S-1/A 1 d501911ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on June 14, 2013

Registration No. 333-187472

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CDW CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   5961   26-0273989

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Number)

 

(I.R.S. Employer

Identification No.)

 

 

200 N. Milwaukee Avenue

Vernon Hills, Illinois 60061

Telephone: (847) 465-6000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Christine A. Leahy

Senior Vice President, General Counsel and Corporate Secretary

CDW Corporation

200 N. Milwaukee Avenue

Vernon Hills, Illinois 60061

Telephone: (847) 465-6000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

James S. Rowe

Kirkland & Ellis LLP

300 N. LaSalle

Chicago, Illinois 60654

Telephone: (312) 862-2000

 

Robert F. Wall, Esq.

Brian M. Schafer, Esq.

Winston & Strawn LLP

35 W. Wacker Drive

Chicago, Illinois 60601

Telephone: (312) 558-5600

Approximate date of commencement of proposed sale of the securities to the public:

As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 ¨

Non-accelerated filer x

(Do not check if a smaller reporting company)

  

Accelerated filer ¨

Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities

to be registered

 

Amount

to be registered(1)

 

Estimated maximum

offering

price per share(2)

 

Proposed maximum

aggregate

offering price(2)(3)

 

Amount of

registration

fee(3)(4)

Common Stock, par value $0.01 per share

 

32,085,000

  $23.00   $737,955,000   $100,658

 

 

 

(1)   Includes 4,185,000 additional shares of common stock that the underwriters have the option to purchase.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   Includes the offering price of any additional shares of common stock that the underwriters have the option to purchase.
(4)   $68,200 was previously paid in connection with the initial filing of this Registration Statement.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell, and neither we nor the selling stockholders are soliciting an offer to buy, these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated June 14, 2013

Prospectus

27,900,000 shares

 

LOGO

CDW Corporation

Common stock

This is an initial public offering of shares of common stock of CDW Corporation. We are offering 23,250,000 shares of our common stock. The selling stockholders identified in this prospectus are offering an additional 4,650,000 shares of our common stock. We will not receive any proceeds from the sale of these shares of our common stock by the selling stockholders. The estimated initial public offering price is between $20.00 and $23.00.

Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the NASDAQ Global Select Market under the symbol “CDW.”

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 18.

 

        Per share        Total  

Initial public offering price

     $                      $                

Underwriting discounts and commissions

     $           $     

Proceeds to CDW, before expenses

     $           $     

Proceeds to selling stockholders

     $           $     

The underwriters have an option to purchase up to 4,185,000 additional shares from the selling stockholders to cover overallotments, if any. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

Delivery of the shares of common stock will be made on or about                     , 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

J.P. Morgan   Barclays    Goldman, Sachs & Co.
Deutsche Bank Securities    Morgan Stanley
Baird      Raymond James

 

William Blair    Needham & Company    Stifel
Loop Capital Markets       The Williams Capital Group, L.P.

                    , 2013


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LOGO


Table of Contents

Table of contents

 

     Page  

Trademarks and service marks

     ii   

Prospectus summary

     1   

Risk factors

     18   

Forward-looking statements

     35   

Market, ranking and other industry data

     36   

Use of proceeds

     37   

Dividend policy

     38   

Capitalization

     39   

Dilution

     41   

Unaudited pro forma condensed consolidated financial data

     43   

Selected consolidated financial and operating data

     54   

Management’s discussion and analysis of financial condition and results of operations

     58   

Business

     101   

Management

     114   

Executive compensation

     124   

Principal and selling stockholders

     151   

Certain transactions

     154   

Description of certain indebtedness

     159   

Description of capital stock

     167   

Shares eligible for future sale

     172   

Certain U.S. federal income and estate tax considerations for non-U.S. holders

     175   

Underwriting

     180   

Legal matters

     190   

Experts

     190   

Where you can find more information

     192   

2002-2012 reconciliation

     R-1   

Index to consolidated financial statements

     F-1   

 

 

Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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Trademarks and service marks

This prospectus includes our trademarks such as “CDW,” which are protected under applicable intellectual property laws and are the property of CDW Corporation or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

 

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Prospectus summary

This summary highlights information contained in greater detail elsewhere in this prospectus. You should carefully read the entire prospectus, including the section entitled “Risk factors” and the consolidated financial statements and notes related to those statements included elsewhere in this prospectus, before deciding to invest in our common stock. Unless otherwise indicated or the context otherwise requires, the terms “we,” “us,” “our,” “the Company,” “CDW” and other similar terms refer to the business of CDW Corporation and its consolidated subsidiaries.

Our business

Our company

CDW is a Fortune 500 company and a leading provider of integrated information technology (“IT”) solutions in the U.S. and Canada. We help our customer base of more than 250,000 small, medium and large business, government, education and healthcare customers by delivering critical solutions to their increasingly complex IT needs. Our broad array of offerings range from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration. We are technology “agnostic,” with a product portfolio that includes more than 100,000 products from more than 1,000 brands. We provide our products and solutions through our sales force and service delivery teams consisting of more than 4,300 coworkers, including over 1,700 field sellers, highly skilled technology specialists and advanced service delivery engineers.

Our sales growth has historically outpaced U.S. IT spending growth. From 2002 to 2012, we grew our net sales at a compound annual growth rate (“CAGR”) of 9.0%, while U.S. IT spending and U.S. real GDP grew at CAGRs of only 4.3% and 1.6%, respectively, according to International Data Corporation (“IDC”) and the Bureau of Economic Analysis, respectively.

We are a leading U.S. sales channel partner for many original equipment manufacturers (“OEMs”) and software publishers (collectively, our “vendor partners”), whose products we sell or include in the solutions we offer. We believe we are an important extension of our vendor partners’ sales and marketing capabilities, providing them with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage and extensive customer access.

We provide value to our customers by simplifying the complexities of technology across design, selection, procurement, integration and management. Our goal is to have our customers, regardless of their size, view us as an indispensable extension of their IT staffs. We seek to achieve this goal by providing our customers with superior service through our large and experienced sales force and service delivery teams. Our multi-brand offering approach enables us to identify the products or combination of products that best address each customer’s specific organizational IT requirements and to evolve our offerings as new technologies develop.

 

 

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We believe we offer the following value proposition to our customers and our vendor partners:

 

Our value proposition to our customers    Our value proposition to our vendor partners

 

• Broad selection of products and multi-branded IT solutions

 

• Value-added services with integration capabilities

 

• Highly skilled specialists and engineers

 

• Solutions across a very broad IT landscape

  

• Access to over 250,000 customers throughout the U.S. and Canada

 

• Large and established customer channels

 

• Strong distribution and implementation capabilities

 

• Value-added solutions and marketing programs that generate end-user demand

 

Our customers include private sector businesses that typically employ fewer than 5,000 employees, government agencies and educational and healthcare institutions. We serve our customers through channel-specific sales teams and service delivery teams with extensive technical skills and knowledge of the specific markets they serve. This market segmentation allows us to customize our offerings and to provide enhanced expertise in designing and implementing IT solutions for our customers. We currently have five dedicated customer channels: medium/large business, small business, government, education and healthcare, each of which generated over $1 billion in net sales in 2012. The scale and diversity of our customer channels provide us with multiple avenues for growth and a balanced customer base to weather economic and technology cycles. For example, from 2008 through 2010, a period that included the recent financial crisis, sales to our government and education customers grew while sales to our medium/large business and small business customers held steady or experienced only slight growth. In contrast, since 2010, our medium/large business and small business channels have experienced significantly stronger growth relative to our government and education channels. Our healthcare channel experienced strong growth during both periods.

The following table provides information regarding our reportable segments and our customer channels:

 

     Corporate segment      Public segment          
Customer Channels   Medium/large
business
     Small
business
     Government      Education      Healthcare      Other  

 

 

Target Customers

   
 
100 - 5,000
employees
 
  
    
 
10 - 100
employees
  
  
    
 
 
 
 
Various
federal,
state
and local
agencies
  
  
  
  
  
    
 
 
Higher
education
and K-12
  
 
  
    
 
 
 
 
 
Hospitals,
ambulatory
service
providers and
long-term
care facilities
  
  
  
  
  
  
    
 
 
 
 
Advanced
services
customers
plus
Canada
  
  
  
  
  

2012 Net Sales (in billions)

  $ 4.4       $ 1.1       $ 1.4       $ 1.2       $ 1.4       $ 0.6   

2010-2012 CAGR

    7%         5%         1%         0%         20%         21%   

2008-2010 CAGR

    0%         1%         11%         8%         15%         12%   

 

 

We offer over 1,000 brands, from well-established companies such as APC, Apple, Cisco, EMC, Hewlett-Packard, IBM, Lenovo, Microsoft, NetApp, Symantec and VMware, to emerging vendor partners such as Drobo, Fusion-io, Meraki, Nimble Storage, Salesforce.com, Sophos and Splunk. In 2012, we generated over $1 billion of revenue for each of three of our vendor partners and over $100 million of revenue for each of 12 other vendor partners. We have received the highest level

 

 

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of certification from major vendor partners, such as Cisco, EMC and Microsoft, which reflects the extensive product and solution knowledge and capabilities that we bring to our customers’ IT challenges. These certifications also provide us with access to favorable pricing, tools and resources, including vendor incentive programs, which we use to provide additional value to our customers. Our vendor partners also regularly recognize us with top awards and select us to develop and grow new customer solutions.

In 2012, our net sales, Adjusted EBITDA, net income and non-GAAP net income were $10.1 billion, $767 million, $119 million and $247 million, respectively. For the three months ended March 31, 2013, our net sales, Adjusted EBITDA and non-GAAP net income were $2.4 billion, $179 million and $56.3 million, respectively. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures. See “Summary consolidated financial information” for the definitions of Adjusted EBITDA and non-GAAP net income, the reasons for their inclusion and a reconciliation to net (loss) income.

Our market

We operate in the U.S. and Canadian IT market, which is a large and growing market. According to IDC, the overall U.S. IT market generated approximately $630 billion in sales in 2012. We believe our addressable market in the U.S. in the indirect sales channel represents more than $200 billion in annual sales and for the year ended December 31, 2012, our U.S. net sales of $9.7 billion represented approximately 5% of that highly diverse and fragmented market. According to IDC, the overall Canadian IT market generated approximately $50 billion in sales in 2012. We believe our addressable market in Canada in the indirect sales channel represents nearly $10 billion in annual sales and for the year ended December 31, 2012, our net sales of $445 million in Canada represented approximately 5% of that market. We believe we have the largest market share in our addressable market, with our 2012 net sales exceeding the cumulative North American net sales of our five largest publicly traded sales channel competitors, based upon publicly available information for those companies. New technologies, including cloud, virtualization and mobility, coupled with the resulting increase in demand for data as well as aging infrastructure, are increasingly requiring businesses and institutions to seek integrated solutions to their IT needs. We expect this trend to continue for the foreseeable future, with end-user demand for business efficiency and productivity driving future IT spending growth.

The table below shows the estimated 2012 annual sales within the IT market and expected growth rates of certain technology solutions that we provide within our addressable market, each of which is expected to grow at a rate faster than both the U.S. IT market and our addressable market:

 

 

(dollars in billions)    2012E     

CAGR
2012E-2015E

 

 

 

Public Cloud(1)

   $ 20.6         13%   

Security(2)

     21.3         9      

Mobility(3)

     3.4         39      

Virtualization(4)

     1.8         11      

Managed Services(5)

     46.2         11      

Collaboration(6)

     5.3         6      

 

 

 

(1)   Gartner, “Forecast: IT Services, 2010-2016, 4Q12 Update,” Cloud Services and Applications Outsourcing (December 2012) (U.S.)

 

(2)   Gartner, “Forecast: Information Security, Worldwide, 2010-2016, 4Q12 Update” (January 2013) (U.S.)

 

 

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(3)   Gartner, “Managed Mobility Services” (March 2013) (US); “Forecast: Tablets and Ultramobiles, Worldwide, 2010-2016, 4Q12 Update,” Business Tablets and Ultramobiles (December 2012) (U.S.)

 

(4)   Gartner, “Forecast: Enterprise Software Markets, Worldwide, 2011-2016,” Virtualization Infrastructure Software (December 2012) (U.S.)

 

(5)   Gartner, “Forecast: IT Services 2010-2016, 4Q12 Update,” Colocation, Hosting, Data Center Outsourcing (December 2012) (U.S.)

 

(6)   Gartner, “Forecast: Enterprise Unified Communications Infrastructure, Worldwide, 2009-2016,” Unified Communications Ready Enterprise Infrastructure (March 2013) (North America)

IDC estimates that 59% of U.S. IT revenues are generated through indirect channels, including value-added resellers (“VARs”), retailers and e-tailers, rather than the direct sales forces of OEMs and software publishers. We purchase products directly from our vendor partners, as well as from wholesale distributors, for resale to our customers or for inclusion in the solutions we offer. Wholesale distributors, such as Arrow, Avnet, Ingram Micro, SYNNEX and Tech Data, provide logistics management and supply-chain services for us and our vendor partners but, unlike CDW, typically do not have relationships with end-users in the U.S.

The charts below depict the current principal sales channels for vendors in the IT market and our estimate of our market-leading share of our addressable market in the U.S.:

 

LOGO    LOGO

Our history

CDW was founded in 1984. We were a public company from 1993 until October 2007, when we were acquired by newly formed entities controlled by Madison Dearborn Partners (“Madison Dearborn”) and Providence Equity Partners (“Providence Equity,” and together with Madison Dearborn, the “Sponsors”) in a transaction valued at approximately $7.4 billion (the “Acquisition”).

Since our inception, our company has exhibited a strong culture of customer service while operating with a lean, highly efficient cost structure. Over the past ten years, we have grown our sales twice as fast as the overall U.S. IT market and maintained strong operating profitability across economic cycles. Most of our growth has been organic, driven largely by our strong execution as well as through our effective market segmentation. Over the years, we have been able to identify attractive growth opportunities, dedicate resources to them and execute on our strategy to capture above-market growth. For example, in 2005, we launched a sales team for our healthcare customer channel, which has since grown to represent over $1.4 billion in net

 

 

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sales in 2012. Our last acquisition was in 2006, when we acquired Berbee Information Networks Corporation, a regional provider of technology products, solutions and customized engineering services in advanced technologies. We leveraged this acquisition to significantly enhance our ability to deliver advanced solutions throughout the U.S. and Canada, adding approximately 675 specialists, field sellers and engineers since the time of the acquisition to further enhance these capabilities.

Since the Acquisition, we have continued to expand our customer footprint, breadth of products and solutions and developed stronger and deeper relationships with a greater number of our vendor partners. We increased our net sales from approximately $8 billion in 2008 to more than $10 billion in 2012, and increased our Adjusted EBITDA by 34% during that period.

We have increased our focus as an IT solutions provider and further diversified our business. We have become more efficient and have continued to improve our coworker productivity, improving our net sales per coworker from $1.22 million in 2008 to $1.50 million in 2012. We have also substantially reduced our leverage through debt reduction and improvement in our Adjusted EBITDA, and will further reduce our leverage as a result of this offering.

Our competitive strengths

We believe the following strengths have contributed to our success and enabled us to become an important strategic partner for both our customers and our vendor partners:

Significant scale and scope

 

 

Breadth of solutions:    We are able to provide our customers with a selection of over 100,000 products from over 1,000 brands and a multitude of advanced technology solutions. We are technology “agnostic,” which we believe better enables us to meet our customers’ evolving IT needs. We have leveraged our scale to provide a high level of customer service and a breadth of technology options, making it easy for customers to do business with us.

 

 

Extensive reach:    We have a large sales organization, providing our vendor partners access to over 250,000 customers. Our extensive reach allows us to provide customers with local, on-site support, while at the same time providing them with the strength and consistency of a large and established organization. We believe this flexibility is particularly important to our customers with multiple geographically-dispersed locations. By engaging with a single IT solutions provider, customers can improve overall efficiency and effectiveness through the use of one set of standards across multiple locations and control costs through centralized purchasing.

 

 

Operational cost efficiencies:    Our scale provides us with operational cost efficiencies across our organization, including purchasing, operations, IT, sales, marketing and other support functions. Our scale also enables us to negotiate volume discounts and other incentives from our vendor partners. We leverage these advantages to provide cost-efficient service to our customers.

 

 

Distribution advantages:    Our scale allows us to maintain two modern distribution centers with sufficient capacity to support future growth. Our distribution capabilities enable us to

 

 

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provide effective and efficient inventory management and configuration services and operate a flexible procurement and fulfillment model, which we believe further distinguishes us from our competitors.

Performance-driven coworker culture

Our steadfast focus on serving our customers and investing in our coworkers has fostered a strong, entrepreneurial “make it happen” culture. Since our founding, we have adhered to a core philosophy known as the Circle of Service, which places the customer at the center of all of our actions. Our compensation structure is a key component of our performance-driven culture, with a significant portion of compensation based on performance. Our senior management’s incentive compensation is based on both market share gains and our overall financial performance, and our account managers’ incentive compensation is based on the gross profit they generate. In addition, we have consistently and cost-effectively invested in our coworkers by providing extensive coworker training, supplying our coworkers with resources that contribute to their success, and offering them career development and advancement opportunities. This consistent focus on customers and coworkers has created a customer-centric, highly engaged coworker base. We believe this philosophy ultimately benefits our customers and fosters long-term customer loyalty.

Large and knowledgeable direct selling organization

We have a large and highly experienced sales force providing multi-brand solutions throughout the U.S. and Canada. Our sales force and service delivery team consists of more than 4,300 coworkers, including more than 2,800 account managers and field sellers. We believe our success is due in part to the strength of our account managers’ dedicated relationships with customers that are developed by frequently calling on existing and new customers, providing advice on products, responding to customer inquiries and developing solutions to our customers’ complex technology needs. The deep industry knowledge of our dedicated sales, marketing and support resources within each of our customer channels allows us to understand and solve the unique challenges and evolving IT needs of our customers.

Highly skilled technology specialists and engineers focused on delivering solutions

We have nearly 1,400 highly skilled technology specialists and engineers supporting solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration. These individuals bring deep product and solution knowledge and experience to the technology challenges of our customers. We believe our technology specialists and engineers, who work with customers and our sales force to design, select, integrate and manage solutions, are a critical resource and differentiator for us as we seek to continue to expand our offerings of value-added services and solutions. We believe that the knowledge and experience that our technology specialists and engineers bring to our customers’ needs allow us to pursue the expected higher growth opportunities from solutions offerings.

