CDW Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; financial statements are unaudited. CDW provides IT products and solutions to business, government, education and healthcare customers in the U.S. and Canada. It completed its IPO on July 2, 2013, after the quarter-end.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,779.3M | $2,584.7M | $5,191.0M | $4,903.9M |
| Gross profit / margin | $451.6M / 16.2% | $426.9M / 16.5% | $853.6M / 16.4% | $811.5M / 16.5% |
| Operating income / margin | $153.6M / 5.5% | $136.4M / 5.3% | $273.7M / 5.3% | $240.0M / 4.9% |
| Net income | $46.7M | $36.8M | $75.0M | $47.7M |
| Diluted EPS | $0.32 | $0.25 | $0.51 | $0.33 |
| Net interest expense | $70.3M | $76.9M | $142.4M | $155.8M |
| Operating cash flow | — | $207.1M | $304.7M |
Q2 sales grew 7.5%; operating income rose 12.6%. For the first half, sales grew 5.9% (6.7% on an average-daily-sales basis, with one fewer selling day), operating income increased 14.0%, and net income rose to $75.0M. Adjusted EBITDA, a non-GAAP measure, was $212.6M in Q2 (up 6.0%) and $391.2M for the half (up 6.6%).
Liquidity and debt
- At June 30, cash was $179.3M; total debt was approximately $3.724B and net debt was $3.545B. The total net leverage ratio was 4.5, down from 4.9 at December 31, 2012.
- No revolver borrowings were outstanding; reported additional borrowing availability was $631.4M. CDW was in compliance with debt covenants.
- First-half operating cash flow declined $97.6M year over year, primarily due to working capital: receivables used $108.9M of cash versus a $19.8M source in the prior period. Management cited sales growth and slower collections. The cash conversion cycle was unchanged at 21 days.
- In April, CDW refinanced its term loan with a new $1.35B facility maturing in 2020. The June 30 balance sheet predates IPO proceeds and subsequent debt redemptions.
Material changes and management commentary
- Growth was strongest in Corporate medium/large customers (+13.0% in Q2) and education (+20.4%); small business sales fell 1.4% and government sales fell 7.0%. Management attributed education strength partly to K-12 purchases supporting standardized digital testing planned for 2014, and government weakness to federal spending delays after sequestration and the continuing resolution.
- Q2 gross margin declined 30 basis points, reflecting unfavorable product price/mix and a prior-year vendor-audit accrual reversal. Operating margin nevertheless improved as selling and administrative expense and advertising declined as a share of sales. Management cited sales growth, a more tenured sales force and productivity focus as contributors.
- Management said it expected existing funding sources to meet cash operating needs for the next year and believed longer-term liquidity was adequate, while noting dependence on operating performance and economic conditions. It gave no specific revenue or earnings guidance in the provided filing text.
- Following the IPO, CDW received approximately $424.5M net proceeds after underwriting discounts and estimated expenses/transaction costs (the filing also reports approximately $429.5M after underwriting discounts but before expenses and transaction costs). It used proceeds for a $24.4M sponsor-management agreement termination fee and debt redemptions. Subsequent to quarter-end, it redeemed $175M of 8.0% notes and $324M of 12.535% subordinated notes; the latter included $190M of incremental term-loan borrowing. Expected Q3 debt-extinguishment losses were $16.7M and $24.7M, respectively.
- Management also expected Q3 pre-tax IPO-related charges of $36.7M for accelerated equity-award expense, $4.0M related employer payroll taxes, and $7.5M for a Restricted Debt Unit Plan retention pool. These items, together with the $24.4M termination fee and stated debt losses, are unusual items to distinguish from ongoing performance.
- CDW expected to begin a quarterly dividend of $0.0425 per share in Q4 2013, subject to board discretion and debt-agreement restrictions. A court-approved LCD panel price-fixing settlement was expected to yield about $10.5M net; $8.5M had been received by July 29, with the balance expected by year-end.
Risks and contingencies
Management highlighted sensitivity to economic conditions, customer IT spending, competitive pricing and government budgets. Ordinary-course litigation, contract audits and indemnification matters remain inherently unpredictable, although the company did not believe a material loss beyond amounts already recognized was reasonably possible at June 30. The filing notes that unfavorable resolution could still adversely affect results in a particular period.
Investor verification priorities
- Confirm post-IPO debt balances, interest costs, and the realized impact of the note redemptions and incremental term borrowing.
- Track receivable collections and operating cash flow; assess whether the first-half working-capital outflow and slower collections persist.
- Monitor gross margin and product mix, particularly whether operating-margin improvement can continue despite product-margin pressure.
- Separate Q3 IPO, equity-award and debt-extinguishment charges from recurring earnings; review the company’s non-GAAP adjustments alongside GAAP results.
- Verify the timing and amount of the proposed dividend, subject to board approval and debt restrictions, and receipt of the remaining settlement proceeds.