CDW 2006 Annual Report Download

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Expanding Our Platform for Growth
2006 Annual Report

Table of contents

  • Page 1
    2006 Annual Report Expanding Our Platform for Growth

  • Page 2
    Focus Acquire Reach Perform

  • Page 3
    ... a full year of operations at our new state-of-the-art distribution center in North Las Vegas, Nevada. Focus. We focus on the specific needs of our customers. Our dedicated account managers and industry-certified technology specialists help customers identify the right technology to enhance business...

  • Page 4
    ...our Western Distribution Center in North Las Vegas, Nevada. Recognition: FORTUNE: FORTUNE 500 America's Most Admired Companies 100 Best Companies to Work For; on the list for nine consecutive years CIO Insight magazine: Vendor Value Study 2006; ranked No. 1 Computerworld: 100 Best Places to Work in...

  • Page 5
    ...year anniversary of operations at our new 513,000 square foot Western Distribution Center in North Las Vegas, Nevada. By the end of 2006, we shifted approximately 30 percent of our total shipping volume from our legacy distribution center in Vernon Hills, Illinois, to the Western Distribution Center...

  • Page 6
    ...for new account managers to gain selling expertise and build customer relationships, we believe this is the right time to make this important investment. We will strategically hire engineers for Berbee to drive additional growth and IT coworkers to better leverage technology and improve productivity...

  • Page 7
    ... Devices Data Storage Desktops & Servers Printers (1%) 1% 11% 11% 8% 7% 7% 6% 22% John A. Edwardson Chairman and Chief Executive Officer March 2, 2007 *Net sales of products by product category as a percentage of total net sales of products. Excludes items such as commission revenue or delivery...

  • Page 8
    ... Summary For the years ended December 31, 2006, 2005, 2004, 2003 and 2002 (in millions, except per share data) Operating Results Net sales Income from operations Net income Earnings per share (diluted) Cash, cash equivalents & marketable securities Shareholders' equity 2006 GAAP1 $6,785 $396...

  • Page 9
    ... the fiscal year ended December 31, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____ to _____ Commission file number 0-21796 CDW Corporation (Exact name of registrant as specified in its charter) Illinois (State...

  • Page 10
    ... Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related...

  • Page 11
    ...to custom configure multi-branded solutions, manage software licenses through our Software License Tracker tool, track tagged assets through our IT Asset Management Tracking Database and generate online quotes. We also offer technical support and customer service 24 hours a day, seven days a week to...

  • Page 12
    ... technology planning, network infrastructure and unified communications, systems and storage, security, productivity applications and managed services. Berbee has 11 offices and two data centers in six Midwestern states and employed approximately 850 coworkers at December 31, 2006. Berbee operates...

  • Page 13
    ... technology planning, network infrastructure and unified communications, systems and storage, security, productivity applications, and managed services. These solutions and services, provided by our Berbee operating segment, are performed by engineers and data center professionals who customize...

  • Page 14
    ... the vendors and usually require the achievement of a specified sales volume or growth rate within a specified period of time to qualify for all, or some, of the incentive programs. Inventory Management/Distribution We utilize our proprietary information technology systems to manage our inventory in...

  • Page 15
    ...% of total sales, respectively. We continue to enhance our customized Web sites, marketed as CDW@work® 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 account 5

  • Page 16
    ... gross profit. Each catalog and advertisement distributed by the Company lists a toll-free number and Web site address to be used by customers in contacting CDW to place a product order. Once a customer order is received, by phone, online, or by fax, it is processed for credit approval. We ship most...

  • Page 17
    ...-branded information technology products and services in the United States and Canada. Our customized information technology and telephony systems allow for centralized management of key functions, including inventory management, collection of accounts receivable, purchasing, sales, and distribution...

  • Page 18
    ... products via direct marketing activities. Our authorization with each manufacturer is subject to specific terms and conditions regarding such things as product return privileges, price protection policies, purchase discounts and vendor incentive programs, including purchase rebates, sales volume...

  • Page 19
    ..., our ability to 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 20
    ... in product costs from vendors; the availability of price protection, purchase discounts and incentive programs from vendors; the availability of cooperative advertising funds from vendors, which are classified as a reduction of cost of sales; the risk of some of the items in our inventory becoming...

  • Page 21
    ... facilities or data centers could damage our business. Substantially all of our corporate, warehouse and distribution functions are located at our Vernon Hills, Illinois facilities and we have a second distribution center in North Las Vegas, Nevada. If the warehouse and distribution equipment at one...

