CDW Corporation — 2014 Form 10-K Summary
Business context and reporting period
CDW provides IT products, services and integrated solutions to business, government, education and healthcare customers in the U.S. and Canada. Its fiscal year ended December 31, 2014; this is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $12,074.5 | $10,768.6 |
| Gross profit / margin | $1,921.3 / 15.9% | $1,760.3 / 16.3% |
| Operating income / margin | $673.0 / 5.6% | $508.6 / 4.7% |
| Net income | $244.9 | $132.8 |
| Diluted EPS | $1.42 | $0.84 |
| Operating cash flow | $435.0 | $366.3 |
| Capital expenditures | $55.0 | $47.1 |
| Cash and cash equivalents at year-end | $344.5 | $188.1 |
| Working capital at year-end | $985.4 | $810.9 |
Fourth-quarter 2014 sales were $3,050.1, gross profit $491.9, operating income $164.3 and net income $51.8. In fourth-quarter 2013, the corresponding figures were $2,713.3, $448.3, $142.0 and $60.0.
At year-end, reported total debt and capitalized lease obligations were $3,190.0; inventory financing obligations, reported separately, were $332.1. The company reported $935.6 of additional borrowing capacity under its revolving facility and net debt of $2,845.5, defined as total debt less cash and excluding inventory financing. It was in compliance with debt covenants. Cash conversion cycle improved to 21 days from 23 days.
Material changes versus the prior period
- Sales rose 12.1%; growth came from client-device refresh activity, K-12 digital-testing demand, and growth in networking and software. Public segment sales increased 17.2%, including 25.9% growth in education; Corporate sales increased 8.6%.
- Gross margin declined 40 basis points, mainly from product mix and margin pressure in notebooks/mobile devices and desktops, plus vendor funding representing a smaller share of sales. Operating margin improved 90 basis points, aided by lower selling and administrative expenses and the absence of most 2013 IPO-related costs.
- Net income increased despite a $90.7 debt-extinguishment loss, versus $64.0 in 2013. Net interest expense declined to $197.3 from $250.1, following debt repayment and refinancing. The effective tax rate rose to 36.8% from 32.1%.
- Operating cash flow increased by $68.7. Investing cash outflow included $86.8 for a 35% non-controlling investment in UK-based Kelway and $55.0 of capital expenditures. Financing cash outflow was $112.0.
Outlook, risks and unusual items
- Management said it expected client-device demand to moderate in 2015 as refresh activity slowed and K-12 digital-testing preparation wound down. It planned to monitor macroeconomic conditions; the filing provides no quantified 2015 earnings or sales guidance.
- Management attributed improving Public segment trends to more settled federal budget allocations and confidence in a 2015 federal budget. Federal-government sales were approximately 7% of 2014 net sales. Government spending changes, customer budgets and regulation remain risks.
- Debt refinancing included issuing $600.0 of 6.0% notes due 2022 and $575.0 of 5.5% notes due 2024, and retiring higher-rate or 2019 notes. Related 2014 debt-extinguishment losses totaled $90.7. Variable-rate debt was $1,513.5; interest-rate caps were used to limit some exposure.
- The company acquired its Kelway stake for $86.8 and held an option to purchase the remaining 65% between June 2015 and June 2017. The investment is accounted for under the equity method.
- A $500 million share-repurchase authorization was approved; no shares had been repurchased as of the filing. The quarterly dividend was raised to $0.0675 per share late in 2014; future dividends remain discretionary and subject to debt and other restrictions.
- Key risks include substantial leverage and restrictive covenants, vendor and product concentration, intense competition and pricing pressure, technology shifts toward cloud and direct sales, cybersecurity and IT-system disruption, inventory obsolescence, and exposure to government spending. The company disclosed ordinary-course legal matters and audits, but did not believe a material loss beyond amounts recognized was reasonably possible; outcomes remain uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether 2015 growth can offset expected moderation in client-device demand, especially in education and Public markets.
- Whether gross-margin pressure persists and how vendor incentives, product mix and pricing affect profitability.
- Debt service capacity, refinancing terms, covenant headroom and variable-rate exposure; distinguish reported debt from inventory financing obligations.
- Cash-flow sustainability and working-capital movements, including the favorable year-end inventory and collections effects described by management.
- Kelway’s performance and the terms or likelihood of exercising the option to acquire the remaining interest.
- Dividend and repurchase capacity given leverage covenants and the disclosed deferred cancellation-of-debt tax considerations.