CDW Corporation — Q1 2013 Form 10-Q
Business context and reporting period
CDW provides IT products and integrated solutions to business, government, education and healthcare customers in the U.S. and Canada. This unaudited quarterly report covers the three months ended March 31, 2013, with comparisons to Q1 2012. The company reported Corporate and Public segments, plus Other, which combines Canada and CDW Advanced Services.
CDW filed an S-1 on March 22, 2013 for a proposed initial public offering; the number of shares and offering price had not been determined. As of May 7, 2013, the reported common shares were owned by CDW Holdings LLC.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $2,411.7 million | $2,319.2 million | +4.0%; average daily sales +5.6% |
| Gross profit / margin | $402.0 million / 16.7% | $384.6 million / 16.6% | Margin +10 bps |
| Operating income / margin | $120.1 million / 5.0% | $103.6 million / 4.5% | +15.9%; margin +50 bps |
| Net income | $28.3 million | $10.9 million | Increased $17.4 million |
| Adjusted EBITDA | $178.6 million (7.4% of sales) | $166.4 million (7.2%) | +7.3% |
| Net interest expense | $72.1 million | $78.9 million | Down $6.8 million |
Net income included a $3.9 million pretax loss on extinguishment of debt in 2013, versus $9.4 million in 2012. Effective tax rates were 36.4% and 27.9%, respectively; the prior-year rate benefited from state tax-credit adjustments. Adjusted EBITDA is a non-GAAP measure defined in the filing.
- Revenue by segment: Corporate $1,403.9 million, up 3.0%; Public $846.8 million, up 3.6%; Other $161.0 million, up 16.0%.
- Cash flow: Operating cash flow was $208.0 million, versus $223.0 million. Capital expenditures were $8.8 million; operating cash flow less capital expenditures was $199.2 million, calculated from the filing. Financing activities used $89.5 million, and cash increased $109.2 million to $147.1 million.
- Debt and liquidity: Long-term debt was $3,680.8 million at March 31, down from $3,771.0 million at year-end 2012; cash was $147.1 million. Management’s net-debt metric was $3,533.7 million versus $3,835.1 million in Q1 2012. No borrowings were outstanding under the asset-based revolver, and additional borrowing availability was $649.4 million. The company reported covenant compliance.
- Working capital: Cash conversion cycle was 23 days versus 26 days a year earlier, primarily reflecting higher days payable outstanding.
Material changes and management commentary
- Sales growth reflected favorable hardware price/mix, software growth, a more tenured sales force and seller productivity. Corporate medium/large customer sales increased 5.2%, while small-business sales fell 5.7% amid cautious spending.
- Healthcare sales rose 8.7% and education sales 4.8%; government sales declined 3.9%, with federal budget and sequestration uncertainty weighing on demand. Software, netcomm and mobile/notebook products supported growth; desktop sales declined.
- Gross margin improved 10 basis points. Higher commission revenue and professional-services contribution were partly offset by unfavorable product price/mix. Selling and administrative costs were essentially flat, lowering that expense to 10.4% of sales from 10.8%.
- Management expected cautious customer spending, which had emerged in Q2 2012, to continue through the rest of 2013. It identified economic uncertainty, government budget priorities and competitive pricing as risks. The filing gives no numerical earnings or revenue guidance.
Financing, contingencies and unusual items
- In March, CDW redeemed $50.0 million of 12.535% senior subordinated notes, paying a 6.268% premium and recording a $3.9 million extinguishment loss.
- Subsequent to quarter-end, on April 29, CDW entered a new seven-year $1.35 billion secured term loan, principally to repay the prior $1,299.5 million term loan. The new facility carries LIBOR plus 2.25%–2.50%, with a 1.00% LIBOR floor; the company expected a $10.3 million second-quarter extinguishment loss. The new loan removes the prior senior secured leverage-ratio and hedging requirements.
- Management said liquidity sources were sufficient for operating requirements over the next year and adequate for longer-term needs, while noting dependence on operating cash generation and economic conditions.
- Ordinary-course legal, tax, contract-audit, indemnification and customer-bankruptcy matters remained pending. Management did not believe a material loss beyond amounts already recognized was reasonably possible, but noted outcomes are unpredictable. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- IPO status, proposed terms, ownership structure and any effects of accelerated equity-award vesting or compensation expense.
- Progress and final economics of the April 2013 term-loan refinancing, including the expected extinguishment loss and resulting interest costs.
- Debt repayment capacity, revolver availability, covenant terms and exposure to interest rates; reported debt remains substantial relative to cash.
- Whether government-spending uncertainty and cautious small-business demand persist, and whether healthcare and software growth offsets them.
- Cash-flow quality and working-capital trends, particularly receivables, inventory financing and the contribution from trade payables.