CDW-2015.3.31-10-Q
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    

Commission File Number 001-35985
CDW CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
 
26-0273989
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 N. Milwaukee Avenue
Vernon Hills, Illinois
 
60061
(Address of principal executive offices)
 
(Zip Code)
(847) 465-6000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    ý  No
As of April 30, 2015, there were 172,613,182 shares of common stock, $0.01 par value, outstanding.
 


1

Table of Contents

CDW CORPORATION AND SUBSIDIARIES
FORM 10-Q

TABLE OF CONTENTS
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
SIGNATURES


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Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per-share amounts)
 
March 31,
2015
 
December 31, 2014
Assets
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
447.4

 
$
344.5

Accounts receivable, net of allowance for doubtful accounts of $5.7 for both periods
1,448.9

 
1,561.1

Merchandise inventory
357.0

 
337.5

Miscellaneous receivables
174.1

 
155.6

Prepaid expenses and other
58.5

 
54.7

Total current assets
2,485.9

 
2,453.4

Property and equipment, net
135.1

 
137.2

Equity investments
86.7

 
86.7

Goodwill
2,215.2

 
2,217.6

Other intangible assets, net
1,128.8

 
1,168.8

Deferred financing costs, net
34.3

 
33.0

Other assets
2.6

 
3.2

Total assets
$
6,088.6

 
$
6,099.9

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable—trade
$
695.1

 
$
704.0

Accounts payable—inventory financing
289.8

 
332.1

Current maturities of long-term debt
15.4

 
15.4

Deferred revenue
82.3

 
81.3

Accrued expenses:
 
 

Compensation
102.3

 
130.1

Interest
17.2

 
28.1

Sales taxes
27.1

 
29.1

Advertising
35.4

 
34.0

Income taxes
47.4

 
0.2

Other
113.6

 
113.7

Total current liabilities
1,425.6

 
1,468.0

Long-term liabilities:
 
 
 
Debt
3,190.8

 
3,174.6

Deferred income taxes
450.0

 
475.0

Other liabilities
46.7

 
45.8

Total long-term liabilities
3,687.5

 
3,695.4

Commitments and contingencies (Note 6)

 


Shareholders’ equity:
 
 
 
Preferred shares, $0.01 par value, 100.0 shares authorized, no shares issued or outstanding for both periods

 

Common shares, $0.01 par value, 1,000.0 shares authorized for both periods; 172.5 and 172.2 shares issued and outstanding, respectively
1.7

 
1.7

Paid-in capital
2,718.9

 
2,711.9

Accumulated deficit
(1,717.5
)
 
(1,760.5
)
Accumulated other comprehensive loss
(27.6
)
 
(16.6
)
Total shareholders’ equity
975.5

 
936.5

Total liabilities and shareholders’ equity
$
6,088.6

 
$
6,099.9


The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Net sales
$
2,755.2

 
$
2,652.3

Cost of sales
2,298.7

 
2,227.1

Gross profit
456.5

 
425.2

Selling and administrative expenses
275.5

 
260.9

Advertising expense
29.4

 
28.5

Income from operations
151.6

 
135.8

Interest expense, net
(44.8
)
 
(50.1
)
Net loss on extinguishments of long-term debt
(24.3
)
 
(5.4
)
Other income, net
4.5

 
0.5

Income before income taxes
87.0

 
80.8

Income tax expense
(32.3
)
 
(29.9
)
Net income
$
54.7

 
$
50.9

 
 
 
 
Net income per common share:
 
 
 
Basic
$
0.32

 
$
0.30

Diluted
$
0.32

 
$
0.30

 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
Basic
172.1

 
169.6

Diluted
173.5

 
172.3

 
 
 
 
Cash dividends declared per common share
$
0.0675

 
$
0.0425


The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net income
 
$
54.7

 
$
50.9

Foreign currency translation adjustment (net of tax benefit of $1.4 million and $0.0 million, respectively)
 
(11.0
)
 
(3.9
)
Other comprehensive loss, net of tax
 
(11.0
)
 
(3.9
)
Comprehensive income
 
$
43.7

 
$
47.0

The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents

CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)
 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Shareholders’ Equity
Balance at December 31, 2014
 

 
$

 
172.2

 
$
1.7

 
$
2,711.9

 
$
(1,760.5
)
 
$
(16.6
)
 
$
936.5

Equity-based compensation expense
 

 

 

 

 
4.7

 

 

 
4.7

Stock option exercises
 

 

 

 

 
0.5

 

 

