CDW 2004 Annual Report Download - page 30

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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.
The effective income tax rate, expressed as a percentage of income before income taxes, was 39.5% in
2003 and 2002.
Net income in 2003 was $175.2 million, a 5.4% decrease from $185.2 million in 2002. Diluted earnings
per share were $2.03 in 2003, a decrease of 3.3% from $2.10 in 2002. These results include $22.3 million
($13.5 million after tax) of transaction and integration expenses recorded in connection with the Micro
Warehouse transactions, or a $0.16 per share impact on basic and diluted earnings per share.
Seasonality
Sales in our corporate segment, which serves primarily business and, to a small extent, consumer
customers, have not historically experienced 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 a percentage of overall sales, the Company as a whole may experience increased seasonality in
future periods.
Legal Proceedings
For a description of certain legal proceedings, see Item 3 of Part I of this Form 10-K.
Liquidity and Capital Resources
Working Capital
We have historically financed our operations and capital expenditures primarily through cash flow from
operations. At December 31, 2004, we had cash, cash equivalents, and current marketable securities of $478.2
million, representing an increase of $80.6 million in cash, cash equivalents, and current marketable securities
from December 31, 2003. Our working capital increased $215.2 million, to $1,036.9 million at December 31,
2004 from $821.7 million at December 31, 2003. The increase in working capital was a result of increases in
cash, cash equivalents, and current marketable securities, accounts receivable and merchandise inventory,
partially offset by increases in accounts payable and accrued expenses. The increases in these categories are
primarily due to our sales growth.