CDW 2004 Annual Report Download

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Table of contents

  • Page 1

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    Annual Report 2004 Dear Shareholder: We had a great year. Thanks for your confidence and support.* Sincerely, John A. Edwardson Chairman and Chief Executive Officer *Doesn't it seem like all Letters to Shareholders try to say the same thing one way or another? Like you, I read many letters ...

  • Page 3
    ... in Vernon Hills, Illinois, the additional distribution center will be located in North Las Vegas, Nevada. To ensure our new facility will be as productive and efficient as our Vernon Hills location, we will be transferring a number of coworkers to North Las Vegas to make sure that our CDW culture...

  • Page 4
    ...working hard to make sure we reach capacity in the North Las Vegas distribution center much more quickly! To do so, we expect to grow our sales force by an additional 100 to 125 net new account managers and product specialists during 2005. In addition, we will further segment our sales and marketing...

  • Page 5
    ... 100 Best Companies to Work For (FORTUNE® magazine) No. 1 - America's Most Admired Company for Wholesalers: Electronics and Office Equipment (FORTUNE® magazine) Financial Summary For the years ended December 31, 2004, 2003, and 2002 (in millions, except per share data) Operating Results Net sales...

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    ... file number 0-21796 CDW Corporation (Exact name of registrant as specified in its charter) Illinois (State or other jurisdiction of incorporation or organization) 200 N. Milwaukee Ave. Vernon Hills, Illinois (Address of principal executive offices) 36-3310735 (I.R.S. Employer Identification...

  • Page 8
    ... 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2004 INDEX PART I Item 1. Item 2. Item 3. Item 4. Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of...

  • Page 9
    ... well-trained coworkers and high volume, cost-efficient operations, supported by our proprietary information technology systems, enable us to offer these products at competitive prices combined with a high level of customer service. We provide a variety of value-added services and web-based tools to...

  • Page 10
    ... file these reports with the Securities and Exchange Commission. Business Strategy Our business strategy is to be a high volume, cost-efficient direct marketer of multi-brand, competitivelypriced computers and related technology products and services, while providing a high level of support to our...

  • Page 11
    ... short-term incentive programs, stock-based compensation and an on-site childcare and fitness center facility at our Vernon Hills, Illinois headquarters. Product Offering We sell multi-brand computers and related technology products, including hardware and peripherals, software, accessories and...

  • Page 12
    ... in North Las Vegas, Nevada, to support the Company's projected growth beyond 2005. We expect the new 513,240 square foot facility to be completed and operational by the end of 2005. This new facility will predominantly serve customers located in the Western United States. Marketing and Advertising...

  • Page 13
    ... and CDWG@work extranets. These sites give customers online access to information such as order and shipping status, payment details, purchase history and details about their dedicated CDW or CDW-G account team. Customers may also use their sites to automate technology purchasing procedures, manage...

  • Page 14
    ... sales. In May 2004, we opened a new 8,000 square foot Enterprise Configuration Center in our Vernon Hills, Illinois headquarters, in order to meet growing demand for configuration services, particularly from medium-to-large size businesses and public sector organizations. Our technical support...

  • Page 15
    ... of the "100 Best Companies to Work For" for the seventh consecutive year. For the third consecutive year, we were the highest ranked FORTUNE 500 company on this list. Our Vernon Hills, Illinois headquarters offers an on-site childcare and fitness center, on-site dry cleaning service, private rooms...

  • Page 16
    ... to: x x x x 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...

  • Page 17
    ... 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 computers and related technology products and accessories is highly competitive. Our competition...

  • Page 18
    ...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, substantially all of our corporate, warehouse and distribution...

  • Page 19
    ... Technology Center Sales Office Vernon Hills, Illinois Voorhees, New Jersey 550,000 18,000 Owned Leased In February 2005, we signed a lease for a 513,240 square foot distribution center to be constructed in North Las Vegas, Nevada. We expect this new facility to be completed and operational...

  • Page 20
    ... the fourth quarter of 2004 to a vote of security holders. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The following table sets forth for the periods indicated the high and low sales prices for the Company's common...

  • Page 21
    2004 Quarter Ended March 31 June 30 September 30 December 31 Low $ $ $ $ 58.06 61.30 56.07 56.61 $ $ $ $ High 74.45 70.93 65.20 68.26 $ $ $ $ Low 2003 High 36.30 38.86 44.93 55.91 $ $ $ $ 47.45 46.65 60.55 63.65 We did not repurchase any shares of...