 
0.5

Common shares issued for equity-based compensation
 

 

 
0.2

 

 

 

 

 

Excess tax benefits from equity-based compensation
 

 

 

 

 
0.1

 

 

 
0.1

Coworker Stock Purchase Plan
 


 

 
0.1

 

 
1.7

 

 

 
1.7

Dividends declared
 

 

 

 

 

 
(11.7
)
 

 
(11.7
)
Net income
 

 

 

 

 

 
54.7

 

 
54.7

Foreign currency translation adjustment
 

 

 

 

 

 

 
(11.0
)
 
(11.0
)
Balance at March 31, 2015
 

 
$

 
172.5

 
$
1.7

 
$
2,718.9

 
$
(1,717.5
)
 
$
(27.6
)
 
$
975.5

The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

 
 
Three Months Ended March 31
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
54.7

 
$
50.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
52.5

 
52.0

Equity-based compensation expense
 
4.7

 
3.3

Deferred income taxes
 
(22.6
)
 
(22.1
)
Amortization of deferred financing costs, debt premium, and debt discount, net
 
1.5

 
1.6

Net loss on extinguishments of long-term debt
 
24.3

 
5.4

Income from equity method investment
 
(4.0
)
 

Mark-to-market loss on interest rate cap agreements
 
1.3

 

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
105.4

 
113.2

Merchandise inventory
 
(19.7
)
 
(6.5
)
Other assets
 
(23.1
)
 
(25.7
)
Accounts payable-trade
 
(7.0
)
 
21.5

Other current liabilities
 
8.7

 
52.0

Long-term liabilities
 
1.1

 
0.7

Net cash provided by operating activities
 
177.8

 
246.3

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(10.0
)
 
(9.3
)
Payment of accrued charitable contribution related to the MPK Coworker Incentive Plan II
 

 
(20.9
)
Premium payments on interest rate cap agreements
 
(0.5
)
 

Net cash used in investing activities
 
(10.5
)
 
(30.2
)
Cash flows from financing activities:
 
 
 
 
Repayments of long-term debt
 
(3.9
)
 
(3.9
)
Proceeds from issuance of long-term debt
 
525.0

 

Payments to extinguish long-term debt
 
(525.3
)
 
(79.5
)
Payments of debt financing costs
 
(6.8
)
 

Net change in accounts payable-inventory financing
 
(42.3
)
 
(6.4
)
Proceeds from stock option exercises
 
0.5

 
0.1

Proceeds from Coworker Stock Purchase Plan
 
1.7

 

Dividends paid
 
(11.7
)
 
(7.3
)
Excess tax benefits from equity-based compensation
 
0.1

 

Net cash used in financing activities
 
(62.7
)
 
(97.0
)
Effect of exchange rate changes on cash and cash equivalents
 
(1.7
)
 
(0.5
)
Net increase in cash and cash equivalents
 
102.9

 
118.6

Cash and cash equivalents—beginning of period
 
344.5

 
188.1

Cash and cash equivalents—end of period
 
$
447.4

 
$
306.7

Supplementary disclosure of cash flow information:
 
 
 
 
Interest paid
 
$
(53.1
)
 
$
(16.1
)
Taxes paid, net
 
$
(4.3
)
 
$
(9.5
)
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)





1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
CDW Corporation (“Parent”) is a Fortune 500 company and a leading provider of integrated information technology (“IT”) solutions to small, medium and large business, government, education and healthcare customers in the U.S. and Canada. The Company's offerings range from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.
Throughout these notes, the terms the “Company” and “CDW” refer to Parent and its 100% owned subsidiaries.
Parent has two 100% owned subsidiaries, CDW LLC and CDW Finance Corporation. CDW LLC is an Illinois limited liability company that, together with its 100% owned subsidiaries, holds all material assets and conducts all business activities and operations of the Company. CDW Finance Corporation is a Delaware corporation formed for the sole purpose of acting as co-issuer of certain debt obligations as described in Note 8 and does not hold any material assets or engage in any business activities or operations.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 (the “consolidated financial statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (the “December 31, 2014 financial statements”). The significant accounting policies used in preparing these consolidated financial statements were applied on a basis consistent with those reflected in the December 31, 2014 financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows and changes in shareholders' equity as of the dates and for the periods indicated. The unaudited consolidated statements of operations for such interim periods reported are not necessarily indicative of results for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Parent and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
The notes to the consolidated financial statements contained in the December 31, 2014 financial statements include an additional discussion of the significant accounting policies and estimates used in the preparation of the Company's consolidated financial statements. There have been no material changes to the Company's significant accounting policies and estimates during the three months ended March 31, 2015.

