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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, 2015
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)
 
15219
(Zip Code)

(412) 454-2200
(Registrant's telephone number, including area code)
Not applicable.
(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.
Large accelerated filer þ
 
 
 
Accelerated filer o
 
 
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
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 30, 2015, 43,547,989 shares of common stock, $.01 par value, of the registrant were outstanding.






WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


QUARTERLY REPORT ON FORM 10-Q




1


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial information required by this item is set forth in the Condensed Consolidated Financial Statements and Notes thereto in this Quarterly Report on Form 10-Q, as follows:


2


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
(unaudited)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
174,307

 
$
128,319

Trade accounts receivable, net of allowance for doubtful accounts of $22,081 and $21,084 in 2015 and 2014, respectively
1,124,893

 
1,117,420

Other accounts receivable
60,820

 
138,745

Inventories, net
847,045

 
819,502

Prepaid expenses and other current assets
160,985

 
146,352

Total current assets
2,368,050

 
2,350,338

Property, buildings and equipment, net of accumulated depreciation of $237,656 and $229,196 in 2015 and 2014, respectively
180,049

 
182,725

Intangible assets, net of accumulated amortization of $125,899 and $110,828 in 2015 and 2014, respectively
415,327

 
429,840

Goodwill
1,713,118

 
1,735,440

Other assets
49,823

 
56,094

    Total assets
$
4,726,367

 
$
4,754,437

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
770,605

 
$
765,135

Accrued payroll and benefit costs
40,882

 
67,935

Short-term debt
46,924

 
46,787

Current portion of long-term debt
2,232

 
2,343

Other current liabilities
151,068

 
181,672

Total current liabilities
1,011,711

 
1,063,872

Long-term debt, net of discount of $167,029 and $170,367 in 2015 and 2014, respectively
1,436,802

 
1,366,430

Deferred income taxes
360,178

 
346,743

Other noncurrent liabilities
51,733

 
49,227

    Total liabilities
$
2,860,424

 
$
2,826,272

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, 58,586,095 and 58,400,736 shares issued and 43,580,243 and 44,489,989 shares outstanding in 2015 and 2014, respectively
586

 
584

Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2015 and 2014, respectively
43

 
43

Additional capital
1,110,716

 
1,102,369

Retained earnings
1,742,549

 
1,643,914

Treasury stock, at cost; 19,345,283 and 18,250,178 shares in 2015 and 2014, respectively
(695,959
)
 
(616,366
)
Accumulated other comprehensive loss
(290,164
)
 
(201,892
)
Total WESCO International, Inc. stockholders' equity
1,867,771

 
1,928,652

Noncontrolling interest
(1,828
)
 
(487
)
    Total stockholders’ equity
1,865,943

 
1,928,165

    Total liabilities and stockholders’ equity
$
4,726,367

 
$
4,754,437


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

3


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
1,916,718

 
$
2,005,165

 
$
3,733,048

 
$
3,815,991

Cost of goods sold (excluding depreciation and
  amortization below)
1,535,084

 
1,593,437

 
2,983,723

 
3,029,470

Selling, general and administrative expenses
275,242

 
278,709

 
539,826

 
544,171

Depreciation and amortization
16,139

 
17,186

 
32,060

 
33,558

Income from operations
90,253

 
115,833

 
177,439

 
208,792

Interest expense, net
18,613

 
20,337

 
39,508

 
41,025

Income before income taxes
71,640

 
95,496

 
137,931

 
167,767

Provision for income taxes
21,001

 
26,709

 
40,500

 
47,125

Net income
50,639

 
68,787

 
97,431

 
120,642

Net loss attributable to noncontrolling interest
(1,102
)
 
(15
)
 
(1,341
)
 
(65
)
Net income attributable to WESCO International, Inc.
$
51,741

 
$
68,802

 
$
98,772

 
$
120,707

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
25,542

 
43,023

 
(88,257
)
 
(3,477
)
Comprehensive income attributable to WESCO International, Inc.
$
77,283

 
$
111,825

 
$
10,515

 
$
117,230

 
 
 
 
 
 
 
 
Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.18

 
$
1.55

 
$
2.23

 
$
2.72

Diluted
$
1.00

 
$
1.29

 
$
1.90

 
$
2.26


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


4


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
97,431

 
$
120,642

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,060

 
33,558

  Deferred income taxes
16,717

 
13,719

Other operating activities, net
12,708

 
5,882

Changes in assets and liabilities:
 
