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EX-32.2 - EXHIBIT 32.2 - WESCO INTERNATIONAL INCwcc-2q17ex322.htm
EX-32.1 - EXHIBIT 32.1 - WESCO INTERNATIONAL INCwcc-2q17ex321.htm
EX-31.2 - EXHIBIT 31.2 - WESCO INTERNATIONAL INCwcc-2q17ex312.htm
EX-31.1 - EXHIBIT 31.1 - WESCO INTERNATIONAL INCwcc-2q17ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
 
 
Accelerated filer o
 
 
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
 
 
 
Emerging growth company o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 August 3, 2017, 47,973,171 shares of common stock, $0.01 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)
 
As of
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
87,799

 
$
110,131

Trade accounts receivable, net of allowance for doubtful accounts of $23,061 and $22,007 in 2017 and 2016, respectively
1,144,978

 
1,034,402

Other accounts receivable
69,321

 
85,019

Inventories
866,301

 
821,441

Prepaid expenses and other current assets
137,146

 
121,464

Total current assets
2,305,545

 
2,172,457

Property, buildings and equipment, net of accumulated depreciation of $268,723 and $259,126 in 2017 and 2016, respectively
155,203

 
157,607

Intangible assets, net of accumulated amortization of $200,755 and $178,813 in 2017
and 2016, respectively
380,426

 
393,362

Goodwill
1,741,540

 
1,720,714

Other assets
40,957

 
46,844

    Total assets
$
4,623,671

 
$
4,490,984

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
768,997

 
$
684,721

Accrued payroll and benefit costs
37,830

 
49,250

Short-term debt
23,972

 
20,920

Current portion of long-term debt
1,221

 
1,218

Bank overdrafts
29,535

 
29,384

Other current liabilities
102,851

 
111,304

Total current liabilities
964,406

 
896,797

Long-term debt, net of debt discount and debt issuance costs of $15,291 and $17,278 in 2017 and 2016, respectively
1,334,542

 
1,363,135

Deferred income taxes
165,689

 
158,009

Other noncurrent liabilities
63,928

 
63,031

    Total liabilities
$
2,528,565

 
$
2,480,972

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, 59,033,859 and 58,817,781 shares issued and 47,972,383 and 48,611,497 shares outstanding in 2017 and 2016, respectively
590

 
588

Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2017 and 2016, respectively
43

 
43

Additional capital
991,750

 
986,020

Retained earnings
2,044,719

 
1,956,532

Treasury stock, at cost; 15,400,907 and 14,545,715 shares in 2017 and 2016, respectively
(596,659
)
 
(542,537
)
Accumulated other comprehensive loss
(342,164
)
 
(387,365
)
Total WESCO International, Inc. stockholders' equity
2,098,279

 
2,013,281

Noncontrolling interests
(3,173
)
 
(3,269
)
    Total stockholders’ equity
2,095,106

 
2,010,012

    Total liabilities and stockholders’ equity
$
4,623,671

 
$
4,490,984


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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
1,909,624

 
$
1,911,582

 
$
3,682,215

 
$
3,687,543

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
amortization)
1,543,510

 
1,532,113

 
2,966,083

 
2,952,906

Selling, general and administrative expenses
267,288

 
274,523

 
534,252

 
543,809

Depreciation and amortization
15,721

 
16,959

 
31,686

 
33,332

Income from operations
83,105

 
87,987

 
150,194

 
157,496

Interest expense, net
16,816

 
19,452

 
33,537

 
38,281

Income before income taxes
66,289

 
68,535

 
116,657

 
119,215

Provision for income taxes
16,754

 
18,683

 
29,323

 
34,828

Net income
49,535

 
49,852

 
87,334

 
84,387

Less: Net income (loss) attributable to noncontrolling interests
25

 
54

 
96

 
(1,465
)
Net income attributable to WESCO International, Inc.
$
49,510

 
$
49,798

 
$
87,238

 
$
85,852

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
33,381

 
(1,765
)
 
44,949

 
80,505

Post retirement benefit plan adjustment

 

 
252

 
(16
)
Comprehensive income attributable to WESCO International, Inc.
$
82,891

 
$
48,033

 
$
132,439

 
$
166,341

 
 
 
 
 
 
 
 
Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.03

 
$
1.18

 
$
1.80

 
$
2.03

Diluted
$
1.02

 
$
1.02

 
$
1.78

 
$
1.79


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,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
87,334