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Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




2.
Recent Accounting Pronouncements
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-05 that amends the guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The new guidance is effective for the Company beginning in the first quarter of 2016, with early adoption permitted. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. While the Company is currently evaluating the impact of the standard, it does not expect that this standard will have a material impact on its consolidated financial position, results of operations and cash flows.

Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03 that amends the presentation of debt issuance costs guidance. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The new guidance is effective for the Company beginning in the first quarter of 2016, with early adoption permitted. The standard requires retrospective application of the new guidance to all prior periods (i.e., the balance sheet for each period presented is adjusted). While the Company is currently evaluating the impact of the standard, it does not expect that this standard will have a material impact on its consolidated financial position, results of operations and cash flows.
Consolidation
In February 2015, the FASB issued ASU 2015-02 that amends the current consolidation guidance. The amendments affect both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. The new guidance is effective for the Company beginning in the first quarter of 2016, with early adoption permitted. The standard allows for either a full retrospective approach or a modified retrospective approach. This new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, which clarifies the standard for recognizing revenue from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. The standard is effective for the Company beginning in the first quarter of 2017 and early adoption is not permitted. The standard allows for either a full retrospective approach or a modified retrospective approach. The Company is currently evaluating the impact that the standard will have on its consolidated financial position, results of operations and cash flows.
3.
Inventory Financing Agreements
The Company has entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions, as described below. These amounts are classified separately as accounts payable-inventory financing on the accompanying consolidated balance sheets. The Company does not incur any interest expense associated with these agreements as balances are paid when they are due.
The following table presents the amounts included in accounts payable-inventory financing:
(in millions)
 
March 31, 2015
 
December 31, 2014
Revolving Loan inventory financing agreement
 
$
289.2

 
$
330.1

Other inventory financing agreements
 
0.6

 
2.0

Accounts payable-inventory financing
 
$
289.8

 
$
332.1


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Table of Contents

The Company's Revolving Loan described in Note 4 below includes an inventory floorplan sub-facility in conjunction with the related Revolving Loan inventory financing agreement with a financial intermediary to facilitate the purchase of inventory from a certain vendor. Amounts outstanding under the Revolving Loan inventory financing agreement are unsecured and non-interest bearing.
The Company also maintains other inventory financing agreements with financial intermediaries to facilitate the purchase of inventory from certain vendors. At March 31, 2015 and December 31, 2014, amounts owed under other inventory financing agreements of $0.6 million and $2.0 million, respectively, were collateralized by the inventory purchased under these financing agreements and a second lien on the related accounts receivable.
4.
Long-Term Debt
Long-term debt was as follows:
(dollars in millions)
 
Interest
Rate (1)
 
March 31, 2015
 
December 31,
2014
Senior secured asset-based revolving credit facility

%

$


$

Senior secured term loan facility

3.25
%

1,509.7


1,513.5

Unamortized discount on senior secured term loan facility



(3.5
)

(3.7
)
Senior notes due 2019

8.5
%



503.9

Unamortized premium on senior notes due 2019





1.3

Senior notes due 2022

6.0
%

600.0


600.0

Senior notes due 2023

5.0
%

525.0



Senior notes due 2024

5.5
%

575.0


575.0

Total long-term debt
 
 
 
3,206.2

 
3,190.0

Less current maturities of long-term debt
 
 
 
(15.4
)
 
(15.4
)
Long-term debt, excluding current maturities
 
 
 
