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EX-32.2 - EXHIBIT 32.2 - WESCO INTERNATIONAL INCwcc09302015ex322.htm
EX-32.1 - EXHIBIT 32.1 - WESCO INTERNATIONAL INCwcc09302015ex321.htm
EX-31.1 - EXHIBIT 31.1 - WESCO INTERNATIONAL INCwcc09302015ex311.htm
EX-31.2 - EXHIBIT 31.2 - WESCO INTERNATIONAL INCwcc09302015ex312.htm
EX-10.1 - EXHIBIT 10.1 - WESCO INTERNATIONAL INCex101vanossreleaseagreement.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 September 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 October 29, 2015, 42,131,220 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)
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
132,852

 
$
128,319

Trade accounts receivable, net of allowance for doubtful accounts of $22,513 and $21,084 in 2015 and 2014, respectively
1,149,743

 
1,117,420

Other accounts receivable
71,253

 
138,745

Inventories, net
844,955

 
819,502

Prepaid expenses and other current assets
167,287

 
146,352

Total current assets
2,366,090

 
2,350,338

Property, buildings and equipment, net of accumulated depreciation of $239,604 and $229,196 in 2015 and 2014, respectively
171,789

 
182,725

Intangible assets, net of accumulated amortization of $130,929 and $110,828 in 2015 and 2014, respectively
388,988

 
429,840

Goodwill
1,666,218

 
1,735,440

Other assets
49,424

 
56,094

    Total assets
$
4,642,509

 
$
4,754,437

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
787,637

 
$
765,135

Accrued payroll and benefit costs
45,736

 
67,935

Short-term debt
44,419

 
46,787

Current portion of long-term debt
2,144

 
2,343

Other current liabilities
136,841

 
181,672

Total current liabilities
1,016,777

 
1,063,872

Long-term debt, net of discount of $165,714 and $170,367 in 2015 and 2014, respectively
1,454,705

 
1,366,430

Deferred income taxes
361,678

 
346,743

Other noncurrent liabilities
49,501

 
49,227

    Total liabilities
$
2,882,661

 
$
2,826,272

Commitments and contingencies (Note 8)



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, 58,587,349 and 58,400,736 shares issued and 42,164,170 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
1,114,299

 
1,102,369

Retained earnings
1,806,052

 
1,643,914

Treasury stock, at cost; 20,762,610 and 18,250,178 shares in 2015 and 2014, respectively
(772,659
)
 
(616,366
)
Accumulated other comprehensive loss
(385,526
)
 
(201,892
)
Total WESCO International, Inc. stockholders' equity
1,762,795

 
1,928,652

Noncontrolling interests
(2,947
)
 
(487
)
    Total stockholders’ equity
1,759,848

 
1,928,165

    Total liabilities and stockholders’ equity
$
4,642,509

 
$
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 (LOSS)
(In thousands of dollars, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
1,923,899

 
$
2,078,150

 
$
5,656,947

 
$
5,894,141

Cost of goods sold (excluding depreciation and
  amortization below)
1,543,113

 
1,655,787

 
4,526,836

 
4,685,257

Selling, general and administrative expenses
258,151

 
271,697

 
797,980

 
815,869

Depreciation and amortization
16,287

 
17,418

 
48,347

 
50,976

Income from operations
106,348

 
133,248

 
283,784

 
342,039

Interest expense, net
20,417

 
20,798

 
59,924

 
61,823

Income before income taxes
85,931

 
112,450

 
223,860

 
280,216

Provision for income taxes
23,547

 
31,632

 
64,047

 
78,757

Net income
62,384

 
80,818

 
159,813

 
201,459

Net (loss) income attributable to noncontrolling interests
(1,119
)
 
2

 
(2,460
)
 
(64
)
Net income attributable to WESCO International, Inc.
$
63,503

 
$
80,816

 
$
162,273

 
$
201,523

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(95,377
)
 
(63,794
)
 
(183,634
)
 
(67,271
)
Comprehensive (loss) income attributable to WESCO International, Inc.
$
(31,874
)
 
$
17,022

 
$
(21,361
)
 
$
134,252

 
 
 
 
 
 
 
 
Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.47

 
$
1.82

 
$
3.70

 
$
4.54

Diluted
$
1.28

 
$
1.52

 
$
3.16

 
$
3.78


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)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
159,813