 
$
84,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,686

 
33,332

  Deferred income taxes
6,404

 
13,425

Other operating activities, net
8,306

 
10,393

Changes in assets and liabilities:
 
 
 
Trade accounts receivable, net
(95,978
)
 
(17,250
)
Other accounts receivable
16,425

 
29,442

Inventories
(36,877
)
 
(4,377
)
Prepaid expenses and other assets
(6,360
)
 
(12,775
)
Accounts payable
76,836

 
(18,782
)
Accrued payroll and benefit costs
(10,786
)
 
(2,559
)
Other current and noncurrent liabilities
(10,221
)
 
23,374

Net cash provided by operating activities
66,769

 
138,610

 
 
 
 
Investing activities:
 
 
 
Acquisition payments, net of cash acquired

 
(50,946
)
Capital expenditures
(9,795
)
 
(7,086
)
Other investing activities
3,467

 
(8,103
)
Net cash used in investing activities
(6,328
)
 
(66,135
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of short-term debt
69,257

 
63,745

Repayments of short-term debt
(68,517
)
 
(62,937
)
Proceeds from issuance of long-term debt
662,078

 
1,026,392

Repayments of long-term debt
(692,078
)
 
(1,102,792
)
Repurchases of common stock (Note 6)
(56,665
)
 
(740
)
Increase in bank overdrafts
155

 
6,474

Other financing activities, net
(768
)
 
(6,322
)
Net cash used in financing activities
(86,538
)
 
(76,180
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
3,765

 
3,716

 
 
 
 
Net change in cash and cash equivalents
(22,332
)
 
11

Cash and cash equivalents at the beginning of period
110,131

 
160,279

Cash and cash equivalents at the end of period
$
87,799

 
$
160,290


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. ("WESCO International") 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 manufacturer (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 approximately 75,000 active customers globally, through approximately 500 full service branches and nine distribution centers located primarily in the United States, Canada and Mexico, with operations in 14 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 2016 Annual Report on Form 10-K as filed with the SEC on February 22, 2017. The Condensed Consolidated Balance Sheet at December 31, 2016 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, 2017, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2017 and 2016, respectively, and the unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016, 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.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The Company adopted this ASU in the first quarter of 2017. The amendment related to the recognition of excess tax benefits and deficiencies was applied prospectively and, as disclosed in Note 9, lowered the Company's effective tax rate for the six months ended June 30, 2017. The amendment related to the presentation of excess tax benefits on the statement of cash flows was also applied prospectively, and did not have a material impact on WESCO's cash flows. The other amendments, which were adopted by the Company according to the respective transition requirements, had no impact on the consolidated financial statements and notes thereto.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The Company early adopted this ASU on a modified retrospective basis in the first quarter of 2017. The adoption of this ASU did not have a material impact on WESCO's financial position and it had no impact on its results of operations or cash flows.
Recently Issued Accounting Pronouncements
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

6

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


guidance to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. During 2016, the FASB issued four ASUs that address implementation issues and correct or improve certain aspects of the new revenue recognition guidance, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These ASUs do not change the core principles in the revenue recognition standard outlined above. The Company has developed a multiphase plan and established a cross-functional team to evaluate and implement the new standard. Management is in the process of completing the diagnostic phase. In this phase, management is reviewing various customer contracts and comparing current accounting and disclosure policies to the requirements of the new standard. Management expects to adopt the new standard using the modified retrospective approach in the first quarter of 2018. The method of adoption is subject to change as management continues to evaluate the impact that this pronouncement may have on WESCO's consolidated financial statements and notes thereto.
In February 2016, the FASB issued ASU 2016-02, Leases, a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. Management is currently evaluating the impact of this new standard on WESCO's consolidated financial statements and notes thereto.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces new guidance for the accounting for credit losses on certain financial instruments. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and early adoption is permitted. Management is currently evaluating the impact of this accounting standard on WESCO's consolidated financial statements and notes thereto.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU provides guidance on eight specific cash flow issues where there is diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact of this accounting standard on WESCO's consolidated financial statements and notes thereto.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this ASU on a prospective basis. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Management has not yet evaluated the impact of this accounting standard on WESCO's consolidated financial statements and notes thereto.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Presently, net benefit cost is reported as an employee cost within operating income (or capitalized into assets when appropriate). This amendment requires the bifurcation of net benefit cost. The service component will be presented with other employee compensation costs in operating income (or capitalized in assets). The other components will be reported separately outside of operations, and will not be eligible for capitalization. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Management has not yet evaluated the impact of this accounting standard on WESCO's consolidated financial statements and notes thereto.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. Management has not yet evaluated the impact of this accounting standard on WESCO's consolidated financial statements and notes thereto.

