CDW Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada. Figures are in U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date | Change or context |
|---|---|---|---|
| Net sales | $4,389.2 million | $3,957.9 million | Up 10.9%; average-daily-sales growth was 9.2% (9.4% constant currency). |
| Gross profit / margin | $756.5 million / 17.2% | $672.1 million / 17.0% | Gross profit up 12.6%; margin up 20 basis points. |
| Operating income / margin | $245.8 million / 5.6% | $228.9 million / 5.8% | Income up 7.4%; margin down 20 basis points. |
| Net income | $167.9 million | $152.9 million | Diluted EPS was $1.16, versus $1.02. |
| Operating cash flow | $223.0 million | $252.4 million | Down $29.4 million, with higher receivables use of cash. |
| Cash and cash equivalents | $214.4 million | $154.0 million at Dec. 31, 2019 | Quarter-end cash increased $60.4 million. |
| Debt and net debt | $3.5 billion total indebtedness; $3,257.8 million net debt | $2,998.4 million net debt | Net debt increased year over year. |
| Liquidity availability | $0.9 billion under U.S. revolving facility, plus $62 million under U.K. facility | — | Management said it had adequate liquidity and funding for at least the next year. |
Material changes and operating drivers
- Sales growth reflected strong demand for remote-work enablement, particularly client devices, collaboration tools and software. Management said this demand should moderate as customers complete remote-work deployments and that some March sales likely represented a pull-forward of future demand.
- Public segment sales increased 14.6%; Corporate and Small Business each increased 10.1%. Public operating income rose 47.8%, while Corporate operating income fell 5.4% and Other fell 42.5%.
- Selling and administrative expenses rose 15.2%, faster than sales. The increase included a $29.2 million provision for credit losses, largely reflecting expected COVID-19-related economic effects, as well as higher payroll costs. The allowance for credit losses was $35.1 million at March 31, versus $7.9 million at year-end.
- Cash conversion cycle increased to 20 days from 17 days a year earlier, primarily due to higher days sales outstanding and lower days purchases outstanding.
- Non-GAAP operating income was $303.9 million, up 5.8%; non-GAAP operating margin was 6.9%, versus 7.3%. Non-GAAP net income was $200.0 million, up 7.8%. These company-defined measures exclude specified items, including acquisition-related amortization and equity-based compensation.
Liquidity, capital allocation and outlook
- Q1 financing included $781.0 million of revolving-facility borrowings and $619.5 million of repayments. CDW spent $140.8 million on share repurchases and paid $54.2 million in dividends during the quarter.
- CDW suspended share repurchases as a precaution amid COVID-19. It also cited cost-saving initiatives and measures to enhance liquidity.
- On April 21, 2020, after quarter-end, CDW issued $600 million of 4.125% senior notes due 2025 at par for general corporate purposes.
- The board declared a $0.38-per-share quarterly dividend on May 6, payable June 10, 2020. Future dividends remain subject to board discretion and other restrictions.
- No numerical full-year guidance is provided in the filing. Management emphasized substantial uncertainty around the duration and effects of COVID-19, customer spending, supply availability and the timing of a return to normal operations.
Risks, contingencies and other notable items
- COVID-19 could disrupt suppliers, product availability, distribution, delivery services and coworker operations; weaken customer payment capacity; and reduce technology spending through recession, budget cuts or tighter credit. A distribution center was temporarily closed after coworkers tested positive; the company reported modest shipping delays and no material impact to date.
- CDW took strategic inventory positions to mitigate possible supply constraints. The resulting effect on working capital and inventory risk warrants monitoring.
- Other risks cited include customer credit exposure, high indebtedness and debt restrictions, foreign currency movements, Brexit-related uncertainty, cybersecurity, vendor relationships and government, education and healthcare budget changes.
- CDW reported compliance with debt covenants at March 31. It said it did not believe material losses beyond amounts already recognized were reasonably possible for disclosed legal and other proceedings, while noting outcomes are inherently unpredictable.
- Adoption of the expected-credit-loss accounting standard had no significant effect on the financial statements. The CARES Act deferred certain tax and payroll-tax payments.
Investor verification points
- Track whether remote-work-related demand moderates as management expected, and whether March sales were pulled forward from later periods.
- Monitor receivables, credit-loss provisions and cash collections as the economic impact of COVID-19 develops.
- Assess cash conversion cycle, inventory levels and supplier constraints alongside operating cash flow.
- Review debt, revolving-facility availability, the use of proceeds from the $600 million notes issuance, and the company’s capacity to service debt.
- Compare segment sales and operating margins in subsequent quarters, particularly Corporate and Other, and distinguish reported results from non-GAAP measures.
- Verify the duration and operational effects of COVID-19 disruptions and any changes to share repurchases, dividends or liquidity plans.