CDW Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. CDW provides IT products and integrated solutions to business, government, education, and healthcare customers in the U.S., U.K., and Canada. All financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $3,957.9 million | $3,606.4 million | +9.7%; +10.6% constant currency; average daily sales +11.5% |
| Gross profit / margin | $672.1 million / 17.0% | $603.9 million / 16.7% | Gross profit +11.3%; margin +30 bps |
| Operating income / margin | $228.9 million / 5.8% | $204.1 million / 5.7% | +12.2%; margin +10 bps |
| Net income | $152.9 million | $127.0 million | +20.4% |
| Diluted EPS | $1.02 | $0.82 | +24.4% |
| Non-GAAP operating income / margin | $287.3 million / 7.3% | $259.4 million / 7.2% | Income +10.7% |
| Non-GAAP net income | $185.4 million | $162.8 million | +13.9% |
| Operating cash flow | $252.4 million | $222.2 million | +$30.2 million |
Management attributed sales growth to broad demand, particularly client devices, software, servers, and enterprise storage. Product margin improvement supported gross-margin expansion; higher payroll, sales commissions, coworker count, and stock-based compensation partly offset operating leverage. Hardware represented 79.3% of sales, software 15.0%, and services 5.0%.
Sales increased across the major segments: Corporate +10.9%, Small Business +8.5%, Public +8.2%, and Other (U.K. and Canada) +10.9%. Public-sector growth was led by government and healthcare. Other sales included two months of Scalar Decisions’ results following its February 1 acquisition.
Cash, debt, and liquidity
- Cash and cash equivalents were $285.0 million at March 31, versus $205.8 million at December 31, 2018. Cash, cash equivalents, and restricted cash totaled $290.7 million at quarter-end.
- Net cash provided by operations was $252.4 million. Investing used $88.1 million, including $68.7 million for the Scalar acquisition and $19.4 million of capital expenditures. Financing used $80.2 million, including $177.1 million of share repurchases and $43.4 million of dividends, partly offset by borrowings and increased inventory financing.
- Total debt was approximately $3.3 billion; net debt was $2,998.4 million. Long-term debt, including current maturities, rose to $3,283.4 million from $3,208.6 million at year-end. CDW reported compliance with debt covenants.
- Available borrowing capacity was $938 million under the U.S. asset-based revolving facility and approximately $65 million under the U.K. revolving facility. Management said liquidity and funding were adequate for at least the next year.
- Current assets were $4,132.5 million and current liabilities $3,215.0 million. Inventory increased to $590.7 million from $454.3 million; accounts payable-inventory financing increased to $500.0 million from $429.3 million. The cash conversion cycle remained 17 days year over year.
Material changes, outlook, and risks
- Scalar acquisition: CDW acquired Canadian technology solutions provider Scalar for a preliminary purchase price of $86.4 million. $13 million is deferred, subject to potential indemnity obligations, and expected to be paid in 2021. The purchase-price allocation remains preliminary; recognized goodwill was $60.4 million.
- Leases: CDW adopted the new lease accounting standard on January 1, 2019, initially recognizing $81 million of right-of-use assets and lease liabilities. At March 31, operating lease assets were $132.1 million and lease liabilities were $170.1 million. The filing also disclosed a $91 million commitment for a lease expected to commence in 2020–2021.
- Capital returns: CDW repurchased 1.9 million shares for $177.1 million and paid a $0.295-per-share quarterly dividend. On May 1, 2019, the board declared another $0.295 dividend, payable June 11 to holders of record May 24. Future dividends remain at the board’s discretion.
- Outlook: The filing gives no quantified revenue, earnings, or margin guidance. Management identified economic conditions, customer technology spending, public-sector budgets, vendor product availability, trade policy, currency movements, and Brexit uncertainty as factors that could affect results. CDW said U.K. customers had not shown significant buying-behavior changes to date and noted its continental European presence as a contingency.
- Other risks and contingencies: The company cited substantial indebtedness, cybersecurity and IT-system risks, competition, supplier and delivery disruptions, receivables and inventory exposure, legal proceedings, audits, and regulatory matters. Management did not believe a material loss beyond amounts already recognized was reasonably possible at quarter-end, while noting outcomes are inherently unpredictable.
Important facts for investors to verify
- Whether sales momentum and gross-margin improvement persist, especially given product mix and the contribution from Scalar.
- Scalar’s final purchase price and purchase-price allocation, and whether expected integration and cross-selling benefits materialize.
- Working-capital trends: inventory rose substantially, while receivables days increased to 57 from 54 and inventory days to 14 from 12.
- Debt service, variable-rate exposure, covenant headroom, and the effect of continued buybacks and dividends on leverage and liquidity.
- Lease commitments, including the additional $91 million commitment, and the continuing impact of the lease-accounting adoption.
- Developments in Brexit, foreign exchange, vendor supply, public-sector demand, cybersecurity, and legal or audit matters.