SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____________ TO _____________
Commission file number 0-21796
CDW Computer Centers, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. Milwaukee Ave. 60061
Vernon Hills, Illinois (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
_______________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------------- -----------------
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----------------- -----------------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 3, 2001, 88,034,304 common shares were issued
and 85,906,804 were outstanding.
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
-----------
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 1
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2001 and 2000 2
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 2001 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
2001 2000
---------- ----------
Assets
Current assets :
Cash and cash equivalents $ 44,257 $ 43,664
Marketable securities 235,275 158,957
Accounts receivable, net of allowance for doubtful
accounts of $8,750 and $7,000, respectively 315,610 337,424
Merchandise inventory 120,767 110,202
Miscellaneous receivables 10,709 13,442
Deferred income taxes 6,736 6,736
Prepaid expenses 3,000 3,458
Total current assets 736,354 673,883
Property and equipment, net 66,803 61,966
Investment in and advances to joint venture 7,965 5,804
Deferred income taxes and other assets 6,550 6,784
---------- ----------
Total assets $ 817,672 $ 748,437
========== ==========
Liabilities and Shareholders' Equity
Current liabilities :
Accounts payable $ 100,694 $ 56,081
Accrued expenses :
Compensation 27,111 26,645
Income taxes 16,475 17,868
Other 13,354 9,730
Exit costs 1,593 1,862
---------- ----------
Total current liabilities 159,227 112,186
---------- ----------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $0.01 par value; 500,000 shares
authorized; 87,895 and 87,465 shares
issued, respectively 879 875
Paid-in capital 199,118 185,054
Retained earnings 536,119 452,613
Unearned compensation (2,976) (202)
---------- ----------
733,140 638,340
Less cost of common shares in treasury,
2,128 shares and 200 shares, respectively (74,695) (2,089)
---------- ----------
Total shareholders' equity 658,445 636,251
---------- ----------
Total liabilities and shareholders' equity $ 817,672 $ 748,437
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------ ------------ ------------ ------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 995,045 $ 943,342 $ 1,982,290 $ 1,807,330
Cost of sales 862,422 821,121 1,719,548 1,575,896
------------ ------------ ------------ ------------
Gross profit 132,623 122,221 262,742 231,434
Selling and administrative expenses 62,532 53,444 126,375 101,657
Net advertising expense 1,592 4,463 4,405 8,615
------------ ------------ ------------ ------------
Income from operations 68,499 64,314 131,962 121,162
Interest income 3,119 2,165 6,943 3,920
Other expense, net (200) (172) (306) (347)
------------ ------------ ------------ ------------
Income before income taxes 71,418 66,307 138,599 124,735
Income tax provision 28,388 26,258 55,093 49,395
------------ ------------ ------------ ------------
Net income $ 43,030 $ 40,049 $ 83,506 $ 75,340
============ ============ ============ ============
Earnings per share
Basic $ 0.50 $ 0.46 $ 0.97 $ 0.87
============ ============ ============ ============
Diluted $ 0.48 $ 0.44 $ 0.94 $ 0.83
============ ============ ============ ============
Weighted average number of
common shares outstanding
Basic 85,598 86,951 85,896 86,763
============ ============ ============ ============
Diluted 88,889 91,154 88,989 90,312
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Shares Treasury Shares Total
------------------ Retained Unearned ---------------- Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Shares Amount Equity
---------------------------------------------------------------------------------------
Balance at December 31, 2000 87,465 $ 875 $ 185,054 $452,613 $ (202) 200 $(2,089) $ 636,251
MPK Restricted Stock Plan forfeitures (2) 2 -
Amortization of unearned compensation 887 887
Compensatory stock option grants 106 106
Compensatory restricted stock grants 100 1 3,662 (3,663) -
Exercise of stock options 330 3 3,071 3,074
Tax benefit from stock option and
restricted stock transactions 7,227 7,227
Purchase of treasury shares 1,928 (72,606) (72,606)
Net income 83,506 83,506
----------------------------------------------------------------------------------------
Balance at June 30, 2001 87,895 879 $ 199,118 $536,119 $ (2,976) 2,128 $(74,695) $ 658,445
========================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------------------
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net income $ 83,506 $ 75,340
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 7,079 4,529
Accretion of marketable securities (286) (1,495)
Stock-based compensation expense 993 149
Allowance for doubtful accounts 1,750 700
Deferred income taxes 380 1,020
Tax benefit from stock option and restricted stock transactions 7,227 63,072
Changes in assets and liabilities:
Accounts receivable 20,064 (75,256)
Miscellaneous receivables and other assets 2,627 (2,270)
Merchandise inventory (10,565) (26,532)
Prepaid expenses 312 (851)
Prepaid income taxes - (16,386)
Accounts payable 44,613 57,434
Accrued compensation 466 1,734
Accrued income taxes and other expenses 2,231 (10,932)
Accrued exit costs (269) (83)
