Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “us,” “the Company,” “our,” “CDW” and similar terms refer to CDW Corporation and its subsidiaries. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the unaudited interim Consolidated Financial Statements and the related notes included elsewhere in this report and with the audited Consolidated Financial Statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. This discussion contains forward-looking statements that are subject to numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See “Forward-Looking Statements” at the end of this discussion.

Overview

CDW Corporation, a Fortune 500 company and member of the S&P 500 Index, is a leading multi-brand provider of information technology (“IT”) solutions to small, medium and large business, government, education and healthcare customers in the US, the UK and Canada. Our broad array of offerings ranges from discrete hardware and software products to integrated IT solutions and services that include on-premise and cloud capabilities across hybrid infrastructure, digital experience and security.

We are vendor, technology and consumption model “agnostic”, with a solutions portfolio including more than 100,000 products and services from more than 1,000 leading and emerging brands. Our solutions are delivered in physical, virtual and cloud-based environments through approximately 10,600 customer-facing coworkers, including sellers, highly-skilled technology specialists and advanced service delivery engineers. We are a leading sales channel partner for many original equipment manufacturers (“OEMs”), software publishers and cloud providers (collectively, our “vendor partners”), whose products we sell or include in the solutions we offer. We provide our vendor partners with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage, technical expertise and extensive customer access.

We have three reportable segments, Corporate, Small Business and Public. Our Corporate segment primarily serves US private sector business customers with more than 250 employees. Our Small Business segment primarily serves US private sector business customers with up to 250 employees. Our Public segment is comprised of government agencies and education and healthcare institutions in the US. We also have two other operating segments: CDW UK and CDW Canada, each of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category (“Other”).

We may sell all or only select products that our vendor partners offer. Each vendor partner agreement provides for specific terms and conditions, which may include one or more of the following: product return privileges, price protection policies, purchase discounts and vendor incentive programs, such as purchase or sales rebates and cooperative advertising reimbursements. We also resell software for major software publishers. Our agreements with software publishers allow the end-user customer to acquire software or licensed products and services. In addition to helping our customers determine the best software solutions for their needs, we help them manage their software agreements, including warranties and renewals. A significant portion of our advertising and marketing expenses are reimbursed through cooperative advertising programs with our vendor partners. These programs are at the discretion of our vendor partners and are typically tied to sales or other commitments to be met by us within a specified period of time.

Trends and Key Factors Affecting our Financial Performance

We believe the following key factors may have a meaningful impact on our business performance, influencing our ability to generate sales and achieve our targeted financial and operating results:

*•*General economic conditions are a key factor affecting our results as they impact our customers’ willingness and ability to spend on information technology. Macroeconomic uncertainty persists as a result of the current inflationary environment, corresponding increase in interest rates driven by monetary policy, overall decline in economic growth rates in the United States and other countries and recent market events related to certain financial institutions. This increased uncertainty in the current economic environment resulted in, and may continue to result in, a delay, pause or reduction of investments in technology by our customers.

Customers are balancing priorities to focus more on solutions that lead to business optimization and cost management, or in many cases are reassessing the timing of IT refresh cycles and pausing or deferring their IT spend. We have orchestrated solutions by leveraging netcomm products, security, software and hybrid and cloud offerings to help customers achieve their objectives.
Changes in spending policies, budget priorities and funding levels, including current and future stimulus packages, are key factors influencing the purchasing levels of Government, Healthcare and Education customers. As the duration and ongoing impact of current economic conditions remain uncertain, current and future budget priorities and funding levels for Government, Healthcare and Education customers may be adversely affected, leading to lower IT spend.
Technology trends drive customer purchasing behaviors in the market. Current technology trends are focused on delivering greater flexibility and efficiency, as well as designing and managing IT securely. These trends are driving customer adoption of solutions such as those delivered via cloud, software defined architectures and hybrid on-premise and off-premise combinations, as well as the evolution of the IT consumption model to more “as a service” offerings, including software as a service and infrastructure as a service, in addition to ongoing managed and professional service arrangements. Technology trends are likely to change as customers prioritize the projects that produce the most significant outcomes for their business.

Key Business Metrics

We monitor a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, Gross profit, Net income, Operating income, Operating income margin, Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Net sales on a constant currency basis, Net income per diluted share, Non-GAAP net income per diluted share, Free cash flow, Cash and cash equivalents, cash conversion cycle and debt levels including available credit. These measures and ratios are closely monitored by management, so that actions can be taken, as necessary, in order to achieve financial objectives.

In this section, we present Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share, Net sales on a constant currency basis and Free cash flow, which are non-GAAP financial measures.

We believe Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share and Net sales on a constant currency basis provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. We also present Free cash flow as we believe this measure provides more information regarding our liquidity and capital resources. Certain non-GAAP financial measures are also used to determine certain components of performance-based compensation. For the definitions of Non-GAAP measures and reconciliations to the most directly comparable US GAAP measure, see “Results of Operations - Non-GAAP Financial Measure Reconciliations.”

