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EXCEL - IDEA: XBRL DOCUMENT - WESCO INTERNATIONAL INCFinancial_Report.xls
EX-3.1 - EXHIBIT 3.1 - WESCO INTERNATIONAL INCwcc-06302014xexhibit31.htm
EX-31.2 - EXHIBIT 31.2 - WESCO INTERNATIONAL INCwcc-06302014xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - WESCO INTERNATIONAL INCwcc-06302014xexhibit311.htm
EX-3.2 - EXHIBIT 3.2 - WESCO INTERNATIONAL INCwcc-06302014xexhibit32.htm
EX-32.1 - EXHIBIT 32.1 - WESCO INTERNATIONAL INCwcc-06302014xexhibit321.htm
EX-32.2 - EXHIBIT 32.2 - WESCO INTERNATIONAL INCwcc-06302014xexhibit322.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2014
or
o
 
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 001-14989
WESCO International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
25-1723342
(I.R.S. Employer
Identification No.)
 
 
 
225 West Station Square Drive
Suite 700
Pittsburgh, Pennsylvania
(Address of principal executive offices)
 
(412) 454-2200
(Registrant's telephone number, including area code)
N/A
(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 at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2014, WESCO International, Inc. had 44,473,103 shares of common stock outstanding.






WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q

Table of Contents
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 EX-3.1
 EX-3.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT



1



WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Amounts in thousands, except share data
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
101,643

 
$
123,725

Trade accounts receivable, net of allowance for doubtful accounts of $22,153 and $19,309 in 2014 and 2013, respectively
1,186,062

 
1,045,054

Other accounts receivable
118,088

 
130,043

Inventories, net
850,179

 
787,324

Current deferred income taxes
43,801

 
44,691

Prepaid expenses and other current assets
108,768

 
74,778

Total current assets
2,408,541

 
2,205,615

Property, buildings and equipment, net of accumulated depreciation of $225,715 and $213,758 in 2014 and 2013, respectively
199,951

 
198,654

Intangible assets, net
475,708

 
439,167

Goodwill
1,790,853

 
1,734,391

Other assets
54,079

 
71,066

    Total assets
$
4,929,132

 
$
4,648,893

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
794,505

 
$
735,097

Accrued payroll and benefit costs
51,061

 
56,548

Short-term debt
44,962

 
37,551

Current portion of long-term debt
2,456

 
2,510

Other current liabilities
221,383

 
219,957

    Total current liabilities
1,114,367

 
1,051,663

Long-term debt, net of discount of $172,683 and $174,686 in 2014 and 2013, respectively
1,520,960

 
1,447,634

Deferred income taxes
360,290

 
341,334

Other noncurrent liabilities
44,013

 
43,471

    Total liabilities
$
3,039,630

 
$
2,884,102

Commitments and contingencies (Note 7)



Stockholders’ Equity:
 
 
 
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or outstanding

 

Common stock, $.01 par value; 210,000,000 shares authorized, 58,373,194 and 58,107,304 shares issued and 44,470,801 and 44,267,460 shares outstanding in 2014 and 2013, respectively
584

 
581

Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2014 and 2013, respectively
43

 
43

Additional capital
1,095,866

 
1,082,772

Retained earnings
1,488,722

 
1,368,386

Treasury stock, at cost; 18,241,824 and 18,179,275 shares in 2014 and 2013, respectively
(615,609
)
 
(610,430
)
Accumulated other comprehensive income
(80,020
)
 
(76,543
)
Total WESCO International stockholders' equity
1,889,586

 
1,764,809

Noncontrolling interest
(84
)
 
(18
)
    Total stockholders’ equity
1,889,502

 
1,764,791

    Total liabilities and stockholders’ equity
$
4,929,132

 
$
4,648,893


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

2



WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 Amounts in thousands, except per share data
2014
 
2013
 
2014
 
2013
Net sales
$
2,005,165

 
$
1,893,953

 
$
3,815,991

 
$
3,702,011

Cost of goods sold (excluding depreciation and amortization below)
1,593,437

 
1,501,403

 
3,029,470

 
2,928,382

Selling, general and administrative expenses
278,709

 
265,506

 
544,171

 
492,962

Depreciation and amortization
17,186

 
17,153

 
33,558

 
33,870

Income from operations
115,833

 
109,891

 
208,792

 
246,797

Interest expense, net
20,337

 
21,769

 
41,025

 
43,695

Income before income taxes
95,496

 
88,122

 
167,767

 
203,102

Provision for income taxes
26,709

 
22,771

 
47,125

 
53,658

Net income
68,787

 
65,351

 
120,642

 
149,444

Less: Net income (loss) attributable to noncontrolling interest
(15
)
 
66

 
(65
)
 
170

Net income attributable to WESCO International, Inc.
$
68,802

 
$
65,285

 
$
120,707

 
$
149,274

Comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
43,023

 
(44,350
)
 
(3,477
)
 
(67,830
)
Comprehensive income attributable to WESCO International, Inc.
$
111,825

 
$
20,935

 
$
117,230

 
$
81,444

 
 
 
 
 
 
 
 
Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.55

 
$
1.48

 
$
2.72

 
$
3.38

Diluted
$
1.29

 
$
1.25

 
$
2.26

 
$
2.85


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


3



WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended
 
June 30,
Amounts in thousands
2014
 
2013
Operating Activities:
 
 
 
Net income
$
120,642

 
$
149,444

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,558

 
33,870

  Deferred income taxes
13,719

 
26,760

Other operating activities, net
7,724

 
7,690

Changes in assets and liabilities:
 
 
 
Trade receivables, net
(122,070
)
 
(83,316
)
Other accounts receivable
12,672

 
(21,648
)
Inventories, net
(44,910
)
 
(27,719
)
Prepaid expenses and other current assets
(32,087
)
 