---------------- ----------------
Net cash provided by operating activities 160,128 70,173
---------------- ----------------
Cash flows from investing activities:
Purchases of available-for-sale securities (943,440) (26,610)
Redemptions of available-for-sale securities 799,180 29,900
Purchases of held-to-maturity securities - (91,237)
Redemptions of held-to-maturity securities 68,228 48,991
Investment in and advances to joint venture (11,929) (9,460)
Repayment of advances from joint venture 9,874 3,300
Purchase of property and equipment (11,916) (10,608)
---------------- ----------------
Net cash used in investing activities (90,003) (55,724)
---------------- ----------------
Cash flows from financing activities:
Purchase of treasury shares (72,606) -
Proceeds from exercise of stock options 3,074 6,792
---------------- ----------------
Net cash (used in) /provided by financing activities (69,532) 6,792
---------------- ----------------
Net increase in cash 593 21,241
Cash and cash equivalents - beginning of period 43,664 19,747
---------------- ----------------
Cash and cash equivalents - end of period $ 44,257 $ 40,988
================ ================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the sale of multi-brand computers and related
technology products primarily through direct marketing to end users within the
United States. The Company's primary business is conducted from a corporate
office, distribution center and showroom facility located in Vernon Hills,
Illinois and through www.cdw.com, its Internet site. The Company also operates
sales offices in Buffalo Grove, Mettawa and Chicago, Illinois, a retail showroom
in Chicago, Illinois and a government sales office in Lansdowne, Virginia.
The Company extends credit to business, government, education and
institutional customers under certain circumstances based upon the financial
strength of the customer. Such customers are typically granted net 30 day credit
terms. The balance of the Company's sales are made to customers using third
party credit cards and for cash-on-delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States. Such principles were applied on a basis consistent with those
reflected in the 2000 Annual Report on Form 10-K and documents incorporated
therein as filed with the Securities and Exchange Commission. The accompanying
financial data should be read in conjunction with the notes to consolidated
financial statements contained in the 2000 Annual Report on Form 10-K and
documents incorporated therein. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting solely of normal recurring accruals) necessary to present fairly the
financial position of the Company as of June 30, 2001 and December 31, 2000, the
results of operations for the three and six months ended June 30, 2001 and 2000,
the changes in shareholders' equity for the six months ended June 30, 2001 and
cash flows for the six months ended June 30, 2001 and 2000. The unaudited
condensed consolidated statements of income for such interim periods are not
necessarily indicative of results for the full year.
The Company has adopted Statements of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", and has
determined that the Statement had no, nor will have any, significant impact on
its financial statements for the three and six months ended June 30, 2001 or for
the year ended December 31, 2001.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings Per Share
A reconciliation of basic and diluted earnings per share computations in
accordance with Financial Accounting Standards No. 128, "Earnings Per Share",
(SFAS 128) is included in Note 5 to the financial statements.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at June 30, 2001, were (in thousands):
Gross
Unrealized
Holding
Estimated ------------------------ Amortized
Fair Value Gains (Losses) Cost
------------- ----------- ----------- -------------
Security Type
Available-for-sale:
U.S. Government and Government Agency $ 231,277 $ 2 $ - $ 231,275
Securities
------------- ----------- ----------- -------------
Total available-for-sale 231,277 2 - 231,275
------------- ----------- ----------- -------------
Held to maturity:
U.S. Government and Government Agency 4,000 - - 4,000
Securities
------------- ----------- ----------- -------------
Total held-to-maturity 4,000 - - 4,000
------------- ----------- ----------- -------------
Total marketable securities $ 235,277 $ 2 $ - $ 235,275
============= =========== =========== =============
Estimated fair values of marketable securities are based on quoted market
prices. The amortized cost and estimated fair value of the Company's investments
in marketable securities at June 30, 2001 by contractual maturity were (in
thousands):
Estimated Amortized
Fair Value Cost
--------------- ---------------
Due in one year or less $ 228,295 $ 228,268
Due in greater than one year 6,982 7,007
--------------- ---------------
Total investments in marketable securities $ 235,277 $ 235,275
=============== ===============
All of the marketable securities that were due in greater than one year have
maturity dates prior to July 31, 2002.
4. Financing Arrangements
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions. One line of
credit expires in June 2002, at which time the Company intends to renew the
line, and the other does not have a fixed expiration date. Borrowings under the
first credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus
1/2% or the federal funds rate plus 1/2%, as determined by the Company.
