CDW Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. CDW sells IT hardware, software and services to business, government, education and healthcare customers in the U.S. and Canada through Corporate, Public and Other segments.
Financial performance and liquidity
- Revenue: FY2012 net sales were $10.13 billion, up 5.5% year over year; average daily sales rose 5.9%. Q4 sales were $2.60 billion, up 4.9% from Q4 2011.
- Profit and margins: Gross profit was $1.67 billion, up 5.4%, with gross margin flat at 16.5%. Operating income rose 8.5% to $510.6 million; operating margin increased to 5.0% from 4.9%. Net income was $119.0 million versus $17.1 million. Q4 net income was $33.3 million versus $19.0 million.
- Segment trends: Corporate sales increased 3.3%; Public sales rose 7.1%, led by healthcare growth of 18.1%. Education sales declined 0.4%. Federal government sales were approximately 10% of total revenue.
- Cash flow: Operating cash flow was $317.4 million, up from $214.7 million. Investing cash outflow was $41.7 million, including $41.4 million of capital expenditures; financing cash outflow was $338.0 million. Cash ended the year at $37.9 million, down from $99.9 million.
- Debt and liquidity: Long-term debt was $3.77 billion, down from $4.07 billion; additional inventory-financing obligations were $249.2 million. Net debt was $3.73 billion. The company reported $622.4 million of additional borrowing availability under its revolving facility and $666.5 million in working capital. Senior secured leverage was 2.4x; net leverage was 5.2x. The company reported compliance with debt covenants.
- Other measures: Adjusted EBITDA, a non-GAAP measure, increased 6.9% to $766.6 million. The cash conversion cycle improved to 24 days from 27 days.
Material changes versus prior periods
- Revenue growth moderated to 5.5% in 2012 from 9.1% in 2011. Healthcare was the principal segment growth driver; business customers were more cautious, and education remained pressured by budgets.
- Net income increased substantially, aided by higher operating income, lower net interest expense and a smaller debt-extinguishment loss. The 2012 debt-extinguishment loss was $17.2 million versus $118.9 million in 2011; these charges materially affect the year-to-year earnings comparison.
- Gross margin remained at 16.5%. A favorable mix of commission and net service contract revenue was offset by lower vendor funding.
- Debt declined through repayments and refinancing. The remaining 2015 senior notes were retired in 2012, while $100 million of 2017 subordinated notes were redeemed.
Outlook, risks and unusual items
- Management provided no specific numeric revenue or earnings guidance. It expected cautious customer spending and macroeconomic uncertainty to continue into 2013, while identifying complex technology solutions as a growth opportunity.
- Key risks include high leverage and interest-rate exposure, restrictive debt covenants, economic and government-budget uncertainty, intense competition and pricing pressure, dependence on major technology vendors and distributors, technology changes, cybersecurity and IT-system disruptions, and accounts-receivable and inventory risks.
- Variable-rate debt was $1.34 billion at year-end. Interest-rate caps covered portions of term-loan exposure through January 2015; the filing cautions that hedges may not fully protect against rate increases.
- Ordinary-course litigation, audits and indemnification matters were disclosed; management did not believe material losses beyond amounts recognized were reasonably possible, while noting outcomes are uncertain. No material off-balance-sheet arrangements were reported.
- Subsequent events: CDW prepaid $40 million of term-loan principal in January 2013, satisfying the related excess-cash-flow payment requirement. It also called $50 million of subordinated notes for redemption in March 2013 and expected a $3.9 million extinguishment loss.
- The company was privately held, with all common stock owned by CDW Holdings LLC; there was no public trading market, and no dividends were paid in 2012 or 2011. The filing reports unqualified audit opinions and effective internal controls over financial reporting.
Most important facts for investors to verify
- Whether sales growth and margins can hold up amid cautious spending, competitive pricing and potential federal budget cuts.
- Debt maturities, interest costs, covenant headroom and the availability and terms of revolving credit and inventory financing.
- Whether operating cash flow and the improved cash-conversion cycle are sustainable, given the low year-end cash balance and working-capital needs.
- Exposure to major vendors: six manufacturers represented approximately 56% of sales; Hewlett-Packard and Cisco represented 21% and 13%, respectively.
- The effects of debt-extinguishment charges and other adjustments when assessing earnings and non-GAAP Adjusted EBITDA.