 
$
201,459

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
48,347

 
50,976

  Deferred income taxes
26,339

 
17,847

Other operating activities, net
17,498

 
4,744

Changes in assets and liabilities:
 
 
 
Trade accounts receivable, net
(49,799
)
 
(174,438
)
Other accounts receivable
64,893

 
(2,779
)
Inventories, net
(38,862
)
 
(54,053
)
Prepaid expenses and other assets
(12,052
)
 
(35,097
)
Accounts payable
30,389

 
106,886

Accrued payroll and benefit costs
(20,394
)
 
7,748

Other current and noncurrent liabilities
(50,208
)
 
16,527

Net cash provided by operating activities
175,964

 
139,820

 
 
 
 
Investing activities:
 
 
 
Acquisition payments, net of cash acquired
(68,502
)
 
(138,805
)
Capital expenditures
(16,242
)
 
(16,036
)
Other investing activities
1,791

 
5,444

Net cash used in investing activities
(82,953
)
 
(149,397
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of short-term debt
75,564

 
49,727

Repayments of short-term debt
(73,464
)
 
(42,168
)
Proceeds from issuance of long-term debt
1,220,334

 
912,146

Repayments of long-term debt
(1,128,694
)
 
(885,408
)
Repayment of deferred acquisition payable

 
(29,395
)
Repurchases of common stock (Note 5)
(155,775
)
 
(6,931
)
Other financing activities, net
(11,253
)
 
(2,381
)
Net cash used in financing activities
(73,288
)
 
(4,410
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(15,190
)
 
630

 
 
 
 
Net change in cash and cash equivalents
4,533

 
(13,357
)
Cash and cash equivalents at the beginning of period
128,319

 
123,725

Cash and cash equivalents at the end of period
$
132,852

 
$
110,368


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 manufacturers (“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 September 30, 2015, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014, respectively, and the unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 Statement of Cash Flows for the nine months ended September 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 September 30, 2015, the carrying value of WESCO’s 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") was $180.5 million and the fair value was approximately $578.4 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

6

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


carrying 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 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 a material impact on WESCO's financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date. The Company previously reported that in May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which 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 ASU 2014-09 is for companies to recognize revenue for 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. ASU 2014-09 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 amendments in ASU 2015-14 defer the effective date of the new revenue recognition guidance to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted to the original effective date of December 15, 2016, including interim periods within that reporting period. Management is currently evaluating the future impact of this guidance on WESCO's consolidated financial statements and notes thereto.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The Company previously reported that in April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs by requiring 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 amendments in ASU 2015-15 address the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements such that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 and ASU 2015-03 are effective for financial statements of public business entities issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this guidance is not expected to have a material impact on WESCO's financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined; calculated as if the accounting had been completed at the acquisition date. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively with earlier application permitted for financial statements that have not been issued. The adoption of this guidance is not expected to have a material impact on WESCO's financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements and notes thereto.

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:
 
Nine Months Ended
(In thousands of dollars)
September 30,
2015
 
September 30,
2014
Fair value of assets acquired
$
89,786

 
$
153,430

Fair value of liabilities assumed
21,284

 
14,625

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

 
$
138,805

The fair values of assets acquired and liabilities assumed during the nine months ended September 30, 2015, which are primarily for the acquisition of Hill Country Electric Supply, LP ("Hill Country"), are 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 its prior 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 its prior 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 nine months 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 nine months ended September 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
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Stock-settled appreciation rights granted

 

 
394,182

 
274,508

Weighted-average fair value
$

 
$

 
$
21.68

 
$
30.64

 
 
 
 
 
 
 
 
Restricted stock units granted
2,730

 
611

 
81,022

 
63,117

Weighted-average fair value
$
54.94

 
$
81.88

 
$
69.05

 
$
85.32

 
 
 
 
 
 
 
 
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
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Risk free interest rate

 

 
1.6
%
 
1.5
%
Expected life (in years)
0

 
0

 
5

 
5

Expected volatility

 

 
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.

