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, a Fortune 500 company and member of the S&P 500 Index, is a market-leading provider of integrated information technology ("IT") solutions to small, medium and large business, 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 solutions 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 approximately 6,800 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 CDW 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.

For a discussion of results for the year ended December 31, 2017, see "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, 2018, filed with the Securities and Exchange Commission on February 27, 2019.

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 our Corporate and Small Business customers, as their purchases tend to reflect confidence in their business prospects, which are driven by their discrete perceptions of business and general economic conditions. Additionally, changes in trade policy and product constraints from suppliers could have an adverse impact on our business. There is uncertainty regarding whether the rapidly evolving coronavirus could impact our supply chain causing product constraints, which could have an adverse impact on our business. There continues to be substantial uncertainty regarding the impact of the UK's exit from the European Union ("EU") (referred to as "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 has not experienced significant changes in the buying behavior of its customers even with the uncertainty related to the ultimate terms of

Brexit. We have established a presence in the Netherlands to support CDW UK's broader growth opportunities in the EU and to help address future developments, as needed, for Brexit.

•	Changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of government, healthcare and education customers.

•

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 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. Effective January 1, 2019, we made a change to the non-GAAP financial measures that we use to provide meaningful methods of evaluating our financial performance and have replaced EBITDA, Adjusted EBITDA and Adjusted EBITDA margin with Non-GAAP operating income and Non-GAAP operating income margin. We made this change due to the continuing evolution of the IT consumption model. We believe Non-GAAP operating income will be more reflective of the costs of providing services to our customers and our own costs as the consumption model continues to evolve. Non-GAAP operating income is also being used for the first time in 2019 as a key business metric for our annual incentive compensation programs.

In addition to Non-GAAP operating income and Non-GAAP operating income margin, we believe that the most important financial and non-financial 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 diluted share, Non-GAAP net income per diluted share, free cash flow, return on working capital, Cash and cash equivalents, net working capital, cash conversion cycle, debt levels including available credit, 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 report, we discuss Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes and Non-GAAP net income, 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. For the definitions of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes and Non-GAAP net income and reconciliations to the most directly comparable GAAP measure, see "Results of Operations - Non-GAAP Financial Measure Reconciliations."

The results of certain key business metrics are as follows:

	Year Ended December 31,
(dollars in millions)	2019				2018				2017
Net sales	$	18,032.4			$	16,240.5			$	14,832.9
Gross profit	3,039.9				2,706.9				2,450.2
Operating income	1,133.6				987.3				866.5
Net income	736.8				643.0				523.1
Non-GAAP operating income	1,368.4				1,216.6				1,106.8
Non-GAAP net income	902.1				794.3				605.9
Average daily sales(1)	71.0				63.9				58.4
Net debt(2)	3,163.3				3,002.8				3,091.3
Cash conversion cycle (in days)(3)	18				19				19

(1)	There were 254 selling days for each of the years ended December 31, 2019, 2018 and 2017.

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

(3)	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

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

		Year Ended December 31,
		2019							2018
		Dollars in Millions				Percentage of Net Sales			Dollars in Millions				Percentage of Net Sales
Net sales		$	18,032.4			100.0	%		$	16,240.5			100.0	%
Cost of sales		14,992.5				83.1			13,533.6				83.3
Gross profit		3,039.9				16.9			2,706.9				16.7
Selling and administrative expenses		1,713.1				9.5			1,537.1				9.5
Advertising expense		193.2				1.1			182.5				1.1
Operating income		1,133.6				6.3			987.3				6.1
Interest expense, net		(159.4		)		(0.9	)		(148.6		)		(0.9	)
Other (expense) income, net		(24.5		)		(0.1	)		1.8				—
Income before income taxes		949.7				5.3			840.5				5.2
Income tax expense		(212.9		)		(1.2	)		(197.5		)		(1.2	)
Net income		$	736.8			4.1	%		$	643.0			4.0	%

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:

		Year Ended December 31,
		2019							2018
(dollars in millions)		Net Sales				Percentage of Total Net Sales			Net Sales				Percentage of Total Net Sales			Dollar Change				Percent Change(1)
Corporate		$	7,499.0			41.6	%		$	6,842.5			42.1	%		$	656.5			9.6	%
Small Business		1,510.3				8.4			1,359.6				8.4			150.7				11.1
Public:
Government		2,519.3				14.0			2,097.3				12.9			422.0				20.1
Education		2,411.6				13.4			2,327.4				14.3			84.2				3.6
Healthcare		1,933.9				10.7			1,730.0				10.7			203.9				11.8
Total Public		6,864.8				38.1			6,154.7				37.9			710.1				11.5
Other		2,158.3				12.0			1,883.7				11.6			274.6				14.6
Total Net sales		$	18,032.4			100.0	%		$	16,240.5			100.0	%		$	1,791.9			11.0	%

(1)	There were 254 selling days for each of the years ended December 31, 2019 and 2018.