Second Quarter Overview

The results of certain key business metrics are as follows:


	Three Months Ended June 30,
(dollars in millions, except per share amounts)	2023		2022
Net sales	$	5,626.1	$	6,145.8
Gross profit	1,181.5		1,168.2
Operating income	412.2		435.3
Net income	262.6		279.3
Non-GAAP operating income	529.8		516.3
Non-GAAP net income	349.0		339.5
Net income per diluted share	1.92		2.04
Non-GAAP net income per diluted share	2.56		2.49
Average daily sales(1)	87.9		96.0
Net debt(2)	5,559.3		6,045.3
Cash conversion cycle (in days)(3)	14		19

(1) There were 64 selling days for both the three months ended June 30, 2023 and 2022.

(2) Defined as Total debt minus Cash and cash equivalents.

(3) Cash conversion cycle is defined as days of sales outstanding in Accounts receivable and certain receivables due from vendors plus days of supply in Merchandise inventory minus days of purchases outstanding in Accounts payable and Accounts payable-inventory financing, based on a rolling three-month average.

Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Results of operations, in dollars and as a percentage of Net sales, are as follows:


	Three Months Ended June 30,
	2023				2022
	Dollars in Millions		Percentage of Net Sales		Dollars in Millions		Percentage of Net Sales
Net sales	$	5,626.1	100.0	%	$	6,145.8	100.0	%
Cost of sales	4,444.6		79.0		4,977.6		81.0
Gross profit	1,181.5		21.0		1,168.2		19.0
Selling and administrative expenses	769.3		13.7		732.9		11.9
Operating income	412.2		7.3		435.3		7.1
Interest expense, net	(58.2)		(1.0)		(57.7)		(0.9)
Other income (expense), net	(0.6)		—		(0.4)		—
Income before income taxes	353.4		6.3		377.2		6.2
Income tax expense	(90.8)		(1.6)		(97.9)		(1.6)
Net income	$	262.6	4.7	%	$	279.3	4.6	%

Net sales

Total Net sales decreased $520 million, or 8.5%, to $5,626 million for the three months ended June 30, 2023, compared to $6,146 million for the three months ended June 30, 2022. The decline in Net sales was driven by the Corporate and Small Business segments and our UK and Canadian operations, partially offset by an increase in the Public segment. The increase in economic uncertainty has led customers to focus their business priorities, resulting in a reduction of their technology spend, most notably in the Corporate and Small Business segments. For additional information, see the “Segment Results of Operations” below.

Gross profit

Gross profit increased $13 million, or 1.1%, to $1,182 million for the three months ended June 30, 2023, compared to $1,168 million for the three months ended June 30, 2022. As a percentage of Net sales, Gross profit margin increased 200 basis points to 21.0% for the three months ended June 30, 2023. The increase in Gross profit margin was primarily driven by higher product margin due to lower mix in notebooks and increased rate across various categories, and a higher mix of netted down revenue, primarily software as a service.

Selling and administrative expenses

Selling and administrative expenses increased $36 million, or 5.0%, to $769 million for the three months ended June 30, 2023, compared to $733 million for the three months ended June 30, 2022. The increase was primarily due to costs related to the reduction of our workforce and real estate portfolio (collectively “workplace optimization”), increased payroll expenses associated with higher year-over-year coworker count, partially offset by the impact of reduced discretionary expenses.

Operating income

Operating income decreased $23 million, or 5.3%, to $412 million for the three months ended June 30, 2023, compared to $435 million for the three months ended June 30, 2022. Operating income decreased primarily due to costs related to workplace optimization, increased payroll expenses associated with higher year-over-year coworker count, partially offset by the impact of reduced discretionary expenses.

Interest expense, net

Interest expense, net was $58 million for both the three months ended June 30, 2023 and June 30, 2022. Interest expense, net remained consistent due to higher variable interest rate on the senior unsecured term loan, partially offset by lower debt levels.

Income tax expense

Income tax expense was $91 million and $98 million for the three months ended June 30, 2023 and 2022, respectively. The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 25.7% and 26.0% for the three months ended June 30, 2023 and 2022, respectively.

The lower effective tax rate for the three months ended June 30, 2023 as compared to the same period of the prior year was primarily attributable to higher excess tax benefits on equity-based compensation.

Segment Results of Operations

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:


	Three Months Ended June 30,
	2023				2022
(dollars in millions)	Net Sales		Percentage of Total Net Sales		Net Sales		Percentage of Total Net Sales		Dollar Change		Percent Change(1)
Corporate	$	2,245.0	39.9	%	$	2,660.7	43.3	%	$	(415.7)	(15.6)	%

Small Business	396.2		7.0		500.0		8.1		(103.8)		(20.8)

Public:
Government	681.2		12.1		609.5		9.9		71.7		11.8
Education	1,026.8		18.3		1,041.3		16.9		(14.5)		(1.4)
Healthcare	587.1		10.4		592.2		9.6		(5.1)		(0.9)
Total Public	2,295.1		40.8		2,243.0		36.4		52.1		2.3

Other	689.8		12.3		742.1		12.2		(52.3)		(7.0)

Total Net sales	$	5,626.1	100.0	%	$	6,145.8	100.0	%	$	(519.7)	(8.5)	%

(1)There were 64 selling days for both the three months ended June 30, 2023 and 2022.