9

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


The following table sets forth a summary of stock-settled stock appreciation rights and related information for the nine months ended September 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
(229,732
)
 
35.87

 
 
 
 
     Forfeited
(32,430
)
 
75.61

 
 
 
 
Outstanding at September 30, 2015
2,612,765

 
54.73

 
5.4
 
$
14,640

Exercisable at September 30, 2015
1,994,736

 
$
48.73

 
4.3
 
$
14,640

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

 
$
73.87

     Granted
81,022

 
69.05

     Vested
(67,437
)
 
65.39

     Forfeited
(8,593
)
 
75.89

Unvested at September 30, 2015
190,449

 
$
74.73

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 nine months ended September 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
(14,064
)
 
82.91

Unvested at September 30, 2015
136,732

 
$
76.79

The fair value of the performance shares granted during the nine months ended September 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
%

10

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


The unvested performance-based awards in the table above include 68,366 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 68,366 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 $1.9 million and $2.5 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended September 30, 2015 and 2014, respectively. WESCO recognized $9.7 million and $11.0 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was $23.1 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $5.3 million is expected to be recognized over the remainder of 2015, $11.2 million in 2016, $5.9 million in 2017 and $0.7 million in 2018.
During the nine months ended September 30, 2015 and 2014, the total intrinsic value of all awards exercised and vested was $15.4 million and $24.2 million, respectively. The total amount of cash received from the exercise of options was $0.8 million for the nine months ended September 30, 2014. The gross deferred tax benefit associated with the exercise of awards for the nine months ended September 30, 2015 and 2014 totaled $5.6 million and $9.1 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
 
September 30,
(In thousands, except per share data)
2015
 
2014
Net income attributable to WESCO International, Inc.
$
63,503

 
$
80,816

Weighted-average common shares outstanding used in computing basic earnings per share
43,191

 
44,475

Common shares issuable upon exercise of dilutive equity awards
538

 
990

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
5,989

 
7,778

Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share
49,718

 
53,243

Earnings per share attributable to WESCO International, Inc.
 
 

     Basic
$
1.47

 
$
1.82

     Diluted
$
1.28

 
$
1.52


11

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


 
Nine Months Ended
 
September 30,
(In thousands, except per share data)
2015
 
2014
Net income attributable to WESCO International, Inc.
$
162,273

 
$
201,523

Weighted-average common shares outstanding used in computing basic earnings per share
43,860

 
44,425

Common shares issuable upon exercise of dilutive equity awards
717

 
1,036

Common shares issuable from contingently convertible debentures (see below for basis of calculation)
6,738

 
7,901

Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share
51,315

 
53,362

Earnings per share attributable to WESCO International, Inc.
 
 
 
     Basic
$
3.70

 
$
4.54

     Diluted
$
3.16

 
$
3.78

For the three and nine months ended September 30, 2015, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded approximately 1.6 million and 1.0 million stock-settled stock appreciation rights at weighted-average exercise prices of $69.29 per share and $74.05 per share, respectively. For the three and nine months ended September 30, 2014, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded approximately 0.3 million and 0.5 million stock-settled stock appreciation rights at weighted average exercise prices of $84.47 per share and $79.29 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 11,947,602 shares for the 2029 Debentures. For the three and nine months September 30, 2015, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.17 and $0.48, respectively. For the three and nine months September 30, 2014, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.26 and $0.65, 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 three months ended September 30, 2015, the Company entered into an accelerated stock repurchase agreement (the "ASR Transaction") with a financial institution to purchase shares of its common stock. In exchange for an up-front cash payment of $75.0 million, the Company received 1,417,649 shares. The total number of shares ultimately delivered under the ASR Transaction was determined by the average of the volume-weighted average prices of the Company's common stock for each exchange business day during the settlement valuation period. WESCO funded the repurchase with borrowings under its prior revolving credit facility. For the nine months ended September 30, 2015, WESCO has repurchased 2,468,576 shares of the Company's common stock for $150.0 million. For purposes of computing earnings per share, share repurchases have been reflected as a reduction to common shares outstanding on the respective share delivery dates.
6. DEBT
Revolving Credit Facility
On September 24, 2015, WESCO International, Inc., WESCO Distribution, Inc. and certain other subsidiaries of the Company entered into a $600 million revolving credit facility (the “Revolving Credit Facility”), which contains a letter of credit sub-facility of up to $125 million, pursuant to the terms and conditions of a Second Amended and Restated Credit Agreement (the "Credit Agreement"). The Revolving Credit Facility contains an accordion feature allowing WESCO Distribution, Inc. to request increases to the borrowing commitments, subject to customary conditions. This accordion feature increased from $100 million to $200 million in the aggregate. The Revolving Credit Facility replaces WESCO Distribution Inc.’s prior revolving credit facility entered into on December 12, 2012.

