CDW (CDW) - 2023 Q4 - Annual Report

PART I Item 1. Business CDW is a Fortune 500 and S&P 500 company providing IT solutions and services to over 250,000 customers across various sectors in the US, UK, and Canada - CDW is a leading multi-brand provider of IT solutions to over 250,000 customers in the US, UK, and Canada, operating as a Fortune 500 company and a member of the S&P 500 Index[48][50] - The company's offerings span from discrete hardware and software to integrated IT solutions, including on-premise and cloud capabilities across hybrid infrastructure, digital experience, and security[48][69] - CDW operates through three reportable segments: Corporate (US private sector, >250 employees), Small Business (US private sector, <250 employees), and Public (US government, education, healthcare) Operations in the UK and Canada are categorized as 'Other'[52] | Category | 2023 Net Sales | 2023 % of Total | 2022 Net Sales | 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | Total Hardware | $15,702.6M | 73.5% | $18,091.0M | 76.1% | | Software | $3,799.3M | 17.8% | $3,684.9M | 15.5% | | Services | $1,761.3M | 8.2% | $1,842.0M | 7.8% | | Total Net Sales | $21,376.0M | 100.0% | $23,748.7M | 100.0% | - The company partners with over 1,000 vendors, including major names like Apple, Cisco, Dell EMC, HP, and Microsoft In 2023, the three largest vendor partners each generated $2.0 billion in Net sales for CDW[61][62] Item 1A. Risk Factors The company identifies various business, macroeconomic, legal, and debt-related risks, including vendor dependence, intense competition, cybersecurity threats, and $5.6 billion in total debt - A significant portion of sales comes from products by Apple, Cisco, Dell EMC, HP Inc., Lenovo, and Microsoft Over 25% of total purchases are from two distributors, Ingram Micro and TD SYNNEX, highlighting vendor concentration risk[104] - The business faces substantial competition from a variety of players, including hardware resellers, direct manufacturers, and cloud providers Innovation, while an opportunity, can also disrupt the business model by enabling more direct-to-customer sales[107][108] - Cybersecurity threats are a significant risk, as the business handles sensitive data Breaches could lead to legal claims, remediation costs, and reputational damage[123][137] - Global and regional economic conditions, such as inflation and rising interest rates, may cause customers to delay or reduce technology spending, adversely affecting results[5][6] - The company is exposed to legal and regulatory risks, including audits, intellectual property claims, and a False Claims Act investigation by the DOJ regarding teaming agreements with OEMs[1][153][164] - As of December 31, 2023, the company had $5.6 billion of total debt outstanding, which requires a substantial portion of cash flow for debt service and includes restrictive covenants that may limit operational flexibility[353] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[185][377] Item 1C. Cybersecurity CDW maintains a comprehensive, ISO 27001 certified cybersecurity program led by a CISO with Board oversight, reporting no material threats as of the report date - The company has a dedicated cybersecurity team led by a CISO, with oversight from the Audit Committee, which receives regular reports on cybersecurity matters[378][379] - The information security management program is ISO 27001 certified and includes routine audits, penetration testing, and processes to manage third-party service provider risks[390] - As of the report date, no cybersecurity threats have materially affected or are reasonably likely to materially affect the company[187] Item 2. Properties As of December 31, 2023, CDW owned or leased 2.3 million square feet of space, including two key distribution centers in North Las Vegas, NV, and Vernon Hills, IL - The company owns or leases 2.3 million square feet of space, primarily in the US, UK, and Canada[391] - Key owned properties include a distribution center in North Las Vegas, Nevada, and a combined office/distribution center in Vernon Hills, Illinois[391] Item 3. Legal Proceedings The company is involved in various legal proceedings arising in the ordinary course of business, with specific details referenced in Note 16 of the Consolidated Financial Statements - CDW is party to various legal proceedings arising in the ordinary course of business[189][154] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[191] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CDW's common stock is listed on the Nasdaq Global Select Market, with the company announcing a new $750 million share repurchase authorization and continuing quarterly cash dividends - The company's common stock trades on the Nasdaq Global Select Market under the symbol "CDW" As of February 20, 2024, there were 4 holders of record[192][393] | Period | Total Shares Purchased (millions) | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 0.1 | $204.19 | | Nov 2023 | 0.1 | $212.56 | | Dec 2023 | 0.0 | $219.02 | | Total Q4 2023 | 0.2 | N/A | - On February 7, 2024, the Board of Directors authorized a $750 million increase to the share repurchase program[198] - The company expects to continue paying quarterly cash dividends, with the most recent being $0.62 per share declared on February 7, 2024[197][401] 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 In 2023, CDW's Net sales decreased by 10.0% to $21.4 billion due to reduced hardware spending, while Gross profit margin improved by 210 basis points to 21.8%, and Net income remained relatively