  • Page 22
    ... CDW Corporation and Subsidiaries Selected Financial Data (in thousands, except per share amounts) 2004 Income Statement Data: Net sales Income from operations Net income Earnings per share: Basic Diluted Dividends per share 5,737,774 392,759 241,445 2.90 2.79 0.36 $ $ $ $ $ $ 2003 Year Ended...

  • Page 23
    ... corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois, Virginia, Connecticut, New Jersey, and Toronto, Canada. Additionally, we market and sell products through CDW.com, CDWG.com, macwarehouse.com and CDW.ca, our Web sites. For financial reporting...

  • Page 24
    ...inability to collect receivables related to these vendor transactions could have a material impact on gross margin and operating income. In September 2003, we purchased selected U.S. assets and the Canadian operations of Micro Warehouse, a reseller of computers, software and peripheral products. The...

  • Page 25
    ... Number of invoices processed Average invoice size % of sales to commercial customers (1) Sales force, end of period Annualized inventory turnover (2) Accounts receivable - days sales outstanding (3) Direct web sales (000's) Net sales per coworker (000's) Return on shareholders' equity Years Ended...

  • Page 26
    ... lines are based upon internal product code classifications. Analysis of Product Mix Notebook computers and accessories Desktop computers and servers Subtotal computer products Software Data storage devices Printers NetComm products Video Add-on boards/memory Input devices Other Total Years Ended...

  • Page 27
    ... specialized product expertise such as networking, security, data storage, and volume software licensing. Payroll costs for 2004 and 2003 also included $1.5 million and $4.9 million, respectively, of expenses for former Micro Warehouse employees performing transition services. Employee-related costs...

  • Page 28
    ... end of 2003, and our investment in our sales force, with the addition of 191 new account managers in 2003 (excluding former members of the Micro Warehouse sales force who joined CDW in conjunction with the Micro Warehouse transactions). Sales of notebook computers and accessories, printers, video...

  • Page 29
    ... or specialized product expertise such as networking, security, data storage, and volume software licensing. 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...

  • Page 30
    ...significant seasonality throughout the year. In contrast, sales in our public sector segment have historically been higher in the third quarter than in other quarters due to the buying patterns of federal government and education customers. If sales to public sector customers continue to increase as...

  • Page 31
    ... a lease for a new distribution center to be constructed in North Las Vegas, Nevada, to support the Company's projected growth beyond 2005. We expect the new facility to be completed and operational by the end of 2005. Capital expenditures for machinery, equipment and leasehold improvements related...

  • Page 32
    ... as of December 31, 2004 (in thousands): Operating leases Total $ 54,153 Less than 1 year $ 7,268 1-3 years $ 16,284 3-5 years $ 17,184 Over 5 years $ 13,417 In February 2005, we signed a lease for a new distribution center to be constructed in North Las Vegas, Nevada. See Note 19 to...

  • Page 33
    ... Affecting CDW's Business" and other factors identified from time to time in the Company's filings with the Securities and Exchange Commission. Such risks and uncertainties may have a significant impact on the Company's business, operating results or financial condition. Investors are cautioned...

  • Page 34
    ... Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended...

  • Page 35
    ... management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein. CDW Corporation Vernon Hills...

  • Page 36
    ... opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing on page 27 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004, that the Company maintained effective internal control over financial reporting as of...

  • Page 37
    ... reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company...

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    CDW CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2004 Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net of allowance for doubtful accounts of $9,890 and $10,057, respectively Merchandise inventory Miscellaneous ...

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    CDW CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) 2004 Net sales Cost of sales Gross profit Selling and administrative expenses Net advertising expense Income from operations Interest income Other expense, net Income before income taxes Income ...

  • Page 40
    ... of unearned compensation Exercise of stock options Issuance of common stock in connection with Employee Stock Purchase Plan Tax benefit from stock option and restricted stock transactions Purchase of treasury shares Cash dividends Net income Net unrealized (losses) on marketable securities Foreign...

  • Page 41
    ... of advances from joint venture Purchase of property and equipment Purchase of selected U.S. assets of Micro Warehouse Purchase of Canadian operations of Micro Warehouse Consolidation of joint venture Sale of investment in CDW Leasing, LLC, net of cash sold Net cash used in investing activities...