Operating income by segment, in dollars and as a percentage of total Net sales, and the year-over-year percentage change are as follows:


	Three Months Ended June 30,
	2023				2022
(dollars in millions)	Operating Income		Operating Margin		Operating Income		Operating Margin		Percent Change in Operating Income
Segments:(1)
Corporate	$	206.5	9.2	%	$	231.2	8.7	%	(10.7)	%
Small Business	42.4		10.7		47.0		9.4		(9.8)
Public	210.3		9.2		177.2		7.9		18.7
Other(2)	32.4		4.7		27.8		3.7		16.5
Headquarters(3)	(79.4)		nm*		(47.9)		nm*		65.8
Total Operating income	$	412.2	7.3	%	$	435.3	7.1	%	(5.3)	%

nm - Not meaningful

(1)Segment operating income includes the segment’s direct operating income, allocations for certain Headquarters’ costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.

(2)Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(3)Includes Headquarters’ function costs that are not allocated to the segments.

Corporate

Corporate segment Net sales for the three months ended June 30, 2023 decreased $416 million, or 15.6%, compared to the three months ended June 30, 2022. This decrease in Net sales was across various hardware categories and software, partially offset by an increase in services.

Corporate segment Operating income was $207 million for the three months ended June 30, 2023, a decrease of $24 million, or 10.7%, compared to $231 million for the three months ended June 30, 2022. Corporate segment Operating income decreased primarily driven by lower Gross profit dollars.

Small Business

Small Business segment Net sales for the three months ended June 30, 2023 decreased $104 million, or 20.8%, compared to the three months ended June 30, 2022. This decrease in Net sales was primarily driven by a decline in notebooks/mobile devices.

Small Business segment Operating income was $42 million for the three months ended June 30, 2023, a decrease of $5 million, or 9.8%, compared to $47 million for the three months ended June 30, 2022. Small Business segment Operating income decreased primarily due to lower Gross profit dollars partially offset by lower performance-based compensation consistent with lower Gross profit attainment.

Public

Public segment Net sales for the three months ended June 30, 2023 increased $52 million, or 2.3%, compared to the three months ended June 30, 2022. This increase was primarily within netcomm products across all sales channels, partially offset by collaboration and notebooks/mobile devices specifically within the Education and Healthcare sales channels.

Public segment Operating income was $210 million for the three months ended June 30, 2023, an increase of $33 million, or 18.7%, compared to $177 million for the three months ended June 30, 2022. Public segment Operating income increased primarily due to higher Gross profit dollars and lower payroll expenses.

Other

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the three months ended June 30, 2023 decreased $52 million, or 7.0%, compared to the three months ended June 30, 2022. This decrease was driven by decreased Net sales across various categories related to both the Canadian and UK operations.

Other Operating income was $32 million for the three months ended June 30, 2023, an increase of $5 million, or 16.5%, compared to $28 million for the three months ended June 30, 2022. Other Operating income increased primarily due to higher Gross profit dollars related to the UK operations.

Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share, and Net sales on a constant currency basis for the three months ended June 30, 2023 and 2022 below.

Non-GAAP operating income excludes, among other things, charges related to the amortization of acquisition-related intangible assets, equity-based compensation and the associated payroll taxes, acquisition and integration expenses, transformation initiatives and workplace optimization. Non-GAAP operating income margin is defined as Non-GAAP operating income as a percentage of Net sales. Non-GAAP net income excludes, among other things, charges related to acquisition-related intangible asset amortization, equity-based compensation, acquisition and integration expenses, transformation initiatives, workplace optimization and the associated tax effects of each. Net sales on a constant currency basis is defined as Net sales excluding the impact of foreign currency translation on Net sales.

Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share, and Net sales on a constant currency basis are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial condition that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

Non-GAAP operating income and Non-GAAP operating income margin


	Three Months Ended June 30,
(dollars in millions)	2023		% of Net Sales		2022		% of Net Sales		% Change
Operating income, as reported	$	412.2	7.3	%	$	435.3	7.1	%	(5.3)	%
Amortization of intangibles(1)	37.3				40.7
Equity-based compensation	24.8				23.5
Acquisition and integration expenses	8.7				14.9
Transformation initiatives(2)	4.6				1.2
Workplace optimization(3)	42.0				—
Other adjustments	0.2				0.7
Non-GAAP operating income	$	529.8	9.4	%	$	516.3	8.4	%	2.6	%

(1)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(2)Includes costs related to strategic transformation initiatives focused on optimizing various operations and systems.

(3)Includes costs related to the workforce reduction program and charges related to the reduction of our real estate lease portfolio.

