CDW CORP Item 1A Risk Factors |
There are many factors that affect our business and the results of operations, some of which are beyond our control |
The following is a description of some important factors that may cause the actual results of operations in future periods to differ materially from those currently expected or desired |
Our sales and profitability may be affected by changes in the economic environment and other factors |
There are many factors which could affect our business, including: • the capital and technology spending patterns of existing and prospective customers; • general economic trends; • the addition of new customers and further penetration of our existing customer base; • the productivity and retention of our sales force; • the optimization of our product mix and pricing strategies; • the availability of products from our vendors; • the successful development of new technology and products by equipment manufacturers and software developers; and • new competitors and new forms of competition |
Our business depends on our vendor relationships and the availability of products |
We purchase products for resale from manufacturers, distributors and other sources, all of whom we consider our vendors |
During 2005, we purchased approximately 52prca of the products we sold directly from manufacturers and the remaining amount from distributors and other sources |
We are authorized by manufacturers to sell all or some of their products via direct marketing activities |
Our authorization with each manufacturer is subject to specific terms and conditions regarding such things as product return privileges, price protection policies, purchase discounts and vendor incentive programs, including purchase rebates, sales volume rebates and cooperative advertising reimbursements |
From time to time, vendors may terminate our right to sell some or all of their products or change these terms and conditions or reduce or discontinue the incentives that they offer us |
Any such termination or the implementation of such changes could have a negative impact on our operating income |
Additionally, some products are subject to manufacturer allocation, which limits the number of units of those products that are available to resellers, including us |
Sales of Cisco, Hewlett-Packard, IBM, Lenovo, Microsoft, Sony and Toshiba products comprise a substantial portion of our sales |
In 2005, sales of products manufactured by Hewlett-Packard represented approximately 28prca of our total sales and, therefore, we are dependent on the economic condition and product competitiveness of, and our business relationship with, this manufacturer in particular |
In addition, although we purchase from a diverse vendor base, in 2005, products we purchased from distributors Tech Data and Ingram Micro represented approximately 17prca and 15prca, respectively, of our total purchases |
The loss of, or change in business relationship with, any of these or any other key vendors, or the diminished availability of their products, could reduce the supply and increase the cost of products we sell and negatively impact our competitive position |
Additionally, the relocation of key distributors utilized in our purchasing model could adversely impact our results of operations |
Although to date mergers among manufacturers have not had an 7 _________________________________________________________________ [65]Table of Contents adverse impact on our business and results of operations, further consolidation could adversely impact us |
The success of our business depends on the continuing development, maintenance and operation of our information technology systems |
Our success is dependent on the accuracy, proper utilization and continuing development of our information technology systems, including our business application systems, Web servers and telephony system |
The quality and our utilization of the information generated by our information technology systems, and our success in implementing new systems and upgrades, affects, among other things, our ability to: • conduct business with our customers; • manage our inventory and accounts receivable; • purchase, sell, ship and invoice our products efficiently and on a timely basis; and • maintain our cost-efficient operating model |
The integrity of our information technology systems is vulnerable to certain forms of disaster including, but not limited to, natural disasters such as tornadoes |
While we have taken steps to protect our information technology systems from a variety of threats, including computer viruses and malicious hackers, there can be no guarantee that those steps will be effective |
Furthermore, although we have redundant systems at a separate location to back up our primary application systems, there can be no assurance that these redundant systems will operate properly if and when required |
Any disruption to or infiltration of our information technology systems could significantly harm our business and results of operations |
Our sales are dependent on the continued development of new technologies and products |
The market for information technology products and services has evolved as a result of the development of new technologies that are transformed by manufacturers into new products and applications |
We have been and will continue to be dependent on the development of new technologies and products by manufacturers, as well as the acceptance of those technologies and products by customers |
A decrease in the rate of development of new technologies and new products by manufacturers, or the lack of acceptance of those technologies and products by customers, could have an adverse effect on our business and results of operations |
We would be adversely affected if we are not able to expand or retain our sales force or if we are not able to maintain or increase their productivity |
Our statistics show that the level of sales achieved by our account managers increases with the number of years of experience they have with us |
Our rate of sales growth and our operating results would be negatively affected if we are unable to expand the size of our sales force, if the turnover rate of account managers increases from relatively constant historical levels or if the sales volumes achieved by our account managers do not increase with experience |
Substantial competition could reduce our market share and significantly harm our financial performance |
The market for information technology products and accessories is highly competitive |
Our competition includes: • national direct marketers, such as Insight Enterprises, PC Connection, PC Mall and Zones; • value-added resellers; • manufacturers, such as Dell, who sell directly to customers; • computer superstores, such as CompUSA; • government resellers, such as GTSI; • consumer electronic and office supply superstores, such as Best Buy, Circuit City, Office Depot, Office Max and Staples; • corporate resellers; and • Web resellers, such as Amazon |
Some of our hardware and software vendors, such as Apple, Hewlett-Packard, IBM, and Lenovo, have sold, and could intensify their efforts to sell, their products directly to customers |
In addition, some software manufacturers have developed, and may continue to develop, sales methods that directly provide customers with 8 _________________________________________________________________ [66]Table of Contents subscription-based software programs and packages |
