CDW

CDW Corp. 2010 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: CDW Corporation (CDW)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: CDW is a leading multi-brand technology solutions provider serving business, government, education, and healthcare customers in the U.S. and Canada. The company operates through two reportable segments: Corporate (small and medium businesses) and Public (government, education, and healthcare). It also maintains an "Other" segment comprising CDW Advanced Services and Canada operations.
Ownership: As of the filing date, CDW was a privately held company owned by CDW Holdings LLC, controlled by equity sponsors Madison Dearborn Partners and Providence Equity Partners.

Key Financial Metrics (Year Ended Dec 31, 2010)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 22.9% to $8.8 billion, driven by a rebound in the Corporate segment (+26.6%) and growth in the Public segment (+17.3%). The Corporate segment recovery was attributed to the end of the economic downturn.
• Profitability Improvement: Operating income swung from a $31.9 million loss in 2009 to a $352.7 million profit in 2010. This improvement was significantly aided by the absence of the $241.8 million goodwill impairment charge recorded in 2009.
• Net Loss Reduction: The net loss narrowed significantly to $29.2 million from $373.4 million, primarily due to higher operating income and lower interest expense.
• Debt Reduction: Total debt decreased by approximately $332 million. The company issued $500 million in Senior Secured Notes in December 2010 and used proceeds to repay $500 million of its Term Loan.
• Cash Flow: Operating cash flow surged to $426.9 million, a 332% increase from 2009, driven by improved working capital management and higher operating performance.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted a successful rebound in 2010 following the 2008-2009 economic downturn. The company emphasized its ability to grow market share and maintain cost discipline. Adjusted EBITDA grew 29.3% to $601.8 million.

Subsequent Events (Post-Dec 31, 2010):

• On February 22, 2011, CDW announced a cash tender offer to purchase its outstanding $1.2 billion Senior Unsecured Debt.
• On February 23, 2011, the company announced it was pursuing a repricing of its $1.15 billion Extended Term Loan to take advantage of lower interest rates.

Key Risks:

• Indebtedness: The company is highly leveraged with over $4.2 billion in debt. High debt levels restrict flexibility, increase vulnerability to economic downturns, and require significant cash flow for debt service.
• Vendor Dependence: CDW relies on vendor partners (e.g., HP, Microsoft, Cisco) for products and incentives. Sales of HP products alone comprised 24% of 2010 net sales.
• Economic Conditions: General economic weakness could reduce customer spending on technology and increase pricing pressure.
• Public Sector Spending: Sales to the federal government accounted for 11% of net sales; changes in government budgets could impact revenue.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the senior secured leverage ratio (reported as 3.9x, well below the 8.0x covenant limit) and the fixed charge coverage ratio.
• Goodwill Valuation: Confirm the methodology used for the annual goodwill impairment test, as the company recorded significant impairments in 2008 and 2009.
• Vendor Concentration: Assess the risk associated with Hewlett-Packard representing 24% of net sales and the top five distributors representing 36% of purchases.
• Interest Rate Exposure: Review the effectiveness of interest rate swaps and caps in hedging the $1.86 billion of variable rate debt.
• Subsequent Debt Restructuring: Monitor the outcome of the February 2011 tender offer and term loan repricing announced after the fiscal year-end.