7

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


Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to WESCO’s financial position, results of operations or cash flows.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, and outstanding indebtedness. The reported carrying amounts of WESCO’s financial 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.
3. ACQUISITIONS
On March 14, 2016, WESCO Distribution, Inc. ("WESCO Distribution") completed the acquisition of Atlanta Electrical Distributors, LLC ("AED"), an Atlanta-based electrical distributor focused on the construction and MRO markets from five locations in Georgia with approximately $85 million in annual sales. WESCO Distribution funded the purchase price paid at closing with borrowings under its 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. In addition to the cash paid at closing, the purchase price included a contingent payment that may be earned upon the achievement of certain financial performance targets over three consecutive one year periods. The fair value of the contingent consideration was determined using a probability-weighted outcome analysis and Level 3 inputs such as internal forecasts. This amount was accrued at the maximum potential payout under the terms of the purchase agreement. The fair value of intangibles was estimated by management and the allocation resulted in intangible assets of $21.8 million and goodwill of $30.0 million. The intangible assets include customer relationships of $15.8 million amortized over 13 and 14 years, a trademark of $6.0 million amortized over 13 years, and non-compete agreements of less than $0.1 million amortized over 5 years. No residual value was estimated for the intangible assets being amortized. The majority of goodwill is deductible for tax purposes.
4. GOODWILL
The following table sets forth the changes in the carrying value of goodwill:
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
 
(In thousands)
Beginning balance January 1
$
1,720,714

 
$
1,681,662

Foreign currency exchange rate changes
20,826

 
40,062

Adjustments to goodwill for acquisitions (1)

 
18,432

Ending balance June 30
$
1,741,540

 
$
1,740,156

(1)
For the six months ended June 30, 2016, adjustments relate to goodwill resulting from the preliminary allocation of the AED purchase price to the respective assets acquired and liabilities assumed, partially offset by a correction to goodwill for deferred income taxes related to prior acquisitions.
5. 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.

8

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


During the three and six months ended June 30, 2017 and 2016, WESCO granted the following stock-settled stock appreciation rights, restricted stock units and performance-based awards at the following weighted-average fair values:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Stock-settled stock appreciation rights granted

 
4,744

 
443,731

 
708,254

Weighted-average fair value
$

 
$
17.22

 
$
20.65

 
$
12.90

 
 
 
 
 
 
 
 
Restricted stock units granted

 
137

 
98,680

 
143,305

Weighted-average fair value
$

 
$
54.67

 
$
71.65

 
$
42.45

 
 
 
 
 
 
 
 
Performance-based awards granted

 

 
39,978

 
91,768

Weighted-average fair value
$

 
$

 
$
76.63

 
$
47.00

The fair value of stock-settled stock appreciation rights was estimated using the following weighted-average assumptions:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Risk free interest rate
%
 
1.2
%
 
1.9
%
 
1.2
%
Expected life (in years)
0

 
5

 
5

 
5

Expected volatility
%
 
32
%
 
29
%
 
32
%
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve rate 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, 2017:
 
Awards
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term (In years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2016
2,439,487

 
$
52.62

 
 
 
 
     Granted
443,731

 
71.65

 
 
 
 
     Exercised
(468,600
)
 
42.48

 
 
 
 
     Forfeited
(87,445
)
 
68.93

 
 
 
 
Outstanding at June 30, 2017
2,327,173

 
57.68

 
6.6
 
$
17,651

Exercisable at June 30, 2017
1,398,502

 
$
56.84

 
5.0
 
$
11,783


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, 2017:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2016
257,096

 
$
57.47

     Granted
98,680

 
71.65

     Vested
(43,169
)
 
85.17

     Forfeited
(12,449
)
 
53.91

Unvested at June 30, 2017
300,158

 
$
58.29

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, 2017:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2016
149,320

 
$
60.36

     Granted
39,978

 
76.63

     Vested

 

     Forfeited
(36,162
)
 
79.64

Unvested at June 30, 2017
153,136

 
$
60.05

The fair value of the performance shares granted during the six months ended June 30, 2017 and 2016 was estimated using the following weighted-average assumptions:
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
Grant date share price
$
71.65

