CDW 2003 Annual Report Download - page 31

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for 2003. Public sector segment sales increased 25.8%, from $865 million in 2002 to $1.089 billion in 2003,
and comprised 23.3% of our total sales for 2003.
In general, the average selling price of most of our product categories decreased from 2002. We believe
there may be future decreases in pricing for technology products in 2004, resulting in a lower average invoice
size. Such decreases require us to generate more orders and sell more units in order to maintain or increase the
level of sales.
On a forward-looking basis, our core strategies to grow our business include: further penetrate existing
accounts, expand our customer base, enhance the productivity and increase the number of our account managers,
optimize our product mix, strengthen national brand awareness and selectively pursue strategic transactions.
Gross profit increased 19.5% to $673.8 million in 2003, compared to $563.8 million in 2002. As a
percentage of net sales, gross profit was 14.4% in 2003, compared to 13.2% in 2002. The increase in the gross
profit percentage was primarily due to the adoption in January 2003 of a new accounting pronouncement,
Emerging Issues Task Force Issue No. 02-16, “Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor’s Products)” (“EITF 02-16”).
The income statement classification provisions of EITF 02-16 cover vendor consideration related to
agreements entered into or modified after January 1, 2003. This pronouncement requires that consideration
from vendors, such as advertising support funds, be accounted for as a reduction of cost of sales unless certain
requirements are met showing that the funds are used for a specific program entirely funded by an individual
vendor. If these specific requirements related to individual vendors are met, the consideration is accounted for
as a reduction in the related expense category, such as advertising or selling and administrative expense. We
provide numerous advertising programs to support vendors, including catalogs, television, radio, Internet,
magazine, and newspaper advertising for which we receive consideration. Some of these programs relate to
multiple vendors, while others are performed on behalf of individual vendors for specific projects.
As a consequence of adopting EITF 02-16, we recorded $62.7 million of vendor consideration as a reduction
of cost of sales in 2003, which would have previously been recorded as a reduction of advertising expense
($60.9 million) and selling and administrative expense ($1.8 million). Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, the gross profit margin would have been 13.1% in 2003 compared to 13.2% in
2002. The non-GAAP gross profit margin is included in this discussion because the Company believes it
provides a meaningful comparison to reported results of prior periods.
Our gross profit objective as a percentage of net sales is between 12.50% and 13.25%, excluding the impact
of EITF 02-16. The gross profit margin depends on various factors, including vendor inventory price protection
and rebate programs, product mix, including third party services, pricing strategies, market conditions, and other
factors, any of which could result in a fluctuation of gross margins below recent experience.
Selling and administrative expenses increased 24.3% to $325.2 million in 2003, compared to $261.6 million
in 2002. Included in selling and administrative expenses in 2003 were $20.2 million of transaction and
integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling
and administrative expenses are discussed below.
• Payroll costs increased $43.0 million, including $4.9 million of expenses for former Micro Warehouse
employees performing transition services. The remainder of the increase in payroll costs was due to an
increase in our sales force from 1,320 at December 31, 2002 to 1,924 at December 31, 2003, including
413 former members of the Micro Warehouse sales force who joined CDW in September 2003 in
conjunction with the Micro Warehouse transactions. Our sales force consists of account managers
(including field sales representatives) as well as product category specialists who provide consultation
in areas requiring technical or specialized product expertise such as networking, security, data storage,
and volume software licensing.