CDW Corporation — Q2 2015 Form 10-Q
Business context and reporting period
CDW provides IT products and integrated solutions to business, government, education and healthcare customers in the U.S. and Canada. This unaudited quarterly report covers the three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $3,314.0 | $3,106.0 | $6,069.2 | $5,758.3 |
| Gross profit / margin | $534.5 / 16.1% | $496.9 / 16.0% | $991.0 / 16.3% | $922.1 / 16.0% |
| Operating income / margin | $205.9 / 6.2% | $188.2 / 6.1% | $357.5 / 5.9% | $324.0 / 5.6% |
| Net income | $108.2 | $86.6 | $162.9 | $137.5 |
| Diluted EPS | $0.63 | $0.50 | $0.94 | $0.80 |
| Net cash from operating activities | Not stated for the quarter | $99.1 | $175.9 |
- Q2 revenue rose 6.7%, operating income 9.4% and net income about 25% year over year. For the first half, revenue grew 5.4%, operating income 10.3% and net income 18.5%.
- Adjusted EBITDA, a non-GAAP measure, was $268.0 in Q2, up 8.4%, and $478.8 for the first half, up 8.4%. Management reported Q2 non-GAAP net income of $139.0 and first-half non-GAAP net income of $236.6.
- First-half operating cash flow fell $76.8 to $99.1, largely because working-capital changes used more cash; receivables and inventory were significant uses. Capital expenditures were $22.9. Cash declined $8.8 to $335.7.
- At June 30, total debt was approximately $3.17 billion, cash was $335.7 and net debt was $2.83 billion. The company had $888.5 of additional revolver availability, no revolver borrowings, and a 3.0 total net leverage ratio. It reported compliance with debt covenants.
- Current assets were $2,714.4 and current liabilities $1,625.6. Accounts payable-inventory financing was $373.3 and is described as non-interest-bearing when paid when due. Cash conversion cycle was 19 days, unchanged year over year.
Material changes versus prior periods
- Sales growth was broad-based: Q2 Corporate sales increased 6.3% and Public sales 8.1%; government sales rose 22.9%. For the first half, government sales rose 18.7%, while healthcare sales declined 1.1% amid industry consolidation.
- Management cited stronger demand for integrated solutions, including networking, software and servers; notebook/mobile device growth partly offset declining desktop sales. First-half federal sales benefited from a funded budget and changes aligning CDW with purchasing programs.
- Gross margin expanded 10 basis points in Q2 and 30 basis points for the first half. Management cited revenue mix, vendor funding and, for the first half, the absence of prior-period inventory adjustments. Operating expenses remained broadly stable as a share of sales.
- Net interest expense declined year over year, reflecting lower effective rates after refinancing. First-half results included a $24.3 debt-extinguishment loss related to redeeming the remaining 8.5% notes due 2019; CDW issued $525.0 of 5.0% notes due 2023 to help fund the redemption.
- CDW repurchased 2.5 million shares for $91.7 during the first half and declared dividends of $0.135 per share for the period. A separate 11.5 million-share public offering by existing stockholders generated no proceeds for CDW.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said first-half economic signals were mixed and it would continue monitoring conditions; it expects customer demand for complex IT solutions to remain an opportunity.
- Management identified risks from economic uncertainty and customer IT spending, government budget and purchasing priorities, competition and pricing pressure, healthcare consolidation, delays in education eRate funding, and foreign-currency fluctuations. Public-sector sales are sensitive to government spending and budgets.
- On August 1, 2015, after quarter-end, CDW acquired the remaining 65% of Kelway for total consideration of $431.0, including $372.3 cash and $58.7 in CDW shares; the stated total includes its prior investment for a 35% stake. CDW expected to consolidate about $80 of Kelway debt. Purchase-price allocation details were not yet available in this filing.
- The board declared a $0.0675-per-share quarterly dividend on August 3, payable September 10, subject to the stated record date. Future dividends remain subject to board approval.
- CDW said it did not believe material losses beyond amounts already recognized were reasonably possible for disclosed legal, audit, indemnification and bankruptcy-preference matters, while noting outcomes are inherently unpredictable. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether revenue and margin growth persisted beyond Q2, especially in government, healthcare and integrated solutions.
- Whether working-capital cash use reverses and operating cash flow recovers after the first-half decline.
- Debt service, leverage and liquidity after the Kelway acquisition, including the acquisition’s final purchase-price allocation and consolidated debt.
- The recurring earnings impact of refinancing and whether reported performance excluding debt-extinguishment and other non-GAAP adjustments is sustainable.
- Future share repurchases and dividends, considering cash needs, debt restrictions and acquisition integration.