Non-GAAP net income and Non-GAAP net income per diluted share


	Three Months Ended June 30,
	2023						2022
(dollars in millions)	Income before income taxes		Income tax expense(1)		Net income		Income before income taxes		Income tax expense(1)		Net income		Net Income % Change
US GAAP, as reported	$	353.4	$	(90.8)	$	262.6	$	377.2	$	(97.9)	$	279.3	(6.0)	%
Amortization of intangibles(2)	37.3		(9.6)		27.7		40.7		(10.6)		30.1
Equity-based compensation	24.8		(7.1)		17.7		23.5		(5.9)		17.6
Acquisition and integration expenses	8.7		(2.3)		6.4		14.9		(3.8)		11.1
Transformation initiatives(3)	4.6		(1.2)		3.4		1.2		(0.3)		0.9
Workplace optimization(4)	42.0		(10.9)		31.1		—		—		—
Other adjustments	0.2		(0.1)		0.1		0.8		(0.3)		0.5
Non-GAAP	$	471.0	$	(122.0)	$	349.0	$	458.3	$	(118.8)	$	339.5	2.8	%

Net income per diluted share, as reported					$	1.92					$	2.04
Non-GAAP net income per diluted share					$	2.56					$	2.49
Shares used in computing US GAAP and Non-GAAP net income per diluted share					136.1						136.8

(1)Income tax on non-GAAP adjustments includes excess tax benefits associated with equity-based compensation.

(2)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(3)Includes costs related to strategic transformation initiatives focused on optimizing various operations and systems.

(4)Includes costs related to the workforce reduction program and charges related to the reduction of our real estate lease portfolio.

Net sales on a constant currency basis


	Three Months Ended June 30,
(dollars in millions)	2023		2022		% Change(1)
Net sales, as reported	$	5,626.1	$	6,145.8	(8.5)	%
Foreign currency translation(2)	—		(14.9)
Net sales, on a constant currency basis	$	5,626.1	$	6,130.9	(8.2)	%

(1)There were 64 selling days for both the three months ended June 30, 2023 and 2022.

(2)Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in the second quarter of 2023.

Six Months Overview

The results of certain key business metrics are as follows:


	Six Months Ended June 30,
(dollars in millions, except per share amounts)	2023		2022
Net sales	$	10,729.2	$	12,094.9
Gross profit	2,270.9		2,272.3
Operating income	767.5		822.2
Net income	492.7		529.5
Non-GAAP operating income	964.1		978.4
Non-GAAP net income	627.7		641.0
Net income per diluted share	3.60		3.87
Non-GAAP net income per diluted share	4.59		4.69
Average daily sales(1)	83.8		95.2
Net debt(2)	5,559.3		6,045.3
Cash conversion cycle (in days)(3)	14		19
Cash provided by operating activities	593.6		761.1
Free cash flow	683.9		717.4

(1) There were 128 and 127 selling days for the six months ended June 30, 2023 and 2022, respectively.

(2) Defined as Total debt minus Cash and cash equivalents.

Results of Operations

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Results of operations, in dollars and as a percentage of Net sales, are as follows:


	Six Months Ended June 30,
	2023				2022
	Dollars in Millions		Percentage of Net Sales		Dollars in Millions		Percentage of Net Sales
Net sales	$	10,729.2	100.0	%	$	12,094.9	100.0	%
Cost of sales	8,458.3		78.8		9,822.6		81.2
Gross profit	2,270.9		21.2		2,272.3		18.8
Selling and administrative expenses	1,503.4		14.0		1,450.1		12.0
Operating income	767.5		7.2		822.2		6.8
Interest expense, net	(115.9)		(1.1)		(113.7)		(0.9)
Other expense, net	(1.9)		—		(0.9)		—
Income before income taxes	649.7		6.1		707.6		5.9
Income tax expense	(157.0)		(1.5)		(178.1)		(1.5)
Net income	$	492.7	4.6	%	$	529.5	4.4	%

Net sales

Total Net sales decreased $1,366 million, or 11.3%, to $10,729 million for the six months ended June 30, 2023, compared to $12,095 million for the six months ended June 30, 2022. The decline in Net sales occurred across all operating segments. The increase in economic uncertainty has led customers to focus their business priorities, resulting in a deferral or reduction of their technology spend. For additional information, see the “Segment Results of Operations” below.

Gross profit

Gross profit decreased $1 million, or 0.1%, to $2,271 million for the six months ended June 30, 2023, compared to $2,272 million for the six months ended June 30, 2022. As a percentage of Net sales, Gross profit margin increased 240 basis points to 21.2% for the six months ended June 30, 2023. The increase in Gross profit margin was primarily driven by higher product margin due to lower mix in notebooks and increased rate across various categories and a higher mix of netted down revenue, primarily software as a service.

Selling and administrative expenses

Selling and administrative expenses increased $53 million, or 3.7%, to $1,503 million for the six months ended June 30, 2023, compared to $1,450 million for the six months ended June 30, 2022. The increase was driven by costs related to workplace optimization, increased payroll expenses associated with higher year-over-year coworker count, partially offset by reduced discretionary expenses.

Operating income

Operating income decreased $55 million, or 6.7%, to $768 million for the six months ended June 30, 2023 compared to $822 million for the six months ended June 30, 2022. Operating income decreased driven by costs related to workplace optimization, increased payroll expenses associated with higher year-over-year coworker count, partially offset by the impact of reduced discretionary expenses.

