CDW Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement amounts 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 | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $3,106.0 | $2,779.3 | $5,758.3 | $5,191.0 |
| Gross profit | $496.9 | $451.6 | $922.1 | $853.6 |
| Gross margin | 16.0% | 16.2% | 16.0% | 16.4% |
| Operating income | $188.2 | $153.6 | $324.0 | $273.7 |
| Operating margin | 6.1% | 5.5% | 5.6% | 5.3% |
| Net income | $86.6 | $46.7 | $137.5 | $75.0 |
| Diluted EPS | $0.50 | $0.32 | $0.80 | $0.51 |
| Adjusted EBITDA, non-GAAP | $247.1 | $212.6 | $440.8 | $391.2 |
- Q2 sales increased 11.8%; six-month sales increased 10.9%. Growth was primarily driven by notebooks/mobile devices and desktop computers. Public segment sales rose 17.5% in Q2 and 16.2% for the six months, with particularly strong education and healthcare demand. Corporate sales increased 7.7% and 7.5%, respectively.
- Operating income and net income grew faster than sales, helped by lower selling and administrative expenses as a percentage of sales and substantially lower interest expense. Gross margin nevertheless contracted, reflecting product mix and continued margin pressure in notebooks and desktops; the six-month comparison also reflected lower cooperative advertising funding.
- Q2 net interest expense was $48.5, down from $70.3; six-month expense was $98.6, down from $142.4. Lower debt balances, refinancing and lower effective rates contributed to the decline. Debt-extinguishment losses were $2.6 in Q2 and $8.0 for the six months.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $175.9, compared with $207.1 in 2013. Investing cash outflow was $41.9, including $21.0 of capital expenditures and a $20.9 charitable contribution payment. Financing cash outflow was $94.7. Cash increased $39.5 to $227.6.
- At June 30, cash was $227.6, total assets were $6,045.3, current liabilities were $1,529.4 and shareholders’ equity was $844.8. Total debt was $3,126.0; management’s reported net debt measure was $2,898.4. The cash conversion cycle improved to 19 days from 20.
- CDW entered a five-year, $1.25 billion asset-based revolving facility in June. There were no revolver borrowings at quarter-end; the company reported up to $954.4 of additional borrowing availability, subject to the borrowing base and liquidity conditions. Management stated it was in compliance with debt covenants and believed available funding would cover cash operating requirements for the next year.
Outlook, developments and risks
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management reported improving economic confidence and a return to federal government sales growth in Q2, while noting it would continue monitoring macroeconomic conditions.
- After quarter-end, on August 5, CDW issued $600.0 of 6.0% senior notes due 2022. Proceeds and cash on hand were designated to redeem the remaining $325.0 of 8.0% secured notes and $234.7 of 8.5% notes. The company expected a $45.8 debt-extinguishment loss in Q3 from premiums and write-offs of financing costs.
- The board declared a $0.0425 per-share dividend for payment in September 2014. Future dividends remain subject to board approval, debt-agreement restrictions and other factors.
- Key business risks include dependence on customer IT spending and government budgets, competitive pricing and product-margin pressure, and the ability to deliver complex technology solutions. Legal, contract-audit, indemnification and customer-bankruptcy matters arise in the ordinary course; management did not believe a material loss beyond amounts recognized was reasonably possible, but outcomes remain uncertain.
- Management was evaluating the impact of the new revenue-recognition standard, effective for CDW in 2017. It reported no material change in risk factors, market-risk disclosures or internal control over financial reporting.
Important facts for investors to verify
- Whether strong Public-segment and device-refresh demand continues, and how much growth depends on education testing requirements and government spending.
- Whether product mix, price competition and vendor funding continue to pressure gross margins despite improved operating margins.
- Cash-flow conversion and working-capital needs: six-month operating cash flow declined year over year even as net income increased.
- Post-quarter refinancing completion, the resulting debt balances and the expected $45.8 Q3 extinguishment charge; also assess variable-rate exposure and covenant/liquidity conditions.
- Dividend capacity under debt restrictions and the eventual impact of the 2017 revenue-recognition standard.