Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "CDW" and similar terms refer to CDW Corporation and its subsidiaries. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that are subject to numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See "Forward-Looking Statements" above.

Overview

CDW Corporation is a Fortune 500 company and a leading provider of integrated IT solutions to small, medium and large business, and government, education and healthcare customers in the US, the UK and Canada. Our broad array of offerings

ranges from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.

We are technology "agnostic," with a product portfolio including more than 100,000 products and services from more than 1,000 leading and emerging brands. Our solutions are delivered in physical, virtual and cloud-based environments through over 6,000 customer-facing coworkers, including sellers, highly-skilled technology specialists and advanced service delivery engineers. We are a leading sales channel partner for many original equipment manufacturers ("OEMs"), software publishers and cloud providers (collectively, our "vendor partners"), whose products we sell or include in the solutions we offer. We provide our vendor partners with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage, technical expertise and extensive customer access.

We have three reportable segments, Corporate, Small Business and Public. Our Corporate segment primarily serves US private sector business customers with more than 250 employees. Our Small Business segment primarily serves US private sector business customers with up to 250 employees. Our Public segment is comprised of government agencies and education and healthcare institutions in the US. We also have two other operating segments: CDW UK and Canada, each of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category ("Other").

We may sell all or only select products that our vendor partners offer. Each vendor partner agreement provides for specific terms and conditions, which may include one or more of the following: product return privileges, price protection policies, purchase discounts and vendor incentive programs, such as purchase or sales rebates and cooperative advertising reimbursements. We also resell software for major software publishers. Our agreements with software publishers allow the end-user customer to acquire software or licensed products and services. In addition to helping our customers determine the best software solutions for their needs, we help them manage their software agreements, including warranties and renewals. A significant portion of our advertising and marketing expenses are reimbursed through cooperative advertising programs with our vendor partners. These programs are at the discretion of our vendor partners and are typically tied to sales or other commitments to be met by us within a specified period of time.

Effective January 1, 2018, we adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers, as amended ("Topic 606"), utilizing the full retrospective method. Prior period amounts have been adjusted accordingly.

Trends and Key Factors Affecting our Financial Performance

We believe the following key factors may have a meaningful impact on our business performance, influencing our ability to generate sales and achieve our targeted financial and operating results:

•

General economic conditions are a key factor affecting our results as they impact our customers' willingness to spend on information technology. This is particularly the case for business customers, as their purchases tend to reflect confidence in their business prospects, which are driven by their perceptions of business conditions. Purchasing behavior may be different between our Corporate customers and Small Business customers due to their perception of business conditions. Additionally, changes in trade policy and product constraints from suppliers could have an adverse impact on our business. There continues to be substantial uncertainty regarding the impact of Brexit. Potential adverse consequences of Brexit such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between UK and EU countries and increased regulatory complexities could have a negative impact on our business, financial condition and results of operations. To date, CDW UK is not seeing significant changes in the buying behavior of its customers even with the uncertainty related to the timing and terms of Brexit.

•

Changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of government, healthcare and education customers. A prolonged partial shutdown of the US Government could have an adverse impact to our sales to Government customers and sales to our other customers that do business with the areas of the US Government affected by a partial shutdown. Additionally, a prolonged partial shutdown could impact cash collections from contracts with customers who do business with areas of the US Government affected by a partial shutdown.

•

Technology trends drive customer purchasing behaviors in the market. Current technology trends are focused on delivering greater flexibility and efficiency, as well as designing IT securely. These trends are driving customer adoption of solutions such as those delivered via cloud, software defined architectures and hybrid on-premise and off-premise combinations, as well as the evolution of the IT consumption model to more "as-a-service" offerings, including Device-as-a-Service ("DaaS") and managed services.

Key Business Metrics

We monitor a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, gross margin, operating margin, Net income, Non-GAAP income before income taxes, Non-GAAP net income, Net income per common share, Non-GAAP net income per diluted share, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, return on working capital, Cash and cash equivalents, net working capital, cash conversion cycle (defined to be days of sales outstanding in Accounts receivable plus days of supply in Inventory minus days of purchases outstanding in Accounts payable, based on a rolling three-month average), debt levels including available credit and leverage ratios, sales per coworker and coworker turnover. These measures and ratios are compared to standards or objectives set by management, so that actions can be taken, as necessary, in order to achieve the standards and objectives.

In this Form 10-K, we discuss Non-GAAP income before income taxes, Non-GAAP net income, Non-GAAP net income per diluted share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin which are non-GAAP financial measures.

We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. Additionally, Adjusted EBITDA is a measure in the credit agreement governing our senior secured term loan facility (the "Term Loan") used to evaluate our ability to make certain investments, incur additional debt, and make restricted payments, such as dividends and share repurchases, as well as whether we are required to make additional principal prepayments on the Term Loan beyond the quarterly amortization payments. For further details regarding the Term Loan, see Long-Term Debt and Financing Arrangements within Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements. For the definitions of Non-GAAP income before income taxes, Non-GAAP net income and Adjusted EBITDA and reconciliations to Net income, see "Results of Operations."

The results of certain key business metrics are as follows:

	Years Ended December 31,
(dollars in millions)	2018				2017(1)				2016(1)
Net sales	$	16,240.5			$	14,832.9			$	13,672.7
Gross profit	2,706.9				2,450.2				2,328.3
Operating income	987.3				866.5				820.0
Net income	643.0				523.1				425.1
Non-GAAP net income	794.3				605.9				569.7
Adjusted EBITDA	1,302.2				1,186.0				1,118.1
Average daily sales(2)	63.9				58.4				53.8
Net debt(3)	3,002.8				3,091.3				2,970.7
Cash conversion cycle (in days)(4)	19				19				19

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	There were 254 selling days for each of the years ended December 31, 2018, 2017 and 2016.

(3)	Defined as Total debt minus Cash and cash equivalents.

(4)	Cash conversion cycle is defined as days of sales outstanding in Accounts receivable and certain receivables due from vendors plus days of supply in Merchandise inventory minus days of purchases outstanding in Accounts payable and Accounts payable-inventory financing, based on a rolling three-month average.