  • Page 22
    ... office and 450,000 square foot distribution center in Vernon Hills, Illinois, and a 513,000 square foot distribution center in North Las Vegas, Nevada. In addition, we conduct sales, services, and administrative activities in various leased locations throughout North America, including Berbee data...

  • Page 23
    ... to time, both with respect to specific transactions and in the ordinary course of our business. CDW is also subject to audit by federal, state and local tax authorities, by various government agencies relating to sales under certain government contracts and by vendors relating to vendor incentive...

  • Page 24
    ... period commencing December 31, 2001 and ending December 31, 2006 where $100 was invested on December 31, 2001. The Company's Peer Group consists of GTSI Corp., Insight Enterprises, Inc., PC Connection, Inc., PC Mall, Inc., and Zones, Inc. Historical stock price performance shown on the graph is not...

  • Page 25
    ... (in thousands, except per share amounts) 2006 Income Statement Data: Net sales Income from operations Net income Earnings per share: Basic Diluted Dividends per share 6,785,473 396,399 266,080 3.37 3.30 0.52 $ $ $ $ $ $ 2005 6,291,845 419,634 272,092 3.35 3.26 0.43 Year Ended December 31, 2004...

  • Page 26
    ..."CDW" or the "Company") is a leading provider of multi-branded information technology products and services in the United States and Canada. We focus on meeting the technology needs of our customers in business, government, and education through our extensive offering of products from leading brands...

  • Page 27
    ...fixed fee. Revenue for data center services, including Internet connectivity, Web hosting, server co-location, and managed services, is recognized over the period service is provided. In accordance with our revenue recognition policy, we estimate the value of products that have shipped but that have...

  • Page 28
    ... our consolidated operating statistics: Operating Statistics Sales force, end of period (1) Annualized inventory turnover Accounts receivable - days sales outstanding (2) Direct Web sales (000's) Net sales per coworker (000's) (2) Return on shareholders' equity (2) Years Ended December 31, 2006 2005...

  • Page 29
    ... in individual product 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 December 31, 2006 2005...

  • Page 30
    ... specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage, and volume software licensing. Included in payroll costs in 2006 was $6.3 million related to the operation of our distribution center in North Las Vegas...

  • Page 31
    ... 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...

  • Page 32
    ... 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. In addition, payroll...

  • Page 33
    ...serves business 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...

  • Page 34
    ... distribution center in December 2006 for $29.6 million, expenditures for machinery and equipment and leasehold improvements related to the North Las Vegas, Nevada distribution center and new leased office space in Chicago and Vernon Hills, Illinois, and improvements to our information technology...

  • Page 35
    ...example, statements concerning the Company's sales growth, cooperative advertising reimbursements, vendor incentives, gross profit as a percentage of sales, selling and administrative expenses, advertising expense, operating income as a percentage of sales, and effective tax rate. In addition, words...

  • Page 36
    ... 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, 2006 and 2005 Consolidated Statements of Income for the years ended...

  • Page 37
    ... the effectiveness of our internal control over financial reporting as of December 31, 2006 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, Illinois March 1, 2007 27

  • Page 38
    ... it accounts for share-based compensation in 2006. Internal control over financial reporting Also, in our 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...

  • Page 39
    ... Internal Control Over Financial Reporting, management has excluded Berbee Information Networks Corporation from its assessment of internal control over financial reporting as of December 31, 2006 because it was acquired by the Company in a purchase business combination in October 2006. We have also...

  • Page 40
    ... Total current assets Marketable securities Property and equipment, net Goodwill Other intangible assets, net Other assets Total assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable Accrued expenses: Compensation Income taxes Sales taxes Advertising Other Total current...

  • Page 41
    CDW CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) 2006 Net sales Cost of sales Gross profit Selling and administrative expenses Advertising expense Litigation settlement Income from operations Interest income Other expense, net Income before ...

  • Page 42
    ...-based compensation plans Excess tax benefit from stock option and restricted stock transactions Purchase of treasury shares Cash dividends Net income Net unrealized gains on marketable securities, net of tax Foreign currency translation adjustment Comprehensive income Balance at December 31, 2006...

  • Page 43
    ... and equipment Acquisition of businesses, net of cash acquired Sale of investment in CDW Leasing, LLC, net of cash sold Net cash used in investing activities Cash flows from financing activities: Purchase of treasury shares Proceeds from issuance of common stock under sharebased compensation plans...