 
 
Trade accounts receivable, net
(3,788
)
 
(121,797
)
Other accounts receivable
76,571

 
12,672

Inventories, net
(26,742
)
 
(44,910
)
Prepaid expenses and other assets
400

 
(30,840
)
Accounts payable
846

 
47,082

Accrued payroll and benefit costs
(26,513
)
 
(5,710
)
Other current and noncurrent liabilities
(47,049
)
 
20,544

Net cash provided by operating activities
132,641

 
50,842

 
 
 
 
Investing activities:
 
 
 
Acquisition payments, net of cash acquired
(68,502
)
 
(133,318
)
Capital expenditures
(12,624
)
 
(11,785
)
Other investing activities
1,425

 
27

Net cash used in investing activities
(79,701
)
 
(145,076
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of short-term debt
60,420

 
33,085

Repayments of short-term debt
(58,153
)
 
(25,983
)
Proceeds from issuance of long-term debt
794,176

 
606,836

Repayments of long-term debt
(721,307
)
 
(537,048
)
Repurchases of common stock (Note 5)
(80,749
)
 
(6,441
)
Other financing activities, net
3,580

 
4,861

Net cash (used in) provided by financing activities
(2,033
)
 
75,310

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,919
)
 
(3,158
)
 
 
 
 
Net change in cash and cash equivalents
45,988

 
(22,082
)
Cash and cash equivalents at the beginning of period
128,319

 
123,725

Cash and cash equivalents at the end of period
$
174,307

 
$
101,643


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


5

   
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. WESCO serves over 75,000 active customers globally, through approximately 485 full service branches and nine distribution centers located primarily in the United States, Canada and Mexico, with operations in 16 additional countries.
2. ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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 information should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in WESCO’s 2014 Annual Report on Form 10-K as filed with the SEC on February 24, 2015. The Condensed Consolidated Balance Sheet at December 31, 2014 was derived from the audited Consolidated Financial Statements as of that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America.
The unaudited Condensed Consolidated Balance Sheet as of June 30, 2015, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2015 and 2014, respectively, and the unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, 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 presented herein. All adjustments reflected in the unaudited condensed consolidated financial information are of a normal recurring nature unless indicated. The results for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
The Condensed Consolidated Balance Sheet at December 31, 2014 and the unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 include certain reclassifications to previously reported amounts to conform to the current period presentation.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.
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, 2015, the carrying value of WESCO’s 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") was $179.5 million and the fair value was approximately $839.4 million. At December 31, 2014, the carrying value of WESCO’s 2029 Debentures was $177.6 million and the fair value was approximately $936.1 million. The reported carrying

6

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


amounts of WESCO’s other debt instruments approximate their fair values. The Company uses a market approach to fair value all of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, all of the Company's debt instruments are classified as Level 2 within the valuation hierarchy. For all of the Company's remaining financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, carrying values are considered to approximate fair value due to the short maturity of these instruments.
New Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board 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. The original standard was effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard. Accordingly, the standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). Management is currently evaluating the future impact of this guidance on WESCO's financial position, results of operations and cash flows.
In June 2014, the FASB issued Accounting Standards Update ("ASU") 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require a reporting entity to treat a performance target that affects vesting and could be achieved after the requisite service period as a performance condition. A reporting entity should apply FASB ASC Topic 718, CompensationStock Compensation, to awards with performance conditions that affect vesting. For all entities, ASU 2014-12 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. This ASU may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption and to all new or modified awards thereafter. The adoption of this guidance is not expected to have an impact on WESCO's consolidated financial statements and notes thereto.
In September 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU describes how an entity should assess its ability to meet obligations and sets disclosure requirements for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used with existing auditing standards. The amendments in this ASU are effective for the annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have an impact on WESCO's consolidated financial statements and notes thereto.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. To simplify the presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). Management is currently evaluating the future impact of this guidance on WESCO's financial position, results of operations and cash flows.