Results of Operations

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Results of operations, in dollars and as a percentage of Net sales are as follows:

		Years Ended December 31,
		2018							2017(1)
		Dollars in Millions				Percentage of Net Sales			Dollars in Millions				Percentage of Net Sales
Net sales		$	16,240.5			100.0	%		$	14,832.9			100.0	%
Cost of sales		13,533.6				83.3			12,382.7				83.5
Gross profit		2,706.9				16.7			2,450.2				16.5
Selling and administrative expenses		1,537.1				9.5			1,410.0				9.5
Advertising expense		182.5				1.1			173.7				1.2
Operating income		987.3				6.1			866.5				5.8
Interest expense, net		(148.6		)		(0.9	)		(150.5		)		(1.0	)
Net loss on extinguishments of long-term debt		—				—			(57.4		)		(0.4	)
Other income, net		1.8				—			2.1				—
Income before income taxes		840.5				5.2			660.7				4.5
Income tax expense		(197.5		)		(1.2	)		(137.6		)		(0.9	)
Net income		$	643.0			4.0	%		$	523.1			3.5	%

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

Net sales

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:

		Years Ended December 31,
		2018							2017(1)
(dollars in millions)		Net Sales				Percentage of Total Net Sales			Net Sales				Percentage of Total Net Sales			Dollar Change				Percent Change(2)
Corporate		$	6,842.5			42.1	%		$	6,172.8			41.6	%		$	669.7			10.8	%
Small Business		1,359.6				8.4			1,220.5				8.2			139.1				11.4
Public:
Government		2,097.3				12.9			2,109.8				14.2			(12.5		)		(0.6	)
Education		2,327.4				14.3			2,184.5				14.7			142.9				6.5
Healthcare		1,730.0				10.7			1,612.2				10.9			117.8				7.3
Total Public		6,154.7				37.9			5,906.5				39.8			248.2				4.2
Other		1,883.7				11.6			1,533.1				10.4			350.6				22.9
Total Net sales		$	16,240.5			100.0	%		$	14,832.9			100.0	%		$	1,407.6			9.5	%

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)	There were 254 selling days for each of the years ended December 31, 2018 and 2017.

Total Net sales for the year ended December 31, 2018 increased $1,408 million, or 9.5%, to $16,241 million, compared to $14,833 million for the year ended December 31, 2017. Excluding the impact of foreign currency fluctuations, constant currency Net sales growth was 9.2%.

For the year ended December 31, 2018, sales growth was driven by ongoing focus on client device refresh, the underlying demand for solutions and strong growth from our international operations.

Corporate segment Net sales for the year ended December 31, 2018 increased $670 million, or 10.8%, compared to the year ended December 31, 2017. Growth was primarily driven by client device refresh, as well as continued success helping customers with solutions, including data center and software.

Small Business segment Net sales for the year ended December 31, 2018 increased by $139 million, or 11.4%, between periods. Sales growth was primarily driven by client device refresh.

Public segment Net sales for the year ended December 31, 2018 increased $248 million, or 4.2%, compared to the year ended December 31, 2017. Education Net sales increased 6.5%, primarily driven by continued success addressing client device and networking needs for both K-12 and Higher Education customers. Net sales in Healthcare increased 7.3%, primarily driven by performance in client devices and video as customers moved forward on refresh projects. Net sales to Government customers were flat compared to the prior year. Federal Net sales were lower due to the prior year success of meeting the Department of Defense mandate to move to new client devices with stronger security features. Federal Net sales were nearly fully offset by the success of executing against contracts to State and Local government customers, including meeting public safety needs.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the year ended December 31, 2018 increased $351 million, or 22.9%, compared to the year ended December 31, 2017. Both operations had strong growth in local currency as we continued to take share in the local markets. In addition, UK growth was driven in part by increased sales from referrals for US-based customers. The impact of foreign currency exchange increased Other sales growth by approximately 270 basis points, primarily due to the favorable translation of the British pound to US dollar.

Gross profit

Gross profit increased $257 million, or 10.5%, to $2,707 million for the year ended December 31, 2018, compared to $2,450 million for the year ended December 31, 2017. As a percentage of Net sales, Gross profit margin increased 20 basis points to 16.7% for the year ended December 31, 2018. Gross profit margin was impacted by an increase in the mix of revenue recognized on a net basis, such as Software as a Service and warranties, as well as improved product margin. This was partially offset by year-over-year Net sales growth out-pacing the year-over-year growth rate in partner funding.

Gross profit margin may fluctuate based on various factors, including vendor incentive and inventory price protection programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, revenue recognized on a net basis, pricing strategies, market conditions and other factors.

Selling and administrative expenses

Selling and administrative expenses increased $127 million, or 9.0%, to $1,537 million for the year ended December 31, 2018, compared to $1,410 million for the year ended December 31, 2017. The increase was driven by higher sales payroll expenses, including sales commissions, primarily due to higher Gross profit dollars and higher coworker costs due to higher attainment of performance-based compensation.

As a percentage of total Net sales, Selling and administrative expenses remained flat at 9.5% for the year ended December 31, 2018.

Operating income

Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change was as follows:

		Years Ended December 31,
		2018							2017(1)
		Dollars in Millions				Operating Margin			Dollars in Millions				Operating Margin			Percent Change in Operating Income
Segments:(2)
Corporate		$	536.9			7.8	%		$	487.9			7.9	%		10.0	%
Small Business		95.7				7.0			74.3				6.1			28.8
Public		410.8				6.7			374.4				6.3			9.7
Other(3)		82.2				4.4			57.1				3.7			43.9
Headquarters(4)		(138.3		)		nm*			(127.2		)		nm*			8.7
Total Operating income		$	987.3			6.1	%		$	866.5			5.8	%		13.9	%

• Not meaningful

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)	Segment operating income includes the segment's direct operating income, allocations for certain Headquarters costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.

(3)	Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(4)	Includes Headquarters function costs that are not allocated to the segments.

Operating income was $987 million for the year ended December 31, 2018, an increase of $120 million, or 13.9%, compared to $867 million for the year ended December 31, 2017. Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses and higher coworker costs due to higher attainment on performance-based compensation. Total operating margin percentage increased 30 basis points to 6.1% for the year ended December 31, 2018, from 5.8% for the year ended December 31, 2017. The increase was primarily due to Gross profit margin expansion driven by a higher mix into revenue recognized on a net basis, as well as improved product margin. Lower intangible asset amortization and equity-based compensation expense and the associated payroll taxes as a percentage of Net sales, which do not trend in line with sales movement, also had a favorable impact on the operating margin percentage. This was partially offset by higher attainment on performance-based compensation expense as a percentage of Net sales.

Corporate segment Operating income was $537 million for the year ended December 31, 2018, an increase of $49 million, or 10.0%, compared to $488 million for the year ended December 31, 2017. Corporate segment Operating income increased primarily due to higher Gross profit dollars driven by higher sales, partially offset by higher sales payroll expenses. Corporate segment operating margin percentage decreased 10 basis points to 7.8% for the year ended December 31, 2018, from 7.9% for the year ended December 31, 2017. The decrease was driven by higher attainment on performance-based compensation expense as a percentage of Net sales.

Small Business segment Operating income was $96 million for the year ended December 31, 2018, an increase of $22 million, or 28.8%, compared to $74 million for the year ended December 31, 2017. Small Business segment Operating income increased primarily due to higher Gross profit dollars. Small Business segment operating margin percentage increased 90 basis points to 7.0% for the year ended December 31, 2018, from 6.1% for the year ended December 31, 2017. This increase in operating margin percentage was primarily driven by a higher mix into revenue recognized on a net basis and the benefit of lower sales payroll expenses as a percentage of Net sales. This was partially offset by higher attainment on performance-based compensation expense as a percentage of Net sales.

Public segment Operating income was $411 million for the year ended December 31, 2018, an increase of $37 million, or 9.7%, compared to $374 million for the year ended December 31, 2017. Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses. Public segment operating margin percentage increased 40 basis points to 6.7% for the year ended December 31, 2018, from 6.3% for the year ended December 31, 2017. This

increase in operating margin percentage was primarily driven by a higher mix into revenue recognized on a net basis, partially offset by higher performance-based compensation expense as a percentage of Net sales.

