CDW Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S. and Canada. It completed its IPO in July 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,864.3m | $2,623.3m | $8,055.3m | $7,527.2m |
| Gross profit / margin | $458.4m / 16.0% | $432.7m / 16.5% | $1,312.0m / 16.3% | $1,244.2m / 16.5% |
| Operating income / margin | $92.9m / 3.2% | $139.7m / 5.3% | $366.6m / 4.6% | $379.7m / 5.0% |
| Net income (loss) | $(2.2)m | $38.0m | $72.8m | $85.7m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $370.8m | $367.1m |
- Q3 sales rose 9.2% year over year; average daily sales increased 7.5%. Corporate sales grew 11.7%, Public 6.9%, and Other 4.8%. Education sales rose 30.1%, while government sales fell 8.2%.
- For the first nine months, sales grew 7.0%. Medium/large Corporate customers and education were key growth areas; small-business sales fell 1.7% and government sales fell 6.7%.
- Q3 selling and administrative expense included $74.1m of IPO-related items. The quarter also included a $41.3m debt-extinguishment loss and a $10.4m litigation-settlement benefit. Management reported Q3 non-GAAP net income of $85.2m and Adjusted EBITDA of $216.1m; these non-GAAP measures exclude specified items and are not directly comparable to GAAP net income.
- Nine-month net income declined despite higher sales, primarily amid lower operating income and $55.5m of debt-extinguishment losses. Interest expense decreased to $198.6m from $232.5m.
- Gross margin fell 50 basis points in Q3, mainly from unfavorable product price/mix, inventory-reserve comparisons and vendor funding. Nine-month gross margin declined 20 basis points.
Cash, liquidity and debt
- At September 30, cash was $350.2m, versus $37.9m at year-end 2012. Nine-month operating cash flow was $370.8m; capital expenditures were $30.5m.
- Total debt was approximately $3.41bn, including $170.4m of current maturities; net debt was $3.06bn. Total net leverage was 3.8x. The company reported compliance with debt covenants.
- No borrowings were outstanding under the asset-based revolver, and reported additional borrowing availability was $676.8m. Inventory financing payables were $225.2m.
- The July IPO generated $424.7m in net proceeds. Proceeds supported debt redemptions and the termination of the sponsors’ management-services agreement. The company refinanced its term loan and redeemed portions of its 8.0% secured notes and 12.535% subordinated notes.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said current funding sources should cover cash operating needs for the next year and that it believes longer-term liquidity is adequate.
- Management warned that the federal government shutdown affected approximately 25% of Q4 selling days and was likely to hurt Q4 Public-segment results. Federal budget uncertainty, cautious small-business spending, macroeconomic conditions, competition and pricing pressure are cited risks.
- Management attributed education growth partly to K-12 purchases ahead of standardized digital testing requirements taking effect in 2014; the filing does not quantify how much of this demand may recur.
- After quarter-end, CDW redeemed another $155.0m of subordinated notes and expected an $8.5m Q4 extinguishment loss. It also declared a $0.0425-per-share dividend, payable December 2, 2013; future dividends remain subject to board approval and debt restrictions.
- Ordinary-course legal, contract-audit and indemnification matters remain; the company did not believe a material loss beyond amounts recognized was reasonably possible, while noting outcomes are inherently unpredictable.
Most important facts for investors to verify
- How much reported earnings and operating-margin pressure reflects IPO, equity-compensation and debt-redemption charges versus recurring operating performance.
- Whether Q4 government spending weakness and the federal shutdown affected Public-segment sales as management anticipated.
- The sustainability of education-driven sales and the effects of product mix and price competition on gross margin.
- Debt maturity, interest-rate exposure, covenant headroom and revolver availability, including the company’s ability to continue reducing high-cost debt.
- The assumptions behind management’s liquidity assessment and the cash requirements for the declared dividend and other commitments.