12

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


The Revolving Credit Facility matures in September 2020 and consists of two separate sub-facilities: (i) a Canadian sub-facility with a borrowing limit of up to $400 million, which is collateralized by substantially all assets of WESCO Canada and the other Canadian Borrowers, other than, among other things, real property, in each case, subject to customary exceptions and limitations, and (ii) a U.S sub-facility with a borrowing limit of up to $600 million less the amount of outstanding borrowings under the Canadian sub-facility. The U.S. sub-facility is collateralized by substantially all assets of WESCO Distribution, Inc. and its subsidiaries which are party to the Credit Agreement, other than, among other things, real property and accounts receivable sold or intended to be sold pursuant to WESCO Distribution Inc.’s accounts receivable securitization facility. The applicable interest rate for borrowings under the Revolving Credit Facility includes interest rate spreads based on available borrowing capacity that range between 1.25% and 1.75% for LIBOR-based borrowings and 0.25% and 0.75% for prime rate-based borrowings.
The Credit Agreement requires compliance with conditions precedent that must be satisfied prior to any borrowing as well as ongoing compliance with certain customary covenants. The Credit Agreement contains customary events of default.
Accounts Receivable Securitization Facility
On September 24, 2015, WESCO Distribution, Inc. amended and restated its accounts receivable securitization facility (the "Receivables Facility") pursuant to the terms and conditions of a Fourth Amended and Restated Receivables Purchase Agreement (the “Receivables Purchase Agreement”), by and among WESCO Receivables Corp. (“WESCO Receivables”), WESCO Distribution, Inc., the various purchaser groups from time to time party thereto and PNC Bank, National Association, as Administrator. The Receivables Purchase Agreement amends and restates the receivables purchase agreement entered into on April 13, 2009.
The Receivables Purchase Agreement increases the purchase limit from $500 million to $550 million, with the opportunity to exercise an accordion feature which permits increases in the purchase limit of up to $100 million, extends the term of the Receivables Facility to September 24, 2018 and adds and amends certain defined terms. The interest rate spread and commitment fee of the Receivables Facility remains 0.95% and 0.45%, respectively.
Under the Receivables Facility, WESCO sells, on a continuous basis, an undivided interest in all domestic accounts receivable to WESCO Receivables, a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables, in the form of overcollateralization. WESCO has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at market rates; accordingly, no servicing asset or liability has been recorded.
7. 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 nine months ended September 30, 2015 and 2014, WESCO incurred charges of $17.5 million and $23.3 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.
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.

13

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


The following table reflects the components of net periodic benefit costs for the Company's defined benefit plans:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands of dollars)
2015
 
2014
 
2015
 
2014
Service cost
$
1,113

 
$
912

 
$
3,442

 
$
2,712

Interest cost
991

 
1,172

 
3,064

 
3,486

Expected return on plan assets
(1,299
)
 
(1,380
)
 
(4,017
)
 
(4,103
)
Recognized actuarial gain
(4
)
 
(14
)
 
(12
)
 
(43
)
Net periodic benefit cost
$
801

 
$
690

 
$
2,477

 
$
2,052

During the three and nine months ended September 30, 2015, the Company made aggregate cash contributions of $0.5 million and $1.5 million, respectively, to its defined benefit plans. During the three and nine months ended September 30, 2014, the Company made aggregate cash contributions of $0.5 million and $1.7 million, respectively, to its defined benefit plans.
8. 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.

14

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


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.
9. INCOME TAXES
The effective tax rate for the three and nine months ended September 30, 2015 was 27.4% and 28.6%, respectively. The effective tax rate for the three and nine months ended September 30, 2014 was 28.1%. 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.

