CDW Corporation — Q3 2015 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2015, compared with 2014. CDW provides IT products and integrated solutions to business, government, education and healthcare customers in North America and the UK. On August 1, CDW acquired the remaining 65% of UK-based Kelway, increasing ownership from 35% to 100%; results were consolidated from that date.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $3,501.1m | $3,266.1m | $9,570.3m | $9,024.4m |
| Gross profit / margin | $567.2m / 16.2% | $507.3m / 15.5% | $1,558.2m / 16.3% | $1,429.4m / 15.8% |
| Operating income / margin | $204.6m / 5.8% | $184.7m / 5.7% | $562.1m / 5.9% | $508.7m / 5.6% |
| Net income | $150.9m | $55.6m | $313.8m | $193.1m |
| Diluted EPS | $0.88 | $0.32 | $1.82 | $1.12 |
| Adjusted EBITDA (non-GAAP) | $282.1m | $242.6m | $761.0m | $683.4m |
- Q3 sales rose 7.2%; organic sales grew 3.0%, or 3.6% on a constant-currency basis. Two months of Kelway contributed $138.4m of Q3 revenue. Nine-month reported sales grew 6.0%; organic sales grew 4.5%, or 5.1% constant currency.
- Q3 Corporate sales grew 6.3%, while Public sales were essentially flat: government rose 10.7%, offset by an 8.5% decline in education. For nine months, Corporate rose 5.8% and Public rose 3.7%.
- Q3 gross margin improved 70 basis points, supported by service-contract revenue, vendor funding, favorable mix and inventory adjustments. Operating margin increased 10 basis points; higher selling and administrative expense partly offset gross-margin improvement.
- Q3 GAAP net income included a $98.1m noncash gain from remeasuring CDW’s previously held Kelway investment. The comparison period included a $45.8m debt-extinguishment loss. Nine-month 2015 income also included a $24.3m debt-extinguishment loss. Adjusted EBITDA and non-GAAP net income are company-defined measures, not GAAP results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $294.9m, down from $350.5m; investing cash use was $308.2m, including $263.8m net cash paid for Kelway and $43.9m of capital expenditures. Financing cash use was $229.9m, including $193.3m of share repurchases and $34.6m of dividends. Cash declined $247.0m to $97.5m.
- At September 30, total debt carrying value was approximately $3.27bn; net debt was $3.17bn. The term-loan net leverage ratio was 3.1x. CDW reported compliance with debt covenants.
- CDW reported $981.5m of borrowing availability across its revolving facilities. The ABL facility had no borrowings and approximately $905.9m of additional borrowing capacity; Kelway’s revolving facility was also undrawn.
- Current assets were $2.73bn and current liabilities $1.87bn. Accounts receivable was $1.86bn, up from $1.56bn at year-end; management cited slower government payments in some states and customer-payment timing as factors affecting working capital. Cash conversion cycle was 18 days versus 20 days a year earlier.
Outlook, commentary and risks
- No numerical full-year revenue or earnings guidance is provided in the filing. Management described global economic signals as mixed and said it would monitor conditions. It noted customer spending may be affected by economic uncertainty, policy changes, confidence and competitive pricing.
- Management said customer demand was shifting toward integrated IT solutions; solutions-focused products grew faster than transactional sales. It expected potential benefit from K-12 E-Rate implementations, but approval and spending timing was uncertain. Q3 education sales declined amid weaker client-device demand and competitive pricing.
- Key operating exposures include public-sector budget and spending decisions, customer IT-spending levels, vendor incentives and pricing, and foreign-currency translation and transaction effects.
- On October 29, 2015, CDW received an SEC request for documents regarding its vendor partner program incentives and said it was cooperating. The company reported no reasonable possibility of a material loss beyond amounts already recognized from other disclosed legal matters, while noting outcomes are inherently unpredictable.
- CDW declared a $0.1075 quarterly dividend payable in December 2015, subject to the stated record date. Future dividends remain subject to board approval.
Most important facts for investors to verify
- How much of reported growth and earnings reflects Kelway consolidation and the one-time $98.1m remeasurement gain versus ongoing organic performance.
- Whether Kelway integration, acquired intangible amortization and acquisition-related costs affect margins and cash generation as expected.
- Progress on receivables collection, operating cash flow and liquidity after the acquisition and substantial repurchases.
- Debt leverage, covenant headroom, refinancing costs and sensitivity to interest rates and currency movements.
- Status and potential consequences of the SEC inquiry into vendor partner program incentives.
- Whether education demand and E-Rate funding recover, and whether government and integrated-solutions growth persists.