  • Page 42
    ..."CDW" or the "Company") is a leading direct marketer of multi-brand computers and related technology products and services in the United States. Our primary business is conducted from a combined corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois...

  • Page 43
    ... relate to written agreements with specified performance requirements with the vendors and are recorded as adjustments to cost of sales or net advertising expense, as appropriate. Vendors may change the terms of some or all of these programs which could have an impact on our results of operations...

  • Page 44
    ... of the contract, at the net amount retained by us, with no cost of sales. In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," we record freight billed to our customers as net sales and the related freight costs as a cost of sales. Vendor rebates are recorded when...

  • Page 45
    ... the years ended December 31, 2004, 2003 and 2002, respectively (in thousands, except per share amounts): 2004 $ 241,445 2003 $ 175,186 2002 $ 185,249 Net income, as reported Add stock-based employee compensation expense included in reported net income, net of related tax effects Deduct total stock...

  • Page 46
    ... from a Vendor by a Customer (Including a Reseller of the Vendor's Products)" ("EITF 02-16") became effective for the Company on January 1, 2003. EITF 02-16 requires that consideration received from vendors, such as advertising support funds, be accounted for as a reduction to cost of sales when...

  • Page 47
    ...: Municipal bonds Corporate fixed income securities Total available-for-sale Held-to-maturity: U.S Government and Government agency securities Municipal securities Corporate fixed income securities Total held-to-maturity Total marketable securities Estimated Fair Value Amortized Cost $ 165,688...

  • Page 48
    ... obligated under various operating lease agreements, for sales office facilities that generally provide for minimum rent payments and a proportionate share of operating expenses and property taxes and include certain renewal and expansion options. For the years ended December 31, 2004, 2003 and 2002...

  • Page 49
    ... in the fourth quarter of 2002 and sales personnel were relocated to the Mettawa, Illinois office. The Buffalo Grove lease term expired in December 2003. We completed the restoration of the facility during 2004. 9. Income Taxes Pretax income from continuing operations for the years ended December 31...

  • Page 50
    ... tax asset relating to employee stock plans results primarily from the compensatory stock option grants under the CDW Stock Option Plans. Compensation expense related to these plans is deductible for income tax purposes in the year the options are exercised. The net operating loss in Canada of...

  • Page 51
    ...-average fair value of options granted was as follows: 2004 34.85 15.38 2003 23.74 11.75 2002 30.82 - Exercise price equals market price at time of grant Exercise price is less than market price at time of grant (1) $ $ $ $ $ $ (1) Relates to the Employee Stock Purchase Plan, whereby eligible...

  • Page 52
    ..., except per share amounts): 2004 $ 241,445 2003 $ 175,186 2002 $ 185,249 Net income, as reported Add stock-based employee compensation expense included in reported net income, net of related tax effects Deduct total stock-based employee compensation expense determined under fair value based method...

  • Page 53
    ...his common stock to be held in escrow for the benefit of those persons employed by the Company as of December 31, 1992. The number of shares allocated to each employee was dependent upon the employee's years of service and salary history. As a result of these grants, which provided for vesting based...

  • Page 54
    ...last business day of the quarterly offering period. Coworkers may purchase shares having a fair market value of up to $25,000 (measured on the first day of the quarterly offering period for each calendar year) or 325 shares per quarter. No compensation expense is recorded in connection with the plan...

  • Page 55
    ... Additional options to purchase common shares were outstanding during the years ended December 31, 2004 and 2003 but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of common shares during the...

  • Page 56
    ... Information We are engaged in the sale of multi-brand computers and related technology products and services, primarily through direct marketing activities. We have two operating segments: corporate, which is primarily comprised of business customers, but also includes consumers, and public sector...

  • Page 57
    ..., training and benefits. The table below presents information about our reportable segments: Year Ended December 31, 2004 (in 000's) Public Sector Eliminations $ 1,330,435 $ $ 1,330,435 38,640 $ $ $ (1,259,812) (1,259,812) $ $ Corporate External customer sales Transfers between segments Total net...

  • Page 58
    ... accounted for more than 1% of net sales in fiscal years 2004, 2003 or 2002. During 2004, approximately 1% of our sales were to customers outside of the continental United States, primarily in Canada. 16. Share Repurchase Programs In January 2001, our Board of Directors authorized the purchase...