Total Net sales for the year ended December 31, 2019 increased $1,792 million, or 11.0%, to $18,032 million, compared to the prior year. Excluding the impact of foreign currency fluctuations, constant currency Net sales growth was 11.5%. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth.

For the year ended December 31, 2019, Net sales growth reflected growth across all major product categories, particularly client devices (defined as notebooks/mobile devices and desktops), software and services. Additionally, eleven months of results from Scalar, which was acquired on February 1, 2019, contributed to our Net sales growth. For additional information, see Note 17 (Segment Information) to the accompanying Consolidated Financial Statements.

Corporate segment Net sales for the year ended December 31, 2019 increased $657 million, or 9.6%, compared to the year ended December 31, 2018. Growth was primarily driven by client devices and software.

Small Business segment Net sales for the year ended December 31, 2019 increased by $151 million, or 11.1%, compared to the year ended December 31, 2018. Growth was primarily driven by client devices and software.

Public segment Net sales for the year ended December 31, 2019 increased $710 million, or 11.5%, compared to the year ended December 31, 2018. The increase was primarily driven by growth in Government and Healthcare. Net sales to Government customers increased 20.1% primarily driven by client devices, software and netcomm. Net sales to Healthcare customers increased 11.8% primarily driven by client devices and software. Net sales to Education customers increased 3.6% primarily driven by client devices and video, partially offset by netcomm.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the year ended December 31, 2019 increased $275 million, or 14.6%, compared to the year ended December 31, 2018. Both operations grew in local currency and Canada growth included the incremental Net sales from Scalar. The impact of foreign currency exchange decreased Other Net sales growth by approximately 430 basis points, primarily due to the unfavorable translation of the British pound and Canadian dollar to the US dollar.

Gross profit

Gross profit increased $333 million, or 12.3%, to $3,040 million for the year ended December 31, 2019, compared to $2,707 million for the year ended December 31, 2018. As a percentage of Net sales, Gross profit margin increased 20 basis points to 16.9% for the year ended December 31, 2019. Gross profit margin was positively impacted by product margin and an increase in the mix of netted down revenues that are booked net of costs of goods sold, partially offset by Net sales growth outpacing partner funding growth.

Selling and administrative expenses

Selling and administrative expenses increased $176 million, or 11.5%, to $1,713 million for the year ended December 31, 2019, compared to $1,537 million for the year ended December 31, 2018. The increase was driven by higher sales payroll expenses consistent with higher gross profit.

As a percentage of total Net sales, Selling and administrative expenses remained flat at 9.5% for the years ended December 31, 2019 and 2018.

Operating income

During 2019, we evaluated our methodology for allocating certain depreciation and amortization expenses to each of our segments. The evaluation resulted in a revision to the allocation of depreciation and amortization expenses from Headquarters to our reportable segments, effective January 1, 2019. The prior period results have been recast to reflect these changes and present comparable information.

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

		Year Ended December 31,
		2019							2018
		Dollars in Millions				Operating Margin			Dollars in Millions				Operating Margin			Percent Change in Operating Income
Segments:(1)
Corporate		$	585.1			7.8	%		$	530.4			7.8	%		10.3	%
Small Business		107.5				7.1			94.4				6.9			13.9
Public		475.0				6.9			405.0				6.6			17.3
Other(2)		101.6				4.7			82.2				4.4			24.8
Headquarters(3)		(135.6		)		nm*			(124.7		)		nm*			8.7
Total Operating income		$	1,133.6			6.3	%		$	987.3			6.1	%		14.8	%

• Not meaningful

(1)	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.

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

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

Operating income was $1,134 million for the year ended December 31, 2019, an increase of $147 million, or 14.8%, compared to $987 million for the year ended December 31, 2018. Operating income increased primarily due to higher gross profit dollars, partially offset by higher payroll expenses. Total operating margin percentage increased 20 basis points to 6.3% for the year ended December 31, 2019, from 6.1% for the year ended December 31, 2018 due to an increase in Gross profit margin and lower intangible asset amortization as a percentage of Net sales, partially offset by higher sales payroll expenses.