$
3,190.8

 
$
3,174.6

(1)Interest rate at March 31, 2015.
At March 31, 2015, the Company remained in compliance with the covenants under its various credit agreements. Under the credit agreement governing the Senior Secured Term Loan Facility there are restrictions on the ability of CDW to pay dividends, make share repurchases, redeem subordinated debt and engage in certain other transactions.  At March 31, 2015, the amount of CDW’s restricted payment capacity under the Senior Secured Term Loan Facility was $765.9 million.
Senior Secured Asset-Based Revolving Credit Facility (“Revolving Loan”)
At March 31, 2015, the Company had no outstanding borrowings under the Revolving Loan, $2.1 million of undrawn letters of credit and $280.1 million reserved related to the floorplan sub-facility. At March 31, 2015, the borrowing base was $1,224.9 million based on the amount of eligible inventory and accounts receivable balances as of February 28, 2015. The Company could have borrowed up to an additional $942.7 million under the Revolving Loan at March 31, 2015.
The Revolving Loan includes an inventory floorplan sub-facility that is related to the Revolving Loan inventory financing agreement with a financial intermediary. At March 31, 2015, the financial intermediary reported an outstanding balance of $280.1 million under the Revolving Loan inventory financing agreement. The amount included on the Company's consolidated balance sheet as of March 31, 2015 as accounts payable-inventory financing related to the Revolving Loan inventory financing agreement of $289.2 million includes a $9.1 million accrual for amounts in transit.
Senior Secured Term Loan Facility (“Term Loan”)
At March 31, 2015, the outstanding principal amount of the Term Loan was $1,509.7 million, excluding $3.5 million in unamortized discount. The total net leverage ratio was 3.0 at March 31, 2015. An interest rate of 3.25%, comprised of the 1% LIBOR floor plus a 2.25% margin, was in effect during the three-month period ended March 31, 2015.

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Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




In order to manage the risk associated with changes in interest rates on borrowings under the Term Loan, the Company maintains interest rate cap agreements. During the year ended December 31, 2014, the Company entered into fourteen interest rate cap agreements with a combined notional amount of $1,000.0 million. In the first quarter of 2015, the Company entered into six interest rate cap agreements at a rate of 2.0% with a combined notional amount of $400.0 million. Under the 2015 agreements, the Company made premium payments totaling $0.5 million to the counterparties in exchange for the right to receive payments equal to the amount, if any, by which the three-month LIBOR exceeds 2.0% during the agreement period. The interest rate cap agreements are effective from January 14, 2015 through January 14, 2017. The fair value of the Company's interest rate cap agreements was $0.9 million and $1.7 million at March 31, 2015 and December 31, 2014, respectively. Previously, the Company had ten interest rate cap agreements with a combined notional amount of $1,150.0 million that expired on January 14, 2015.
The Company's interest rate cap agreements have not been designated as cash flow hedges of interest rate risk for GAAP accounting purposes. The interest rate cap agreements are recorded at fair value on the Company’s consolidated balance sheet in other assets each period, with changes in fair value recorded directly to interest expense in the Company's consolidated statement of operations. The fair value of the Company's interest rate cap agreements is classified as Level 2 in the fair value hierarchy.
8.5% Senior Notes due 2019 (“2019 Senior Notes”)
At March 31, 2015, there were no outstanding 2019 Senior Notes.
On March 3, 2015, the proceeds from the issuance of the 2023 Senior Notes, discussed below, along with cash on hand, were deposited with the trustee to redeem the remaining $503.9 million aggregate principal amount of the 2019 Senior Notes at a redemption price of 104.25% of the principal amount redeemed, plus accrued and unpaid interest up to, but not including, the date of redemption, April 2, 2015. On the same date, the indenture governing the 2019 Senior Notes was satisfied and discharged and the Company was released from its remaining obligation by the trustee. In connection with this redemption, the Company recorded a loss on extinguishment of long-term debt of $24.3 million in the consolidated statement of operations for the three months ended March 31, 2015, which was comprised of $4.2 million for the write-off of the remaining unamortized deferred financing fees and a redemption premium of $21.4 million, partially offset by $1.3 million for the write-off of the remaining unamortized premium.
5.0% Senior Notes due 2023 (“2023 Senior Notes”)
On March 3, 2015, CDW LLC and CDW Finance Corporation, as co-issuers, completed the issuance of $525.0 million aggregate principal amount of 2023 Senior Notes at par. Fees of $6.8 million related to the 2023 Senior Notes were capitalized as deferred financing costs and are being amortized over the term of the notes on a straight-line basis. The 2023 Senior Notes will mature on September 1, 2023 and bear interest at a rate of 5.0% per annum, payable semi-annually on March 1 and September 1 of each year.
CDW LLC and CDW Finance Corporation are the co-issuers of the 2023 Senior Notes and the obligations under the notes are guaranteed by Parent and each of CDW LLC's direct and indirect, wholly owned, domestic subsidiaries. The 2023 Senior Notes indenture contains negative covenants that, among other things, place restrictions and limitations on the ability of Parent and each of CDW LLC's direct and indirect 100% owned domestic subsidiaries to enter into sale and lease-back transactions, incur additional secured indebtedness, and create liens. The indenture governing the 2023 Senior Notes does not contain any financial covenants.
Fair Value
The fair values of the 2022, 2023, and 2024 Senior Notes were estimated using quoted market prices for identical assets or liabilities that are traded in over-the-counter secondary markets that are not considered active. The fair value of the Term Loan was estimated using dealer quotes for identical assets or liabilities in markets that are not considered active. Consequently, the Company's long-term debt is classified as Level 2 within the fair value hierarchy.