24,947

Accounts payable
47,082

 
53,256

Other current and noncurrent liabilities
14,512

 
(43,557
)
Net cash provided by operating activities
50,842

 
119,727

 
 
 
 
Investing Activities:
 
 
 
Acquisition payments, net of cash acquired
(133,318
)
 

Capital expenditures
(11,785
)
 
(11,750
)
Other investing activities
27

 
9,654

Net cash used in investing activities
(145,076
)
 
(2,096
)
 
 
 
 
Financing Activities:
 
 
 
Proceeds from issuance of short-term debt
33,085

 
25,435

Repayments of short-term debt
(25,983
)
 
(14,387
)
Proceeds from issuance of long-term debt
606,836

 
510,864

Repayments of long-term debt
(537,048
)
 
(625,767
)
Other financing activities, net
(1,580
)
 
6,029

Net cash provided by (used in) financing activities
75,310

 
(97,826
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(3,158
)
 
(1,392
)
 
 
 
 
Net change in cash and cash equivalents
(22,082
)
 
18,413

Cash and cash equivalents at the beginning of period
123,725

 
86,099

Cash and cash equivalents at the end of period
$
101,643

 
$
104,512


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


4


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, “WESCO” or the "Company"), headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of electrical, industrial and communications maintenance, repair and operating (“MRO”) and original equipment manufactures' (“OEM”) products, construction materials, and advanced supply chain management and logistics services used primarily in the industrial, construction, utility and commercial, institutional and government markets. We serve over 75,000 active customers globally, through approximately 475 full service branches and nine distribution centers located primarily in the United States, Canada and Mexico, with offices in 15 additional countries.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of WESCO have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in WESCO’s 2013 Annual Report on Form 10-K filed with the SEC. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.
The unaudited condensed consolidated balance sheet as of June 30, 2014, the unaudited condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2014 and 2013, respectively, and the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013, respectively, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair statement of the results of the interim periods. All adjustments reflected in the unaudited condensed consolidated financial statements are of a normal recurring nature unless indicated. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Revision
Certain amounts in the Company's consolidated balance sheet as of December 31, 2013, as presented herein, have been revised to appropriately present current and non-current deferred tax balances as well as current taxes refundable/payable in accordance with ASC 740, "Income Taxes".  Specifically, other assets and deferred income tax liabilities each increased by $24.7 million at December 31, 2013.  Additionally, prepaid expenses and other current assets increased by $7.1 million with a corresponding increase to other current liabilities of $7.1 million at December 31, 2013.  The Company also revised its consolidated balance sheet as of December 31, 2012, which is not presented herein, for the same items.  Deferred income tax assets and liabilities each increased by $16.2 million to $17.5 million and $316.7 million, respectively, at December 31, 2012. Income taxes receivable and other current liabilities each increased by $6.0 million to $14.8 million and $140.6 million, respectively, at December 31, 2012.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820, "Fair Value Measurements and Disclosures," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
At June 30, 2014, the carrying value of WESCO’s 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") was $175.8 million and the fair value was approximately $1.1 billion. At December 31, 2013, the carrying value of WESCO’s

5


2029 Debentures was $174.1 million and the fair value was approximately $1.1 billion. The fair value of WESCO’s 2029 Debentures is based on quoted prices in active markets and is therefore classified as Level 1 within the valuation hierarchy. The reported carrying amounts of WESCO’s other debt instruments approximate their fair values and are classified as Level 2 within the valuation hierarchy. Other debt instruments included in Level 2 are valued using a market approach, utilizing interest rates and other relevant information generated by market transactions involving similar instruments.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued updated guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This updated guidance requires entities to present unrecognized tax benefits, or a portion of unrecognized tax benefits, in the financial statements as a reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This guidance is effective for interim and annual periods beginning after December 15, 2013. WESCO adopted this guidance in 2014. Adoption of this guidance did not have a material impact on WESCO's financial position, results of operations or cash flows.
In May 2014, the FASB and International Accounting Standards Board ("IASB") issued a converged final standard on the recognition of revenue from contracts with customers. This updated guidance provides a framework for addressing revenue recognition issues and replaces almost all existing revenue recognition guidance in current U.S. generally accepted accounting principles. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This guidance is effective for interim and annual periods beginning after December 15, 2016. Management has not yet evaluated the future impact of this guidance on WESCO's financial position, results of operations or cash flows.
3. ACQUISITIONS
The following table sets forth the consideration paid for acquisitions:

Six Months Ended June 30, 2014
Fair value of assets acquired
$
150,966

Fair value of liabilities assumed
17,648

   Cash paid for acquisitions
$
133,318

The fair values of assets acquired and liabilities assumed were based upon preliminary calculations and valuations. Our estimates and assumptions for our preliminary purchase price allocation are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the respective acquisition dates).
2014 Acquisitions of LaPrairie, Inc., Hazmasters, Inc., and Hi-Line Utility Supply
On February 3, 2014, WESCO Distribution, Inc., through its wholly-owned Canadian subsidiary, completed the acquisition of LaPrairie, Inc. ("LaPrairie"), a wholesale distributor of electrical products that services the transmission, distribution, and substation needs of utilities and utility contractors with approximately $30 million in annual sales from a single location in Newmarket, Ontario. WESCO funded the purchase price paid at closing with cash. The purchase price was allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. The preliminary fair value of intangibles was determined by management and the allocation resulted in intangible assets of $11.0 million and goodwill of $8.9 million. Management believes the majority of goodwill will be deductible for tax purposes.
On March 17, 2014, WESCO Distribution, Inc., through its wholly-owned Canadian subsidiary, completed the acquisition of Hazmasters, Inc. ("Hazmasters"), a leading independent Canadian distributor of safety products servicing customers in the industrial, construction, commercial, institution, and government markets with approximately $80 million in annual sales from 14 branches across Canada. WESCO funded the purchase price paid at closing with cash and borrowings under the Revolving Credit Facility. The purchase price was allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. The preliminary fair value of intangibles was estimated by management and the allocation resulted in intangible assets of $35.4 million and goodwill of $19.3 million which is not deductible for tax purposes.
On June 11, 2014, Wesco Distribution, Inc., completed the acquisition of Hi-Line Utility Supply ("Hi-Line"), a provider of utility MRO and safety products, as well as rubber goods testing and certification services, with approximately $30 million in annual sales from locations in Chicago, Illinois and Millbury, Massachusetts.  WESCO funded the purchase price paid at closing with cash.  The purchase price was allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date.  The preliminary fair value of intangibles was estimated by management and the allocation

