CDW Corporation — FY 2016 Form 10-K
Business context and reporting period. CDW is an IT products, services and solutions reseller serving business, government, education and healthcare customers in the U.S., Canada and the U.K. This 10-K covers the year ended December 31, 2016; Q4 figures are also shown below. CDW’s 2015 acquisition of the remaining interest in Kelway, rebranded CDW UK, affects year-over-year comparability.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $13,981.9 million | $12,988.7 million | +7.6%; +8.3% constant currency |
| Gross profit / margin | $2,327.2 million / 16.6% | $2,115.8 million / 16.3% | +10.0%; margin +30 bps |
| Operating income / margin | $819.2 million / 5.9% | $742.0 million / 5.7% | +10.4%; margin +20 bps |
| Net income | $424.4 million | $403.1 million | +5.3% |
| Diluted EPS | $2.56 | $2.35 | +8.9% |
| Adjusted EBITDA (non-GAAP) | $1,117.3 million; 8.0% margin | $1,018.5 million; 7.8% margin | +9.7% |
| Operating cash flow | $604.0 million | $277.5 million | +$326.5 million |
| Free cash flow (non-GAAP) | $684.1 million | $283.3 million | +$400.8 million |
Q4 2016 net sales were $3,492.4 million versus $3,418.4 million in Q4 2015; gross profit was $577.9 million versus $557.6 million; operating income was $197.2 million versus $179.9 million; net income was $103.2 million versus $89.3 million; and diluted EPS was $0.63 versus $0.52.
- Liquidity: Cash was $263.7 million at year-end, up from $37.6 million. Working capital was $957.4 million. The company reported $716 million of additional U.S. revolver availability and £50 million (about $62 million) under the U.K. facility. Management said liquidity was adequate for at least the next year.
- Debt: Long-term debt was $3.234 billion, and net debt, as defined by CDW, was $2.971 billion. A further $580.4 million was outstanding under inventory-financing arrangements, classified as accounts payable rather than debt by the company. CDW reported compliance with debt covenants and a 2.68x total net leverage ratio.
- Capital returns: CDW repurchased 8.7 million shares for $367.4 million in 2016 and paid $78.7 million in dividends. Declared dividends were $0.4825 per share for the year; the quarterly rate increased to $0.16 late in 2016.
Material changes versus prior period
- Sales rose 7.6%, including a full year of CDW UK versus five months consolidated in 2015; both Canada and the U.K. grew at high-single-digit rates in local currency. Public segment sales increased 7.8%, while Corporate sales increased 0.9%; medium/large business sales were essentially flat.
- Gross margin improved 30 basis points. Management cited higher service-contract revenue and vendor funding, partly offset by 30 basis points of unfavorable product margin. Selling and administrative expense rose 9.7% and increased as a share of sales by 20 basis points.
- Operating cash flow improved substantially, supported by earnings and working-capital movements, including increased trade payables and improved collections versus 2015. The cash conversion cycle improved to 19 days from 21 days.
- Interest expense declined to $146.5 million from $159.5 million, and debt-extinguishment losses declined to $2.1 million from $24.3 million. 2015 net income included a $98.1 million gain from remeasuring CDW’s previously held CDW UK investment, making reported net-income growth less representative of underlying operating progress.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management highlighted continued demand for security, cloud and hybrid-cloud solutions, hyper-converged infrastructure, software assurance and mobile devices, while noting slow economic conditions affected U.S. medium/large customers. Federal customer orders delayed into 2017 were a partial offset to government-channel growth.
- Key risks include economic and government-spending weakness; intense competition and pricing pressure; reliance on vendor and distributor relationships, incentives and product availability; technology shifts that may bypass resellers; cybersecurity and IT-system disruption; customer credit and inventory obsolescence; foreign-exchange exposure and Brexit uncertainty; and substantial indebtedness, variable interest rates and restrictive covenants.
- The SEC’s 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 cautioning that outcomes are uncertain.
- CDW reported no goodwill impairment; the U.K. reporting unit’s estimated fair value exceeded carrying value by 16%, with sales growth and EBITDA margin identified as sensitive assumptions. Deferred cancellation-of-debt income creates future cash-tax exposure through 2018 and could affect dividend flexibility under specified conditions.
- After year-end, CDW priced $600 million of 5.0% notes due 2025, intended to refinance its $600 million notes due 2022. It also completed a term-loan refinancing that reduced the interest margin by 0.25 percentage points and removed the 0.75% LIBOR floor. The auditor issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Separate organic growth from the acquisition-related contribution and currency effects, especially when assessing U.K. and “Other” results.
- Track service and software mix, vendor funding, and product-margin pressure to assess the durability of gross-margin improvement.
- Review the SEC inquiry’s progress and any subsequent disclosure regarding vendor incentives or contingencies.
- Reconcile total borrowings, inventory-financing obligations, available revolver capacity, refinancing terms and cash interest burden; assess whether buybacks and dividends remain consistent with leverage and covenant limits.
- Monitor receivables, collections, inventory, and cash conversion, including the impact of services recorded net for revenue but with gross receivables.