 
$
42.44

WESCO expected volatility
29
%
 
26
%
Peer group median volatility
24
%
 
24
%
Risk-free interest rate
1.5
%
 
0.9
%
Correlation of peer company returns
114
%
 
122
%
The unvested performance-based awards in the table above include 76,568 shares in which vesting of the ultimate number of shares 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 76,568 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 $4.1 million and $3.4 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended June 30, 2017 and 2016, respectively. WESCO recognized $7.8 million and $7.0 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was $26.4 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $7.5 million is expected to be recognized over the remainder of 2017, $11.5 million in 2018, $6.7 million in 2019 and $0.7 million in 2020.

10

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


6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to WESCO International by the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is computed by dividing net income attributable to WESCO International 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 equity awards and contingently convertible debt.
The following table sets forth the details of basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands, except per share data)
2017
 
2016
 
2017
 
2016
Net income attributable to WESCO International, Inc.
$
49,510

 
$
49,798

 
$
87,238

 
$
85,852

Weighted-average common shares outstanding used in computing basic earnings per share
48,294

 
42,238

 
48,499

 
42,224

Common shares issuable upon exercise of dilutive equity awards
482

 
569

 
582

 
494

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

 
5,820

 

 
5,120

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

48,776

 
48,627

 
49,081

 
47,838

Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.03

 
$
1.18

 
$
1.80

 
$
2.03

Diluted
$
1.02

 
$
1.02

 
$
1.78

 
$
1.79

For the three and six months ended June 30, 2017, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded stock-based awards of approximately 1.3 million and 1.2 million, respectively. For the three and six months ended June 30, 2016, the computation of diluted earnings per share attributable to WESCO International, Inc. excluded stock-based awards of approximately 1.5 million and 2.1 million, respectively. These amounts were excluded because their effect would have been antidilutive.
Because of WESCO’s previous obligation to settle the par value of the 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") in cash upon conversion, WESCO was 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 exceeded the conversion price of the debentures. Only the number of shares that would have been issuable under the treasury stock method of accounting for share dilution were included, which was based upon the amount by which the average stock price exceeded the conversion price. The conversion price of the 2029 Debentures was $28.87 and the maximum amount of share dilution was limited to 11,951,932 shares. Since the 2029 Debentures were redeemed on September 15, 2016, there was no dilution from contingently convertible debentures for the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International, Inc. was a decrease of $0.14 and $0.22, 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. As of December 31, 2016, WESCO had repurchased 2,468,576 shares of the Company's common stock for $150.0 million under this repurchase authorization. On May 2, 2017, the Company entered into an accelerated stock repurchase agreement (the "ASR Transaction") with a financial institution to repurchase additional shares of its common stock. In exchange for an up-front cash payment of $50.0 million, the Company received 804,291 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 available cash and borrowings under the Company's accounts receivable securitization facility. For purposes of computing earnings per share, shares received under the ASR Transaction were reflected as a reduction to common shares outstanding on the respective delivery dates.

11

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


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 matches contributions made by employees at an amount equal to 50% of participants' total monthly contributions up to a maximum of 6% of eligible compensation. For Canadian participants, WESCO makes contributions in amounts ranging from 3% to 5% of the participants' eligible compensation based on years of continuous service. WESCO may also make, subject to the Board of Directors' approval, a discretionary contribution to the defined contribution retirement savings plan covering U.S. participants if certain predetermined profit levels are attained. For the six months ended June 30, 2017 and 2016, WESCO incurred charges of $10.6 million and $18.1 million, respectively, for all such plans. Contributions are made in cash to employee retirement savings plan accounts. The deferred compensation plan is an unfunded plan. As of June 30, 2017 and December 31, 2016, the Company's obligation under the deferred compensation plan was $22.9 million and $21.7 million, respectively. 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.
The following table reflects the components of net periodic benefit costs for the defined benefit plans:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands of dollars)
2017
 
2016
 
2017
 
2016
Service cost
$
1,049

 
$
990

 
$
2,116

 
$
1,913

Interest cost
945

 
993

 
1,907

 
1,918

Expected return on plan assets
(1,343
)
 
(1,372
)
 
(2,711
)
 
(2,651
)
Recognized actuarial gain
(48
)
 
(11
)
 
(97
)
 
(20
)
Net periodic benefit cost
$
603

 
$
600

 
$
1,215

 
$
1,160

During the three and six months ended June 30, 2017, there were no employer contributions to the defined benefit plans. During the three and six months ended June 30, 2016, the Company made aggregate cash contributions of $0.5 million and $1.0 million, respectively, to the defined benefit plans.
8. COMMITMENTS AND CONTINGENCIES
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 is 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. The third party auditor has issued preliminary findings for review by the Company, 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 may issue 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 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 potential exposure at this time.

