CDW Corporation (CDW) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Comparative figures are for Q1 2015 unless stated otherwise. Amounts are in U.S. dollars.
Business context
CDW distributes IT products and provides integrated technology solutions to business, government, education and healthcare customers in the U.S., Canada and the U.K. Q1 2016 results include three months of CDW UK (formerly Kelway), acquired in August 2015; the comparable 2015 period did not include its consolidated results. CDW reports Corporate and Public segments; Canada and the U.K. are included in “Other.”
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $3,116.7 million | $2,755.2 million; up 13.1% reported |
| Organic sales | Up 4.7%; up 5.1% at constant currency | Average-daily organic constant-currency growth: 3.5% |
| Gross profit / margin | $524.5 million / 16.8% | $456.5 million / 16.6% |
| Operating income / margin | $161.0 million / 5.2% | $151.6 million / 5.5% |
| Net income / diluted EPS | $77.8 million / $0.46 | $54.7 million / $0.32 |
| Adjusted EBITDA | $232.7 million; 7.5% of sales | $210.8 million; 7.7% of sales |
| Operating cash flow | $427.6 million | $177.8 million |
| Capital expenditures | $11.0 million | $10.0 million |
- Sales growth reflects both organic growth and CDW UK consolidation. Corporate and Public sales each rose 5.1%; government sales rose 15.5%, while education sales declined 1.3%. “Other” sales rose 178.1%, chiefly due to CDW UK.
- Gross margin expanded 25 basis points, helped by vendor funding and service-contract revenue, partly offset by unfavorable product price/mix. Operating margin fell 30 basis points as selling and administrative costs rose faster than sales, including payroll and acquired-intangible amortization.
- Operating cash flow benefited from collections of receivables and operating results; inventory growth partly offset the benefit. Cash conversion cycle improved to 20 days from 21 days.
- At March 31, cash was $248.2 million and total debt, including current maturities, was approximately $3.252 billion; net debt was $3.004 billion. The company reported $908 million of additional U.S. revolver availability and $72 million under the CDW UK facility. No borrowings were outstanding on the U.S. revolver at quarter-end.
- CDW was in compliance with debt covenants. Its reported total net leverage ratio was 2.8, and restricted-payment capacity under the term loan was $680 million. Management said available liquidity was adequate for at least the next year.
Changes, outlook and risks
- Reported sales rose 13.1%, but organic growth was materially lower; acquisition and foreign-exchange effects should be separated when assessing underlying performance. The 2015 comparison also included a $24.3 million debt-extinguishment loss, absent in 2016, while net interest expense declined year over year.
- Management described customer demand as balanced between integrated solutions and transactional products, with growth in software, networking and enterprise storage and in notebooks/mobile devices. It gave no quantified full-year guidance in the supplied filing text.
- Management cited mixed macroeconomic signals and said it was monitoring conditions and adjusting hiring plans. Risks include weaker or deferred IT spending, competitive pricing, government budget priorities, education budget pressure, product mix, vendor incentive programs and foreign-currency movements.
- In October 2015, CDW received an SEC document request in an investigation concerning vendor-partner program incentives and said it was cooperating. As of March 31, management did not believe a material loss beyond amounts already recognized was reasonably possible, but noted outcomes are inherently unpredictable.
- During Q1, CDW repurchased 3.0 million shares for $118 million and declared a $0.1075-per-share dividend. Subsequent to quarter-end, the board authorized a $750 million increase to the share-repurchase program and declared another $0.1075 dividend, payable in June 2016.
- Other notable items: the U.K. business was rebranded CDW UK on April 4, 2016; the company early-adopted a deferred-tax presentation standard with no material impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Underlying sales and earnings growth excluding CDW UK, currency effects and acquisition-related amortization.
- Whether gross-margin gains from vendor funding and service revenue persist, given product price/mix pressure and reliance on vendor programs.
- Cash-flow quality and working-capital trends, particularly receivables, inventory and inventory-financing balances.
- Debt, leverage, covenant headroom and the effect of expanded buybacks and dividends on liquidity and net debt.
- Updates and potential financial consequences of the SEC inquiry into vendor-partner program incentives.