Borrowings under the second credit facility bear interest at the prime rate less
2 1/2%, LIBOR plus .45% or the federal funds rate plus .45%, as determined by
the Company. At June 30, 2001, there were no borrowings under either of the
credit facilities.
The Company has entered into security agreements with certain financial
institutions ("Flooring Companies") in order to facilitate the purchase of
inventory from various suppliers under certain terms and conditions. The
agreements allow for a maximum credit line of $89.0 million as of June 30, 2001,
collateralized by inventory purchases financed by the Flooring Companies. At
June 30, 2001, all amounts owed the Flooring Companies are included in trade
accounts payable.
5. Earnings Per Share
At June 30, 2001, the Company had outstanding common shares totaling
approximately 85,768,000. The Company has also granted options to purchase
common shares to the directors and coworkers of the Company under several stock
option plans. These options have a dilutive effect on the calculation of
earnings per share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations as
required by SFAS 128.
Three Months Ended Six Months Ended
June 30, June 30,
(in 000's except per (in 000's except per
share data) share data)
------------------------- ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Basic earnings per share:
Income available to
common shareholders (numerator) $ 43,030 $ 40,049 $ 83,506 $ 75,340
--------- --------- --------- ---------
Weighted average common
shares outstanding (denominator) 85,598 86,951 85,896 86,763
--------- --------- --------- ---------
Basic earnings per share $ 0.50 $ 0.46 $ 0.97 $ 0.87
========= ========= ========= =========
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 43,030 $ 40,049 $ 83,506 $ 75,340
--------- --------- --------- ---------
Weighted average common
shares outstanding 85,598 86,951 85,896 86,763
Effect of dilutive securities:
Options on common stock 3,291 4,203 3,093 3,549
--------- --------- --------- ---------
Total common shares and dilutive
securities (denominator) 88,889 91,154 88,989 90,312
--------- --------- --------- ---------
Diluted earnings per share $ 0.48 $ 0.44 $ 0.94 $ 0.83
========= ========= ========= =========
Additional options to purchase common shares were outstanding during the
three and six months ended June 30, 2001 but were not included in the
computation of diluted earnings per share as the exercise price of these options
was greater than the average market price of common shares during the respective
periods. The following table summarizes the weighted average number of options
outstanding and the weighted average exercise price of those options which were
excluded from the calculation:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
---------------- ----------------
Weighted average number of options 1,538,556 1,549,329
Weighed average exercise price $40.13 $40.02
The options were all outstanding at June 30, 2001.
6. Share Repurchase Program
In January 2001, the Company's Board of Directors authorized the purchase
of up to 5 million shares of its common stock, slightly more than 5% of its
total outstanding shares, from time to time in both open market and private
transactions, as conditions warrant. The repurchase program is expected to
remain effective for approximately twenty-four months, unless sooner completed
or terminated by the Board of Directors. The Company intends to hold the
repurchased shares in treasury for general corporate purposes, including
issuances under various employee stock option plans. In connection with the
program the Company purchased 1,927,500 shares of its common stock during the
six months ended June 30, 2001, at a total cost of approximately $72.6 million.
These repurchases included 1.5 million shares repurchased on February 2, 2001,
at a total cost of $57.6 million ($38.423 per share) from Gregory C. Zeman, Vice
Chairman and Director, and Daniel B. Kass, Executive Vice President - Sales and
Director.
7. Public Offering of Common Shares
On June 26, 2001, the Company filed a registration on Form S-3 for the sale
in a proposed underwritten public offering of 8,750,000 shares of common stock
by Michael P. Krasny, the Chairman Emeritus, principal shareholder and a
Director of the Company, Gregory C. Zeman, the Vice Chairman and a Director of
the Company and Daniel B. Kass, the Executive Vice President - Sales and a
Director of the Company, including approximately 6.3 million shares to be sold
by Mr. Krasny and entities related to him. The Company filed an amendment to
such registration statement on July 20, 2001. Mr. Krasny and Mr. Zeman intend
also to provide an over-allotment option to the underwriters for a total of an
additional 1,312,500 common shares. The Company will not receive any proceeds
from the sale of the shares and the number of outstanding common shares will not
be impacted. The shares to be sold by Mr. Zeman and Mr. Kass will be obtained
from Mr. Krasny through the exercise of options pursuant to the MPK Stock Option
Plan. Assuming a sale price of $40.00 per share, the sale of shares by Mr. Zeman
and Mr. Kass will result in the realization by the Company in the period the
sale is completed of an income tax benefit of approximately $38.5 million, of
which approximately $500,000 was previously recorded to deferred taxes. The
incremental tax benefit of $38.0 million will be recorded as an increase to
paid-in-capital. Additionally, the Company will record incremental payroll tax
expense of approximately $1.4 million, which will reduce diluted earnings per
share in the period in which the offering is completed by approximately $0.01
per share.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the notes thereto
included elsewhere herein.
