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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 March 31, 2019
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 April 26, 2019, there were 146,021,999 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)
 
March 31, 2019
 
December 31, 2018
Assets
(unaudited)
 

Current assets:
 
 
 
Cash and cash equivalents
$
285.0

 
$
205.8

Accounts receivable, net of allowance for doubtful accounts of $7.6 and $7.0, respectively
2,725.1

 
2,671.2

Merchandise inventory
590.7

 
454.3

Miscellaneous receivables
353.4

 
316.4

Prepaid expenses and other
178.3

 
149.1

Total current assets
4,132.5

 
3,796.8

Operating lease right-of-use assets
132.1

 

Property and equipment, net
155.2

 
156.1

Goodwill
2,528.2

 
2,462.8

Other intangible assets, net
696.0

 
712.2

Other assets
35.5

 
39.8

Total Assets
$
7,679.5

 
$
7,167.7

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable-trade
$
1,745.4

 
$
1,577.1

Accounts payable-inventory financing
500.0

 
429.3

Current maturities of long-term debt
25.7

 
25.3

Contract liabilities
192.1

 
178.3

Accrued expenses and other current liabilities:
 
 

Compensation
178.4

 
186.4

Advertising
125.3

 
119.2

Sales and income taxes
101.3

 
55.5

Other
346.8

 
232.0

Total current liabilities
3,215.0

 
2,803.1

Long-term liabilities:
 
 
 
Debt
3,257.7

 
3,183.3

Deferred income taxes
132.7

 
141.9

Operating lease liabilities
93.0

 

Other liabilities
53.8

 
64.2

Total long-term liabilities
3,537.2

 
3,389.4

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; 146.3 and 147.7 shares outstanding, respectively
1.5

 
1.5

Paid-in capital
3,025.3

 
2,996.9

Accumulated deficit
(1,972.0
)
 
(1,892.6
)
Accumulated other comprehensive loss
(127.5
)
 
(130.6
)
Total stockholders' equity
927.3

 
975.2

Total Liabilities and Stockholders' Equity
$
7,679.5

 
$
7,167.7


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)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net sales
 
$
3,957.9

 
$
3,606.4

Cost of sales
 
3,285.8

 
3,002.5

Gross profit
 
672.1

 
603.9

Selling and administrative expenses
 
404.0

 
362.7

Advertising expense
 
39.2

 
37.1

Operating income
 
228.9

 
204.1

Interest expense, net
 
(38.3
)
 
(37.7
)
Other income (expense), net
 
1.0

 
(0.7
)
Income before income taxes
 
191.6

 
165.7

Income tax expense
 
(38.7
)
 
(38.7
)
Net income
 
$
152.9

 
$
127.0

 
 
 
 
 
Net income per common share:
 
 
 
 
Basic
 
$
1.04

 
$
0.83

Diluted
 
$
1.02

 
$
0.82

 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
Basic
 
147.0

 
152.2

Diluted
 
149.2

 
154.8


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)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net income
 
$
152.9

 
$
127.0

Other comprehensive income:
 
 
 
 
Unrealized (loss) gain from hedge accounting, net of tax
 
(8.3
)
 
2.7

Reclassification of hedge accounting gain to net income, net of tax
 
1.5

 
0.5

Foreign currency translation, net of tax
 
9.9

 
14.2

Other comprehensive income
 
3.1

 
17.4

Comprehensive income
 
$
156.0

 
$
144.4

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

5


CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
 
Three Months Ended March 31, 2019
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders' Equity
Balance as of December 31, 2018
 
147.7

 
$
1.5

 
$
2,996.9

 
$
(1,892.6
)
 
$
(130.6
)
 
$
975.2

Net income
 

 

 

 
152.9

 

 
152.9

Equity-based compensation expense
 

 

 
12.2

 

 

 
12.2

Stock option exercises
 
0.5

 

 
13.0

 

 

