CDW CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 31, 2003, 90,798,032 common shares were issued and 83,237,232 were outstanding.


			Page No.

PART I.	Financial Information

	Item 1.	Financial Statements (unaudited):

		Condensed Consolidated Balance Sheets -
		September 30, 2003 and December 31, 2002		1

		Condensed Consolidated Statements of Income -
		Three and nine months ended September 30, 2003 and 2002		2

		Condensed Consolidated Statement of Shareholders’ Equity -
		Nine months ended September 30, 2003		3

		Condensed Consolidated Statements of Cash Flows -
		Nine months ended September 30, 2003 and 2002		4

		Notes to Condensed Consolidated Financial Statements		5

	Item 2.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations		12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22

	Item 4.	Controls and Procedures		22

PART II.	Other Information

	Item 6.	Exhibits and Reports on Form 8-K		22

		Signature		23

CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


				September 30,			December 31,
				2003			2002

				(unaudited)
Assets

Current assets:
	Cash and cash equivalents			$	228,147		$	157,140
	Marketable securities				300,818			347,474
	Accounts receivable, net of allowance for doubtful accounts of $10,018 and $10,500, respectively				455,569			333,084
	Merchandise inventory				189,950			150,785
	Miscellaneous receivables				21,008			14,084
	Deferred income taxes				11,757			11,757
	Prepaid expenses				5,470			4,212


		Total current assets			1,212,719			1,018,536

Property and equipment, net					62,906			64,088
Investment in and advances to joint venture					2,638			5,176
Deferred income taxes and other assets					14,683			7,864


			Total assets	$	1,292,946		$	1,095,664


Liabilities and Shareholders’ Equity

Current liabilities:
	Accounts payable			$	210,478		$	102,786
	Accrued expenses:
		Compensation			35,508			33,057
		Income taxes			16,912			17,945
		Other			28,646			17,806


		Total current liabilities			291,544			171,594


Shareholders’ equity:
	Preferred shares, $1.00 par value; 5,000 shares authorized; none issued				—			—
	Common shares, $.01 par value; 500,000 shares authorized; 90,518 and 89,669 shares issued, respectively				905			897
	Paid-in capital				393,450			346,054
	Retained earnings				912,313			806,548
	Unearned compensation				(403	)		(837	)
	Accumulated other comprehensive income				56			3

					1,306,321			1,152,665
	Less cost of common shares in treasury; 7,561 shares and 5,708 shares, respectively				(304,919	)		(228,595	)

		Total shareholders’ equity			1,001,402			924,070

			Total liabilities and shareholders’ equity	$	1,292,946		$	1,095,664

The accompanying notes are an integral part of the consolidated financial statements.

CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)


		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002

Net sales		$	1,222,785		$	1,150,970		$	3,315,700		$	3,210,626
Cost of sales			1,046,561			993,930			2,835,630			2,786,175


Gross profit			176,224			157,040			480,070			424,451

Selling and administrative expenses			84,657			67,186			221,728			196,396
Net advertising expense			19,004			931			46,842			3,244


Income from operations			72,563			88,923			211,500			224,811

Interest income			1,573			2,188			5,671			7,239
Other expense, net			(410	)		(377	)		(1,250	)		(1,136	)


Income before income taxes			73,726			90,734			215,921			230,914

Income tax provision			29,122			35,840			85,289			91,211


Net income		$	44,604		$	54,894		$	130,632		$	139,703


Earnings per share:
	Basic	$	0.54		$	0.65		$	1.57		$	1.64

	Diluted	$	0.52		$	0.63		$	1.52		$	1.57


Weighted-average number of common shares outstanding:
	Basic		82,791			84,206			83,367			85,212

	Diluted		85,786			87,326			86,024			88,740


Dividends per share		$	0.30		$	0.00		$	0.30		$	0.00

The accompanying notes are an integral part of the consolidated financial statements.

CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)


																	Accumulated
	Total																Other
	Shareholders'			Common		Paid-in		Retained			Unearned			Treasury			Comprehensive		Comprehensive
	Equity			Shares		Capital		Earnings			Compensation			Shares			Income		Income

Balance at December 31, 2002	$	924,070		$	897	$	346,054	$	806,548		$	(837	)	$	(228,595	)	$	3
Amortization of unearned compensation		434			—		—		—			434			—			—
Exercise of stock options		13,969			8		13,961		—			—			—			—
Issuance of common stock in connection with Employee Stock Purchase Plan		2,247			—		2,247		—			—			—			—
Tax benefit from stock option and restricted stock transactions		31,188			—		31,188		—			—			—			—
Purchase of treasury shares		(76,324	)		—		—		—			—			(76,324	)		—
Cash dividends		(24,867	)		—		—		(24,867	)		—			—			—
Net income		130,632			—		—		130,632			—			—			—	$	130,632
Net unrealized gains on marketable securities		15			—		—		—			—			—			15		15
Foreign currency translation adjustment		38			—		—		—			—			—			38		38

Comprehensive income		—			—		—		—			—			—			—	$	130,685

Balance at September 30, 2003	$	1,001,402		$	905	$	393,450	$	912,313		$	(403	)	$	(304,919	)	$	56

The accompanying notes are an integral part of the consolidated financial statements.

CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


			Nine Months Ended September 30,

			2003			2002

Cash flows from operating activities:
Net income			$	130,632		$	139,703

Adjustments to reconcile net income to net cash provided by operating activities:

	Depreciation			11,286			11,836
	Accretion of marketable securities			788			488
	Stock-based compensation expense			434			815
	Allowance for doubtful accounts			(828	)		1,000
	Deferred income taxes			1,131			1,382
	Tax benefit from stock option and restricted stock transactions			31,188			62,066

	Changes in assets and liabilities:
		Accounts receivable		(117,253	)		(44,708	)
		Miscellaneous receivables and other assets		(9,731	)		(7,054	)
		Merchandise inventory		(23,085	)		(7,483	)
		Prepaid expenses		(1,258	)		243
		Accounts payable		103,550			6,474
		Accrued compensation		1,738			1,426
		Accrued income taxes and other expenses		8,880			26,379

	Net cash provided by operating activities			137,472			192,567


Cash flows from investing activities:
	Purchases of available-for-sale securities			(1,577,510	)		(1,092,473	)
	Redemptions of available-for-sale securities			1,597,580			1,183,625
	Purchases of held-to-maturity securities			(417,846	)		(227,801	)
	Redemptions of held-to-maturity securities			443,659			100,968
	Investment in and advances to joint venture			(79	)		(8,913	)
	Repayment of advances from joint venture			3,100			8,650
	Purchase of property and equipment			(8,338	)		(6,542	)
	Purchase of selected U.S. assets of Micro Warehouse			(19,350	)		—
	Purchase of Canadian operations of Micro Warehouse			(2,744	)		—

	Net cash provided by (used in) investing activities			18,472			(42,486	)

Cash flows from financing activities:
	Purchase of treasury shares (1)			(76,324	)		(120,124	)
	Proceeds from exercise of stock options			13,969			9,339
	Issuance of common stock in connection with Employee Stock Purchase Plan			2,247			—
	Dividends paid			(24,867	)		—

	Net cash used in financing activities			(84,975	)		(110,785	)


Effect of exchange rate changes on cash and cash equivalents				38			—


Net increase in cash				71,007			39,296

Cash and cash equivalents — beginning of period				157,140			145,977


Cash and cash equivalents — end of period			$	228,147		$	185,273

(1)

The Company acquired $8.2 million of shares in September 2002 for treasury purposes for which cash settlement occurred in October 2002. Accordingly, the Company has excluded this non-cash item from both the “Purchase of treasury shares” and “Accounts payable” amounts presented above.

The accompanying notes are an integral part of the consolidated financial statements.

CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

CDW Corporation (collectively with its subsidiaries, “CDW” or the “Company”) is the largest 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, Virginia, Connecticut, New Jersey, and Canada. Additionally, we market and sell products through CDW.com, CDWG.com, and macwarehouse.com, our Web sites.

During September 2003, we purchased selected U.S. assets and the Canadian operations of Micro Warehouse, a reseller of computers, software, and peripheral products. The U.S. transaction, completed on September 9, 2003, was accounted for as a purchase of assets, with the $20 million purchase price allocated to the assets purchased, including inventory, fixed assets, and customer lists, based upon their fair values at the date of purchase. Sales, subsequent to the completion of the U.S. transaction, made by former members of the Micro Warehouse U.S. sales force who joined CDW in conjunction with this transaction, along with the associated costs, are included in the accompanying condensed consolidated financial statements. The Canadian transaction, completed on September 23, 2003, was accounted for as the purchase of a business and, accordingly, the results of operations subsequent to the date of purchase are included in the accompanying condensed consolidated financial statements, and the assumed assets and liabilities were recorded based upon their fair values at the date of purchase. The Canadian operations were purchased for $2.7 million.

In the third quarter of 2003, we recorded $8 million of transaction and integration expenses associated with these transactions. These expenses are primarily comprised of severance and outplacement costs, payroll expenses for former Micro Warehouse employees performing transition services, customer satisfaction expenses, customer communications and advertising expenses, and legal and accounting advisory fees. These expenses are included in selling and administrative expenses ($6.9 million) and net advertising expenses ($1.1 million) in the Condensed Consolidated Statements of Income.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with those reflected in our 2002 Annual Report on Form 10-K and documents incorporated therein as filed with the Securities and Exchange Commission. The accompanying financial data should be read in conjunction with the notes to consolidated financial statements contained in our 2002 Annual Report on Form 10-K and documents incorporated therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2003 and December 31, 2002, the results of operations for the three and nine month periods ended September 30, 2003 and 2002, the cash flows for the nine month periods ended September 30, 2003 and 2002, and the changes in shareholders’ equity for the nine month period ended September 30, 2003. The unaudited condensed consolidated statements of income for such interim periods are not necessarily indicative of results for the full year.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. See the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002 for an additional discussion of the most significant accounting policies and estimates used in the preparation of our financial statements.

At September 30, 2003, we had several stock-based employee compensation plans. In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we account for our stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, compensation expense is recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the three and nine month periods ended September 30, 2003 and 2002 (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Net income, as reported	$	44,604		$	54,894		$	130,632		$	139,703

Add stock-based employee compensation expense included in reported net income, net of related tax effects		81			156			262			493

Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6,242	)		(6,399	)		(18,622	)		(19,546	)


Pro forma net income	$	38,443		$	48,651		$	112,272		$	120,650


Basic earnings per share, as reported	$	0.54		$	0.65		$	1.57		$	1.64
Diluted earnings per share, as reported	$	0.52		$	0.63		$	1.52		$	1.57

Pro forma basic earnings per share	$	0.46		$	0.58		$	1.35		$	1.42
Pro forma diluted earnings per share	$	0.45		$	0.56		$	1.31		$	1.36

Our functional currency is the U.S. dollar. The functional currency of our Canadian subsidiary is the local currency, the Canadian dollar. Assets and liabilities of this subsidiary are translated at the spot rate in effect at the applicable reporting date and the results of operations are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity.

The amortized cost and estimated fair values of our investments in marketable securities at September 30, 2003, were (in thousands):

Estimated fair values of marketable securities are based on quoted market prices. The amortized cost and estimated fair value of our investments in marketable securities at September 30, 2003, by contractual maturity, were (in thousands):

As of September 30, 2003, all of the marketable securities that are due after one year have maturity dates prior to September 15, 2005.