Other Operating income was $82 million for the year ended December 31, 2018, an increase of $25 million, or 43.9%, compared to $57 million for the year ended December 31, 2017. Other Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses. Foreign exchange translation also had a favorable impact on Operating income. Other operating margin percentage increased 70 basis points to 4.4% for the year ended December 31, 2018, from 3.7% for the year ended December 31, 2017. This increase was primarily due to lower sales payroll expenses and lower intangible asset amortization as a percentage of Net sales, which does not trend in line with sales movement.

Net loss on extinguishments of long-term debt

For information regarding our debt, see Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements. During 2017, we recorded a net loss on extinguishments of long-term debt of $57 million.

Net loss on extinguishments of long-term debt are as follows:

Month of Extinguishment	Debt Instrument		(in millions)
	Amount Extinguished				Loss Recognized
February 2017	Senior Secured Term Loan Facility		$	1,483.0			$	(13.7	)
March 2017	Senior Notes due 2022		600.0				(42.5		)	(1)
March 2017	Senior Secured Asset-based Revolving Credit Facility		—				(1.2		)
	Total Loss Recognized						$	(57.4	)

(1)	We repaid all of the remaining aggregate principal amount outstanding. The loss recognized represents the difference between the aggregate principal amount and the net carrying amount of the purchased debt, adjusted for the remaining unamortized deferred financing fees and premium.

Income tax expense

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The Tax Cuts and Jobs Act changed several aspects of US federal tax law including: reducing the US corporate income tax rate from 35.0% to 21.0% beginning on January 1, 2018; applying a one-time tax on the deemed mandatory repatriation of the Company's unremitted foreign earnings which have not been subject to US tax; imposing a minimum US tax on foreign earnings; providing for the immediate expensing of certain qualified property; and changing the tax treatment of performance-based executive compensation and certain employee fringe benefits.

The SEC issued Staff Accounting Bulletin 118 allowing for provisional amounts to be recorded during a measurement period not to exceed one year. During the year ended December 31, 2017, the Company recorded provisional amounts for the impact of revaluing deferred tax assets and liabilities, the deemed mandatory repatriation tax on the Company's unremitted foreign earnings and the state income tax effects from the changes in federal tax law. The Company adjusted the US federal and state provisional amounts during 2018, recording a net tax benefit of $2 million. The adjustment was primarily driven by the rate differential on adjustments to temporary book-tax differences made in finalizing the 2017 federal income tax return and finalizing the deemed mandatory repatriation tax on the Company's unremitted foreign earnings.

Income tax expense was $198 million in 2018, compared to $138 million in 2017. The effective income tax rate, expressed by calculating income tax expense as a percentage of Income before income taxes, was 23.5% and 20.8% for 2018 and 2017, respectively.

For 2018, the effective tax rate differed from the US federal statutory rate primarily due to state income taxes, partially offset by excess tax benefits on equity compensation. For 2017, the effective tax rate differed from the US federal statutory rate primarily due to a one-time benefit of $96 million to reflect the revaluation of deferred tax assets and liabilities, excess tax benefits on equity compensation and lower corporate tax rates on our international income, partially offset by state income taxes and a one-time charge of $20 million for the mandatory repatriation tax. The 2018 effective tax rate was higher than 2017 primarily due to the benefits recorded in 2017 for the Tax Cuts and Jobs Act and excess tax benefits, which exceeded the benefit in 2018 from the lower federal income rate in 2018 and partially offset by a higher state income taxes.

Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP income before income taxes, Non-GAAP net income, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and consolidated Net sales growth on a constant currency basis for the years ended December 31, 2018 and 2017 below.

Non-GAAP income before income taxes and Non-GAAP net income exclude, among other things, charges related to the amortization of acquisition-related intangible assets, equity-based compensation and the associated tax benefits, integration expenses, and gains and losses from the extinguishment of long-term debt. EBITDA is defined as consolidated net income before interest expense, net, income tax expense, depreciation and amortization. Adjusted EBITDA, which is a measure defined in our credit agreements, means EBITDA adjusted for certain items which are described in the table below. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of Net sales. Consolidated Net sales growth on a constant currency basis is defined as consolidated Net sales growth excluding the impact of foreign currency translation on net sales compared to the prior period.

Non-GAAP income before income taxes, Non-GAAP net income, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and consolidated Net sales growth on a constant currency basis are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance or financial position that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. Additionally, Adjusted EBITDA is a measure in the credit agreement governing our Term Loan used to evaluate our ability to make certain investments, incur additional debt, and make restricted payments, such as dividends and share repurchases, as well as whether we are required to make additional principal prepayments on the Term Loan beyond the quarterly amortization payments. For further details regarding the Term Loan, see Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

Non-GAAP net income

Non-GAAP net income was $794 million for the year ended December 31, 2018, an increase of $188 million, or 31.1%, compared to $606 million for the year ended December 31, 2017.

		Year Ended December 31, 2018												Year Ended December 31, 2017(1)
(in millions)		Income before income taxes				Income tax expense(2)				Net income				Income before income taxes				Income tax expense(2)				Net income
GAAP (as reported)		$	840.5			$	(197.5	)		$	643.0			$	660.7			$	(137.6	)		$	523.1
Amortization of intangibles(3)		182.7				(45.7		)		137.0				185.1				(66.6		)		118.5
Equity-based compensation		40.7				(29.2		)		11.5				43.7				(51.9		)		(8.2		)
Net loss on extinguishments of long-term debt		—				—				—				57.4				(20.7		)		36.7
Tax Cuts and Jobs Act(4)		—				(1.9		)		(1.9		)		—				(75.5		)		(75.5		)
Other adjustments(5)		5.9				(1.2		)		4.7				11.5				(0.2		)		11.3
Non-GAAP		$	1,069.8			$	(275.5	)		$	794.3			$	958.4			$	(352.5	)		$	605.9

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)	Income tax on non-GAAP adjustments includes excess tax benefits associated with equity compensation. Additionally, 2018 includes the impact of global intangible low tax income ("GILTI") on equity-based compensation and amortization of intangibles.

(3)	Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(4)	2018 is comprised of adjustments to the provisional amounts recorded to finalize the US federal and state impact of revaluing deferred tax assets and liabilities and mandatory repatriation tax due to the completion of the 2017 US federal

and state tax returns.

(5)

Includes other expenses such as payroll taxes on equity-based compensation for the year ended December 31, 2018 and 2017, expenses related to the acquisition of Scalar Decisions Inc. incurred during 2018, integration expenses related to CDW UK during 2017, the reinstatement of prior year unclaimed property balances in 2017 and tax benefits due to state law changes for the year ended December 31, 2017.

Adjusted EBITDA

Adjusted EBITDA was $1,302 million for the year ended December 31, 2018, an increase of $116 million, or 9.8%, compared to $1,186 million for the year ended December 31, 2017. As a percentage of Net sales, Adjusted EBITDA was 8.0% for each of the years ended December 31, 2018 and 2017.

