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Table of Contents


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    

Commission File Number 001-35985
CDW CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
 
26-0273989
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
75 Tri-State International
Lincolnshire, Illinois
 
60069
(Address of principal executive offices)
 
(Zip Code)
(847) 465-6000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ 
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    ý  No
As of October 26, 2018, there were 149,984,769 shares of common stock, $0.01 par value, outstanding.
 

1

Table of Contents


CDW CORPORATION AND SUBSIDIARIES
FORM 10-Q

TABLE OF CONTENTS
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
SIGNATURES

2

Table of Contents


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
 
September 30, 2018
 
December 31, 2017
Assets
(unaudited)
 
(as adjusted)
Current assets:
 
 
 
Cash and cash equivalents
$
255.1

 
$
144.2

Accounts receivable, net of allowance for doubtful accounts of $8.0 and $6.2, respectively
2,650.5

 
2,329.3

Merchandise inventory
481.1

 
411.5

Miscellaneous receivables
370.4

 
343.0

Prepaid expenses and other
192.4

 
168.3

Total current assets
3,949.5

 
3,396.3

Property and equipment, net
147.8

 
161.1

Goodwill
2,469.5

 
2,479.6

Other intangible assets, net
758.2

 
897.0

Other assets
50.4

 
32.7

Total Assets
$
7,375.4

 
$
6,966.7

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable-trade
$
1,609.9

 
$
1,317.7

Accounts payable-inventory financing
407.6

 
498.0

Current maturities of long-term debt
32.0

 
25.5

Contract liabilities
188.5

 
158.8

Accrued expenses and other current liabilities:
 
 

Compensation
162.8

 
129.5

Interest
15.9

 
21.6

Sales taxes
34.6

 
43.8

Advertising
132.2

 
89.2

Income taxes
11.2

 
16.2

Other
209.2

 
221.8

Total current liabilities
2,803.9

 
2,522.1

Long-term liabilities:
 
 
 
Debt
3,187.4

 
3,210.0

Deferred income taxes
158.4

 
196.3

Other liabilities
65.0

 
52.7

Total long-term liabilities
3,410.8

 
3,459.0

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 100.0 shares authorized, no shares issued or outstanding for both periods

 

Common stock, $0.01 par value, 1,000.0 shares authorized; 150.9 and 153.1 shares issued, respectively
1.5

 
1.5

Less: treasury stock, $0.01 par value, 0.0 and 0.1 shares held, respectively

 

Outstanding common stock, $0.01 par value, 150.9 and 153.0 shares outstanding, respectively
1.5

 
1.5

Paid-in capital
2,970.9

 
2,911.6

Accumulated deficit
(1,703.5
)
 
(1,831.6
)
Accumulated other comprehensive loss
(108.2
)
 
(95.9
)
Total stockholders' equity
1,160.7

 
985.6

Total Liabilities and Stockholders' Equity
$
7,375.4

 
$
6,966.7


The accompanying notes are an integral part of the Consolidated Financial Statements.

3

Table of Contents


CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(unaudited)
 
(as adjusted)
 
(unaudited)
 
(as adjusted)
Net sales
 
$
4,373.2

 
$
3,933.2

 
$
12,165.7

 
$
11,080.8

Cost of sales
 
3,659.6

 
3,291.0

 
10,152.6

 
9,244.3

Gross profit
 
713.6

 
642.2

 
2,013.1

 
1,836.5

Selling and administrative expenses
 
390.7

 
351.9

 
1,134.8

 
1,062.8

Advertising expense
 
48.1

 
46.3

 
133.9

 
128.1

Income from operations
 
274.8

 
244.0

 
744.4

 
645.6

Interest expense, net
 
(36.6
)
 
(37.8
)
 
(111.5
)
 
(113.4
)
Net loss on extinguishments of long-term debt
 

 

 

 
(57.4
)
Other income, net
 
0.2

 
0.7

 
1.0

 
1.9

Income before income taxes
 
238.4

 
206.9

 
633.9

 
476.7

Income tax expense
 
(54.7
)
 
(77.6
)
 
(150.2
)
 
(148.4
)
Net income
 
$
183.7

 
$
129.3

 
$
483.7

 
$
328.3

 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.22

 
$
0.84

 
$
3.19

 
$
2.10

Diluted
 
$
1.20

 
$
0.83

 
$
3.14

 
$
2.06

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
150.9

 
153.8

 
151.6

 
156.3

Diluted
 
153.7

 
156.2

 
154.1

 
159.2

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.2100

 
$
0.1600

 
$
0.6300

 
$
0.4800


The accompanying notes are an integral part of the Consolidated Financial Statements.