12

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


9. INCOME TAXES
The effective tax rate for the three and six months ended June 30, 2017 was 25.3% and 25.1%, respectively. The effective tax rate for the three and six months ended June 30, 2016 was 27.3% and 29.2%, respectively. WESCO’s effective tax rate is lower than the federal statutory rate of 35% due to benefits resulting from the tax effect of intercompany financing and lower tax rates on foreign earnings, which are partially offset by nondeductible expenses and state taxes. The current year's effective tax rate is lower than the prior year primarily due to favorable discrete items, including a benefit from the exercise and vesting of stock-based awards, as well as the mix of income earned in jurisdictions with lower tax rates.
The total amount of unrecognized tax benefits was reduced by $1.5 million during the six months ended June 30, 2017 to $4.7 million due to the expiration of statutes of limitation and the settlement of state audits. At June 30, 2017, the amount of unrecognized tax benefits that could affect the effective tax rate if recognized in the consolidated financial statements was $6.0 million. Within the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will decrease by approximately $0.3 million due to the expiration of statutes of limitation and the settlement of state audits. Of this amount, $0.1 million could impact the effective tax rate.

13

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


10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
WESCO Distribution has outstanding $500 million in aggregate principal amount of 5.375% Senior Notes due 2021 (the "2021 Notes") and $350 million in aggregate principal amount of 5.375% Senior Notes due 2024 (the "2024 Notes"). The 2021 Notes and 2024 Notes are unsecured senior obligations of WESCO Distribution and are fully and unconditionally guaranteed on a senior unsecured basis by WESCO International.
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, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
36,138

 
$
51,661

 
$

 
$
87,799

Trade accounts receivable, net

 

 
1,144,978

 

 
1,144,978

Inventories

 
379,826

 
486,475

 

 
866,301

Prepaid expenses and other current assets
13,652

 
24,311

 
212,335

 
(43,831
)
 
206,467

Total current assets
13,652

 
440,275

 
1,895,449

 
(43,831
)
 
2,305,545

Intercompany receivables, net

 

 
2,118,924

 
(2,118,924
)
 

Property, buildings and equipment, net

 
49,797

 
105,406

 

 
155,203

Intangible assets, net

 
3,094

 
377,332

 

 
380,426

Goodwill

 
244,648

 
1,496,892

 

 
1,741,540

Investments in affiliates
3,717,402

 
4,139,039

 

 
(7,856,441
)
 

Other assets

 
18,615

 
22,342

 


 
40,957

Total assets
$
3,731,054

 
$
4,895,468

 
$
6,016,345

 
$
(10,019,196
)
 
$
4,623,671

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
413,605

 
$
355,392

 
$

 
$
768,997

Short-term debt

 

 
23,972

 

 
23,972

Other current liabilities

 
39,699

 
175,569

 
(43,831
)
 
171,437

Total current liabilities

 
453,304

 
554,933

 
(43,831
)
 
964,406

Intercompany payables, net
1,620,034

 
498,890

 

 
(2,118,924
)
 

Long-term debt, net

 
958,697

 
375,845

 

 
1,334,542

Other noncurrent liabilities
12,741

 
49,577

 
167,299

 

 
229,617

Total WESCO International, Inc. stockholders' equity
2,098,279

 
2,935,000

 
4,921,441

 
(7,856,441
)
 
2,098,279

Noncontrolling interests

 

 
(3,173
)
 

 
(3,173
)
Total liabilities and stockholders’ equity
$
3,731,054

 
$
4,895,468

 
$
6,016,345

 
$
(10,019,196
)
 
$
4,623,671


14

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


 
Condensed Consolidating Balance Sheet
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
41,552

 
$
68,579

 
$

 
$
110,131

Trade accounts receivable, net

 

 
1,034,402

 

 
1,034,402

Inventories

 
364,562

 
456,879

 

 
821,441

Prepaid expenses and other current assets
13,647

 
24,214

 
225,412

 
(56,790
)
 