Large and established customer channels

We have five customer channels each accounting for more than $1 billion of our net sales in 2012 that provide us with the scale to offer channel- and industry-specific solutions to our customers.

 

 

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Our specialized sales resources and targeted solutions enable us to better meet our customers’ evolving IT needs. In addition, the diversity of our customer channels provides us multiple avenues for growth and a balanced customer base, which enable us to better weather economic and technology cycles.

Strong, established vendor partner relationships

We believe that our strong vendor partner relationships differentiate us from other technology solutions providers. We are the largest U.S. sales channel partner for many of our vendor partners. We believe this makes us an important extension of their own sales and marketing capabilities, providing them with a cost-effective route to market for their products. We are also able to provide valuable customer feedback to our vendor partners, which allows us to collaborate with our vendor partners to develop solutions to meet our customers’ changing and evolving needs.

Our growth strategies

We believe we are well-positioned for growth and have a multifaceted strategy that builds upon our scale, broad solutions offerings and our important role in delivering value for both our customers and vendor partners. We believe we can further enhance our position as a leading provider of integrated IT solutions and increase our revenues and operating profits by capitalizing on our competitive strengths and executing the following strategies:

Further penetrate core customer markets

We compete in a highly fragmented market and believe this fragmentation presents significant opportunities for us to increase our market share. We intend to maintain our focus on continuing to outpace our competitors in revenue growth in the markets we serve through increased “share of wallet” from existing customers and sales to new customers. We intend to accomplish this objective by:

 

 

leveraging our existing deep customer relationships to grow customer verticals;

 

 

continuing to focus on improvements in sales productivity and sales coverage in underpenetrated markets;

 

 

dedicating additional resources in high growth customer channels; and

 

 

leveraging our existing relationships with both established and emerging vendor partners.

Continue to expand solution offerings

Our customers increasingly need complex integrated solutions, including solutions involving mobility, security, data center optimization, cloud computing, virtualization and collaboration, all of which are expected to grow at rates faster than the overall U.S. IT market. We offer a broad set of solutions to capture these growth opportunities. We intend to continue to invest resources to expand and deepen the capabilities of our technology specialists and engineers in these solutions, as well as in other technologies as they emerge. We will also continue to evaluate our suite of solutions and expand the range of our solutions as new customer needs emerge. We will continue to seek to identify and develop close, mutually beneficial relationships with both well-established and emerging vendor partners who are likely to be leaders across new technologies.

 

 

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Expand our services capabilities

As our customers’ needs for integrated solutions grow, we expect increased demand for our value-added services. We plan to continue to invest in resources and training for our technology specialists and services delivery coworkers to provide our customers with the expert advice and experience they need to make the most of their technology expenditures. We believe our services offerings have and will continue to create deeper relationships with our customers and create further opportunities to cross-sell our products.

Risk factors

Our business is subject to a number of risks. These risks include, but are not limited to, the following:

 

 

General economic conditions could negatively affect technology spending by our customers and put downward pressure on prices, which may have an adverse impact on our business, results of operations or cash flows.

 

 

Our business depends on our vendor partner relationships and the availability of their products.

 

 

Our sales are dependent on continued innovations in hardware and software offerings by our vendor partners, the competitiveness of their offerings and our ability to partner with new and emerging technology providers.

 

 

Substantial competition could reduce our market share and significantly harm our financial performance.

 

 

Our substantial indebtedness could impact our operating flexibility, competitive position compared to our less leveraged competitors and susceptibility to both general and industry-specific adverse economic conditions.

 

 

The Sponsors will have the ability to control significant corporate activities after the completion of this offering and their interests may not align with those of our other stockholders.

If these or any of the other risks described in the section entitled “Risk factors” were to occur, the market price of our common stock could decline and you may lose all or part of your original investment.

Sponsors

Madison Dearborn is a leading private equity investment firm based in Chicago, Illinois that has raised over $18 billion of equity capital. Since its formation in 1992, it has invested in approximately 125 companies across a broad spectrum of industries, including basic industries, business and government services, consumer, financial and transaction services, healthcare and telecom, media and technology services. Madison Dearborn’s objective is to invest in companies in partnership with outstanding management teams to achieve significant long-term appreciation in equity value.

Providence Equity is a leading global private equity firm focused on media, communications, education and information investments. Providence Equity manages funds with $28 billion of

 

 

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equity commitments and has invested in more than 130 companies over its 23-year history. Providence Equity is headquartered in Providence, Rhode Island and has offices in New York, London, Hong Kong, Beijing and New Delhi. Providence’s objective is to build extraordinary companies that will shape the future of the media, communications, education and information industries.

Corporate ownership

Currently, CDW Corporation is a wholly owned subsidiary of CDW Holdings LLC (“CDW Holdings”). Substantially all of the equity interests of CDW Holdings are owned by investment funds affiliated with the Sponsors, certain other co-investors and certain members of our current and former management. In connection with this offering, CDW Holdings will distribute all of its shares of CDW Corporation common stock to its existing members in accordance with their respective membership interests and pursuant to the terms of CDW Holdings’ limited liability company agreement and unitholders agreement. It is currently contemplated that CDW Holdings will be dissolved shortly following the distribution and the completion of this offering.

Recent developments

Term Loan Facility

On April 29, 2013, CDW LLC, a 100% owned subsidiary of CDW Corporation, entered into a new seven-year $1,350.0 million senior secured term loan facility (the “Term Loan Facility”). The Term Loan Facility replaces CDW LLC’s prior senior secured term loan facility (as amended, modified or supplemented from time to time, the “Prior Term Loan Facility,” and such refinancing transaction, the “2013 Term Loan Refinancing”). Borrowings under the Term Loan Facility bear interest at either (a) the alternate base rate (“ABR”) plus a margin or (b) LIBOR plus a margin; provided that for the purposes of the Term Loan Facility, LIBOR shall not be less than 1.00% per annum at any time. The margin is based upon a net leverage ratio as defined in the agreement governing the Term Loan Facility. The Term Loan Facility, among other things, (i) for ABR borrowings, reduces the range of applicable margins from 1.75%-3.00% to 1.25%-1.50%, (ii) for LIBOR borrowings, reduces the range of applicable margins from 2.75%-4.00% to 2.25%-2.50%, (iii) effectively extends the maturity of CDW LLC’s senior secured term loans from 2014 (in the case of non-extended loans under the Prior Term Loan Facility) and 2017 (in the case of extended loans under the Prior Term Loan Facility) to 2020, (iv) eliminates all hedging requirements, (v) provides for quarterly amortization equal to 0.25% of the principal amount of the Term Loan Facility, (vi) increases the maximum amount of new incremental term loan commitments from $300.0 million to $500.0 million, and (vii) eliminates the senior secured leverage ratio financial covenant. For a summary of the material terms of the Term Loan Facility, see “Description of certain indebtedness.”

Incremental Borrowings

Upon completion of this offering, we intend to borrow an additional $190.0 million under CDW LLC’s existing senior secured asset-based revolving credit facility (the “ABL Facility,” and together with the Term Loan Facility, the “Senior Credit Facilities”) or under an additional incremental term loan under the Term Loan Facility (the “Incremental Borrowings”). Our ability to incur the Incremental Borrowings is conditioned upon the completion of this offering. The terms

 

 

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governing the Incremental Borrowings, if incurred in the form of an incremental term loan, will be substantially the same as the terms governing the Term Loan Facility. See “Description of certain indebtedness—Senior credit facilities—Additional commitments.”

Redemptions

On May 31, 2013, we issued a conditional notice of redemption to the holders of the senior secured notes due 2018 (the “Senior Secured Notes”) notifying such holders that, subject to the completion of this offering, we will use a portion of the net proceeds received by us from this offering to exercise the right under the “equity clawback” provision in the indenture governing the Senior Secured Notes to redeem $175.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 108.000% plus accrued and unpaid interest thereon to the date of redemption. We will use cash on hand or borrowings under the ABL Facility to pay such accrued and unpaid interest.

After and subject to the completion of this offering, we intend to issue an irrevocable notice of redemption to the holders of the senior subordinated exchange notes due 2017 (the “Senior Subordinated Notes”) notifying such holders that we will redeem $417.0 million aggregate principal amount of Senior Subordinated Notes at a redemption price of 106.268% plus accrued and unpaid interest thereon to the date of redemption. Specifically, we intend to use a portion of the net proceeds received by us from this offering to redeem $239.0 million aggregate principal amount of Senior Subordinated Notes and the Incremental Borrowings to redeem $178.0 million aggregate principal amount of Senior Subordinated Notes, in each case using cash on hand or borrowings under the ABL Facility to pay accrued and unpaid interest.

Corporate information

Our principal executive offices are located at 200 N. Milwaukee Avenue, Vernon Hills, Illinois 60061, and our telephone number at that address is (847) 465-6000. Our website is located at http://www.cdw.com. The information on our website is not part of this prospectus.

 

 

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The offering

 

Common stock offered by us

23,250,000 shares

 

Common stock offered by the selling stockholders

4,650,000 shares

 

Common stock to be outstanding immediately after the offering

168,469,728 shares

 

Underwriters’ option to purchase additional shares

The underwriters have a 30-day option to purchase up to an additional 4,185,000 shares from the selling stockholders at the public offering price less underwriting discounts and commissions.

 

Use of proceeds

We estimate that the proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, will be approximately $467.4 million, assuming the shares offered by us are sold for $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus. For a sensitivity analysis as to the initial public offering price and other information, see “Use of proceeds.” We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

  We intend to use a portion of the net proceeds received by us from this offering to exercise the right under the “equity clawback” provision in the indenture governing the Senior Secured Notes to redeem $175.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 108.000% plus accrued and unpaid interest thereon to the date of redemption, using cash on hand or borrowings under the ABL Facility to pay such accrued and unpaid interest.

 

  We intend to use a portion of the net proceeds received by us from this offering to redeem $239.0 million aggregate principal amount of the Senior Subordinated Notes at a redemption price of 106.268% plus accrued and unpaid interest thereon to the date of redemption, using cash on hand or borrowings under the ABL Facility to pay such accrued and unpaid interest.

 

  We will use $24.4 million of the net proceeds received by us from this offering to make a one-time payment to affiliates of the Sponsors in connection with the termination of our management services agreement with such entities (the “Management Services Agreement”) as described in “Use of proceeds.”

 

 

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Dividends

After the completion of this offering and assuming an initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, we expect to pay a quarterly cash dividend on our common stock of $0.05375 per share, or $0.215 per annum, commencing in the fourth quarter of 2013. The payment of such dividend in the fourth quarter of 2013 and any future dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our board of directors deems relevant. See “Risk factors—Risks related to our business—We have significant deferred cancellation of debt income” for a discussion of certain tax considerations that could impact our willingness to pay dividends in the future. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness. See “Description of certain indebtedness” for further information regarding the restrictions on our subsidiaries’ ability to pay dividends to us and make other distributions to us.

 

Proposed symbol

We have applied to list the shares of our common stock on the NASDAQ Global Select Market under the symbol “CDW.”

 

Risk factors

For a discussion of risks relating to our business, our indebtedness and ownership of our common stock, see “Risk factors.”

Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after the completion of this offering:

 

 

gives effect to the reclassification of our Class A common stock and our Class B common stock into a single class of common stock and the subsequent 143.0299613-for-1 stock split of our common stock, both of which were effected on June 6, 2013;

 

 

assumes the distribution of shares of CDW Corporation held by CDW Holdings to its members and the subsequent dissolution of CDW Holdings;

 

 

excludes an aggregate of 11,700,000 shares of our common stock reserved for issuance under the new equity incentive plan we have adopted in connection with this offering, including

 

 

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(1) the shares of our common stock underlying the stock options to be issued under this plan to a limited number of holders of B Units of CDW Holdings with a participation threshold in excess of $0.01 in connection with the distribution of shares of common stock held by CDW Holdings and (2) restricted stock units to be granted to certain coworkers in connection with this offering; and

 

 

assumes (1) no exercise by the underwriters of their option to purchase up to 4,185,000 additional shares from the selling stockholders and (2) an initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus.

 

 

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Summary consolidated financial information

The following table sets forth our summary historical financial data and unaudited pro forma financial data for the periods ended and as of the dates indicated below. We have derived the summary historical financial data as of March 31, 2013 and for the three months ended March 31, 2013 and March 31, 2012 from the unaudited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical financial data presented below as of December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The summary historical financial data presented below as of December 31, 2010 have been derived from our audited consolidated balance sheet as of that date, which is not included in this prospectus. Our summary historical financial data may not be a reliable indicator of future results of operations.

The unaudited pro forma net income for the three months ended March 31, 2013 and the year ended December 31, 2012 gives effect to the transactions described in “Unaudited pro forma condensed consolidated financial data” as if such transactions had occurred on January 1, 2012. The unaudited pro forma financial data are for informational purposes only and are not intended to represent or be indicative of the consolidated results of operations that we would have reported had the foregoing transactions and this offering been completed on the dates indicated, and should not be taken as representative of our future consolidated results of operations.

The summary historical financial data and unaudited pro forma financial data set forth below are only a summary and should be read in conjunction with “Selected consolidated financial and operating data,” “Unaudited pro forma condensed consolidated financial data,” “Risk factors,” “Use of proceeds,” “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our historical consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     Three months ended     Years ended December 31,  
(in millions)  

March 31,

2013

   

March 31,

2012

    2012     2011     2010  

 

 
    (unaudited)     (unaudited)                    

Statement of Operations Data:

         

Net sales

  $  2,411.7      $  2,319.2      $ 10,128.2      $ 9,602.4      $ 8,801.2   

Cost of sales

    2,009.7        1,934.6        8,458.6        8,018.9        7,410.4   
 

 

 

 

Gross profit

    402.0        384.6        1,669.6        1,583.5        1,390.8   

Selling and administrative expenses

    251.5        251.6        1,029.5        990.1        932.1   

Advertising expense

    30.4        29.4        129.5        122.7        106.0   
 

 

 

 

Income from operations

    120.1        103.6        510.6        470.7        352.7   

Interest expense, net

    (72.1     (78.9     (307.4     (324.2     (391.9

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

    (3.9     (9.4     (17.2     (118.9     2.0   

Other income (expense), net

    0.4        (0.2     0.1        0.7        0.2   
 

 

 

 

Income (loss) before income taxes

    44.5        15.1        186.1        28.3        (37.0

Income tax (expense) benefit

    (16.2     (4.2     (67.1     (11.2     7.8   
 

 

 

 

Net income (loss)

  $ 28.3      $ 10.9      $ 119.0      $ 17.1      $ (29.2
 

 

 

 

Pro forma net income

  $ 39.7        $ 175.9       

 

 

 

 

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     Three months ended     Years ended December 31,  
(dollars in millions)   March 31,
2013
    March 31,
2012
    2012     2011     2010  

 

 
    (unaudited)     (unaudited)                    

Balance Sheet Data (at period end):

         

Cash and cash equivalents

  $ 147.1      $ 36.5      $ 37.9      $ 99.9      $ 36.6   

Total debt and capitalized lease obligations(1)

    3,680.8        3,871.6        3,771.0        4,066.0        4,290.0   

Working capital

    673.2        593.6        666.5        538.1        675.4   

Cash Flows Data:

         

Net cash provided by operating activities

  $ 208.0      $ 223.0      $ 317.4      $ 214.7      $ 423.7   

Net change in accounts payable-inventory financing(2)

    3.7        (74.0     (29.5     250.5        3.2   

Capital expenditures

    (8.8     (8.3     (41.4     (45.7     (41.5
 

 

 

 

Subtotal

  $ 202.9      $ 140.7      $ 246.5      $ 419.5      $ 385.4   

Income taxes (paid) refunded, net (included in net cash provided by operating activities)

    (1.7     (0.3     (123.2     20.9        (48.0

Net cash used in investing activities

    (8.8     (8.3     (41.7     (56.0     (125.4

Net cash used in financing activities

    (89.5     (278.4     (338.0     (95.4     (350.1

Other Key Metrics (unaudited):

         

Gross profit as a percentage of net sales

    16.7     16.6     16.5     16.5     15.8

Adjusted EBITDA(3)

  $ 178.6      $ 166.4      $ 766.6      $ 717.3      $ 601.8   

Non-GAAP net income(4)

  $ 56.3      $ 45.9      $ 247.1      $ 198.8      $ 85.7   

Cash conversion cycle(5)

    23        26        24        28        32   

Coworker count (at period end)

    6,779        6,839        6,804        6,745        6,268   

Revenue per coworker(6)

  $ 0.36      $ 0.34      $ 1.50      $ 1.48      $ 1.42   

 

 

 

(1)   Excludes obligations outstanding of $252.9 million, $204.7 million, $249.2 million, $278.7 million and $28.2 million, as of March 31, 2013, March 31, 2012, December 31, 2012, December 31, 2011 and December 31, 2010, respectively, under our inventory financing agreements. We do not include these obligations in total debt because we have not in the past incurred, and in the future do not expect to incur, any interest expense under these agreements. These amounts are classified separately as accounts payable–inventory financing on our consolidated balance sheets. For more information, see “Description of certain indebtedness.”

 

(2)   We have entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers. These amounts are classified separately as accounts payable-inventory financing on our consolidated balance sheets and, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), included in financing activities in our consolidated statements of cash flows. We have not incurred, and in the future do not expect to incur, any interest expense under the agreements.

 

(3)   EBITDA is defined as consolidated net income (loss) before interest income (expense), income tax benefit (expense), depreciation, and amortization. Adjusted EBITDA, which is a measure defined in the Senior Credit Facilities (as defined herein), is calculated by adjusting EBITDA for certain items of income and expense including (but not limited to) the following: (a) non-cash equity-based compensation; (b) goodwill impairment charges; (c) sponsor fees; (d) certain consulting fees; (e) debt-related legal and accounting costs; (f) equity investment income and losses; (g) certain severance and retention costs; (h) gains and losses from the early extinguishment of debt; (i) gains and losses from asset dispositions outside the ordinary course of business; and (j) non-recurring, extraordinary or unusual gains or losses or expenses.

We have included a reconciliation of EBITDA and Adjusted EBITDA in the table below. Both EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures used by the Company may differ from similar measures used by other companies, even when similar terms are used to identify such measures. We believe that EBITDA and Adjusted EBITDA provide helpful information with respect to our operating performance and cash flows including our ability to meet our future debt service, capital expenditures and working capital requirements. Adjusted EBITDA also provides helpful information as it is the primary measure used in certain financial covenants contained in the Senior Credit Facilities.