The gross unrealized holding gains and losses on available-for-sale securities are recorded as accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity. The gross realized gains and losses on marketable securities that are included in other expense in the Condensed Consolidated Statements of Income are not material.

plus 1/2% or the federal funds rate plus 1/2%, as determined by the Company. Borrowings under the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus .45% or the federal funds rate plus .45%, as determined by the Company. At September 30, 2003, there were no borrowings under either of the credit facilities.

We have entered into security agreements with certain financial institutions (“Flooring Companies”) in order to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreements allowed for a maximum credit line of $64 million collateralized by inventory purchases financed by the Flooring Companies. At September 30, 2003, all amounts owed the Flooring Companies were included in trade accounts payable.

At September 30, 2003, we had outstanding common shares totaling 82,957,507. We have granted options to purchase common shares to the directors and coworkers of CDW under several stock option plans. These options have a dilutive effect on the calculation of earnings per share. The following table is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations as required by Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (in thousands, except per share amounts):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2003		2002		2003		2002

Basic earnings per share:
Income available to common shareholders (numerator)		$	44,604	$	54,894	$	130,632	$	139,703

Weighted-average common shares outstanding (denominator)			82,791		84,206		83,367		85,212

Basic earnings per share		$	0.54	$	0.65	$	1.57	$	1.64

Diluted earnings per share:
Income available to common shareholders (numerator)		$	44,604	$	54,894	$	130,632	$	139,703

Weighted-average common shares outstanding			82,791		84,206		83,367		85,212
Effect of dilutive securities:
	Options on common stock		2,995		3,120		2,657		3,528

Total common shares and dilutive securities (denominator)			85,786		87,326		86,024		88,740

Diluted earnings per share		$	0.52	$	0.63	$	1.52	$	1.57

Additional options to purchase common shares were outstanding during the three and nine month periods ended September 30, 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 respective periods. The following table summarizes the weighted-average number, and the weighted-average exercise price, of those options which were excluded from the calculation:

In January 2001, our Board of Directors authorized the purchase of up to 5,000,000 shares of our common stock. From January 2001 through September 30, 2002, we purchased the 5,000,000 shares authorized to be repurchased at a total cost of $204.6 million (an average price of $40.92 per share).

In July 2002, our Board of Directors authorized another share repurchase program of up to 2,500,000 shares of our common stock. These purchases may be made from time to time in both the open market and private transactions, as conditions warrant. This program will remain in effect through July 2004, unless earlier terminated by the Board or completed. Under this repurchase program, we purchased 1,852,424 shares of our common stock during the nine month period ended September 30, 2003, at a total cost of $76.3 million (an average price of $41.20 per share). From July 2002 through September 30, 2003, we purchased 2,360,800 shares of our common stock under this program at a total cost of $98.2 million (an average price of $41.59 per share).

In July 2003, our Board of Directors authorized a new share repurchase program of up to 2,500,000 shares of our common stock. These purchases may be made from time to time in both open market and private transactions, as conditions warrant. This new repurchase program is expected to remain in effect through July 2005, unless earlier terminated by the Board or completed. As of September 30, 2003, no purchases have been made under this new program.

Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee stock plans.

We are engaged in the sale of multi-brand computers and related technology products and services, primarily through direct marketing. We have two operating segments: corporate, which is primarily comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government, and educational institution customers. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the internal organization that is used by management for making operating decisions and assessing performance is the source of our reportable segments.

The accounting policies of the segments are the same as those described previously in the “Summary of Significant Accounting Policies.” We allocate resources to and evaluate performance of our segments based on both sales and operating income. Our corporate segment provides purchasing, merchandising, accounting, information technology, marketing, distribution, and fulfillment services to the public sector segment. Certain elements of gross margin and operating expenses are subject to intercompany service agreements which provide for, among other things, a mark-up on intercompany sales and allocation of indirect expenses such as occupancy, operations and other support, payroll, training, and benefits. The table below presents information about our reportable segments:


	Three Months Ended September 30, 2003 (in 000's)

	Corporate		Public Sector		Eliminations			Consolidated

External customer sales	$	878,393	$	344,392	$	—		$	1,222,785
Transfers between segments		340,808		—		(340,808	)		—

Total net sales	$	1,219,201	$	344,392	$	(340,808	)	$	1,222,785

Income from operations	$	63,721	$	8,842	$	—		$	72,563

Net interest income and other expense									1,163

Income before income taxes								$	73,726

Total assets	$	1,247,215	$	166,646	$	(120,915	)	$	1,292,946


	Three Months Ended September 30, 2002 (in 000's)

	Corporate		Public Sector		Eliminations			Consolidated

External customer sales	$	869,127	$	281,843	$	—		$	1,150,970
Transfers between segments		276,359		—		(276,359	)		—

Total net sales	$	1,145,486	$	281,843	$	(276,359	)	$	1,150,970

Income from operations	$	83,737	$	5,186	$	—		$	88,923

Net interest income and other expense									1,811

Income before income taxes								$	90,734

Total assets	$	1,007,596	$	101,203	$	(45,670	)	$	1,063,129


	Nine Months Ended September 30, 2003 (in 000's)

	Corporate		Public Sector		Eliminations			Consolidated

External customer sales	$	2,530,166	$	785,534	$	—		$	3,315,700
Transfers between segments		759,963		—		(759,963	)		—

Total net sales	$	3,290,129	$	785,534	$	(759,963	)	$	3,315,700

Income from operations	$	192,827	$	18,673	$	—		$	211,500

Net interest income and other expense									4,421

Income before income taxes								$	215,921

Total assets	$	1,247,215	$	166,646	$	(120,915	)	$	1,292,946


	Nine Months Ended September 30, 2002 (in 000's)

	Corporate		Public Sector		Eliminations			Consolidated

External customer sales	$	2,553,320	$	657,306	$	—		$	3,210,626
Transfers between segments		637,417		—		(637,417	)		—

Total net sales	$	3,190,737	$	657,306	$	(637,417	)	$	3,210,626

Income from operations	$	212,684	$	12,127	$	—		$	224,811

Net interest income and other expense									6,103

Income before income taxes								$	230,914

Total assets	$	1,007,596	$	101,203	$	(45,670	)	$	1,063,129

The results of operations for our Canadian subsidiary are included in our corporate segment. Our assets are primarily managed as part of the corporate segment, including all inventory and the majority of all property and equipment. As a result, capital expenditures and related depreciation are immaterial for the public sector segment. The public sector segment assets consist principally of cash and cash equivalents and accounts receivable.