		Years Ended December 31,
(in millions)		2018				Percentage of Net Sales		2017(1)				Percentage of Net Sales
Net income		$	643.0			4.0%		$	523.1			3.5%
Depreciation and amortization		265.6						260.9
Income tax expense		197.5						137.6
Interest expense, net		148.6						150.5
EBITDA		1,254.7				7.7%		1,072.1				7.2%
Adjustments:
Equity-based compensation		40.7						43.7
Net loss on extinguishments of long-term debt		—						57.4
Other adjustments(2)		6.8						12.8
Total adjustments		47.5						113.9
Adjusted EBITDA		$	1,302.2			8.0%		$	1,186.0			8.0%

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)

Includes other expenses such as payroll taxes on equity-based compensation and our share of net income from our equity investment during the years ended December 31, 2018 and 2017, expenses related to the acquisition of Scalar Decisions Inc. incurred during 2018, integration expenses related to CDW UK during 2017, and the reinstatement of prior year unclaimed property balances as a result of a retroactive Illinois state law change enacted during 2017. Also includes historical retention costs during the year ended December 31, 2017.

Consolidated Net sales growth on a constant currency basis

Consolidated Net sales increased $1,408 million, or 9.5%, to $16,241 million for the year ended December 31, 2018, compared to $14,833 million for the year ended December 31, 2017. Consolidated Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $1,374 million, or 9.2%.

		Years Ended December 31,
(in millions)		2018				2017(1)				% Change		Average Daily % Change(2)
Net sales, as reported		$	16,240.5			$	14,832.9			9.5	%	9.5	%
Foreign currency translation(3)		—				34.1
Consolidated Net sales, on a constant currency basis		$	16,240.5			$	14,867.0			9.2	%	9.2	%

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)	There were 254 selling days for each of the years ended December 31, 2018 and 2017.

(3)	Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in the current year.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Results of operations, in dollars and as a percentage of Net sales are as follows:

		Years Ended December 31,
		2017(1)							2016(1)
		Dollars in Millions				Percentage of Net Sales			Dollars in Millions				Percentage of Net Sales
Net sales		$	14,832.9			100.0	%		$	13,672.7			100.0	%
Cost of sales		12,382.7				83.5			11,344.4				83.0
Gross profit		2,450.2				16.5			2,328.3				17.0
Selling and administrative expenses		1,410.0				9.5			1,345.4				9.8
Advertising expense		173.7				1.2			162.9				1.2
Operating income		866.5				5.8			820.0				6.0
Interest expense, net		(150.5		)		(1.0	)		(146.5		)		(1.1	)
Net loss on extinguishments of long-term debt		(57.4		)		(0.4	)		(2.1		)		—
Other income, net		2.1				—			1.8				—
Income before income taxes		660.7				4.5			673.2				4.9
Income tax expense		(137.6		)		(0.9	)		(248.1		)		(1.8	)
Net income		$	523.1			3.5	%		$	425.1			3.1	%

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

Net sales

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:

		Years Ended December 31,
		2017(1)							2016(1)
(dollars in millions)		Net Sales				Percentage of Total Net sales			Net Sales				Percentage of Total Net Sales			Dollar Change				Percent Change (2)
Corporate		$	6,172.8			41.6	%		$	5,734.9			41.9	%		$	437.9			7.6	%
Small Business		1,220.5				8.2			1,118.1				8.2			102.4				9.1
Public:
Government		2,109.8				14.2			1,813.6				13.3			296.2				16.3
Education		2,184.5				14.7			1,994.4				14.6			190.1				9.5
Healthcare		1,612.2				10.9			1,669.4				12.2			(57.2		)		(3.4	)
Total Public		5,906.5				39.8			5,477.4				40.1			429.1				7.8
Other		1,533.1				10.4			1,342.3				9.8			190.8				14.2
Total Net sales		$	14,832.9			100.0	%		$	13,672.7			100.0	%		$	1,160.2			8.5	%

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	There were 254 selling days for each of the years ended December 31, 2017 and 2016.

Total Net sales in 2017 increased $1,160 million, or 8.5%, to $14,833 million, compared to $13,673 million for the year ended December 31, 2016. Net sales on a constant currency basis, which excludes the impact of currency translation, for the year ended December 31, 2017 increased $1,188 million, or 8.7%, to $14,833 million, compared to $13,645 million for the year ended December 31, 2016.

For the year ended December 31, 2017, sales growth was driven by gains in all our customer markets except Healthcare, which saw a Net sales decline year over year. During 2017, and in contrast to 2016, we saw an acceleration of hardware sales, driven by strong growth within client device sales due to customer refresh, which impacted categories such as notebooks, mobile devices and desktops. Additionally, we saw growth in several other categories, including video and networking. We also saw ongoing customer focus on designing IT securely, which led to strong sales growth across our entire security portfolio and the adoption of more efficient architectures, which drove strong growth in hyper-converged infrastructure and solutions delivered via the cloud, as well as the continuing trend of greater integration of software into solutions.

Corporate segment Net sales in 2017 increased $438 million, or 7.6%, compared to 2016, as customer confidence improved throughout the year. Growth was primarily driven by customer refresh of client devices and networking.

Small Business segment Net sales in 2017 increased by $102 million, or 9.1%, compared to 2016. Sales growth was primarily driven by customer refresh of client devices and video.

Public segment Net sales in 2017 increased $429 million, or 7.8%, compared to 2016. The growth was primarily driven by Government and Education customers. Net sales to Federal government customers reflected a focus on spending existing budgets on planned projects and ongoing successful alignment with strategic programs, as well as success meeting the Department of Defense mandated move to new client devices with stronger security features. Strong Net sales to our State and Local government customers was driven by a continued focus on public safety and the on-going success executing against recently added contracts. Net sales to our Higher Education customers were driven by networking and software as we continued to see the benefit from "connected campus" strategies to ensure network infrastructures can handle multiple devices used by students, faculty and visitors across the entire campus. K-12 growth was driven by success in delivering collaborative learning environments and networking. Net sales to Healthcare customers decreased 3.4%, reflecting continued customer uncertainty related to reimbursements and funding.

Net sales in Other for 2017 increased $191 million, or 14.2%, compared to 2016. Other is comprised of results from our UK and Canadian operations. Both operations had strong growth in local currency as we continued to take share in the local

markets, as well as the benefit from increased sales for referrals from US customers to the UK. The impact of foreign currency exchange decreased Other sales growth by approximately 250 basis points, due to the impact resulting from the British pound to US dollar translation, partially offset by favorable translation of the Canadian to US dollar.

Gross profit

Gross profit increased $122 million, or 5.2%, to $2,450 million in 2017, compared to $2,328 million in 2016. As a percentage of Net sales, Gross profit decreased 50 basis points to 16.5% in 2017, down from 17.0% in 2016. Although there was an increase in Gross profit due to higher sales volumes, we experienced a decline in our Gross profit margin. This decline was primarily driven by product margin compression due to increased hardware sales, which generally have lower profit margins, and an ongoing competitive marketplace.

Gross profit margin may fluctuate based on various factors, including vendor incentive and inventory price protection programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, revenue recognized on a net basis, pricing strategies, market conditions and other factors.