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Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




The approximate fair values and related carrying values of the Company's long-term debt, including current maturities, were as follows:
(in millions)
 
March 31,
2015
 
December 31,
2014
Fair value
 
$
3,282.0

 
$
3,208.7

Carrying value
 
3,209.7

 
3,192.4

5.
Earnings per Share

The numerator for both basic and diluted earnings per share is net income. The denominator for basic earnings per share is the weighted average number of common shares outstanding during the period. The dilutive effect of outstanding restricted stock, restricted stock units, stock options, and Coworker Stock Purchase Plan units is reflected in the denominator for diluted earnings per share using the treasury stock method.
The following is a reconciliation of basic shares to diluted shares:
 
Three Months Ended March 31,
(in millions)
2015
 
2014
Weighted-average shares - basic
172.1

 
169.6

Effect of dilutive securities
1.4

 
2.7

Weighted-average shares - diluted
173.5

 
172.3


There were 0.4 million and 0.1 million potential common shares excluded from diluted earnings per share for the three-month periods ended March 31, 2015 and 2014, respectively, as their inclusion would have had an anti-dilutive effect.
6.
Commitments and Contingencies
The Company is party to various legal proceedings that arise in the ordinary course of its business, which include commercial, intellectual property, employment, tort and other litigation matters. The Company is also subject to audit by federal, state and local authorities, by various partners, group purchasing organizations and customers, including government agencies, relating to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts. From time to time, certain customers of the Company file voluntary petitions for reorganization or liquidation under the U.S. bankruptcy laws. In such cases, certain pre-petition payments received by the Company could be considered preference items and subject to return to the bankruptcy administrator.
As of March 31, 2015, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company's financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
7.
Segment Information
Segment information is presented in accordance with a “management approach,” which designates the internal reporting used by the chief operating decision-maker for making decisions and assessing performance as the source of the Company's reportable segments. The Company's segments are organized in a manner consistent with which separate financial information is available and evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
The Company has two reportable segments: Corporate, which is comprised primarily of private sector business customers, and Public, which is comprised of government agencies and education and healthcare institutions. The Company also has three other operating segments, CDW Advanced Services, Canada, and Kelway TopCo Limited (“Kelway”), which do not meet the reportable segment quantitative thresholds and, accordingly, are combined in an all other category (“Other”).

12

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




The Company has centralized logistics and headquarters functions that provide services to the segments. The logistics function includes purchasing, distribution and fulfillment services to support both the Corporate and Public segments. As a result, costs and intercompany charges associated with the logistics function are fully allocated to both of these segments based on a percent of sales. The centralized headquarters function provides services in areas such as accounting, information technology, marketing, legal and coworker services. Headquarters' function costs that are not allocated to the segments are included under the heading of “Headquarters” in the tables below. Depreciation expense is included in Headquarters as it is not allocated among segments or used in measuring segment performance.
The Company allocates resources to and evaluates performance of its segments based on net sales, income (loss) from operations and Adjusted EBITDA, a non-GAAP measure as defined in the Company's credit agreements. However, the Company has concluded that income (loss) from operations is a more useful measure in terms of discussion of operating results, as it is a GAAP measure.
Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources between segments. 
Selected Segment Financial Information
The following table presents information about the Company’s segments for the three months ended March 31, 2015 and 2014:
(in millions)

Corporate

Public

Other

Headquarters

Total
Three Months Ended March 31, 2015:










Net sales

$
1,574.0


$
1,005.8


$
175.4


$


$
2,755.2

Income (loss) from operations

110.2


59.6


10.1


(28.3
)

151.6

Depreciation and amortization expense

(24.0
)

(10.9
)

(2.3
)

(15.3
)

(52.5
)











Three Months Ended March 31, 2014:










Net sales

$
1,505.6


$
969.9


$
176.8


$


$
2,652.3

Income (loss) from operations

101.1


54.1


6.5


(25.9
)

135.8

Depreciation and amortization expense

(24.1
)

(10.9
)

(2.1
)

(14.9
)

(52.0
)