7

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


3. ACQUISITIONS
The following table sets forth the consideration paid for acquisitions:
 
Six Months Ended
(In thousands of dollars)
June 30,
2015
 
June 30,
2014
Fair value of assets acquired
$
89,786

 
$
150,966

Fair value of liabilities assumed
21,284

 
17,648

   Cash paid for acquisitions, net of cash acquired
$
68,502

 
$
133,318

The fair values of assets acquired and liabilities assumed during the six months ended June 30, 2015, which were primarily for the acquisition of Hill Country Electric Supply, LP ("Hill Country"), were based upon preliminary calculations and valuations. WESCO's estimates and assumptions for its preliminary purchase price allocation are subject to change as it obtains additional information for its estimates during the respective measurement periods (up to one year from the respective acquisition date).
2015 Acquisition of Hill Country Electric Supply, LP
On May 1, 2015, WESCO Distribution, Inc. completed the acquisition of Hill Country, an electrical distributor focused on the commercial construction market from nine locations in Central and South Texas with approximately $140 million in annual sales. WESCO funded the purchase price paid at closing with borrowings under the revolving credit facility (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 $21.1 million and goodwill of $15.8 million. The intangible assets include customer relationships of $13.1 million amortized over 11 years, non-compete agreements of $0.2 million amortized over 5 years, and trademarks of $7.8 million amortized over 12 years. No residual value is estimated for the intangible assets being amortized. Management believes that the majority of goodwill is deductible for tax purposes.
2014 Acquisitions of LaPrairie, Inc., Hazmasters, Inc. and Hi-Line Utility Supply.
On February 1, 2014, WESCO Distribution, Inc., through its wholly-owned Canadian subsidiary, completed the acquisition of LaPrairie, Inc. ("LaPrairie"), a wholesale distributor of electrical products with approximately $30 million in annual sales servicing the transmission, distribution, and substation needs of utilities and utility contractors 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 fair value of intangibles was estimated by management and the allocation resulted in intangible assets of $11.0 million and goodwill of $8.9 million. The majority of goodwill is 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 with approximately $80 million in annual sales servicing customers in the industrial, construction, commercial, institution, and government markets 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 fair value of intangibles was estimated by management and the allocation resulted in intangible assets of $28.1 million and goodwill of $29.5 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 fair value of intangibles was estimated by management and the allocation resulted in intangible assets of $14.2 million and goodwill of $24.0 million. The majority of goodwill is deductible for tax purposes.
For all acquisitions made in the first half of 2014, the intangible assets include customer relationships of $38.9 million amortized over 2 to 12 years, supplier relationships of $3.2 million amortized over 10 years, trademarks of $10.9 million, and other intangibles of $0.3 million. Certain trademarks have been assigned an indefinite life while others are amortized over 5 and 10 years. No residual value is estimated for the intangible assets being amortized.

8

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


4. STOCK-BASED COMPENSATION
WESCO’s stock-based employee compensation plans are comprised of 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-settled stock appreciation rights and performance-based awards with market conditions is determined using the Black-Scholes and Monte Carlo simulation models, respectively. The fair value of restricted stock units and performance-based awards with performance conditions 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, 2015 and 2014, WESCO granted the following stock-settled appreciation rights, restricted stock units and performance-based awards at the following weighted-average fair values:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Stock-settled appreciation rights granted

 
2,295

 
394,182

 
274,508

Weighted-average fair value
$

 
$
27.71

 
$
21.68

 
$
30.64

 
 
 
 
 
 
 
 
Restricted stock units granted

 

 
78,292

 
62,506

Weighted-average fair value
$

 
$

 
$
69.54

 
$
85.35

 
 
 
 
 
 
 
 
Performance-based awards granted

 

 
59,661

 
44,046

Weighted-average fair value
$

 
$

 
$
67.81

 
$
86.65

The fair value of stock-settled appreciation rights was estimated using the following weighted-average assumptions:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Risk free interest rate
%
 
1.6
%
 
1.6
%
 
1.5
%
Expected life (in years)
0

 
5

 
5

 
5

Expected volatility
%
 
34
%
 
32
%
 
39
%
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve rates as of the grant date. The expected life is based on historical exercise experience and the expected volatility is based on the volatility of the Company's daily stock prices over a five-year period preceding the grant date.
The following table sets forth a summary of stock-settled stock appreciation rights and related information for the six months ended June 30, 2015:
 
Awards
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term (In years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2014
2,480,745

 
$
50.91

 
 
 
 
     Granted
394,182

 
69.54

 
 
 
 
     Exercised
(227,441
)
 
35.87

 
 
 
 
     Forfeited
(13,643
)
 
79.35

 
 
 
 
