CDW Corp. 10-Q Summary: Period Ended June 30, 2011
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for CDW Corporation, a leading provider of multi-branded information technology products and services in the U.S. and Canada. The report covers the three and six-month periods ended June 30, 2011. The company operates through two primary reportable segments: Corporate (business customers) and Public (government, education, and healthcare).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Net Sales | $2,412.1 million | $4,541.7 million |
| Gross Profit | $401.8 million (16.7% margin) | $753.3 million (16.6% margin) |
| Income from Operations | $128.2 million (5.3% margin) | $219.9 million (4.8% margin) |
| Net Loss | $(34.8) million | $(39.0) million |
| Adjusted EBITDA | $187.5 million | $343.0 million |
| Cash and Cash Equivalents | $44.6 million (as of June 30, 2011) | N/A |
| Total Long-Term Debt | $4,226.0 million (as of June 30, 2011) | N/A |
| Operating Cash Flow | N/A | $207.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.5% year-over-year for the quarter and 9.2% for the six-month period. The Corporate segment drove this growth with a 12.1% increase in quarterly sales, while the Public segment grew only 2.2% due to declines in government sales offset by strong healthcare growth.
- Profitability: Operating income increased 34.2% for the quarter and 31.8% for the six-month period, driven by higher sales volume and improved gross margins (16.7% vs. 16.2% for the quarter).
- Net Loss: Despite strong operating income, the company reported a net loss of $34.8 million for the quarter and $39.0 million for the six months. This is primarily due to a $115.7 million loss on extinguishment of long-term debt recorded in the quarter (and $118.9 million for the six months) related to debt refinancing activities.
- Debt Restructuring: The company completed tender offers to repurchase approximately $1.078 billion of Senior Notes due 2015 and issued $1.175 billion of new Senior Notes due 2019. It also entered into a new $900 million revolving credit facility.
Outlook, Risks, and Management Commentary
- Debt Management: Management successfully reduced interest expense by refinancing high-cost debt. The senior secured leverage ratio was 3.4x as of June 30, 2011, well below the 7.5x covenant requirement.
- Market Conditions: Management notes that while economic conditions have improved, competitive pricing pressures persist. The Public segment remains sensitive to government spending policies and budget priorities.
- Liquidity: The company maintains adequate liquidity with $44.6 million in cash and approximately $705.9 million of availability under its revolving credit facility. Operating cash flow for the six months was $207.4 million.
- Risks: Key risks include general economic downturns affecting IT spending, declines in government funding, and potential supply chain disruptions (noted regarding inventory purchases from Japan).
Investor Verification Checklist
- Debt Extinguishment Impact: Verify the non-recurring nature of the $115.7 million loss on debt extinguishment to understand the divergence between strong operating income and the reported net loss.
- Segment Mix: Monitor the shift in revenue mix, specifically the decline in Federal government sales within the Public segment versus the growth in the Corporate segment.
- Interest Rate Exposure: Review the details of the new interest rate cap agreements and the termination of previous swaps to assess future interest expense volatility.
- Covenant Compliance: Confirm continued compliance with the senior secured leverage ratio and fixed charge coverage ratios under the new credit facilities.
- Working Capital: Track the cash conversion cycle, which improved to 28 days, and monitor accounts receivable days (DSO) given the mix of government customers.