6


resulted in intangible assets of $8.8 million and goodwill of $29.2 million.  Management believes the majority of goodwill will be deductible for tax purposes.
For all acquisitions made in the first half of 2014, the intangible assets include customer relationships of $43.5 million amortized over 10 years, supplier relationships of $3.2 million amortized over 10 years, trademarks of $8.2 million, and other intangibles of $0.3 million as of June 30, 2014. Certain trademarks have been assigned an indefinite life while others are amortized over 5 to 20 years. No residual value is estimated for the intangible assets being amortized.
4. STOCK-BASED COMPENSATION
WESCO’s stock-based employee compensation plans are comprised of stock options, stock-settled stock appreciation rights, restricted stock units and performance-based awards. Compensation cost for all stock-based awards is measured at fair value on the date of grant, and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair value of stock options and stock-settled appreciation rights is determined using the Black-Scholes valuation model. The fair value of restricted stock units is determined by the grant-date closing price of WESCO’s common stock. The forfeiture assumption is based on WESCO’s historical employee behavior that is reviewed on an annual basis. No dividends are assumed.
During the three and six months ended June 30, 2014 and 2013, WESCO granted the following stock-settled stock appreciation rights, restricted stock units and performance-based awards at the following weighted average fair values and assumptions:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2014
 
2013
2014
 
2013
Stock-settled appreciation rights granted
2,295

 
5,449

274,508

 
251,573

Weighted average fair value
$
27.71

 
$
31.05

$
30.64

 
$
31.33

 
 
 
 
 
 
 
Restricted stock units granted

 

62,506

 
69,393

Weighted average fair value
$

 
$

$
85.35

 
$
72.15

 
 
 
 
 
 
 
Performance-based awards granted

 

44,046

 
48,058

Weighted average fair value
$

 
$

$
86.65

 
$
78.21

 
 
 
 
 
 
 
Risk free interest rate
1.6
%
 
1.0
%
1.5
%
 
0.9
%
Expected life (in years)
5

 
5

5

 
5

Expected volatility
34
%
 
49
%
39
%
 
50
%
The following table sets forth a summary of stock options and stock-settled stock appreciation rights and related information for the six months ended June 30, 2014:
 
Awards
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Term (In Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2013
2,715,651

 
$
45.93

 
 
 
 
     Granted
274,508

 
85.35

 
 
 
 
     Exercised
(414,201
)
 
39.95

 
 
 
 
     Forfeited
(10,454
)
 
67.30

 
 
 
 
Outstanding at June 30, 2014
2,565,504

 
51.03

 
5.7

 
$
90,703

Exercisable at June 30, 2014
2,046,684

 
$
44.28

 
4.9

 
$
86,159

The following table sets forth a summary of restricted stock units and related information for the six months ended June 30, 2014:

7


 
Awards
 
Weighted
Average
Fair
Value
Unvested at December 31, 2013
184,746

 
$
66.08

     Granted
62,506

 
85.35

     Vested
(50,655
)
 
60.77

     Forfeited
(5,927
)
 
66.28

Unvested at June 30, 2014
190,670

 
$
73.80


Performance shares are awards for which the vesting will occur based on market or performance conditions. The following table sets forth a summary of performance-based awards for the six months ended June 30, 2014:
 
Awards
 
Weighted
Average
Fair
Value
Unvested at December 31, 2013
92,484

 
$
76.98

     Granted
44,046

 
86.65

     Vested

 

     Forfeited
(4,366
)
 
76.97

Unvested at June 30, 2014
132,164

 
$
80.20

The performance-based awards in the table above include 66,082 shares in which vesting of the ultimate number of shares underlying such awards is dependent upon WESCO's total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period. These awards are valued based upon a Monte Carlo simulation model, which is a valuation model that represents the characteristics of these grants. The probability of meeting the market criteria was considered when calculating the estimated fair market value on the date of grant. These awards are accounted for as awards with market conditions, in which compensation cost is recognized over the service period, regardless of whether the market conditions are achieved and the awards ultimately vest.
The fair value of the performance shares granted during the six months ended June 30, 2014 were estimated using the following weighted-average assumptions:
Weighted Average Assumptions
Grant date share price
$
86.65

WESCO expected volatility
35.4
%
Peer group median volatility
28.7
%
Risk-free interest rate
0.62
%
Correlation
103.1
%
Vesting of the remaining 66,082 shares of performance-based awards in the table above is dependent upon the three-year average growth rate of WESCO's net income. These awards are valued based upon the grant-date closing price of WESCO's common stock. These awards are accounted for as awards with performance conditions, in which compensation cost is recognized over the performance period based upon WESCO's determination of whether it is probable that the performance targets will be achieved.
WESCO recognized $4.3 million and $4.8 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended June 30, 2014 and 2013, respectively. WESCO recognized $8.5 million and $8.8 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there was $25.9 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $8.1 million is expected to be recognized over the remainder of 2014, $11.2 million in 2015, $5.9 million in 2016 and $0.7 million in 2017.
During the six months ended June 30, 2014 and 2013, the total intrinsic value of awards exercised was $22.9 million and $6.1 million, respectively. The total amount of cash received from the exercise of options was $0.8 million for the six months ended June 30, 2014 and less than $0.1 million for the six months ended June 30, 2013. The tax benefit associated with the