Outstanding at June 30, 2015
2,633,843

 
54.85

 
5.7
 
$
41,895.0

Exercisable at June 30, 2015
1,996,529

 
$
48.71

 
4.6
 
$
41,891.2


9

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


The following table sets forth a summary of time-based restricted stock units and related information for the six months ended June 30, 2015:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2014
185,457

 
$
73.87

     Granted
78,292

 
69.54

     Vested
(66,902
)
 
65.32

     Forfeited
(4,179
)
 
77.75

Unvested at June 30, 2015
192,668

 
$
74.99

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, 2015:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2014
130,004

 
$
80.21

     Granted
59,661

 
67.81

     Vested
(38,869
)
 
72.25

     Forfeited
(10,800
)
 
85.87

Unvested at June 30, 2015
139,996

 
$
76.70

The fair value of the performance shares granted during the six months ended June 30, 2015 was estimated using the following weighted-average assumptions:
Weighted-Average Assumptions
Grant date share price
$
69.54

WESCO expected volatility
26.9
%
Peer group median volatility
23.2
%
Risk-free interest rate
1.05
%
Correlation of peer company returns
95.8
%
The unvested performance-based awards in the table above include 69,998 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 accounted for as awards with market conditions; compensation cost is recognized over the service period, regardless of whether the market conditions are achieved and the awards ultimately vest.
Vesting of the remaining 69,998 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 accounted for as awards with performance conditions; 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 $4.0 million and $4.3 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended June 30, 2015 and 2014, respectively. WESCO recognized $7.8 million and $8.5 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was $25.8 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $7.6 million is expected to be recognized over the remainder of 2015, $11.4 million in 2016, $6.1 million in 2017 and $0.7 million in 2018.

10

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


During the six months ended June 30, 2015 and 2014, the total intrinsic value of all awards exercised and vested was $15.3 million and $22.9 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. The gross deferred tax benefit associated with the exercise of awards for the six months ended June 30, 2015 and 2014 totaled $5.5 million and $8.7 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 number of 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 dilutive equity awards and contingently convertible debt.
The following tables set forth the details of basic and diluted earnings per share:
 
Three Months Ended
 
June 30,
(In thousands of dollars, except per share data)
2015
 
2014
Net income attributable to WESCO International, Inc.
$
51,741

 
$
68,802

Weighted-average common shares outstanding used in computing basic earnings per share
43,997

 
44,449

Common shares issuable upon exercise of dilutive equity awards
767

 
1,031

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
7,138

 
7,996

Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share
51,902

 
53,476

Earnings per share attributable to WESCO International, Inc.
 
 

     Basic
$
1.18

 
$
1.55

     Diluted
$
1.00

 
$
1.29

 
Six Months Ended
 
June 30,
(In thousands of dollars, except per share data)
2015
 
2014
Net income attributable to WESCO International, Inc.
$
98,772

 
$
120,707

Weighted-average common shares outstanding used in computing basic earnings per share
44,200

 
44,399

Common shares issuable upon exercise of dilutive equity awards
795

 
1,061

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
7,055

 
7,962

Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share
52,050

 
53,422

Earnings per share attributable to WESCO International, Inc.
 
 
 
     Basic
$
2.23

 
$
2.72

     Diluted
$
1.90

 
$
2.26

For the three and six months ended June 30, 2015, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded approximately 0.9 million stock-settled stock appreciation rights at a weighted-average exercise price of $74.93 per share. 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. These amounts were excluded because their effect would have been antidilutive.

11

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


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 11,947,671 shares for the 2029 Debentures. For the three and six months June 30, 2015, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.16 and $0.30, respectively. For the three and six months June 30, 2014, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.22 and $0.40, respectively.
In December 2014, the Company's Board of Directors authorized the repurchase of up to $300 million of the Company's common stock through December 31, 2017. During the six months ended June 30, 2015, the Company entered into accelerated stock repurchase agreements (the "ASR Transactions") with certain financial institutions to purchase shares of its common stock. In exchange for up-front cash payments totaling $75.0 million, the Company received 1,050,927 shares. The total number of shares ultimately delivered under the ASR Transactions was determined by the average of the volume-weighted average prices of the Company's common stock for each exchange business day during the respective settlement valuation periods. WESCO funded the repurchases with borrowings under the Revolving Credit Facility. For purposes of computing earnings per share, shares received under the ASR Transactions were reflected as a reduction to common shares outstanding on the respective delivery dates.
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 3% to 5% of the participant’s eligible compensation based on years of continuous service. In addition, for U.S. participants, employer contributions may be made at the discretion of the Board of Directors. For the six months ended June 30, 2015 and 2014, WESCO incurred charges of $14.3 million and $15.0 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:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands of dollars)
2015
 