No single customer accounted for more than 1% of net sales in the three or nine month periods ended September 30, 2003 or 2002. Less than 1% of our revenues are comprised of sales to customers outside the United States.

Sales and operating expenses relating to our investment in CDW Leasing, L.L.C. (“CDW-L”), accounted for under the equity method, are immaterial to the Company as a whole and are evaluated by management for making operating decisions and allocating resources as part of the corporate segment. The net equity earnings (losses) relating to our investment in CDW-L, accounted for under the equity method, were $182,238 and $(40,216) for the three month periods ended September 30, 2003 and 2002, respectively, and $483,409 and $230,258 for the nine month periods ended September 30, 2003 and 2002, respectively. These amounts are included in selling and administrative expenses in the Condensed Consolidated Statements of Income.

Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting for Consideration Received 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 recognized in the reseller’s income statement unless certain conditions are met showing that the funds are used for a specific program entirely funded by an individual vendor. If these specific requirements related to individual vendors are met, the consideration is accounted for as a reduction in the related expense category, such as advertising or selling and administrative expense. EITF 02-16 applies to all agreements modified or entered into on or after January 1, 2003. As a result of prospectively adopting EITF 02-16, we recorded $17.4 million and $45.3 million of vendor consideration as a reduction of cost of sales in the three and nine month periods ended September 30, 2003, respectively. Adopting EITF 02-16 had no impact on our operating profit, as the vendor consideration recorded as a reduction of cost of sales would previously have been recorded as a reduction of advertising expense and selling and administrative expense.

In November 2002, the EITF published Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), which addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF 00-21 was effective for the Company for revenue arrangements entered into beginning July 1, 2003. The adoption of EITF 00-21 had no impact on our 2003 consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). FIN 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. FIN 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. FIN 46 was effective for the Company on February 1, 2003 for variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, the FASB deferred the implementation date of FIN 46 to December 15, 2003. We do not expect the adoption of FIN 46 to have a material impact on our 2003 consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto.

We are the largest 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, Virginia, Connecticut, New Jersey, and Canada. Additionally, we market and sell products through CDW.com, CDWG.com, and macwarehouse.com, our Web sites.

For financial reporting purposes, we have two operating segments: corporate, which is primarily comprised of business customers, but also includes consumers (which generated approximately 2% of net sales in the three and nine month periods ended September 30, 2003), and public sector, comprised of federal, state and local government, and educational institution customers which are served by CDW Government, Inc. (“CDW-G”), a wholly-owned subsidiary.

In Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of our Annual Report on Form 10-K for the year ended December 31, 2002, which was filed with the Securities and Exchange Commission on March 28, 2003, we included a discussion of the most significant accounting policies and estimates used in the preparation of our financial statements. There has been no material change in the policies and estimates used by us in the preparation of our financial statements since the filing of our Annual Report.

Total transaction and integration expenses associated with these transactions are expected to be approximately $16 million, with $8 million recorded in the third quarter of 2003 and approximately $8 million expected to be recorded in the fourth quarter of 2003. These expenses are primarily comprised of severance and outplacement costs, payroll expenses for former Micro Warehouse employees performing transition services, customer satisfaction expenses, customer communications and advertising expenses, and legal and accounting advisory fees. These expenses are included in selling and administrative expenses ($6.9 million in the third quarter of 2003) and net advertising expenses ($1.1 million in the third quarter of 2003) in the Condensed Consolidated Statements of Income.

The following table sets forth for the periods indicated information derived from our consolidated statements of income expressed as a percentage of net sales:

The following three tables include information on operating statistics, product mix, and product category growth for the periods indicated. Except as otherwise noted, the information in the tables does not reflect sales made by former members of the Micro Warehouse sales force who joined CDW in conjunction with the Micro Warehouse transactions for the three and nine month periods ended September 30, 2003, which were $42.9 million for both periods (“Micro Warehouse sales”). The information for Micro Warehouse sales was not available because, for the period following the closing of the Micro Warehouse transactions through September 30, 2003, the Micro Warehouse sales were recorded through the I.T. systems formerly maintained by Micro Warehouse and the classifications used by Micro Warehouse differed from those used by CDW. The operating statistics, product mix, and product category growth tables will include Micro Warehouse sales beginning with the fourth quarter of 2003.


Operating Statistics		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002

Commercial customers served (1):
	Current period		192,074			177,969			321,564			310,936
	Trailing 12 months		371,327			363,597			371,327			363,597
% of sales to commercial customers			98.2	%		97.9	%		98.0	%		97.4	%
Number of invoices processed			1,287,675			1,273,758			3,834,742			3,737,826
Average invoice size		$	989		$	1,034		$	917		$	950
Direct web sales (000’s)		$	281,446		$	224,351		$	755,779		$	614,659
Sales force, end of period (2)			1,459			1,250			1,459			1,250
Annualized inventory turnover(3)			25			28			22			30
Accounts receivable — days sales outstanding(3)			34			29			38			31

(1)		Commercial customers are defined as public sector and corporate customers excluding consumers.