13

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




8.
Supplemental Guarantor Information
The 2022 Senior Notes, the 2023 Senior Notes and the 2024 Senior Notes are, and, prior to being redeemed in full, the 2019 Senior Notes, the Senior Subordinated Notes, and the Senior Secured Notes were guaranteed by Parent and each of CDW LLC’s direct and indirect, 100% owned, domestic subsidiaries (the “Guarantor Subsidiaries”). All guarantees by Parent and Guarantor Subsidiaries are and were joint and several, and full and unconditional; provided that guarantees by the Guarantor Subsidiaries (i) are subject to certain customary release provisions contained in the indentures governing the 2022 Senior Notes, the 2023 Senior Notes and the 2024 Senior Notes and (ii) were subject to certain customary release provisions contained in the indentures governing the 2019 Senior Notes, the Senior Subordinated Notes and the Senior Secured Notes until such indentures were satisfied and discharged in 2014 and the first quarter of 2015. CDW LLC's Canada subsidiary (the “Non-Guarantor Subsidiary”) does not guarantee the debt obligations. CDW LLC and CDW Finance Corporation, as co-issuers, are 100% owned by Parent, and each of the Guarantor Subsidiaries and the Non-Guarantor Subsidiary is 100% owned by CDW LLC.
The following tables set forth condensed consolidating balance sheets as of March 31, 2015 and December 31, 2014, consolidating statements of operations for the three months ended March 31, 2015 and 2014, condensed consolidating statements of comprehensive income for the three months ended March 31, 2015 and 2014, and condensed consolidating statements of cash flows for the three months ended March 31, 2015 and 2014, in accordance with Rule 3-10 of Regulation S-X. The consolidating financial information includes the accounts of CDW Corporation (the “Parent Guarantor”), which has no independent assets or operations, the accounts of CDW LLC (the “Subsidiary Issuer”), the combined accounts of the Guarantor Subsidiaries, the accounts of the Non-Guarantor Subsidiary, and the accounts of CDW Finance Corporation (the “Co-Issuer”) for the periods indicated. The information was prepared on the same basis as the Company’s consolidated financial statements.

14

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




 
Condensed Consolidating Balance Sheet
March 31, 2015
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
428.3

 
$

 
$
29.3

 
$

 
$
(10.2
)
 
$
447.4

Accounts receivable, net

 

 
1,375.8

 
73.1

 

 

 
1,448.9

Merchandise inventory

 

 
352.4

 
4.6

 

 

 
357.0

Miscellaneous receivables

 
58.7

 
109.5

 
5.9

 

 

 
174.1

Prepaid expenses and other

 
14.5

 
46.5

 
0.6

 

 
(3.1
)
 
58.5

Total current assets

 
501.5

 
1,884.2

 
113.5

 

 
(13.3
)
 
2,485.9

Property and equipment, net

 
81.3

 
52.8

 
1.0

 

 

 
135.1

Equity investments

 
86.7

 

 

 

 

 
86.7

Goodwill

 
751.8

 
1,439.0

 
24.4

 

 

 
2,215.2

Other intangible assets, net

 
314.7

 
809.5

 
4.6

 

 

 
1,128.8

Deferred financing costs, net

 
34.3

 

 

 

 

 
34.3

Other assets
4.3

 
2.4

 
0.4

 
1.6

 

 
(6.1
)
 
2.6

Investment in and advances to subsidiaries
971.2

 
2,770.4

 

 

 

 
(3,741.6
)
 

Total assets
$
975.5

 
$
4,543.1

 
$
4,185.9

 
$
145.1

 
$

 
$
(3,761.0
)
 
$
6,088.6

Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable—trade
$

 
$
22.3

 
$
648.5

 
$
34.6

 
$

 
$
(10.3
)
 
$
695.1

Accounts payable—inventory financing

 

 
289.8

 

 

 

 
289.8

Current maturities of
long-term debt

 
15.4

 

 

 

 

 
15.4

Deferred revenue

 

 
82.0

 
0.3

 

 

 
82.3

Accrued expenses

 
163.1

 
176.2

 
7.1

 

 
(3.4
)
 
343.0

Total current liabilities

 
200.8

 
1,196.5

 
42.0

 

 
(13.7
)
 
1,425.6

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt

 
3,190.8

 

 

 

 

 
3,190.8

Deferred income taxes

 
136.6

 
316.5

 
1.2

 

 
(4.3
)
 
450.0

Other liabilities

 
43.7

 
3.6

 
0.8

 

 
(1.4
)
 
46.7

Total long-term liabilities

 
3,371.1

 
320.1

 
2.0

 

 
(5.7
)
 