Interest expense, net

Interest expense, net, increased $2 million, or 1.9%, to $116 million for the six months ended June 30, 2023, compared to $114 million for the six months ended June 30, 2022. This increase was driven by a higher variable interest rate on the senior unsecured term loan, partially offset by lower debt levels.

Income tax expense

Income tax expense was $157 million and $178 million for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 24.2% and 25.2% for the six months ended June 30, 2023 and 2022, respectively.

The lower effective tax rate for the six months ended June 30, 2023 as compared to the same period of the prior year was primarily attributable to higher excess tax benefits on equity-based compensation.

Segment Results of Operations

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:


	Six Months Ended June 30,
	2023				2022
(dollars in millions)	Net Sales		Percentage of Total Net Sales		Net Sales		Percentage of Total Net Sales		Dollar Change		Percent Change		Average Daily Sales Percent Change(1)
Corporate	$	4,448.7	41.5	%	$	5,288.3	43.7	%	$	(839.6)	(15.9)	%	(16.5)	%

Small Business	807.6		7.5		1,024.0		8.5		(216.4)		(21.1)		(21.7)

Public:
Government	1,232.7		11.5		1,153.4		9.5		79.3		6.9		6.0
Education	1,692.5		15.8		1,944.1		16.1		(251.6)		(12.9)		(13.6)
Healthcare	1,182.7		11.0		1,178.5		9.7		4.2		0.4		(0.4)
Total Public	4,107.9		38.3		4,276.0		35.3		(168.1)		(3.9)		(4.7)

Other	1,365.0		12.7		1,506.6		12.5		(141.6)		(9.4)		(10.1)

Total Net sales	$	10,729.2	100.0	%	$	12,094.9	100.0	%	$	(1,365.7)	(11.3)	%	(12.0)	%

(1)There were 128 and 127 selling days for the six months ended June 30, 2023 and 2022, respectively.

Operating income by segment, in dollars and as a percentage of total Net sales, and the year-over-year percentage change are as follows:


	Six Months Ended June 30,
	2023				2022
(dollars in millions)	Operating Income		Percentage of Net Sales		Operating Income		Percentage of Net Sales		Percent Change in Operating Income
Segments:(1)
Corporate	$	399.8	9.0	%	$	441.2	8.3	%	(9.4)	%
Small Business	83.9		10.4		93.7		9.2		(10.5)
Public	337.8		8.2		319.0		7.5		5.9
Other(2)	68.9		5.0		64.5		4.3		6.8
Headquarters(3)	(122.9)		nm*		(96.2)		nm*		27.8
Total Operating income	$	767.5	7.2	%	$	822.2	6.8	%	(6.7)	%

nm - Not meaningful

(2)Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(3)Includes Headquarters’ function costs that are not allocated to the segments.

Corporate

Corporate segment Net sales for the six months ended June 30, 2023 decreased $840 million, or 15.9%, compared to the six months ended June 30, 2022. On an average daily sales basis, Corporate segment Net sales decreased 16.5%. This decrease in Net sales was across various hardware categories, primarily notebooks/mobile devices, partially offset by an increase in software.

Corporate segment Operating income was $400 million for the six months ended June 30, 2023, a decrease of $41 million, or 9.4%, compared to $441 million for the six months ended June 30, 2022. Corporate segment Operating income decreased primarily due to lower Gross profit dollars and increased payroll expenses.

Small Business

Small Business segment Net sales for the six months ended June 30, 2023 decreased $216 million, or 21.1%, compared to the six months ended June 30, 2022. On an average daily sales basis, Small Business segment Net sales decreased 21.7%. This decrease in Net sales was primarily driven by a decline in notebooks/mobile devices.

Small Business segment Operating income was $84 million for the six months ended June 30, 2023, a decrease of $10 million, or 10.5%, compared to $94 million for the six months ended June 30, 2022. Small Business segment Operating income decreased primarily due to lower Gross profit dollars, partially offset by lower performance-based compensation consistent with lower Gross profit attainment.

Public

Public segment Net sales for the six months ended June 30, 2023 decreased $168 million, or 3.9%, compared to the six months ended June 30, 2022. On an average daily sales basis, Public segment Net sales decreased 4.7%. This decrease was primarily within notebooks/mobile devices and collaboration hardware specifically within the Education and Healthcare sales channels, partially offset by netcomm products across all sales channels.

Public segment Operating income was $338 million for the six months ended June 30, 2023, which was an increase of $19 million, or 5.9%, compared to $319 million for the six months ended June 30, 2022. Public segment Operating income increased primarily due to lower payroll costs.

Other

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the six months ended June 30, 2023 decreased $142 million, or 9.4%, compared to the six months ended June 30, 2022. On an average daily sales basis, Other Net sales decreased 10.1%. This decrease was driven by decreased Net sales in various hardware categories, partially offset by an increase in software related to both the Canadian and UK operations.

Other Operating income was $69 million for the six months ended June 30, 2023, which was an increase of $4 million or 6.8%, compared to $65 million for the six months ended June 30, 2022. Other Operating income increased primarily due to higher Gross profit dollars related to the UK operations.

Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share, Net sales on a constant currency basis and Free cash flow for the six months ended June 30, 2023 and 2022 below.

Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP net income, Non-GAAP net income per diluted share, Net sales on a constant currency basis and Free cash flow are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial condition that either

excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

Non-GAAP operating income and Non-GAAP operating income margin


	Six Months Ended June 30,
(dollars in millions)	2023		% of Net Sales		2022		% of Net Sales		% Change
Operating income, as reported	$	767.5	7.2	%	$	822.2	6.8	%	(6.7)	%
Amortization of intangibles(1)	78.9				81.6
Equity-based compensation	45.6				44.6
Acquisition and integration expenses	17.6				26.6
Transformation initiatives(2)	9.6				2.4
Workplace optimization(3)	42.9				—
Other adjustments	2.0				1.0
Non-GAAP operating income	$	964.1	9.0	%	$	978.4	8.1	%	(1.5)	%

(1)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(2)Includes costs related to strategic transformation initiatives focused on optimizing various operations and systems.

(3)Includes costs related to the workforce reduction program and charges related to the reduction of our real estate lease portfolio.

Non-GAAP net income and Non-GAAP net income per diluted share


	Six Months Ended June 30,
	2023						2022
(dollars in millions)	Income before income taxes		Income tax expense(1)		Net income		Income before income taxes		Income tax expense(1)		Net income		Net Income % Change
US GAAP, as reported	$	649.7	$	(157.0)	$	492.7	$	707.6	$	(178.1)	$	529.5	(6.9)	%
Amortization of intangibles(2)	78.9		(20.5)		58.4		81.6		(21.2)		60.4
Equity-based compensation	45.6		(22.4)		23.2		44.6		(15.6)		29.0


Acquisition and integration expenses	17.6		(4.6)		13.0		26.6		(6.8)		19.8
Transformation initiatives(3)	9.6		(2.5)		7.1		2.4		(0.6)		1.8
Workplace optimization(4)	42.9		(11.1)		31.8		—		—		—
Other adjustments	2.0		(0.5)		1.5		1.0		(0.5)		0.5
Non-GAAP	$	846.3	$	(218.6)	$	627.7	$	863.8	$	(222.8)	$	641.0	(2.1)	%

Net income per diluted share, as reported					$	3.60					$	3.87
Non-GAAP net income per diluted share					$	4.59					$	4.69
Shares used in computing US GAAP and Non-GAAP net income per diluted share					136.7						136.8

(1)Income tax on non-GAAP adjustments includes excess tax benefits associated with equity-based compensation.

(2)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(3)Includes costs related to strategic transformation initiatives focused on optimizing various operations and systems.

(4)Includes costs related to the workforce reduction program and charges related to the reduction of our real estate lease portfolio.

Net sales on a constant currency basis


	Six Months Ended June 30,
(dollars in millions)	2023		2022		% Change		Average Daily % Change(1)
Net sales, as reported	$	10,729.2	$	12,094.9	(11.3)	%	(12.0)	%
Foreign currency translation(2)	—		(78.0)
Net sales, on a constant currency basis	$	10,729.2	$	12,016.9	(10.7)	%	(11.4)	%

(1)There were 128 and 127 selling days for the six months ended June 30, 2023 and 2022, respectively.

(2)Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in year to date 2023.

Free cash flow


	Six Months Ended June 30,
(dollars in millions)	2023		2022
Net cash provided by operating activities	$	593.6	$	761.1
Capital expenditures	(71.3)		(63.6)
Net change in accounts payable - inventory financing(1)	161.6		19.9

Free cash flow	$	683.9	$	717.4

(1)Free cash flow is adjusted to include cash flows from financing activities that relate to the purchase of inventory.

Seasonality

While we have not historically experienced significant seasonality throughout the year, sales in our Corporate segment, which primarily serves US private sector business customers with more than 250 employees, have historically been higher in the fourth quarter than in other quarters due to customers spending their remaining technology budget dollars at the end of the year. Additionally, sales in our Public segment have historically been higher in the third quarter than in other quarters primarily due to the buying patterns of the federal government and education customers. Since 2020, we have experienced variability compared to historic seasonality trends. Seasonality by channel is expected to continue to be different than historical experience.

Liquidity and Capital Resources

Overview

We finance our operations and capital expenditures with cash from operations and borrowings under our revolving loan facility. As of June 30, 2023, we had $1.0 billion of availability for borrowings under our revolving loan facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of inventory, payroll and general expenses. We also take into consideration our overall capital allocation strategy, which includes dividend payments, assessment of debt levels, acquisitions and share repurchases. We believe we have adequate sources of liquidity and funding available for at least the next year; however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan, general economic conditions and working capital management.

Long-Term Debt and Financing Arrangements

During the six months ended June 30, 2023, we prepaid $50 million on our senior unsecured term loan facility without penalty. No additional mandatory payments are required on the remaining principal amount until its maturity date on December 1, 2026.

