CDW Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; compared with the corresponding 2019 periods. Amounts are in U.S. dollars. CDW provides IT products and integrated solutions to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $4,756.4m | $4,907.7m | $13,511.3m | $13,495.5m |
| Gross profit / margin | $825.5m / 17.4% | $816.5m / 16.6% | $2,329.2m / 17.2% | $2,262.4m / 16.8% |
| Operating income / margin | $317.8m / 6.7% | $320.6m / 6.5% | $847.0m / 6.3% | $849.8m / 6.3% |
| Net income | $193.2m | $201.7m | $550.2m | $551.2m |
| Diluted EPS | $1.33 | $1.37 | $3.80 | $3.72 |
- Q3 sales fell 3.1% year over year (3.3% on a constant-currency basis); average daily sales were $74.3m versus $76.7m. Nine-month reported sales rose 0.1%, but average daily sales declined 0.4%.
- Q3 gross margin improved 80 basis points, primarily from stronger product margin and a higher mix of revenues recorded net of cost of goods sold, including software-as-a-service. Operating income declined 0.9% as higher payroll and workforce-reduction costs offset gross-profit growth.
- For the nine months, gross margin increased 50 basis points, while operating income was nearly flat. Selling and administrative expense rose 4.9%, including higher payroll and a $30m increase in expected credit-loss reserves associated largely with COVID-19.
- Management-reported non-GAAP Q3 operating income was $386.3m, up 1.5%, with an 8.1% margin versus 7.8%; non-GAAP net income was $265.4m versus $249.9m. Nine-month non-GAAP operating income was $1,028.4m, essentially flat, and non-GAAP net income was $690.7m versus $673.0m. These measures exclude specified items, including acquired-intangible amortization, equity compensation and workforce-reduction charges.
Segments and business drivers
- Q3 Public segment sales grew 9.2%: Education rose 33.6% as schools enabled remote learning, and Government rose 6.8%, partly supported by Census-related business. Healthcare sales declined 26.5% amid budget pressure and delayed projects.
- Q3 Corporate and Small Business sales declined 13.2% and 12.7%, respectively, amid weaker customer demand. Notebook and mobile-device sales were a relative strength; most other major hardware categories declined.
- For the first nine months, Public sales increased 10.8%, while Corporate and Small Business declined 7.3% and 7.9%. Management attributed demand for notebooks and mobile devices to remote-work and remote-learning needs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $738.4m versus $682.3m; investing cash outflow was $172.1m versus $150.0m. Capital expenditures were $133.6m, including devices for the Census project.
- Cash was $1,249.5m at September 30, 2020, compared with $154.0m at year-end 2019. Total debt was approximately $3.9bn and net debt was $2,681.4m; net debt was $3,117.5m in the prior-year Q3 overview. The cash increase reflected, among other factors, debt issuance and financing activity.
- CDW issued $600m of 4.125% notes due 2025 in April and $700m of 3.25% notes due 2029 in August; proceeds from the latter primarily funded redemption of $600m of 5.00% notes due 2025. The company recorded a $27.3m loss on debt extinguishment in the nine-month period.
- At quarter-end, CDW reported $856m available under its U.S. asset-based revolving facility and a further $65m available under its U.K. facility. It was in compliance with debt covenants. Management said it believed liquidity and funding were adequate for at least the next year, while noting that cash generation depends on business execution, economic conditions and working-capital management.
- The cash conversion cycle was 16 days versus 17 days a year earlier. Days sales outstanding increased to 61 from 56, reflecting longer customer payment cycles and mix; days purchases outstanding increased to 58 from 52, partly supported by extended vendor terms.
Outlook, risks and notable items
- The filing provides no specific financial guidance. Management emphasized substantial uncertainty around COVID-19 and its potential effects on customer spending, collections, supply availability, operations, cash flows and liquidity. Corporate and Small Business demand was particularly exposed to economic confidence; education spending strengthened while healthcare budgets were pressured.
- Other risks cited include supplier or delivery disruptions, customer credit and inventory exposure, cybersecurity and IT-system risks, competition, indebtedness and restrictive covenants, foreign-exchange volatility, Brexit-related uncertainty, and legal proceedings or audits. CDW said it did not believe a material loss beyond amounts already recognized was reasonably possible for existing legal and other matters, but outcomes are inherently unpredictable.
- CDW temporarily suspended share repurchases from March through October 2020 and announced their resumption in November. It declared a $0.40-per-share quarterly dividend on November 2, payable December 10, 2020.
- Workforce-reduction charges were $8.5m in Q3. The filing also notes that the allowance for credit losses increased materially under the forward-looking expected-loss approach adopted in 2020; the adoption itself had no significant financial-statement impact.
Investor verification points
- Assess whether remote-work, education and Census-driven demand can offset weakness in Corporate, Small Business and Healthcare customers.
- Track receivable aging, collections and credit-loss reserves as pandemic-related economic conditions evolve.
- Review debt levels, refinancing costs, available revolver capacity, covenant headroom and the sustainability of dividends and resumed repurchases.
- Separate GAAP results from management’s non-GAAP measures and review the adjustments, especially debt-extinguishment and workforce-reduction costs.
- Monitor product availability, customer and vendor payment terms, and the cash-conversion-cycle trend.