Results of Operations
The following table sets forth financial information derived from the
Company's statements of income expressed as a percentage of net sales:
Percentage of Net Sales
Financial Information ------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 86.7 87.0 86.7 87.2
----------- ----------- ----------- -----------
Gross profit 13.3 13.0 13.3 12.8
Selling and administrative expenses 6.2 5.7 6.4 5.6
Net advertising expense 0.2 0.5 0.2 0.5
----------- ----------- ----------- -----------
Income from operations 6.9 6.8 6.7 6.7
Interest and other income 0.3 0.2 0.3 0.2
----------- ----------- ----------- -----------
Income before income taxes 7.2 7.0 7.0 6.9
Income tax provision 2.9 2.8 2.8 2.7
----------- ----------- ----------- -----------
Net income 4.3 % 4.2 % 4.2 % 4.2 %
=========== =========== =========== ===========
The following table sets forth for the periods indicated a summary of
certain of the Company's operating statistics:
Operating Statistics Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Number of invoices processed 1,062,782 925,474 2,154,572 1,845,557
Average invoice size $997 $1,065 $976 $1,026
Number of account managers, end of period 1,179 853
Commercial customers served (1) 164,135 135,309 237,705 203,260
Commercial customers served - trailing 12 months 334,281 300,226
% of sales to commercial customers 97% 96% 97% 96%
Annualized inventory turnover 25.2 22.9 29.8 22.6
Accounts receivable days sales outstanding 28.9 29.4 28.8 30.7
Net sales per coworker (000's) (2) $ 1,473 $ 1,648 $ 1,448 $ 1,629
Direct web sales (000's) $152,832 $98,438 $303,416 $170,853
Average daily unique web site users 81,135 76,289 93,012 86,782
<FN>
(1) Commercial customers include business, government, education and institutional customers.
(2) Net sales per coworker is equal to annualized net sales divided by average number of coworkers in the period.
</FN>
The following table presents net sales by product category as a percentage
of total net sales. Product lines are based upon internal product code
classifications. Product mix for the three and six months ended June 30, 2000
has been retroactively adjusted for certain changes in individual product
categorization.
Three Months Ended Six Months Ended
June 30, June 30,
Analysis of Product Mix -------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Notebook Computers and Accessories 14.6 % 19.0 % 15.0 % 20.2 %
Desktop Computers and Servers 13.3 16.3 13.7 16.0
--------- --------- --------- ---------
Subtotal Computer Products 27.9 35.3 28.7 36.2
--------- --------- --------- ---------
Software 17.5 12.2 16.5 11.9
Data Storage Devices 14.4 14.0 14.4 13.8
Printers 12.5 11.1 12.7 11.2
Net/Comm Products 9.6 9.2 9.5 9.0
Video 8.5 7.6 8.3 7.5
Add-On Boards/Memory 4.5 6.1 4.8 5.9
Input Devices 2.9 2.5 2.8 2.4
Accessories and Other 2.2 2.0 2.3 2.1
--------- --------- --------- ---------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========= =========
The following table represents year-over-year sales growth by product
categories for each of the periods indicated. Product lines are based upon
internal product code classifications. Product growth rates for the three and
six months ended June 30, 2000 have been retroactively adjusted for certain
changes in individual product categorization.
Three Months Ended Six Months Ended
Analysis of Product June 30, June 30,
Category Growth -------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Notebook Computers and Accessories (19.2)% 57.1 % (18.9) % 72.9 %
Desktop Computers and Servers (13.7) 58.2 (6.6) 53.6
--------- --------- --------- ---------
Subtotal Computer Products (16.7) 57.6 (13.4) 63.8
--------- --------- --------- ---------
Software 51.7 39.2 52.3 40.8
Data Storage Devices 9.2 62.0 13.8 60.5
Printers 19.2 39.4 24.4 37.3
Net/Comm Products 9.4 75.6 15.5 74.1
Video 18.3 63.7 20.0 70.5
Add-On Boards/Memory (22.2) 110.5 (12.1) 103.6
Input Devices 26.0 49.2 26.3 53.1
Accessories and Other 6.7 79.5 66.8 18.4
--------- --------- --------- ---------
Total 5.5 % 57.9 % 9.7 % 59.0 %
========= ========= ========= =========
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Net sales in the second quarter of 2001 increased 5.5% to $995.0 million
compared to $943.3 million in the second quarter of 2000. The Company was able
to achieve growth by increasing the number of commercial customers served and
leveraging the diversity of its product mix, despite a difficult economic
environment and decreased levels of IT spending by customers.