4

Table of Contents


CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(unaudited)
 
(as adjusted)
 
(unaudited)
 
(as adjusted)
Net income
 
$
183.7

 
$
129.3

 
$
483.7

 
$
328.3

Foreign currency translation, net(1)
 
(3.2
)
 
14.0

 
(17.9
)
 
39.5

Unrealized gain (loss) from hedge accounting, net(2)
 
0.1

 
0.3

 
5.6

 
(1.4
)
Other comprehensive (loss) income, net
 
(3.1
)
 
14.3

 
(12.3
)
 
38.1

Comprehensive income
 
$
180.6

 
$
143.6

 
$
471.4

 
$
366.4

The accompanying notes are an integral part of the Consolidated Financial Statements.
(1)
Net of tax expense of $0.1 million and tax expense of $0.3 million for the three months ended September 30, 2018 and 2017, respectively, and net of tax benefit of $0.1 million and tax expense of $0.3 million for the nine months ended September 30, 2018 and 2017, respectively.
(2)
Net of tax expense of zero and $0.2 million for the three months ended September 30, 2018 and 2017, respectively, and net of tax expense of $1.9 million and tax benefit of $0.9 million for the nine months ended September 30, 2018 and 2017, respectively.


5

Table of Contents


CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
 
 
Nine Months Ended September 30, 2018
 
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders' Equity
Balance as of
December 31, 2017 (as reported)
 

 
$

 
153.1

 
$
1.5

 
0.1

 
$

 
$
2,911.6

 
$
(1,834.3
)
 
$
(95.9
)
 
$
982.9

Cumulative adjustment
upon adoption of ASC 606
 

 

 

 

 

 

 

 
2.7

 

 
2.7

Balance as of
December 31, 2017 (as adjusted)
 

 

 
153.1

 
1.5

 
0.1

 

 
2,911.6

 
(1,831.6
)
 
(95.9
)
 
985.6

Net income
 

 

 

 

 

 

 

 
483.7

 

 
483.7

Equity-based compensation expense
 

 

 

 

 

 

 
26.0

 

 

 
26.0

Stock option exercises
 

 

 
0.7

 

 

 

 
24.4

 

 

 
24.4

Coworker Stock Purchase Plan
 

 

 
0.1

 

 

 

 
8.4

 

 

 
8.4

Repurchases of common stock
 

 

 
(3.0
)
 

 

 

 

 
(232.5
)
 

 
(232.5
)
Dividends paid
 

 

 

 

 

 

 
0.5

 
(96.0
)
 

 
(95.5
)
Incentive compensation plan stock withheld for taxes
 

 

 

 

 
(0.1
)
 

 

 
(27.1
)
 

 
(27.1
)
Foreign currency translation
 

 

 

 

 

 

 

 

 
(17.9
)
 
(17.9
)
Unrealized gain from hedge accounting
 

 

 

 

 

 

 

 

 
5.6

 
5.6

Balance as of
September 30, 2018
 

 
$

 
150.9

 
$
1.5

 

 
$

 
$
2,970.9

 
$
(1,703.5
)
 
$
(108.2
)
 
$
1,160.7

The accompanying notes are an integral part of the Consolidated Financial Statements.