Corporate segment Operating income was $585 million for the year ended December 31, 2019, an increase of $55 million, or 10.3%, compared to $530 million for the year ended December 31, 2018. Corporate segment Operating income increased primarily due to higher gross profit dollars, partially offset by higher payroll expenses. Corporate segment operating margin percentage remained flat at 7.8% for the years ended December 31, 2019 and 2018.

Small Business segment Operating income was $108 million for the year ended December 31, 2019, an increase of $14 million, or 13.9%, compared to $94 million for the year ended December 31, 2018. Small Business segment Operating income increased primarily due to higher gross profit dollars, partially offset by higher sales payroll expenses. Small Business segment operating margin percentage increased 20 basis points to 7.1% for the year ended December 31, 2019, from 6.9% for the year ended December 31, 2018 due to lower sales payroll expenses and lower intangible asset amortization as a percentage of Net sales.

Public segment Operating income was $475 million for the year ended December 31, 2019, an increase of $70 million, or 17.3%, compared to $405 million for the year ended December 31, 2018. 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 30 basis points to 6.9% for the year ended December 31, 2019, from 6.6% for the year ended December 31, 2018 primarily due to product margin.

Other Operating income was $102 million for the year ended December 31, 2019, an increase of $20 million, or 24.8%, compared to $82 million for the year ended December 31, 2018. Other Operating income increased primarily due to higher gross profit dollars, partially offset by higher payroll expenses along with the unfavorable translation of the British pound and Canadian dollar to the US dollar. Other operating margin percentage increased 30 basis points to 4.7% for the year ended December 31, 2019, from 4.4% for the year ended December 31, 2018 due to product margin and lower intangible asset amortization as a percentage of Net sales, partially offset by higher payroll expenses.

Interest expense, net

Interest expense, net in 2019 was $159 million, an increase of $10 million, compared to $149 million in 2018. This increase was primarily due to paying an effective interest rate on the term loan in 2019 that exceeded the capped rate in 2018 and higher interest expense to finance the Scalar acquisition.

Income tax expense

Income tax expense was $213 million in 2019, compared to $198 million in 2018. The effective income tax rate, expressed by calculating income tax expense as a percentage of Income before income taxes, was 22.4% and 23.5% for 2019 and 2018, respectively.

For 2019, the effective tax rate differed from the US federal statutory rate primarily due to state income taxes, partially offset by tax credits, excess tax benefits on equity-based compensation and a tax benefit related to CDW Canada's acquisition of Scalar. 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-based compensation. The 2019 effective tax rate was lower than 2018 primarily due to tax credits, higher excess tax benefits on equity-based compensation and a discrete tax benefit related to CDW Canada's acquisition of Scalar.

Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, and Net sales growth on a constant currency basis for the years ended December 31, 2019 and 2018 below.

Non-GAAP operating income excludes, among other things, charges related to the amortization of acquisition-related intangible assets, equity-based compensation and the associated payroll taxes, and acquisition and integration expenses. Non-GAAP operating income margin is defined as Non-GAAP operating income as a percentage of Net sales. Non-GAAP income before income taxes and Non-GAAP net income exclude, among other things, charges related to acquisition-related intangible asset amortization, equity-based compensation, acquisition and integration expenses, and the associated tax effects of each. Net sales growth on a constant currency basis is defined as Net sales growth excluding the impact of foreign currency translation on net sales compared to the prior period.

Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and 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.

Non-GAAP operating income

Non-GAAP operating income was $1,368 million for the year ended December 31, 2019, an increase of $151 million, or 12.5%, compared to $1,217 million for the year ended December 31, 2018. As a percentage of Net sales, Non-GAAP operating income was 7.6% and 7.5% for the years ended December 31, 2019 and 2018, respectively.

	Year Ended December 31,
(dollars in millions)	2019				2018
Operating income	$	1,133.6			$	987.3
Amortization of intangibles(1)	178.5				182.7
Equity-based compensation	48.5				40.7
Scalar acquisition and integration expenses	3.0				1.5
Other adjustments(2)	4.8				4.4
Non-GAAP operating income	$	1,368.4			$	1,216.6
Non-GAAP operating income margin	7.6		%		7.5		%

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

(2)	Includes other expenses such as payroll taxes on equity-based compensation.