 

 

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The following unaudited table sets forth reconciliations of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA for the periods presented:

 

      Three months ended      Years ended December 31,  
(in millions)    March 31,
2013
     March 31,
2012
         2012          2011          2010  

 

 

Net income (loss)

   $ 28.3       $ 10.9       $ 119.0       $ 17.1       $ (29.2

Depreciation and amortization

     52.0         52.5         210.2         204.9         209.4   

Income tax expense (benefit)

     16.2         4.2         67.1         11.2         (7.8

Interest expense, net

     72.1         78.9         307.4         324.2         391.9   
  

 

 

 

EBITDA

     168.6         146.5         703.7         557.4         564.3   
  

 

 

 

Non-cash equity-based compensation

     1.9         5.7         22.1         19.5         11.5   

Sponsor fees(i)

     1.3         1.3         5.0         5.0         5.0   

Consulting and debt-related professional fees

     0.1         0.1         0.6         5.1         15.1   

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

     3.9         9.4         17.2         118.9         (2.0

Other adjustments(ii)

     2.8         3.4         18.0         11.4         7.9   
  

 

 

 

Adjusted EBITDA

   $ 178.6       $ 166.4       $ 766.6       $ 717.3       $ 601.8   

 

 

 

  (i)   Reflects historical fees paid to affiliates of the Sponsors under the Management Services Agreement. In connection with this offering, we will terminate the Management Services Agreement. See “Certain transactions—Management Services Agreement.”

 

  (ii)   Includes certain retention costs and equity investment income and a litigation loss in the fourth quarter of 2012.

The following unaudited table sets forth a reconciliation of EBITDA to net cash provided by operating activities for the periods presented:

 

      Three months ended     Years ended December 31,  
(in millions)   

March 31,
2013

    March 31,
2012
    2012     2011     2010  

 

 

EBITDA

   $ 168.6      $ 146.5      $ 703.7      $ 557.4      $ 564.3   

Depreciation and amortization

     (52.0     (52.5     (210.2     (204.9     (209.4

Income tax (expense) benefit

     (16.2     (4.2     (67.1     (11.2     7.8   

Interest expense, net

     (72.1     (78.9     (307.4     (324.2     (391.9
  

 

 

 

Net income (loss)

     28.3        10.9        119.0        17.1        (29.2
  

 

 

 

Depreciation and amortization

     52.0        52.5        210.2        204.9        209.4   

Equity-based compensation expense

     1.9        5.7        22.1        19.5        11.5   

Amortization of deferred financing costs and debt premium

     3.0        5.2        13.6        15.7        18.0   

Allowance for doubtful accounts

            0.4               0.4        (1.3

Deferred income taxes

     (14.1     (16.6     (56.3     (10.2     (4.3

Realized loss on interest rate swap agreements

                          2.8        51.5   

Mark to market loss on interest rate derivatives

                   0.9        4.2        4.7   

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

     3.9        9.4        17.2        118.9        (2.0

Net loss on sale and disposals of assets

                   0.1        0.3        0.7   

Changes in assets and liabilities

     133.0        154.8        (9.4     (158.3     165.3   

Other non-cash items

            0.7               (0.6     (0.6
  

 

 

 

Net cash provided by operating activities

   $ 208.0      $ 223.0      $ 317.4      $ 214.7      $ 423.7   

 

 

 

(4)   Non-GAAP net income is considered a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures used by the Company may differ from similar measures used by other companies, even when similar terms are used to identify such measures. We believe that non-GAAP net income provides meaningful information regarding our operating performance and our prospects for the future. This supplemental measure excludes, among other things, charges related to the amortization of Acquisition-related intangibles, non-cash equity-based compensation and gains and losses from the early extinguishment of debt.

 

 

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The following unaudited table sets forth a reconciliation of net income (loss) to non-GAAP net income for the periods presented:

 

      Three months ended     Years ended December 31,  
(in millions)    March 31,
2013
    March 31,
2012
        2012         2011         2010  

 

 

Net income (loss)

   $ 28.3      $ 10.9      $ 119.0      $ 17.1      $ (29.2

Amortization of intangibles(i)

     40.2        41.1        163.7        165.7        166.8   

Non-cash equity-based compensation

     1.9        5.7        22.1        19.5        11.5   

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

     3.9        9.4        17.2        118.9        (2.0

Interest expense adjustment related to extinguishments of long-term debt(ii)

     (0.8     (1.7     (3.3     (19.4     (0.7

Debt-related refinancing costs(iii)

                          3.8        5.6   

Aggregate adjustment for income taxes(iv)

     (17.2     (19.5     (71.6     (106.8     (66.3
  

 

 

 

Non-GAAP net income

   $ 56.3      $ 45.9      $ 247.1      $ 198.8      $ 85.7   

 

 

 

  (i)   Includes amortization expense for Acquisition-related intangible assets, primarily customer relationships and trade names.

 

  (ii)   Reflects adjustments to interest expense resulting from debt extinguishments. Represents the difference between interest expense previously recognized under the effective interest method and actual interest paid.

 

  (iii)   Represents fees and costs expensed related to the December 2010 and March 2011 amendments to the Prior Term Loan Facility.

 

  (iv)   Based on a normalized effective tax rate of 39.0%.

 

(5)   Cash conversion cycle is defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average.

 

(6)   Revenue per coworker is defined as net sales for the period divided by the average number of coworkers employed during such period (calculated as the sum of the number of coworkers employed at the beginning and end of the period divided by two).

 

 

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Risk factors

You should carefully consider each of the following risk factors and all of the other information set forth in this prospectus before deciding to invest in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. If any of these risks are realized, the market price of our common stock could decline, and you may lose all or part of your original investment.

Risks related to our business

General economic conditions could negatively affect technology spending by our customers and put downward pressure on prices, which may have an adverse impact on our business, results of operations or cash flows.

Weak economic conditions generally, sustained uncertainty about global economic conditions, skepticism about the resolution of U.S. fiscal cliff negotiations and the implementation of resulting agreements, concerns about future scheduled budgetary cuts and that the U.S. government may reach its debt ceiling in 2013, or a prolonged or further tightening of credit markets could cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure on prices, which could have an adverse effect on our business, results of operations or cash flows. For example, during the economic downturn at the end of 2008 and in 2009, due to a number of factors, including declines in the availability of credit, weakening consumer and business confidence and increased unemployment, we experienced significantly reduced revenue and gross margins when our customers and potential customers reduced their spending on technology and put downward pressure on prices.

Our financial performance could be adversely affected by decreases in spending on technology products and services by our Public segment customers.

Our sales to our Public segment customers are impacted by government spending policies, budget priorities and revenue levels. Although our sales to the federal government are diversified across multiple agencies and departments, they collectively accounted for approximately 10% of 2012 net sales. An adverse change in government spending policies (including budget cuts at the federal level resulting from sequestration), budget priorities or revenue levels could cause our Public segment customers to reduce their purchases or to terminate or not renew their contracts with us, which could adversely affect our business, results of operations or cash flows.

Our business depends on our vendor partner relationships and the availability of their products.

We purchase products for resale from vendor partners, which include OEMs and software publishers, and wholesale distributors. For the year ended December 31, 2012, we purchased approximately 52% of the products we sold directly from vendor partners and the remaining amount from wholesale distributors. We are authorized by vendor partners to sell all or some of their products via direct marketing activities. Our authorization with each vendor partner is subject to specific terms and conditions regarding such things as sales channel restrictions, product return privileges, price protection policies, purchase discounts and vendor partner programs and funding, including purchase rebates, sales volume rebates, purchasing incentives and cooperative advertising reimbursements. However, we do not have any long-term contracts

 

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with our vendor partners and many of these arrangements are terminable upon notice by either party. A reduction in vendor partner programs or funding or our failure to timely react to changes in vendor partner programs or funding could have an adverse effect on our business, results of operations or cash flows. In addition, a reduction in the amount of credit granted to us by our vendor partners could increase our need for, and the cost of, working capital and could have an adverse effect on our business, results of operations or cash flows, particularly given our substantial indebtedness.

From time to time, vendor partners may terminate or limit our right to sell some or all of their products or change the terms and conditions or reduce or discontinue the incentives that they offer us. For example, there is no assurance that, as our vendor partners continue to sell directly to end users and through resellers, they will not limit or curtail the availability of their products to resellers like us. Any such termination or limitation or the implementation of such changes could have a negative impact on our business, results of operations or cash flows.

Although we purchase from a diverse vendor base, in 2012, products we purchased from distributors Ingram Micro, Tech Data and SYNNEX represented 12%, 10% and 9%, respectively, of our total purchases. In addition, sales of Apple, Cisco, EMC, Hewlett-Packard, Lenovo and Microsoft products comprise a substantial portion of our sales, representing approximately 56% of net sales in 2012. Sales of products manufactured by Hewlett-Packard and Cisco represented approximately 21% and 13%, respectively, of our 2012 net sales. The loss of, or change in business relationship with, any of these or any other key vendor partners, the diminished availability of their products, or backlogs for their products leading to manufacturer allocation, could reduce the supply and increase the cost of products we sell and negatively impact our competitive position.

Additionally, the relocation of key distributors utilized in our purchasing model could increase our need for, and the cost of, working capital and have an adverse effect on our business, results of operations or cash flows. Further, the sale, spin-off or combination of any of our vendor partners and/or certain of their business units, including any such sale to or combination with a vendor with whom we do not currently have a commercial relationship or whose products we do not sell, could have an adverse impact on our business, results of operations or cash flows.

Our sales are dependent on continued innovations in hardware, software and services offerings by our vendor partners and the competitiveness of their offerings, and our ability to partner with new and emerging technology providers.

The technology industry is characterized by rapid innovation and the frequent introduction of new and enhanced hardware, software and services offerings. We have been and will continue to be dependent on innovations in hardware, software and services offerings, as well as the acceptance of those innovations by customers. A decrease in the rate of innovation, or the lack of acceptance of innovations by customers, could have an adverse effect on our business, results of operations or cash flows.

In addition, if we are unable to keep up with changes in technology and new hardware, software and services offerings, for example by providing the appropriate training to our account managers, sales technology specialists and engineers to enable them to effectively sell and deliver such new offerings to customers, our business, results of operations or cash flows could be adversely affected.

 

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We also are dependent upon our vendor partners for the development and marketing of hardware, software and services to compete effectively with hardware, software and services of vendors whose products and services we do not currently offer or that we are not authorized to offer in one or more customer channels. To the extent that a vendor’s offering that is highly in demand is not available to us for resale in one or more customer channels, and there is not a competitive offering from another vendor that we are authorized to sell in such customer channels, our business, results of operations or cash flows could be adversely impacted.

Substantial competition could reduce our market share and significantly harm our financial performance.

Our current competition includes:

 

 

resellers, such as Dimension Data, ePlus, Insight Enterprises, PC Connection, PCM, Presidio, Softchoice, World Wide Technology, and many smaller resellers;

 

 

manufacturers who sell directly to customers, such as Dell, Hewlett-Packard and Apple;

 

 

e-tailers, such as Amazon, Newegg, TigerDirect.com and Buy.com;

 

 

large service providers and system integrators, such as IBM, Accenture, Hewlett-Packard and Dell; and

 

 

retailers (including their e-commerce activities), such as Staples, Office Depot and Office Max.

We expect the competitive landscape in which we compete to continue to change as new technologies are developed. While innovation can help our business as it creates new offerings for us to sell, it can also disrupt our business model and create new and stronger competitors.

Some of our hardware and software vendor partners sell, and could intensify their efforts to sell, their products directly to our customers. In addition, traditional OEMs have increased their services capabilities through mergers and acquisitions with service providers, which could potentially increase competition in the market to provide comprehensive technology solutions to customers. Moreover, newer, potentially disruptive technologies exist and are being developed that deliver technology solutions as a service, for example, cloud-based solutions, including software as a service (“SaaS”), infrastructure as a service (“IaaS”) and platform as a service (“PaaS”). These technologies could increase the amount of sales directly to customers rather than through resellers like us, or could lead to a reduction in our profitability. If any of these trends becomes more prevalent, it could adversely affect our business, results of operations or cash flows.

We focus on offering a high level of service to gain new customers and retain existing customers. To the extent we face increased competition to gain and retain customers, we may be required to reduce prices, increase advertising expenditures or take other actions which could adversely affect our business, results of operations or cash flows. Additionally, some of our competitors may reduce their prices in an attempt to stimulate sales, which may require us to reduce prices. This would require us to sell a greater number of products to achieve the same level of net sales and gross profit. If such a reduction in prices occurs and we are unable to attract new customers and sell increased quantities of products, our sales growth and profitability could be adversely affected.

 

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The success of our business depends on the continuing development, maintenance and operation of our information technology systems.

Our success is dependent on the accuracy, proper utilization and continuing development of our information technology systems, including our business systems, Web servers and voice and data networks. The quality and our utilization of the information generated by our information technology systems, and our success in implementing new systems and upgrades, affects, among other things, our ability to:

 

 

conduct business with our customers;

 

 

manage our inventory and accounts receivable;

 

 

purchase, sell, ship and invoice our hardware and software products and provide and invoice our services efficiently and on a timely basis; and

 

 

maintain our cost-efficient operating model.

The integrity of our information technology systems is vulnerable to disruption due to forces beyond our control. While we have taken steps to protect our information technology systems from a variety of threats, including computer viruses and malicious hackers, there can be no guarantee that those steps will be effective. Furthermore, although we have redundant systems at a separate location to back up our primary systems, there can be no assurance that these redundant systems will operate properly if and when required. Any disruption to or infiltration of our information technology systems could significantly harm our business and results of operations.

Breaches of data security could impact our business.

Our business involves the storage and transmission of proprietary information and sensitive or confidential data, including personal information of coworkers, customers and others. In addition, we operate three customer data centers which may store and transmit both business-critical data and confidential information of our customers. In connection with our services business, our coworkers also have access to our customers’ confidential data and other information. We have privacy and data security policies in place that are designed to prevent security breaches; however, breaches in security could expose us, our customers or other individuals to a risk of public disclosure, loss or misuse of this information, resulting in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, as well as the loss of existing or potential customers and damage to our brand and reputation. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Such breaches, costs and consequences could adversely affect our business, results of operations or cash flows.

The failure to comply with our Public segment contracts or applicable laws and regulations could result in, among other things, termination, fines or other liabilities, and changes in procurement regulations could adversely impact our business, results of operations or cash flows.

Revenues from our Public segment customers are derived from sales to governmental departments and agencies, educational institutions and healthcare customers, through various contracts and open market sales of products and services. Sales to Public segment customers are highly regulated. Noncompliance with contract provisions, government procurement regulations or other applicable laws or regulations (including but not limited to the False Claims Act and the

 

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Medicare and Medicaid Anti-Kickback Statute) could result in civil, criminal and administrative liability, including substantial monetary fines or damages, termination of government contracts or other Public segment customer contracts, and suspension, debarment or ineligibility from doing business with the government and other customers in the Public segment. In addition, generally contracts in the Public segment are terminable at any time for convenience of the contracting agency or group purchasing organization or upon default. The effect of any of these possible actions could adversely affect our business, results of operations or cash flows. In addition, the adoption of new or modified procurement regulations and other requirements may increase our compliance costs and reduce our gross margins, which could have a negative effect on our business, results of operations or cash flows.

If we fail to provide high-quality services to our customers, or if our third-party service providers fail to provide high-quality services to our customers, our reputation, business, results of operations or cash flows could be adversely affected.

Our service offerings include field services, managed services, warranties, configuration services, partner services and telecom services. Additionally, we deliver and manage mission critical software, systems and network solutions for our customers. Finally, we also offer certain services, such as implementation and installation services and repair services, to our customers through various third-party service providers engaged to perform these services on our behalf. If we or our third-party service providers fail to provide high quality services to our customers or such services result in a disruption of our customers’ businesses, this could, among other things, result in legal claims and proceedings and liability, and our reputation with our customers, our brand and our business, results of operations or cash flows could be adversely affected.

If we lose any of our key personnel, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.

Our success is heavily dependent upon our ability to attract, develop and retain key personnel to manage and grow our business, including our key executive, management, sales, services and technical coworkers.

Our future success will depend to a significant extent on the efforts of Thomas E. Richards, our Chairman and Chief Executive Officer, as well as the continued service and support of our other executive officers. Our future success also will depend on our ability to retain our customer-facing coworkers, who have been given critical CDW knowledge regarding, and the opportunity to develop strong relationships with, many of our customers. In addition, as we seek to expand our offerings of value-added services and solutions, our success will even more heavily depend on attracting and retaining highly skilled technology specialists and engineers, for whom the market is extremely competitive.

Our inability to attract, develop and retain key personnel could have an adverse effect on our relationships with our vendor partners and customers and adversely affect our ability to expand our offerings of value-added services and solutions. Moreover, our inability to train our sales, services and technical personnel effectively to meet the rapidly changing technology needs of our customers could cause a decrease in the overall quality and efficiency of such personnel. Such consequences could adversely affect our business, results of operations or cash flows.

The interruption of the flow of products from suppliers could disrupt our supply chain.

A significant portion of the products we sell are manufactured or purchased by our vendor partners outside of the U.S., primarily in Asia. Political, social or economic instability in Asia, or in

 

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other regions in which our vendor partners purchase or manufacture the products we sell, could cause disruptions in trade, including exports to the U.S. Other events that could also cause disruptions to our supply chain include:

 

 

the imposition of additional trade law provisions or regulations;

 

the imposition of additional duties, tariffs and other charges on imports and exports;

 

foreign currency fluctuations;

 

natural disasters or other adverse occurrences at, or affecting, any of our suppliers’ facilities;

 

restrictions on the transfer of funds;

 

the financial instability or bankruptcy of manufacturers; and

 

significant labor disputes, such as strikes.

We cannot predict whether the countries in which the products we sell are purchased or manufactured, or may be purchased or manufactured in the future, will be subject to new or additional trade restrictions or sanctions imposed by the U.S. or foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargos, sanctions, safeguards and customs restrictions against the products we sell, as well as foreign labor strikes and work stoppages or boycotts, could increase the cost or reduce the supply of product available to us and adversely affect our business, results of operations or cash flows.

A natural disaster or other adverse occurrence at one of our primary facilities or customer data centers could damage our business.