If either of these trends becomes more prevalent, it could adversely affect our sales growth and profitability |
We believe that competition may increase in the future, which could require us to reduce prices, increase advertising expenditures or take other actions which may have an adverse effect on our operating results |
Some of our competitors have reduced their prices in an attempt to stimulate sales |
Decreasing prices of information technology products and accessories resulting from competition and technological changes require us to sell a greater number of products to achieve the same level of net sales and gross profit |
If this trend continues and we are unable to attract new customers and sell increased quantities of products, our sales growth and profitability could be adversely affected |
We are exposed to inventory risks |
We are exposed to inventory risks as a result of the rapid technological changes that affect the market and pricing for the products we sell |
We seek to minimize our inventory exposure through a variety of inventory management procedures and policies, including our rapid-turn inventory model, as well as vendor price protection and product return programs |
However, if we were unable to maintain our rapid-turn inventory model, if there were unforeseen product developments that created more rapid obsolescence or if vendors were to change their terms and conditions, our inventory risks could increase |
We also periodically take advantage of cost savings associated with certain opportunistic bulk inventory purchases offered by our vendors |
These bulk purchases could increase our exposure to inventory obsolescence |
Our future operating results may fluctuate significantly |
We may experience significant variations in our future quarterly results of operations |
These fluctuations may result from many factors, including the condition of the information technology industry in general, shifts in demand and pricing for hardware and software products and the introduction of new products or upgrades |
Our operating results are also highly dependent on our level of gross profit as a percentage of net sales |
Our gross profit percentage fluctuates due to numerous factors, some of which may be outside of our control |
These factors include: • our pricing strategies; • changes in product costs from vendors; • the availability of price protection, purchase discounts and incentive programs from vendors; • the availability of cooperative advertising funds from vendors, which are classified as a reduction of cost of sales; • the risk of some of the items in our inventory becoming obsolete; • the relative mix of products sold, and customers sold to, during the period; • general market and competitive conditions; and • increases in delivery costs that we cannot pass on to customers |
A natural disaster or other adverse occurrence at our primary facility could damage our business |
We operate our business from a primary facility in Vernon Hills, Illinois |
Although we have multiple sales office locations and a second distribution center in North Las Vegas, Nevada, substantially all of our corporate, warehouse and distribution functions are located at our Vernon Hills facility |
If the warehouse and distribution equipment at our Vernon Hills facility were to be seriously damaged by a natural disaster or other adverse occurrence, we could utilize third-party distributors to ship products to our customers |
However, this may not be sufficient to avoid interruptions in our service and may not enable us to meet all of the needs of our customers |
Additionally, this would cause us to incur incremental operating costs |
As a result, a natural disaster or other adverse occurrence at our primary facility in Vernon Hills could negatively impact our business and profitability |
We are heavily dependent on commercial delivery services |
We generally ship our products to customers by AIT, DHL, Eagle, FedEx, United Parcel Service and other commercial delivery services and invoice customers for delivery charges |
If we are unable to pass on to our customers future increases in the cost of commercial delivery services, our profitability could be adversely affected |
Additionally, strikes or other service interruptions by such shippers could adversely affect our ability to deliver products on a timely basis |
9 _________________________________________________________________ [67]Table of Contents Our earnings and growth rate could be adversely affected by changes in general economic conditions and uncertain geopolitical conditions |
Weak general economic conditions, along with uncertainties in geopolitical conditions, could adversely impact our revenue and growth rate |
In addition, our revenue, gross margin and earnings could deteriorate in the future as a result of unfavorable economic or political conditions |
We could be exposed to additional risks if we make acquisitions or alliances |
We may pursue transactions, including acquisitions or alliances, to extend or complement our existing business |
These types of transactions involve numerous risks, including investor acceptance, finding suitable transaction partners and negotiating terms that are acceptable to us, the diversion of management’s attention from other business concerns, entering product or geographic markets in which we have limited experience, the potential loss of key coworkers or business relationships and successfully integrating acquired businesses, any of which could adversely affect our operations or the price of our stock |
The failure to comply with our public sector contracts could result in, among other things, fines or other liabilities |
Revenues from the public sector segment are derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions and healthcare customers, through various contracts and open market sales |
Government contracting is a highly regulated area |
Noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government |
The effect of any of these possible actions by any governmental department or agency could adversely affect our business and results of operations |
We are exposed to the risks of a global market |
Many of our products are either produced, or have major components produced, in the Asia Pacific region |
We engage in US dollar denominated transactions with US divisions and subsidiaries of companies located in this region |
As a result, we may be indirectly affected by risks associated with international events, including economic and labor conditions, political instability, tariffs and taxes, availability of products and currency fluctuations in the US dollar versus the regional currencies |
In the past, countries in the Asia Pacific region have experienced volatility in their currency, banking and equity markets |
Future volatility could adversely affect the supply and price of products and components and ultimately, our results of operations |
We are exposed to litigation risk |
CDW is party to legal proceedings that arise from time to time, both with respect to specific transactions, such as our acquisition of selected US assets of Micro Warehouse, and in the ordinary course of our business |
We do not believe that any currently pending or threatened litigation will have a material adverse effect on our financial condition |
Litigation, however, involves uncertainties and it is possible that the eventual outcome of litigation could adversely affect our results of operations for a particular period |