15

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


10. 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
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
39,779

 
$
93,073

 
$

 
$
132,852

Trade accounts receivable, net

 

 
1,149,743

 

 
1,149,743

Inventories, net

 
401,669

 
443,286

 

 
844,955

Prepaid expenses and other current assets
18

 
121,802

 
123,134

 
(6,414
)
 
238,540

Total current assets
18

 
563,250

 
1,809,236

 
(6,414
)
 
2,366,090

Intercompany receivables, net

 

 
1,947,258

 
(1,947,258
)
 

Property, buildings and equipment, net

 
57,722

 
114,067

 

 
171,789

Intangible assets, net

 
4,237

 
384,751

 

 
388,988

Goodwill

 
255,251

 
1,410,967

 

 
1,666,218

Investments in affiliates
3,294,404

 
3,776,151

 

 
(7,070,555
)
 

Other assets
3,875

 
12,262

 
33,287

 

 
49,424

Total assets
$
3,298,297

 
$
4,668,873

 
$
5,699,566

 
$
(9,024,227
)
 
$
4,642,509

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
454,216

 
$
333,421

 
$

 
$
787,637

Short-term debt

 

 
44,419

 

 
44,419

Other current liabilities
7,291

 
54,027

 
129,817

 
(6,414
)
 
184,721

Total current liabilities
7,291

 
508,243

 
507,657

 
(6,414
)
 
1,016,777

Intercompany payables, net
1,325,788

 
621,470

 

 
(1,947,258
)
 

Long-term debt, net
180,534

 
730,813

 
543,358

 

 
1,454,705

Other noncurrent liabilities
21,889

 
256,204

 
133,086

 

 
411,179

Total WESCO International, Inc. stockholders' equity
1,762,795

 
2,552,143

 
4,518,412

 
(7,070,555
)
 
1,762,795

Noncontrolling interests

 

 
(2,947
)
 

 
(2,947
)
Total liabilities and stockholders’ equity
$
3,298,297

 
$
4,668,873

 
$
5,699,566

 
$
(9,024,227
)
 
$
4,642,509


16

   
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

Prepaid expenses and 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 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 interests

 

 
(487
)
 

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

 
$
4,700,538

 
$
5,691,211

 
$
(8,946,321
)
 
$
4,754,437


17

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


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

 
$
876,098

 
$
1,077,255

 
$
(29,454
)
 
$
1,923,899

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
705,698

 
866,869

 
(29,454
)
 
1,543,113

Selling, general and administrative expenses
5

 
131,648

 
126,498

 

 
258,151

Depreciation and amortization

 
4,866

 
11,421

 

 
16,287

Results of affiliates’ operations
66,944

 
48,419

 

 
(115,363
)
 

Interest expense (income), net
6,253

 
19,681

 
(5,517
)
 

 
20,417

Provision for income taxes
(1,698
)
 
3,988

 
21,257

 

 
23,547

Net income
62,384

 
58,636

 
56,727

 
(115,363
)
 
62,384

Net loss attributable to noncontrolling interests

 

 
(1,119
)
 

 
(1,119
)
Net income attributable to WESCO International, Inc.
$
62,384

 
$
58,636

 
$
57,846

 
$
(115,363
)
 
$
63,503

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(95,377
)
 
(95,377
)
 
(95,377
)
 
190,754

 
(95,377
)
Comprehensive loss income attributable to WESCO International, Inc.
$
(32,993
)
 
$
(36,741
)
 
$
(37,531
)
 
$
75,391

 
$
(31,874
)

 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Three Months Ended
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
932,948

 
$
1,174,935

 
$
(29,733
)
 
$
2,078,150

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
747,219

 
938,301

 
(29,733
)
 
1,655,787

Selling, general and administrative expenses

 
141,924

 
129,773

 

 
271,697

Depreciation and amortization

 
4,670

 
12,748

 

 
17,418

Results of affiliates’ operations
85,219

 
62,611

 

 
(147,830
)
 

Interest expense (income), net
6,123

 
18,765

 
(4,090
)
 

 
20,798

Provision for income taxes
(1,722
)
 
5,733

 
27,621

 

 
31,632

Net income
80,818

 
77,248

 
70,582

 
(147,830
)
 
80,818

Net income attributable to noncontrolling interests

 

 
2

 

 
2

Net income attributable to WESCO International, Inc.
$
80,818

 
$
77,248

 
$
70,580

 
$
(147,830
)
 
$
80,816

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(63,794
)
 
(63,794
)
 