(2)		Sales force at September 30, 2003 of 1,459 does not include 465 former members of the Micro Warehouse sales force who joined CDW in conjunction with the Micro Warehouse transaction.

(3)		Reflects Micro Warehouse sales.

The following table presents net sales dollars by product category as a percentage of total net sales dollars. Product lines are based upon internal product code classifications. Product mix for the three and nine month periods ended September 30, 2002 has been retroactively adjusted for certain changes in individual product categorization.


Analysis of Product Mix			Three Months Ended September 30,						Nine Months Ended September 30,

			2003			2002			2003			2002

Notebook computers and accessories				13.8	%		12.2	%		12.6	%		12.6	%
Desktop computers and servers				12.9			13.1			13.1			13.4

	Subtotal computer products			26.7			25.3			25.7			26.0
Software				15.5			19.0			16.3			18.1
Data storage devices				14.2			13.7			14.3			14.1
Printers				13.6			13.4			14.0			13.2
NetComm products				9.8			9.3			9.5			9.4
Video				9.0			8.7			9.0			8.7
Add-on boards/memory				4.5			3.8			4.3			4.3
Input devices				3.4			3.2			3.5			3.1
Other				3.3			3.6			3.4			3.1

		Total		100.0	%		100.0	%		100.0	%		100.0	%

The following table represents the change in year-over-year sales dollars by product category for each of the periods indicated. Product lines are based upon internal product code classifications. The rates of change for the three and nine month periods ended September 30, 2002 have been retroactively adjusted for certain changes in individual product categorization.


Analysis of Product Category Growth		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002

Notebook computers and accessories			17.4	%		(4.3)	%		2.7	%		(9.3)	%
Desktop computers and servers			2.4			19.1			(0.1	)		8.0

	Subtotal computer products		9.7			6.5			1.3			(1.1	)
Software			(15.4	)		27.7			(7.9	)		16.6
Data storage devices			7.4			8.2			2.9			5.5
Printers			5.6			16.8			8.6			10.5
NetComm products			8.7			9.3			3.7			5.2
Video			8.1			15.9			5.4			12.1
Add-on boards/memory			21.5			15.1			2.7			3.6
Input devices			10.4			24.3			12.5			20.8
Other			0.3			50.2			9.5			29.7

Three Month Period Ended September 30, 2003 Compared to Three Month Period Ended September 30, 2002

Net sales in the third quarter of 2003 increased 6.2% to $1.223 billion, compared to $1.151 billion in the third quarter of 2002. Included in third quarter 2003 were $42.9 million of Micro Warehouse sales, representing 3.7 percentage points of the year-over-year increase. Corporate segment sales increased 1.1% to $878.4 million in the third quarter of 2003 from $869.1 million in the third quarter of 2002, and comprised 72.0% of our total

net sales for the quarter. Included in the third quarter 2003 corporate segment sales were $24.5 million of Micro Warehouse sales, representing 2.8 percentage points of the year-over-year change. The decline in corporate segment sales, excluding Micro Warehouse sales, was due to unusually high levels of Microsoft software sold in the third quarter of 2002 in conjunction with the Microsoft Upgrade Advantage program, weak general economic conditions, and reduced sales to consumer customers. Public sector segment sales increased 22.2% to $344.4 million in the third quarter of 2003 from $281.8 million in the third quarter of 2002, and comprised 28.0% of our total net sales for the quarter. Included in the third quarter 2003 public sector segment sales were $18.4 million of Micro Warehouse sales, representing 6.5 percentage points of the year-over-year increase. The growth in our public sector segment was primarily due to our focused sales and marketing efforts in the federal, state and local government, and educational institution markets.

In general, the average selling price of our products decreased from the third quarter of 2002, however, the impact of this decrease was more than offset by increased unit sales. We believe there may be future decreases in pricing for technology products during the remainder of 2003, resulting in a lower average invoice size. Such decreases require us to generate more orders and sell more units in order to maintain or increase the level of sales.

Gross profit increased to $176.2 million in the third quarter of 2003, compared to $157.0 million in the third quarter of 2002. As a percentage of net sales, gross profit was 14.4% in the third quarter of 2003, compared to 13.6% in the third quarter of 2002. The increase in the gross profit percentage was primarily due to the adoption in January 2003 of a new accounting pronouncement, Emerging Issues Task Force Issue No. 02-16, “Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 02-16”).

The income statement classification provisions of EITF 02-16 cover vendor consideration related to agreements entered into or modified after January 1, 2003. This pronouncement requires that consideration from vendors, such as advertising support funds, be accounted for as a reduction of cost of sales unless certain requirements are met showing that the funds are used for a specific program entirely funded by an individual vendor. If these specific requirements related to individual vendors are met, the consideration is accounted for as a reduction in the related expense category, such as advertising or selling and administrative expense. We provide numerous advertising programs to support vendors, including catalogs, television, radio, Internet, magazine, and newspaper advertising for which we receive consideration. Some of these programs relate to multiple vendors, while others are performed on behalf of individual vendors for specific projects.

As a consequence of adopting EITF 02-16, we recorded $17.4 million of vendor consideration as a reduction of cost of sales in the third quarter of 2003. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, the gross profit margin would have been 13.0% in the third quarter of 2003 compared to 13.6% in the third quarter of 2002. In the third quarter of 2002, the gross profit margin was positively impacted by unusually high sales of Microsoft Upgrade Advantage along with the related increased levels of vendor software rebates. We accounted for Upgrade Advantage on a net basis, so the method of accounting was similar to the method of accounting for commissions. Sales of Upgrade Advantage, therefore, had a positive impact on our gross profit margin, but did not have a significant impact on our sales. This version of Upgrade Advantage was only sold through July 31, 2002. The non-GAAP gross profit margin is included in this discussion to provide a meaningful comparison to prior periods.