Substantially all of our corporate, warehouse and distribution functions are located at our Vernon Hills, Illinois facilities and our second distribution center in North Las Vegas, Nevada. If the warehouse and distribution equipment at one of our distribution centers were to be seriously damaged by a natural disaster or other adverse occurrence, we could utilize the other distribution center or third-party distributors to ship products to our customers. However, this may not be sufficient to avoid interruptions in our service and may not enable us to meet all of the needs of our customers and would cause us to incur incremental operating costs. In addition, we operate three customer data centers and numerous sales offices which may contain both business-critical data and confidential information of our customers. A natural disaster or other adverse occurrence at any of the customer data centers or at any of our major sales offices could negatively impact our business, results of operations or cash flows.

We are heavily dependent on commercial delivery services.

We generally ship hardware products to our customers by FedEx, United Parcel Service and other commercial delivery services and invoice customers for delivery charges. If we are unable to pass on to our customers future increases in the cost of commercial delivery services, our profitability could be adversely affected. Additionally, strikes or other service interruptions by such shippers could adversely affect our ability to deliver products on a timely basis.

We are exposed to accounts receivable and inventory risks.

We extend credit to our customers for a significant portion of our net sales, typically on 30-day payment terms. We are subject to the risk that our customers may not pay for the products they have purchased, or may pay at a slower rate than we have historically experienced, the risk of which is heightened during periods of economic downturn or uncertainty or, in the case of Public segment customers, during periods of budget constraints.

 

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We are also exposed to inventory risks as a result of the rapid technological changes that affect the market and pricing for the products we sell. We seek to minimize our inventory exposure through a variety of inventory management procedures and policies, including our rapid-turn inventory model, as well as vendor price protection and product return programs. However, if we were unable to maintain our rapid-turn inventory model, if there were unforeseen product developments that created more rapid obsolescence or if our vendor partners were to change their terms and conditions, our inventory risks could increase. We also from time to time take advantage of cost savings associated with certain opportunistic bulk inventory purchases offered by our vendor partners or we may decide to carry high inventory levels of certain products that have limited or no return privileges due to customer demand or request. These bulk purchases could increase our exposure to inventory obsolescence.

We could be exposed to additional risks if we make acquisitions or enter into alliances.

We may pursue transactions, including acquisitions or alliances, in an effort to extend or complement our existing business. These types of transactions involve numerous business risks, including finding suitable transaction partners and negotiating terms that are acceptable to us, the diversion of management’s attention from other business concerns, extending our product or service offerings into areas in which we have limited experience, entering into new geographic markets, the potential loss of key coworkers or business relationships and successfully integrating acquired businesses, any of which could adversely affect our operations.

In addition, our financial results could be adversely affected by financial adjustments required by GAAP in connection with these types of transactions where significant goodwill or intangible assets are recorded. To the extent the value of goodwill or identifiable intangible assets with indefinite lives becomes impaired, we may be required to incur material charges relating to the impairment of those assets.

Our future operating results may fluctuate significantly.

We may experience significant variations in our future quarterly results of operations. These fluctuations may cause the market price of our common stock to be volatile and may result from many factors, including the condition of the technology industry in general, shifts in demand and pricing for hardware, software and services and the introduction of new products or upgrades.

Our operating results are also highly dependent on our level of gross profit as a percentage of net sales. Our gross profit percentage fluctuates due to numerous factors, some of which may be outside of our control, including general macroeconomic conditions; pricing pressures; changes in product costs from our vendor partners; the availability of price protection, purchase discounts and incentive programs from our vendor partners; changes in product, order size and customer mix; the risk of some items in our inventory becoming obsolete; increases in delivery costs that we cannot pass on to customers; and general market and competitive conditions.

In addition, our cost structure is based, in part, on anticipated sales and gross margins. Therefore, we may not be able to adjust our cost structure quickly enough to compensate for any unexpected sales or gross margin shortfall, and any such inability could have an adverse effect on our business, results of operations or cash flows.

We are exposed to risks from legal proceedings and audits.

We are party to various legal proceedings that arise in the ordinary course of our business, which include commercial, employment, tort and other litigation.

 

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We are subject to intellectual property infringement claims against us in the ordinary course of our business, either because of the products and services we sell or the business systems and processes we use to sell such products and services, in the form of cease-and-desist letters, licensing inquiries, lawsuits and other communications and demands. In our industry, such intellectual property claims have become more frequent as the complexity of technological products and the intensity of competition in our industry have increased. Increasingly, many of these assertions are brought by non-practicing entities whose principal business model is to secure patent licensing revenue, but we may also be subject to suits from competitors who may seek licensing revenue, lost profits and/or an injunction preventing us from engaging in certain activities, including selling certain products and services.

Because of our significant sales to governmental entities, we also are subject to audits by federal, state and local authorities. We also are subject to audits by various vendor partners and large customers, including government agencies, relating to purchases and sales under various contracts. In addition, we are subject to indemnification claims under various contracts.

Current and future litigation, infringement claims, governmental proceedings, audits or indemnification claims that we face may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. In addition, current and future litigation, infringement claims, governmental proceedings, audits or indemnification claims could lead to increased costs or interruptions of our normal business operations. Litigation, infringement claims, governmental proceedings, audits or indemnification claims involve uncertainties and the eventual outcome of any litigation, infringement claim, governmental proceeding, audit or indemnification claim could adversely affect our business, results of operations or cash flows.

We have significant deferred cancellation of debt income.

As a result of a 2009 debt modification, we realized $395.5 million of cancellation of debt income (“CODI”). We made an election under Code Section 108(i) to defer this CODI from taxable income, pursuant to which we are also required to defer certain original issue discount (“OID”) deductions as they accrue. As of December 31, 2012, we had already deferred approximately $110.4 million of OID deductions and, on the relevant remaining debt instruments, we have $34.7 million of OID deductions that have yet to be accrued. Starting in 2014 we will be required to include the deferred CODI into taxable income ratably over a five-year period ending in 2018. During this same period we will also be permitted to benefit from our deferred OID deductions. Because we have more CODI than the aggregate of our deferred and unaccrued OID on the relevant remaining debt instruments, we will have a future cash tax liability associated with our significant deferred CODI. We have reflected the associated cash tax liability in our deferred taxes for financial accounting purposes.

All of our deferred CODI will be accelerated into current taxable income if, prior to 2018, we engage in a so-called “impairment transaction” and the gross value of our assets immediately afterward is less than 110% of the sum of our total liabilities and the tax on the net amount of our deferred CODI and OID (the “110% test”) as determined under the applicable Treasury Regulations. An “impairment transaction” is any transaction that impairs our ability to pay the tax on our deferred CODI, and includes dividends or distributions with respect to our equity and charitable contributions, in each case in a manner that is not consistent with our historical practice within the meaning of the applicable Treasury Regulations.

 

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Prior to 2018, our willingness to pay dividends or make distributions with respect to our equity could be adversely affected if, at the time, we do not meet the 110% test and, as a result, the payment of a dividend or the making of a distribution would accelerate the tax payable with respect to our deferred CODI. We currently believe that, based on our interpretation of applicable Treasury Regulations, the gross value of our assets will exceed 110% of the sum of our total liabilities and the tax on the net amount of our deferred CODI and OID upon the completion of this offering. However, we cannot assure you that this will continue to be true in the future.

The applicable Treasury Regulations relating to the 110% test expire in August 2013. We cannot be certain at this time whether the U.S. Internal Revenue Service (the “IRS”) will extend or make permanent the current regulations, allow such regulations to expire or adopt different regulations. If the IRS adopts different regulations, such regulations may adversely affect our willingness to pay dividends or make distributions with respect to our equity if they would result in the acceleration of the tax payable with respect to our deferred CODI.

Risks related to our indebtedness

We have a substantial amount of indebtedness, which could have important consequences to our business.

We have a substantial amount of indebtedness. As of March 31, 2013, on a pro forma basis after giving effect to the 2013 Term Loan Refinancing, this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” we had $3.3 billion of total long-term debt outstanding and $252.9 million of obligations outstanding under our inventory financing agreements, and the ability to borrow an additional $649.4 million under the ABL Facility. Our substantial indebtedness could have important consequences, including the following:

 

 

making it more difficult for us to satisfy our obligations with respect to our indebtedness;

 

 

requiring us to dedicate a substantial portion of our cash flow from operations to debt service payments on our and our subsidiaries’ debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

 

requiring us to comply with restrictive covenants in the Senior Credit Facilities and the Indentures, which limit the manner in which we conduct our business;

 

 

making it more difficult for us to obtain vendor financing from our vendor partners;

 

 

limiting our flexibility in planning for, or reacting to, changes in the industry in which we operate;

 

 

placing us at a competitive disadvantage compared to any of our less leveraged competitors;

 

 

increasing our vulnerability to both general and industry-specific adverse economic conditions; and

 

 

limiting our ability to obtain additional debt or equity financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.

 

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We will be required to generate sufficient cash to service our indebtedness and, if not successful, we may be forced to take other actions to satisfy our obligations under our indebtedness.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Our outstanding long-term debt will impose significant cash interest payment obligations on us in 2013 and subsequent years and, accordingly, we will have to generate significant cash flow from operating activities to fund our debt service obligations. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources.”

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional debt or equity capital, restructure or refinance our indebtedness, or revise or delay our strategic plan. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or satisfy our capital requirements, or that these actions would be permitted under the terms of our existing or future debt agreements, including the Senior Credit Facilities or the indentures respectively governing the Senior Subordinated Notes, the Senior Secured Notes and the senior notes due 2019 (the “Senior Notes”) (such indentures collectively referred to herein as the “Indentures”). In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The Senior Credit Facilities and the Indentures restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. See “Description of certain indebtedness.” Furthermore, the Sponsors have no obligation to provide us with debt or equity financing.

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

 

our debt holders could declare all outstanding principal and interest to be due and payable;

 

 

the lenders under the Senior Credit Facilities could foreclose against the assets securing the borrowings from them and the lenders under the Term Loan Facility could terminate their commitments to lend us money; and

 

 

we could be forced into bankruptcy or liquidation.

Despite our indebtedness levels, we and our subsidiaries may be able to incur substantially more debt, including secured debt. This could further increase the risks associated with our leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the Senior Credit Facilities and the Indentures do not fully prohibit us or our subsidiaries from doing so. To the extent that we incur additional indebtedness or such other obligations, the risks associated with our substantial indebtedness described above, including our possible inability to service our debt, will increase. As of March 31, 2013, we had approximately $649.4 million available for additional borrowing under the ABL Facility after taking into account borrowing base limitations (net of $1.7 million of issued and undrawn letters of credit and $248.9 million of reserves related to our floorplan sub-facility). See “Description of certain indebtedness.”

 

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Restrictive covenants under the Senior Credit Facilities and the Indentures may adversely affect our operations and liquidity.

The Senior Credit Facilities and the Indentures contain, and any future indebtedness of ours may contain, various covenants that limit our ability to, among other things:

 

 

incur or guarantee additional debt;

 

 

pay dividends or make distributions to holders of our capital stock or to make certain other restricted payments or investments;

 

 

repurchase or redeem capital stock;

 

 

make loans, capital expenditures or investments or acquisitions;

 

 

receive dividends or other payments from our subsidiaries;

 

 

enter into transactions with affiliates;

 

 

create liens;

 

 

merge or consolidate with other companies or transfer all or substantially all of our assets;

 

 

transfer or sell assets, including capital stock of subsidiaries; and

 

 

prepay, repurchase or redeem debt.

As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. A breach of any of these covenants or any of the other restrictive covenants would result in a default under the Senior Credit Facilities. Upon the occurrence of an event of default under the Senior Credit Facilities, the lenders:

 

 

will not be required to lend any additional amounts to us;

 

 

could elect to declare all borrowings outstanding thereunder, together with accrued and unpaid interest and fees, to be due and payable;

 

 

could require us to apply all of our available cash to repay these borrowings; or

 

 

could prevent us from making payments on the Senior Subordinated Notes;

any of which could result in an event of default under the Indentures.

If we were unable to repay those amounts, the lenders under the Senior Credit Facilities could proceed against the collateral granted to them to secure our borrowings thereunder. We have pledged a significant portion of our assets as collateral under the Senior Credit Facilities and the Senior Secured Notes. If the lenders under the Senior Credit Facilities or the holders of the Senior Secured Notes accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the Senior Credit Facilities and our other indebtedness or the ability to borrow sufficient funds to refinance such indebtedness. Even if we were able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. See “Description of certain indebtedness.”

 

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In addition, under the ABL Facility, we are permitted to borrow an aggregate amount of up to $900 million; however, our ability to borrow under the ABL Facility is limited by a borrowing base and a liquidity condition. The borrowing base at any time equals the sum of up to 85% of CDW LLC and its subsidiary guarantors’ eligible accounts receivable (net of accounts reserves) (up to 30% of such eligible accounts receivable which can consist of federal government accounts receivable) plus the lesser of (i) 70% of CDW LLC and its subsidiary guarantors’ eligible inventory (valued at cost and net of inventory reserves) and (ii) the product of 85% multiplied by the net orderly liquidation value percentage multiplied by eligible inventory (valued at cost and net of inventory reserves), less reserves (other than accounts reserves and inventory reserves). The borrowing base in effect as of March 31, 2013 was $1,009.7 million.

Our ability to borrow under the ABL Facility is also limited by a minimum liquidity condition, which provides that, if excess cash availability is less than the lesser of (i) $90 million or (ii) the greater of (A) 10% of the borrowing base or (B) $60 million, the lenders are not required to lend any additional amounts under the ABL Facility unless the consolidated fixed charge coverage ratio (as defined in the credit agreement for the ABL Facility) is at least 1.0 to 1.0. Moreover, the ABL Facility provides discretion to the agent bank acting on behalf of the lenders to impose additional availability reserves, which could materially impair the amount of borrowings that would otherwise be available to us. We cannot assure you that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair our liquidity.

Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Certain of our borrowings, primarily borrowings under the Senior Credit Facilities, are at variable rates of interest and expose us to interest rate risk. As of March 31, 2013, on a pro forma basis after giving effect to the 2013 Term Loan Refinancing, we had $1,350.0 million of variable rate debt outstanding. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Although we have entered into interest rate cap agreements on the Term Loan Facility to reduce interest rate volatility, we cannot assure you we will be able to do so in the future on acceptable terms or that such caps or the caps we have in place now will be effective.

Risks related to this offering and ownership of our common stock

An active trading market for our common stock may not develop.

Since 2007 and prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations among us, the selling stockholders and the underwriters, and market conditions, and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market for our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after this offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

 

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Our common stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, many of which we cannot control, including those described under “—Risks related to our business” and “—Risks related to our indebtedness” and the following:

 

 

changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of securities analysts to initiate or maintain coverage of our common stock;

 

 

downgrades by any securities analysts who follow our common stock;

 

 

future sales of our common stock by our officers, directors and significant stockholders, including the Sponsors;

 

 

market conditions or trends in our industry or the economy as a whole;

 

 

investors’ perceptions of our prospects;

 

 

announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and

 

 

changes in key personnel.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, including companies in our industry. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.

The Sponsors will have the ability to control significant corporate activities after the completion of this offering and their interests may not align with yours.

After the consummation of this offering, the Sponsors will beneficially own approximately 71.8% of our common stock, assuming the underwriters do not exercise their option to purchase additional shares. If the underwriters exercise in full their option to purchase additional shares, the Sponsors will beneficially own approximately 69.4% of our common stock. As a result of their ownership, the Sponsors, so long as they hold a majority of our outstanding common stock, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decisionmaking with respect to our business direction and policies. Matters over which the Sponsors will, directly or indirectly, exercise control following this offering include:

 

 

the election of our board of directors and the appointment and removal of our officers;

 

 

mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares;

 

 

other acquisitions or dispositions of businesses or assets;

 

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incurrence of indebtedness and the issuance of equity securities;

 

 

repurchase of stock and payment of dividends; and

 

 

the issuance of shares to management under our equity incentive plans.

Even if the Sponsors’ ownership of our shares falls below a majority, they may continue to be able to strongly influence or effectively control our decisions. Under our amended and restated certificate of incorporation, the Sponsors and their affiliates do not have any obligation to present to us, and the Sponsors may separately pursue corporate opportunities of which they become aware, even if those opportunities are ones that we would have pursued if granted the opportunity. See “Description of capital stock—Corporate opportunity.”

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 168,469,728 shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except that any shares of our common stock that may be acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, may be sold only in compliance with the limitations described in “Shares eligible for future sale.”

The remaining 140,569,728 shares, representing 83.4% of our total outstanding shares of common stock following this offering, will be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale following the consummation of this offering. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144 or Rule 701, as described in “Shares eligible for future sale.”

We, each of our executive officers and directors, the Sponsors and certain other security holders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus (subject to extension in certain circumstances). J.P. Morgan Securities LLC may, in its sole discretion, release any of these shares from these restrictions at any time without notice. See “Underwriting.”

After this offering, subject to any lock-up restrictions described above with respect to certain holders, holders of approximately 132,000,000 shares of our common stock will have the right to require us to register the sales of their shares under the Securities Act, under the terms of an agreement between us and the holders of these securities. See “Shares eligible for future sale—Registration rights” for a more detailed description of these rights.

In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

 

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Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of the Company more difficult without the approval of our board of directors. These provisions:

 

 

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

 

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

 

generally prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our stockholders, except that any action required or permitted to be taken by our stockholders may be effected by written consent until such time as the Sponsors cease to beneficially own 50% or more of our common stock;

 

 

provide that special meetings of the stockholders can only be called by (i) the chairman or vice chairman of our board of directors, (ii) our chief executive officer, (iii) a majority of our board of directors through a special resolution or (iv) the holders of at least 10% of our common stock until such time as the Sponsors cease to beneficially own 50% or more of our common stock, effected by consent in writing by such stockholders;

 

 

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

 

provide that our board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws.

Our amended and restated certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporate Law, and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval is obtained prior to the acquisition. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of the Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. For a further discussion of these and other such anti-takeover provisions, see “Description of capital stock—Anti-takeover effects of our amended and restated certificate of incorporation and amended and restated bylaws.”

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $39.47 per share because the assumed initial public offering price of $21.50, which is the midpoint of the price range listed on the cover of this prospectus, is substantially higher than the net tangible book deficit per share of our outstanding common stock. Dilution results from the fact that the initial public offering price per share of the common stock is substantially in excess

 

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of the book deficit per share of common stock attributable to our existing stockholder for the currently outstanding shares of common stock. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our coworkers and directors under our equity incentive plans. See “Dilution.”