6

Table of Contents


CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
(unaudited)
 
(as adjusted)
Net income
 
$
483.7

 
$
328.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
198.7

 
195.2

Equity-based compensation expense
 
29.9

 
33.6

Deferred income taxes
 
(39.2
)
 
(55.2
)
Net loss on extinguishments of long-term debt
 

 
57.4

Other
 
8.7

 
3.9

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(334.3
)
 
(120.7
)
Merchandise inventory
 
(72.1
)
 
(83.6
)
Other assets
 
(66.1
)
 
(181.6
)
Accounts payable-trade
 
300.6

 
140.2

Other liabilities
 
92.4

 
121.6

Net cash provided by operating activities
 
602.3

 
439.1

Cash flows used in investing activities:
 
 
 
 
Capital expenditures
 
(53.4
)
 
(58.6
)
Net cash used in investing activities
 
(53.4
)
 
(58.6
)
Cash flows used in financing activities:
 
 
 
 
Proceeds from borrowings under revolving credit facilities
 
688.9

 
1,279.1

Repayments of borrowings under revolving credit facilities
 
(681.9
)
 
(1,087.5
)
Repayments of long-term debt
 
(18.2
)
 
(11.2
)
Proceeds from issuance of long-term debt
 

 
2,083.0

Payments to extinguish long-term debt
 

 
(2,121.3
)
Payments of debt financing fees
 
(1.0
)
 
(9.6
)
Net change in accounts payable-inventory financing
 
(90.1
)
 
(41.4
)
Premium payments on interest rate cap agreements
 
(12.6
)
 

Proceeds from stock option exercises
 
24.4

 
9.1

Proceeds from Coworker Stock Purchase Plan
 
8.4

 
7.6

Repurchases of common stock
 
(232.5
)
 
(534.0
)
Payment of incentive compensation plan withholding taxes

 
(27.1
)
 
(42.0
)
Dividends
 
(95.5
)
 
(74.7
)
Other
 
1.9

 
(4.7
)
Net cash used in financing activities
 
(435.3
)
 
(547.6
)
Effect of exchange rate changes on cash and cash equivalents
 
(2.7
)
 
1.3

Net increase (decrease) in cash and cash equivalents
 
110.9

 
(165.8
)
Cash and cash equivalents—beginning of period
 
144.2

 
263.7

Cash and cash equivalents—end of period
 
$
255.1

 
$
97.9

Supplementary disclosure of cash flow information:
 
 
 
 
Interest paid
 
$
(117.4
)
 
$
(118.6
)
Taxes paid, net
 
$
(200.5
)
 
$
(169.6
)
The accompanying notes are an integral part of the Consolidated Financial Statements.

7

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
CDW Corporation ("Parent") is a Fortune 500 company with multi-national capabilities and a leading provider of integrated information technology ("IT") solutions to small, medium and large business, government, education and healthcare customers in the United States ("US"), the United Kingdom ("UK") and Canada. The Company's offerings range from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.
Throughout this report, the terms the "Company" and "CDW" refer to Parent and its 100% owned subsidiaries.
Parent has two 100% owned subsidiaries, CDW LLC and CDW Finance Corporation. CDW LLC is an Illinois limited liability company that, together with its 100% owned subsidiaries, holds all material assets and conducts all business activities and operations of the Company. CDW Finance Corporation is a Delaware corporation formed for the sole purpose of acting as co-issuer of certain debt obligations as described in Note 13 (Supplemental Guarantor Information) and does not hold any material assets or engage in any business activities or operations.
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 (the "Consolidated Financial Statements") have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the US Securities and Exchange Commission (the "SEC") for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (the "December 31, 2017 Consolidated Financial Statements"). The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2017 Consolidated Financial Statements except for changes from the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as amended ("Topic 606"), as discussed below. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for such interim periods reported are not necessarily indicative of results for the full year.
Effective January 1, 2018, the Company adopted the requirements of Topic 606 utilizing the full retrospective method as discussed in Note 2 (Recent Accounting Pronouncements). Prior period amounts have been adjusted accordingly.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Parent and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.
Use of 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 and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

8

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The notes to the Consolidated Financial Statements contained in the December 31, 2017 Consolidated Financial Statements include a discussion of the significant accounting policies and estimates used in the preparation of the Company's Consolidated Financial Statements. Except as noted above for the adoption of Topic 606, there have been no material changes to the Company's significant accounting policies and estimates during the nine months ended September 30, 2018.
Revenue Recognition

The Company is a primary distribution channel for a large group of vendors and suppliers, including original equipment manufacturers ("OEMs"), software publishers and wholesale distributors.

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.

The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company's products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company's warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically specify F.O.B. destination.