  • Page 59
    ... costs, payroll expenses for former Micro Warehouse employees performing transition services, customer satisfaction expenses, customer communications and advertising expenses, legal and accounting advisory fees and a reserve established for the equipment in a Wilmington, Ohio distribution center...

  • Page 60
    ... Company's exposure. During the third quarter of 2004, substantially all of this equipment was liquidated at values in line with our expectations. 19. Subsequent Event In February 2005, we signed a lease for a new 513,240 square foot distribution center to be constructed in North Las Vegas, Nevada...

  • Page 61
    ... Quarter December 31, 2004 Net sales Gross profit Income before income taxes Net income Earnings per share: Basic Diluted December 31, 2003 Net sales Gross profit Income before income taxes Net income Earnings per share: Basic Diluted $ 1,336,689 204,463 91,606 55,293 $ $ 0.66 0.63 Second Quarter...

  • Page 62
    ... during the Company's fiscal quarter ended December 31, 2004 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. None. Other Information. PART III Item 10. Directors and Executive Officers of the Registrant...

  • Page 63
    ... "Director Compensation;" "Employment Related Agreements;" "Executive Compensation;" "Summary Compensation Table;" "Option Grants in 2004;" and "2004 Option Exercises and Fiscal Year-End Option Values." Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 64
    ... Limited Partnership, as agent for the owner, as lessor, relating to the premises located in Chicago, Illinois, incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended June 30, 1995. CDW 1996 Incentive Stock Option Plan...

  • Page 65
    ... Management Limited Partnership as Lessor relating to the retail sales space located at 317 West Grand Avenue, Chicago, Illinois, incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended June 30, 2001. Line of Credit Demand...

  • Page 66
    ... the CDW 2000 Incentive Stock Option Plan, incorporated by reference from the exhibits filed with the Company's Quarterly Report (00021796) on Form 10-Q for the quarter ended September 30, 2004. Form of Stock Option Agreement for awards to non-employee directors under the 2004 Non-Employee Director...

  • Page 67
    ...of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CDW CORPORATION Date: March 15, 2005 By: /s/ John A. Edwardson John A. Edwardson Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange...

  • Page 68
    ... and Expenses Charged to Other Accounts Column D Column E Balance at End of Period Description Year ended December 31, 2004 Deducted in the balance sheet from the asset to which it applies: Allowance for doubtful accounts Year ended December 31, 2003 Deducted in the balance sheet from the asset...

  • Page 69
    ... CDW Canada, Inc. CDW Capital Corporation CDW Corporation CDW Direct, LLC CDW Government, Inc. CDW ISFC, LLC CDW Logistics, Inc. CDW SAC, Inc. CDW Select, Inc. CDW Technology Services, Inc. Jurisdiction of Incorporation New Brunswick Illinois Delaware Illinois Illinois Delaware Illinois Illinois...

  • Page 70
    ...) of CDW Corporation of our report dated March 15, 2005 relating to the financial statements, financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears...

  • Page 71
    ... report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John A. Edwardson John A. Edwardson Chairman and Chief Executive Officer CDW Corporation...

  • Page 72
    ...; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Barbara A. Klein Barbara A. Klein Senior Vice President and Chief Financial Officer CDW Corporation March 15, 2005 b.

  • Page 73
    ...OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, John A. Edwardson, the chief executive officer of CDW Corporation ("CDW"), certify that (i) the Annual Report on Form 10-K for the year ended December 31, 2004 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15(d) of...

  • Page 74
    ... 63 OF TITLE 18 OF THE UNITED STATES CODE I, Barbara A. Klein, the chief financial officer of CDW Corporation, ("CDW"), certify that (i) the Annual Report on Form 10-K for the year ended December 31, 2004 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15(d) of the...

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  • Page 76
    ... Officers John A. Edwardson* Chairman and Chief Executive Officer Harry J. Harczak, Jr.* Executive Vice President - Sales James R. Shanks* Executive Vice President and President, CDW Government, Inc. Douglas E. Eckrote* Senior Vice President - Purchasing and Operations Barbara A. Klein* Senior Vice...

  • Page 77
    ... Information Corporate Office 200 North Milwaukee Avenue Vernon Hills, Illinois 60061 847.465.6000 Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Chicago, Illinois Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane New York, New York...

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