CDW

CDW Corp. Q1 2011 Financial Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. CDW Corporation is a leading provider of multi-branded information technology products and services in the U.S. and Canada, serving business, government, education, and healthcare customers. The company operates through two reportable segments: Corporate and Public, with additional operations in Advanced Services and Canada grouped as "Other."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 10.1% year-over-year, driven primarily by a 14.6% increase in the Corporate segment. The Public segment remained relatively flat (+0.5%) as growth in healthcare offset declines in government and education sales.
• Profitability: Operating income rose 28.6% to $91.7 million due to improved gross margins (16.5% vs. 15.8%) and favorable product mix. However, net income turned negative due to higher interest expenses and a one-time loss on debt extinguishment.
• Interest Expense: Net interest expense increased to $92.1 million from $77.1 million. This was largely due to the absence of a $25.9 million non-cash gain from hedge ineffectiveness recorded in Q1 2010, partially offset by lower rates on the term loan following the termination of interest rate swaps.
• Debt Restructuring: The company recorded a $3.2 million loss on the extinguishment of long-term debt related to an amendment of its senior secured term loan facility in March 2011.
• Cash Flow: Operating cash flow decreased $117.0 million compared to the prior year, primarily due to a lower increase in accounts payable. In Q1 2010, the company had accelerated payments to capture early pay discounts, a strategy not repeated to the same extent in 2011.

Outlook, Risks, and Unusual Items

• Debt Refinancing (Subsequent Event): Following the quarter-end, CDW completed a tender offer to purchase $665.1 million of Senior Notes, funded by a new $725.0 million senior notes offering. A follow-on tender offer for an additional $412.8 million was announced in April 2011.
• Interest Rate Hedging: Interest rate swap agreements terminated on January 14, 2011. The company entered into new interest rate cap agreements to manage exposure on its floating-rate debt.
• Supply Chain Risks: Management noted increased inventory purchases in anticipation of potential supply shortages resulting from the earthquake and tsunami in Japan.
• Government Spending: Sales to federal government customers declined 17.3%, reflecting sensitivity to government spending policies and budget priorities.
• Liquidity: The company maintains a senior secured leverage ratio of 3.5x (well below the 7.5x covenant limit) and has approximately $554.0 million of additional borrowing capacity available under its revolving credit facility, accounting for a defaulting lender.

Investor Verification Checklist

• Verify the status and closing of the follow-on tender offer for Senior Notes announced in April 2011.
• Monitor the impact of the terminated interest rate swaps and new cap agreements on future interest expense volatility.
• Assess the sustainability of the 14.6% growth in the Corporate segment versus the stagnation in the Public segment.
• Review the company's ability to maintain the senior secured leverage ratio covenant as debt refinancing activities conclude.
• Confirm the extent of inventory build-up related to Japan supply chain disruptions and its effect on working capital.