The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.

Revenue Recognition for Hardware
Revenues from sales of hardware products are recognized on a gross basis as the Company is acting as a principal in these transactions, with the selling price to the customer recorded as Net sales and the acquisition cost of the product recorded as Cost of sales. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon delivery of the product to the customer.
In some instances, the customer agrees to buy the product from the Company but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company views products ready for delivery when the customer has a signed agreement, significant risk and rewards for the products, the ability to direct the assets, the products have been set aside specifically for the customer, cannot be redirected to another customer and for customer orders that include configuration services, when such services have been completed.

The Company's vendor partners warrant most of the products the Company sells. These manufacturer warranties are assurance-type warranties and are not considered separate performance obligations. The warranties are not sold separately and only provide assurance that products will conform with the manufacturer's specifications. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these service-type warranties to be separate performance obligations from the underlying product. For service-type warranties, the Company is arranging for those services to be provided by the third-party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition for Software
Revenues from most software license sales are recognized as a single performance obligation on a gross basis as the Company is acting as a principal in these transactions at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. The value of the product is primarily the accompanying support delivered by a third-party and therefore the Company is acting as an agent in these transactions and recognizes them on a net basis at the point the associated software license is delivered to the customer. For software licenses where the accompanying third-party delivered software assurance is not critical or essential to the core functionality, the software assurance is recognized as a separate performance obligation, with the associated revenue recognized on a net basis at the point the related software license is delivered to the customer. For additional details regarding the accounting for bundled arrangements, see "Revenue Recognition for Bundled Arrangements" below.
Revenue Recognition for Services
The Company provides professional services, which include project managers and consultants recommending, designing and implementing IT solutions. Revenue from professional services is recognized either on a time and materials basis or recognized proportionally as costs are incurred for fixed fee project work. For time and materials projects, revenue is recognized on a gross basis each month as work is performed and the Company transfers those services.
The Company sells cloud computing solutions, which include Software as a Service ("SaaS") and Infrastructure as a Service ("IaaS"). SaaS solutions utilize third-party partners to offer the Company's customers access to software in the cloud that enhances office productivity, provides security or assists in collaboration. IaaS solutions utilize third-party partners to enable customers to access data center functionality in a cloud-based solution, including storage, computing and networking. The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction. For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis.

Revenues from the sale of data center services, such as managed and remote managed services, server co-location, internet connectivity and data backup and storage provided by the Company, are recognized over the period the service is provided. Most hosting and managed service obligations are based on the quantity and pricing parameters established in the agreement. As the customer receives the benefit of the service each month, the Company recognizes the respective revenue on a gross basis as the Company is acting as a principal in the transaction. Additionally, the Company's managed services team provides project support to customers that are billed on a fixed fee basis. The Company is acting as the principal in the transaction and recognizes revenue on a gross basis based on the total number of hours incurred for the period over the total expected hours for the project. Total expected hours to complete the project is updated for each period and best represents the transfer of control of the service to the customer.

The Company's customers are offered the opportunity by certain of its vendors to purchase software licenses and software assurance under enterprise agreements ("EAs"), referred to as services in this paragraph. For most EA transactions, the Company's obligation to the customer is that of a distributor or sales agent of the services, where all obligations for providing the services to customers are passed to the Company's vendors. The Company's performance obligations are satisfied at the time of the sale. In other EA transactions, the Company is responsible for fulfilling the promised services to the customer and providing remedy or refund for work if the customer is not satisfied with the delivered services, has inventory risk in the arrangement and has full control to set the price for the customer. This results in the Company acting as a principal in the agreement. With most EAs, the Company's vendors will transfer the license and invoice the customer

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

directly, paying resellers an agency fee or commission on these sales. The Company records these fees as a component of Net sales as earned and there is no corresponding Cost of sales amount.

