CDW 2006 Annual Report Download - page 32

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• Payroll costs increased $38.3 million, primarily due to our continued investment in our sales
force and increases in administrative areas to support a larger and growing business. Our
sales force increased to 2,153 at December 31, 2005, from 2,012 at December 31, 2004.
Our sales 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 costs for 2005 include $3.7 million of compensation
expense in connection with the acceleration of vesting of stock options for coworkers through
the manager level. Payroll costs for 2004 included $1.5 million of expenses for former Micro
Warehouse employees performing transition services.
• Employee-related costs (which include items such as profit sharing, incentive awards, and
insurance) increased $2.8 million, primarily due to $4.0 million of additional profit sharing
expense related to the additional contribution to the 401(k) plan in conjunction with a
modification to the Company’s stock option program and increased expenses to support a
larger number of coworkers. These expenses were partially offset by a reduction of $5.3
million in an accrual for a company-wide incentive bonus program. The accrual was adjusted
based on certain program modifications which provided for specific payout levels for partial
achievement of full year financial objectives.
• Occupancy costs increased $1.7 million. This increase was primarily due to increased
depreciation related to asset additions for new sales offices and new financial systems,
partially offset by reduced rent. Occupancy costs for 2004 included $0.8 million of facility
expenses related to the Micro Warehouse transactions.
• Other selling and administrative costs increased $4.1 million. The increase was primarily due
to increased administrative expenses required to support a larger business, such as
professional fees and travel and entertainment expenses. Other selling and administrative
costs for 2004 included $1.6 million of costs related to the Micro Warehouse transactions.
Net advertising expense increased to $114.5 million in 2005, compared to $90.8 million in 2004.
This was due to an increase in gross advertising expense and an increase in cooperative advertising
funds classified as a reduction of cost of sales rather than as a reduction of advertising expense in
2005 compared to 2004. As a percentage of net sales, net advertising expense increased to 1.8% in
2005, compared to 1.6% in 2004.
Consolidated operating income was $419.6 million in 2005, a 6.8% increase from $392.8 million
in 2004. Consolidated operating income as a percentage of net sales was 6.7% in 2005, compared
to 6.9% in 2004. Corporate sector segment operating income was $341.8 million in 2005, a 4.4%
increase from $327.5 million in 2004. The increase in corporate sector segment operating income
was primarily due to an increase in sales, partially offset by increased expenses related to the
ongoing investment in the sales force. Public sector segment operating income was $110.4 million in
2005, an 18.2% increase from $93.4 million in 2004. The increase in public sector segment
operating income was primarily due to a 15.2% increase in sales during 2005 compared to 2004.
Headquarters expenses increased to $32.6 million in 2005, compared to $28.2 million in 2004,
primarily due to a larger number of coworkers and increased depreciation expense, partially offset by
$3.9 million of integration expenses related to the Micro Warehouse transactions incurred during
2004 that did not repeat. Headquarters expenses also included $3.7 million of compensation
expense in connection with the acceleration of vesting of stock options for coworkers through the
manager level and the impact of a $5.3 million reduction in an accrual for a company-wide incentive
bonus program.
The effective income tax rate, expressed as a percentage of income before income taxes,
decreased to 37.2% in 2005 compared to 39.6% in 2004. On April 1, 2005, we voluntarily began