CDW 2006 Annual Report Download - page 26

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our Consolidated Financial Statements and the Notes thereto.
Overview
CDW Corporation (collectively with its subsidiaries, “CDW” or the “Company”) is a leading
provider of multi-branded information technology products and services in the United States and
Canada. We focus on meeting the technology needs of our customers in business, government, and
education through our extensive offering of products from leading brands and a variety of value-
added services.
For financial reporting purposes, we have three operating segments: corporate sector, which is
primarily comprised of business customers; public sector, which is comprised of federal, state and
local government entities, educational institutions, and healthcare institutions; and Berbee, a new
segment as a result of our acquisition of Berbee Information Networks Corporation (“Berbee”) in
October 2006, which provides advanced information technology solutions. See Note 16 to the
Consolidated Financial Statements for more information on our operating segments.
CDW management monitors a number of financial and non-financial measures and ratios on a
daily, weekly, and monthly basis in order to track the progress of the business and make adjustments
as necessary. We believe that the most important of these measures and ratios include daily sales,
by business segment and total company, gross margin, number of orders shipped per day, number of
orders shipped complete per day, inventory balance, aging, and turnover, cash, cash equivalents,
and marketable securities balance, accounts receivable balance and aging, accounts receivable days
sales outstanding, operating expenses, and operating margin. We also monitor certain measures
and ratios specifically for the Berbee operating segment, such as realized bill rates, utilization of
engineers and consultants, and employee turnover. The measures and ratios are compared to
standards or objectives set by management, so that actions can be taken, as necessary, in order to
achieve the standards and objectives.
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make use of certain estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the reported amounts of revenue
and expenses during the reported periods. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those estimates, and revisions to
estimates are included in our results for the period in which the actual amounts become known. The
estimates and assumptions used in accounting for revenue recognition, inventory valuation and
vendor transactions have the most significant impact on our consolidated financial statements, and
therefore, are considered to be our critical accounting policies. The following discussion details the
estimates and assumptions associated with these policies.
Revenue recognition. We record revenue from sales transactions when both risk of loss and title
to products sold pass to the customer. Our shipping terms dictate that the passage of title occurs
upon receipt of products by the customer. The majority of our revenue relates to physical products
and are recognized on a gross basis with the selling price to the customer recorded as net sales and
the acquisition cost of the product recorded as cost of sales. Software assurance products, third
party services and extended warranties that we sell (for which we are not the primary obligor) are
recognized on a net basis in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue
Recognition” and Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal
versus Net as an Agent.” Accordingly, such revenue is recognized in net sales either at the time of