Revenue Recognition for Bundled Arrangements
The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of products and services. For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices of each performance obligation. The Company excludes amounts collected on behalf of third-parties, such as sales taxes, when determining the transaction price. For certain performance obligations, the Company will use a combination of methods to estimate the standalone selling price. 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.
Sales In-Transit
The Company performs 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. This analysis is the basis upon which the Company estimates the amount of Net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment.
Freight Costs
The Company records freight billed to its customers as Net sales and the related freight costs as a Cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as a Cost of sales. The Company's typical shipping terms are F.O.B. destination, which results in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.
Other
The nature of the Company's contracts give rise to variable consideration in the form of sales returns and allowances. The Company estimates variable consideration at the most likely amount to which it is expected to be entitled. This estimated amount is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of the Company's anticipated performance and all information that is reasonably available. At the time of sale, the Company records an estimate for sales returns and allowances and an associated right of return asset based on historical experience.
When a contract results in revenue being recognized in excess of the amount the Company has the right to invoice to the customer, a contract asset is recorded on the balance sheet. Contract assets are comprised primarily of professional services with fixed fee arrangements.
Contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services. Contract liabilities are comprised primarily of professional services with fixed fee arrangements, bill-and-hold transactions where control has not passed to the customer and certain governmental contracts.

Trade accounts receivable are recorded at the point of sale (or in accordance with the Statement of Work for services) for the total amount payable by the customer to the Company for sale of goods. Taxes to be collected from the customer as part of the sale are included in Accounts receivable.

Any incremental direct costs of obtaining a contract, primarily sales commissions, are deferred on the Consolidated Balance Sheets and amortized over the period of contract performance.
 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company typically does not enter into long-term contracts. The Company has elected to use the practical expedient for its performance obligations table to show only those contracts that are longer than 12 months at the time of contract inception and those contracts that are non-cancelable. Additionally, for certain governmental contracts where there are annual renewals, the Company has excluded these contracts since there is only a one-year legal obligation. Typically, the only contracts that are longer than 12 months in duration are related to the Company's professional and managed services business.
The Company requests payments for its products and services at the point of sale. The Company generally does not enter into any long-term financing arrangements or payment plans with customers or contracts with customers that have non-cash consideration.
2.
Recent Accounting Pronouncements
Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (the "FASB") issued ASU 2017-12, Derivatives and Hedging (Topic 815), intending to improve the transparency of information included in the financial statements by aligning cash flow and fair value hedge accounting with its risk management activities. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness for cash flow hedges and net investment hedges, and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The ASU also simplifies certain documentation and assessment requirements and will incorporate new disclosure requirements and amendments to existing disclosures. This ASU is effective for the Company beginning the first quarter of 2019 and allows for early adoption. The Company is currently evaluating the impact the ASU will have on its Consolidated Financial Statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the assumptions, models and methods for estimating expected credit losses. This ASU is effective for the Company beginning in the first quarter of 2020 and allows for early adoption beginning in the first quarter of 2019. The Company is currently evaluating the impact the ASU will have on its Consolidated Financial Statements.
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, together with amendments issued during 2018, requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU is effective for the Company beginning in the first quarter of 2019 and allows for early adoption. Entities are required to use the modified retrospective approach, with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented or (2) retrospectively at the beginning of the period of adoption.
The Company plans to adopt the standard on January 1, 2019, and will apply it at the beginning of the period of adoption. Therefore, upon adoption, financial information and disclosures will not be updated for comparative reporting periods under the new standard. Additionally, the Company intends to elect the transition package of practical expedients upon adoption which, among other things, allows an entity to not reassess the historical lease classification. The Company has established a cross-functional implementation team to analyze the effect of the ASU. The Company utilized a combination of a bottom-up and top-down approach to identify and analyze its lease portfolio. The analysis included reviewing all forms of leases, performing a completeness assessment over the lease population, assessing the policy elections offered by the standard and evaluating its business processes and internal controls to meet the ASU's accounting, reporting and disclosure requirements.
The Company expects adoption of the standard will have an impact on the Consolidated Balance Sheet. The Company does not expect the adoption of the standard to impact the Consolidated Statements of Operations or the Consolidated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Statements of Cash Flows. The most significant effect of the new standard on the Consolidated Balance Sheet relates to the recognition of right-of-use assets and lease liabilities for the Company’s real estate portfolio. The Company will also be providing new disclosures for its leasing activities.
Revenue Recognition
On January 1, 2018, the Company adopted Topic 606 and utilized the full retrospective method. For additional details, see Note 1 (Description of Business and Summary of Significant Accounting Policies).    
The adoption of Topic 606 impacted the Company's results as follows:
 
