CDW 2003 Annual Report Download - page 32

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• Employee-related costs (which includes items such as profit sharing, incentive awards, and insurance)
increased $2.3 million, including $1.6 million in employee benefits related to the Micro Warehouse
transactions.
• Occupancy costs increased $1.6 million, including $0.7 million in facility expenses related to the Micro
Warehouse transactions.
• Other selling and administrative costs increased $16.7 million, including $13.0 million of costs related
to the Micro Warehouse transactions. Of the $13.0 million of costs, $8.0 million relates to severance
and outplacement costs, customer satisfaction expenses, and legal and accounting advisory fees. The
remaining $5.0 million relates to a reserve established for the equipment in a Wilmington, Ohio
distribution center leased by Micro Warehouse. In September 2003, in conjunction with our purchase
of selected U.S. assets of Micro Warehouse, we agreed to assume the lease for the distribution center
and purchase the equipment in the facility for $8.0 million if requested by Micro Warehouse. In
February 2004, under the terms of a modified agreement, we purchased the equipment and forfeited
leasing the distribution center in exchange for $8.25 million. The purchase price of the equipment in
the facility of $8.0 million, net of the reserve of $5.0 million, reflects the estimated realizable value of
the equipment to CDW.
Selling and administrative expenses increased to 7.0% of net sales in 2003 versus 6.1% in 2002. Transaction
and integration expenses recorded in connection with the Micro Warehouse transactions, totaling $20.2 million,
accounted for 0.5% of the increase in selling and administrative expenses as a percentage of net sales. The
remainder of the increase was primarily due to the increase in payroll costs described above resulting from
additions to our sales force.
Net advertising expense increased to $64.1 million in 2003, compared to $4.0 million in 2002. This
increase is primarily due to the adoption of EITF 02-16, which resulted in the reclassification of $60.9 million of
vendor consideration to a reduction of cost of sales, which would previously have been recorded as a reduction
of advertising expense. Additionally, $1.5 million of the increase is due to customer communication and
advertising costs related to the Micro Warehouse transactions. Gross advertising expense increased slightly, to
$92.0 million in 2003, compared to $89.1 million in 2002, while decreasing as a percentage of net sales to 2.0%
versus 2.1% in 2002. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, cooperative
advertising reimbursements increased 4.4% to $88.7 million in 2003, compared to $85.0 million in 2002. This
non-GAAP measurement is included because the Company believes it provides a more meaningful comparison
to reported results of prior periods.
Consolidated operating income was $284.5 million in 2003, a 4.6% decrease from $298.2 million in 2002.
Consolidated operating income as a percentage of net sales decreased to 6.1% in 2003, compared to 7.0% in
2002. Corporate segment operating income was $256.6 million in 2003, a 9.0% decrease from $281.9 million
in 2002. The decrease in corporate segment operating income was due to $22.0 million of cost of sales, selling
and administrative, and net advertising expenses related to the Micro Warehouse transactions, and increased
payroll costs related to the investment in our sales force and former members of the Micro Warehouse sales
force who joined CDW. Public sector segment operating income was $27.9 million in 2003, a 71.5% increase
from $16.3 million in 2002. As a percentage of net sales, public sector segment operating income increased to
2.6% in 2003, compared to 1.9% in 2002. The increase in public sector operating income was due to increased
sales and higher gross margin. Our operating income objective as a percentage of net sales is between 6.5% and
7.0%.
Interest income, net of other expenses, decreased to $5.1 million in 2003, compared to $8.0 million in 2002,
as higher levels of cash available for investing were offset by decreases in the rates of interest earned. The
higher levels of cash were due to cash flows from operations, primarily net income, and tax benefits from stock
options and restricted stock transactions.