8


exercise of awards for the six months ended June 30, 2014 and 2013 totaled $8.7 million and $0.5 million, respectively, and was recorded as an increase to additional capital.
5. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding during the periods. Diluted earnings per share are computed by dividing net income by the weighted average common shares and common share equivalents outstanding during the periods. The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury stock method, which includes consideration of stock-based compensation and convertible debt.
The following table sets forth the details of basic and diluted earnings per share:
 
Three Months Ended
 
June 30,
 
2014
 
2013
Net income attributable to WESCO International, Inc.
$
68,802

 
$
65,285

Weighted average common shares outstanding used in computing basic earnings per share
44,449

 
44,115

Common shares issuable upon exercise of dilutive equity awards
1,031

 
1,091

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
7,996

 
7,113

Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share
53,476

 
52,319

Earnings per share attributable to WESCO International, Inc.
 
 

     Basic
$
1.55

 
$
1.48

     Diluted
$
1.29

 
$
1.25

 
 
 
 
 
Six Months Ended
 
June 30,
 
2014
 
2013
Net income attributable to WESCO International, Inc.
$
120,707

 
$
149,274

Weighted average common shares outstanding used in computing basic earnings per share
44,399

 
44,100

Common shares issuable upon exercise of dilutive equity awards
1,061

 
1,090

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
7,962

 
7,168

Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share
53,422

 
52,358

Earnings per share attributable to WESCO International, Inc.
 
 
 
     Basic
$
2.72

 
$
3.38

     Diluted
$
2.26

 
$
2.85

For the three and six months ended June 30, 2014, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded approximately 0.5 million stock-settled stock appreciation rights at weighted average exercise prices of $84.71 per share and $79.37 per share, respectively. For the three and six months ended June 30, 2013, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded 0.5 million stock-settled stock appreciation rights at weighted average exercise prices of $67.99 per share and $67.84 per share, respectively. These amounts were excluded because their effect would have been antidilutive.
Because of WESCO’s obligation to settle the par value of the 2029 Debentures in cash upon conversion, WESCO is required to include shares underlying the 2029 Debentures in its diluted weighted average shares outstanding when the average stock price per share for the period exceeds the conversion price of the respective debentures. Only the number of shares issuable under the treasury stock method of accounting for share dilution are included, which is based upon the amount by which the average stock price exceeds the conversion price. The conversion price of the 2029 Debentures is $28.87. Share dilution is limited to a maximum of 11,948,374 shares for the 2029 Debentures. For the three and six months ended June 30, 2014, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease

9


of $0.22 and $0.40, respectively. For the three and six months ended June 30, 2013, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.20 and $0.45, respectively.
6. EMPLOYEE BENEFIT PLANS
A majority of WESCO’s employees are covered by defined contribution retirement savings plans for their services rendered subsequent to WESCO’s formation. WESCO also offers a deferred compensation plan for select individuals. For U.S. participants, WESCO will make contributions in an amount equal to 50% of the participant’s total monthly contributions up to a maximum of 6% of eligible compensation. For Canadian participants, WESCO will make contributions in an amount ranging from 1% to 7% of the participant’s eligible compensation based on years of continuous service. In addition, employer contributions may be made at the discretion of the Board of Directors. For the six months ended June 30, 2014 and 2013, WESCO incurred charges of $15.0 million and $19.1 million, respectively, for all such plans. Contributions are made in cash to defined contribution retirement savings plans. The deferred compensation plan is an unfunded plan. Employees have the option to transfer balances allocated to their accounts in the defined contribution retirement savings plan and the deferred compensation plan into any of the available investment options. An investment option for employees in the defined contribution retirement savings plan is WESCO common stock.
In connection with the December 14, 2012 acquisition of EECOL, the Company assumed a contributory defined benefit plan covering substantially all Canadian employees of EECOL and a Supplemental Executive Retirement Plan for certain executives of EECOL. The following table reflects the components of net periodic benefit costs for the Company's defined benefit plans for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
900

 
$
1,020

 
$
1,800

 
$
2,053

Interest cost
1,158

 
1,145

 
2,314

 
2,305

Expected return on plan assets
(1,362
)
 
(948
)
 
(2,723
)
 
(1,908
)
Net periodic benefit cost
$
696

 
$
1,217

 
$
1,391

 
$
2,450

During the three and six month periods ended June 30, 2014, the Company made cash contributions of $0.6 million and $1.2 million, respectively, to its defined benefit plans.
7. COMMITMENTS AND CONTINGENCIES
As initially reported in our 2008 Annual Report on Form 10-K, WESCO is a defendant in a lawsuit filed in a state court in Indiana in which a customer, ArcelorMittal Indiana Harbor, Inc. (“AIH”), alleges that the Company sold defective products to AIH in 2004 that were supplied to the Company by others.  The lawsuit sought monetary damages in the amount of approximately $50 million.  On February 14, 2013, the jury returned a verdict in favor of AIH and awarded damages in the amount of approximately $36.1 million, and judgment was entered on the jury's verdict.  As a result, the Company recorded a $36.1 million charge to selling, general and administrative expenses in 2012. The Company disputes this outcome and filed a post-trial motion challenging the verdict alleging various errors that occurred during trial.  The Company received letters from its insurers confirming insurance coverage of the matter and recorded a receivable in the quarter ended March 31, 2013 in an amount equal to the previously recorded liability. AIH also filed a post-trial motion asking the court to award additional amounts to AIH, including prejudgment and post-judgment interest.  The Court denied the Company's post-trial motion on June 28, 2013 and granted in part AIH's motion, awarding prejudgment interest in the amount of $3.9 million and ordering post-judgment interest to accrue on the entire judgment at 8% per annum. In the quarter ended June 30, 2013, the Company received letters from its insurers confirming insurance coverage of all prejudgment and post-judgment interest related to the matter. Final judgment was entered by the court on July 16, 2013, and the Company is appealing the judgment. As of June 30, 2014, the Company recorded a liability and a corresponding receivable in the amount of $7.9 million for all prejudgment and post-judgment interest accrued in connection with this matter. The judgment may increase or decrease based on the outcome of the appellate proceedings that cannot be predicted with certainty. 