Conflicts of interest may arise because some of our directors are principals of our largest stockholders.

Paul Finnegan and Robin Selati, who are principals of Madison Dearborn, and Glenn Creamer and Michael Dominguez, who are managing directors of Providence Equity, serve on our board of directors. The Sponsors will continue to hold a majority of our outstanding common stock after giving effect to this offering. The Sponsors and the entities respectively controlled by them may hold equity interests in entities that directly or indirectly compete with us, and companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of Madison Dearborn or Providence Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our amended and restated certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our amended and restated certificate of incorporation also provides that any principal, officer, member, manager and/or employee of a Sponsor or any entity that controls, is controlled by or under common control with a Sponsor (other than us or any company that is controlled by us) or a Sponsor-managed investment fund will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness and certain tax considerations could limit our ability to pay dividends on our common stock. If we do not pay dividends, you may not receive any return on investment unless you are able to sell your common stock for a price greater than your purchase price.

After the completion of this offering, we expect to pay quarterly cash dividends on our common stock, commencing in the fourth quarter of 2013. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, including those under the Senior Credit Facilities and the Indentures, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors our board of directors deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. Accordingly, if you purchase shares in this offering and we do not pay dividends in the future, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. See “—Risks related to our business—We have significant deferred cancellation of debt income” for a discussion of certain tax considerations that could impact our willingness to pay dividends in the future.

 

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We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

 

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Forward-looking statements

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact included in this prospectus are forward-looking statements. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this prospectus, including those entitled “Prospectus summary,” “Business” and “Management’s discussion and analysis of financial condition and results of operations.” Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this prospectus under the heading “Risk factors,” as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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Market, ranking and other industry data

This prospectus includes industry data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk factors” in this prospectus. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

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Use of proceeds

Based upon an assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, we estimate we will receive net proceeds from this offering of approximately $467.4 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

We intend to use (i) $443.0 million of the net proceeds received by us from this offering to redeem $175.0 million aggregate principal amount of Senior Secured Notes and $239.0 million aggregate principal amount of Senior Subordinated Notes and redemption premia of $14.0 million and $15.0 million, respectively and (ii) $17.9 million of cash on hand or borrowings under the ABL Facility to pay accrued and unpaid interest as outlined below.

On May 31, 2013, we issued a conditional notice of redemption to the holders of the Senior Secured Notes notifying such holders that, subject to the completion of this offering, we will use a portion of the net proceeds received by us from this offering to exercise the right under the “equity clawback” provision in the indenture governing the Senior Secured Notes to redeem $175.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 108.000% plus accrued and unpaid interest thereon to the date of redemption. We will use cash on hand or borrowings under the ABL Facility to pay such accrued and unpaid interest. As of the date of this prospectus, $500.0 million aggregate principal amount of Senior Secured Notes is outstanding. The Senior Secured Notes mature on December 15, 2018 and have an interest rate of 8.00% per annum. See “Description of certain indebtedness.”

We intend to use a portion of the net proceeds received by us from this offering to redeem $239.0 million aggregate principal amount of Senior Subordinated Notes at a redemption price of 106.268% plus accrued and unpaid interest thereon to the date of redemption, using cash on hand or borrowings under the ABL Facility to pay such accrued and unpaid interest. After and subject to the completion of this offering, we intend to issue an irrevocable notice of redemption to the holders of the Senior Subordinated Notes notifying such holders that we will redeem $417.0 million aggregate principal amount of Senior Subordinated Notes, $239.0 million of which will be redeemed using net proceeds from this offering and $178.0 million of which will be redeemed using the Incremental Borrowings. In each case, we will use cash on hand or borrowings under the ABL facility to pay accrued and unpaid interest. As of the date of this prospectus, $571.5 million aggregate principal amount of Senior Subordinated Notes is outstanding. The Senior Subordinated Notes mature on October 12, 2017 and have an interest rate of 12.535% per annum. See “Description of certain indebtedness.”

In connection with this offering, we will terminate the Management Services Agreement. We will use $24.4 million of the net proceeds received by us from this offering to pay a one-time termination fee to affiliates of the Sponsors in connection with the termination of the Management Services Agreement. See “Certain transactions—Management Services Agreement.”

Pending application of the net proceeds as described above, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities.

A $1.00 increase or decrease in the assumed initial public offering price of $21.50 per share would increase or decrease the net proceeds we receive from this offering by approximately $22.0 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase or decrease by 1.0 million shares in the number of shares offered by us would increase or decrease the net proceeds to us by $20.3 million assuming the assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Dividend policy

After the completion of this offering and assuming an initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, we expect to pay a quarterly cash dividend on our common stock of $0.05375 per share, or $0.215 per annum, commencing in the fourth quarter of 2013. The payment of such dividend in the fourth quarter of 2013 and any future dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our board of directors deems relevant. See “Risk factors—Risks related to our business—We have significant deferred cancellation of debt income” for a discussion of certain tax considerations that could impact our willingness to pay dividends in the future. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness. See “Description of certain indebtedness” for further information regarding the restrictions on our subsidiaries’ ability to pay dividends to us and make other distributions to us.

 

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Capitalization

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2013:

 

 

on an actual basis reflecting the reclassification of our Class A common stock and our Class B common stock into a single class of common stock and the subsequent 143.0299613-for-1 stock split of our common stock, both of which were effected on June 6, 2013; and

 

 

on a pro forma as adjusted basis to give effect to (1) the 2013 Term Loan Refinancing, (2) the issuance of 23,250,000 shares of common stock in this offering, (3) our receipt of the estimated net proceeds from the sale of shares of common stock offered by us in this offering at an assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds as described in “Use of proceeds,” (4) the $16.8 million loss on extinguishment for the redemption premium and write-off of unamortized deferred financing costs that will be recognized in connection with the redemption of the Senior Secured Notes using a portion of the proceeds from this offering, (5) the $18.4 million loss on extinguishment for the redemption premium and write-off of unamortized deferred financing costs that will be recognized in connection with the redemption of the Senior Subordinated Notes using a portion of the proceeds from this offering and (6) the $38.6 million of compensation expense related to the acceleration of the expense recognition for certain equity incentive awards that will be recognized in connection with the completion of this offering.

The following table does not reflect the Incremental Borrowings or their intended use, which is described in “Prospectus summary—Recent developments.”

 

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This information should be read in conjunction with “Use of proceeds,” “Selected consolidated financial and operating data,” “Unaudited pro forma condensed consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and the historical consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

March 31, 2013
(dollars in millions, except share-related amounts)
   Actual     Pro forma
as adjusted(1)
 

 

 

Cash and cash equivalents

   $ 147.1      $ 169.1   
  

 

 

 

Total debt (including current portion):

    

ABL Facility due 2016

   $          

Term Loan Facility due 2014

     408.7        (2) 

Term Loan Facility due 2017

     890.8        (2) 

Term Loan Facility due 2020

    

  
    1,350.0 (2) 

Senior Secured Notes due 2018

     500.0        325.0   

Senior Notes due 2019

     1,305.0 (3)      1,305.0   

Senior Subordinated Notes due 2017

     571.5        332.5   
  

 

 

 

Total debt (including current portion)

     3,676.0 (4)      3,312.5 (4) 

Shareholders’ equity:

    

Preferred stock, par value $0.01 per share; no shares authorized or outstanding on an actual basis; 100,000,000 shares authorized and no shares outstanding on a pro forma as adjusted basis

              

Common stock, par value $0.01 per share; 286,059,923 shares authorized and 145,128,068 shares outstanding on an actual basis as adjusted; 1,000,000,000 shares authorized and 168,378,068 shares outstanding on a pro forma as adjusted basis(5)

     1.4        1.7   

Additional paid-in capital

     2,209.2        2,714.9   

Accumulated deficit

     (2,044.8     (2,108.9

Accumulated other comprehensive loss

     (2.0     (2.0
  

 

 

 

Total shareholders’ equity

     163.8        605.7   
  

 

 

 

Total capitalization

   $ 3,839.8      $ 3,918.2   

 

 
(1)   A $1.00 increase or decrease in the assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, would result in an approximately $22.0 million increase or decrease in each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization, assuming that the number of shares offered by us set forth on the cover of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million increase or decrease in the number of shares offered by us would increase or decrease each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $20.3 million, assuming the initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering.

 

(2)   On April 29, 2013, CDW LLC entered into a new seven-year $1,350.0 million Term Loan Facility. The Term Loan Facility replaces the Prior Term Loan Facility. The amounts disclosed exclude the unamortized discount of $3.4 million.

 

(3)   Excludes the unamortized premium of $4.8 million.

 

(4)   This amount does not include any of the $252.9 million in obligations outstanding under our inventory financing agreements as of March 31, 2013. We include these obligations in current liabilities and not in total debt because we have not in the past
  incurred, and in the future do not expect to incur, any interest expense under these agreements. This amount is classified separately as accounts payable–inventory financing on our consolidated balance sheets. For more information, see “Description of certain indebtedness.”

 

(5)   The number of shares of our common stock to be outstanding immediately after the completion of this offering is based on 145,128,068 shares of common stock outstanding on March 31, 2013, plus 23,250,000 shares of common stock to be sold by us in this offering.

 

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Dilution

If you purchase our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book deficit per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of our common stock is substantially in excess of the book deficit per share of common stock attributable to our existing stockholders for the currently outstanding shares of common stock.

Our net tangible book deficit as of March 31, 2013 was $(3,493.1) million, or $(24.07) per share of common stock. Net tangible book deficit per share represents the amount of our total tangible assets (which for the purpose of this calculation represents total assets excluding goodwill, customer relationships, trade names and deferred financing costs) less total liabilities, divided by the number of shares of common stock outstanding.

After giving effect to the sale of the 23,250,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, less estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book deficit as of March 31, 2013 would have been approximately $(3,025.7) million, or $(17.97) per share of common stock. This represents an immediate increase in net tangible book deficit to our existing stockholders of $6.10 per share and an immediate dilution to purchasers in this offering of $39.47 per share. The following table illustrates this pro forma per share dilution in net tangible book deficit to purchasers.

 

   

Assumed initial public offering price per share

   $ 21.50   

Net tangible book deficit per share as of March 31, 2013

     (24.07

Increase per share attributable to purchasers in this offering

     6.10   

Net tangible book deficit per share after giving effect to this offering

     (17.97
  

 

 

 

Dilution in net tangible book deficit per share to purchasers in this offering

   $ 39.47   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease net tangible book deficit by $22.0 million, or $0.13 per share, and would increase or decrease the dilution per share to purchasers in this offering by $0.87, based on the assumptions set forth above.

 

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The following table summarizes as of March 31, 2013, on an as adjusted basis, the number of shares of common stock purchased, the total consideration paid and the average price per share paid by purchasers in this offering, based upon an assumed initial public offering price of $21.50 per share, the midpoint of the initial public offering price range on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

      Shares purchased     Total consideration     Average price
per share
 
     Number      Percent     Amount      Percent    

 

 

Existing stockholders

     145,128,068         86.2   $ 2,146,633,582         81.1   $ 14.79   

New investors

     23,250,000         13.8     499,875,000         18.9     21.50   
  

 

 

 

Total

     168,378,068         100   $ 2,646,508,582         100   $ 15.72   

 

 

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares and no exercise of any outstanding options. The sale of 4,650,000 shares of common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 140,478,068 shares, or 83.4% of the total number of shares of our common stock outstanding after this offering, and will increase the total number of shares of our common stock held by new investors participating in this offering to 27,900,000 shares, or 16.6% of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own approximately 80.9% and purchasers in this offering would own approximately 19.1% of the total number of shares of our common stock outstanding after this offering. If the underwriters exercise their option to purchase additional shares in full, the net tangible book deficit per share after this offering would be $(17.54) per share, and the dilution in the net tangible book deficit per share to purchasers in this offering would be $39.04 per share.

The tables and calculations above are based on 168,378,068 shares of common stock outstanding as of March 31, 2013 after giving effect to the sale of 23,250,000 shares of common stock offered by us in this offering and assume no exercise by the underwriters of their option to purchase up to an additional 4,185,000 shares from the selling stockholders. This number excludes an aggregate of 11,700,000 shares of common stock reserved for issuance under our equity incentive plan that we have adopted in connection with this offering, including the shares of common stock underlying the stock options to be issued under such plan to a limited number of holders of B Units of CDW Holdings with a participation threshold in excess of $0.01 in connection with the distribution of shares of common stock held by CDW Holdings, as described in “Certain transactions—Management, board member and sponsor equity arrangements—Unitholders agreement,” and restricted stock units to be granted to certain coworkers in connection with this offering.

 

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Unaudited pro forma condensed consolidated financial data

The following tables set forth our unaudited pro forma and historical condensed consolidated balance sheet at March 31, 2013 and consolidated statements of operations for the three months ended March 31, 2013 and the year ended December 31, 2012.

The unaudited pro forma condensed consolidated balance sheet at March 31, 2013 gives effect to the following transactions as if each had occurred on March 31, 2013: (i) the 2013 Term Loan Refinancing, and (ii) this offering and the use of proceeds therefrom as set forth under “Use of proceeds.” The unaudited pro forma condensed consolidated balance sheet also includes adjustments for (a) the $16.8 million loss on extinguishment for the redemption premium and write-off of unamortized deferred financing costs that will be recognized in connection with the redemption of the Senior Secured Notes using a portion of the proceeds from this offering, (b) the $18.4 million loss on extinguishment for the redemption premium and write-off of unamortized deferred financing costs that will be recognized in connection with the redemption of the Senior Subordinated Notes using a portion of the proceeds from this offering, and (c) the $38.6 million of compensation expense related to the acceleration of the expense recognition for certain equity incentive awards in connection with the completion of this offering. The effects of the 2012 Debt Transactions and the 2013 Redemption (as defined below) are already reflected on the historical balance sheet at March 31, 2013.

The unaudited pro forma consolidated statements of operations for the three months ended March 31, 2013 and the year ended December 31, 2012 give effect to the following transactions as if each had occurred on January 1, 2012: (i) the February 17, 2012 issuance of $130.0 million aggregate principal amount of Senior Notes (the “2012 Senior Notes Issuance”), (ii) the February 17, 2012 and March 5, 2012 repurchases and March 19, 2012 redemption of an aggregate of $129.0 million principal amount of senior exchange notes due 2015 (the “Senior Notes due 2015”) (the “2012 Senior Notes Repurchases and Redemption”), (iii) the December 21, 2012 redemption of $100.0 million aggregate principal amount of Senior Subordinated Notes (the “2012 Senior Subordinated Notes Redemption” and, together with the 2012 Senior Notes Issuance and the 2012 Senior Notes Repurchases and Redemption, the “2012 Debt Transactions”), (iv) the March 8, 2013 redemption of $50.0 million aggregate principal amount of Senior Subordinated Notes (the “2013 Redemption”), (v) the 2013 Term Loan Refinancing (together with the 2013 Redemption, the “2013 Debt Transactions” and, collectively with the 2012 Debt Transactions, the “2012 and 2013 Debt Transactions”), (vi) the redemption of $175.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 108.000%, (vii) the redemption of $239.0 million aggregate principal amount of Senior Subordinated Notes at a redemption price of 106.268%, (viii) the elimination of the annual $5.0 million management fee paid to the Sponsors that the parties will terminate in connection with the completion of this offering, and (ix) this offering and use of proceeds therefrom as set forth under “Use of proceeds.”

The unaudited pro forma condensed consolidated balance sheet at March 31, 2013 and the unaudited pro forma consolidated statements of operations for the three months ended March 31, 2013 and the year ended December 31, 2012 do not give effect to the Incremental Borrowings or their intended use, as described in “Prospectus summary—Recent developments.”

We are party to the Management Services Agreement with affiliates of the Sponsors pursuant to which they have agreed to provide us with management and consulting services and financial and other advisory services. Pursuant to such agreement, the Sponsors earn an annual advisory

 

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fee of $5.0 million and reimbursement of out-of-pocket expenses incurred in connection with the provision of such services. In connection with this offering, the parties will terminate the Management Services Agreement, and in connection with such termination we will pay affiliates of the Sponsors a termination fee of $24.4 million.

In connection with this offering, we expect to recognize certain nonrecurring charges which have not been adjusted in the unaudited pro forma consolidated statement of operations, as such charges will not have an ongoing impact on our financial results. These charges include a $24.4 million termination fee related to the Management Services Agreement, compensation expense of $38.6 million related to the acceleration of the expense recognition for certain equity incentive awards upon the completion of this offering, a loss on extinguishment of $16.8 million related to the Senior Secured Notes redemption using a portion of the proceeds from this offering, and a loss on extinguishment of $18.4 million related to the Senior Subordinated Notes redemption using a portion of the proceeds from this offering.

We derived the unaudited pro forma condensed consolidated financial data by applying pro forma adjustments to our consolidated financial statements appearing elsewhere in this prospectus. The adjustments give effect to pro forma events that are (1) directly attributable to the 2012 and 2013 Debt Transactions and this offering, (2) factually supportable and (3) with respect to the unaudited pro forma consolidated statements of operations, expected to have a continuing impact on our financial results. The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. These assumptions are subject to change and the effect of any such change could be material. The adjustments necessary to fairly present these unaudited pro forma condensed consolidated financial data are described in the accompanying notes. The unaudited pro forma condensed consolidated financial data should be read in conjunction with the sections of this prospectus entitled “Use of proceeds,” “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations,” and our historical consolidated financial statements and related notes appearing elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial data are for informational purposes only and are not intended to represent or to be indicative of the consolidated results of operations or financial position that we would have reported had the transactions and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.