The number of commercial customers served increased 21.3% to 164,135 in the
second quarter of 2001 from 135,309 in the second quarter of 2000. Net sales to
the Company's commercial customers increased 6.1% during the quarter while sales
to consumers decreased 11.2% from the second quarter of 2000. Sales to
commercial accounts, including business, government, education and institutional
customers, increased to 96.9% of net sales in the second quarter of 2001 from
96.3% in the second quarter of 2000, consistent with the Company's focus on
growing in the business-to-business marketplace. The Company experienced a
positive growth rate in sales to government and education customers for the
second quarter, and a slight decline in sales to business customers.
The average selling price of desktop computers decreased 16.2%, server
computers decreased 22.5% and notebook computers decreased 11.2% from the second
quarter of 2000. The Company believes there may be future decreases in prices
for personal computers and related products. Such decreases require the Company
to sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected by
future manufacturer price reductions or if the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft, Sony and Toshiba products comprise a substantial
portion of the Company's sales. The loss of any of these, or any other key
vendors, could have an adverse effect on the Company's results from operations.
The statements concerning future prices, sales and results from operations are
forward-looking statements that involve certain risks and uncertainties such as
stated above.
Software sales were strong during the quarter with sales increasing 51.7%
over second quarter 2000, due to strength in volume software licensing driven in
part by the anti-piracy efforts of some software manufacturers. Demand for
certain products and the growth of certain product categories are driven by
advances in technology and the development of new products and applications by
the industry manufacturers, and acceptance of these new technologies and
products by end-users. Any slowdown in the rate of technological advancement and
new product development by industry manufacturers, or the lack of acceptance of
these technologies and products by end users, could have a material adverse
effect on the Company's future sales growth.
The Company relies primarily on its dedicated sales force to serve its
customers and also believes its Internet web site, www.cdw.com, is an integral
part of its business. Direct web sales are defined as those orders that are
entered directly on-line by customers after using the web site and/or talking
with a sales account manager to obtain product, pricing and other relevant
information. During the second quarter of 2001, direct web sales grew 55.3% to
$152.8 million from $98.4 million in the same period of 2000. The number of
average daily unique web site users grew 6.4% to 81,135 in the second quarter of
2001 from 76,289 in the same period of 2000.
Gross profit as a percentage of net sales for the three months ended June
30, 2001 increased to 13.3% as compared to 13.0% in the second quarter of 2000.
The increase in gross margin as a percentage of sales versus the second quarter
of 2000 is primarily due to product mix, vendor incentives and the impact of
service contract revenue, partially offset by decreases in margin due to pricing
pressure in certain product categories. On a forward-looking basis, the
Company's goal is to maintain gross profit as a percentage of net sales between
12.5% and 13.0%. The statement concerning future gross profit is a
forward-looking statement that involves certain risks and uncertainties such as
the continued participation by vendors in inventory price protection and rebate
programs, product mix, market conditions, aggressive competitor pricing and
other factors which could result in a fluctuation of gross margins below recent
experience. Price protection and rebate programs are at the discretion of the
manufacturers, who may make changes that limit the amount of price protection or
rebates for which the Company is eligible. Additionally, vendor rebate programs
are generally dependent on achieving certain goals and objectives and there is
no certainty that the established goals and objectives will be attained.
Selling and administrative expenses increased to 6.2% of net sales in the
three months ended June 30, 2001 from 5.7% in the same period of 2000. The
increase is primarily the result of increased payroll and occupancy costs as a
percentage of net sales. Occupancy expense, including rent and depreciation,
increased approximately $3.0 million versus the second quarter of 2000 as a
result of our facility expansions. The Company does not plan for any significant
incremental occupancy costs for the remainder of the year versus the level
incurred in the second quarter. The Company's salesforce increased to
approximately 1,179 account managers at June 30, 2001, a 38% increase from the
second quarter of 2000. Productivity per account manager decreased 24.9% from
the second quarter of 2000 due to slowing economic conditions, reduced IT
spending by customers and the higher number of account managers. The Company is
currently hiring account managers primarily for the purpose of maintaining the
number at current levels and will adjust hiring goals as business conditions
dictate.