  • Page 44
    ... Accounting Policies CDW Corporation (collectively with its subsidiaries, "CDW" or the "Company") is a leading provider of multi-branded information technology products and services in the United States and Canada. We focus on meeting the technology needs of our customers in business, government...

  • Page 45
    ... demand or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Vendor transactions. We receive incentives from vendors related to cooperative advertising allowances, volume rebates, bid programs, price protection and other...

  • Page 46
    ... the selling price to the customer recorded as net sales and the acquisition cost of the product recorded as cost of sales. At the time of sale, we also record an estimate for sales returns based on historical experience. Software assurance products, third party services and extended warranties that...

  • Page 47
    ... Force Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor's Products)." Most vendor consideration received by CDW for cooperative advertising is considered a reduction of cost of sales. Advertising expense is offset by cooperative...

  • Page 48
    ... in advanced technologies primarily across the Cisco, IBM, and Microsoft platforms. Areas of expertise include strategic technology planning, network infrastructure and unified communications, systems and storage, security, productivity applications and managed services. Berbee's customer base...

  • Page 49
    ...the combined results of operations of the Company and Berbee for the years ended December 31, 2006 and 2005 as if the acquisition had occurred at January 1, 2005 (in thousands, except per share amounts). 2006 7,118,427 271,605 3.44 3.37 2005 6,600,251 275,102 3.39 3.29 Net sales Net income Earnings...

  • Page 50
    ... State and municipal bonds Corporate fixed income securities U.S Government and Government agency securities Total available-for-sale Held-to-maturity: U.S Government and Government agency securities Total held-to-maturity Total marketable securities Estimated Fair Value Amortized Cost $ 132,175...

  • Page 51
    ... and equipment Building and leasehold improvements Computer and data processing equipment Computer software Furniture and fixtures Construction in progress Total property and equipment Less accumulated depreciation Net property and equipment $ $ During 2006 and 2005, we recorded adjustments...

  • Page 52
    ...described in Note 3. The goodwill assigned to the public sector segment resulted from the acquisition of Technology Resource Center, Inc., an education software reseller, in July 2006, for a total purchase price of $3.2 million. The following table presents a summary of intangible assets at December...

  • Page 53
    ..., which was $0.9 million. From the date of acquisition through December 31, 2006, we recorded $0.1 million of depreciation expense related to this equipment. Future minimum lease payments are as follows (in thousands): Years Ended December 31, 2007 2008 2009 2010 2011 Thereafter Total future minimum...

  • Page 54
    ... capital relating to the exercise and vesting of shares pursuant to the CDW stock incentive plans as described in Note 11. The reconciliation between the statutory tax rate expressed as a percentage of income before income taxes and the actual effective tax rate for the years ended December 31, 2006...

  • Page 55
    ... such persons to act in the longterm best interests of the Company and its shareholders. At the 2006 Annual Meeting of Shareholders, the CDW 2006 Stock Incentive Plan ("2006 Plan") was approved. The 2006 Plan allows our Compensation and Stock Option Committee to grant stock options, restricted stock...

  • Page 56
    .... The coworkers' purchase price is 95% of the fair market value of the stock on the last business day of the quarterly offering period. Coworkers may purchase shares having a fair market value of up to $25,000 per year but not to exceed 325 shares per quarter. No compensation expense is recorded in...

  • Page 57
    ...to value option grants and compensatory stock purchase rights under the ESPP for the years ended December 31, 2004, 2005, and 2006 are as follows: 2006 Weighted-average grant date fair values of option awards Risk-free interest rate Dividend yield Expected life (years) Stock price volatility $ 24.88...

  • Page 58
    ...for the year ended December 31, 2006 includes $15.8 million of compensation expense and $6.0 million of income tax benefits related to our share-based compensation arrangements. No portion of share-based compensation was capitalized. For the year ended December 31, 2006: • Cash proceeds related to...

  • Page 59
    ... awards granted under our plans. That cost is expected to be recognized over a weighted-average period of 3.81 years. The Company has historically settled stock option exercises with newly issued common shares. In April 2006, our Board of Directors authorized a new share repurchase program of up to...

  • Page 60
    ...14,575 1,179 15,754 (6,049) 9,705 $ $ $ $ $ (17,053) 17,053 0.12 0.12 For the year ended December 31, 2006, the share-based compensation expense of $1.18 million related to Restricted Stock would also have been recorded as an expense under APB 25. Prior to the adoption of SFAS 123R, we presented...