 

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CDW Corporation and Subsidiaries

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

 

March 31, 2013

(in millions)

   Historical as
reported
March 31,
2013
     Adjustments
related to
the 2013
Term Loan
Refinancing
     Pro forma
for the 2013
Term Loan
Refinancing
     Adjustments
related to
this offering
    Pro forma
March 31,
2013
 

 

 

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 147.1       $ 39.9(1)       $ 187.0       $ (17.9 )(8)    $ 169.1   

Accounts receivable, net

     1,264.5            1,264.5           1,264.5   

Merchandise inventory

     358.4            358.4           358.4   

Miscellaneous receivables

     151.5            151.5           151.5   

Deferred income taxes

     13.1            13.1           13.1   

Prepaid expenses and other

     51.5            51.5           51.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,986.1         39.9         2,026.0         (17.9     2,008.1   

Property and equipment, net

     134.0            134.0           134.0   

Goodwill

     2,208.5            2,208.5           2,208.5   

Other intangible assets, net

     1,443.6            1,443.6           1,443.6   

Deferred financing costs, net

     49.3         (10.6)(5)         43.4         (6.3 )(9)      37.1   
        4.7(7)           

Other assets

     1.2            1.2           1.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,822.7         $34.0       $ 5,856.7       $ (24.2   $ 5,832.5   

 

  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Historical as
reported
March 31,
2013
   

Adjustments

related to
the 2013
Term Loan
Refinancing

    Pro forma
for the 2013
Term Loan
Refinancing
    Adjustments
related to
this offering
    Pro forma
March 31,
2013
 

 

 

Liabilities and shareholders’ equity

         

Current liabilities:

         

Accounts payable—trade

  $ 642.1        $ 642.1        $ 642.1   

Accounts payable—inventory financing

    252.9          252.9          252.9   

Deferred revenue

    66.0          66.0          66.0   

Accrued expenses

    351.9      $ (4.1)(6)        345.3      $ (56.3 )(10)      288.2   
      (2.5)(4)          (0.8 )(12)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,312.9        (6.6)        1,306.3        (57.1     1,249.2   

Long-term liabilities

         

Debt

    3,680.8        50.5(3)        3,727.9        (239.0 )(11)      3,313.9   
      (3.4)(2)          (175.0 )(14)   

Deferred income taxes

    609.0          609.0        1.4 (13)      610.4   

Accrued interest

    6.9          6.9        (2.9 )(12)      4.0   

Other liabilities

    49.3          49.3          49.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

    4,346.0        47.1        4,393.1        (415.5     3,977.6   

Commitments and contingencies

         

Shareholders’ equity:

         

Common Stock

    1.4          1.4        0.3 (19)      1.7   

Paid-in capital

    2,209.2          2,209.2        506.0 (15)      2,714.9   
          (0.3 )(19)   

Accumulated deficit

    (2,044.8     (10.6)(5)        (2,051.3     (19.2 )(16)      (2,108.9
      4.1(6)          (14.9 )(17)   
          (23.5 )(18)   

Accumulated other comprehensive loss

    (2.0       (2.0       (2.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    163.8        (6.5)        157.3        448.4        605.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 5,822.7      $ 34.0      $ 5,856.7      $ (24.2   $ 5,832.5   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the unaudited pro forma condensed consolidated balance sheet

 

1)   Reflects the adjustments to cash and cash equivalents for the following (in millions):

 

Proceeds from the Term Loan Facility (see note 3)

   $ 1,350.0   

Repayment of the Prior Term Loan Facility—non-extended loans (see note 3)

     (408.7

Repayment of the Prior Term Loan Facility—extended loans (see note 3)

     (890.8

Discount on the Term Loan Facility (see note 2)

     (3.4

Accrued and unpaid interest on the Prior Term Loan Facility (see note 4)

     (2.5

Transaction fees and expenses related to the Term Loan Facility (see note 7)

     (4.7
  

 

 

 

Net pro forma adjustment to cash and cash equivalents

   $ 39.9   
  

 

 

 

 

       For more information about the 2013 Term Loan Refinancing, please refer to Note 20 to the historical audited consolidated financial statements appearing elsewhere in this prospectus.

 

2)   Reflects the adjustment for the discount on the Term Loan Facility, calculated using the aggregate principal amount of $1,350.0 million and the discount rate of 0.25%.

 

3)   Reflects the adjustment to debt for the proceeds from the Term Loan Facility of $1,350.0 million less repayments totaling $1,299.5 million for the Prior Term Loan Facility (non-extended and extended loans).

 

4)   Reflects the adjustment for accrued and unpaid interest through March 31, 2013 related to the Prior Term Loan Facility.

 

5)   Reflects the write-off of the unamortized deferred financing costs related to the Prior Term Loan Facility.

 

6)   Reflects the adjustment to income taxes payable related to the tax effect of the write-off of the unamortized deferred financing costs related to the Prior Term Loan Facility, calculated using an estimated combined federal and state statutory tax rate of 39%.

 

7)   Reflects the adjustment to deferred financing costs, net to capitalize transaction fees and expenses related to the Term Loan Facility.

 

8)   Reflects the adjustments to cash and cash equivalents for the following (in millions):

 

Net proceeds from this offering (see note 15)

   $ 467.4   

Fee to terminate the Management Services Agreement (see note 17)

     (24.4

Redemption of the Senior Secured Notes (see note 14)

     (189.0

Redemption of the Senior Subordinated Notes (see note 11)

     (254.0

Accrued and unpaid interest related to the Senior Secured Notes redemption (see note 14)

     (4.1

Accrued and unpaid interest related to the Senior Subordinated Notes redemption (see note 11)

     (13.8
  

 

 

 

Net pro forma adjustment to cash and cash equivalents

   $ (17.9
  

 

 

 

 

9)   Reflects the write-off of a portion of the unamortized deferred financing costs related to the redemption of the Senior Secured Notes and Senior Subordinated Notes with a portion of the proceeds from this offering.

 

10)   Reflects the adjustments to accrued expenses for the following (in millions):

 

Tax effect of the Management Services Agreement termination fee (see note 17)

     $(9.5 )(a) 

Tax effect of the acceleration of expense recognition for certain equity incentive awards (see note 18)

     (15.1 )(a) 

Tax effect of the write-off of the unamortized deferred financing costs (see note 9)

     (2.5 )(a) 

Tax effect of the redemption premiums (see notes 11 and 14)

     (11.3 )(a) 

Accrued and unpaid interest related to the Senior Secured Notes redemption (see note 14)

     (4.1

Accrued and unpaid interest related to the Senior Subordinated Notes redemption (see note 11)

     (13.8
  

 

 

 

Net pro forma adjustment to accrued expenses

   $ (56.3
  

 

 

 

 

  (a)   Adjustment to income taxes payable, calculated using an estimated combined federal and state statutory tax rate of 39%.

 

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11)   Reflects the redemption of $239.0 million aggregate principal amount of the Senior Subordinated Notes, $13.8 million of accrued and unpaid interest to the date of redemption and a redemption premium of $15.0 million representing 6.268% of the principal amount redeemed.

 

12)   Reflects the adjustment to interest expense and accrued interest payable for the difference between interest expense previously recognized under the effective interest method and actual interest paid related to the redemption of the Senior Subordinated Notes with a portion of the proceeds from this offering.

 

13)   Reflects the adjustment to deferred income taxes related to the tax effect of the interest expense adjustment discussed in note 12, calculated using an estimated combined federal and state statutory tax rate of 39%.

 

14)   Reflects the redemption of $175.0 million aggregate principal amount of the Senior Secured Notes, $4.1 million of accrued and unpaid interest to the date of redemption and a redemption premium of $14.0 million representing 8.0% of the principal amount redeemed.

 

15)   Reflects the adjustments to paid-in capital for the following (in millions):

 

Net proceeds from this offering (see note 8)

   $ 467.4 (a) 

Acceleration of the expense recognition for certain equity incentive awards (see note 18)

     38.6   
  

 

 

 

Net pro forma adjustment to paid-in capital

   $ 506.0   
  

 

 

 

 

  (a)   Reflects the issuance of 23,250,000 shares of common stock in this offering at an assumed public offering price of $21.50 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses of $32.5 million. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

16)   Reflects the adjustments to accumulated deficit for the following debt-related items (in millions):

 

Redemption premium related to the Senior Secured Notes (see note 14)

   $ (14.0

Redemption premium related to the redemption of the Senior Subordinated Notes (see note 11)

     (15.0

Tax effect of the redemption premiums (see note 10)

     11.3   

Interest expense adjustment related to the redemption of the Senior Subordinated Notes (see note 12)

     3.7   

Tax effect of the Senior Subordinated Notes interest expense adjustment (see note 13)

     (1.4

Write-off of the unamortized deferred financing costs related to the redemption of the Senior Secured Notes and Senior Subordinated Notes (see note 9)

     (6.3

Tax effect of the write-off of the unamortized deferred financing costs (see note 10)

     2.5   
  

 

 

 

Net pro forma adjustments to accumulated deficit

   $ (19.2
  

 

 

 

 

17)   In connection with this offering, the parties will terminate the Management Services Agreement and pay affiliates of the Sponsors a termination fee of $24.4 million (see note 8). Reflects the adjustment to accumulated deficit for the $24.4 million termination fee, net of the tax effect of $9.5 million (see note 10).

 

18)   Reflects the adjustment to accumulated deficit for the $38.6 million of compensation expense related to the acceleration of the expense recognition for certain equity incentive awards upon completion of this offering, net of the tax effect of $15.1 million (see note 10).

 

       Compensation expense related to the acceleration of the expense recognition for certain equity awards is calculated as follows:

 

MPK Plan Units outstanding at March 31, 2013

     64,121   

MPK Plan Units settled from plan inception through March 31, 2013

     2,388   
  

 

 

 

MPK Plan Units subject to historical compensation expense

     66,509   

Grant date fair value per MPK Plan Unit

   $ 1,000   

Grant date fair value of MPK Plan Units subject to historical compensation expense (in millions)

     66.5   

Expense recognized from plan inception through March 31, 2013 (in millions)

     (27.9
  

 

 

 

Compensation expense related to the acceleration of the expense recognition for certain equity incentive awards (in millions)

   $ 38.6   
  

 

 

 
19)   Reflects the adjustment to common stock for the par value of $0.01 per share for the 23,250,000 shares issued in this offering.

 

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CDW Corporation and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

 

 

For the three months ended March 31,
2013

(in millions, except per-share

amounts)

   Historical as
reported
three months
ended
March 31,
2013
    Adjustments
related to the
2012 and
2013 Debt
Transactions
    Pro forma
for the 2012
and 2013
Debt
Transactions
    Adjustments
related to
this offering
    Pro forma
three months
ended
March 31,
2013
 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 2,411.7        $ 2,411.7        $ 2,411.7   

Cost of sales

     2,009.7          2,009.7          2,009.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     402.0          402.0          402.0   

Selling and administrative expenses

     251.5          251.5      $ (1.3 )(4)      250.2   

Advertising expense

     30.4          30.4          30.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     120.1          120.1        1.3        121.4   

Interest expense, net

     (72.1   $ 2.3 (1)      (69.8     11.1 (5)      (58.7

Net loss on extinguishments of long-term debt

     (3.9     3.9 (2)            

Other income, net

     0.4          0.4          0.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     44.5        6.2        50.7        12.4        63.1   

Income tax expense

     (16.2     (2.4 )(3)      (18.6     (4.8 )(6)      (23.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28.3      $ 3.8      $ 32.1      $ 7.6      $ 39.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

          

Basic

   $ 0.19            $ 0.24 (7) 

Diluted

   $ 0.19            $ 0.24 (7) 

Weighted average number of common shares outstanding:

          

Basic

     145.2              164.5 (7) 

Diluted

     146.1              168.2 (7) 

 

 

 

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CDW Corporation and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

 

 

For the year ended December 31, 2012

(in millions, except per-share

amounts)

  Historical as
reported
year ended
December 31,
2012
    Adjustments
related to the
2012 and
2013 Debt
Transactions
    Pro forma
for 2012
and 2013
Debt
Transactions
    Adjustments
related to
this offering
    Pro forma
year ended
December 31,
2012
 

 

 

Net sales

  $ 10,128.2        $ 10,128.2        $ 10,128.2   

Cost of sales

    8,458.6          8,458.6          8,458.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,669.6          1,669.6          1,669.6   

Selling and administrative expenses

    1,029.5          1,029.5      $ (5.0 )(4)      1,024.5   

Advertising expense

    129.5          129.5          129.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    510.6          510.6        5.0        515.6   

Interest expense, net

    (307.4)      $ 26.7  (1)      (280.7     44.4 (5)      (236.3

Net loss on extinguishments of long-term debt

    (17.2)        17.2  (2)                 

Other income, net

    0.1          0.1          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    186.1        43.9        230.0        49.4        279.4   

Income tax expense

    (67.1)        (17.1 )(3)      (84.2     (19.3 )(6)      (103.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 119.0      $ 26.8      $ 145.8      $ 30.1      $ 175.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

         

Basic

  $ 0.82            $ 1.07 (7) 

Diluted

  $ 0.82            $ 1.05 (7) 

Weighted average number of common shares outstanding:

         

Basic

    145.1              164.4 (7) 

Diluted

    145.8              168.1 (7) 

 

 

 

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Notes to the unaudited pro forma consolidated statements of operations

 

1)   Reflects the net adjustment to interest expense for the 2012 and 2013 Debt Transactions, calculated as follows:

 

    Stated interest rate   Assumed
interest rate
   

Pro forma

interest expense
for the
three months ended
March 31,

2013

(in millions)

   

Pro forma

interest expense
for the year ended
December 31,
2012

(in millions)

 

 

 

$1,350.0 million Term Loan Facility, based on average balances of $1,343.3 million and $1,334.8 million at December 31, 2012 and March 31, 2013, respectively (a)

  1% LIBOR floor plus 2.5% (rate on transaction date of April 29, 2013)     3.6% (b)    $ 12.0      $ 48.4   

$1,305.0 million Senior
Notes

  Fixed at 8.5%     8.5%        27.7        110.9   

$571.5 million Senior Subordinated Notes

  Fixed at 12.535%     12.2% (b)      17.4        69.7   

Amortization of deferred financing costs

        0.6        4.5   
     

 

 

   

 

 

 

Pro forma interest expense related to the 2012 and 2013 Debt Transactions

        57.7        233.5   

Elimination of historical interest expense related to the 2012 and 2013 Debt Transactions

        (60.0     (260.2
     

 

 

   

 

 

 

Net pro forma adjustment to interest expense

      $ (2.3   $ (26.7
     

 

 

   

 

 

 

 

  (a)   Reflects the required quarterly principal payments of $3.4 million.

 

  (b)   Represents the effective interest rate on the original transaction date.

 

       For more information about the 2012 and 2013 Debt Transactions, please refer to Notes 7 and 20 to the historical audited consolidated financial statements appearing elsewhere in this prospectus.

 

2)   The net loss on extinguishments of long-term debt included in the historical consolidated financial statements is a direct result of the 2012 and 2013 Debt Transactions and accordingly, such amount is excluded from the unaudited pro forma consolidated statements of operations.

 

3)   Reflects the tax effect of the pro forma adjustments using an estimated combined federal and state statutory tax rate of 39%.

 

4)   Reflects the elimination of $5.0 million of annual management fees paid to the Sponsors. In connection with this offering, the parties will terminate the Management Services Agreement.

 

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(5)   Reflects the net adjustment to interest expense for the redemptions of the Senior Secured Notes and Senior Subordinated Notes, which are incremental to the pro forma adjustments included in Note 1 above. Amounts are calculated as follows:

 

    Stated interest rate   Assumed
interest rate
   

Pro forma
interest expense
for the three months
ended March 31,

2013

(in millions)

   

Pro forma
interest expense
for the year ended
December 31,

2012

(in millions)

 

 

 

$325.0 million Senior Secured Notes (a)

  Fixed at 8.0%     8.0%      $ 6.5      $ 26.0   

$332.5 million Senior Subordinated Notes (b)

  Fixed at 12.535%     12.2%        10.1        40.5   

Amortization of deferred financing costs

        0.5        2.0   
     

 

 

   

 

 

 

Pro forma interest expense related to the redemptions of the Senior Secured Notes and Senior Subordinated Notes

        17.1        68.5   

Elimination of historical interest expense related to the Senior Secured Notes redemption

        (10.0     (40.0

Elimination of pro forma interest expense related to the 2012 Senior Subordinated Notes Redemption and 2013 Redemption (c)

        (17.4     (69.7

Elimination of amortization of deferred financing costs

        (0.8     (3.2
     

 

 

   

 

 

 

Net incremental pro forma adjustment to interest expense

      $ (11.1   $ (44.4
     

 

 

   

 

 

 

 

  (a)   Reflects the principal amount after the redemption of $175.0 million aggregate principal amount of the Senior Secured Notes using a portion of the proceeds from this offering.

 

  (b)   Reflects the principal amount after the redemption of $239.0 million aggregate principal amount of the Senior Subordinated Notes using a portion of the proceeds from this offering.

 

  (c)   Reflects the pro forma interest expense for the Senior Subordinated Notes included in Note 1 above.

 

(6)   Reflects the tax effect of the pro forma adjustments using an estimated combined federal and state statutory tax rate of 39%.

 

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7)   Reflects adjustments to outstanding common shares and net income per share as if the 2012 and 2013 Debt Transactions and this offering had occurred on January 1, 2012. The following table sets forth the computation of pro forma basic and diluted net income per common share (in millions, except per-share amounts):

 

    

Three months ended
March 31,

2013

    Year ended
December 31,
2012
 

 

 

Pro forma net income

   $ 39.7      $ 175.9   

Pro forma weighted-average number of common shares outstanding:

    

Weighted-average number of existing common shares

     145.2        145.1   

Weighted-average common shares to be restricted as a result of this offering (a)

     (4.0     (4.0

Shares issued in this offering

     23.3        23.3   
  

 

 

 

Pro forma weighted-average number of common shares
outstanding - basic

     164.5        164.4   

Effect of restricted shares (a)

     3.7        3.7   
  

 

 

 

Pro forma weighted-average number of common shares outstanding - diluted

     168.2        168.1   

Pro forma net income per common share:

    

Basic

   $ 0.24      $ 1.07   

Diluted

     0.24       1.05  

 

  (a)   In connection with this offering, CDW Holdings will distribute all of its shares of our common stock to its existing members in accordance with their respective membership interests. Pursuant to the terms of the CDW Holdings limited liability company agreement, common stock received by holders of B Units in connection with the distribution will be subject to any vesting provisions currently applicable to any such holder’s B Units and the shares of common stock that are subject to vesting will be issued in the form of restricted stock.

 

8)   We expect to recognize certain nonrecurring charges directly related to this offering which have not been adjusted in the unaudited pro forma consolidated statements of operations as they will not have a continuing impact on our financial results. These charges include an expense of $24.4 million related to the termination of the Management Services Agreement, $38.6 million of compensation expense related to the acceleration of the expense recognition for certain equity incentive awards upon completion of this offering, and a loss on extinguishment of $35.2 million related to the Senior Secured Notes and Senior Subordinated Notes redemptions using a portion of the proceeds from this offering. As these adjustments are nonrecurring, they are not included in the pro forma adjustments above.