Selling and administrative expenses

Selling and administrative expenses increased $65 million, or 4.8%, to $1,410 million in 2017, compared to $1,345 million in 2016. This was driven by higher sales payroll expenses, including sales commissions, primarily due to higher Gross profit, as well as higher coworker costs consistent with increased coworker count. Total coworker count was 8,726 at December 31, 2017, up 210 from 8,516 at December 31, 2016. Additionally, equity-based compensation expense and the associated payroll taxes increased $8 million, or 19.8%, during 2017 compared to 2016, primarily due to the impact of annual equity awards granted under our Long-Term Incentive Plan and the vesting of an equity grant made at the time of our initial public offering. Also during 2017, a retroactive Illinois state law change was enacted which required the reinstatement of unclaimed property balances, resulting in an additional $4 million of expenses. These increases were partially offset by lower senior management incentive compensation.

As a percentage of total Net sales, Selling and administrative expenses decreased 30 basis points to 9.5% in 2017, down from 9.8% in 2016.

Operating income

Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change was as follows:

		Years Ended December 31,
		2017(1)							2016(1)
		Dollars in Millions				Operating Margin			Dollars in Millions				Operating Margin			Percent Change in Operating Income
Segments: (2)
Corporate		$	487.9			7.9	%		$	453.5			7.9	%		7.6	%
Small Business		74.3				6.1			69.1				6.2			7.4
Public		374.4				6.3			367.7				6.7			1.8
Other(3)		57.1				3.7			44.6				3.3			28.2
Headquarters(4)		(127.2		)		nm*			(114.9		)		nm*			10.7
Total Operating income		$	866.5			5.8	%		$	820.0			6.0	%		5.7	%

• Not meaningful

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	Segment operating income includes the segment's direct operating income, allocations for certain Headquarters costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.

(3)	Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(4)	Includes Headquarters function costs that are not allocated to the segments.

Operating income was $867 million in 2017, an increase of $47 million, or 5.7%, compared to $820 million in 2016. Although Operating income increased, total operating margin percentage decreased 20 basis points to 5.8% in 2017, from 6.0% in 2016. The decrease was primarily due to Gross profit margin compression from higher hardware sales and an ongoing competitive marketplace. Also contributing to lower operating margin percentage was the reinstatement of prior year unclaimed property balances in 2017 and the non-recurrence of the settlement payments received from the Dynamic Random Access Memory class action lawsuits in 2016. Partially offsetting these decreases were lower sales payroll, consistent with our variable compensation cost structure, lower senior management incentive compensation and a decline in intangible asset amortization expense as a percentage of Net sales.

Corporate segment Operating income was $488 million in 2017, an increase of $34 million, or 7.6%, compared to $454 million in 2016. Corporate segment operating margin remained flat at 7.9% for 2017 and 2016. Although Operating income increased, primarily due to an increase in sales volume, Corporate segment operating margin percentage remained flat. The flat operating margin percentage reflects higher hardware sales and an ongoing competitive marketplace, which were fully offset by lower sales payroll expenses.

Small Business segment Operating income was $74 million in 2017, an increase of $5 million, or 7.4%, compared to $69 million in 2016. Operating income increased due to an increase in sales volume, while operating margin decreased 10 basis points to 6.1% for 2017. The decrease in operating margin percentage reflects higher hardware sales and an ongoing competitive marketplace, which were offset by lower sales payroll expenses.

Public segment Operating income was $374 million in 2017, an increase of $6 million, or 1.8%, compared to $368 million in 2016. Public segment operating margin decreased 40 basis points to 6.3% in 2017, from 6.7% in 2016. This decrease in operating margin percentage was primarily driven by higher hardware sales, which were partially offset by lower sales payroll expenses.

Other Operating income was $57 million in 2017, an increase of $12 million, or 28.2%, compared to $45 million in 2016. Other Operating income increased primarily due to higher sales volumes and Gross profit as we continued to take share in the local markets. Other operating margin percentage increased 40 basis points to 3.7% in 2017, from 3.3% in 2016. This increase was primarily driven by a decline in intangible asset amortization expense as a percentage of Net sales.

Interest expense, net

Net interest expense in 2017 was $151 million, an increase of $4 million, compared to $147 million in 2016. This increase was primarily driven by mark-to-market gains recognized on our interest rate cap agreements in 2016, with no comparable activity in 2017 due to the election of hedge accounting in February 2017 and by a rising interest rate environment which resulted in higher interest expense on the Term Loan. This was partially offset by a reduced coupon rate due to the refinancing activity that occurred during 2017.

Net loss on extinguishments of long-term debt

For information regarding our debt, see Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements. During 2017, we recorded a net loss on extinguishments of long-term debt of $57 million compared to $2 million in 2016.

Net loss on extinguishments of long-term debt are as follows:

Month of Extinguishment	Debt Instrument		(in millions)
	Amount Extinguished				Loss Recognized
For the Year Ended December 31, 2017
February 2017	Senior Secured Term Loan Facility		$	1,483.0			$	(13.7	)
March 2017	Senior Notes due 2022		600.0				(42.5		)	(1)
March 2017	Senior Secured Asset-based Revolving Credit Facility		—				(1.2		)
	Total Loss Recognized						$	(57.4	)
For the Year Ended December 31, 2016
August 2016	Senior Secured Term Loan Facility		$	1,490.4			$	(2.1	)
	Total Loss Recognized						$	(2.1	)

(1)	We repaid all of the remaining aggregate principal amount outstanding. The loss recognized represents the difference between the aggregate principal amount and the net carrying amount of the purchased debt, adjusted for the remaining unamortized deferred financing costs and premium.

Income tax expense

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The Tax Cuts and Jobs Act changed several aspects of US federal tax law including: reducing the US corporate income tax rate from 35% to 21% beginning on January 1, 2018; establishing a territorial tax system, which includes a one-time tax on the deemed mandatory repatriation of our international operations' unremitted earnings which have not been subject to US tax; imposing a minimum US tax on foreign earnings; providing for the immediate expensing of certain qualified property; and changing the tax treatment of performance based executive compensation and certain employee fringe benefits. GAAP requires the income tax effects of the Tax Cuts and Jobs Act to be accounted for in the period of enactment.

The SEC issued Staff Accounting Bulletin 118 allowing for provisional amounts to be recorded during a measurement period not to exceed one year. We recorded provisional amounts for the impact of revaluing deferred tax assets and liabilities, the deemed mandatory repatriation tax of our international operations' unremitted earnings and the state income tax effects from the change in federal tax law.

Income tax expense was $138 million in 2017, compared to $248 million in 2016. The effective income tax rate, expressed by calculating income tax expense as a percentage of Income before income taxes, was 20.8% and 36.9% for 2017 and 2016, respectively.

