CDW 2015 Annual Report Download - page 32

Table of Contents
Trends and Key Factors Affecting our Financial Performance
We believe the following trends may have an important impact on our financial performance:
• Our Public segment sales are impacted by government spending policies, budget priorities and revenue levels. An adverse change in any of these factors
could cause our Public segment customers to reduce their purchases or to terminate or not renew contracts with us, which could adversely affect our
business, results of operations or cash flows. For the year ended December 31, 2015, sales to federal customers increased year-over-year in the mid-teens
as we continued to benefit from strategic changes made to better align with new federal government purchasing programs implemented last year. During
the same period, sales to state and local customers also increased year-over-year in the mid-teens, driven by the continued focus on public safety. Meeting
K-12 customer digital curriculum testing needs through sales of client devices was a significant contributor to education sales throughout 2014 and into
early 2015. Education sales decreased slightly in 2015 as a decline in K-12 client device sales was partially offset by an increase in netcomm sales. In
2015, we were named as provider on both the largest number of applications and the largest dollar amounts requested for funds by K-12 customers to
support internal connections for the 2014-2015 program year of the U.S. Federal Communications Commission E-Rate program. The amount and timing of
E-Rate funds approval and customer implementation is not certain.
• An important factor affecting our ability to generate sales and achieve our targeted operating results is the impact of general economic conditions on our
customers’ willingness to spend on information technology. During the year ended December 31, 2015, global economic signals were mixed. We continue
to closely monitor macroeconomic conditions. Uncertainties related to potential changes in tax and regulatory policy, potential interest rate increases,
weakening consumer and business confidence or increased unemployment could result in reduced or deferred spending on information technology
products and services by our customers and result in increased competitive pricing pressures.
• We believe that our customers’ transition to more complex technology solutions will continue to be an important growth area for us in the future.
However, because the market for technology products and services is highly competitive, our success at capitalizing on this transition will be based on our
ability to tailor specific solutions to customer needs, the quality and breadth of our product and service offerings, the knowledge and expertise of our sales
force, price, product availability and speed of delivery. During the year ended December 31, 2015, customer priorities continued to shift away from last
year's focus on client devices towards more integrated solutions, which grew substantially faster than transactional sales.
Key Business Metrics
Our management monitors a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make
adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, gross margin, operating margin, Net income, Non-
GAAP net income, Net income per common share, Non-GAAP net income per diluted share, EBITDA and Adjusted EBITDA, free cash flow, return on invested capital,
Cash and cash equivalents, net working capital, cash conversion cycle (defined to be days of sales outstanding in Accounts receivable plus days of supply in Inventory minus
days of purchases outstanding in Accounts payable, based on a rolling three-month average), debt levels including available credit and leverage ratios, sales per coworker,
and coworker turnover. These 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.
Non-GAAP net income, Non-GAAP net income per diluted share, EBITDA and Adjusted EBITDA are non-GAAP financial measures. We believe these measures
provide helpful information with respect to our operating performance and cash flows including our ability to meet our future debt service, capital expenditures and working
capital requirements. Adjusted EBITDA also provides helpful information as it is the primary measure used in certain key covenants and definitions contained in the credit
agreement governing our Senior Secured Term Loan Facility (the “Term Loan”), including the excess cash flow payment provision, the restricted payment covenant and the
net leverage ratio. These covenants and definitions are material components of the Term Loan as they are used in determining the interest rate applicable to the Term Loan,
our ability to make certain investments, incur additional debt, and make restricted payments, such as dividends and share repurchases, as well as whether we are required to
make additional principal prepayments on the Term Loan beyond the quarterly amortization payments. For further details regarding the Term Loan, see Long-Term Debt and
Financing Arrangements within Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 (Long-Term Debt) to the
accompanying Consolidated Financial Statements. For the definitions of Non-GAAP net income and Adjusted EBITDA and reconciliations to Net income, see “Results of
Operations”.
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