CDW Corporation — Q3 2016 Form 10-Q
Business context and reporting period
CDW provides IT products and integrated solutions to business, government, education and healthcare customers in the U.S., Canada and U.K. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. CDW UK was consolidated for three months in Q3 2016 versus two months in Q3 2015, and for nine months versus two months in the nine-month comparison.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,708.2 million | $3,501.1 million | $10,489.5 million | $9,570.3 million |
| Gross profit / margin | $614.3 million / 16.6% | $567.2 million / 16.2% | $1,749.3 million / 16.7% | $1,558.2 million / 16.3% |
| Operating income / margin | $237.5 million / 6.4% | $204.6 million / 5.8% | $622.0 million / 5.9% | $562.1 million / 5.9% |
| Net income | $125.9 million | $150.9 million | $321.2 million | $313.8 million |
| Diluted EPS | $0.76 | $0.88 | $1.93 | $1.82 |
Q3 sales increased 5.9% year over year, or 6.5% on a constant-currency basis; nine-month sales rose 9.6%, or 10.0% on a constant-currency basis. Q3 net income declined despite higher operating income, principally because prior-year results included a $98.1 million gain from remeasuring CDW’s former CDW UK investment. Nine-month net income increased 2.4%; prior-year results also included that gain and a $24.3 million debt-extinguishment loss, compared with $2.1 million in 2016.
For the first nine months, operating cash flow was $499.3 million, up from $294.9 million. Investing cash outflow was $43.5 million versus $308.2 million, largely reflecting the prior-year CDW UK acquisition. Financing cash outflow was $370.9 million, including $355.0 million of share repurchases and $53.1 million of dividends. Cash ended at $118.3 million, versus $37.6 million at year-end 2015.
At September 30, total assets were $6.77 billion, current assets $3.00 billion and current liabilities $2.13 billion. Debt carrying value was $3.24 billion; net debt was $3.12 billion. CDW reported $802 million of additional U.S. revolver availability and a further £50 million (about $65 million) U.K. revolver facility; neither facility had outstanding borrowings. The company was in compliance with debt covenants, with a 2.9 total net leverage ratio.
Material changes and operating trends
- Public-segment sales grew 10.6% in Q3, led by education (up 15.1%) and government (up 8.8%). Corporate sales fell 0.9%; medium/large customers reduced spending on longer-term solution projects, while small-business sales rose 4.1%.
- Higher service-contract mix and vendor partner funding supported gross-margin expansion; unfavorable product price/mix partly offset the benefit. Nine-month selling and administrative expense rose 13.7%, faster than sales, partly due to staffing, CDW UK and acquired-intangible amortization.
- CDW refinanced its $1.49 billion U.S. term loan with a new seven-year facility in August 2016. The new loan carried a 3.0% rate at quarter-end; the refinancing generated a $2.1 million extinguishment loss. CDW also refinanced its U.K. term loan and revolving facility.
- CDW repurchased 8.4 million shares for $355 million in the first nine months. The board had authorized a $750 million increase to the repurchase program in May. Quarterly dividends declared were $0.1075 per share during the period; a $0.16 dividend was announced November 2, payable December 12, subject to the stated record date.
Outlook, risks and contingencies
The filing provides no specific quantitative revenue or earnings guidance. Management cited ongoing customer caution and extended decision cycles, particularly among medium/large business customers. It noted potential support from public-safety spending, education technology projects and more complex IT solutions, while describing fourth-quarter seasonality in Corporate and Public sales. Several larger federal transactional orders were expected to be delivered in Q4.
Risks include uncertain economic conditions and IT spending, government budget changes, pricing pressure and Brexit-related market, currency, trade and regulatory uncertainty. An SEC investigation into vendor partner program incentives remained ongoing; CDW said it was cooperating and did not believe a material loss beyond amounts already recognized was reasonably possible, while noting outcomes are inherently unpredictable. Other ordinary-course litigation, audits and indemnification matters were disclosed. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much reported growth reflects underlying demand versus the different periods of CDW UK consolidation and currency movements.
- Whether medium/large customer project delays and the expected federal orders affect subsequent-quarter sales and margins.
- The sustainability of margin improvement given product mix, vendor incentives and rising operating costs; review definitions and reconciliations for non-GAAP measures.
- Debt, leverage, covenant headroom, interest-rate exposure and the cash impact of continued repurchases and dividends.
- Developments in the SEC vendor-incentive investigation, Brexit-related exposures and other contingencies.