For 2017, the effective tax rate differed from the US federal statutory rate primarily due to a one-time benefit of $96 million to reflect the revaluation of deferred tax assets and liabilities under the Tax Cuts and Jobs Act, excess tax benefits on equity compensation and lower corporate tax rates on our international income, partially offset by state income taxes and a one-time charge of $20 million for the mandatory repatriation tax under the Tax Cuts and Jobs Act. For 2016, the effective tax rate differed from the US federal statutory rate primarily due to state income taxes and non-deductible meals and entertainment expenses, which were partially offset by lower corporate tax rates on our international income, a deferred tax benefit as a result of a tax rate reduction in the UK and excess tax benefits on equity-based compensation as a result of adopting ASU 2016-09, Compensation - Stock Compensation. The lower effective tax rate for 2017 as compared to 2016 was primarily attributable to the impact of revaluing deferred tax assets and liabilities, and excess tax benefits on equity compensation, offset by a one-time charge for the mandatory repatriation tax.

Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP income before income taxes, Non-GAAP net income, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and consolidated Net sales growth on a constant currency basis for the years ended December 31, 2017 and 2016 below. See the "Non-GAAP Financial Measure Reconciliations" section included above for the years ended December 31, 2018 and 2017 for all Non-GAAP measure definitions.

Non-GAAP net income

Non-GAAP net income was $606 million for the year ended December 31, 2017, an increase of $36 million, or 6.3%, compared to $570 million for the year ended December 31, 2016.

(in millions)	Year Ended December 31, 2017(1)												Year Ended December 31, 2016(1)
	Income before income taxes				Income tax expense				Net income				Income before income taxes				Income tax expense				Net income
GAAP (as reported)	$	660.7			$	(137.6	)		$	523.1			$	673.2			$	(248.1	)		$	425.1
Amortization of intangibles(2)	185.1				(66.6		)		118.5				187.2				(67.4		)		119.8
Equity-based compensation	43.7				(51.9		)		(8.2		)		39.2				(15.9		)		23.3
Net loss on extinguishments of long-term debt	57.4				(20.7		)		36.7				2.1				(0.8		)		1.3
Tax Cuts and Jobs Act	—				(75.5		)		(75.5		)		—				—				—
Other adjustments(3)	11.5				(0.2		)		11.3				1.9				(1.7		)		0.2
Non-GAAP	$	958.4			$	(352.5	)		$	605.9			$	903.6			$	(333.9	)		$	569.7

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(3)	Includes other expenses such as payroll taxes on equity-based compensation and tax benefits due to state law changes for the year ended December 31, 2017 and 2016, integration expenses related to CDW UK, and the reinstatement of prior year unclaimed property balances as a result of a retroactive Illinois state law change enacted in the third quarter of 2017.

Adjusted EBITDA

Adjusted EBITDA was $1,186 million for the year ended December 31, 2017, an increase of $68 million, or 6.1%, compared to $1,118 million for the year ended December 31, 2016. As a percentage of Net sales, Adjusted EBITDA was 8.0% and 8.2% for the years ended December 31, 2017 and 2016, respectively.

	Years Ended December 31,
(in millions)	2017(1)				Percentage of Net Sales		2016(1)				Percentage of Net Sales
Net income	$	523.1			3.5%		$	425.1			3.1%
Depreciation and amortization	260.9						254.5
Income tax expense	137.6						248.1
Interest expense, net	150.5						146.5
EBITDA	1,072.1				7.2%		1,074.2				7.9%
Adjustments:
Equity-based compensation	43.7						39.2
Net loss on extinguishments of long-term debt	57.4						2.1
Other adjustments(2)	12.8						2.6
Total adjustments	113.9						43.9
Adjusted EBITDA	$	1,186.0			8.0%		$	1,118.1			8.2%

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)

Primarily includes expenses related to payroll taxes on equity-based compensation, our share of net income from our equity investment, and historical retention costs during 2017. The year ended December 31, 2016 primarily includes our share of the settlement payments received from the Dynamic Random Access Memory class action lawsuits and the favorable resolution of a local sales tax matter, partially offset by expenses related to the consolidation of office locations north of Chicago. Also comprised of integration expenses related to CDW UK and the reinstatement of prior year unclaimed property balances as a result of a retroactive Illinois state law change enacted during 2017.

Consolidated Net sales growth on a constant currency basis

Consolidated Net sales increased $1,160 million, or 8.5%, to $14,833 million for the year ended December 31, 2017, compared to $13,673 million for the year ended December 31, 2016. Consolidated Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $1,188 million, or 8.7%, to $14,833 million for the year ended December 31, 2017, compared to $13,645 million for the year ended December 31, 2016.

		Years Ended December 31,
(in millions)		2017(1)				2016(1)				% Change			Average Daily % Change (2)
Net sales, as reported		$	14,832.9			$	13,672.7			8.5	%		8.5	%
Foreign currency translation(3)		—				(28.1		)
Consolidated Net sales, on a constant currency basis		$	14,832.9			$	13,644.6			8.7	%		8.7	%

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	There were 254 selling days for each of the years ended December 31, 2017 and 2016.

(3)	Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in the current year.

Seasonality

While we have not historically experienced significant seasonality throughout the year, sales in our Corporate segment, which primarily serves private sector business customers with more than 250 employees, are typically higher in the fourth quarter than in other quarters due to customers spending their remaining technology budget dollars at the end of the year. Additionally,

sales in our Public segment have historically been higher in the third quarter than in other quarters primarily due to the buying patterns of the federal government and education customers.

Liquidity and Capital Resources

Overview

We finance our operations and capital expenditures with internally generated cash from operations. As of December 31, 2018, we also have $1.1 billion of availability for borrowings under our senior secured asset-based revolving credit facility and an additional £50 million ($64 million at December 31, 2018) under the CDW UK revolving credit facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of inventory, payroll and general expenses. We also take into consideration our overall capital allocation strategy, which includes investment for future growth, dividend payments, acquisitions and stock repurchases. We believe we have adequate sources of liquidity and funding available for at least the next year; however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan and general economic conditions.

Long-Term Debt and Financing Arrangements

As of December 31, 2018, we had total indebtedness of $3.2 billion, of which $1.5 billion was secured indebtedness. At December 31, 2018, we were in compliance with the covenants under our various credit agreements and indentures. The amount of CDW's restricted payment capacity under the Senior Secured Term Loan Facility was $1.5 billion at December 31, 2018. The amount of restricted payment capacity for the CDW UK term loan was $163 million.

For additional details regarding our debt and refinancing activities, refer to Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

Inventory Financing Agreements

We have entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. We do not incur any interest expense associated with these agreements as balances are paid when they are due. For further details, see Note 5 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

Share Repurchase Program

During 2018, we repurchased 6.3 million shares of our common stock for $522 million under the previously announced share repurchase program. On February 7, 2019, we announced that our Board of Directors authorized a $1.0 billion increase to our share repurchase program. For more information on our share repurchase program, see Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."

Dividends

Dividend Amount		Declaration Date		Record Date		Payment Date
$0.210		February 7, 2018		February 26, 2018		March 12, 2018
$0.210		May 2, 2018		May 25, 2018		June 11, 2018
$0.210		August 2, 2018		August 24, 2018		September 10, 2018
$0.295		October 31, 2018		November 26, 2018		December 10, 2018
$0.925

On February 7, 2019, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.295 per share. The dividend will be paid on March 12, 2019 to all stockholders of record as of the close of business on February 25, 2019.

The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends

or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness.