As of June 30, 2023, we had total unsecured indebtedness of $5.8 billion and we were in compliance with the covenants under our credit agreements and indentures.

We may from time to time repurchase one or more series of our outstanding unsecured senior notes, depending on market conditions, contractual commitments, our capital needs and other factors. Repurchases of our senior notes may be made by open market or privately negotiated transactions and may be pursuant to Rule 10b5-1 plans or otherwise.

For additional information regarding our debt and refinancing activities, see Note 5 (Debt) to the accompanying Consolidated Financial Statements.

Inventory Financing Agreements

We have entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. We do not incur any interest expense associated with these agreements as balances are paid when they are due. For additional information, see Note 4 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

Share Repurchase Program

During the six months ended June 30, 2023, we repurchased 2 million shares of our common stock for $396 million under the previously announced share repurchase program. For additional information on our share repurchase program, see “Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.”

Dividends

A summary of 2023 dividend activity for our common stock is as follows:


Dividend Amount	Declaration Date	Record Date	Payment Date
$0.590	February 7, 2023	February 24, 2023	March 10, 2023
$0.590	May 3, 2023	May 25, 2023	June 13, 2023

On August 2, 2023, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.590 per share. The dividend will be paid on September 12, 2023 to all stockholders of record as of the close of business on August 25, 2023.

The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions (including in current or future agreements governing our indebtedness), restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant.

Cash Flows

Cash flows from operating, investing and financing activities are as follows:


	Six Months Ended June 30,
(dollars in millions)	2023		2022
Net cash provided by operating activities	$	593.6	$	761.1

Investing Activities:
Capital expenditures	(71.3)		(63.6)
Acquisitions of businesses, net of cash acquired	(75.5)		(28.0)

Net cash used in investing activities	(146.8)		(91.6)

Financing Activities:
Net change in accounts payable - inventory financing	161.6		19.9

Other cash flows used in financing activities	(721.1)		(394.8)
Net cash used in financing activities	(559.5)		(374.9)

Effect of exchange rate changes on cash and cash equivalents	1.4		(11.1)
Net (decrease) increase in cash and cash equivalents	$	(111.3)	$	283.5

Operating Activities

Cash flows provided by operating activities are as follows:


	Six Months Ended June 30,
(dollars in millions)	2023		2022		Change
Net income	$	492.7	$	529.5	$	(36.8)
Adjustments for the impact of non-cash items(1)	187.3		191.3		(4.0)
Net income adjusted for the impact of non-cash items	680.0		720.8		(40.8)
Changes in assets and liabilities:
Accounts receivable	(13.0)		(19.8)		6.8
Merchandise inventory(2)	17.0		(109.7)		126.7
Accounts payable-trade(3)	(39.7)		210.6		(250.3)
Other	(50.7)		(40.8)		(9.9)
Cash flows provided by operating activities	$	593.6	$	761.1	$	(167.5)

(1)Includes items such as depreciation and amortization, deferred income taxes, provision for credit losses and equity-based compensation expense.

(2)The change is primarily due to lower stocking positions driven by customer demand in 2023.

(3)The change is primarily driven by timing of payments and lower sales activity in 2023.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:


	June 30,
(in days)	2023	2022
Days of sales outstanding (DSO)(1)	67	64
Days of supply in inventory (DIO)(2)	14	18
Days of purchases outstanding (DPO)(3)	(67)	(63)
Cash conversion cycle	14	19

(1)Represents the rolling three-month average of the balance of Accounts receivable, net at the end of the period, divided by average daily Net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.

(2)Represents the rolling three-month average of the balance of Merchandise inventory at the end of the period divided by average daily Cost of sales for the same three-month period.

(3)Represents the rolling three-month average of the combined balance of Accounts payable-trade, excluding cash overdrafts, and Accounts payable-inventory financing at the end of the period divided by average daily Cost of sales for the same three-month period.

The cash conversion cycle decreased to 14 days at June 30, 2023, compared to 19 days at June 30, 2022. The overall decrease was primarily driven by a reduction in DIO resulting from lower stocking positions. In addition, netted down revenue has an unfavorable impact to DSO and a favorable impact to DPO as the corresponding receivables and payables reflect the gross amounts due from customers and due to vendors while the corresponding sales and cost of sales are reflected on a net basis within Net sales.

Investing Activities

Net cash used in investing activities increased $55 million for the six months ended June 30, 2023 compared to June 30, 2022. This increase was primarily due to higher acquisition activity in 2023 and increased capital expenditures.

Financing Activities

Net cash used in financing activities increased $185 million for the six months ended June 30, 2023 compared to June 30, 2022. This increase was primarily driven by share repurchases in 2023 with no similar activity in 2022 and net repayments on our revolving loan facility, partially offset by mixing into vendors with extended payment terms under our inventory financing arrangements. For additional information regarding the inventory financing agreements and debt activities, see Note 4 (Inventory Financing Agreements) and Note 5 (Debt) to the accompanying Consolidated Financial Statements.