 

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Selected consolidated financial and operating data

The following table sets forth our selected historical consolidated financial and operating data for the periods ended and as of the dates indicated below. The selected historical consolidated financial and operating data presented below as of March 31, 2013 and for the three months ended March 31, 2013 and 2012 have been derived from the unaudited consolidated financial statements included elsewhere in this prospectus. We have derived the selected historical consolidated financial and operating data presented below as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The selected historical consolidated financial and operating data as of December 31, 2010,

2009 and 2008 and for the years ended December 31, 2009 and 2008 have been derived from our audited consolidated financial statements as of and for those periods, which are not included in this prospectus.

The unaudited pro forma financial data for the three months ended March 31, 2013 and the year ended December 31, 2012 give effect to the transactions described in “Unaudited pro forma condensed consolidated financial data” as if such transactions had occurred on January 1, 2012. The unaudited pro forma financial data are for informational purposes only and are not intended to represent or be indicative of the consolidated results of operations that we would have reported had the foregoing transactions and this offering been completed on the dates indicated, and should not be taken as representative of our future consolidated results of operations.

The selected historical consolidated financial and operating data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations,” “Risk factors,” “Use of proceeds,” “Capitalization” and our historical financial statements and related notes appearing elsewhere in this prospectus.

The following are some of the items affecting comparability of the selected historical consolidated financial and operating data for the periods presented:

 

 

During the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012 and 2011, we recorded net losses on extinguishments of long-term debt of $3.9 million, $9.4 million, $17.2 million and $118.9 million, respectively. During the year ended December 31, 2010, we recorded a net gain on extinguishments of long-term debt of $2.0 million. The amounts represented the difference between the amount paid upon extinguishment, including call premiums and expenses paid to the debt holders and agents, and the net carrying amount of the extinguished debt, adjusted for a portion of the unamortized deferred financing costs.

 

 

During the years ended December 31, 2009 and 2008, we recorded goodwill impairment charges of $241.8 million and $1,712.0 million, respectively. These impairments were primarily attributable to deterioration in macroeconomic conditions and overall declines in net sales.

 

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(in millions, except per-share data)

  Three months
ended  March 31,
    Years ended December 31,  
  2013     2012     2012     2011     2010     2009     2008  

 

 
    (unaudited)     (unaudited)                                

Statement of Operations Data:

             

Net sales

  $  2,411.7      $  2,319.2      $ 10,128.2      $ 9,602.4      $ 8,801.2      $ 7,162.6      $ 8,071.2   

Cost of sales

    2,009.7        1,934.6        8,458.6        8,018.9        7,410.4        6,029.7        6,710.2   
 

 

 

 

Gross profit

    402.0        384.6        1,669.6        1,583.5        1,390.8        1,132.9        1,361.0   

Selling and administrative expenses

    251.5        251.6        1,029.5        990.1        932.1        821.1        894.8   

Advertising expense

    30.4        29.4        129.5        122.7        106.0        101.9        141.3   

Goodwill impairment

                                       241.8        1,712.0   
 

 

 

 

Income (loss) from operations

    120.1        103.6        510.6        470.7        352.7        (31.9     (1,387.1

Interest expense, net

    (72.1     (78.9     (307.4     (324.2     (391.9     (431.7     (390.3

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

    (3.9     (9.4     (17.2     (118.9     2.0                 

Other income (expense), net

    0.4        (0.2     0.1        0.7        0.2        2.4        0.2   
 

 

 

 

Income (loss) before income taxes

    44.5        15.1        186.1        28.3        (37.0     (461.2     (1,777.2

Income tax (expense) benefit

    (16.2     (4.2     (67.1     (11.2     7.8        87.8        12.1   
 

 

 

 

Net income (loss)

  $ 28.3      $ 10.9      $ 119.0      $ 17.1      $ (29.2   $ (373.4   $ (1,765.1
 

 

 

 

Net income (loss) per common share

             

Basic

  $ 0.19      $ 0.08      $ 0.82      $ 0.12      $ (0.20   $ (2.60   $ (12.32

Diluted

  $ 0.19      $ 0.07      $ 0.82      $ 0.12      $ (0.20   $ (2.60   $ (12.32

Weighted-average common shares outstanding

             

Basic

    145.2        145.0        145.1        144.8        144.4        143.8        143.3   

Diluted

    146.1        145.8        145.8        144.9        144.4        143.8        143.3   

Pro forma net income per common share(1)

             

Basic

  $ 0.24        $ 1.07           

Diluted

  $ 0.24        $ 1.05           

Pro forma weighted-average common shares outstanding(1)

             

Basic

    164.5          164.4           

Diluted

    168.2          168.1           

(dollars in millions)

  March 31,     December 31,  
  2013     2012     2012     2011     2010     2009     2008  

 

 
    (unaudited)     (unaudited)                                

Balance Sheet Data:

             

Cash and cash equivalents

  $ 147.1      $ 36.5      $ 37.9      $ 99.9      $ 36.6      $ 88.0      $ 94.4   

Working capital

    673.2        593.6        666.5        538.1        675.4        923.2        877.6   

Total assets

    5,822.7        5,740.9        5,720.0        5,967.7        5,943.8        5,976.0        6,276.3   

Total debt and capitalized lease obligations(2)

    3,680.8        3,871.6        3,771.0        4,066.0        4,290.0        4,621.9        4,633.5   

Total shareholders’ equity (deficit)

    163.8        10.6        136.5        (7.3     (43.5     (44.7     262.2   

Other Financial Data:

             

Capital expenditures

  $ 8.8      $ 8.3      $ 41.4      $ 45.7      $ 41.5      $ 15.6      $ 41.1   

Depreciation and amortization

    52.0        52.5        210.2        204.9        209.4        218.2        218.4   

Gross profit as a percentage of net sales

    16.7%        16.6%        16.5%        16.5%        15.8%        15.8%        16.9%   

Ratio of earnings to fixed charges(3)

             

(unaudited)

    1.6        1.2        1.6        1.1          (a)        (a)        (a) 

EBITDA(4)

             

(unaudited)

    168.6        146.5        703.7        557.4        564.3        188.7        (1,168.5

Adjusted EBITDA(4)

             

(unaudited)

    178.6        166.4        766.6        717.3        601.8        465.4        570.6   

Statement of Cash Flows Data:

             

Net cash provided by (used in):

             

Operating activities

  $ 208.0      $ 223.0      $ 317.4      $ 214.7      $ 423.7      $ 107.6      $ 215.4   

Investing activities

    (8.8     (8.3     (41.7     (56.0     (125.4     (82.6     (60.3

Financing activities

    (89.5     (278.4     (338.0     (95.4     (350.1     (31.9     (75.8

 

   

 

 

 

 

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(1)   Both pro forma net income per share and pro forma weighted-average common shares outstanding give effect to the reclassification of our Class A common stock and Class B common stock into a single class of common stock and the subsequent 143.0299613-for-1 stock split of our common stock, both of which were effected on June 6, 2013, and the issuance of shares in this offering. In addition, the pro forma presentation does not reflect certain nonrecurring charges directly related to this offering which we expect to recognize, as they will not have an ongoing impact on our financial results. These charges include a $24.4 million termination fee related to termination of the Management Services Agreement, compensation expense of $38.6 million related to the acceleration of the expense recognition for certain equity incentive awards upon the completion of this offering, and a loss on extinguishment of $35.2 million related to the Senior Secured Notes and Senior Subordinated Notes redemptions using a portion of the proceeds from this offering.

 

(2)   Excludes obligations outstanding of $252.9 million, $204.7 million, $249.2 million, $278.7 million, $28.2 million, 25.0 million and 34.1 million, as of March 31, 2013, March 31, 2012, December 31, 2012, December 31, 2011, December 31, 2010, December 31, 2009 and December 31, 2008, respectively, under our inventory financing agreements. We do not include these obligations in total debt because we have not in the past incurred, and in the future do not expect to incur, any interest expense these agreements. For more information, see “Description of certain indebtedness.” These amounts are classified separately as accounts payable–inventory financing on our consolidated balance sheets.

 

(3)   For purposes of calculating the ratio of earnings to fixed charges, earnings consist of earnings before income taxes minus income from equity investment plus fixed charges. Fixed charges consist of interest expensed and the portion of rental expense we believe is representative of the interest component of rental expense.

 

  (a)   For the years ended December 31, 2010, 2009 and 2008, earnings available for fixed charges were inadequate to cover fixed charges by $37.0 million, $461.2 million and $1,777.2 million, respectively.

 

(4)   EBITDA is defined as consolidated net income (loss) before interest income (expense), income tax benefit (expense), depreciation, and amortization. Adjusted EBITDA, which is a measure defined in the Senior Credit Facilities, is calculated by adjusting EBITDA for certain items of income and expense including (but not limited to) the following: (a) non-cash equity-based compensation; (b) goodwill impairment charges; (c) sponsor fees; (d) certain consulting fees; (e) debt-related legal and accounting costs; (f) equity investment income and losses; (g) certain severance and retention costs; (h) gains and losses from the early extinguishment of debt; (i) gains and losses from asset dispositions outside the ordinary course of business; and (j) non-recurring, extraordinary or unusual gains or losses or expenses.

We have included a reconciliation of EBITDA and Adjusted EBITDA in the table below. Both EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures used by the Company may differ from similar measures used by other companies, even when similar terms are used to identify such measures. We believe that EBITDA and Adjusted EBITDA provide helpful information with respect to our operating performance and cash flows including our ability to meet our future debt service, capital expenditures, and working capital requirements. Adjusted EBITDA also provides helpful information as it is the primary measure used in certain financial covenants contained in the Senior Credit Facilities.

The following unaudited table sets forth reconciliations of GAAP net income (loss) to EBITDA and EBITDA to Adjusted EBITDA for the periods presented:

 

      Three months
ended
March 31,
     Years ended December 31,  
(in millions)    2013      2012      2012      2011      2010     2009    

2008

 

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 28.3       $ 10.9       $ 119.0       $ 17.1       $ (29.2   $ (373.4   $ (1,765.1

Depreciation and amortization

     52.0         52.5         210.2         204.9         209.4        218.2        218.4   

Income tax expense (benefit)

     16.2         4.2         67.1         11.2         (7.8     (87.8     (12.1

Interest expense, net

     72.1         78.9         307.4         324.2         391.9        431.7        390.3   
  

 

 

    

 

 

    

 

 

 

EBITDA

     168.6         146.5         703.7         557.4         564.3        188.7        (1,168.5
  

 

 

    

 

 

    

 

 

 

Non-cash equity-based compensation

     1.9         5.7         22.1         19.5         11.5        15.9        17.8   

Sponsor fees(i)

     1.3         1.3         5.0         5.0         5.0        5.0        5.0   

Goodwill impairment

                                            241.8        1,712.0   

Consulting and debt-related professional fees

     0.1         0.1         0.6         5.1         15.1        14.1        4.3   

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

     3.9         9.4         17.2         118.9         (2.0              

Other adjustments(ii)

     2.8         3.4         18.0         11.4         7.9        (0.1       
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 178.6       $ 166.4       $ 766.6       $ 717.3       $ 601.8      $ 465.4      $ 570.6   

 

 

 

  (i)   Reflects historical fees paid to affiliates of the Sponsors under the Management Services Agreement. In connection with this offering, we will terminate the Management Services Agreement. See “Certain transactions—Management Services Agreement.”

 

  (ii)   Includes certain retention costs and equity investment income, a litigation loss in the fourth quarter of 2012, certain severance costs in 2009, and a gain related to the sale of the Informacast software and equipment in 2009.

 

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The following unaudited table sets forth a reconciliation of EBITDA to net cash provided by operating activities for the periods presented:

 

(in millions)

  Three months ended March 31,     Years ended December 31,  
                  2013                     2012     2012     2011     2010     2009     2008  

 

 

EBITDA

  $ 168.6      $ 146.5      $ 703.7      $ 557.4      $ 564.3      $ 188.7      $ (1,168.5

Depreciation and amortization

    (52.0     (52.5     (210.2     (204.9     (209.4     (218.2     (218.4

Income tax (expense) benefit

    (16.2     (4.2     (67.1     (11.2     7.8        87.8        12.1   

Interest expense, net

    (72.1     (78.9     (307.4     (324.2     (391.9     (431.7     (390.3
 

 

 

 

Net income (loss)

    28.3        10.9        119.0        17.1        (29.2     (373.4     (1,765.1
 

 

 

 

Depreciation and amortization

    52.0        52.5        210.2        204.9        209.4        218.2        218.4   

Goodwill impairment

                                       241.8        1,712.0   

Equity-based compensation expense

    1.9        5.7        22.1        19.5        11.5        15.9        17.8   

Amortization of deferred financing costs and debt premium

    3.0        5.2        13.6        15.7        18.0        16.2        38.6   

Deferred income taxes

    (14.1     (16.6     (56.3     (10.2     (4.3     (94.4     (39.9

Allowance for doubtful accounts

           0.4               0.4        (1.3     (0.2     0.4   

Realized loss on interest rate swap agreements

                         2.8        51.5        103.2        18.6   

Mark to market loss on interest rate derivatives

                  0.9        4.2        4.7                 

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

    3.9        9.4        17.2        118.9        (2.0              

Net loss (gain) on sale and disposals of assets

                  0.1        0.3        0.7        (1.7     0.5   

Changes in assets and liabilities

    133.0        154.8        (9.4     (158.3     165.3        (18.0     14.1   

Other non-cash items

           0.7               (0.6     (0.6              
 

 

 

 

Net cash provided by operating activities

  $ 208.0      $ 223.0      $ 317.4      $ 214.7      $ 423.7      $ 107.6      $ 215.4   

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section entitled “Selected consolidated financial and operating data” and our historical consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to numerous risks and uncertainties, including but not limited to those described in the section entitled “Risk factors.” Actual results may differ materially from those contained in any forward-looking statements.

Overview

CDW is a Fortune 500 company and a leading provider of integrated IT solutions in the U.S. and Canada. We help our customer base of more than 250,000 small, medium and large business, government, education and healthcare customers by delivering critical solutions to their increasingly complex IT needs. Our broad array of offerings range from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration. We are technology “agnostic,” with a product portfolio that includes more than 100,000 products from more than 1,000 brands. We provide our products and solutions through sales force and service delivery teams consisting of more than 4,300 coworkers, including over 1,700 field sellers, highly skilled technology specialists and advanced service delivery engineers.

We are a leading U.S. sales channel partner for many OEMs and software publishers, whose products we sell or include in the solutions we offer. We believe we are an important extension of our vendor partners’ sales and marketing capabilities, providing them with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage and extensive customer access.

We have 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. Our Corporate segment is divided into a medium-large business customer channel, primarily serving customers with more than 100 employees, and a small business customer channel, primarily serving customers with up to 100 employees. We also have two other operating segments, CDW Advanced Services and Canada, which do not meet the reportable segment quantitative thresholds and, accordingly, are combined together as “Other.” The CDW Advanced Services business consists primarily of customized engineering services delivered by technology specialists and engineers and managed services that include IaaS offerings. Revenues from the sale of hardware, software, custom configuration and third-party provided services are recorded within our Corporate and Public segments.

We may sell all or only select products that our vendor partners offer. Each vendor partner agreement provides for specific terms and conditions, which may include one or more of the following: product return privileges, price protection policies, purchase discounts and vendor incentive programs, such as purchase or sales rebates and cooperative advertising reimbursements. We also resell software for major software publishers. Our agreements with software publishers allow the end-user customer to acquire software or licensed products and services. In addition to helping our customers determine the best software solutions for their

 

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needs, we help them manage their software agreements, including warranties and renewals. A significant portion of our advertising and marketing expenses is reimbursed through cooperative advertising reimbursement programs with our vendor partners. These programs are at the discretion of our vendor partners and are typically tied to sales or purchasing volumes or other commitments to be met by us within a specified period of time.

Trends and key factors affecting our financial performance

We believe the following trends may have an important impact on our financial performance:

 

 

An important factor affecting our ability to generate sales and achieve our targeted operating results is the impact of general economic conditions on our customers’ willingness to spend on information technology. While our operating results have improved significantly from the recent financial crisis, beginning in the second quarter of 2012, we began to see customers take a more cautious approach to spending as increased macroeconomic uncertainty impacted decision-making and led to some customers delaying purchases. We expect this trend to continue for the remainder of 2013. Uncertainties related to the potential impacts of federal budget negotiations, potential changes in tax and regulatory policy, weakening consumer and business confidence or increased unemployment could result in reduced or deferred spending by our customers on information technology products and services and increased competitive pricing pressures.

 

 

Our Public segment sales are impacted by government spending policies, budget priorities and revenue levels. An adverse change in any of these factors could cause our Public segment customers to reduce their purchases or to terminate or not renew contracts with us, which could adversely affect our business, results of operations or cash flows. Although our sales to the federal government are diversified across multiple agencies and departments, they collectively accounted for approximately 10%, 10% and 11% of our net sales for the years ended December 31, 2012, 2011 and 2010, respectively.

 

 

We believe that our customers’ transition to more complex technology solutions will continue to be an important growth area for us in the future. However, because the market for technology products and services is highly competitive, our success at capitalizing on this transition will be based on our ability to tailor specific solutions to customer needs, the quality and breadth of our product and service offerings, the knowledge and expertise of our sales force, price, product availability and speed of delivery.

Key business metrics

Our management monitors a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, gross margin, operating margin, EBITDA and Adjusted EBITDA, cash and cash equivalents, net working capital, cash conversion cycle (defined to be days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average), debt levels including available credit and leverage ratios, sales per coworker and coworker turnover. These measures and ratios are compared to standards or objectives set by management, so that actions can be taken, as necessary, in order to achieve the standards and objectives. Adjusted EBITDA, a non-GAAP financial measure, also provides helpful information as it is the primary measure used in certain

 

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financial covenants contained in the Senior Credit Facilities. See “Summary consolidated financial information” for the definition of Adjusted EBITDA and a reconciliation to net income (loss).