flat at $1.10 billion Results of Operations For the year ended December 31, 2023, Net sales decreased by 10.0% to $21.38 billion, Gross profit decreased slightly by 0.7% to $4.65 billion, and Operating income fell 3.1% to $1.68 billion | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $21,376.0 M | $23,748.7 M | (10.0)% | | Gross Profit | $4,652.4 M | $4,686.6 M | (0.7)% | | Operating Income | $1,680.9 M | $1,735.2 M | (3.1)% | | Net Income | $1,104.3 M | $1,114.5 M | (0.9)% | - The decrease in Net sales was driven by customers reducing or delaying hardware spending due to economic uncertainty[219] - Gross profit margin increased by 210 basis points to 21.8%, primarily due to a more favorable contribution from netted down revenue (e.g., software as a service) and higher product margins[221] | Segment | 2023 Net Sales | % Change from 2022 | | :--- | :--- | :--- | | Corporate | $8,960.8 M | (13.4)% | | Small Business | $1,556.0 M | (19.7)% | | Public | $8,305.7 M | (2.9)% | | Other | $2,553.5 M | (12.2)% | Liquidity and Capital Resources The company maintains strong liquidity with $1.2 billion available under its revolving loan facility, $1.60 billion in cash from operations, and an improved cash conversion cycle of 17 days - As of December 31, 2023, the company had $5.6 billion in total debt and $1.2 billion of availability under its revolving loan facility[353][259] | Cash Flow Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,598.7 M | $1,335.9 M | | Adjusted free cash flow | $1,426.8 M | $1,292.7 M | - The cash conversion cycle decreased to 17 days at year-end 2023 from 21 days in 2022, primarily driven by a reduction in Days of Supply in Inventory (DIO)[274][283] - In 2023, the company repurchased 2.6 million shares for $500 million and paid $321.5 million in dividends[267][268] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including Revenue Recognition (principal vs agent), annual Goodwill impairment testing, and Business Combinations (purchase price allocation) - Revenue Recognition requires significant judgment in determining whether CDW is the principal (reporting gross revenue) or agent (reporting net revenue) in a transaction[298] - Goodwill is tested for impairment annually at the reporting unit level The 2023 annual analysis was a quantitative test which determined that the fair values of all reporting units substantially exceeded their carrying values[229][215] - Business Combinations require significant estimates to allocate purchase price to the fair value of assets acquired and liabilities assumed, particularly for intangible assets like customer relationships[216][217] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from interest rate changes on its $635 million variable-rate debt and foreign currency fluctuations from its UK and Canadian subsidiaries - The company's main market risks are from changes in interest rates and foreign currency exchange rates[206][228] - As of December 31, 2023, the company had $635 million of variable rate debt outstanding, exposing it to interest rate risk[366] - Foreign currency exposure results primarily from translating the financial statements of subsidiaries in the UK (British pound) and Canada (Canadian dollar) into US dollars[17][196] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, 2022, and 2021, along with Ernst & Young LLP's unqualified opinion and a critical audit matter regarding professional services revenue recognition - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[321][322] - A Critical Audit Matter was identified related to the judgment required in determining estimated total costs for fixed-fee professional services projects, which impacts the timing of revenue recognition[315][324] | Consolidated Balance Sheet (As of Dec 31, 2023) | Amount (in millions) | | :--- | :--- | | Total Current Assets | $6,705.0 | | Total Assets | $13,284.6 | | Total Current Liabilities | $5,442.0 | | Total Long-term Debt | $5,031.8 | | Total Liabilities | $11,242.1 | | Total Stockholders' Equity | $2,042.5 | 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 accounting and financial disclosure - None reported[619] 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, 2023, with no material changes during Q4 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[620] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2023[627] - No changes in internal control over financial reporting occurred during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[628] Item 9B. Other Information This section discloses that on August 7, 2023, CEO Christine Leahy adopted a Rule 10b5-1 trading plan for the exercise of stock options and sale of up to 51,437 shares of common stock - On August 7, 2023, CEO Christine Leahy adopted a Rule 10b5-1 trading plan for exercising stock options and selling up to 51,437 shares between November 2023 and April 2024[633] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[429][642] PART III Items 10, 11, 12, 13, and 14 Information for these items, covering Directors, Executive Compensation, Security Ownership, Related Transactions, and Accountant Fees, is incorporated by reference from the company's 2024 proxy statement - Information for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) is incorporated by reference from the 2024 Proxy Statement[43][635][644] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and various agreements - This section provides a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K[664][675] Item 16. Form 10-K Summary The company reports no Form 10-K summary - None[697]