  • Page 61
    ...feature established under the Internal Revenue Code Section 401(k) covering substantially all employees. Company contributions to the profit sharing plan are made in cash and determined at the discretion of the Board of Directors. For the years ended December 31, 2006, 2005 and 2004, amounts charged...

  • Page 62
    ... to time, both with respect to specific transactions and in the ordinary course of our business. CDW is also subject to audit by federal, state and local tax authorities, by various government agencies relating to sales under certain government contracts and by vendors relating to vendor incentive...

  • Page 63
    .... This new team focuses on IT solutions addressing the unique needs of a range of customers within the healthcare field. For financial reporting purposes, results of operations and assets related to healthcare customers are reported as part of the public sector segment. The accounting policies of...

  • Page 64
    ...made from time to time in both open market and private transactions, as conditions warrant. The new program is expected to remain in effect through April 2008, unless earlier terminated by the Board or completed. The following table presents share repurchases during the years ended December 31, 2006...

  • Page 65
    ...of this equipment was liquidated at values in line with our expectations. 19. Selected Quarterly Financial Data (Unaudited) The following information is for the years ended December 31, 2006 and 2005 (in thousands, except per share data): First Quarter December 31, 2006 Net sales Gross profit Income...

  • Page 66
    ...the Company's fiscal quarter ended December 31, 2006 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, Executive Officers and Corporate Governance Except...

  • Page 67
    ... officers and other senior financial personnel which is available on our Web site at CDW.com. Item 11. Executive Compensation The information required by this item is incorporated by reference from the discussion in our Proxy Statement under the headings "Director Compensation;" "Employment Related...

  • Page 68
    ... Annual Report (000-21796) on Form 10-K for the year ended December 31, 1998. Second Amendment to CDW 1996 Incentive Stock Option Plan, incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended September 30, 2006. Employment...

  • Page 69
    ... 10-Q for the quarter ended September 30, 2001. CDW Compensation Protection Plan adopted as of December 10, 2002, applicable to the Company's executive officers, incorporated by reference from the exhibits filed with the Company's Annual Report (000-21796) on Form 10-K for the year ended December 31...

  • Page 70
    ... 2004 Non-Employee Director Equity Compensation Plan, as amended and restated effective October 19, 2006, incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended September 30, 2006. CDW 2006 Stock Incentive Plan, as amended...

  • Page 71
    ... 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 1, 2007 By: /s/ John A. Edwardson John A. Edwardson Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange...

  • Page 72
    CDW CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2006, 2005 and 2004 (in thousands) Column A Column B Column C Charged to Costs and Expenses Column D Column E Description Year ended December 31, 2006 Deducted in the balance sheet from the asset to which ...

  • Page 73
    ... Berbee Information Networks Corporation CDW Asia Holdings, LLC CDW Canada, Inc. CDW Capital Corporation CDW Corporation CDW Direct, LLC CDW Government, Inc. CDW ISFC, LLC CDW Logistics, Inc. Technology Resource Center, Inc. Jurisdiction of Incorporation Wisconsin Delaware New Brunswick Illinois...

  • Page 74
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-134204, No. 333-120260, No. 333-43925, No. 333-48172, and No. 333-98123) of CDW Corporation of our report dated March 1, 2007 relating to the...

  • Page 75
    ... 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 76
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who...

  • Page 77
    ... 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, 2006 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information...

  • Page 78
    ... chief financial officer of CDW Corporation, ("CDW"), certify that (i) the Annual Report on Form 10-K for the year ended December 31, 2006 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in...

  • Page 79
    ... - Public Sector Gregory L. Sliwicki Group Vice President Berbee Information Networks Corporation Kevin P. Adams Vice President - Program Management Kenneth B. Grimsley Vice President - Strategic Sales Anne B. Ireland Vice President - Business Development Cindy T. Klimstra Vice President - Investor...

  • Page 80
    ... annual reports, can be accessed online at CDW.com/investor. Copies may also be obtained upon written request to: CDW Corporation Attention: Investor Relations 200 North Milwaukee Avenue Vernon Hills, Illinois 60061 Investor Inquiries Cindy Thorson Klimstra Vice President - Investor Relations Phone...

  • Page 81
    CDW.com • 800.800.4CDW 34848 032707