 
13.0

Coworker Stock Purchase Plan
 

 

 
3.0

 

 

 
3.0

Repurchases of common stock
 
(1.9
)
 

 

 
(177.1
)
 

 
(177.1
)
Dividends paid ($0.295 per share)
 

 

 
0.2

 
(43.6
)
 

 
(43.4
)
Incentive compensation plan stock withheld for taxes
 

 

 

 
(11.6
)
 

 
(11.6
)
Foreign currency translation
 

 

 

 

 
9.9

 
9.9

Unrealized loss from hedge accounting
 

 

 

 

 
(6.8
)
 
(6.8
)
Balance as of March 31, 2019
 
146.3

 
$
1.5

 
$
3,025.3

 
$
(1,972.0
)
 
$
(127.5
)
 
$
927.3


 
 
Three Months Ended March 31, 2018
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders' Equity
Balance as of December 31, 2017
 
153.1

 
$
1.5

 
$
2,911.6

 
$
(1,831.6
)
 
$
(95.9
)
 
$
985.6

Net income
 

 

 

 
127.0

 

 
127.0

Equity-based compensation expense
 

 

 
7.1

 

 

 
7.1

Stock option exercises
 
0.3

 

 
7.3

 

 

 
7.3

Coworker Stock Purchase Plan
 

 

 
2.4

 

 

 
2.4

Repurchases of common stock
 
(1.5
)
 

 

 
(109.2
)
 

 
(109.2
)
Dividends paid ($0.210 per share)
 

 

 
0.1

 
(32.1
)
 

 
(32.0
)
Incentive compensation plan stock withheld for taxes
 

 

 

 
(8.7
)
 

 
(8.7
)
Foreign currency translation
 

 

 

 

 
14.2

 
14.2

Unrealized gain from hedge accounting
 

 

 

 

 
3.2

 
3.2

Balance as of March 31, 2018
 
151.9

 
$
1.5

 
$
2,928.5

 
$
(1,854.6
)
 
$
(78.5
)
 
$
996.9

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)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
152.9

 
$
127.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
64.3

 
66.6

Equity-based compensation expense
 
12.7

 
8.1

Deferred income taxes
 
(13.7
)
 
(13.4
)
Other
 
2.8

 
1.1

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
11.9

 
60.5

Merchandise inventory
 
(134.2
)
 
(72.4
)
Other assets
 
(31.9
)
 
15.4

Accounts payable-trade
 
116.0

 
(29.8
)
Other liabilities
 
71.6

 
59.1

Net cash provided by operating activities
 
252.4

 
222.2

Cash flows used in investing activities:
 
 
 
 
Capital expenditures
 
(19.4
)
 
(15.9
)
Acquisition of business, net of cash acquired
 
(68.7
)
 

Net cash used in investing activities
 
(88.1
)
 
(15.9
)
Cash flows used in financing activities:
 
 
 
 
Proceeds from borrowings under revolving credit facility
 
88.5

 
170.0

Repayments of borrowings under revolving credit facility
 
(12.5
)
 
(170.0
)
Repayments of long-term debt
 
(5.9
)
 
(3.7
)
Net change in accounts payable-inventory financing
 
70.2

 
24.9

Repurchases of common stock
 
(177.1
)
 
(109.2
)
Payment of incentive compensation plan withholding taxes

 
(11.6
)
 
(8.7
)
Dividend payments
 
(43.4
)
 
(32.0
)
Other
 
11.6

 
(2.5
)
Net cash used in financing activities
 
(80.2
)
 
(131.2
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
0.8

 
1.7

Net increase in cash, cash equivalents and restricted cash
 
84.9

 
76.8

Cash, cash equivalents and restricted cash—beginning of period
 
205.8

 
144.2

Cash, cash equivalents and restricted cash—end of period
 
$
290.7

 
$
221.0

Supplementary disclosure of cash flow information:
 
 
 
 
Interest paid
 
$
(44.1
)
 
$
(42.7
)
Taxes paid, net
 
$
(11.4
)
 
$
(10.6
)

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 March 31, 2019 and for the three months ended March 31, 2019 and 2018 (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, 2018 (the "December 31, 2018 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, 2018 Consolidated Financial Statements. 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.
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.
The notes to the Consolidated Financial Statements contained in the December 31, 2018 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 below for the adoption of Accounting Standards Update ("ASU") 2016-02, Leases ("Topic 842"), there have been no material changes to the Company's significant accounting policies and estimates during the three months ended March 31, 2019.