The gross profit margin depends on various factors, including vendor inventory price protection and rebate programs, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in a fluctuation of gross margins below recent experience.

Selling and administrative expenses increased in the third quarter of 2003 to $84.7 million, compared to $67.2 million in the third quarter of 2002. Included in selling and administrative expenses in the third quarter of 2003 were $6.9 million of transaction and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were payroll costs, employee-related costs, and other selling and administrative costs.

•

Payroll costs increased $10.4 million, including $2.0 million of expenses for former Micro Warehouse employees performing transition services. The remainder of the increase in payroll costs was due to an increase in our sales force during the quarter ended September 30, 2003. Our sales force includes account managers 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.

•

Employee-related costs (which includes items such as profit sharing, incentive awards and insurance) increased $1.1 million, including $0.4 million of expenses related to the Micro Warehouse transactions.

•

Other selling and administrative costs increased $5.1 million, including $4.4 million in severance and outplacement costs, customer satisfaction expenses, and legal and accounting advisory fees related to the Micro Warehouse transactions.

Selling and administrative expenses increased to 6.9% of net sales in the quarter ended September 30, 2003, from 5.8% in the same period of 2002.

Net advertising expense increased to $19.0 million in the third quarter of 2003, compared to $0.9 million in the same period of 2002. This increase is primarily due to the adoption of EITF 02-16, which resulted in the reclassification of $17.1 million of vendor consideration to a reduction of cost of sales, which would previously have been recorded as a reduction of advertising expense. Additionally, $1.1 million of the increase is due to customer communication and advertising costs related to the Micro Warehouse transactions. Gross advertising expense increased slightly, to $24.8 million in the third quarter of 2003, compared to $24.5 million in the third quarter of 2002, while decreasing to 2.0% of net sales in the third quarter of 2003 compared to 2.1% of net sales in the same period of 2002. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, cooperative advertising reimbursements decreased 2.8% to $22.9 million in the third quarter of 2003, compared to $23.6 million in the same period of 2002. This non-GAAP measurement is included to provide a meaningful comparison to prior periods.

Consolidated operating income was $72.6 million in the third quarter of 2003, a decrease from $88.9 million in the third quarter of 2002. Consolidated operating income as a percentage of net sales decreased to 5.9% in the third quarter of 2003, compared to 7.7% in the same period of 2002. Corporate segment operating income was $63.7 million in the third quarter of 2003, a decrease from $83.7 million in the third quarter of 2002. The decrease in corporate segment operating income was due to reduced sales of Microsoft Upgrade Advantage, the reduced level of associated Microsoft vendor rebates and the $8.0 million of selling and administrative expenses and net advertising expenses related to the Micro Warehouse transactions. Public sector segment operating income was $8.8 million in the third quarter of 2003, an increase from $5.2 million in the third quarter of 2002. The increase in public sector segment operating income was due to increased sales, improved gross margin and the leveraging of our investment in additional sales force.

Interest income, net of other expenses, decreased to $1.2 million in the third quarter of 2003, compared to $1.8 million in the third quarter of 2002, as higher levels of cash available for investing were offset by decreases in the rates of interest earned.

The effective income tax rate, expressed as a percentage of income before income taxes, was 39.5% in the third quarter of 2003 and 2002.

Net income in the third quarter of 2003 was $44.6 million, an 18.7% decrease from $54.9 million in the third quarter of 2002. Diluted earnings per share were $0.52 in the third quarter of 2003, a decrease of 17.5% from $0.63 in the third quarter of 2002.

Nine Month Period Ended September 30, 2003 Compared to Nine Month Period Ended September 30, 2002

Net sales in the nine month period ended September 30, 2003 increased 3.3% to $3.316 billion, compared to $3.211 billion in the same period of 2002. Corporate segment sales decreased 0.9% to $2.530 billion in the first nine months of 2003 from $2.553 billion in the first nine months of 2002, and comprised 76.3% of our total net sales for the period. The decline in corporate segment sales was due to weak general economic conditions and reduced sales to consumer customers. Public sector segment sales increased 19.5% to $785.5 million in the

first nine months of 2003 from $657.3 million in the first nine months of 2002, and comprised 23.7% of our total net sales for the period. The growth in our public sector segment was primarily due to our focused sales and marketing efforts in the federal, state and local government, and educational institution markets.

In general, the average selling price of our products decreased from the first nine months of 2002, however, the impact of this decrease was more than offset by increased unit sales. We believe there may be future decreases in pricing for technology products during the remainder of 2003, resulting in a lower average invoice size. Such decreases require us to generate more orders and sell more units in order to maintain or increase the level of sales.

Gross profit increased to $480.1 million in the first nine months of 2003, compared to $424.5 million in the same period of 2002. As a percentage of net sales, gross profit was 14.5% in the first nine months of 2003, compared to 13.2% in the first nine months of 2002. The increase in the gross profit percentage was primarily due to the adoption of EITF 02-16.

As a consequence of adopting EITF 02-16, we recorded $45.3 million of vendor consideration as a reduction of cost of sales in the first nine months of 2003. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, the gross profit margin would have been 13.1% in the first nine months of 2003 compared to 13.2% in the same period of 2002. The decrease in the gross profit margin was due to reduced sales of Microsoft Upgrade Advantage and a decrease in Microsoft vendor rebates. The non-GAAP gross profit margin is included in this discussion to provide a meaningful comparison to prior periods.

Selling and administrative expenses increased in the first nine months of 2003 to $221.7 million, compared to $196.4 million in the first nine months of 2002. Included in selling and administrative expenses in the first nine months of 2003 were $6.9 million of transaction and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were payroll costs and other selling and administrative costs.