(63,794
)
 
127,588

 
(63,794
)
Comprehensive income attributable to WESCO International, Inc.
$
17,024

 
$
13,454

 
$
6,786

 
$
(20,242
)
 
$
17,022


18

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


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

 
$
2,600,150

 
$
3,144,759

 
$
(87,962
)
 
$
5,656,947

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
2,089,594

 
2,525,204

 
(87,962
)
 
4,526,836

Selling, general and administrative expenses
22

 
415,971

 
381,987

 

 
797,980

Depreciation and amortization

 
14,640

 
33,707

 

 
48,347

Results of affiliates’ operations
173,137

 
131,074

 

 
(304,211
)
 

Interest expense (income), net
18,641

 
55,561

 
(14,278
)
 

 
59,924

Provision for income taxes
(5,339
)
 
6,976

 
62,410

 

 
64,047

Net income
159,813

 
148,482

 
155,729

 
(304,211
)
 
159,813

Net loss attributable to noncontrolling interests

 

 
(2,460
)
 

 
(2,460
)
Net income attributable to WESCO International, Inc.
$
159,813

 
$
148,482

 
$
158,189

 
$
(304,211
)
 
$
162,273

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(183,634
)
 
(183,634
)
 
(183,634
)
 
367,268

 
(183,634
)
Comprehensive loss attributable to WESCO International, Inc.
$
(23,821
)
 
$
(35,152
)
 
$
(25,445
)
 
$
63,057

 
$
(21,361
)

 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Nine Months Ended
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
2,656,619

 
$
3,323,237

 
$
(85,715
)
 
$
5,894,141

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
2,126,743

 
2,644,229

 
(85,715
)
 
4,685,257

Selling, general and administrative expenses
2

 
423,371

 
392,496

 

 
815,869

Depreciation and amortization

 
14,284

 
36,692

 

 
50,976

Results of affiliates’ operations
214,601

 
164,826

 

 
(379,427
)
 

Interest expense (income), net
18,277

 
55,854

 
(12,308
)
 

 
61,823

Provision for income taxes
(5,137
)
 
10,244

 
73,650

 

 
78,757

Net income
201,459

 
190,949

 
188,478

 
(379,427
)
 
201,459

Net loss attributable to noncontrolling interests

 

 
(64
)
 

 
(64
)
Net income attributable to WESCO International, Inc.
$
201,459

 
$
190,949

 
$
188,542

 
$
(379,427
)
 
$
201,523

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(67,271
)
 
(67,271
)
 
(67,271
)
 
134,542

 
(67,271
)
Comprehensive income attributable to WESCO International, Inc.
$
134,188

 
$
123,678

 
$
121,271

 
$
(244,885
)
 
$
134,252


19

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


 
Condensed Consolidating Statement of Cash Flows
 
Nine Months Ended
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash (used in) provided by operating activities
$
(3,332
)
 
$
210,270

 
$
(30,974
)
 
$

 
$
175,964

Investing activities:

 

 

 

 

Capital expenditures

 
(12,137
)
 
(4,105
)
 

 
(16,242
)
Acquisition payments, net of cash acquired

 
(68,502
)
 

 

 
(68,502
)
Other

 
(157,422
)
 
1,791

 
157,422

 
1,791

Net cash used in investing activities

 
(238,061
)
 
(2,314
)
 
157,422

 
(82,953
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
157,422

 
936,352

 
359,546

 
(157,422
)
 
1,295,898

Repayments

 
(888,352
)
 
(313,806
)
 

 
(1,202,158
)
Equity activities
(154,090
)
 

 

 

 
(154,090
)
Other

 
(12,938
)
 

 

 
(12,938
)
Net cash provided by (used in) financing activities
3,332

 
35,062

 
45,740

 
(157,422
)
 
(73,288
)
Effect of exchange rate changes on cash and cash equivalents

 

 
(15,190
)
 

 
(15,190
)
Net change in cash and cash equivalents

 
7,271

 
(2,738
)
 

 
4,533

Cash and cash equivalents at the beginning of period

 
32,508

 
95,811

 

 
128,319

Cash and cash equivalents at the end of period
$

 
$
39,779

 
$
93,073

 
$

 
$
132,852























20

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


 
Condensed Consolidating Statement of Cash Flows
 
Nine Months Ended
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash (used in) provided by operating activities
$
(5,202
)
 