3,687.5

Total shareholders’ equity
975.5

 
971.2

 
2,669.3

 
101.1

 

 
(3,741.6
)
 
975.5

Total liabilities and shareholders’ equity
$
975.5

 
$
4,543.1

 
$
4,185.9

 
$
145.1

 
$

 
$
(3,761.0
)
 
$
6,088.6




15

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Condensed Consolidating Balance Sheet
December 31, 2014
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
346.4

 
$

 
$
24.6

 
$

 
$
(26.5
)
 
$
344.5

Accounts receivable, net

 

 
1,479.1

 
82.0

 

 

 
1,561.1

Merchandise inventory

 

 
333.9

 
3.6

 

 

 
337.5

Miscellaneous receivables

 
56.1

 
93.3

 
6.2

 

 

 
155.6

Prepaid expenses and other

 
11.0

 
46.0

 
1.5

 

 
(3.8
)
 
54.7

Total current assets

 
413.5

 
1,952.3

 
117.9

 

 
(30.3
)
 
2,453.4

Property and equipment, net

 
80.5

 
55.5

 
1.2

 

 

 
137.2

Equity investments

 
86.7

 

 

 


 


 
86.7

Goodwill

 
751.8

 
1,439.0

 
26.8

 

 

 
2,217.6

Other intangible assets, net

 
320.0

 
843.6

 
5.2

 

 

 
1,168.8

Deferred financing costs, net

 
33.0

 

 

 

 

 
33.0

Other assets
4.3

 
3.2

 
0.4

 
1.4

 

 
(6.1
)
 
3.2

Investment in and advances to subsidiaries
932.2

 
2,784.5

 

 

 

 
(3,716.7
)
 

Total assets
$
936.5

 
$
4,473.2

 
$
4,290.8

 
$
152.5

 
$

 
$
(3,753.1
)
 
$
6,099.9

Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable-trade
$

 
$
23.9

 
$
671.9

 
$
34.7

 
$

 
$
(26.5
)
 
$
704.0

Accounts payable-inventory financing

 

 
332.1

 

 

 

 
332.1

Current maturities of long-term debt

 
15.4

 

 

 

 

 
15.4

Deferred revenue

 

 
79.9

 
1.4

 

 

 
81.3

Accrued expenses

 
137.8

 
193.6

 
7.9

 

 
(4.1
)
 
335.2

Total current liabilities

 
177.1

 
1,277.5

 
44.0

 

 
(30.6
)
 
1,468.0

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt

 
3,174.6

 

 

 

 

 
3,174.6

Deferred income taxes

 
146.7

 
331.3

 
1.3

 

 
(4.3
)
 
475.0

Other liabilities

 
42.6

 
3.7

 
1.0

 

 
(1.5
)
 
45.8

Total long-term liabilities

 
3,363.9

 
335.0

 
2.3

 

 
(5.8
)
 
3,695.4

Total shareholders’ equity
936.5

 
932.2

 
2,678.3

 
106.2

 

 
(3,716.7
)
 
936.5

Total liabilities and shareholders’ equity
$
936.5

 
$
4,473.2

 
$
4,290.8

 
$
152.5

 
$

 
$
(3,753.1
)
 
$
6,099.9





16

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Consolidating Statement of Operations
Three Months Ended March 31, 2015
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$

 
$
2,627.6

 
$
127.6

 
$

 
$

 
$
2,755.2

Cost of sales

 

 
2,186.4

 
112.3

 

 

 
2,298.7

Gross profit

 

 
441.2

 
15.3

 

 

 
456.5

Selling and administrative expenses

 
28.3

 
238.5

 
8.7

 

 

 
275.5

Advertising expense

 

 
28.7

 
0.7

 

 

 
29.4

Income (loss) from operations

 
(28.3
)
 
174.0

 
5.9

 

 

 
151.6

Interest (expense) income, net

 
(44.9
)
 

 
0.1

 

 

 
(44.8
)
Net loss on extinguishments of long-term debt

 
(24.3
)
 

 

 

 

 
(24.3
)
Management fee

 
1.0

 

 
(1.0
)
 

 

 

Other income (expense), net

 
4.1

 
0.7

 
(0.3
)
 

 

 
4.5

Income (loss) before income taxes

 
(92.4
)
 
174.7

 
4.7

 

 

 
87.0

Income tax benefit (expense)

 
34.8

 
(65.8
)
 
(1.3
)
 

 

 
(32.3
)
Income (loss) before equity in earnings of subsidiaries

 
(57.6
)
 