Non-GAAP net income

Non-GAAP net income was $902 million for the year ended December 31, 2019, an increase of $108 million, or 13.6%, compared to $794 million for the year ended December 31, 2018.

		Year Ended December 31, 2019												Year Ended December 31, 2018
(dollars in millions)		Income before income taxes				Income tax expense(1)				Net income				Income before income taxes				Income tax expense(1)				Net income
GAAP (as reported)		$	949.7			$	(212.9	)		$	736.8			$	840.5			$	(197.5	)		$	643.0
Amortization of intangibles(2)		178.5				(44.6		)		133.9				182.7				(45.7		)		137.0
Equity-based compensation		48.5				(36.6		)		11.9				40.7				(29.2		)		11.5
Net loss on extinguishments of long-term debt		22.1				(5.5		)		16.6				—				—				—
Scalar acquisition and integration expenses(3)		3.0				(3.7		)		(0.7		)		1.5				—				1.5
Other adjustments(4)		4.8				(1.2		)		3.6				4.4				(3.1		)		1.3
Non-GAAP		$	1,206.6			$	(304.5	)		$	902.1			$	1,069.8			$	(275.5	)		$	794.3

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

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

(3)	Includes a $3 million discrete tax benefit related to CDW Canada's acquisition of Scalar.

(4)	Includes other expenses such as payroll taxes on equity-based compensation.

Net sales growth on a constant currency basis

Net sales increased $1,791 million, or 11.0%, to $18,032 million for the year ended December 31, 2019, compared to $16,241 million for the year ended December 31, 2018. Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $1,860 million, or 11.5%.

		Year Ended December 31,
(dollars in millions)		2019				2018				% Change(1)
Net sales, as reported		$	18,032.4			$	16,240.5			11.0	%
Foreign currency translation(2)		—				(67.8		)
Net sales, on a constant currency basis		$	18,032.4			$	16,172.7			11.5	%

(1)	There were 254 selling days for each of the years ended December 31, 2019 and 2018.

(2)	Represents the effect of translating the prior period 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 US 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, 2019, we also have $1.0 billion of availability for borrowings under our senior secured asset-based revolving credit facility and an additional £50 million ($66 million at December 31, 2019) 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 share 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

On September 26, 2019, we refinanced our 2023 Senior Notes through the issuance of 2028 Senior Notes. On October 11, 2019, we extended the maturity date of the Term Loan from August 2023 to October 2026. For additional information, see Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

As of December 31, 2019, we had total indebtedness of $3.3 billion, of which $1.6 billion was secured indebtedness. At December 31, 2019, we were in compliance with the covenants under our various credit agreements and indentures.

For additional information regarding our debt and refinancing activities, see 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 additional information, see Note 6 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

Share Repurchase Program

During 2019, we repurchased 6.1 million shares of our common stock for $657 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 additional information, see "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."

Dividends

A summary of 2019 dividend activity for our common stock is as follows:

Dividend Amount		Declaration Date		Record Date		Payment Date
$0.295		February 7, 2019		February 25, 2019		March 12, 2019
$0.295		May 1, 2019		May 24, 2019		June 11, 2019
$0.295		July 31, 2019		August 26, 2019		September 10, 2019
$0.380		October 31, 2019		November 25, 2019		December 10, 2019
$1.265

On February 6, 2020, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.380 per share. The dividend will be paid on March 10, 2020 to all stockholders of record as of the close of business on February 25, 2020.

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:

	Year Ended December 31,
(dollars in millions)	2019				2018
Net cash provided by (used in):
Operating activities	$	1,027.2			$	905.9
Investing activities	(331.4		)		(86.1		)
Net change in accounts payable - inventory financing	(1.3		)		(67.4		)
Other financing activities	(748.5		)		(687.4		)
Financing activities	(749.8		)		(754.8		)
Effect of exchange rate changes on cash and cash equivalents	2.2				(3.4		)
Net (decrease) increase in cash and cash equivalents	$	(51.8	)		$	61.6

Operating Activities

Cash flows from operating activities are as follows:

	Year Ended December 31,
(dollars in millions)	2019				2018				Change
Net income	$	736.8			$	643.0			$	93.8
Adjustments for the impact of non-cash items(1)	256.7				261.1				(4.4		)
Net income adjusted for the impact of non-cash items(2)	993.5				904.1				89.4
Changes in assets and liabilities:
Accounts receivable(3)	(244.8		)		(365.1		)		120.3
Merchandise inventory(4)	(153.0		)		(46.8		)		(106.2		)
Accounts payable-trade(5)	194.1				271.2				(77.1		)
Other(6)	237.4				142.5				94.9
Net cash provided by operating activities	$	1,027.2			$	905.9			$	121.3

(1)	Includes items such as deferred income taxes, depreciation and amortization, and equity-based compensation expense.