206,483

Total current assets
13,647

 
430,328

 
1,785,272

 
(56,790
)
 
2,172,457

Intercompany receivables, net

 

 
2,056,783

 
(2,056,783
)
 

Property, buildings and equipment, net

 
51,824

 
105,783

 

 
157,607

Intangible assets, net

 
3,417

 
389,945

 

 
393,362

Goodwill

 
244,648

 
1,476,066

 

 
1,720,714

Investments in affiliates
3,584,857

 
4,018,661

 

 
(7,603,518
)
 

Other assets

 
23,846

 
22,998

 

 
46,844

Total assets
$
3,598,504

 
$
4,772,724

 
$
5,836,847

 
$
(9,717,091
)
 
$
4,490,984

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
381,795

 
$
302,926

 
$

 
$
684,721

Short-term debt

 

 
20,920

 

 
20,920

Other current liabilities

 
53,458

 
194,488

 
(56,790
)
 
191,156

Total current liabilities

 
435,253

 
518,334

 
(56,790
)
 
896,797

Intercompany payables, net
1,572,486

 
484,297

 

 
(2,056,783
)
 

Long-term debt, net

 
983,449

 
379,686

 

 
1,363,135

Other noncurrent liabilities
12,737

 
46,476

 
161,827

 

 
221,040

Total WESCO International, Inc. stockholders' equity
2,013,281

 
2,823,249

 
4,780,269

 
(7,603,518
)
 
2,013,281

Noncontrolling interests

 

 
(3,269
)
 

 
(3,269
)
Total liabilities and stockholders’ equity
$
3,598,504

 
$
4,772,724

 
$
5,836,847

 
$
(9,717,091
)
 
$
4,490,984


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, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
843,518

 
$
1,100,661

 
$
(34,555
)
 
$
1,909,624

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
683,064

 
895,001

 
(34,555
)
 
1,543,510

Selling, general and administrative expenses

 
134,730

 
132,558

 

 
267,288

Depreciation and amortization

 
4,583

 
11,138

 

 
15,721

Results of affiliates’ operations
49,535

 
40,753

 

 
(90,288
)
 

Interest expense (income), net

 
28,518

 
(11,702
)
 

 
16,816

Income tax (benefit) expense

 
(1,862
)
 
18,616

 

 
16,754

Net income
49,535

 
35,238

 
55,050

 
(90,288
)
 
49,535

Net income attributable to noncontrolling interests

 

 
25

 

 
25

Net income attributable to WESCO International, Inc.
$
49,535

 
$
35,238

 
$
55,025

 
$
(90,288
)
 
$
49,510

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
33,381

 
33,381

 
33,381

 
(66,762
)
 
33,381

Comprehensive income attributable to WESCO International, Inc.
$
82,916

 
$
68,619

 
$
88,406

 
$
(157,050
)
 
$
82,891

 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Three Months Ended
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
853,028

 
$
1,087,050

 
$
(28,496
)
 
$
1,911,582

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
682,808

 
877,801

 
(28,496
)
 
1,532,113

Selling, general and administrative expenses
11

 
142,942

 
131,570

 

 
274,523

Depreciation and amortization

 
5,098

 
11,861

 

 
16,959

Results of affiliates’ operations
54,511

 
42,518

 

 
(97,029
)
 

Interest expense (income), net
6,333

 
20,845

 
(7,726
)
 

 
19,452

Income tax (benefit) expense
(1,685
)
 
(1,108
)
 
21,476

 

 
18,683

Net income
49,852

 
44,961

 
52,068

 
(97,029
)
 
49,852

Net income attributable to noncontrolling interests

 

 
54

 

 
54

Net income attributable to WESCO International, Inc.
$
49,852

 
$
44,961

 
$
52,014

 
$
(97,029
)
 
$
49,798

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,765
)
 
(1,765
)
 
(1,765
)
 
3,530

 
(1,765
)
Comprehensive income attributable to WESCO International, Inc.
$
48,087

 
$
43,196

 
$
50,249

 
$
(93,499
)
 
$
48,033



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, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
1,622,129

 
$
2,120,315

 
$
(60,229
)
 
$
3,682,215

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
1,304,812

 
1,721,500

 
(60,229
)
 
2,966,083

Selling, general and administrative expenses

 
269,986

 
264,266

 

 
534,252

Depreciation and amortization

 
9,336

 
22,350

 

 
31,686

Results of affiliates’ operations
87,334

 
75,181

 