2014
 
2015
 
2014
Service cost
$
1,158

 
$
900

 
$
2,328

 
$
1,800

Interest cost
1,031

 
1,158

 
2,073

 
2,314

Expected return on plan assets
(1,351
)
 
(1,362
)
 
(2,718
)
 
(2,723
)
Recognized actuarial gain
(4
)
 
(14
)
 
(8
)
 
(28
)
Net periodic benefit cost
$
834

 
$
682

 
$
1,675

 
$
1,363

During the three and six months ended June 30, 2015, the Company made aggregate cash contributions of $0.5 million and $1.0 million, respectively, to its defined benefit plans.

12

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


7. COMMITMENTS AND CONTINGENCIES
As initially reported in its 2008 Annual Report on Form 10-K, WESCO was a defendant in a lawsuit filed in a state court in Indiana in which a customer, ArcelorMittal Indiana Harbor, Inc. (“AIH”), alleged 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 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. The Company disputed this outcome and filed a post-trial motion challenging the verdict, alleging various errors that occurred during trial. 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 appealed the judgment. On November 10, 2014, the Indiana Court of Appeals reversed the prejudgment interest award, but otherwise affirmed the underlying judgment. A petition for further review of the case was filed with the Indiana Supreme Court.
On April 15, 2015, the Company, AIH and the parties’ respective insurance carriers agreed to settle the case. As part of the settlement, the Company's insurers paid $35.8 million to AIH on April 30, 2015 in full and final satisfaction of the judgment, including any prejudgment and post-judgment interest, and AIH agreed to release all claims against the Company and its insurers. The parties also agreed to a dismissal of the pending appeal to the Indiana Supreme Court. To account for the settlement, the Company reversed the previously recorded liability and corresponding receivable of $36.1 million, plus $10.2 million of interest that had accrued in connection with this matter. Accordingly, the settlement of this matter had no net effect on the Company's financial condition or results of operations.
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. WESCO Distribution, Inc. is currently undergoing a compliance audit in the State of Delaware concerning the identification, reporting and escheatment of unclaimed or abandoned property. A third party auditor is conducting the audit on behalf of the State, and the Company has been working with an outside consultant during the audit process and in discussions with the auditors. The Company is defending the audit, the outcome of which cannot be predicted with certainty at this time. After the third party auditor completes its field work, it is expected to issue preliminary findings for review by the Company and the State, and thereafter the auditor is expected to issue a final report of examination. If the Company and State do not reach resolution after further discussion, the State issues a demand for payment, which the Company may either agree to pay or appeal, in full or in part. The Company has recorded a liability for unclaimed property based on the facts currently known to the Company.
In October 2014, WESCO was notified that the New York County District Attorney’s Office is conducting a criminal investigation involving minority and disadvantaged business contracting practices in the construction industry in New York City and that various contractors, minority and disadvantaged business firms, and their material suppliers, including the Company, are a part of this investigation. The Company has commenced an internal review of this matter and intends to cooperate with the government investigation. The Company cannot predict the outcome or impact of the matter at this time, but could be subject to fines, penalties or other adverse consequences. Based on the facts currently known to the Company, it cannot reasonably estimate a range of exposure to potential liability at this time.
8. INCOME TAXES
The effective tax rate for the three and six months ended June 30, 2015 was 29.3% and 29.4%, respectively. The effective tax rate for the three and six months ended June 30, 2014 was 28.0% and 28.1%, respectively. WESCO’s effective tax rate is lower than the federal statutory rate of 35% in both periods 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. There have been no material adjustments to liabilities relating to uncertain tax positions since the last annual disclosure for the year ended December 31, 2014.

13

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


9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
WESCO International, Inc. has outstanding $344.9 million in aggregate principal amount of 2029 Debentures. The 2029 Debentures are fully and unconditionally guaranteed by WESCO Distribution, Inc., a 100% owned subsidiary of WESCO International, Inc., on a senior subordinated basis to all existing and future senior indebtedness of WESCO Distribution, Inc.
WESCO Distribution, Inc. 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, Inc. and are fully and unconditionally guaranteed on a senior unsecured basis by WESCO International, Inc.
Condensed consolidating financial information for WESCO International, Inc., WESCO Distribution, Inc. and the non-guarantor subsidiaries is presented in the following tables.
 