108.9

 
3.4

 

 

 
54.7

Equity in earnings of subsidiaries
54.7

 
112.3

 

 


 

 
(167.0
)
 

Net income
$
54.7

 
$
54.7

 
$
108.9

 
$
3.4

 
$

 
$
(167.0
)
 
$
54.7








17

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Consolidating Statement of Operations
Three Months Ended March 31, 2014
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$

 
$
2,518.1

 
$
134.2

 
$

 
$

 
$
2,652.3

Cost of sales

 

 
2,107.5

 
119.6

 

 

 
2,227.1

Gross profit

 

 
410.6

 
14.6

 

 

 
425.2

Selling and administrative expenses

 
25.9

 
226.3

 
8.7

 

 

 
260.9

Advertising expense

 

 
27.8

 
0.7

 

 

 
28.5

Income (loss) from operations

 
(25.9
)
 
156.5

 
5.2

 

 

 
135.8

Interest (expense) income, net

 
(50.2
)
 

 
0.1

 

 

 
(50.1
)
Net loss on extinguishments of long-term debt

 
(5.4
)
 

 

 

 

 
(5.4
)
Management fee

 
1.0

 

 
(1.0
)
 

 

 

Other (expense) income, net

 

 
0.4

 
0.1

 

 

 
0.5

Income (loss) before income taxes

 
(80.5
)
 
156.9

 
4.4

 

 

 
80.8

Income tax benefit (expense)

 
30.2

 
(58.9
)
 
(1.2
)
 

 

 
(29.9
)
Income (loss) before equity in earnings of subsidiaries

 
(50.3
)
 
98.0

 
3.2

 

 

 
50.9

Equity in earnings of subsidiaries
50.9

 
101.2

 

 

 

 
(152.1
)
 

Net income
$
50.9

 
$
50.9

 
$
98.0

 
$
3.2

 
$

 
$
(152.1
)
 
$
50.9




















18

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2015
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Comprehensive income (loss)
$
43.7

 
$
43.7

 
$
108.9

 
$
(7.6
)
 
$

 
$
(145.0
)
 
$
43.7































19

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2014
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Comprehensive income (loss)
$
47.0

 
$
47.0

 
$
98.0

 
$
(0.7
)
 
$

 
$
(144.3
)
 
$
47.0






20

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2015
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Net cash (used in) provided by operating activities
$

 
$
(20.6
)
 
$
175.3

 
$
6.8

 
$

 
$
16.3

 
$
177.8

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(8.7
)
 
(1.1
)
 
(0.2
)
 

 

 
(10.0
)
Premium payments on interest rate cap agreements

 
(0.5
)
 

 

 

 

 
(0.5
)
Net cash used in investing activities

 
(9.2
)
 
(1.1
)
 
(0.2
)
 

 

 
(10.5
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Repayments of long-term debt

 
(3.9
)
 

 

 

 

 
(3.9
)
Proceeds from the issuance of long-term debt

 
525.0

 

 

 

 

 
525.0

Payments to extinguish long-term debt

 
(525.3
)
 

 

 

 

 
(525.3
)
Payments of debt financing costs

 
(6.8
)
 

 

 

 

 
(6.8
)
Net change in accounts payable-inventory financing

 

 
(42.3
)
 

 

 

 
(42.3
)
Proceeds from stock option exercises

 
0.5

 

 

 

 

 
0.5

Proceeds from Coworker Stock Purchase Plan

 
1.7

 

 

 

 

 
1.7

Dividends paid
(11.7
)
 

 

 

 

 

 
(11.7
)
Excess tax benefits from equity-based compensation

 
0.1

 

 

 

 

 
0.1

Advances from (to) affiliates
11.7

 
120.4

 
(131.9
)
 
(0.2
)
 

 

 

Net cash provided by (used in) financing activities

 
111.7

 
(174.2
)
 
(0.2
)
 

 

 
(62.7
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 
(1.7
)
 

 

 
(1.7
)
Net increase in cash and cash equivalents

 
81.9

 

 
4.7

 

 
16.3

 
102.9

Cash and cash equivalents—beginning of period

 
346.4

 

 
24.6

 

 
(26.5
)
 
344.5

Cash and cash equivalents—end of period
$

 
$
428.3

 
$

 
$
29.3

 
$

 
$
(10.2
)
 
$
447.4








21

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2014
(in millions)
Parent
Guarantor
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Co-Issuer
 
Consolidating
Adjustments
 
Consolidated
Net cash (used in) provided by operating activities
$