Net advertising expense decreased as a percentage of net sales to 0.2% for
the three months ended June 30, 2001 from 0.5% in the same quarter of the prior
year. Gross advertising expense decreased $930,000 to 2.2% of net sales, a
decrease from 2.4% of net sales in the second quarter of 2000. Based upon the
Company's planned marketing initiatives, future levels of gross advertising
expense as a percentage of net sales are likely to be relatively consistent with
or higher than the level achieved in the second quarter of 2001. Cooperative
advertising reimbursements were 2.0% of net sales in the second quarter of 2001,
slightly higher than the second quarter of 2000. Cooperative advertising
reimbursements as a percentage of net sales fluctuate based on the level of
vendor participation achieved and collection experience. The statements
concerning future advertising expense and cooperative advertising reimbursements
are forward-looking statements that involve certain risks and uncertainties,
including the ability to identify and implement cost-effective incremental
advertising and marketing programs, as well as the continued participation of
vendors in the cooperative advertising reimbursement program.
Interest income, net of other expenses, increased to $2.9 million in the
second quarter of 2001 compared to $2.0 million in the second quarter of 2000
due to higher levels of cash available for investment offsetting a decrease in
the average rate of interest earned.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.75% for the three months ended June 30, 2001, an increase
from 39.60% for the second quarter of 2000.
Net income in the second quarter of 2001 was $43.0 million, a 7.4% increase
over $40.0 million in the second quarter of 2000. Diluted earnings per share
were $0.48 for the three months ended June 30, 2001 and $0.44 in the same period
of 2000, an increase of 9.1%.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Net sales in the first six months of 2001 increased 9.7% to $1.98 billion
compared to $1.81 billion in the same period of 2000. The Company was able to
achieve growth by increasing the number of commercial customers served and
leveraging the diversity of its product mix, despite a difficult economic
environment and decreased levels of IT spending by customers.
The number of commercial customers served increased 17.0% to 237,705 in the
first six months of 2001 from 203,260 in the first six months of 2000. Net sales
to commercial customers increased 11.1% during the first six months while sales
to consumers decreased 19.5% from the first six months of 2000. Sales to
commercial accounts, including business, government, education and institutional
customers, increased to 96.7% of net sales in the first six months of 2001 from
95.5% in the first six months of 2000, consistent with the Company's focus on
growing in the business-to-business marketplace. Sales to government and
education customers grew at a higher rate for the six months ended June 30, 2001
than sales to business customers.
The average selling price of desktop computers decreased 14.1%, server
computers decreased 18.1% and notebook computers decreased 9.8% from the first
six months of 2000. The Company believes there may be future decreases in prices
for personal computers and related products. Such decreases require the Company
to sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected by
future manufacturer price reductions or if the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft, Sony and Toshiba products comprise a substantial
portion of the Company's sales. The loss of any of these, or any other key
vendors, could have an adverse effect on the Company's results from operations.
The statements concerning future prices, sales and results from operations are
forward-looking statements that involve certain risks and uncertainties such as
stated above.
Software sales were strong during the six months ended June 30, 2001 with
sales increasing 52.3% over the first six months of 2000, due to strength in
volume software licensing driven in part by the anti-piracy efforts of some
software manufacturers. Demand for certain products and the growth of certain
product categories are driven by advances in technology and the development of
new products and applications by the industry manufacturers, and acceptance of
these new technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers,
or the lack of acceptance of these technologies and products by end-users, could
have a material adverse effect on the Company's future sales growth.
The Company relies primarily on its dedicated sales force to serve its
customers and also believes its Internet web site, www.cdw.com, is an integral
part of its business. Direct web sales are defined as those orders that are
entered directly on-line by customers after using the web site and/or talking
with a sales account manager to obtain product, pricing and other relevant
information. During the first six months of 2001, direct web sales grew 77.6% to
$303.4 million from $170.9 million in the same period of 2000. The number of
average daily unique web site users grew 7.2% to 93,012 in the six months ended
June 30, 2001 from 86,782 in the same period of 2000.
Gross profit as a percentage of net sales for the six months ended June 30,
2001 increased to 13.3% as compared to 12.8% same period in 2000. The increase
in gross margin as a percentage of sales versus the first six months of 2000 is
primarily due to product mix, vendor incentives and the impact of service
contract revenue, partially offset by decreases in margin due to pricing
pressure in certain product categories. On a forward-looking basis, the
Company's goal is to maintain gross profit as a percentage of net sales between
12.5% and 13.0%. The statement concerning future gross profit is a
forward-looking statement that involves certain risks and uncertainties such as
the continued participation by vendors in inventory price protection and rebate
programs, product mix, market conditions, aggressive competitor pricing and
other factors which could result in a fluctuation of gross margins below recent
experience. Price protection and rebate programs are at the discretion of the
manufacturers, who may make changes that limit the amount of price protection or
rebates for which the Company is eligible. Additionally, vendor rebate programs
are generally dependent on achieving certain goals and objectives and there is
no certainty that the established goals and objectives will be attained.