8

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

Leases
The Company enters into operating lease contracts, as assessed at contract inception, primarily for real estate, data centers and equipment. On the Company's Consolidated Balance Sheets, Operating lease assets are included in Operating lease right-of-use assets and Operating lease liabilities are included in Other current liabilities and Operating lease liabilities. At the lease commencement date, the Company records Operating lease liabilities based on the present value of the future lease payments. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. For real estate and data center contracts, the Company accounts for the lease and non-lease components as a single lease component. For certain equipment leases, the Company applies a portfolio approach to account for the right-of-use asset and operating lease liability. In assessing the lease term, the Company includes options to renew only when it is reasonably certain that it will be exercised; a determination which is at the sole discretion of the Company. Generally, for leases with an initial term of 12 months or less, the Company has elected to not record a right-of-use asset and lease liability. For equipment leases used in revenue generating activities, the Company will record a right-of-use asset and lease liability for leases with a term of 12 months or less. The Company records lease expense on a straight-line basis over the lease term beginning on the commencement date.
Cash, Cash Equivalents and Restricted Cash
Restricted cash represents funds that are restricted to satisfy designated current liabilities. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts in the Consolidated Statements of Cash Flows.
(in millions)
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
285.0

 
$
205.8

 
$
221.0

 
$
144.2

Restricted cash:
 
 
 
 
 
 
 
 
Prepaid expenses and other
 
5.7

 

 

 

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows
 
$
290.7

 
$
205.8

 
$
221.0

 
$
144.2


2.     Recent Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The 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. The ASU also expands the disclosure requirements to enable users of financial statements to understand the assumptions, models and methods for estimating expected credit losses. The ASU is effective for the Company beginning in the first quarter of 2020 and allows for early adoption. The Company is currently evaluating the impact the ASU will have on its Consolidated Financial Statements.
Accounting for Leases
On January 1, 2019, the Company adopted and applied Topic 842. The adoption of the standard resulted in the recognition of right-of-use assets and additional lease liabilities of $81 million as of January 1, 2019, mainly related to operating leases for the Company's real estate portfolio. For additional details regarding the impact to the Company's Consolidated Balance Sheets from adopting this standard, see Note 9 (Leases).
3.    Acquisition
On February 1, 2019, the Company completed the acquisition of all issued and outstanding shares of Scalar Decisions Inc. ("Scalar"), a leading technology solutions provider in Canada, for a preliminary total purchase price of $86 million of which $13 million is deferred to satisfy potential indemnity obligations and is expected to be paid in the first quarter of 2021. The final purchase price will be determined following completion of working capital adjustments. This strategic

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

acquisition expands the Company's solutions and services portfolio, extends the Company's in-market presence across Canada and enhances the value that the Company can deliver to its customers. The financial results of Scalar have been included in the Company's Consolidated Financial Statements since the date of the acquisition. Financial results are included in the Canada operating segment which is shown in an all other category ("Other") along with CDW UK. The purchase price allocation is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available.
The preliminary purchase price allocation is as follows:
(in millions)
 
Acquisition-Date Fair Value
Net assets acquired
 
$
7.2

Identified intangible assets(1)
 
18.8

Goodwill(2)
 
