CDW Corporation — 2013 Form 10-K Summary
Business and period. CDW is a U.S. and Canadian IT products and solutions provider serving business, government, education and healthcare customers. This annual report covers the fiscal year ended December 31, 2013; selected fourth-quarter results are also noted below. CDW completed its IPO in July 2013.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $10,768.6 million | $10,128.2 million | +6.3% |
| Gross profit / margin | $1,760.3 million / 16.3% | $1,669.6 million / 16.5% | +5.4%; margin down 20 bps |
| Operating income / margin | $508.6 million / 4.7% | $510.6 million / 5.0% | Down 0.4% |
| Net income | $132.8 million | $119.0 million | +11.6% |
| Operating cash flow | $366.3 million | $317.4 million | +$48.9 million |
| Capital expenditures | $47.1 million | $41.4 million | +$5.7 million |
FY 2013 diluted EPS was $0.84, versus $0.82. Net interest expense declined to $250.1 million from $307.4 million; debt-extinguishment losses rose to $64.0 million from $17.2 million. Adjusted EBITDA, a non-GAAP measure, increased 5.5% to $808.5 million, while its sales margin eased to 7.5% from 7.6%.
For Q4 2013, sales were $2,713.3 million, gross profit $448.3 million, operating income $142.0 million and net income $60.0 million. Q4 2012 comparatives were $2,601.0 million, $425.4 million, $130.9 million and $33.3 million, respectively.
Liquidity, debt and capital
- At year-end, cash was $188.1 million, working capital was $810.9 million and total assets were $5,924.6 million.
- Long-term debt was $3,251.2 million, down from $3,771.0 million; net debt, as defined by CDW, was $3,063.1 million. Inventory-financing obligations of $256.6 million were reported separately.
- CDW had no revolving-credit borrowings and reported $641.1 million of additional borrowing availability, subject to borrowing-base and liquidity limits. It was in compliance with its debt covenants.
- The July IPO generated $424.7 million of net proceeds. Proceeds and cash were used in part for debt redemptions and a $24.4 million sponsor-management-agreement termination fee. The company declared a $0.0425-per-share quarterly dividend in Q4.
Changes, outlook and notable items
- Corporate sales rose 8.1%, led by 10.2% growth in medium/large business; small-business sales declined 0.6%. Public sales increased 3.5%, with education up 21.5%, healthcare up 2.0%, and government down 10.3%.
- Management attributed growth to hardware and software demand, a more tenured sales force, improved seller productivity and additional customer-facing technical and service staff. The second half was affected by federal budget uncertainty, sequestration and the 16-day government shutdown.
- Gross margin declined due mainly to unfavorable product price/mix and transactional product margin compression; increased net service-contract mix partly offset the decline. Operating income was held back by offering-related costs despite higher sales and gross profit.
- FY results included $75.0 million of IPO- and secondary-offering-related expenses, $64.0 million of debt-extinguishment losses and a $10.4 million pre-tax benefit from an LCD price-fixing settlement. Adjusted EBITDA and non-GAAP net income exclude certain charges; they are not GAAP measures.
- Management said available funding was expected to cover near-term operating requirements and longer-term needs, while noting dependence on execution and economic conditions. It saw some channel improvement during 2013 and planned to monitor macroeconomic conditions in 2014; no quantified earnings or sales guidance was provided.
- Key risks include economic and technology-spending sensitivity, government budgets, intense competition and pricing pressure, reliance on major vendors, cybersecurity and systems disruption, receivables and inventory exposure, and substantial debt and variable-rate interest exposure. The company also disclosed ordinary-course litigation, audits and indemnification matters; it did not believe a material excess loss was reasonably possible at year-end.
- Deferred cancellation-of-debt income creates future cash-tax exposure, with inclusion scheduled over 2014–2018; certain transactions could accelerate the tax. After year-end, CDW redeemed additional subordinated notes and expected to redeem the remaining $42.5 million during the following six months.
Investor verification points
- Reconcile GAAP operating and net income with the substantial IPO, debt-refinancing and other adjustments underlying non-GAAP performance measures.
- Track gross-margin trends and whether Corporate growth can offset continuing softness in small business and government demand.
- Verify debt paydown, interest costs, revolving-credit availability, covenant headroom and the effects of subsequent refinancing and note redemptions.
- Assess working-capital movements, especially year-end receivables and inventory increases, and the sustainability of operating cash flow.
- Review the timing and amount of deferred-CODI cash taxes, dividend capacity under debt covenants, and resolution of legal, audit and indemnification matters.