 
(162,515
)
 

Interest expense (income), net

 
49,525

 
(15,988
)
 

 
33,537

Income tax (benefit) expense

 
(2,898
)
 
32,221

 

 
29,323

Net income
87,334

 
66,549

 
95,966

 
(162,515
)
 
87,334

Net income attributable to noncontrolling interests

 

 
96

 

 
96

Net income attributable to WESCO International, Inc.
$
87,334

 
$
66,549

 
$
95,870

 
$
(162,515
)
 
$
87,238

Other comprehensive income:

 


 


 


 


Foreign currency translation adjustments
44,949

 
44,949

 
44,949

 
(89,898
)
 
44,949

Post retirement benefit plan adjustment
252

 
252

 
252

 
(504
)
 
252

Comprehensive income attributable to WESCO International, Inc.
$
132,535

 
$
111,750

 
$
141,071

 
$
(252,917
)
 
$
132,439


17

   
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, 2016
 
 
 
 
 
 
 
 
 
 
(In thousands of dollars)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
1,653,518

 
$
2,087,095

 
$
(53,070
)
 
$
3,687,543

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
1,322,481

 
1,683,495

 
(53,070
)
 
2,952,906

Selling, general and administrative expenses
(366
)
 
223,149

 
321,026

 

 
543,809

Depreciation and amortization

 
10,203

 
23,129

 

 
33,332

Results of affiliates’ operations
92,970

 
33,834

 

 
(126,804
)
 

Interest expense (income), net
12,651

 
39,704

 
(14,074
)
 

 
38,281

Income tax (benefit) expense
(3,702
)
 
16,939

 
21,591

 

 
34,828

Net income
84,387

 
74,876

 
51,928

 
(126,804
)
 
84,387

Net loss attributable to noncontrolling interests

 

 
(1,465
)
 

 
(1,465
)
Net income attributable to WESCO International, Inc.
$
84,387

 
$
74,876

 
$
53,393

 
$
(126,804
)
 
$
85,852

Other comprehensive income:

 


 


 


 


Foreign currency translation adjustments
80,505

 
80,505

 
80,505

 
(161,010
)
 
80,505

Post retirement benefit plan adjustment
(16
)
 
(16
)
 
(16
)
 
32

 
(16
)
Comprehensive income attributable to WESCO International, Inc.
$
164,876

 
$
155,365

 
$
133,882

 
$
(287,782
)
 
$
166,341


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, 2017
 
 
 
 
 
 
 
 
 
 
(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
$
9,117

 
$
73,130

 
$
(15,478
)
 
$

 
$
66,769

Investing activities:

 

 

 

 

Capital expenditures

 
(4,259
)
 
(5,536
)
 

 
(9,795
)
Dividends received from subsidiaries

 
33,818

 

 
(33,818
)
 

Other

 
(72,761
)
 
12,322

 
63,906

 
3,467

Net cash (used in) provided by investing activities

 
(43,202
)
 
6,786

 
30,088

 
(6,328
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
47,548

 
313,749

 
442,674

 
(72,636
)
 
731,335

Repayments

 
(348,478
)
 
(420,847
)
 
8,730

 
(760,595
)
Repurchases of common stock
(56,665
)
 

 

 

 
(56,665
)
Dividends paid by subsidiaries

 

 
(33,818
)
 
33,818

 

Other

 
(613
)
 

 

 
(613
)
Net cash used in financing activities
(9,117
)
 
(35,342
)
 
(11,991
)
 
(30,088
)
 
(86,538
)
Effect of exchange rate changes on cash and cash equivalents

 

 
3,765

 

 
3,765

Net change in cash and cash equivalents

 
(5,414
)
 
(16,918
)
 

 
(22,332
)
Cash and cash equivalents at the beginning of period

 
41,552

 
68,579

 

 
110,131

Cash and cash equivalents at the end of period
$

 
$
36,138

 
$
51,661

 
$

 
$
87,799


19

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


 
Condensed Consolidating Statement of Cash Flows
 
Six Months Ended
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
(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
$
(233
)
 
$
(236,891
)
 
$
375,734

 
$

 
$
138,610

Investing activities:

 

 

 

 

Capital expenditures

 
(5,507
)
 
(1,579
)
 

 
(7,086
)
Acquisition payments, net of cash acquired

 
(50,946
)
 

 

 
(50,946
)
Dividends received from subsidiaries

 
31,234

 

