CDW Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019, compared with the same periods in 2018. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $4,907.7 million | $4,373.2 million | $13,495.5 million | $12,165.7 million |
| Gross profit | $816.5 million | $713.6 million | $2,262.4 million | $2,013.1 million |
| Operating income | $320.6 million | $274.8 million | $849.8 million | $744.4 million |
| Net income | $201.7 million | $183.7 million | $551.2 million | $483.7 million |
| Diluted EPS | $1.37 | $1.20 | $3.72 | $3.14 |
| Gross margin | 16.6% | 16.3% | 16.8% | 16.5% |
| Operating margin | 6.5% | 6.3% | 6.3% | 6.1% |
- Q3 sales grew 12.2% reported and 12.7% on a constant-currency basis; average daily sales rose 10.5% reported and 10.9% constant currency. Nine-month sales increased 10.9% reported and 11.6% constant currency.
- Q3 gross profit increased 14.4% and operating income 16.7% year over year. Management attributed growth to higher gross profit dollars; margin improvement included a greater mix of netted-down revenues, including SaaS and warranties.
- Q3 segment sales increased across Corporate (+12.1%), Small Business (+13.6%), Public (+12.0%) and Other (+12.3%). Government was particularly strong, with average daily sales up 22.2%; Education was essentially flat on that measure.
- For the first nine months, operating cash flow was $682.3 million, versus $602.3 million. Investing used $150.0 million, including $75.0 million for the Scalar acquisition and $75.0 million of capital expenditures. Financing used $568.5 million, including $493.3 million of share repurchases and $128.9 million of dividends. Cash decreased $38.9 million to $166.9 million.
- At September 30, total debt was $3,284.4 million including current maturities; net debt was $3,117.5 million. The filing reports long-term debt of $3,259.0 million plus $25.4 million of current maturities. Cash was $166.9 million; shareholders’ equity was $935.1 million. Management reported $1.1 billion of additional availability under the U.S. revolving facility and $61 million under the U.K. facility.
Changes, transactions and unusual items
- CDW acquired Canadian IT solutions provider Scalar Decisions on February 1, 2019, for a final purchase price of $88 million, including $13 million deferred for potential indemnity obligations. Scalar contributed to growth in Canada; purchase accounting remained preliminary.
- CDW issued $600 million of 4.25% senior notes due 2028 and used proceeds primarily to redeem its $525 million 2023 notes. The redemption occurred October 12, 2019. On October 11, the company also extended its term-loan maturity to October 2026.
- Q3 included a $16.1 million net loss on extinguishment of debt, included in other expense. Interest expense increased year over year, which management attributed primarily to the effective term-loan rate exceeding the capped rate in 2018.
- Cash conversion cycle improved to 17 days from 18 days year over year. The company repurchased 4.8 million shares for $493.3 million during the nine-month period; the board declared a subsequent quarterly dividend of $0.38 per share, payable December 10, 2019.
- CDW adopted the new lease standard on January 1, 2019, recognizing $81 million of right-of-use assets and lease liabilities at adoption. At September 30, lease liabilities were $112.3 million; an additional $99 million lease commitment had not yet commenced.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or earnings guidance. Management said it believed liquidity and funding were adequate for at least the next year, subject to operating performance and economic conditions.
- Management identified customer IT spending, economic and political conditions, government and education funding, vendor product availability, competition, foreign exchange, Brexit, cybersecurity, accounts-receivable and inventory exposure, and substantial indebtedness as risks. CDW said U.K. customers had not shown significant buying-behavior changes related to Brexit and described its continental European presence as a contingency measure.
- The company was in compliance with debt covenants at September 30. It reported ordinary-course legal proceedings, audits and indemnification matters, but did not believe a material loss beyond amounts already recognized was reasonably possible; outcomes remain uncertain.
- Non-GAAP results exclude items including acquisition-related amortization, equity compensation and, for net income, the debt-extinguishment loss. Q3 non-GAAP operating income was $380.4 million and non-GAAP net income $249.9 million; nine-month amounts were $1,026.1 million and $673.0 million, respectively.
Important facts for investors to verify
- Whether sales and margin growth continue, especially given the contribution from client devices, software, services, netted-down revenue mix and Scalar.
- The ongoing cost and cash-flow implications of debt, variable-rate exposure, the 2028 notes and extended term-loan maturity; review covenant terms and revolving-credit availability.
- How much reported earnings growth reflects underlying operations versus the company’s non-GAAP adjustments, including acquisition amortization, equity compensation and debt refinancing costs.
- Working-capital trends, including receivables, customer-driven inventory stocking and vendor/payables timing, alongside the high levels of repurchases and dividends.
- Scalar purchase-accounting finalization, deferred indemnity payment, lease commitments, and developments in litigation, audits, Brexit and other disclosed risks.