WESCO is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment (the transfer of property to the state) of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements.  The Company is currently being examined by a third party auditor for compliance with unclaimed property laws.



10


8. INCOME TAXES
The effective tax rate for the three and six months ended June 30, 2014 was 28.0% and 28.1%, respectively. The effective tax rate for the three and six months ended June 30, 2013 was 25.8% and 26.4%, respectively. WESCO’s effective tax rate is lower than the federal statutory rate of 35% primarily due to benefits resulting from the tax effect of intercompany financing and lower rates on foreign earnings, which are partially offset by nondeductible expenses and state taxes. The effective tax rate for the six months ended June 30, 2014 reflects beneficial discrete adjustments totaling $0.2 million, primarily related to changes in state tax rates and changes in uncertain tax positions. The effective tax rate for the six months ended June 30, 2013 reflects detrimental discrete adjustments totaling $0.2 million, primarily related to changes in state tax rates and changes in uncertain tax positions. There have been no material adjustments to liabilities relating to uncertain tax positions since the last annual disclosure for the year ended December 31, 2013.
9. OTHER FINANCIAL INFORMATION
WESCO International, Inc. ("WESCO International") has outstanding $344.9 million in aggregate principal amount of 2029 Debentures. The 2029 Debentures are fully and unconditionally guaranteed by WESCO Distribution, Inc. ("WESCO Distribution"), a 100% owned subsidiary of WESCO International, on a senior subordinated basis to all existing and future senior indebtedness of WESCO Distribution.
WESCO Distribution has outstanding $500 million in aggregate principal amount of 5.375% Senior Notes due 2021 (the "2021 Notes"). The 2021 Notes are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International.

11


Condensed consolidating financial information for WESCO International, WESCO Distribution and the non-guarantor subsidiaries is as follows:
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(unaudited)
 
June 30, 2014
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
44,687

 
$
56,956

 
$

 
$
101,643

Trade accounts receivable, net

 

 
1,186,062

 

 
1,186,062

Inventories, net

 
369,332

 
480,847

 

 
850,179

Other current assets

 
164,598

 
152,245

 
(46,186
)
 
270,657

Total current assets

 
578,617

 
1,876,110

 
(46,186
)
 
2,408,541

Intercompany receivables, net

 

 
1,881,659

 
(1,881,659
)
 

Property, buildings and equipment, net

 
59,614

 
140,337

 

 
199,951

Intangible assets, net

 
5,069

 
470,639

 

 
475,708

Goodwill

 
246,770

 
1,544,083

 

 
1,790,853

Investments in affiliates
3,263,323

 
3,821,639

 

 
(7,084,962
)
 

Other noncurrent assets
4,222

 
14,242

 
35,246

 
369

 
54,079

Total assets
$
3,267,545

 
$
4,725,951

 
$
5,948,074

 
$
(9,012,438
)
 
$
4,929,132

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
434,071

 
$
360,434

 
$

 
$
794,505

Short-term debt

 

 
44,962

 

 
44,962

Other current liabilities
14,744

 
107,765

 
198,577

 
(46,186
)
 
274,900

Total current liabilities
14,744

 
541,836

 
603,973

 
(46,186
)
 
1,114,367

Intercompany payables, net
1,167,832

 
713,827

 

 
(1,881,659
)
 

Long-term debt
175,811

 
682,825

 
662,324

 

 
1,520,960

Other noncurrent liabilities
19,572

 
237,399

 
146,963

 
369

 
404,303

Total WESCO International stockholders' equity
1,889,586

 
2,550,064

 
4,534,898

 
(7,084,962
)
 
1,889,586

Noncontrolling interest

 

 
(84
)
 

 
(84
)
Total liabilities and stockholders’ equity
$
3,267,545

 
$
4,725,951

 
$
5,948,074

 
$
(9,012,438
)
 
$
4,929,132


12


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(unaudited)
 
December 31, 2013
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
31,695

 
$
92,030

 
$

 
$
123,725

Trade accounts receivable, net

 

 
1,045,054

 

 
1,045,054

Inventories, net

 
351,242

 
436,082

 

 
787,324

Other current assets
22

 
166,540

 
127,439

 
(44,489
)
 
249,512

Total current assets
22

 
549,477

 
1,700,605

 
(44,489
)
 
2,205,615

Intercompany receivables, net

 

 
1,906,785

 
(1,906,785
)
 

Property, buildings and equipment, net

 
59,569

 
139,085

 

 
198,654

Intangible assets, net

 
5,404

 
433,763

 

 
439,167

Goodwill

 
246,125

 
1,488,266

 

 
1,734,391

Investments in affiliates
3,137,418

 
3,722,902

 

 
(6,860,320
)
 

Other noncurrent assets
4,361

 
15,627

 
51,078

 

 
71,066

Total assets
$
3,141,801

 
$
4,599,104

 
$
5,719,582

 
$
(8,811,594
)
 
$
4,648,893

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
410,017

 
$
325,080

 
$

 
$
735,097

Short-term debt

 

 
37,551

 

 
37,551

Other current liabilities
11,920

 
114,894

 
196,690

 
(44,489
)
 
279,015

Total current liabilities
11,920

 
524,911

 
559,321

 
(44,489
)
 
1,051,663

Intercompany payables, net
1,168,507

 
738,278

 

 
(1,906,785
)
 

Long-term debt
174,149

 
675,424

 
598,061

 

 
1,447,634

Other noncurrent liabilities
22,416

 
220,650

 
141,739

 