•

Payroll costs increased $20.4 million, including $2.0 million of expenses for former Micro Warehouse employees performing transition services. The remainder of the increase in payroll costs was due to an increase in our sales force during the nine months ended September 30, 2003. Our sales force includes account managers 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.

•

Other selling and administrative costs increased $4.1 million, resulting from $4.4 million in severance and outplacement costs, customer satisfaction expenses, and legal and accounting advisory fees related to the Micro Warehouse transactions.

Selling and administrative expenses increased to 6.7% of net sales in the nine months ended September 30, 2003, from 6.1% in the same period of 2002.

Net advertising expense increased to $46.8 million in the first nine months of 2003, compared to $3.2 million in the same period of 2002. This increase is primarily due to the adoption of EITF 02-16, which resulted in the reclassification of $44.5 million of vendor consideration to a reduction of cost of sales, which would previously have been recorded as a reduction of advertising expense. Gross advertising expense increased slightly, to $69.1 million in the first nine months of 2003, compared to $67.8 million in the first nine months of 2002, while remaining consistent at 2.1% of net sales in the first nine months of 2003 and 2002. Excluding the impact of EITF 02-16, and therefore on a non-GAAP basis, cooperative advertising reimbursements increased 3.5% to $66.8 million in the first nine months of 2003, compared to $64.6 million in the same period of 2002. This non-GAAP measurement is included to provide a meaningful comparison to prior periods.

Consolidated operating income was $211.5 million in the first nine months of 2003, a decrease from $224.8 million in the first nine months of 2002. Consolidated operating income as a percentage of net sales decreased to 6.4% in the first nine months of 2003 compared to 7.0% in the same period of 2002. Corporate segment operating income was $192.8 million in the first nine months of 2003, a decrease from $212.7 million in the first

nine months of 2002. The decrease in corporate segment operating income was due to reduced sales of Microsoft Upgrade Advantage, the reduced level of Microsoft vendor rebates and the $8.0 million of selling and administrative expenses and net advertising expenses related to the Micro Warehouse transactions. Public sector segment operating income was $18.7 million in the first nine months of 2003, an increase from $12.1 million in the first nine months of 2002. The increase in public sector segment operating income was primarily due to increased sales.

Interest income, net of other expenses, decreased to $4.4 million in the first nine months of 2003, compared to $6.1 million in the same period of 2002, as higher levels of cash available for investing were offset by decreases in the rates of interest earned.

The effective income tax rate, expressed as a percentage of income before income taxes, was 39.5% in the first six months of 2003 and 2002.

Net income in the first nine months of 2003 was $130.6 million, a 6.5% decrease from $139.7 million in the first nine months of 2002. Diluted earnings per share were $1.52 in the first nine months of 2003, a decrease of 3.2% from $1.57 in the first nine months of 2002.

While sales in our corporate segment, which serves business and consumer markets, have not historically experienced significant seasonality throughout the year, sales in our public sector segment have historically been higher in the third quarter than in other quarters due to the buying patterns of 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.

We have historically financed our operations and capital expenditures primarily through cash flows from operations. At September 30, 2003, we had cash, cash equivalents, and marketable securities of $529.0 million and working capital of $921.2 million, representing an increase of $24.4 million in cash, cash equivalents, and marketable securities and an increase of $74.2 million in working capital from December 31, 2002. The increase in working capital was primarily a result of increases in cash and cash equivalents, marketable securities, accounts receivable, and inventory, partially offset by increases in accounts payable and accrued liabilities.

We have an aggregate $70 million available pursuant to two $35 million unsecured lines of credit with two financial institutions. One line of credit expires in June 2004, at which time we intend to renew the line, and the other does not have a fixed expiration date. Borrowings under the first credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or the federal funds rate plus 1/2%, as determined by the Company. Borrowings under the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus .45% or the federal funds rate plus .45%, as determined by the Company. At September 30, 2003, there were no borrowings under either of the credit facilities.

Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee stock plans.

On July 23, 2003, our Board of Directors declared an annual cash dividend to shareholders. The initial dividend of $0.30 per share, totaling $24.9 million, was paid on September 26, 2003, to shareholders of record on September 12, 2003. In future years, we plan to announce a dividend following the annual shareholders meeting, typically held in May.

Our current and anticipated uses of our cash, cash equivalents, and marketable securities are to fund growth in working capital and capital expenditures necessary to support future growth in sales, our stock buyback programs, dividends, and possible expansion through acquisitions. We believe that the funds held in cash, cash equivalents, and marketable securities, and funds available under the credit facilities, will be sufficient to fund our working capital and cash requirements at least through September 30, 2004.

Net cash provided by operating activities was $137.5 million in the nine month period ended September 30, 2003. The primary factors that affected our cash flow from operations were net income, changes in accounts receivable, merchandise inventory and accounts payable, and tax benefits from stock options and restricted stock transactions. Accounts receivable increased from $333.1 million at December 31, 2002 to $455.6 million at September 30, 2003. Days sales outstanding was 34 for the third quarter of 2003, compared with 29 for the third quarter of 2002. The increase in accounts receivable was due to higher sales, particularly toward the end of the third quarter, and sales added as a result of the Micro Warehouse transactions. Merchandise inventory increased from $150.8 million at December 31, 2002 to $190.0 million at September 30, 2003. The increase in merchandise inventory was primarily to support higher sales volume. Accounts payable increased to $210.5 million at September 30, 2003, compared with $102.8 million at December 31, 2002. The accounts payable balance fluctuates due to our normal cycle of payments. The increase in accounts payable at September 30, 2003 was due in part to this periodic fluctuation. Additionally, accounts payable increased due to increased purchases of inventory to support higher sales toward the end of the third quarter. Cash provided by operating activities in the first nine months of 2003 was positively impacted by a $31.2 million tax benefit recorded to paid-in capital, relating to the exercise of options pursuant to the various stock-based employee compensation plans, including $17.4 million related to the exercise of options by two former executive officers.

