CDW Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S. and Canada.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $3,266.1 | $2,864.3 | $9,024.4 | $8,055.3 |
| Gross profit | $507.3 | $458.4 | $1,429.4 | $1,312.0 |
| Gross margin | 15.5% | 16.0% | 15.8% | 16.3% |
| Operating income | $184.7 | $92.9 | $508.7 | $366.6 |
| Operating margin | 5.7% | 3.2% | 5.6% | 4.6% |
| Net income (loss) | $55.6 | $(2.2) | $193.1 | $72.8 |
| Diluted EPS | $0.32 | $(0.01) | $1.12 | $0.47 |
| Operating cash flow | Not stated quarterly | $350.5 | $370.8 |
- Q3 sales rose 14.0%; nine-month sales rose 12.0%. Public segment sales increased 18.0% in Q3 and 16.9% year to date; Corporate sales grew 10.7% and 8.6%, respectively.
- Q3 Adjusted EBITDA, a non-GAAP measure, was $242.6, up 12.2%; nine-month Adjusted EBITDA was $683.4, up 12.5%. Non-GAAP net income was $110.7 for Q3 and $307.7 year to date. These measures exclude specified items and may not be comparable with similarly named measures at other companies.
- Q3 gross margin declined 50 basis points year over year, principally from product mix and margin pressure in faster-growing notebooks/mobile devices, and lower vendor funding as a proportion of sales. Operating margin improved largely because 2013 included substantial IPO-related expenses.
Balance sheet, debt and liquidity
- At September 30, 2014, cash was $357.8, current assets $2,516.2 and current liabilities $1,527.6. Total assets were $6,107.4 and shareholders’ equity $894.0.
- Total debt was $3,161.7, down from $3,251.2 at December 31, 2013; net debt was $2,803.9. The term loan carried a 3.25% rate during the quarter; the company reported a 3.2 total net leverage ratio and compliance with debt covenants.
- The new five-year asset-based revolver has $1.25 billion of capacity. No amounts were drawn at quarter-end; the company reported $955.3 of additional borrowing availability, subject to borrowing-base and liquidity conditions. Inventory financing payables were $299.7 and are described as non-interest-bearing.
- Management said current funding sources should cover cash operating needs for the next year and that longer-term liquidity was adequate. This assessment depends in part on operating cash generation and economic conditions.
Material changes, outlook and risks
- Q3 GAAP net income improved from a loss to profit, but results include $45.8 of debt-extinguishment losses in 2014. The prior-year quarter included $74.1 of IPO-related expenses and a favorable litigation settlement. Nine-month 2014 debt-extinguishment losses were $53.8.
- In August, CDW issued $600 of 6.0% notes due 2022 and used proceeds plus cash to redeem $325 of 2018 secured notes and $234.7 of 2019 notes. It also redeemed its remaining 2017 subordinated notes during 2014. These transactions reduced some higher-cost debt but generated redemption and refinancing charges.
- Management reported improving federal-government sales momentum following budget allocations, with continued momentum through the federal fiscal year-end. Growth was also supported by device refreshes, K-12 digital-testing preparation, and demand for networking and software. The filing provides no specific full-year revenue or earnings guidance.
- Risks highlighted include customer IT spending and economic uncertainty, government budget changes, intense competition and pricing pressure, and gross-margin variability from product mix, vendor incentives and market conditions. Ordinary-course legal, contract-audit and indemnification matters remain; the company did not believe material losses beyond amounts recognized were reasonably possible, while noting outcomes are unpredictable.
- After quarter-end, the board raised the quarterly dividend to $0.0675 per share and authorized a $500 million share-repurchase program; no shares had been repurchased as of the filing date. CDW also completed a 35% investment in UK-based Kelway on November 10, 2014, to be accounted for under the equity method. These are subsequent events, not Q3-period transactions.
Important facts for investors to verify
- How much of the earnings improvement reflects underlying operating growth versus prior-year IPO costs, litigation items and current debt-redemption charges.
- Whether sales growth can be sustained while gross margin remains under pressure, especially in high-volume device categories.
- Debt maturities, interest-rate exposure, revolver borrowing-base availability and covenant headroom; variable-rate term-loan exposure is partly addressed by interest-rate caps.
- Cash conversion and working-capital trends: operating cash flow fell to $350.5 for the first nine months from $370.8, while the cash conversion cycle remained 20 days.
- The implications of the higher dividend, announced buyback and Kelway investment for liquidity and capital allocation; future dividends remain subject to board approval and debt-agreement restrictions.