Issuers and Guarantors of Debt Securities

Each series of our outstanding unsecured senior notes (the “Notes”) are issued by CDW LLC and CDW Finance Corporation (the “Issuers”) and are guaranteed by CDW Corporation (“Parent”) and certain of each CDW LLC’s direct and indirect, 100% owned, domestic subsidiaries (the “Guarantor Subsidiaries” and, together with Parent, the “Guarantors”). All guarantees by Parent and the Guarantors are joint and several, and full and unconditional; provided that guarantees by the Guarantor Subsidiaries are subject to certain customary release provisions contained in the indentures governing the Notes.

The Notes and the related guarantees are the Issuers’ and the Guarantors’ senior unsecured obligations and are:

structurally subordinated to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries; and
rank equal in right of payment with all of the Issuers’ and the Guarantors’ existing and future unsecured senior debt.

The following tables set forth Balance Sheet information as of June 30, 2023 and December 31, 2022, and Statement of Operations information for the six months ended June 30, 2023 and for the year ended December 31, 2022. The financial information includes the accounts of the Issuers and the accounts of the Guarantors (the “Obligor Group”). The financial information of the Obligor Group is presented on a combined basis and the intercompany balances and transactions between the Obligor Group have been eliminated.

Balance Sheet Information


(dollars in millions)	June 30, 2023		December 31, 2022
Current assets	$	5,615.7	$	5,588.3

Goodwill	3,939.7		3,939.7
Other assets	1,885.3		2,032.6
Total Non-current assets	5,825.0		5,972.3

Current liabilities	4,548.2		4,369.3

Long-term debt	5,720.3		5,792.9
Other liabilities	577.8		641.9
Total Long-term liabilities	6,298.1		6,434.8

Statement of Operations Information


(dollars in millions)	Six Months Ended June 30, 2023		Year Ended December 31, 2022
Net sales	$	9,331.9	$	20,741.8
Gross profit	1,993.4		4,156.6
Operating income	680.8		1,584.7
Net income	404.5		1,005.8

Commitments and Contingencies

The information set forth in Note 8 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements is incorporated herein by reference.

Critical Accounting Policies and Estimates

Our critical accounting policies have not changed from those reported in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements

The information set forth in Note 2 (Recent Accounting Pronouncements) to the accompanying Consolidated Financial Statements is incorporated herein by reference.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical fact are forward-looking statements. These statements relate to analyses and other information, which are based on forecasts of future results or events and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. We claim the protection of The Private Securities Litigation Reform Act of 1995 for all forward-looking statements in this report.

These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “goal,” “intend,” “plan,” “potential,” “predict,” “project,” “target” and similar terms and phrases or future or conditional verbs such as “could,” “may,” “should,” “will,” and “would.” However, these words are not the exclusive means of identifying such statements. Although we believe that our plans, intentions and other expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. All forward-looking statements are subject to risks and uncertainties that may cause actual results or events to differ materially from those that we expected.

Important factors that could cause actual results or events to differ materially from our expectations, or cautionary statements, are disclosed under “Trends and Key Factors Affecting our Financial Performance” above, the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 and from time to time in our subsequent Quarterly Reports on Form 10-Q and our other US Securities and Exchange Commission (“SEC”) filings and public

communications. These factors include, among others, inflationary pressures; level of interest rates; CDW’s relationships with vendor partners and terms of their agreements; the COVID-19 pandemic, including resurgences and the emergence of new variants, and actions taken in response thereto and the associated impact on our business, results of operations, cash flows, financial condition and liquidity; continued innovations in hardware, software and services by CDW’s vendor partners; substantial competition that could reduce CDW’s market share; the continuing development, maintenance and operation of CDW’s information technology systems; potential breaches of data security and failure to protect our information technology systems from cybersecurity threats; potential failures to provide high-quality services to CDW’s customers; potential losses of any key personnel, significant increases in labor costs or ineffective workforce management; potential adverse occurrences at one of CDW’s primary facilities or third-party data centers, including as a result of climate change; increases in the cost of commercial delivery services or disruptions of those services; CDW’s exposure to accounts receivable and inventory risks; the potential failure to achieve the anticipated benefits of the acquisition of Sirius in the expected timeframe or at all; future acquisitions or alliances; fluctuations in CDW’s operating results; fluctuations in foreign currency; global and regional economic and political conditions, including impacts of the ongoing military conflict between Russia and Ukraine and related sanctions against Russia; potential interruptions of the flow of products from suppliers; decreases in spending on technology products and services; potential failures to comply with Public segment contracts or applicable laws and regulations; current and future legal proceedings, investigations and audits, including intellectual property infringement claims; changes in laws, including regulations or interpretations thereof, or the potential failure to meet stakeholder expectations on environmental sustainability and corporate responsibility matters; CDW’s level of indebtedness; restrictions imposed by agreements relating to CDW’s indebtedness on its operations and liquidity; failure to maintain the ratings assigned to CDW’s debt securities by rating agencies; changes in, or the discontinuation of, CDW’s share repurchase program or dividend payments; and other risk factors or uncertainties identified from time to time in CDW’s filings with the SEC. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by those cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not reflect all of the factors that could cause actual results or events to differ from our expectations. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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