 
(31,234
)
 

Other

 
(23,477
)
 
627

 
14,747

 
(8,103
)
Net cash used in investing activities

 
(48,696
)
 
(952
)
 
(16,487
)
 
(66,135
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
973

 
919,017

 
193,624

 
(23,477
)
 
1,090,137

Repayments

 
(636,747
)
 
(537,712
)
 
8,730

 
(1,165,729
)
Dividends paid by subsidiaries

 

 
(31,234
)
 
31,234

 

Other
(740
)
 
152

 

 

 
(588
)
Net cash provided by (used in) financing activities
233

 
282,422

 
(375,322
)
 
16,487

 
(76,180
)
Effect of exchange rate changes on cash and cash equivalents

 

 
3,716

 

 
3,716

Net change in cash and cash equivalents

 
(3,165
)
 
3,176

 

 
11

Cash and cash equivalents at the beginning of period

 
38,963

 
121,316

 

 
160,279

Cash and cash equivalents at the end of period
$

 
$
35,798

 
$
124,492

 
$

 
$
160,290

11. SUBSEQUENT EVENTS
The Company evaluated subsequent events 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.


20


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 2016 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, 2016, as well as the Company’s other reports filed with the Securities and Exchange Commission.
Company Overview
WESCO International, Inc. (“WESCO International”), incorporated in 1993 and effectively formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American-based distributor of products and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility, and commercial, institutional and government (“CIG”) markets. We are a leading provider of electrical, industrial, and communications maintenance, repair and operating (MRO) and original equipment manufacturer (OEM) products, construction materials, and advanced supply chain management and logistics services. Our primary product categories include general supplies, wire, cable and conduit, communications and security, electrical distribution and controls, lighting and sustainability, and automation, controls and motors.
We serve approximately 75,000 active customers globally through approximately 500 full service branches located primarily in North America, with operations in 14 additional countries and nine distribution centers located in the United States and Canada. The Company employs approximately 9,000 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 2017 reflect improving momentum in certain end markets and geographies, as well as effective execution of cost management and supply chain initiatives, despite a challenging and demand-constrained pricing environment. Net sales decreased $5.3 million, or 0.1%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.6% and 80.1% for the first six months of 2017 and 2016, respectively. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 14.5% and 14.7% for the first six months of 2017 and 2016, respectively. Operating profit was $150.2 million for the current six month period, compared to $157.5 million for the first six months of 2016. Operating profit decreased due to lower margins, partially offset by lower SG&A expenses. Net income attributable to WESCO International, Inc. for the six months ended June 30, 2017 and 2016 was $87.3 million and $85.9 million, respectively.
Cash Flow
We generated $66.8 million of operating cash flow for the first six months of 2017. Investing activities primarily consisted of capital expenditures of $9.8 million. Financing activities were comprised of borrowings and repayments of $345.9 million and $341.9 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $316.2 million and $320.2 million, respectively, related to our accounts receivable securitization facility (the “Receivables Facility”) and repayments of $30.0 million applied to our term loan facility (the "Term Loan Facility"). Financing activities for the first six months of 2017 also included borrowings and repayments on our various international lines of credit of approximately $69.3 million and $68.5 million, respectively. Additionally, financing activities for the first six months of 2017 included the repurchase of $50.0 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 2017 and 2016 was $57.0 million and $131.5 million, respectively.

21


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


The following table sets forth the components of free cash flow:
 
Six Months Ended
Free Cash Flow:
June 30,
2017
 
June 30,
2016
 
 
 
 
Cash flow provided by operations
$
66.8

 
$
138.6

Less: Capital expenditures
(9.8
)
 
(7.1
)
Free cash flow
$
57.0

 
$
131.5

Note: Free cash flow is a non-GAAP financial measure of liquidity. Capital expenditures are deducted from operating cash flow to determine free cash flow. Free cash flow is available to fund other investing and financing activities.
Financing Availability
As of June 30, 2017, we had $562.0 million in total available borrowing capacity under our Revolving Credit Facility, which matures in September 2020, and $141.7 million in available borrowing capacity under our Receivables Facility, which matures in September 2018.
Critical Accounting Policies and Estimates
During the three months ended March 31, 2017, the Company adopted ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. See Note 2 of our Notes to the Condensed Consolidated Financial Statements for information regarding our critical accounting policies.
Results of Operations
Second Quarter of 2017 versus