$
68,291

 
$
76,731

 
$

 
$
139,820

Investing activities:

 

 

 

 

Capital expenditures

 
(10,811
)
 
(5,225
)
 

 
(16,036
)
Acquisition payments, net of cash acquired

 
(42,132
)
 
(96,673
)
 

 
(138,805
)
Other

 
(5,842
)
 
5,444

 
5,842

 
5,444

Net cash used in investing activities

 
(58,785
)
 
(96,454
)
 
5,842

 
(149,397
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
6,517

 
645,411

 
316,462

 
(6,517
)
 
961,873

Repayments
(675
)
 
(640,411
)
 
(316,560
)
 
675

 
(956,971
)
Equity activities
(640
)
 

 

 

 
(640
)
Other

 
(8,562
)
 
(110
)
 

 
(8,672
)
Net cash provided by (used in) financing activities
5,202

 
(3,562
)
 
(208
)
 
(5,842
)
 
(4,410
)
Effect of exchange rate changes on cash and cash equivalents

 

 
630

 

 
630

Net change in cash and cash equivalents

 
5,944

 
(19,301
)
 

 
(13,357
)
Cash and cash equivalents at the beginning of period

 
31,695

 
92,030

 

 
123,725

Cash and cash equivalents at the end of period
$

 
$
37,639

 
$
72,729

 
$

 
$
110,368

The unaudited Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2014 includes certain reclassifications to previously reported amounts to conform to the current period presentation.
11. SUBSEQUENT EVENTS
On October 30, 2015, WESCO International, Inc., through its wholly-owned subsidiary WESCO Distribution, Inc., acquired a U.S. electrical distributor focused on commercial construction and lighting with annual sales of approximately $115 million. A preliminary purchase price allocation will be completed during the fourth quarter of 2015.

21


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 9,200 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 nine months of 2015 reflect continued weakness in commodity-driven end markets and the unfavorable impact of changes in foreign currencies, partially offset by the benefits of ongoing cost reduction actions. Net sales decreased $237.2 million, or 4.0%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.0% and 79.5% for the first nine months of 2015 and 2014, respectively. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 14.1% and 13.8% for the first nine months of 2015 and 2014, respectively. Operating profit was $283.8 million for the current nine month period, compared to $342.0 million for the first nine 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 nine months ended September 30, 2015 and 2014 was $162.3 million and $201.5 million, respectively.
Cash Flow
We generated $176.0 million in operating cash flow for the first nine months of 2015. Investing activities included acquisitions payments of $68.5 million, which was primarily related to Hill Country, and capital expenditures of $16.2 million. Financing activities consisted of borrowings and repayments of $987.7 million and $939.7 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $232.6 million and $132.6 million, respectively, related to our accounts receivable securitization facility (the “Receivables Facility”), and repayments of $56.4 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 $75.6 million and $73.5 million, respectively. Additionally, financing activities for the first nine months of 2015 included the repurchase of $150.0 million of the Company's common stock pursuant to the share repurchase plan announced on December 17, 2014. Free cash flow for the first nine months of 2015 and 2014 was $159.8 million and $123.8 million, respectively.

22


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


The following table sets forth the components of free cash flow:
 
Three Months Ended
 
Nine Months Ended
Free Cash Flow:
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
 
 
 
 
 
 
 
 
Cash flow provided by operations
$
43.3

 
$
89.0

 
$
176.0

 
$
139.8

Less: Capital expenditures
(3.6
)
 
(4.3
)
 
(16.2
)
 
(16.0
)
Free cash flow
$
39.7

 
$
84.7

 
$
159.8

 
$
123.8

Note: Free cash flow is a non-GAAP financial measure and 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 September 30, 2015, we had $446.5 million in total available borrowing capacity under our Revolving Credit Facility and $20.0 million in available borrowing capacity under our Receivables Facility. These debt facilities were amended and restated on September 24, 2015. As a result of the respective amendments, the Revolving Credit Facility and the Receivables Facility mature in September 2020 and September 2018, respectively. See Note 6 of our Notes to the Condensed Consolidated Financial Statements for a discussion of the amendments to these facilities.
Critical Accounting Policies and Estimates
During the nine