The results of certain key business metrics are as follows:

 

     Three months ended March 31,     Years ended December 31,  
(dollars in millions)               2013                 2012     2012     2011     2010  

 

 

Net sales

  $ 2,411.7      $ 2,319.2      $ 10,128.2      $ 9,602.4      $ 8,801.2   

Gross profit

    402.0        384.6        1,669.6        1,583.5        1,390.8   

Income from operations

    120.1        103.6        510.6        470.7        352.7   

Net income (loss)

    28.3        10.9        119.0        17.1        (29.2

Adjusted EBITDA

    178.6        166.4        766.6        717.3        601.8   

Average daily sales

    38.3        36.2        39.9        37.7        34.7   

Net debt (defined as long-term debt plus capital leases minus cash and cash equivalents)

    3,533.7        3,835.1        3,733.1        3,966.1        4,253.4   

Cash conversion cycle (in days)

    23        26        24        28        32   

 

 

Background and basis of presentation

Corporate and capital structure

On October 12, 2007, CDW Corporation, a then-newly-formed Delaware corporation indirectly controlled by the Sponsors, acquired CDW Corporation, an Illinois corporation (“Target”), in a transaction valued at approximately $7.4 billion (the “Acquisition”). Upon completion of the Acquisition, the outstanding common stock of Target was converted into the right to receive cash, the common stock was delisted and deregistered and Target became a 100% owned subsidiary of CDW Corporation. CDW Corporation is owned directly by CDW Holdings. CDW Holdings is controlled by investment funds affiliated with the Sponsors, certain other co-investors and certain senior management investors. On December 31, 2009, Target merged into CDWC LLC, a limited liability company 100% owned by CDW Corporation with CDWC LLC as the surviving company in the merger. This change had no impact on operations or management. On December 31, 2010, CDWC LLC was renamed CDW LLC. In connection with this offering, CDW Holdings will distribute all of its shares of CDW Corporation common stock to its existing members in accordance with their respective membership interests and pursuant to the terms of CDW Holdings’ limited liability company agreement and unitholders agreement. It is currently contemplated that CDW Holdings will be dissolved shortly following the distribution and the completion of this offering.

Unless otherwise indicated or the context otherwise requires, the terms “we,” “us,” “the Company,” “our,” “CDW” and similar terms refer to CDW Corporation and its 100% owned subsidiaries.

Accompanying financial statements

Throughout management’s discussion and analysis of financial condition and results of operations, data for all periods are derived from our consolidated financial statements included elsewhere in this prospectus, which include:

 

 

Unaudited interim financial statements: the unaudited consolidated financial statements as of March 31, 2013 and for the three months ended March 31, 2013 and 2012 (the “Unaudited Financial Statements”); and

 

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Audited financial statements: the audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 (the “Audited Financial Statements”).

Results of operations

Three months ended March 31, 2013 compared to three months ended March 31, 2012

The following table presents our results of operations, in dollars and as a percentage of net sales, for the three months ended March 31, 2013 and 2012:

 

      Three months ended
March 31, 2013
    Three months ended
March 31, 2012
 
    

Dollars in

millions

   

Percentage of

net sales

   

Dollars in

millions

   

Percentage of

net sales

 

 

 

Net sales

   $ 2,411.7        100.0   $ 2,319.2        100.0

Cost of sales

     2,009.7        83.3        1,934.6        83.4   
  

 

 

 

Gross profit

     402.0        16.7        384.6        16.6   

Selling and administrative expenses

     251.5        10.4        251.6        10.8   

Advertising expense

     30.4        1.3        29.4        1.3   
  

 

 

 

Income from operations

     120.1        5.0        103.6        4.5   

Interest expense, net

     (72.1     (3.0)        (78.9     (3.4)   

Net loss on extinguishments of long-term debt

     (3.9     (0.2)        (9.4     (0.4)   

Other income (expense), net

     0.4               (0.2       
  

 

 

 

Income before income taxes

     44.5        1.8        15.1        0.7   

Income tax expense

     (16.2     (0.6)        (4.2     (0.2)   
  

 

 

 

Net income

   $ 28.3        1.2   $ 10.9        0.5

 

 

Net sales

The following table presents our net sales by segment, in dollars and as a percentage of total net sales, and the year-over-year dollar and percentage change in net sales for the three months ended March 31, 2013 and 2012:

 

      Three months ended
March 31, 2013
    Three months ended
March 31, 2012
                
(dollars in millions)    Net sales     

Percentage

of total net

sales

    Net sales     

Percentage

of total net

sales

   

Dollar

change

    

Percent

change(1)

 

 

 

Corporate

   $ 1,403.9         58.2   $ 1,362.8         58.8   $ 41.1         3.0

Public

     846.8         35.1        817.6         35.3        29.2         3.6   

Other

     161.0         6.7        138.8         5.9        22.2         16.0   
  

 

 

 

Total net sales

   $ 2,411.7         100.0   $ 2,319.2         100.0   $ 92.5         4.0

 

  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)   There were 63 selling days for the three months ended March 31, 2013, compared to 64 selling days for the three months ended March 31, 2012. On an average daily basis, total net sales increased 5.6%.

 

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The following table presents our net sales by customer channel for our Corporate and Public segments and the year-over-year dollar and percentage change in net sales for the three months ended March 31, 2013 and 2012:

 

(dollars in millions)

   Three months  ended
March 31,
     Dollar
change
   

Percent

change

 
   2013      2012       

 

 

Corporate:

          

Medium / Large

   $ 1,146.2       $ 1,089.6       $ 56.6        5.2

Small Business

     257.7         273.2         (15.5     (5.7
  

 

 

 

Total Corporate

   $ 1,403.9       $ 1,362.8       $ 41.1        3.0
  

 

 

 

Public:

          

Government

   $ 252.3       $ 262.6       $ (10.3     (3.9 )% 

Education

     232.2         221.7         10.5        4.8   

Healthcare

     362.3         333.3         29.0        8.7   
  

 

 

 

Total Public

   $ 846.8       $ 817.6       $ 29.2        3.6
  

 

 

 

Total net sales for the three months ended March 31, 2013 increased $92.5 million, or 4.0%, to $2,411.7 million, compared to $2,319.2 million for the three months ended March 31, 2012. There were 63 selling days for the three months ended March 31, 2013, compared to 64 selling days for the three months ended March 31, 2012. On an average daily basis, total net sales increased 5.6%. The increase in total net sales was the result of favorable price/mix changes in hardware, growth in software, a more tenured sales force, and a continued focus on seller productivity across all areas of the organization. Our total net sales growth for the three months ended March 31, 2013 reflected increased sales of software and netcomm products, and unit volume growth in notebooks/mobile devices, partially offset by a decline in sales of desktop computers. Software gains were driven by growth in virtualization, operating systems, security and network management software.

Corporate segment net sales for the three months ended March 31, 2013 increased $41.1 million, or 3.0%, compared to the three months ended March 31, 2012, driven by sales growth in the medium/large customer channel. On an average daily basis, Corporate segment net sales increased 4.6% between periods. Within our Corporate segment, net sales to medium/large customers increased 5.2% between periods due to a more tenured sales force and a continued focus on seller productivity. This increase was led by growth in netcomm products and software. Partially offsetting the growth in the medium/large customer channel was a 5.7% decrease in net sales to small business customers, due to certain of these customers continuing to take a more cautious approach to spending as macroeconomic uncertainty impacted decision-making. This decrease was led by unit volume declines in notebooks/mobile devices.

Public segment net sales for the three months ended March 31, 2013 increased $29.2 million, or 3.6%, between periods, driven by continued strong performance in the healthcare customer channel. On an average daily basis, Public segment net sales increased 5.2% between periods. Net sales to healthcare customers increased $29.0 million, or 8.7%, between periods, led by growth in software, enterprise storage and notebooks/mobile devices. The healthcare customer channel growth was primarily the result of deeper relationships with several group purchasing organizations and increased healthcare industry demand for IT products, as the healthcare industry continued its adoption of electronic medical records and point of care technologies. Net

 

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sales to government customers decreased $10.3 million, or 3.9%, between periods, as uncertainty related to sequestration and federal government budget negotiations led to reduced or deferred federal government spending on IT products and services during the quarter. The government customer channel net sales decline was led by decreases in sales of desktop computers, netcomm products and servers, partially offset by growth in software. Net sales to education customers increased $10.5 million, or 4.8%, between periods, driven by growth in net sales to K-12 customers, reflecting an increased level of funding certainty for certain of these customers. Partially offsetting the increase in net sales to K-12 customers was a reduction in net sales to higher education customers, reflecting ongoing budget constraints.

Gross profit

Gross profit increased $17.4 million, or 4.5%, to $402.0 million for the three months ended March 31, 2013, compared to $384.6 million for the three months ended March 31, 2012. As a percentage of total net sales, gross profit increased 10 basis points to 16.7% for the three months ended March 31, 2013, up from 16.6% for the three months ended March 31, 2012. Gross profit margin was positively impacted 30 basis points by a higher mix of commission revenue and 10 basis points by higher net sales and gross profit related to professional services. These increases were partially offset by an unfavorable impact of 30 basis points from price/mix changes within product margin. Commission revenue, including agency fees earned on sales of software licenses and software assurance under enterprise agreements, has a positive impact on our gross profit margin, as we record the fee or commission as a component of net sales when earned and there is no corresponding cost of sales.

The gross profit margin may fluctuate based on various factors, including vendor incentive and inventory price protection programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, net service contract revenue, commission revenue, pricing strategies, market conditions, and other factors, any of which could result in changes in gross profit margins.

Selling and administrative expenses

Selling and administrative expenses were $251.5 million for the three months ended March 31, 2013, compared to $251.6 million for the three months ended March 31, 2012, or essentially flat between years. As a percentage of total net sales, selling and administrative expenses decreased 40 basis points to 10.4% in the first quarter of 2013, down from 10.8% in the first quarter of 2012. Sales payroll, including sales commissions and other variable compensation costs, increased $5.3 million, or 4.9%, between years, consistent with higher sales and gross profit. Offsetting the majority of this increase was a reduction in non-cash compensation costs of $3.8 million between years related to our equity-based compensation plans, driven by the vesting period for certain awards being fully satisfied by the end of 2012. Occupancy costs also declined $1.8 million between years, primarily due to a $1.9 million lease termination charge recorded for the three months ended March 31, 2012. Total coworker count decreased by 60 coworkers from 6,839 at March 31, 2012 to 6,779 at March 31, 2013.

Advertising expense

Advertising expense increased $1.0 million, or 3.0%, to $30.4 million for the three months ended March 31, 2013, compared to $29.4 million for the three months ended March 31, 2012. As a

 

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percentage of total net sales, advertising expense was 1.3% for each of the three months ended March 31, 2013 and 2012. The increase in advertising expense was due to a focus on development of integrated campaigns to advertise our solutions and products which reinforce our reputation as a leading IT solutions provider. We leveraged personalized digital advertising techniques aimed at our target audience; those costs were partially offset by decreases in television advertising expenditures.

Income from operations

The following table presents income (loss) from operations by segment, in dollars and as a percentage of net sales, and the year-over-year percentage change in income (loss) from operations for the three months ended March 31, 2013 and 2012:

 

      Three months ended
March 31, 2013
    Three months ended
March 31, 2012
        
    

Dollars in

millions

   

Operating

margin

percentage

   

Dollars in

millions

   

Operating

margin
percentage

   

Percent change

in income (loss)

from operations

 

 

 

Segments:(1)

          

Corporate

   $ 94.1        6.7   $ 84.8        6.2     11.0

Public

     45.6        5.4        42.1        5.2        8.3   

Other

     6.1        3.8        2.5        1.8        142.9   

Headquarters(2)

     (25.7     nm     (25.8     nm     (0.5
  

 

 

 

Total income from operations

   $ 120.1        5.0   $ 103.6        4.5     15.9

 

 

 

*   Not meaningful

 

(1)   Segment income from operations includes the segment’s direct operating income and allocations for Headquarters’ costs, allocations for logistics services, certain inventory adjustments, and volume rebates and cooperative advertising from vendors.

 

(2)   Includes certain Headquarters’ function costs that are not allocated to the segments.

Income from operations was $120.1 million for the three months ended March 31, 2013, an increase of $16.5 million, or 15.9%, compared to $103.6 million for the three months ended March 31, 2012. The results for the three months ended March 31, 2013 were driven by higher net sales and gross profit, partially offset by higher advertising expense. Total operating margin percentage increased 50 basis points to 5.0% for the three months ended March 31, 2013, from 4.5% for the three months ended March 31, 2012. Operating margin percentage benefited from the increase in gross profit margin and the decrease in selling and administrative expenses as a percentage of net sales.

Corporate segment income from operations was $94.1 million for the three months ended March 31, 2013, an increase of $9.3 million, or 11.0%, compared to $84.8 million for the three months ended March 31, 2012. This increase was primarily driven by higher net sales and gross profit margin, partially offset by higher selling and administrative expenses, resulting in a net increase in segment operating income before allocations of $5.5 million for the three months ended March 31, 2013 compared to the same period of 2012. In addition, Corporate segment income from operations benefited from a decrease of $3.3 million in Headquarters’ expense allocations to the Corporate segment on a year-over-year basis.

Public segment income from operations was $45.6 million for the three months ended March 31, 2013, an increase of $3.5 million, or 8.3%, compared to $42.1 million for the three months ended March 31, 2012. The increase reflected higher segment operating income before allocations of $1.4

 

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million as a result of increased net sales and gross profit dollars, partially offset by higher selling and administrative expenses. In addition, Public segment income from operations benefited from a decrease of $1.6 million in Headquarters’ expense allocations on a year-over-year basis.

Interest expense, net

At March 31, 2013, our outstanding long-term debt totaled $3,680.8 million compared to $3,871.6 million at March 31, 2012. Net interest expense for the three months ended March 31, 2013 was $72.1 million, a decrease of $6.8 million compared to $78.9 million for the three months ended March 31, 2012. Net interest expense decreased $5.3 million due to lower debt balances and lower effective interest rates for the three months ended March 31, 2013 compared to the same period of the prior year as a result of debt repayments and refinancing activities completed during 2012 and 2013. The remaining decrease was primarily attributable to reduced amortization of deferred financing costs for the three months ended March 31, 2013.

Net loss on extinguishments of long-term debt

During the three months ended March 31, 2013, we recorded a net loss on extinguishment of long-term debt of $3.9 million compared to $9.4 million for the same period in 2012.

In March 2013, we redeemed $50.0 million aggregate principal amount of Senior Subordinated Notes for $53.1 million. We recorded a loss on extinguishment of long-term debt of $3.9 million for the three months ended March 31, 2013, representing the difference between the redemption price and the net carrying amount of the purchased debt, adjusted for a portion of the unamortized deferred financing costs.

In February and March 2012, we purchased or redeemed the remaining $129.0 million of Senior Notes due 2015, funded with the issuance of an additional $130.0 million of Senior Notes. As a result, we recorded a loss on extinguishment of long-term debt of $9.4 million, representing the difference between the purchase or redemption price of the Senior Notes due 2015 and the net carrying amount of the purchased debt, adjusted for the remaining unamortized deferred financing costs.

Income tax expense

Income tax expense was $16.2 million for the three months ended March 31, 2013, compared to $4.2 million for the same period of the prior year. The effective income tax rate, expressed by calculating the income tax expense as a percentage of income before income taxes, was 36.4% for the three months ended March 31, 2013, compared to 27.9% for the same period of the prior year. The change in the effective income tax rate between periods was primarily attributable to favorable adjustments to state tax credits that were recorded during the three months ended March 31, 2012, which did not recur during the three months ended March 31, 2013.

Net income

Net income was $28.3 million for the three months ended March 31, 2013, compared to $10.9 million for the three months ended March 31, 2012. The results for the three months ended March 31, 2013 and 2012 included after tax losses on extinguishments of long-term debt of $2.4 million and $5.7 million, respectively. Other significant factors and events causing the net changes between the periods are discussed above.

 

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Adjusted EBITDA

Adjusted EBITDA was $178.6 million for the three months ended March 31, 2013, an increase of $12.2 million, or 7.3%, compared to $166.4 million for the three months ended March 31, 2012. As a percentage of net sales, Adjusted EBITDA was 7.4% for the three months ended March 31, 2013 compared to 7.2% for the three months ended March 31, 2012.

We have included a reconciliation of EBITDA and Adjusted EBITDA for the three months ended March 31, 2013 and 2012 in the table below. EBITDA is defined as consolidated net income before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA, which is a measure defined in our Senior Credit Facilities, means EBITDA adjusted for certain items which are described in the table below. Both EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures used by the Company may differ from similar measures used by other companies, even when similar terms are used to identify such measures. We believe that EBITDA and Adjusted EBITDA provide helpful information with respect to our operating performance and cash flows including our ability to meet our future debt service, capital expenditures and working capital requirements. Adjusted EBITDA also provides helpful information as it is the primary measure used in certain financial covenants contained in our Senior Credit Facilities.

 

(in millions)

   Three months  ended
March 31,
 
       2013          2012  

 

 

Net income

   $ 28.3       $ 10.9   

Depreciation and amortization

     52.0         52.5   

Income tax expense

     16.2         4.2   

Interest expense, net

     72.1         78.9   
  

 

 

 

EBITDA

     168.6         146.5   
  

 

 

 

Adjustments:

     

Non-cash equity-based compensation

     1.9         5.7   

Sponsor fee

     1.3         1.3   

Consulting and debt-related professional fees

     0.1         0.1   

Net loss on extinguishments of long-term debt

     3.9         9.4   

Other adjustments(1)

     2.8         3.4   
  

 

 

 

Total adjustments

     10.0         19.9   
  

 

 

 

Adjusted EBITDA

   $ 178.6       $ 166.4   

 

  

 

 

 

 

(1)   Other adjustments primarily include certain retention costs and equity investment income.

 

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Year ended December 31, 2012 compared to year ended December 31, 2011

The following table presents our results of operations, in dollars and as a percentage of net sales, for the years ended December 31, 2012 and 2011:

 

      Year ended
December 31, 2012
     Year ended
December 31, 2011
 
     Dollars in
millions
    Percentage of
net sales
     Dollars in
millions
    Percentage of
net sales
 

 

 

Net sales

   $ 10,128.2        100.0%       $ 9,602.4        100.0%   

Cost of sales

     8,458.6        83.5         8,018.9        83.5   
  

 

 

 

Gross profit

     1,669.6        16.5         1,583.5        16.5   

Selling and administrative expenses

     1,029.5        10.2         990.1        10.3   

Advertising expense

     129.5        1.3         122.7