 
384,805

Total WESCO International stockholders' equity
1,764,809

 
2,439,841

 
4,420,479

 
(6,860,320
)
 
1,764,809

Noncontrolling interest

 

 
(18
)
 

 
(18
)
Total liabilities and stockholders’ equity
$
3,141,801

 
$
4,599,104

 
$
5,719,582

 
$
(8,811,594
)
 
$
4,648,893


13


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended June 30, 2014
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
894,199

 
$
1,140,850

 
$
(29,884
)
 
$
2,005,165

Cost of goods sold

 
720,938

 
902,383

 
(29,884
)
 
1,593,437

Selling, general and administrative expenses
2

 
144,766

 
133,941

 

 
278,709

Depreciation and amortization

 
4,914

 
12,272

 

 
17,186

Results of affiliates’ operations
73,172

 
61,502

 

 
(134,674
)
 

Interest expense, net
6,084

 
18,328

 
(4,075
)
 

 
20,337

Provision for income taxes
(1,700
)
 
1,465

 
26,944

 

 
26,709

Net income
68,786

 
65,290

 
69,385

 
(134,674
)
 
68,787

Less: Net loss attributable to noncontrolling interest

 

 
(15
)
 

 
(15
)
Net income attributable to WESCO International, Inc.
$
68,786

 
$
65,290

 
$
69,400

 
$
(134,674
)
 
$
68,802

Comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
43,023

 
43,023

 
43,023

 
(86,046
)
 
43,023

Comprehensive income attributable to WESCO International, Inc.
$
111,809

 
$
108,313

 
$
112,423

 
$
(220,720
)
 
$
111,825


 
Three Months Ended June 30, 2013
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
873,607

 
$
1,052,902

 
$
(32,556
)
 
$
1,893,953

Cost of goods sold

 
698,844

 
835,115

 
(32,556
)
 
1,501,403

Selling, general and administrative expenses
1

 
138,817

 
126,688

 

 
265,506

Depreciation and amortization

 
4,780

 
12,373

 

 
17,153

Results of affiliates’ operations
69,789

 
60,753

 

 
(130,542
)
 

Interest expense, net
5,994

 
19,118

 
(3,343
)
 

 
21,769

Provision for income taxes
(1,557
)
 
2,520

 
21,808

 

 
22,771

Net income
65,351

 
70,281

 
60,261

 
(130,542
)
 
65,351

Less: Net income attributable to noncontrolling interest

 

 
66

 

 
66

Net income attributable to WESCO International, Inc.
$
65,351

 
$
70,281

 
$
60,195

 
$
(130,542
)
 
$
65,285

Comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(44,350
)
 
(44,350
)
 
(44,350
)
 
88,700

 
(44,350
)
Comprehensive income attributable to WESCO International, Inc.
$
21,001

 
$
25,931

 
$
15,845

 
$
(41,842
)
 
$
20,935






14


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
1,723,670

 
$
2,148,303

 
$
(55,982
)
 
$
3,815,991

Cost of goods sold

 
1,379,523

 
1,705,929

 
(55,982
)
 
3,029,470

Selling, general and administrative expenses
2

 
281,446

 
262,723

 

 
544,171

Depreciation and amortization

 
9,614

 
23,944

 

 
33,558

Results of affiliates’ operations
129,382

 
102,215

 

 
(231,597
)
 

Interest expense, net
12,153

 
37,090

 
(8,218
)
 

 
41,025

Provision for income taxes
(3,414
)
 
4,511

 
46,028

 

 
47,125

Net income
120,641

 
113,701

 
117,897

 
(231,597
)
 
120,642

Less: Net income attributable to noncontrolling interest

 

 
(65
)
 

 
(65
)
Net income attributable to WESCO International, Inc.
$
120,641

 
$
113,701

 
$
117,962

 
$
(231,597
)
 
$
120,707

Comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3,477
)
 
(3,477
)
 
(3,477
)
 
6,954

 
(3,477
)
Comprehensive income attributable to WESCO International, Inc.
$
117,164

 
$
110,224

 
$
114,485

 
$
(224,643
)
 
$
117,230


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
1,693,842

 
$
2,071,765

 
$
(63,596
)
 
$
3,702,011

Cost of goods sold

 
1,348,971

 
1,643,007

 
(63,596
)
 
2,928,382

Selling, general and administrative expenses
5

 
239,334

 
253,623

 

 
492,962

Depreciation and amortization

 
8,883

 
24,987

 

 
33,870

Results of affiliates’ operations
158,241

 
99,153

 

 
(257,394
)
 

Interest expense, net
11,949

 
37,844

 
(6,098
)
 

 
43,695

Provision for income taxes
(3,158
)
 
14,762

 
42,054

 

 
53,658

Net income
149,445

 
143,201

 
114,192

 
(257,394
)
 
149,444

Less: Net income attributable to noncontrolling interest

 

 
170

 

 
170

Net income attributable to WESCO International, Inc.
$
149,445

 
$
143,201

 
$
114,022

 
$
(257,394
)
 
$
149,274

Comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(67,830
)
 
(67,830
)
 
(67,830
)
 
135,660

 
(67,830
)
Comprehensive income attributable to WESCO International, Inc.
$
81,615

 
$
75,371

 
$
46,192

 
$
(121,734
)
 
$
81,444


15


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended June 30, 2014
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash (used) provided by operating activities
$
1,063

 
$
57,016

 
$
(7,237
)
 
$

 
$
50,842

Investing activities:

 

 

 

 

Capital expenditures

 
(8,380
)
 
(3,405
)
 

 
(11,785
)
Acquisition payments

 
(42,131
)
 
(91,187
)
 

 
(133,318
)
Other

 
675

 
27

 
(675
)
 
27

Net cash used in investing activities

 
(49,836
)
 
(94,565
)
 
(675
)
 
(145,076
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings

 
409,460

 
230,461

 

 
639,921

Repayments
(675
)
 