60.4

Total purchase price
 
$
86.4

(1)
Net of a related deferred tax liability of $7 million.
(2)
Goodwill in the amount of $60 million was recognized in connection with the acquisition of Scalar, primarily attributed to cross selling opportunities and overall corporate synergies. The full amount of goodwill recognized is not deductible for income tax purposes in Canada.
4.    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)
 
March 31, 2019
 
December 31, 2018
Revolving Loan inventory financing agreement(1)
 
$
475.0

 
$
406.3

Other inventory financing agreements
 
25.0

 
23.0

Accounts payable-inventory financing
 
$
500.0

 
$
429.3


(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.
5.     Contract Liabilities and 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 March 31, 2019 and December 31, 2018, the contract liability balance was $192 million and $178 million, respectively. During the three months ended March 31, 2019 and 2018, the Company recognized revenue of $74 million and $58 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. The following table represents the total transaction price for the remaining performance obligations as of March 31, 2019 related to non-cancelable contracts longer than 12 months in duration that is expected to be recognized over future periods.
(in millions)
 
Within 1 Year
 
Years 1-2
 
Years 2-3
 
Thereafter
Remaining performance obligations
 
$
39.0

 
$
21.8

 
$
5.1

 
$
0.3



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.
Financial Instruments
The Company's indebtedness creates interest rate risk on its variable-rate debt. The Company uses derivative financial instruments to manage its exposure to interest rate risk. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company has interest rate cap agreements that entitle it to payments from the counterparty of the amount, if any, by which three-month LIBOR exceeds the strike rates of the caps during the agreement period in exchange for an upfront premium. During the first quarter of 2019, the Company entered into interest rate cap agreements with a combined notional value of $1.0 billion resulting in premiums paid to the counterparties of $6 million. As of March 31, 2019 and December 31, 2018, the Company had the following interest rate cap agreements for which the fair values are classified within Other assets on the Consolidated Balance Sheets:
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Notional Value (in millions)
 
Effective Date
 
Maturity Date
 
Fair Value (in millions)
 
Fair Value (in millions)
$
1,400.0

 
December 31, 2018
 
December 31, 2020
 
$
4.4

 
$
10.6

1,200.0

 
December 31, 2020
 
December 31, 2022
 
3.9

 
1.5

 
 
 
 
 
 
$
8.3

 
$
12.1


The fair values of the Company's interest rate cap agreements are classified as Level 2 in the fair value hierarchy. The valuation of the interest rate cap agreements is derived by using a discounted cash flow analysis on the expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. This analysis reflects the contractual terms of the interest rate cap agreements, including the period to maturity, and uses observable market-based inputs, including LIBOR curves and implied volatilities. The Company also incorporates insignificant credit valuation adjustments to appropriately reflect the respective counterparty's nonperformance risk in the fair value measurements. The counterparty credit spreads are based on publicly available credit information obtained from a third-party credit data provider. For additional details, see Note 7 (Long-Term Debt).
The interest rate cap agreements are designated as cash flow hedges. The changes in the fair value of derivatives that qualify as cash flow hedges are recorded in Accumulated other comprehensive loss and are subsequently reclassified into Interest expense in the period when the hedged forecasted transaction affects earnings. The Company recorded a $7 million loss and a $3 million gain, net of tax, into Accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019 and 2018, the Company reclassified less than $1 million from Accumulated other comprehensive loss to earnings within Interest expense, net on the Consolidated Statement of Operations. The Company expects to reclassify $6 million from Accumulated other comprehensive loss into Interest expense, net during the next 12 months.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.
Long-Term Debt
 
 
 
 
As of March 31, 2019
 
As of December 31, 2018
(dollars in millions)
 
Maturities
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
Credit Facilities
 
 
 
 
 
 
 
 
 
 
CDW UK revolving credit facility(1)
 
July 2021
 
%
 
$

 
%
 
$

Senior secured asset-based revolving credit facility
 
March 2022
 
3.8
%
 
76.0

 
%
 

Total credit facilities
 
 
 
 
 
76.0

 
 
 

 
 