Condensed Consolidating Balance Sheet
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
43,725

 
$
130,582

 
$

 
$
174,307

Trade accounts receivable, net

 

 
1,124,893

 

 
1,124,893

Inventories, net

 
399,924

 
447,121

 

 
847,045

Other current assets
3

 
102,257

 
125,995

 
(6,450
)
 
221,805

Total current assets
3

 
545,906

 
1,828,591

 
(6,450
)
 
2,368,050

Intercompany receivables, net

 

 
1,838,753

 
(1,838,753
)
 

Property, buildings and equipment, net

 
60,246

 
119,803

 

 
180,049

Intangible assets, net

 
4,193

 
411,134

 

 
415,327

Goodwill

 
254,899

 
1,458,219

 

 
1,713,118

Investments in affiliates
3,322,835

 
3,823,109

 

 
(7,145,944
)
 

Other noncurrent assets
3,943

 
11,418

 
34,462

 

 
49,823

Total assets
$
3,326,781

 
$
4,699,771

 
$
5,690,962

 
$
(8,991,147
)
 
$
4,726,367

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
454,136

 
$
316,469

 
$

 
$
770,605

Short-term debt

 

 
46,924

 

 
46,924

Other current liabilities
12,463

 
58,246

 
129,923

 
(6,450
)
 
194,182

Total current liabilities
12,463

 
512,382

 
493,316

 
(6,450
)
 
1,011,711

Intercompany payables, net
1,245,134

 
593,619

 

 
(1,838,753
)
 

Long-term debt, net
179,526

 
753,014

 
504,262

 

 
1,436,802

Other noncurrent liabilities
21,887

 
251,872

 
138,152

 

 
411,911

Total WESCO International, Inc. stockholders' equity
1,867,771

 
2,588,884

 
4,557,060

 
(7,145,944
)
 
1,867,771

Noncontrolling interest

 

 
(1,828
)
 

 
(1,828
)
Total liabilities and stockholders’ equity
$
3,326,781

 
$
4,699,771

 
$
5,690,962

 
$
(8,991,147
)
 
$
4,726,367


14

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


 
Condensed Consolidating Balance Sheet
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
32,508

 
$
95,811

 
$

 
$
128,319

Trade accounts receivable, net

 

 
1,117,420

 

 
1,117,420

Inventories, net

 
373,938

 
445,564

 

 
819,502

Other current assets
12

 
144,282

 
147,268

 
(6,465
)
 
285,097

Total current assets
12

 
550,728

 
1,806,063

 
(6,465
)
 
2,350,338

Intercompany receivables, net

 

 
1,806,215

 
(1,806,215
)
 

Property, buildings and equipment, net

 
56,735

 
125,990

 

 
182,725

Intangible assets, net

 
4,733

 
425,107

 

 
429,840

Goodwill

 
246,771

 
1,488,669

 

 
1,735,440

Investments in affiliates
3,304,914

 
3,828,727

 

 
(7,133,641
)
 

Other noncurrent assets
4,083

 
12,844

 
39,167

 

 
56,094

Total assets
$
3,309,009

 
$
4,700,538

 
$
5,691,211

 
$
(8,946,321
)
 
$
4,754,437

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
445,680

 
$
319,455

 
$

 
$
765,135

Short-term debt

 

 
46,787

 

 
46,787

Other current liabilities
12,465

 
113,746

 
132,204

 
(6,465
)
 
251,950

Total current liabilities
12,465

 
559,426

 
498,446

 
(6,465
)
 
1,063,872

Intercompany payables, net
1,168,366

 
637,849

 

 
(1,806,215
)
 

Long-term debt, net
177,638

 
683,407

 
505,385

 

 
1,366,430

Other noncurrent liabilities
21,888

 
232,544

 
141,538

 

 
395,970

Total WESCO International, Inc. stockholders' equity
1,928,652

 
2,587,312

 
4,546,329

 
(7,133,641
)
 
1,928,652

Noncontrolling interest

 

 
(487
)
 

 
(487
)
Total liabilities and stockholders’ equity
$
3,309,009

 
$
4,700,538

 
$
5,691,211

 
$
(8,946,321
)
 
$
4,754,437


15

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


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Three Months Ended
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
884,769

 
$
1,062,255

 
$
(30,306
)
 
