CDW

CDW Corp. 10-Q Summary: Quarter Ended September 30, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine months ended on that date. CDW Corporation is a leading provider of multi-branded information technology products and services in the United States and Canada, serving business, government, education, and healthcare customers. The company operates through two reportable segments: Corporate (business customers) and Public (government, education, and healthcare), with other operations combined into an "Other" category.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 20.9% in the quarter and 25.7% for the nine months compared to the prior year periods, driven by a rebound in the Corporate segment and growth in the Public segment's healthcare and education channels.
• Profitability Improvement: Operating income surged 48.8% in the quarter and turned from a loss of $83.7 million to a profit of $271.5 million for the nine months. The prior year's nine-month loss was significantly impacted by a $235.0 million goodwill impairment charge recorded in Q2 2009, which did not recur in 2010.
• Net Loss Reduction: Net loss narrowed significantly to $0.3 million for the quarter and $5.1 million for the nine months, compared to losses of $25.0 million and $336.0 million, respectively, in the prior year.
• Interest Expense: Net interest expense decreased slightly year-over-year due to lower average debt balances and favorable non-cash impacts from hedge ineffectiveness, partially offset by higher interest rates on the term loan facility.

Guidance, Outlook, and Risks

• Outlook: Management notes that general economic conditions and operating results have improved in 2010. However, competitive pricing pressures continue to negatively affect gross profit margins. The company expects software and service offerings to be important growth areas.
• Liquidity: The company maintains an $800.0 million senior secured asset-based revolving credit facility. As of September 30, 2010, outstanding borrowings were $191.1 million, with approximately $547.4 million available for additional borrowing (accounting for a defaulting lender). The company is in compliance with all debt covenants, including a senior secured leverage ratio of 4.1 (required to be at or below 7.75).
• Debt Structure: The company holds significant long-term debt, including senior secured term loans and senior/subordinated extended loans/notes. Interest rates on senior debt range from approximately 11.0% to 12.5% depending on the tranche and PIK election status.
• Risks: Key risks include general economic downturns affecting customer IT spending, competitive pricing pressures, and potential changes in government spending policies impacting the Public segment. There is also a pending legal claim from investment banks regarding bridge loan interest, with a maximum potential exposure of approximately $80.6 million, which the company disputes.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the senior secured leverage ratio and fixed charge coverage ratios, especially given the high interest rate environment.
• Goodwill Valuation: Monitor the annual goodwill impairment test (conducted as of December 1) to ensure no further charges are required following the 2009 write-down.
• Interest Rate Hedging: Review the effectiveness of interest rate swaps and caps in managing the cost of floating-rate debt, noting the volatility in interest expense due to hedge ineffectiveness.
• Working Capital: Assess the cash conversion cycle (33 days as of Sep 30, 2010) and the impact of accounts receivable growth on liquidity.
• Legal Contingencies: Track the status of the $80.6 million potential claim from investment banks regarding bridge loan interest.