CDW Corporation (CDW) — 2019 Form 10-K
Business context and reporting period. CDW is an IT solutions reseller and services provider serving business, government, education and healthcare customers in the U.S., U.K. and Canada. This annual report covers the fiscal year ended December 31, 2019; it also reports fourth-quarter results. The company’s principal offerings include hardware, software, cloud, security and professional services.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $18.032 billion | $16.241 billion | +11.0% (+11.5% constant currency) |
| Gross profit / margin | $3.040 billion / 16.9% | $2.707 billion / 16.7% | Margin +20 basis points |
| Operating income / margin | $1.134 billion / 6.3% | $987.3 million / 6.1% | Income +14.8% |
| Net income / net margin | $736.8 million / 4.1% | $643.0 million / 4.0% | +14.6% |
| Diluted EPS | $4.99 | $4.19 | +19.1% |
| Operating cash flow | $1.027 billion | $905.9 million | +$121.3 million |
- Fourth-quarter 2019 net sales were $4.537 billion, versus $4.075 billion a year earlier; net income was $185.6 million versus $159.3 million, and diluted EPS was $1.27 versus $1.05.
- Cash and cash equivalents were $154.0 million at year-end. Total debt was approximately $3.3 billion; net debt was $3.163 billion. Inventory financing payables of $429.9 million are reported separately from debt.
- CDW reported $1.0 billion of borrowing availability under its U.S. revolving facility and $66 million under its U.K. facility. Working capital was $842.7 million, down from $993.7 million. The cash conversion cycle improved to 18 days from 19.
- Capital expenditures were $236.3 million, versus $86.1 million in 2018. Operating cash flow less capital expenditures was approximately $790.9 million (calculated from reported figures).
Material changes and notable items
- Growth spanned all major product categories, particularly client devices, software and services. Public segment sales rose 11.5%, including 20.1% growth in government; Corporate sales rose 9.6%, Small Business 11.1%, and Other 14.6%.
- Hardware represented 79.8% of sales, down from 80.6%; software was 14.6% versus 14.4%, and services 5.0% versus 4.3%.
- CDW acquired Canadian provider Scalar Decisions on February 1, 2019, for a final purchase price of $88 million; its results were included from the acquisition date. CDW also acquired Aptris on October 1, 2019.
- In September 2019, CDW issued $600 million of 4.25% notes due 2028 and redeemed its $525 million 2023 notes. It extended its term-loan maturity to October 2026. Net interest expense increased to $159.4 million from $148.6 million.
- CDW repurchased 6.1 million shares for $657 million and paid $183.4 million in dividends during 2019. The declared dividend increased to $0.38 per share quarterly in the fourth quarter.
- Management cited improved product margin and a higher mix of revenues recorded net of related costs as contributors to gross-margin improvement; partner funding growth lagged sales growth. Higher payroll costs partly offset operating-income gains.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said it believed liquidity and funding were adequate for at least the next year, while noting that operating cash generation depends on execution and economic conditions.
- Management identified economic uncertainty, changing public-sector budgets, competition and pricing pressure, vendor-partner dependence, product availability and supply-chain disruption as risks. The filing specifically noted uncertainty about the emerging coronavirus’s potential effect on supply and customer demand, and Brexit-related currency, trade and regulatory risks.
- Six vendors’ products accounted for approximately 60% of 2019 consolidated sales; Cisco and Dell EMC products together accounted for approximately 25%. Each of the three largest U.S. distributors represented about 10% of U.S. purchases.
- Debt and liquidity risks include $1.6 billion of variable-rate debt, LIBOR transition uncertainty and restrictive debt covenants. CDW reported covenant compliance at year-end and had interest-rate caps with a combined $1.4 billion notional amount.
- Ordinary-course litigation, audits and indemnification matters remained outstanding; CDW said it did not believe a material loss beyond amounts already recognized was reasonably possible, while acknowledging outcomes are uncertain. The auditor issued unqualified opinions on the financial statements and internal controls; revenue recognition was identified as a critical audit matter.
Most important facts for investors to verify
- How much reported growth came from underlying demand versus Scalar and Aptris acquisitions, and whether services and software growth continues.
- Whether gross-margin gains and operating leverage persist as vendor funding, product mix and competitive pricing change.
- Cash conversion, receivables and inventory trends, especially given higher year-end inventory and the increase in capital spending.
- Debt-service capacity, variable-rate exposure, refinancing terms and covenant headroom alongside continued dividends and repurchases.
- Any realized effects on customer demand, product availability, costs or foreign exchange from supply-chain disruption, coronavirus-related risks and Brexit.