$
1,916,718

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
714,088

 
851,302

 
(30,306
)
 
1,535,084

Selling, general and administrative expenses
9

 
147,911

 
127,322

 

 
275,242

Depreciation and amortization

 
4,940

 
11,199

 

 
16,139

Results of affiliates’ operations
55,029

 
46,387

 

 
(101,416
)
 

Interest expense, net
6,200

 
17,240

 
(4,827
)
 

 
18,613

Provision for income taxes
(1,820
)
 
168

 
22,653

 

 
21,001

Net income
50,640

 
46,809

 
54,606

 
(101,416
)
 
50,639

Net loss attributable to noncontrolling interest

 

 
(1,102
)
 

 
(1,102
)
Net income attributable to WESCO International, Inc.
$
50,640

 
$
46,809

 
$
55,708

 
$
(101,416
)
 
$
51,741

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
25,542

 
25,542

 
25,542

 
(51,084
)
 
25,542

Comprehensive income attributable to WESCO International, Inc.
$
76,182

 
$
72,351

 
$
81,250

 
$
(152,500
)
 
$
77,283


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Three Months Ended
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
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 (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
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

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

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
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


16

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


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Six Months Ended
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
1,724,052

 
$
2,067,504

 
$
(58,508
)
 
$
3,733,048

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
1,383,896

 
1,658,335

 
(58,508
)
 
2,983,723

Selling, general and administrative expenses
16

 
284,322

 
255,488

 

 
539,826

Depreciation and amortization

 
9,774

 
22,286

 

 
32,060

Results of affiliates’ operations
106,194

 
82,655

 

 
(188,849
)
 

Interest expense, net
12,388

 
35,880

 
(8,760
)
 

 
39,508

Provision for income taxes
(3,641
)
 
2,989

 
41,152

 

 
40,500

Net income
97,431

 
89,846

 
99,003

 
(188,849
)
 
97,431

Net loss attributable to noncontrolling interest

 

 
(1,341
)
 

 
(1,341
)
Net income attributable to WESCO International, Inc.
$
97,431

 
$
89,846

 
$
100,344

 
$
(188,849
)
 
$
98,772

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(88,257
)
 
(88,257
)
 
(88,257
)
 
176,514

 
(88,257
)
Comprehensive income attributable to WESCO International, Inc.
$
9,174

 
$
1,589

 
$
12,087

 
$
(12,335
)
 
$
10,515


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Six Months Ended
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
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 (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
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

Net loss attributable to noncontrolling interest

 

 
(65
)
 

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

 
$
113,701

 
$
117,962

 
$
(231,597
)
 
$
120,707

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(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


17

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


 
Condensed Consolidating Statement of Cash Flows
 
Six Months Ended
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash provided by operating activities
$
2,440

 
$
91,787

 
$
38,414

 
$

 
$
132,641

Investing activities:

 

 

 

 

Capital expenditures

 
(7,144
)
 
(5,480
)
 

 
(12,624
)
Acquisition payments, net of cash acquired

 
(68,502
)
 

 

 
(68,502
)
Other

 
(76,769
)
 
1,425

 
76,769

 
1,425

Net cash used in investing activities

 
(152,415
)
 
(4,055
)
 
76,769

 
(79,701
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
76,769

 
598,269

 
256,327

 
(76,769
)
 
854,596

Repayments

 
(528,464
)
 
(250,996
)
 

 
(779,460
)
Equity activities
(80,749
)
 

 

 

 
(80,749
)
Other
1,540

 
2,040

 

 

 
3,580

Net cash (used in) provided by financing activities
(2,440
)
 
71,845

 
5,331

 
(76,769
)
 
(2,033
)
Effect of exchange rate changes on cash and cash equivalents

 

 
(4,919
)
 

 
(4,919
)
Net change in cash and cash equivalents

 
11,217

 
34,771

 

 
45,988

Cash and cash equivalents at the beginning of period

 
32,508

 
95,811

 

 
128,319

Cash and cash equivalents at the end of period
$

 
$
43,725

 
$
130,582

 
$

 
$
174,307























18

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


 
Condensed Consolidating Statement of Cash Flows
 
Six Months Ended
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash provided by (used in) operating activities
$
1,063

 
$
57,016

 
$
(7,237
)
 
$

 
$
50,842

Investing activities:

 

 

 

 

Capital expenditures

 
(8,380
)
 
(3,405
)
 