 
 
 
 
 
 
 
 
 
Term Loans
 
 
 
 
 
 
 
 
 
 
CDW UK term loan(1)
 
August 2021
 
2.3
%
 
66.5

 
2.3
%
 
65.0

Senior secured term loan facility
 
August 2023
 
4.3
%
 
1,449.4

 
4.1
%
 
1,453.2

Total term loans
 
 
 
 
 
1,515.9

 
 
 
1,518.2

 
 
 
 
 
 
 
 
 
 
 
Unsecured Senior Notes
 
 
 
 
 
 
 
 
 
 
Senior notes due 2023 ("2023 Senior Notes")
 
September 2023
 
5.0
%
 
525.0

 
5.0
%
 
525.0

Senior notes due 2024 ("2024 Senior Notes")
 
December 2024
 
5.5
%
 
575.0

 
5.5
%
 
575.0

Senior notes due 2025 ("2025 Senior Notes")
 
September 2025
 
5.0
%
 
600.0

 
5.0
%
 
600.0

Total unsecured senior notes
 
 
 
 
 
1,700.0

 
 
 
1,700.0

 
 
 
 
 
 
 
 
 
 
 
Other long-term obligations
 
 
 
 
 
8.5

 
 
 
8.3

Unamortized deferred financing fees
 
 
 
 
 
(17.0
)
 
 
 
(17.9
)
Current maturities of long-term debt
 
 
 
 
 
(25.7
)
 
 
 
(25.3
)
Total long-term debt
 
 
 
 
 
$
3,257.7

 
 
 
$
3,183.3

(1)
British pound-denominated debt facilities.
As of March 31, 2019, the Company is in compliance with the covenants under the various credit agreements and indentures.
Credit Facilities
The Company has a variable rate CDW UK revolving credit facility that is denominated in British pounds. As of March 31, 2019, the Company could have borrowed up to an additional £50 million ($65 million at March 31, 2019) under the CDW UK revolving credit facility.
The Company also has a variable rate senior secured asset-based revolving credit facility (the "Revolving Loan") that is denominated in US dollars. The Revolving Loan is used by the Company for borrowings, issuances of letters of credit and floorplan financing. As of March 31, 2019, the Revolving Loan had less than $1 million of undrawn letters of credit, $436 million reserved for the floorplan sub-facility and a borrowing base of $1.8 billion, which is based on the amount of eligible inventory and accounts receivable balances as of February 28, 2019. As of March 31, 2019, the Company could have borrowed up to an additional $938 million under the Revolving Loan.
The Revolving Loan is collateralized by a first priority interest in inventory (excluding inventory to the extent collateralized under the inventory financing arrangements as described in Note 4 (Inventory Financing Agreements)), deposits and accounts receivable, and by a second priority interest in substantially all US assets.
Term Loans
The CDW UK term loan has a variable interest rate. The Company is required to make annual principal installments of £5 million ($7 million at March 31, 2019), with the remaining principal amount due at the maturity date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The CDW UK term loan agreement imposes restrictions on CDW UK's ability to transfer funds to the Company through the payment of dividends, repayment of intercompany loans, advances or subordinated debt that require, among other things, the maintenance of a minimum net leverage ratio. As of March 31, 2019, the amount of restricted payment capacity under the CDW UK term loan was £124 million ($162 million at March 31, 2019).
The senior secured term loan facility (the "Term Loan") has a variable interest rate, which has effectively been capped through the use of interest rate caps (see Note 6 (Financial Instruments)). The interest rate disclosed in the table above represents the variable interest rates in effect for March 31, 2019 and December 31, 2018, respectively. The Company is required to pay quarterly principal installments of $4 million with the remaining principal amount due at the maturity date. As of March 31, 2019, the amount of CDW's restricted payment capacity under the Term Loan was $1.5 billion.
The Term Loan is collateralized by a second priority interest in substantially all inventory (excluding inventory to the extent collateralized under the inventory financing arrangements as described in Note 4 (Inventory Financing Agreements), deposits and accounts receivable, and by a first priority interest in substantially all other US assets.
Unsecured Senior Notes
The 2023 Senior Notes, 2024 Senior Notes and 2025 Senior Notes (collectively, the "Senior Notes") have a fixed interest rate, which is paid semi-annually.
Fair Value