Selling and administrative expenses increased to 6.4% of net sales in the
six months ended June 30, 2001 from 5.6% in the same period of 2000. The
increase is primarily the result of increased payroll and occupancy costs as a
percentage of net sales. Occupancy expense, including rent and depreciation,
increased approximately $5.8 million versus the first six months of 2000 as a
result of our facility expansions. The Company's salesforce increased to
approximately 1,179 account managers at June 30, 2001, representing a 38%
increase from June 30, 2000. Productivity per account manager decreased 22.9%
from the first six months of 2000 due to slowing economic conditions, reduced IT
spending by customers and the higher number of account managers.
Net advertising expense decreased as a percentage of net sales to 0.2% for
the six months ended June 30, 2001 from 0.5% in the first six months of the
prior year. Gross advertising expense increased $380,000 but decreased as a
percentage of sales to 2.2% from 2.4% of net sales in the first six months of
2000. Based upon the Company's planned marketing initiatives, future levels of
gross advertising expense as a percentage of net sales are likely to be
relatively consistent with or higher than the level achieved in the first six
months of 2001. Cooperative advertising reimbursements were 2.0% of net sales in
the first six months of 2001, slightly higher than the first six months of 2000.
Cooperative advertising reimbursements as a percentage of net sales fluctuate
based on the level of vendor participation achieved and collection experience.
The statements concerning future advertising expense and cooperative advertising
reimbursements are forward-looking statements that involve certain risks and
uncertainties, including the ability to identify and implement cost-effective
incremental advertising and marketing programs, as well as the continued
participation of vendors in the cooperative advertising reimbursement program.
Interest income, net of other expenses, increased to $6.6 million in the
first six months of 2001 compared to $3.6 million in the first six months of
2000 due to higher levels of cash available for investment offsetting the
decrease in the average rate of interest earned.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.75% for the six months ended June 30, 2001, an increase
from 39.60% for the first six months of 2000.
Net income in the first six months of 2001 was $83.5 million, a 10.9%
increase over $75.3 million in the first six months of 2000. Diluted earnings
per share were $0.94 for the six months ended June 30, 2001 and $0.83 in the
same period of 2000, an increase of 13.3%.
Seasonality
Although the Company has experienced variability in the rates of sales
growth, it has not historically experienced significant seasonality in its
business. Sales to government customers in recent periods have increased at a
higher rate than sales to other customer types. Further, the buying patterns of
government customers typically result in seasonally higher revenues during the
third quarter of the year. If sales to these customers continue to increase as a
percentage of overall sales, the Company may experience increased seasonality.
Liquidity and Capital Resources
Working Capital
The Company has financed its operations and capital expenditures primarily
through cash flow from operations. At June 30, 2001, the Company had cash, cash
equivalents and marketable securities of $279.5 million and working capital of
$577.1 million, representing an increase of $76.9 million in cash, cash
equivalents and marketable securities and an increase of $15.4 million in
working capital from December 31, 2000.
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions. One line of
credit expires in June 2002, at which time the Company intends to renew the
line, and the other does not have a fixed expiration date. Borrowings under the
first credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus
1/2% or the federal funds rate plus 1/2%, as determined by the Company.
Borrowings under the second credit facility bear interest at the prime rate less
2 1/2%, LIBOR plus .45% or the federal funds rate plus .45%, as determined by
the Company. At June 30, 2001, there were no borrowings under either of the
credit facilities.
The Company's current and anticipated uses of its cash, cash equivalents
and marketable securities are to fund working capital requirements, capital
expenditures and the stock buyback program discussed below. The Company
anticipates additional capital expenditures related primarily to facility
expansions through December 31, 2001 to total approximately $4 million. The
Company believes that the funds held in cash, cash equivalents and marketable
securities, and funds available under the credit facilities will be sufficient
to fund the Company's working capital and cash requirements at least through
June 30, 2002.
In January 2001, the Company's Board of Directors authorized the purchase
of up to 5 million shares of the Company's common stock, slightly more than 5%
of its total outstanding shares, from time to time in both open market and
private transactions, as conditions warrant. In connection with the program the
Company purchased approximately 1,927,500 shares of its common stock during the
six months ended June 30, 2001, at a total cost of approximately $72.6 million.
These repurchases included 1.5 million shares repurchased on February 2, 2001,
at a total cost of $57.6 million ($38.423 per share) from Gregory C. Zeman, Vice
Chairman and Director, and Daniel B. Kass, Executive Vice President - Sales and
Director.
Cash flows for the six months ended June 30, 2001
Net cash provided by operating activities for the six months ended June 30,
2001 was $160.1 million and relates primarily to net income combined with an
increase in accounts payable and a decrease in accounts receivable partially
offset by an increase in merchandise inventory. The decline in accounts
receivable relates to a reduction in days sales outstanding. Days sales
outstanding for the six months ended June 30, 2001 was 28.8 as compared to 30.7
for the six months ended June 30, 2000. Accounts payable increased primarily due
to the timing of payments to vendors at the end of the respective periods.