 
(11,785
)
Acquisition payments, net of cash acquired

 
(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
)
Equity activities
(6,441
)
 

 

 

 
(6,441
)
Other
6,053

 
(1,189
)
 
(3
)
 

 
4,861

Net cash (used in) provided 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 period

 
31,695

 
92,030

 

 
123,725

Cash and cash equivalents at the end of period
$

 
$
44,687

 
$
56,956

 
$

 
$
101,643

The unaudited Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2014 includes certain reclassifications to previously reported amounts to conform to the current period presentation.
10. SUBSEQUENT EVENTS
The Company evaluated subsequent events through July 31, 2015, the date the financial statements were approved and authorized for issuance, and concluded that no subsequent events have occurred that would require recognition in the unaudited Condensed Consolidated Financial Statements or disclosure in the Notes thereto.

19


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


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 Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2014 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, 2014, as well as the Company’s other reports filed with the Securities and Exchange Commission.
Company Overview
WESCO International, Inc., 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 485 full service branches and nine distribution centers located in the United States, Canada, and Mexico with offices in 16 additional countries. The Company employs approximately 9,400 employees worldwide. We distribute over 1,000,000 products, grouped into six categories, from more than 25,000 suppliers utilizing a highly automated, proprietary electronic procurement and inventory replenishment system.
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 2015 reflect a reduced demand in commodity-driven end markets and the unfavorable impact of changes in foreign currencies. Net sales decreased $82.9 million, or 2.2%, over the same period last year. Cost of goods sold as a percentage of net sales was 79.9% and 79.4% for the first six months of 2015 and 2014, respectively. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 14.5% and 14.3% for the first six months of 2015 and 2014, respectively. Operating profit was $177.4 million for the current six month period, compared to $208.8 million for the first six months of 2014. Operating profit decreased primarily due to lower sales volume, lower supplier volume rebates, business mix, and continued competitive market pricing pressures. Net income attributable to WESCO International, Inc. for the six months ended June 30, 2015 and 2014 was $98.8 million and $120.7 million, respectively.
Cash Flow
We generated $132.6 million in operating cash flow for the first six months of 2015. Investing activities included cash paid of $68.5 million, which was primarily related to the acquisition of Hill Country, and capital expenditures of $12.6 million. Financing activities consisted of borrowings and repayments of $634.0 million and $564.0 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $160.2 million and $112.6 million, respectively, related to our accounts receivable securitization facility (the “Receivables Facility”), and repayments of $44.7 million applied to our term loan facility (the "Term Loan Facility"). Financing activities in 2015 also included borrowings and repayments on our various international lines of credit of approximately $60.4 million and $58.2 million, respectively. Additionally, financing activities for the first six months of 2015 included the repurchase of $75.0 million of the Company's common stock pursuant to the share repurchase plan announced on December 17, 2014. Free cash flow for the first six months of 2015 and 2014 was $120.0 million and $39.0 million, respectively.

20


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


The following table sets forth the components of free cash flow:
 
Three Months Ended
 
Six Months Ended
Free Cash Flow:
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
 
 
 
 
 
 
 
Cash flow provided by operations
$
42.5

 
$
4.1

 
$
132.6

 
$
50.8

Less: Capital expenditures
(7.6
)
 
(6.8
)
 
(12.6
)
 
(11.8
)
Free cash flow
$
34.9

 
$
(2.7
)
 
$
120.0

 
$
39.0

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 fund the Company's financing needs.
Financing Availability
As of June 30, 2015, we had $433.4 million in total available borrowing capacity under our Revolving Credit Facility, which matures in August 2016, and no available borrowing capacity under our Receivables Facility, which matures in September 2016.
Critical Accounting Policies and Estimates
During the six months ended June 30, 2015, there were no significant changes to our critical accounting policies and estimates referenced in our 2014 Annual Report on Form 10-K.
Results of Operations
Second Quarter of 2015 versus Second Quarter of 2014
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income and Comprehensive Income for the periods presented:
 
Three Months Ended
 
June 30,
 
2015
 
2014
Net sales
100.0
%
 
100.0
%
Cost of goods sold (excluding depreciation and amortization)
80.1

 
79.5

Selling, general and administrative expenses
14.4

 
13.9

Depreciation and amortization
0.8

 
0.9

Income from operations
4.7

 
5.7

Interest expense
1.0

 
1.0

Income before income taxes
3.7

 
4.7

Provision for income taxes
1.1

</