Net cash provided by investing activities for the nine month period ended September 30, 2003 was $18.5 million, including $45.9 million in proceeds from redemptions of investments in marketable securities, partially offset by $22.1 million used to purchase selected U.S. assets and the Canadian operations of Micro Warehouse and $8.3 million used for capital expenditures. At September 30, 2003, we had a $2.6 million net investment in and loan to CDW-L, a joint venture between CDW Capital Corporation (“CDWCC”), a wholly-owned subsidiary of

the Company, and First Portland Corporation (“FIRSTCORP”), an unrelated third party leasing company. During the first quarter of 2003, FIRSTCORP was acquired by IFC Credit Corporation. We use the equity method to account for our investment in CDW-L. Effective May 1, 2002, we decided to stop originating new leases with this venture and began to refer customers to independent leasing sources, including FIRSTCORP and several manufacturer captive entities. The existing leases in CDW-L’s portfolio will be held until maturity, with the majority expiring prior to December 31, 2004. Pursuant to a loan agreement between CDWCC and CDW-L, CDWCC had previously committed up to $10 million in loans to CDW-L. On September 5, 2002, CDWCC terminated its loan commitment. Repayment of the outstanding loans may be made through cash flow from operations after debt service on subordinated loans outstanding from financial institutions. At September 30, 2003, $0.9 million was outstanding under this loan agreement, $0.2 million of which is subordinated to loans from financial institutions.

Net cash used in financing activities for the nine month period ended September 30, 2003 was $85.0 million. This includes the repurchase of 1,852,424 shares of our common stock at a total cost of $76.3 million and the payment of cash dividends totaling $24.9 million. These payments were partially offset by proceeds of $14.0 million from the exercise of stock options under our various stock option plans and $2.2 million from the issuance of common stock in connection with the Employee Stock Purchase Plan.

Any statements in this report that are forward-looking (that is, not historical in nature) are made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, for example, statements concerning the Company’s sales, gross profit as a percentage of sales,

advertising expense and cooperative advertising reimbursements. In addition, words such as “likely,” “may,” “would,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” and similar expressions, may identify forward-looking statements in this report. Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties, including those described below, which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. The following factors, among others, may have an impact on the accuracy of the forward-looking statements contained in this report: the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, continuation of key vendor relationships and support programs, the continuing development, maintenance and operation of the Company’s I.T. systems, changes and uncertainties in economic conditions that could affect the rate of I.T. spending by the Company’s customers, changes in pricing by our vendors, the ability of the Company to hire and retain qualified account managers and any additional factors described from time to time in the Company’s filings with the Securities and Exchange Commission. These among other factors are discussed in further detail in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which was filed with the Securities and Exchange Commission on March 28, 2003, and which discussion is incorporated by reference herein. In addition, there are a number of risks associated with our recent Micro Warehouse transaction. For example, there is no guarantee that the acquisition will have the benefits we anticipate, that we will not encounter difficulty in the integration of the acquired assets and new personnel, that we will not be exposed to unanticipated liabilities arising from the acquisition or that the acquisition will not cause disruption to our existing business.

There has been no material change from the information provided in Item 7a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

(a)

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15 d-14(c)) as of the end of the period covered by this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this quarterly report was being prepared.

(b)

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2003 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(i)

We filed a Current Report on Form 8-K on July 16, 2003 furnishing a Press Release announcing our second quarter 2003 earnings under Item 12.

(ii)

We filed a Current Report on Form 8-K on July 24, 2003 furnishing a Press Release announcing a cash dividend and share repurchase program under Item 5.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2003

	OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Illinois (State or other jurisdiction of incorporation or organization)		36-3310735 (I.R.S. Employer Identification No.)

200 N. Milwaukee Ave. Vernon Hills, Illinois (Address of principal executive offices)		60061 (Zip Code)


Part I. Financial Information
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer


				Gross
				Unrealized
				Holding
		Estimated						Amortized
Security Type		Fair Value		Gains		Losses		Cost

Available-for-sale:
	Municipal bonds	$	104,574	$	18	$	—	$	104,556

	Total available-for-sale		104,574		18		—		104,556

Held-to-maturity:
	U.S. Government and Government agency securities		162,434		308		—		162,126
	Corporate fixed income securities		34,121		3		—		34,118

	Total held-to-maturity		196,555		311		—		196,244

Total marketable securities		$	301,129	$	329	$	—	$	300,800


		Estimated		Amortized
		Fair Value		Cost

Due in one year or less		$	181,653	$	181,467
Due in greater than one year			119,476		119,333

	Total investments in marketable securities	$	301,129	$	300,800

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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Table of Contents

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	Three Months Ended		Nine Months Ended
	September 30, 2003		September 30, 2003

Weighted-average number of options (in 000’s)		1,001		1,039
Weighted-average exercise price	$	55.72	$	55.45


	Percentage of Net Sales

Financial Results	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		85.6			86.4			85.5			86.8

Gross profit		14.4			13.6			14.5			13.2
Selling and administrative expenses		6.9			5.8			6.7			6.1
Net advertising expense		1.6			0.1			1.4			0.1

Income from operations		5.9			7.7			6.4			7.0
Interest and other income/expense		0.1			0.2			0.1			0.2

Income before income taxes		6.0			7.9			6.5			7.2
Income tax provision		2.4			3.1			2.6			2.8

Net income		3.6	%		4.8	%		3.9	%		4.4	%


31.1		Certification of Chief Executive Officer Pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C 1350


	CDW CORPORATION


Date: November 13, 2003	/s/	Barbara A. Klein
	By:	Barbara A. Klein Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)