The fair values of the Senior Notes were estimated using quoted market prices for identical liabilities that are traded in over-the-counter secondary markets that are not considered active. The fair value of the Term Loan was estimated using dealer quotes for identical liabilities in markets that are not considered active. The Senior Notes, Term Loan and CDW UK term loan are classified as Level 2 within the fair value hierarchy. The carrying value of the Revolving Loan and CDW UK revolving credit facility approximate fair value if there are outstanding borrowings. The approximate fair values and related carrying values of the Company's long-term debt, including current maturities and excluding unamortized discount and unamortized deferred financing fees, are as follows:
(in millions)
 
March 31, 2019
 
December 31, 2018
Fair value
 
$
3,358.7

 
$
3,145.8

Carrying value
 
3,300.4

 
3,226.5


8.    Income Taxes
Income tax expense was $39 million for the three months ended March 31, 2019 and 2018. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 20.2% for the three months ended March 31, 2019 and differed from the US federal statutory rate of 21.0% primarily due to excess tax benefits on equity-based compensation and a discrete tax benefit of $3 million related to CDW Canada's acquisition of Scalar, partially offset by state and local income taxes. The effective tax rate for the same period of the prior year was 23.4% and differed from the US federal statutory rate of 21.0% primarily due to state and local income taxes partially offset by excess tax benefits on equity-based compensation.
9.    Leases
The Company has operating leases primarily for real estate, data centers and equipment. Lease terms range from 1 year to 16 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Consolidated Balance Sheet information related to the Company's operating leases is as follows:
(in millions)
 
Classification on the Consolidated Balance Sheets
 
March 31, 2019
Assets
 
 
 
 
 
 
Operating lease right-of-use assets
 
$
132.1

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
Accrued expenses and other current liabilities - Other
 
$
77.1

Long-term
 
Long-term operating lease liabilities
 
93.0

Total lease liabilities
 
 
 
$
170.1

 
 
 
 
 
Lease term and Discount Rate
 
March 31, 2019
Weighted average remaining lease term (years)
 
4.5

Weighted average discount rate
 
3.32
%


The components of operating lease expense are as follows:
(in millions)
Financial statement line item
 
Three months ended March 31, 2019
Cost of sales
 
$
2.7

Selling and administrative expenses
 
7.6

Total lease cost
 
$
10.3



Maturities of operating lease liabilities is as follows:
(in millions)
 
Three months ended March 31, 2019
Remainder of 2019
 
$
73.6

2020
 
31.1

2021
 
21.8

2022
 
14.5

2023
 
11.4

Thereafter
 
37.2

Total lease payments
 
$
189.6

Less: Interest
 
(19.5
)
Present value of lease liabilities
 
$
170.1



Supplemental cash flow information related to leases is as follows:
(in millions)
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
10.2

Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
 
$
49.0



As of March 31, 2019, the Company has an additional operating lease commitment that has not yet commenced of $91 million. This operating lease will commence between 2020 and 2021 with a lease term of 16 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.
Earnings Per Share
The numerator for both basic and diluted earnings per share is Net income. The denominator for basic earnings per share is the weighted-average shares outstanding during the period.
A reconciliation of basic weighted-average shares outstanding to diluted weighted-average shares outstanding is as follows:
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Basic weighted-average shares outstanding
147.0

 
152.2

Effect of dilutive securities(1)
2.2

 
2.6

Diluted weighted-average shares outstanding(2)
149.2

 
154.8


(1)
The dilutive effect of outstanding stock options, restricted stock units, restricted stock, performance share units and Coworker Stock Purchase Plan units is reflected in the diluted weighted-average shares outstanding using the treasury stock method.