Cash Flows

Cash flows from operating, investing and financing activities are as follows:

	Years Ended December 31,
(in millions)	2018				2017				2016
Net cash provided by (used in):
Operating activities	$	905.9			$	777.7			$	604.0
Investing activities	(86.1		)		(81.1		)		(65.9		)
Net change in accounts payable - inventory financing	(67.4		)		(84.0		)		143.6
Other financing activities	(687.4		)		(734.7		)		(448.2		)
Financing activities	(754.8		)		(818.7		)		(304.6		)
Effect of exchange rate changes on cash and cash equivalents	(3.4		)		2.6				(7.4		)
Net increase (decrease) in cash and cash equivalents	$	61.6			$	(119.5	)		$	226.1

Operating Activities

Cash flows from operating activities are as follows:

	Years Ended December 31,
(in millions)	2018				2017(1)				Change
Net income	$	643.0			$	523.1			$	119.9
Adjustments for the impact of non-cash items(2)	261.1				194.4				66.7
Net income adjusted for the impact of non-cash items(3)	904.1				717.5				186.6
Changes in assets and liabilities:
Accounts receivable(4)	(365.1		)		(136.8		)		(228.3		)
Merchandise inventory(5)	(46.8		)		16.9				(63.7		)
Accounts payable-trade(6)	271.2				231.5				39.7
Other(7)	142.5				(51.4		)		193.9
Net cash provided by operating activities	$	905.9			$	777.7			$	128.2

(1)	Amounts for 2017 have been adjusted to reflect the adoption of Topic 606.

(2)	Includes items such as deferred income taxes, depreciation and amortization, equity-based compensation expense and Net loss on extinguishments of long-term debt.

(3)	The change is primarily due to stronger operating results driven by Net sales and Gross profit growth, partially offset by higher sales payroll.

(4)	The change in Accounts receivable is primarily due to increased sales volume in 2018 compared to 2017 and longer payment cycles for certain Public segment customers.

(5)	The change in Merchandise inventory is primarily due to growth in business and timing of shipments to customers in 2018, as well as lower inventory levels at the end of 2017.

(6)	The change in Accounts payable-trade is due to increased sales in 2018 and the timing of inventory purchases.

(7)	The change in Other is driven by improved collection performance of our receivables from vendors, higher accrued compensation expense in 2018 and the settlement of our Restricted Debt Unit Plan liability in 2017.

	Years Ended December 31,
(in millions)	2017(1)				2016(1)				Change
Net income	$	523.1			$	425.1			$	98.0
Adjustments for the impact of non-cash items(2)	194.4				202.9				(8.5		)
Net income adjusted for the impact of non-cash items(3)	717.5				628.0				89.5
Changes in assets and liabilities:
Accounts receivable(4)	(136.8		)		(178.9		)		42.1
Merchandise inventory(5)	16.9				(68.0		)		84.9
Accounts payable-trade	231.5				225.1				6.4
Other(6)	(51.4		)		(2.2		)		(49.2		)
Net cash provided by operating activities	$	777.7			$	604.0			$	173.7

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	Includes items such as deferred income taxes, depreciation and amortization, equity-based compensation expense and Net loss on extinguishments of long-term debt.

(3)	The change is primarily due to stronger operating results driven by Net sales and Gross profit growth and excess tax benefits recognized related to equity-based compensation.

(4)	The change in Accounts receivable was primarily due to the timing of sales compared to the same period in 2016.

(5)	The change in Merchandise inventory was primarily due to higher inventory levels in 2016 as a result of the timing of inventory shipments to customers, increased returns and higher bill-and-hold orders.

(6)	The change in Other is driven by an increase in the receivables from vendors due to the growth in business and the settlement of our Restricted Debt Unit Plan liability, partially offset by an increase in accrued marketing expenses.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:

	December 31,
(in days)	2018			2017(1)			2016(1)
Days of sales outstanding (DSO)(2)	56			53			52
Days of supply in inventory (DIO)(3)	13			13			13
Days of purchases outstanding (DPO)(4)	(50	)		(47	)		(46	)
Cash conversion cycle	19			19			19

(1)	Amounts for 2017 and 2016 have been adjusted to reflect the adoption of Topic 606.

(2)	Represents the rolling three-month average of the balance of Accounts receivable, net at the end of the period, divided by average daily Net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.

(3)	Represents the rolling three-month average of the balance of Merchandise inventory at the end of the period divided by average daily Cost of sales for the same three-month period.

(4)	Represents the rolling three-month average of the combined balance of Accounts payable-trade, excluding cash overdrafts, and Accounts payable-inventory financing at the end of the period divided by average daily Cost of sales for the same three-month period.

The cash conversion cycle was 19 days at December 31, 2018 and 2017. The increase in DSO was primarily driven by higher Net sales and related Accounts receivable recognized on a net basis such as SaaS, software assurance and warranties and longer payment cycles for certain Public segment customers. The third-party services have an unfavorable impact on DSO as the receivable is recognized on the Consolidated Balance Sheet on a gross basis while the corresponding sales amount in the Consolidated Statement of Operations is recorded on a net basis. This also results in a favorable impact on DPO as the payable is recognized on the Consolidated Balance Sheet without a corresponding Cost of sales in the Statement of Operations because the cost paid to the vendor or third-party service provider is recorded as a reduction to Net sales. DPO was also impacted by the timing of inventory purchases.

The cash conversion cycle was 19 days at December 31, 2017 and 2016. The increase in DSO was primarily driven by higher Net sales and related Accounts receivable recognized on a net basis such as SaaS, software assurance and warranties. These services have an unfavorable impact on DSO as the receivable is recognized on the Consolidated Balance Sheet on a gross basis while the corresponding sales amount in the Consolidated Statement of Operations is recorded on a net basis. This also results in a favorable impact on DPO as the payable is recognized on the Consolidated Balance Sheet without a corresponding Cost of sales in the Statement of Operations because the cost paid to the vendor or third-party service provider is recorded as a reduction to Net sales. In addition, DPO also increased due to the mix of payables with certain vendors that have longer payment terms.

Investing Activities

Net cash used in investing activities increased $5 million in 2018 compared to 2017. The increase in cash used primarily related to improvements to our information technology systems.

Net cash used in investing activities increased $15 million in 2017 compared to 2016. The increase in cash used was primarily related to improvements to our information technology systems.

Financing Activities

Net cash used in financing activities decreased $64 million in 2018 compared to 2017. The decrease was primarily driven by 2017 payments to extinguish long-term debt which did not repeat in 2018, an increase in stock options exercised and lower incentive compensation plan withholding taxes, partially offset by an increase in dividends paid.

