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21
Consolidated operating income was $396.4 million in 2006, a decrease of 5.5% from $419.6
million in 2005. Consolidated operating income as a percentage of net sales decreased to 5.8% in
2006, compared to 6.7% in the same period of 2005. The decrease in operating income as a
percentage of net sales was primarily due to the increased selling and administrative expenses and
the litigation settlement, partially offset by the increased gross profit. Corporate sector segment
operating income was $350.6 million in 2006, an increase of 2.6% from $341.8 million in 2005. The
increase in corporate sector segment operating income was primarily due to improved gross profit
margin, partially offset by the recognition of share-based compensation expense due to the adoption
of SFAS 123R. Public sector segment operating income was $106.7 million in 2006, a decrease of
3.4% from $110.4 million in 2005. The decrease in public sector segment operating income was
primarily due to lower gross profit margin, increased selling and administrative expenses related to
the investment in additional sales resources, and the recognition of share-based compensation
expense due to the adoption of SFAS 123R. Headquarters expenses increased to $64.7 million in
2006 compared to $32.6 million in 2005, primarily due to the litigation settlement expense of $25.0
million, a larger number of coworkers, and the recognition of share-based compensation expense
due to the adoption of SFAS 123R.
Interest income increased 30.6% in 2006, to $19.8 million compared to $15.2 million in 2005.
This increase was primarily due to higher interest rates in 2006 compared to 2005.
The effective income tax rate, expressed as a percentage of income before income taxes,
decreased to 35.8% in 2006 compared to 37.2% in 2005. This decrease was primarily attributable to
the resolution of an audit of the Company’s 2003 federal income tax return in the second quarter of
2006 and a benefit relating to the reduction of tax reserves due to the expiration of the statute of
limitations for the 2002 tax year in the third quarter of 2006. The change in the effective tax rate
increased diluted earnings per share in 2006 by approximately $0.07 compared to 2005.
Net income in 2006 was $266.1 million, a 2.2% decrease from $272.1 million in 2005. Net
income in 2006 included the litigation settlement expense of $15.4 million after-tax.
Diluted earnings per share were $3.30 in 2006, an increase of 1.2% from $3.26 in 2005. The
litigation settlement expense in 2006 decreased diluted earnings per share by approximately $0.19.
The change in the weighted-average number of common shares outstanding in 2006 compared to
2005 increased diluted earnings per share by approximately $0.12.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales in 2005 increased 9.7% to $6.292 billion, compared to $5.738 billion in 2004. Sales of
desktop computers and servers, software, data storage devices and netcomm products each
increased more than 10% in 2005 over 2004. Corporate sector segment sales increased 7.4%, to
$4.411 billion in 2005 from $4.105 billion in 2004, and comprised 70% of our total net sales for 2005.
Public sector segment sales increased 15.2%, to $1.881 billion in 2005 from $1.633 billion in 2004,
and comprised 30% of our total sales for 2005.
Gross profit increased 11.2% to $967.6 million in 2005, compared to $870.1 million in 2004. As a
percentage of net sales, gross profit was 15.4% in 2005, compared to 15.2% in 2004. The increase
in the gross profit percentage was primarily due to a larger amount of cooperative advertising funds
classified as a reduction of cost of sales and improved product margins, partially offset by reduced
customer charges for delivery and a lower level of vendor incentives.
Selling and administrative expenses increased 12.1% to $433.5 million in 2005, compared to
$386.6 million in 2004, while increasing as a percentage of net sales to 6.9% versus 6.7% in 2004.
Included in selling and administrative expenses in 2004 were $3.9 million of transaction and
integration expenses related to the Micro Warehouse transactions (see Note 18 to the Consolidated
Financial Statements for more information on the Micro Warehouse transactions). The primary
drivers of the increase in selling and administrative expenses are discussed below.