(2)
There were fewer than 0.1 million potential common shares excluded from diluted weighted-average shares outstanding for both the three months ended March 31, 2019 and 2018 as their inclusion would have had an anti-dilutive effect.
11.    Commitments and Contingencies
The Company is party to various legal proceedings that arise in the ordinary course of its business, which include commercial, intellectual property, employment, tort and other litigation matters. The Company is also subject to audit by federal, state, international, national, provincial and local authorities, and by various partners, group purchasing organizations and customers, including government agencies, relating to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts. From time to time, certain customers of the Company file voluntary petitions for reorganization or liquidation under the US bankruptcy laws or similar laws of the jurisdictions for the Company's business activities outside of the US. In such cases, certain pre-petition payments received by the Company could be considered preference items and subject to return to the bankruptcy administrator.
As of March 31, 2019, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company's financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
12.
Segment Information
The Company has three reportable segments: Corporate, which is comprised primarily of US private sector business customers with more than 250 employees, Small Business, which primarily serves US private sector business customers with up to 250 employees, and Public, which is comprised of government agencies and education and healthcare institutions in the US. The Company has two other operating segments: CDW UK and CDW Canada, both of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category ("Other"). Headquarters function costs that are not allocated to the segments are included under the heading of "Headquarters" in the tables below.
During the first quarter of 2019, the Company evaluated its methodology for allocating certain depreciation and amortization expenses to each of its segments. The evaluation resulted in a revision to the allocation of depreciation and amortization expenses from Headquarters to the Company’s reportable segments, effective January 1, 2019. The prior period results have been recast to reflect these changes and present comparable information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information about the Company's segments is as follows:
(in millions)
 
Corporate
 
Small Business
 
Public
 
Other
 
Headquarters
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,736.2

 
$
355.6

 
$
1,330.7

 
$
535.4

 
$

 
$
3,957.9

Operating income (loss)
 
134.7

 
24.4

 
76.1

 
25.6

 
(31.9
)
 
228.9

Depreciation and amortization expense
 
(21.5
)
 
(5.6
)
 
(12.7
)
 
(7.4
)
 
(17.1
)
 
(64.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,565.8

 
$
327.6

 
$
1,230.0

 
$
483.0

 
$

 
$
3,606.4

Operating income (loss)
 
123.0

 
21.9

 
70.2

 
19.8

 
(30.8
)
 
204.1

Depreciation and amortization expense
 
(22.9
)
 
(5.6
)
 
(12.7
)
 
(8.8
)
 
(16.6
)
 
(66.6
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Geographic Areas and Revenue Mix
 
Three Months Ended March 31, 2019
(in millions)
Corporate
 
Small Business
 
Public
 
Other
 
Total
Geography(1)
 
 
 
 
 
 
 
 
 
United States
$
1,732.9

 
$
355.6

 
$
1,330.7

 
$
8.4

 
$
3,427.6

Rest of World
3.3

 

 

 
527.0

 
530.3

Total Net sales
1,736.2

 
355.6

 
1,330.7

 
535.4

 
3,957.9

 
 
 
 
 
 
 
 
 

Major Product and Services
 
 
 
 
 
 
 
 

Hardware
1,383.9

 
295.0

 
1,063.1

 
395.9

 
3,137.9

Software
247.4

 
48.3

 
221.0

 
77.2

 
593.9

Services
88.1

 
7.0

 
42.3

 
59.2

 
196.6

Other(2)
16.8

 
5.3

 
4.3

 
3.1

 
29.5

Total Net sales
1,736.2

 
355.6

 
1,330.7

 
535.4

 
3,957.9

 
 
 
 
 
 
 
 
 

Sales by Channel
 
 
 
 
 
 
 
 

Corporate
1,736.2

 

 

 

 
1,736.2

Small Business