CDW Corporation — Q1 2018 Form 10-Q
Business context and period. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada. This filing covers the three months ended March 31, 2018; comparative 2017 figures were retrospectively adjusted for adoption of ASC 606.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $3,606.4 million | $3,256.0 million | +10.8%; +9.6% constant currency |
| Gross profit / margin | $603.9 million / 16.7% | $553.5 million / 17.0% | Profit +9.1%; margin down 30 bps |
| Operating income / margin | $204.1 million / 5.7% | $170.7 million / 5.2% | +19.6%; margin up 50 bps |
| Net income | $127.0 million | $58.2 million | +118.2% |
| Diluted EPS | $0.82 | $0.36 | +$0.46 |
| Operating cash flow | $222.2 million | $369.9 million | Down $147.7 million |
| Capital expenditures | $15.9 million | $19.6 million | Down $3.7 million |
| Adjusted EBITDA | $279.8 million; 7.8% margin | $250.1 million; 7.7% margin | +11.9% |
Cash and cash equivalents were $221.0 million at quarter-end. Debt was approximately $3.2 billion; reported net debt was $3,014.5 million. CDW had $987 million of additional borrowing availability under its U.S. revolving facility and no outstanding revolver borrowings. The company reported compliance with debt covenants and a 2.49:1.00 total net leverage ratio.
Quarter-end current assets were $3,479.9 million and current liabilities were $2,582.5 million. The cash conversion cycle improved to 17 days from 19 days a year earlier. CDW repurchased $109.2 million of stock and paid $32.0 million in dividends during the quarter. The declared quarterly dividend was $0.21 per share.
Material changes and management commentary
- Sales rose across all reportable segments: Corporate +8.7%, Small Business +12.2%, and Public +6.6%. Other, comprising U.K. and Canadian operations, grew 30.6%, with favorable currency translation contributing approximately 11 percentage points.
- Management attributed growth to client-device refresh activity, increased solution-based sales led by software, security demand, and services growth in warranties and field services. Public-sector growth included government and healthcare gains; education sales increased only 1.0%.
- Gross margin declined as hardware, generally a lower-margin category, grew and partner funding lagged sales growth. Higher net-basis revenue partly offset the pressure. Operating margin improved with expense leverage, despite increased sales payroll costs.
- Net income growth was amplified by the absence of the prior-year $57.4 million debt-extinguishment loss. Excluding specified items, non-GAAP net income increased 33.6% to $162.8 million.
- Operating cash flow declined despite higher earnings, reflecting working-capital movements, including a larger inventory cash use and lower accounts-receivable cash contribution than in the prior-year quarter.
Outlook, risks and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management stated it believes available liquidity and funding are adequate for at least the next year, while noting operating cash generation depends on execution and economic conditions.
- On April 3, 2018, CDW amended its term-loan agreement, reducing applicable interest margins by 25 basis points. The amendment also changed the restricted-payment leverage threshold to below 3.75:1.00.
- Interest-rate exposure remains relevant because the senior secured term loan is variable-rate. CDW purchased interest-rate caps with $1.4 billion combined notional during Q1; it expected to reclassify about $5 million from accumulated other comprehensive loss to interest expense over the following 12 months.
- Risks identified include economic and IT-spending weakness, vendor and product availability, competition, substantial indebtedness, cybersecurity and system disruptions, public-contract compliance, receivables and inventory exposure, foreign exchange, Brexit uncertainty, and legal proceedings or audits. CDW reported no reasonable possibility of material loss beyond amounts already recognized for its disclosed proceedings, while noting outcomes are inherently unpredictable.
- The 2017 comparison included a one-time debt-refinancing loss. The 2018 effective tax rate was 23.4%; the company continued evaluating provisional effects of the Tax Cuts and Jobs Act and reported no Q1 adjustment to those amounts.
Important facts for investors to verify
- Whether sales growth and higher operating income persist while gross margin remains under pressure from hardware mix and partner funding.
- Whether operating cash flow recovers and working-capital demands remain manageable, particularly inventory, receivables and inventory financing.
- Debt service, variable-rate exposure, covenant headroom and the effects of the April 3 loan amendment on interest expense and capital returns.
- How much reported growth reflects underlying demand versus foreign exchange, customer timing, and the reversal of late-2017 supply-chain issues.
- The comparability of reported results following retrospective ASC 606 adjustments and the sustainability of non-GAAP results relative to GAAP earnings.