CDW Corporation — Q2 2018 Form 10-Q Summary
Business context and reporting period
CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada. This unaudited filing covers the quarter and six months ended June 30, 2018; prior-year comparisons were retrospectively adjusted for adoption of ASC 606.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $4,186.1 million | $3,891.7 million | $7,792.5 million | $7,147.6 million |
| Gross profit / margin | $695.6 million / 16.6% | $640.8 million / 16.5% | $1,299.5 million / 16.7% | $1,194.3 million / 16.7% |
| Operating income / margin | $265.5 million / 6.3% | $230.8 million / 5.9% | $469.6 million / 6.0% | $401.5 million / 5.6% |
| Net income | $173.0 million | $140.9 million | $300.0 million | $199.0 million |
| Diluted EPS | $1.12 | $0.89 | $1.94 | $1.24 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $332.3 million | $376.2 million |
- Q2 sales grew 7.6% year over year, or 7.0% on a constant-currency basis. Six-month sales rose 9.0%, or 8.2% constant currency. Q2 Adjusted EBITDA was $344.7 million, up 9.6%, with an 8.2% margin; six-month Adjusted EBITDA was $624.5 million, up 10.6%, with an 8.0% margin. These are non-GAAP measures.
- At June 30, cash was $100.7 million. Debt carrying value, including current maturities, was approximately $3.24 billion; reported net debt was $3,139.6 million. The company had no U.S. asset-based revolver borrowings and reported approximately $1.1 billion available under that facility, plus $53 million available under the U.K. revolver.
- Six-month cash used in investing was $33.6 million, principally capital expenditures. Financing used $338.2 million, including $176.4 million of share repurchases and $63.8 million of dividends. Cash declined $43.5 million from year-end.
- Working capital demands increased: accounts receivable and inventory uses of cash were $295.2 million and $167.7 million, respectively. The cash conversion cycle rose to 17 days from 16 days a year earlier.
Material changes versus the prior comparable period
- Q2 growth was led by Corporate sales (+9.7%) and Other, comprising U.K. and Canada (+34.0%); Public was nearly flat (+0.2%), with healthcare growth offset by lower government sales. Small Business grew 4.6%.
- For the first half, Corporate grew 9.2%, Small Business 8.3%, Public 2.8% and Other 32.3%. Management cited device refresh demand, international market-share gains and recovery from supply-chain issues at the end of 2017.
- Q2 operating margin improved 40 basis points. Six-month gross margin was unchanged, while operating margin increased 40 basis points, supported by lower selling and administrative expense as a share of sales and lower equity-compensation costs. Management noted partner funding margin was lower for the first half.
- Six-month net income increased from $199.0 million to $300.0 million. The prior-year period included a $57.4 million debt-extinguishment loss; there was no such loss in 2018.
Outlook, risks, contingencies and unusual items
- The filing provides no specific numerical revenue, earnings or margin guidance. Management said it believed available liquidity and funding were adequate for at least the next year, while noting that operating cash generation depends on execution and economic conditions.
- Management highlighted sensitivity to economic and technology spending trends, government and education budgets, vendor relationships and product availability, competition, substantial debt and related restrictions, cybersecurity, receivables and inventory exposure, foreign exchange, and legal or regulatory matters.
- The company was in compliance with debt covenants; its reported total net leverage ratio was 2.53:1.00. It amended the term loan in April 2018, reducing interest margins by 25 basis points, and entered into interest-rate caps with $1.4 billion combined notional value to manage variable-rate exposure.
- Legal proceedings, audits and other claims arise in the ordinary course. CDW said it did not believe a material loss beyond amounts already recognized was reasonably possible, but acknowledged outcomes are inherently unpredictable.
- CDW adopted ASC 606 using the full retrospective method. It also continued evaluating the Tax Cuts and Jobs Act provisional tax amounts; no adjustment was made in the quarter. New lease accounting was expected to put assets and liabilities for operating leases, principally real estate, on the balance sheet beginning in 2019.
- The board declared a $0.21-per-share quarterly dividend payable in September 2018. Future dividends and repurchases remain subject to board discretion and debt-agreement restrictions.
Important facts for investors to verify
- Whether sales growth—particularly international growth and client-device refresh demand—continues, and how much reflects foreign exchange or prior-period supply-chain timing.
- Whether margin performance holds as hardware mix, vendor funding, sales payroll and other operating costs change.
- Working-capital conversion and operating cash flow, given rising receivables and inventory and the longer cash conversion cycle.
- Debt service capacity, variable-rate exposure, covenant headroom and the availability of revolving credit under borrowing-base and liquidity conditions.
- Potential effects of ASC 606, lease accounting and finalization of tax-law estimates; assess non-GAAP results alongside GAAP results.
- Developments in ordinary-course legal matters, customer credit exposure, vendor supply, cybersecurity and public-sector contract compliance.