Net cash used in financing activities increased $514 million in 2017 compared to 2016. The increase was primarily driven by changes in accounts payable-inventory financing, which resulted in an increase in cash used in financing activities of $228 million and by share repurchases during 2017, which resulted in an increase in cash used in financing activities of $167 million. The increase in cash used for Accounts payable-inventory financing was primarily driven by the termination of one of our inventory financing agreements in the fourth quarter of 2016, with amounts owed subsequently reported as Accounts payable - trade on the Consolidated Balance Sheet, which reduced cash flows reported as financing activities during 2017. In addition, an increase in incentive compensation plan tax withholdings paid of $50 million, coupled with an increase in dividends paid of $28 million, contributed to the increase in cash used in financing activities.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments, operating leases and asset retirement obligations. Our estimated future payments, based on undiscounted amounts, under contractual obligations that existed as of December 31, 2018, are as follows:

	Payments Due by Period
(in millions)	Total				2019				2020-2021				2022-2023				2024 & Thereafter
Term Loan(1)	$	1,738.6			$	77.7			$	153.7			$	1,507.2			$	—
CDW UK Term Loan(1)	68.8				8.2				60.6				—				—
Senior Notes due 2023(2)	656.3				26.3				52.5				577.5				—
Senior Notes due 2024(2)	764.8				31.6				63.3				63.3				606.6
Senior Notes due 2025(2)	810.0				30.0				60.0				60.0				660.0
Operating leases(3)	264.7				29.7				49.7				36.7				148.6
Mandatory repatriation tax(4)	10.7				—				—				1.0				9.7
Total	$	4,313.9			$	203.5			$	439.8			$	2,245.7			$	1,424.9

(1)	Includes future principal and cash interest payments on long-term borrowings through scheduled maturity dates. Interest payments for variable rate debt were calculated using interest rates as of December 31, 2018. Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness.

(2)	Includes future principal and cash interest payments on long-term borrowings through scheduled maturity dates. Interest on the Senior Notes is calculated using the stated interest rates. Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness.

(3)	Includes the minimum lease payments for non-cancelable operating leases of properties and equipment used in our operations. Capital leases included in property and equipment are not material.

(4)	Represents future cash tax payments for the one-time mandatory repatriation tax on the earnings of international operations previously deferred for US tax purposes, as required by the Tax Cuts and Jobs Act.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation

Inflation has not had a material impact on our operating results. We generally have been able to pass along price increases to our customers, though certain economic factors and technological advances in recent years have tended to place downward pressure on pricing. We also have been able to generally offset the effects of inflation on operating costs by continuing to emphasize

productivity improvements. There can be no assurances, however, that inflation would not have a material impact on our sales or operating costs in the future.

Commitments and Contingencies

The information set forth in Note 15 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference.

Critical Accounting Policies and Estimates

The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Historically, we have not made significant changes to the methods for determining these estimates as our actual results have not differed materially from our estimates. We do not believe it is reasonably likely that the estimates and related assumptions will change materially in the foreseeable future; however, actual results could differ from those estimates under different assumptions, judgments or conditions. We have reviewed our critical accounting policies with the Audit Committee of our Board of Directors.

Critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and estimates addressed below. For more information related to significant accounting policies used in the preparation of our Consolidated Financial Statements, see Note 1 (Description of Business and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements.

Revenue Recognition

We sell some of our products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of different products and services. Significant judgment may be required when determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together.

For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices of each performance obligation. Judgment is required to determine the standalone selling price for each distinct performance obligation. For certain performance obligations, we will use a combination of methods to estimate the standalone selling price based on recent transactions. When evidence from recent transactions is not available to confirm that the prices are representative of the standalone selling price, an expected cost plus a margin approach is used.

Additional judgment is required in determining whether we are the principal, and report revenues on a gross basis, or agent, and report revenues on a net basis. We evaluate the following indicators amongst others when determining whether we are acting as a principal in the transaction and recording revenue on a gross basis: (i) we are primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) we have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) we have discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate we are acting as a principal in the transaction, then we are acting as an agent in the transaction and the associated revenues are recognized on a net basis.

The nature of our contracts give rise to variable consideration in the form of sales returns and allowances. We estimate variable consideration at the most likely amount to which we are expected to be entitled. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of our anticipated performance and all information that is reasonably available.

We generally recognize revenue on the sale of hardware and software products upon delivery to the customer. As a result, we perform an analysis to estimate the amount of Net sales in-transit at the end of the period and adjust revenue and the related costs to reflect only what has been delivered to the customer. This analysis requires judgment whereby we perform an analysis of the estimated number of days of sales in-transit to customers at the end of each reporting period based on a weighted-average analysis of commercial delivery terms that include drop-shipment arrangements. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment.

Vendor Programs

We receive incentives from certain vendors related to cooperative advertising, volume rebates, bid programs, price protection and other programs. These incentives generally relate to written agreements with specified performance requirements with the vendors and are recorded as adjustments to Cost of sales or Merchandise inventory, depending on the nature of the incentive. We record vendor partner receivables related to these programs when the amounts are probable and reasonably estimable. Some programs are based on the achievement of specific targets, and we base our estimates on information provided by our vendors and internal information to assess our progress toward achieving those targets.

We also record reserves for vendor partner receivables for estimated losses due to vendors' inability to pay or rejections by vendors of claims. In estimating the required allowance, we take into consideration collections performance and the aging of the incentive receivables, as well as specific vendor circumstances.

Goodwill

Goodwill is allocated to reporting units expected to benefit from the business combination. Goodwill is not amortized but is subject to periodic testing for impairment at the reporting unit level on an annual basis each December 1, or more frequently if events or changes in circumstances indicate that the asset may be impaired. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit.

We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. As part of our qualitative assessment, judgment is required in weighing the effect of various positive and negative factors that may affect the fair value. We consider various factors, including the excess of fair value over carrying value from the last quantitative test, macroeconomic conditions, industry and market considerations, the projected financial performance and actual financial performance compared to prior year projected financial performance, as well as other factors.

If we elect to bypass the qualitative assessment, or if indicators of impairment exist, a quantitative impairment test is performed. As part of the quantitative assessment, application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Fair value of a reporting unit is determined by using a weighted combination of an income approach and a market approach, as this combination is considered the most indicative of our fair value in an orderly transaction between market participants. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, determination of our weighted average cost of capital, future market conditions and profitability of future business strategies. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. However, our past estimates of fair value would not have been materially different when revised to include subsequent years' actual results.

Intangible Assets

Intangible assets include customer relationships, trade names, internally developed software and other intangibles. Intangible assets are amortized on a straight-line basis over the estimated useful life of the asset and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The valuation and classification of these assets and the assignment of useful lives involve significant judgment and the use of estimates. The valuation, classification and assignment of useful lives were derived using market inputs, historic experience and third-party guidance.

Income Taxes

The determination of our provision for income taxes and evaluating our tax positions requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Our annual effective tax rate is based on our income, the jurisdiction(s) in which the income is earned and subjected to taxation, the tax laws in those various jurisdictions which can be affected by tax law changes, increases or decreases in permanent differences between book and tax items, and accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the position becomes uncertain based upon one of the following: (1) the tax position is not "more likely than not" to be sustained,

(2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. Reserves related to tax accruals and valuations allowances related to deferred tax assets can be impacted by changes in tax law in the relevant jurisdiction(s) and our future taxable income levels in the relevant jurisdiction(s) with respect to valuation allowances.

Recent Accounting Pronouncements

The information set forth in Note 2 (Recent Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference.

Subsequent Events

The information set forth in Note 19 (Subsequent Events) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference.