CDW Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts are in millions except per-share data. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $4,365.7 | $4,629.9 | $8,754.9 | $8,587.8 |
| Gross profit | $747.2 | $773.8 | $1,503.7 | $1,445.9 |
| Gross margin | 17.1% | 16.7% | 17.2% | 16.8% |
| Operating income | $283.4 | $300.3 | $529.2 | $529.2 |
| Operating margin | 6.5% | 6.5% | 6.0% | 6.2% |
| Net income | $189.1 | $196.6 | $357.0 | $349.5 |
| Diluted EPS | $1.31 | $1.33 | $2.47 | $2.35 |
- Q2: Sales declined 5.7% year over year (5.3% on a constant-currency basis); net income fell 3.8%. Higher gross margin partly offset lower sales and COVID-19-related costs. Non-GAAP operating income was $338.2 million, down 5.6%, with a 7.7% margin, unchanged year over year; non-GAAP net income was $225.3 million, down 5.2%.
- First half: Sales rose 1.9% (2.3% constant currency); average daily sales rose 1.1%. Gross profit increased 4.0%, while operating income was unchanged and net income rose 2.1%. Non-GAAP operating income declined 0.5% to $642.1 million; non-GAAP net income increased 0.5% to $425.3 million.
- Revenue mix: Q2 Public segment sales grew 9.9%, led by government and education; Corporate and Small Business fell 17.3% and 19.9%, respectively. Notebooks/mobile devices increased, supporting remote work and learning; sales of several other hardware categories declined. First-half Public sales increased 11.9% while Corporate and Small Business declined.
Cash flow, debt and liquidity
- First-half operating cash flow was $515.8 million, versus $414.5 million in 2019. Investing cash outflow was $100.0 million, including $100.0 million of capital expenditures. Financing cash inflow was $394.3 million, including proceeds from a $600 million notes offering.
- Cash at June 30 was $958.4 million, compared with $154.0 million at December 31, 2019. Long-term debt, including current maturities, was approximately $3.9 billion, up from $3.3 billion at year-end; reported net debt was $2,941.1 million. The company said it was in compliance with debt covenants.
- CDW reported $1.0 billion of additional borrowing availability under its U.S. revolving facility, plus £50 million ($62 million) under its U.K. facility, and said it expected adequate liquidity for at least the next year.
- Cash conversion cycle increased to 25 days from 16 days a year earlier, with days sales outstanding up 7 days and inventory days up 4 days. Management attributed the receivables increase to the economic environment and a greater mix of third-party services.
Material changes, outlook and risks
- COVID-19 had divergent demand effects: remote-work and remote-learning needs supported notebooks/mobile devices, government and education sales, while weaker business confidence hurt Corporate and Small Business demand. Healthcare customers delayed some refresh projects. Management noted uncertainty about the pandemic’s duration, resurgences and economic effects; the filing gives no quantified earnings or revenue guidance.
- CDW added $27.1 million to its credit-loss provision during the first half, primarily reflecting forecast deterioration associated with COVID-19. The company cautioned that estimates may change as conditions evolve.
- Management described measures to protect employees and maintain operations, monitor collections and credit limits, control costs and strengthen liquidity. Share repurchases were suspended in March; $140.8 million had been repurchased during the first half. A quarterly dividend of $0.38 per share was declared in August, subject to board discretion and debt restrictions.
- The April 2020 issuance of $600 million of 4.125% senior notes due 2025 increased debt. The CARES Act deferred certain corporate income-tax and employer payroll-tax payments. Legal proceedings arise in the ordinary course; CDW reported no reasonable possibility of material loss beyond amounts already recognized, while noting outcomes are unpredictable.
- Other risks highlighted include economic conditions and customer spending, supplier/product constraints, customer credit and collections, indebtedness and covenant restrictions, cybersecurity, foreign exchange, Brexit-related uncertainty, and government/education/healthcare funding.
Important facts for investors to verify
- Whether corporate and small-business demand stabilizes, and whether remote-enablement demand continues to support notebooks and Public-sector sales.
- Subsequent credit-loss provisions, customer collections and receivables trends, given the $27.1 million first-half provision and longer cash conversion cycle.
- Debt levels, interest costs, covenant headroom and use of the $1.0 billion U.S. revolving borrowing availability.
- Whether gross-margin improvement and cost savings can offset lower sales and pandemic-related costs.
- Future share repurchases and dividend decisions, which remain subject to liquidity, results, contractual limits and board discretion.