CDW Corporation — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the same period in 2014. CDW provides IT products and solutions to business, government, education, and healthcare customers in the U.S. and Canada. Reportable segments are Corporate and Public; Canada, CDW Advanced Services, and Kelway are included in Other.
Financial performance and liquidity
- Revenue: $2.755 billion, up 3.9%. Corporate sales rose 4.5% to $1.574 billion and Public sales rose 3.7% to $1.006 billion; Other declined 0.8% to $175.4 million.
- Profit and margins: Gross profit was $456.5 million, up 7.4%; gross margin improved 60 basis points to 16.6%. Operating income rose 11.7% to $151.6 million, with operating margin up 40 basis points to 5.5%. Net income was $54.7 million versus $50.9 million; diluted EPS was $0.32 versus $0.30.
- Non-GAAP measures: Non-GAAP net income increased 20.3% to $97.6 million, and Adjusted EBITDA increased 8.8% to $210.8 million. These measures exclude specified items and are not GAAP measures.
- Cash flow: Operating cash flow was $177.8 million, down from $246.3 million. Capital expenditures were $10.0 million. Cash increased to $447.4 million from $344.5 million at year-end.
- Debt and liquidity: Total debt was approximately $3.206 billion and net debt was $2.759 billion. The term loan balance was $1.510 billion; net leverage was 3.0. CDW reported no revolver borrowings and $942.7 million of additional borrowing capacity. It was in compliance with debt covenants.
- Other indicators: Cash conversion cycle improved to 21 days from 22 days. The company declared dividends of $0.0675 per share during the quarter.
Material changes versus the prior period
- Growth reflected a shift in customer priorities toward data-center and integrated solutions, alongside continued notebook and mobile-device demand. Small-business sales increased 12.7%; government sales rose 13.5% and education sales 6.8%. Healthcare sales fell 5.2%.
- Gross margin gains reflected favorable product mix, service-contract revenue, advanced technology services, and the absence of prior-year inventory adjustments. Higher selling and administrative expenses partly offset these gains.
- Operating cash flow fell by $68.5 million, largely reflecting less favorable working-capital changes, including lower cash inflows from current liabilities and the timing of vendor payments.
- Net interest expense declined to $44.8 million from $50.1 million, while the debt-extinguishment loss increased to $24.3 million from $5.4 million.
Outlook, commentary, risks, and unusual items
- Management said economic growth slowed and macroeconomic uncertainty re-emerged in Q1, and it would continue monitoring conditions. Customer spending may be affected by economic uncertainty, tax and regulatory changes, interest rates, confidence, and employment.
- Management reported double-digit year-over-year growth in federal sales as a 2015 federal budget was in place, while noting that government spending and budgets can affect Public-segment demand. Healthcare sales were pressured by customer cost reduction amid industry consolidation.
- No specific financial guidance was provided. Management stated that current funding sources should meet cash operating requirements for the next year and that longer-term liquidity was adequate, subject to business execution and economic conditions.
- CDW issued $525 million of 5.0% senior notes due 2023 and arranged redemption of the remaining $503.9 million of 8.5% notes due 2019. The Q1 debt-extinguishment charge was $24.3 million; the filing describes redemption at 104.25% plus accrued interest, with the redemption date April 2, 2015.
- The company uses interest-rate caps to manage term-loan rate exposure. It reported ordinary-course litigation, audits, and indemnification matters, but did not believe a material loss beyond amounts recognized was reasonably possible; outcomes remain uncertain.
- Management said it did not expect the cited newly issued accounting standards to have a material impact, or that the consolidation standard would have a material impact. Revenue-recognition guidance was still being evaluated.
Investor verification points
- Check the debt redemption completion and related financing terms, including the reported extinguishment charge and interest-rate exposure.
- Assess whether operating cash flow and working-capital movements support earnings and liquidity, especially receivables and vendor-payment timing.
- Monitor the mix and durability of segment growth, particularly healthcare weakness and the reliance on government and education demand.
- Review the adjustments underlying Non-GAAP net income and Adjusted EBITDA alongside GAAP results.
- Follow any developments in ordinary-course legal, audit, contract, or customer-bankruptcy matters; the filing gives no clear quantified maximum exposure.