CDW Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial figures are unaudited and in U.S. dollars. CDW provides multi-brand IT hardware, software and services to business, government, education and healthcare customers in the U.S. and Canada.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $2,319.2 million | $2,129.6 million; up 8.9% |
| Gross profit / margin | $384.6 million / 16.6% | $350.4 million / 16.5% |
| Operating income / margin | $103.6 million / 4.5% | $91.7 million / 4.3% |
| Net income (loss) | $10.9 million | $(4.2) million |
| Adjusted EBITDA | $166.4 million; 7.2% of sales | $155.5 million; 7.3% of sales |
| Operating cash flow | $223.0 million | $141.6 million |
| Capital expenditures | $8.3 million | $8.4 million |
| Cash and cash equivalents | $36.5 million at March 31 | $99.9 million at December 31, 2011 |
- Gross profit increased 9.8%; selling and administrative expense rose 9.7% to $251.6 million, primarily due to higher payroll, commissions and coworker investment. Advertising expense was unchanged at $29.4 million.
- Net interest expense was $78.9 million, down from $92.1 million. A $9.4 million debt-extinguishment loss reduced earnings.
- Debt was $3,871.6 million at quarter-end. The company had no revolving-credit borrowings and reported $692.8 million of additional borrowing availability. Current assets were $1,701.3 million and current liabilities $1,107.7 million.
- Operating cash flow benefited from working-capital movements, especially $162.3 million of cash contribution from receivables. Financing activities used $278.4 million, including $201.0 million of term-loan repayments; cash declined by $63.4 million during the quarter.
Material changes and drivers
- Public-segment sales grew 12.9% to $817.6 million, led by healthcare (+20.2%) and government (+13.2%). Corporate sales increased 6.5% to $1,362.8 million; Other-segment sales rose 9.8% to $138.8 million.
- Management attributed sales growth to higher IT demand, market-share efforts, and strength in notebook/mobile devices, desktops, networking, storage and software. Gross margin improved 10 basis points, with favorable product mix and higher service-contract revenue partly offset by vendor-funding effects.
- The cash conversion cycle improved to 25 days from 31, mainly because days payable outstanding increased. Inventory was higher in part because CDW built stocks of certain products, particularly hard-disk drives, amid supply concerns related to flooding in Thailand.
- CDW repurchased or redeemed the remaining $129.0 million of 2015 senior notes, funding the transaction primarily with $130.0 million of additional 8.5% 2019 notes. The refinancing and premiums contributed to the $9.4 million extinguishment loss.
- The filing revised the presentation of prior-period cash flows to classify inventory-financing changes as financing rather than operating activities. The revision reduced Q1 2011 reported operating cash flow by $54.7 million to $141.6 million and increased financing cash flow by the same amount; total cash change and net income were unaffected.
Outlook, risks and other disclosures
- Management said available funding sources should cover cash operating requirements for the next year and described longer-term liquidity as adequate, while noting dependence on business execution and economic conditions. The filing gives no specific revenue or earnings guidance.
- Competitive pricing, weaker economic conditions or reduced customer IT spending could pressure results. Public-segment demand is exposed to government budgets and policy priorities; federal and state/local sales represented approximately 10% and 4% of 2011 sales, respectively.
- CDW reported compliance with debt covenants. Its senior secured leverage ratio was 2.5 against a maximum permitted 7.0. It was required to maintain interest-rate hedges on at least half of term-loan principal and had interest-rate caps in place.
- Ordinary-course litigation, tax, customer and vendor audits, and possible bankruptcy preference claims remain contingencies. Management did not believe a material loss beyond amounts recognized was reasonably possible, but noted outcomes are unpredictable. The IRS was auditing tax years 2008–2010.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales and operating-margin growth persists, particularly in the Public segment, and whether vendor funding or pricing pressure changes gross margin.
- Debt-service capacity and refinancing terms, including the high-coupon notes, term-loan repayments, covenant headroom and actual availability under the asset-based revolver.
- Whether Q1 operating cash flow and the shorter cash conversion cycle are sustainable, given the large receivables contribution and inventory-financing movements.
- Potential effects of supply interruptions, government spending changes, and legal or tax matters; the filing provides no quantified estimate for any material adverse outcome.
- Adjusted EBITDA is a non-GAAP, credit-agreement measure; assess its reconciliation and adjustments alongside GAAP earnings and cash flow.