CDW Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. CDW provides IT products and integrated solutions to business, government, education and healthcare customers in the U.S. and Canada.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net sales | $2,652.3 million | $2,411.7 million; up 10.0% |
| Gross profit and margin | $425.2 million; 16.0% | $402.0 million; 16.7% |
| Operating income and margin | $135.8 million; 5.1% | $120.1 million; 5.0% |
| Net income and diluted EPS | $50.9 million; $0.30 | $28.3 million; $0.19 |
| Operating cash flow | $246.3 million | $208.0 million |
| Cash and total debt | $306.7 million cash; $3,172.4 million debt | Cash was $188.1 million and debt $3,251.2 million at December 31, 2013 |
| Net debt | $2,865.7 million | $3,533.7 million in Q1 2013 |
- Non-GAAP net income was $81.1 million, versus $56.3 million; Adjusted EBITDA was $193.7 million, versus $178.6 million. These are non-GAAP measures defined and reconciled in the filing.
- Investing cash outflow was $30.2 million, including $20.9 million to settle an accrued charitable contribution related to the MPK Coworker Incentive Plan II. Financing cash outflow was $97.0 million, including $79.5 million of debt-extinguishment payments and $7.3 million of dividends.
- At March 31, current assets were $2,247.9 million and current liabilities $1,418.5 million. The company reported $649.4 million of additional borrowing availability under its asset-based revolver and no outstanding revolver borrowings. Cash conversion cycle remained 22 days.
Material changes and business drivers
- Sales growth was attributed primarily to customer device refreshes, a more tenured sales force, seller productivity initiatives and added customer-facing technical and service coworkers. Education sales rose 38.5%, largely reflecting K-12 notebook and mobile-device demand for standardized digital testing. Public segment sales increased 14.5%; Corporate sales increased 7.2%.
- Gross margin declined 70 basis points to 16.0%. Management cited product mix and continued margin pressure in desktops and notebooks, lower cooperative advertising funding and inventory adjustments.
- Operating income rose 13.1%, as higher sales and gross profit and lower operating expenses as a share of sales more than offset gross-margin pressure. Net interest expense declined $22.0 million year over year, mainly due to lower debt balances and financing costs.
- Debt repayments and redemptions reduced reported debt from year-end. Q1 debt-extinguishment losses totaled $5.4 million, including costs associated with repurchasing $25.0 million of senior notes and redeeming $50.0 million of senior subordinated notes.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said current funding sources should cover cash operating requirements for the next year and that it believes longer-term liquidity is adequate, while noting dependence on business execution and economic conditions.
- Management said macroeconomic uncertainty had begun to ease and continued to do so in Q1 2014, but would be monitored. Potential reductions in government spending, policy or regulatory changes, weaker confidence and unemployment could defer customer IT spending and intensify pricing pressure.
- Federal government budget uncertainty continued to weigh on federal sales. The company also cited competitive pressures and the need to deliver tailored solutions, broad offerings, knowledgeable sales support, competitive pricing and timely product availability.
- The company was in compliance with credit-agreement covenants at March 31. Its term loan had a 3.25% interest rate during Q1; interest-rate caps covering $1,150 million notional were in place through January 14, 2015.
- Management did not believe ordinary-course legal, tax, contract-audit or indemnification matters were reasonably likely to result in material losses beyond amounts already recognized, but acknowledged outcomes are unpredictable. It reported no material change in risk factors from its 2013 Form 10-K.
- Subsequent to quarter-end, CDW redeemed the remaining $42.5 million of senior subordinated notes on May 9, 2014, expecting a $2.2 million extinguishment loss in Q2. A $0.0425 per-share dividend was declared in May for payment in June, subject to the stated terms.
Most important facts for investors to verify
- Whether revenue growth—particularly education-driven demand and hardware refreshes—continues, and how much it contributes to future results.
- Whether gross-margin pressure in transactional hardware and changes in vendor incentives persist or improve.
- Debt reduction, interest expense, revolver availability and covenant compliance, including the effect of the May 2014 note redemption.
- Cash-flow quality and working-capital movements, including the effect of receivables collections, supplier payment timing and inventory financing.
- Future dividends and capital allocation, which remain subject to board approval, debt restrictions and business conditions.