Inventory increased during the six month period, partially due to higher levels
of inventory in-transit. Annualized inventory turnover of 29.8 times for the six
months ended June 30, 2001 has increased from the annualized inventory turnover
of 22.6 times for the six months ended June 30, 2000.
Net cash used for investing activities for the six months ended June 30,
2001 was $ 90.0 million, including $76.0 million for purchases of marketable
securities and $11.9 million for capital expenditures. At June 30, 2001, the
Company has an $8.0 million net investment in and loan to CDW Leasing, LLC
("CDW-L"), a 50/50 joint venture with First Portland Corporation. The Company
advanced approximately $12.0 million to CDW-L during the six months ended June
30, 2001 which was offset by repayments of approximately $9.9 million. The
Company is committed to loan up to $10.0 million to CDW-L to fund new leases
initiated by CDW-L. The terms of the loan provide for monthly interest payments
to the Company based on the 90 day LIBOR rate plus 2.2%.
On June 26, 2001, the Company filed a registration on Form S-3 for the sale
in a proposed underwritten public offering of 8,750,000 shares of common stock
by Michael P. Krasny, the Chairman Emeritus, principal shareholder and a
Director of the Company, Gregory C. Zeman, the Vice Chairman and a Director of
the Company and Daniel B. Kass, the Executive Vice President - Sales and a
Director of the Company, including approximately 6.3 million shares to be sold
by Mr. Krasny and entities related to him. The Company filed an amendment to
such registration statement on July 20, 2001. Mr. Krasny and Mr. Zeman intend
also to provide an over-allotment option to the underwriters for a total of an
additional 1,312,500 common shares. The Company will not receive any proceeds
from the sale of the shares and the number of outstanding common shares will not
be impacted. The shares to be sold by Mr. Zeman and Mr. Kass will be obtained
from Mr. Krasny through the exercise of options pursuant to the MPK Stock Option
Plan. Assuming a sale price of $40.00 per share, the sale of shares by Mr. Zeman
and Mr. Kass will result in the realization by the Company in the period the
sale is completed of an income tax benefit of approximately $38.5 million, of
which approximately $500,000 was previously recorded to deferred taxes. The
incremental tax benefit of $38.0 million will be recorded as an increase to
paid-in-capital. Additionally, the Company will record incremental payroll tax
expense of approximately $1.4 million, which will reduce diluted earnings per
share in the period in which the offering is completed by approximately $0.01
per share.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense and
cooperative advertising reimbursements are forward-looking statements that
involve certain risks and uncertainties, as specified herein and in the
Company's Amendment No. 1 to the Form S-3 Registration Statement filed with the
Securities and Exchange Commission on July 20, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change from the information provided in
Item 7a of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
Part II Other Information
Item 1. Legal Proceedings
The Company is currently not a party to any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of Shareholders
on May 23, 2001.
(b) Two matters were voted upon and approved by the Shareholders. The
presentation below briefly describes the matters voted upon and
results of Shareholders' votes.
1. Election of Directors
Votes For Votes Withheld Non-Votes
By Nominee
- Michael P. Krasny 81,872,142 267,284 -
- John A. Edwardson 81,872,142 267,284 -
- Gregory C. Zeman 81,872,142 267,284 -
- Daniel B. Kass 81,872,142 267,284 -
- Michelle L. Collins 81,872,142 267,284 -
- Casey G. Cowell 81,872,142 267,284 -
- Donald P. Jacobs 81,790,261 349,165 -
- Terry L. Lengfelder 81,872,142 267,284 -
- Brian E. Williams 81,872,142 267,284 -
2. Ratification of Selection of Independent Accountants
The selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 2001.
Votes For Votes Against Abstentions Non-Votes
81,668,950 454,733 15,743 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 (oo) Revolving Note between the Company and LaSalle
National Bank dated June 28, 2001
10 (pp) Second Lease Amendment dated April 15, 2001
between the Company as Lessee and IJM Management
Limited Partnership as Lessor relating to the
retail sales space located at 317 West Grand
Avenue, Chicago, Illinois
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on July 20, 2001 in
conjunction with the release of earnings for the quarter ended
June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CDW Computer Centers, Inc.
(Registrant)
Date August 3, 2001 /s/ Harry J. Harczak, Jr.
--------------------- -------------------------
Harry J. Harczak, Jr.
Executive Vice President Corporate
Strategy and Chief Financial Officer
(Duly authorized officer and
principal financial officer)