Business context and reporting period
CDW Corporation filed this Form 10-K for the fiscal year ended December 31, 2018. CDW is a technology solutions reseller serving business, government, education and healthcare customers in the U.S., U.K. and Canada. Its offerings span hardware, software, services and integrated IT solutions. The filing reports full-year results; fourth-quarter figures are also provided below.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $16,240.5 million | $14,832.9 million |
| Gross profit / margin | $2,706.9 million / 16.7% | $2,450.2 million / 16.5% |
| Operating income / margin | $987.3 million / 6.1% | $866.5 million / 5.8% |
| Net income / diluted EPS | $643.0 million / $4.19 | $523.1 million / $3.31 |
| Adjusted EBITDA / margin | $1,302.2 million / 8.0% | $1,186.0 million / 8.0% |
| Cash from operations | $905.9 million | $777.7 million |
| Capital expenditures | $86.1 million | $81.1 million |
Fourth-quarter 2018 sales were $4,074.8 million, gross profit $693.8 million, operating income $242.9 million and net income $159.3 million; diluted EPS was $1.05. In fourth-quarter 2017, the corresponding figures were $3,752.1 million, $613.7 million, $221.1 million, $194.8 million and $1.25.
At year-end, cash was $205.8 million, working capital $993.7 million and total assets $7,167.7 million. Long-term debt was $3,183.3 million, plus $25.3 million of current maturities; net debt was $3,002.8 million. Inventory-financing payables of $429.3 million were separately reported. CDW had $1.1 billion available under its U.S. revolving facility and $64 million under its U.K. facility. The cash conversion cycle was 19 days.
Material changes versus prior comparable period
- Full-year sales increased 9.5% (9.2% on a constant-currency basis). Growth reflected client-device refresh demand, solutions sales and international performance.
- Corporate sales rose 10.8%, Small Business 11.4%, Public 4.2% and Other, including U.K. and Canadian operations, 22.9%. Government sales were nearly flat; education and healthcare grew.
- Gross margin expanded 20 basis points, which management attributed to improved product margin and a higher mix of revenue recorded net, partly offset by partner funding growing more slowly than sales.
- Operating margin improved 30 basis points. Net income rose 22.9%; 2017 included a $57.4 million debt-extinguishment loss, while 2018 did not. The effective tax rate was 23.5% in 2018 versus 20.8% in 2017, when tax reform benefits reduced the rate.
- Operating cash flow increased $128.2 million. Higher accounts receivable, partly reflecting sales growth and longer payment cycles for some public customers, was a significant working-capital use.
Outlook, commentary, risks and unusual items
The 10-K does not provide a quantified sales or earnings forecast. Management cited continued opportunity from cloud, security, client-device refresh, software-defined and as-a-service solutions, while noting that economic conditions and customer spending affect results.
- Key risks include competition and pricing pressure; dependence on major vendors, distributors and vendor incentives; technology shifts that may bypass resellers; public-sector budgets and contract compliance; cybersecurity and IT-system disruption; supply interruptions and tariffs; Brexit and foreign-exchange exposure; customer credit and inventory obsolescence; and substantial indebtedness.
- CDW reported $3.2 billion of debt and $1.5 billion of variable-rate debt at year-end; it used interest-rate caps and said it was in compliance with debt covenants. Management stated it believed liquidity was adequate for at least the next year, subject to operating performance and other risks.
- CDW repurchased 6.3 million shares for $522.3 million and paid $139.4 million in dividends during 2018. The board later authorized a further $1.0 billion increase to the repurchase program and declared a quarterly dividend of $0.295 per share.
- After year-end, CDW completed its acquisition of Canadian provider Scalar Decisions Inc. on February 1, 2019. The company also adopted the new lease standard on January 1, 2019, expecting approximately $81 million of right-of-use assets and lease liabilities, with no expected effect on earnings or cash flows.
- Ordinary-course litigation, audits and indemnification matters remain pending; management did not believe a material loss beyond amounts already recognized was reasonably possible, while cautioning outcomes are unpredictable. The filing reports no material off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether sales growth and margin improvement continue, especially given the 80.6% hardware share of sales and sensitivity to vendor incentives, product mix and price competition.
- Whether collections and public-customer payment cycles stabilize; year-end receivables rose to $2,671.2 million and DSO increased to 56 days from 53.
- Debt maturities, variable-rate exposure, availability under borrowing facilities and restrictions on dividends, repurchases and other uses of cash.
- The performance and integration of Scalar Decisions, and the effect of lease-standard adoption and other accounting changes.
- Quarterly comparability: fourth-quarter 2018 net income and diluted EPS were below fourth-quarter 2017 despite higher sales and operating income.