CDW Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; Q4 figures are noted separately below. CDW is a U.S. and Canadian technology products and solutions provider, serving business, government, education and healthcare customers through Corporate, Public and Other segments.
CDW was privately held by CDW Holdings LLC, controlled by investment sponsors and other investors; its common stock had no public trading market. The company described itself as a voluntary SEC filer.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net sales | $9,602.4 million | $8,801.2 million | Up 9.1%; average daily sales up 8.7% |
| Gross profit / margin | $1,587.4 million / 16.5% | $1,390.8 million / 15.8% | Profit up 14.1%; margin expanded 70 basis points |
| Operating income / margin | $470.7 million / 4.9% | $352.7 million / 4.0% | Up 33.5% |
| Net income (loss) | $17.1 million | $(29.2) million | Returned to profit; net margin was about 0.2% |
| Adjusted EBITDA | $717.3 million | $601.8 million | Up 19.2%; non-GAAP measure, 7.5% of sales versus 6.8% |
| Cash from operations | $214.7 million | $423.7 million | Down $209.0 million, primarily from working-capital movements |
| Capital expenditures | $45.7 million | $41.5 million | Primarily information technology investment |
| Cash and working capital at year-end | $99.9 million; $538.2 million | $36.6 million; $675.4 million | Cash increased; working capital decreased |
| Long-term debt, excluding capital leases | $4,066.0 million | $4,289.1 million | Down $223.1 million; additionally, $278.7 million in inventory-financing payables |
| Revolver availability | $679.3 million | $548 million | No revolver borrowings outstanding at year-end 2011 |
Liquidity measures improved in some respects: the cash conversion cycle fell to 27 days from 32, and the senior secured leverage ratio declined to 2.7 from 3.9. Management said existing funding sources were expected to cover cash operating requirements for the next year. The company reported compliance with debt covenants at year-end.
Fourth-quarter snapshot
Q4 2011 net sales were $2,479.3 million, gross profit $413.3 million, operating income $111.1 million and net income $19.0 million. Q4 2010 net sales were $2,269.3 million and net loss was $24.2 million. Public-sector sales timing affected quarterly results; federal orders placed near the government’s fiscal year-end shipped in Q4 2011.
Material changes versus FY2010
- Sales growth was led by Corporate, up 10.4%, and Other, up 25.5%. Public sales rose 5.5%, driven by healthcare growth of 22.7%; government sales declined 1.8% and education declined 0.2%.
- Gross margin benefited from favorable product price/mix and a higher mix of commission and net service-contract revenue. Hardware represented 78.9% of sales; software 18.3% and services 2.7%.
- Operating expenses increased, including selling and administrative expense up 6.6% and advertising expense up 15.7%, but grew more slowly than sales.
- Net interest expense fell to $324.2 million from $391.9 million, while debt refinancing produced a $118.9 million loss on extinguishment. The refinancing included issuing $1.175 billion of 8.5% notes due 2019 and repurchasing most of the 2015 notes.
- Operating cash flow fell despite improved earnings, reflecting a $158.3 million cash use from changes in assets and liabilities, including higher receivables. The cash conversion-cycle improvement partly reflected higher days payable outstanding.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management identified software, services and solutions as growth areas and emphasized market-share growth, productivity and cost management, while noting continued competitive pricing pressure and macroeconomic uncertainty.
- Key risks include substantial leverage and variable-rate debt, interest-rate exposure, restrictive covenants, reliance on major technology vendors and vendor incentives, intense price competition, and exposure to technology spending cycles.
- Public-sector sales are exposed to government budgets and procurement rules; federal government sales were approximately 10% of FY2011 revenue. The healthcare channel’s strong growth included an expanded group-purchasing relationship.
- Other risks include cybersecurity and information-system disruption, service quality, supply-chain interruption, receivable collection, inventory obsolescence, and legal, regulatory and audit matters. Management did not believe a material loss beyond amounts already recognized was reasonably possible at year-end, but outcomes remain uncertain.
- Subsequent to year-end, CDW made $180 million of optional term-loan prepayments and completed a tender offer and redemption process for the remaining 2015 notes, funded in part by $130 million of additional 2019 notes. The company expected about $9 million of related debt-extinguishment loss in Q1 2012. These were post-year-end events, not FY2011 results.
- Prior-period cash-flow statements were revised to reclassify inventory-financing movements from operating to financing activities. The filing says this did not change total cash, net income or Adjusted EBITDA. Auditors issued unqualified opinions on FY2011 financial statements and internal controls.
Most important facts for investors to verify
- Reconcile debt balances, maturities, interest costs, covenant definitions and the effect of the 2012 repayments and note redemption; assess refinancing and floating-rate exposure.
- Review the quality and sustainability of operating cash flow, including receivables, payables and the substantial increase in inventory-financing payables.
- Assess whether margin improvement and Adjusted EBITDA growth persist, and distinguish the non-GAAP measure from GAAP earnings and cash generation.
- Check the durability of healthcare growth, the timing of federal-government orders, and exposure to budgets, vendor concentration and vendor incentive programs.
- Consider the implications of private ownership, sponsor control, lack of a public trading market and restrictions on dividends.