 
Three Months Ended September 30, 2017(1)
 
Nine Months Ended September 30, 2017(1)
(in millions)
(except per share amounts)
 
As Reported
 
New Revenue Standard Adjustment
 
As Adjusted
 
As Reported
 
New Revenue Standard Adjustment
 
As Adjusted
Net sales
 
$
4,033.9

 
$
(100.7
)
 
$
3,933.2

 
$
11,353.0

 
$
(272.2
)
 
$
11,080.8

Gross profit
 
642.0

 
0.2

 
642.2

 
1,835.6

 
0.9

 
1,836.5

Gross profit margin
 
15.9
%
 
40 bps

 
16.3
%
 
16.2
%
 
40 bps

 
16.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
 
243.7

 
0.3

 
244.0

 
644.6

 
1.0

 
645.6

Income tax expense
 
(77.4
)
 
(0.2
)
 
(77.6
)
 
(147.9
)
 
(0.5
)
 
(148.4
)
Net income
 
$
129.2

 
$
0.1

 
$
129.3

 
$
327.8

 
$
0.5

 
$
328.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.84

 
$

 
$
0.84

 
$
2.10

 
$

 
$
2.10

Diluted
 
$
0.83

 
$

 
$
0.83

 
$
2.06

 
$

 
$
2.06

(1)
Amounts may not foot or cross-foot due to rounding.
The adoption of Topic 606 impacted the Company's Consolidated Balance Sheet as follows:
 
 
December 31, 2017(1)
(in millions)
 
As Reported
 
New Revenue Standard Adjustment
 
As Adjusted
Accounts receivable
 
$
2,320.5

 
$
8.8

 
$
2,329.3

Merchandise inventory
 
449.5

 
(38.0
)
 
411.5

Miscellaneous receivables
 
336.5

 
6.5

 
343.0

Prepaid expenses and other
 
127.4

 
40.9

 
168.3

Total current assets
 
3,378.1

 
18.2

 
3,396.3

 
 
 
 
 
 
 
Other assets
 
40.8

 
(8.1
)
 
32.7

Total assets
 
6,956.6

 
10.1

 
6,966.7

 
 
 
 
 
 
 
Contract liabilities
 
194.0

 
(35.2
)
 
158.8

Income tax payable
 
15.1

 
1.1

 
16.2

Other accrued expenses
 
180.2

 
41.6

 
221.8

Total current liabilities
 
2,514.6

 
7.5

 
2,522.1

 
 
 
 
 
 
 
Total liabilities
 
5,973.7

 
7.5

 
5,981.1

Total stockholders’ equity
 
$
982.9

 
$
2.7

 
$
985.6

(1)
Amounts may not foot or cross-foot due to rounding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    Inventory Financing Agreements
The Company has entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions, as described below. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. The Company does not incur any interest expense associated with these agreements as balances are paid when they are due.
Amounts included in Accounts payable-inventory financing are as follows:
(in millions)
 
September 30, 2018
 
December 31, 2017
Revolving Loan inventory financing agreement(1)
 
$
394.8

 
$
480.9

Other inventory financing agreements
 
12.8

 
17.1

Accounts payable-inventory financing
 
$
407.6

 
$
498.0


(1)
The Senior Secured Asset-Based Revolving Credit Facility includes an inventory floorplan sub-facility that enables the Company to maintain an inventory financing agreement with a financial intermediary to facilitate the purchase of inventory from certain vendors on more favorable terms than offered directly by the vendors.
4.     Contract Liabilities and Remaining Performance Obligations
The Company's contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services. The Company's contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. As of September 30, 2018 and December 31, 2017, the contract liability balance was $188 million and $159 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company recognized revenue of $153 million and $126 million, respectively, related to its contract liabilities.
A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For more information regarding the Company's performance obligations, see Note 1 (Description of Business and Summary of Significant Accounting Policies). The following table represents the total transaction price for the remaining performance obligations as of September 30, 2018 related to non-cancelable contracts longer than 12 months in duration that is expected to be recognized over future periods.