(2)	The change is due to stronger operating results driven by Net sales and Gross profit growth.

(3)	The change is due to improved collections performance.

(4)	The change is due to higher customer-driven and strategic stocking positions and timing of receipts and shipments.

(5)	The change is due to timing of payments.

(6)	The change is due to higher contract liabilities, partially offset by an increase in the receivables from vendors attributed to the growth in business.

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)	2019			2018
Days of sales outstanding (DSO)(1)	57			56
Days of supply in inventory (DIO)(2)	14			13
Days of purchases outstanding (DPO)(3)	(53	)		(50	)
Cash conversion cycle	18			19

(1)	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.

(2)	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.

(3)	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 decreased to 18 days at December 31, 2019, compared to 19 days at December 31, 2018. DSO, DIO and DPO increased 1 day, 1 day and 3 days, respectively, compared to December 31, 2018. The increase in DSO was primarily driven by higher Net sales and third-party services such as Software as a Service and warranties. These sales have an unfavorable impact on DSO as the receivable is recognized on the Consolidated Balance Sheets 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 Sheets without a corresponding Cost of sales in the Consolidated Statement of Operations because the cost paid to the vendor or third-party service provider is recorded as a reduction to Net sales. Additionally, DIO increased due to high customer-driven and strategic stocking positions and timing of receipts and shipments.

Investing Activities

Net cash used in investing activities increased $245 million in 2019 compared to 2018. The increase was primarily due to capital expenditures due to revenue generating assets and the completion of our acquisition of Scalar on February 1, 2019.

Financing Activities

Net cash used in financing activities decreased $5 million in the year ended December 31, 2019 compared to year ended December 31, 2018. The decrease was primarily driven by refinancing of our 2023 Senior Notes through the issuance of 2028 Senior Notes, further leveraging our inventory financing arrangements and borrowings under our revolving credit facilities, which were partially offset by our share repurchases and increasing dividends per share in the year ended December 31, 2019. For additional information regarding our debt activities, see Note 9 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments and operating leases. Our estimated future payments, based on undiscounted amounts, under contractual obligations that existed as of December 31, 2019, are as follows:

	Payments Due by Period
(dollars in millions)	Total				2020				2021-2022				2023-2024				2025 & Thereafter
Term Loan(1)	$	1,777.5			$	66.6			$	131.3			$	129.3			$	1,450.3
Revolving Loan(1)	58.7				2.6				56.1				—				—
CDW UK Term Loan(1)	63.1				7.9				55.2				—				—
Senior Notes due 2024(2)	733.1				31.6				63.3				638.2				—
Senior Notes due 2025(2)	780.0				30.0				60.0				60.0				630.0
Senior Notes due 2028(2)	817.2				25.9				51.0				51.0				689.3
Operating leases(3)	277.3				32.2				50.9				37.6				156.6
Total	$	4,506.9			$	196.8			$	467.8			$	916.1			$	2,926.2

(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, 2019. 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)	For additional information, see Note 11 (Leases) to the accompanying Consolidated Financial Statements.

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 16 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this report 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 additional 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 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. For each identified performance obligation in a transaction, we evaluate the facts and circumstances present to determine whether or not we control the specified good or service prior to transfer to the customer. This evaluation includes, but is not limited to, assessing indicators such as whether: (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 and (iii) we have discretion in establishing the price for the specified good or service. When the evaluation indicates we control the specified good or service prior to transfer to the customer, we are acting as a principal. When the evaluation indicates we do not control the specified good or service prior transfer to the customer, we are acting as an agent.

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 recognize revenue on performance obligations when the customer obtains control over the specified good or service. That is, when the customer has the ability to direct the use of and obtain substantially all of the benefits from the good or service. For the sale of hardware and software, this is generally 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 indicated an impairment 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 are 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 US 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 report is incorporated herein by reference.