(402,459
)
 
(160,572
)
 
675

 
(563,031
)
Other
(388
)
 
(1,189
)
 
(3
)
 

 
(1,580
)
Net cash provided (used) by financing activities
(1,063
)
 
5,812

 
69,886

 
675

 
75,310

Effect of exchange rate changes on cash and cash equivalents

 

 
(3,158
)
 

 
(3,158
)
Net change in cash and cash equivalents

 
12,992

 
(35,074
)
 

 
(22,082
)
Cash and cash equivalents at the beginning of year

 
31,695

 
92,030

 

 
123,725

Cash and cash equivalents at the end of period
$

 
$
44,687

 
$
56,956

 
$

 
$
101,643






















16


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended June 30, 2013
 
(In thousands)
 
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash (used) provided by operating activities
$
(9,418
)
 
$
70,521

 
$
58,624

 
$

 
$
119,727

Investing activities:

 

 

 

 

Capital expenditures

 
(9,621
)
 
(2,129
)
 

 
(11,750
)
Acquisition payments

 

 

 

 

Other

 
(10,454
)
 
9,654

 
10,454

 
9,654

Net cash (used) provided by investing activities

 
(20,075
)
 
7,525

 
10,454

 
(2,096
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
10,454

 
333,036

 
203,263

 
(10,454
)
 
536,299

Repayments

 
(396,036
)
 
(244,118
)
 

 
(640,154
)
Other
(1,036
)
 
7,566

 
(501
)
 

 
6,029

Net cash provided (used) by financing activities
9,418

 
(55,434
)
 
(41,356
)
 
(10,454
)
 
(97,826
)
Effect of exchange rate changes on cash and cash equivalents

 

 
(1,392
)
 

 
(1,392
)
Net change in cash and cash equivalents

 
(4,988
)
 
23,401

 

 
18,413

Cash and cash equivalents at the beginning of year

 
52,275

 
33,824

 

 
86,099

Cash and cash equivalents at the end of period
$

 
$
47,287

 
$
57,225

 
$

 
$
104,512


The Company revised its condensed consolidating balance sheet as of December 31, 2013 to properly reflect balance sheet positions of the Company's tax-paying entities and to conform with the current period's financial statement presentation. Specifically, other assets and deferred income taxes of non-guarantor subsidiaries each increased by $24.7 million at December 31, 2013. Additionally, prepaid expenses and other current assets of non-guarantor subsidiaries increased by $7.1 million, with a corresponding increase in other current liabilities of non-guarantor subsidiaries of $7.1 million at December 31, 2013.
The impact of the revisions noted above, which the Company has determined is not material to the consolidated financial statements taken as a whole, did not have any impact on the consolidated amounts previously reported, nor did they impact the Company's obligations under the 2029 Debentures.

17


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

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International, Inc.’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2013 Annual Report on Form 10-K. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as the Company’s other reports filed with the Securities and Exchange Commission.

Company Overview
WESCO International, Inc. (“WESCO International”), incorporated in 1993 and effectively formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American based distributor of products and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility and commercial, institutional and government (“CIG”) markets. We are a leading provider of electrical, industrial, and communications maintenance, repair and operating (“MRO”) and original equipment manufacturers' (“OEM”) products, construction materials, and advanced supply chain management and logistics services. Our primary product categories include general electrical and industrial supplies, wire, cable and conduit, data and broadband communications, power distribution equipment, lighting and lighting control systems, control and automation, motors, and safety.
We serve over 75,000 active customers globally through approximately 475 full service branches and nine distribution centers located in the United States, Canada, and Mexico with offices in 15 additional countries. The Company employs approximately 9,200 employees worldwide. We distribute over 1,000,000 products, grouped into six categories, from more than 25,000 suppliers.
In addition, we offer a comprehensive portfolio of value-added capabilities, which includes supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting, limited assembly of products and system installation. Our value-added capabilities, extensive geographic reach, experienced workforce and broad product and supply chain solutions have enabled us to grow our business and establish a leading position in North America.
Our financial results for the first six months of 2014 reflect an improving U.S. economy and solid performance in our Canadian and international markets. Net sales increased $114.0 million, or 3.1%, over the same period last year. Cost of goods sold as a percentage of net sales was 79.4% and 79.1% for the first six months of 2014 and 2013, respectively. Selling, general, and administrative ("SG&A") expenses as a percentage of net sales were 14.3% and 13.3% for the first six months of 2014 and 2013, respectively. The increase in SG&A expenses as a percentage of net sales was primarily due to the $36.1 million ArcelorMittal litigation recovery receivable recorded in the first quarter of 2013 related to a fourth quarter 2012 liability and charge for the same amount. Operating profit was $208.8 million for the current six month period, compared to $246.8 million for the first six months of 2013. Operating profit decreased primarily from the reduced SG&A expenses in the first quarter of 2013 due to recording the $36.1 million receivable. Net income attributable to WESCO International for the six months ended June 30, 2014 and 2013 was $120.7 million and $149.3 million, respectively.

Cash Flow
We generated $50.8 million in operating cash flow for the first six months of 2014. Included in this amount was income from operations offset by an investment in working capital to support sales growth. Investing activities included payments of $133.3 million for the acquisition of LaPrairie, Hazmasters and Hi-Line in the first half of 2014. Financing activities consisted of borrowings and repayments of $494.7 million and $461.5 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $112.1 million and $65.7 million, respectively, related to our accounts receivable securitization facility (the “Receivables Facility”), and repayments of $9.8 million applied to the Company's term loan facility (the "Term Loan Facility"). Financing activities in 2014 also included borrowings and repayments on our various international lines of credit of approximately $33.1 million and $26.0 million, respectively. Free cash flow for the first six months of 2014 and 2013 was $39.0 million and $108.0 million, respectively.


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The following table sets forth the components of free cash flow:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Free Cash Flow:
2014
 
2013
 
2014
 
2013
(In millions)
 
 
 
 
 
 
 
  Cash flow provided by operations
$
4.1

 
$
39.4

 
$
50.8

 
$
119.8

  Less: Capital expenditures
(6.8
)
 
(5.8
)
 
(11.8
)
 
(11.8
)
    Free cash flow
$
(2.7
)
 
$
33.6

 
$
39.0

 
$
108.0


Note: Free cash flow is provided by the Company as an additional liquidity measure. Capital expenditures are deducted from operating cash flow to determine free cash flow. Free cash flow is available to provide a source of funds for any of the Company's financing needs.

Financing Availability
As of June 30, 2014, we had $490.8 million in total available borrowing capacity under our Revolving Credit Facility, which has a maturity date in August 2016. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. For further discussion refer to “Liquidity and Capital Resources.”

Critical Accounting Policies and Estimates
During the six months ended June 30, 2014, there were no significant changes to our critical accounting policies and estimates referenced in our 2013 Annual Report on Form 10-K.
Results of Operations
Second Quarter of 2014 versus Second Quarter of 2013
The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of income for the periods presented:
 
Three Months Ended
 
June 30,
 
2014
 
2013
Net sales
100.0
%
 
100.0
%
Cost of goods sold
79.5

 
79.3

Selling, general and administrative expenses
13.9

 
14.0

Depreciation and amortization
0.9

 
0.9

Income from operations
5.7

 
5.8

Interest expense
1.0

 
1.1

Income before income taxes
4.7

 
4.7

Provision for income taxes
1.3

 
1.2

     Net income attributable to WESCO International, Inc.
3.4
%
 
3.5
%

Net sales were $2.0 billion for the second quarter of 2014, compared to $1.9 billion for the second quarter of 2013, an increase of 5.9%. Organic sales increased 6.0%, acquisitions positively impacted sales by 1.6%, and foreign exchange negatively impacted sales by 1.7%. Sequentially, sales increased 10.7%, and organic sales increased 7.9%.


19


The following table sets forth normalized organic sales growth:
 
Three Months Ended
 
June 30,
Normalized Organic Sales:
2014
 
2013
    Change in net sales
5.9
 %
 
13.2
 %
    Less: Impact from acquisitions
1.6
 %
 
14.6
 %
    Less: Impact from foreign exchange rates
(1.7
)%
 
(0.2
)%
    Less: Impact from number of workdays
 %
 
 %
        Normalized organic sales growth
6.0
 %
 
(1.2
)%

Note: Organic sales growth is provided by the Company as an additional financial measure to provide a better understanding of the Company's sales growth trends. Organic sales growth is calculated by deducting the percentage impact on net sales from acquisitions, foreign exchange rates and number of workdays from the overall percentage change in consolidated net sales.

Cost of goods sold for the second quarter of 2014 and 2013 was $1.6 billion and $1.5 billion, respectively, and was 79.5% and 79.3% as a percentage of net sales in 2014 and 2013, respectively. The increase in cost of goods sold was primarily due to lower supplier volume rebates and a change in business mix compared to last year's comparable quarter.

SG&A expenses in the second quarter of 2014 totaled $278.7 million versus $265.5 million in last year's comparable quarter. As a percentage of net sales, SG&A expenses were 13.9% in the second quarter of 2014 compared to 14.0% in the second quarter of 2013.

SG&A payroll expenses for the second quarter of 2014 of $194.6 million increased by $9.6 million compared to the same quarter in 2013. The increase in SG&A payroll expenses was primarily due to increases in salaries and wages of $7.8 million and commissions and incentives of $1.5 million.

Depreciation and amortization for the second quarter of 2014 and 2013 was $17.2 million.

Interest expense totaled $20.3 million for the second quarter of 2014 compared to $21.8 million in last year's comparable quarter, a decrease of 6.6%. The following table sets forth the components of interest expense:
 
Three Months Ended
 
June 30,
 
2014
 
2013
(In millions)
 
 
 
Amortization of convertible debt discount
$
1.0

 
$
1.1

Amortization of deferred financing fees
1.1

 
1.3

Interest related to uncertain tax provisions
0.1

 
(0.2
)
 Non-Cash Interest Expense
2.2

 
2.2

   Cash Interest Expense
18.1

 
19.6

 
$
20.3

 
$
21.8


Income tax expense totaled $26.7 million in the second quarter of 2014 compared to $22.8 million in last year's comparable quarter, and the effective tax rate was 28.0% compared to 25.8% in the same quarter in 2013. The increase in the effective tax rate is primarily due to a shift in the geographic mix of income from lower rate tax jurisdictions to the U.S.
For the second quarter of 2014, net income increased by $3.4 million to $68.8 million compared to $65.4 million in the second quarter of 2013.
A net loss of less than $0.1 million was attributable to the noncontrolling interest for the second quarter of 2014, and net income of $0.1 million was attributable to the noncontrolling interest for the first quarter of 2013.
Net income and diluted earnings per share attributable to WESCO International was $68.8 million and $1.29 per share, respectively, for the second quarter of 2014, compared with $65.3 million and $1.25 per share, respectively, for the second quarter of 2013.


20


Six Months Ended June 30, 2014 versus Six Months Ended June 30, 2013
The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of income for the periods presented:
 
Six Months Ended
 
June 30,
 
2014
 
2013
Net sales
100.0
%
 
100.0
%
Cost of goods sold
79.4
%
 
79.1
%
Selling, general and administrative expenses
14.3
%
 
13.3
%
Depreciation and amortization
0.9
%
 
0.9
%
     Income from operations
5.4
%
 
6.7
%
Interest expense
1.1
%
 
1.2
%
     Income before income taxes
4.3
%
 
5.5
%
Provision for income taxes
1.2
%
 
1.4
%
     Net income attributable to WESCO International, Inc.
3.1
%
 
4.1
%