Document
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, 2018
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
 
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 November 1, 2018, 46,691,008 shares of common stock, $0.01 par value, of the registrant were outstanding.



WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


QUARTERLY REPORT ON FORM 10-Q

Table of Contents
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 



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 unaudited Condensed Consolidated Financial Statements and Notes thereto in this Quarterly Report on Form 10-Q, as follows:
 
Page
 
 


2


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
(unaudited)
 
As of
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
142,760

 
$
117,953

Trade accounts receivable, net of allowance for doubtful accounts of $25,272 and $21,313 in 2018 and 2017, respectively
1,265,880

 
1,170,080

Other accounts receivable
80,676

 
101,229

Inventories
926,768

 
956,148

Prepaid expenses and other current assets
90,415

 
63,439

Total current assets
2,506,499

 
2,408,849

Property, buildings and equipment, net of accumulated depreciation of $289,273 and $278,455 in 2018 and 2017, respectively
157,129

 
156,445

Intangible assets, net of accumulated amortization of $248,797 and $223,554 in 2018
and 2017, respectively
334,026

 
367,104

Goodwill
1,755,292

 
1,771,877

Other assets
25,845

 
31,193

    Total assets
$
4,778,791

 
$
4,735,468

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
813,395

 
$
799,520

Accrued payroll and benefit costs
73,074

 
72,686

Short-term debt
31,125

 
34,075

Current portion of long-term debt
1,179

 
1,224

Bank overdrafts
30,266

 
37,644

Other current liabilities
102,489

 
95,820

Total current liabilities
1,051,528

 
1,040,969

Long-term debt, net of debt discount and debt issuance costs of $10,596 and $14,224 in 2018 and 2017, respectively
1,229,314

 
1,313,261

Deferred income taxes
147,048

 
136,858

Other noncurrent liabilities
119,064

 
128,237

    Total liabilities
$
2,546,954

 
$
2,619,325

Commitments and contingencies (Note 10)



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, 59,152,810 and 59,045,762 shares issued and 46,753,475 and 47,009,540 shares outstanding in 2018 and 2017, respectively
592

 
591

Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2018 and 2017, respectively
43

 
43

Additional capital
1,006,222

 
999,156

Retained earnings
2,249,327

 
2,079,697

Treasury stock, at cost; 16,738,766 and 16,375,653 shares in 2018 and 2017, respectively
(669,212
)
 
(647,158
)
Accumulated other comprehensive loss
(349,619
)
 
(312,590
)
Total WESCO International, Inc. stockholders' equity
2,237,353

 
2,119,739

Noncontrolling interests
(5,516
)
 
(3,596
)
    Total stockholders’ equity
2,231,837

 
2,116,143

    Total liabilities and stockholders’ equity
$
4,778,791

 
$
4,735,468


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
 
Nine Months Ended
 
September 30
 
September 30
 
2018
 
2017
 
2018
 
2017
Net sales (Note 3)
$
2,067,245

 
$
2,000,159

 
$
6,165,154

 
$
5,682,375

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
amortization)
1,670,037

 
1,614,814

 
4,988,103

 
4,580,896

Selling, general and administrative expenses (Note 8)
284,073

 
280,497

 
867,790

 
815,653

Depreciation and amortization
15,618

 
16,074

 
47,321

 
47,758

Income from operations
97,517

 
88,774

 
261,940

 
238,068

Net interest and other (Notes 8 and 9)
17,050

 
16,835

 
54,574

 
49,469

Income before income taxes
80,467

 
71,939

 
207,366

 
188,599

Provision for income taxes
13,822

 
18,363

 
40,077

 
47,684

Net income
66,645

 
53,576

 
167,289

 
140,915

Less: Net loss attributable to noncontrolling interests
(204
)
 
(99
)
 
(1,921
)
 
(3
)
Net income attributable to WESCO International, Inc.
$
66,849

 
$
53,675

 
$
169,210

 
$
140,918

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
20,486

 
51,148

 
(37,029
)
 
96,097

Post retirement benefit plan adjustments, net of tax

 

 

 
252

Comprehensive income attributable to WESCO International, Inc.
$
87,335

 
$
104,823

 
$
132,181

 
$
237,267

 
 
 
 
 
 
 
 
Earnings per share attributable to WESCO International, Inc.
 
 
 
 
 
 
 
Basic
$
1.42

 
$
1.13

 
$
3.60

 
$
2.93

Diluted
$
1.41

 
$
1.12

 
$
3.56

 
$
2.90


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
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
167,289

 
$
140,915

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
47,321

 
47,758

  Deferred income taxes
12,194

 
8,433

Other operating activities, net
7,590

 
12,617

Changes in assets and liabilities:
 
 
 
Trade accounts receivable, net
(104,215
)
 
(174,667
)
Other accounts receivable
19,859

 
4,421

Inventories
23,189

 
(86,736
)
Prepaid expenses and other assets
(22,088
)
 
(8,515
)
Accounts payable
18,235

 
138,348

Accrued payroll and benefit costs
2,788

 
2,383

Other current and noncurrent liabilities
2,298

 
(3,846
)
Net cash provided by operating activities
174,460

 
81,111

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(23,749
)
 
(15,970
)
Other investing activities
3,609

 
3,490

Net cash used in investing activities
(20,140
)
 
(12,480
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of short-term debt
116,775

 
130,890

Repayments of short-term debt
(119,239
)
 
(114,972
)
Proceeds from issuance of long-term debt
994,323

 
1,079,718

Repayments of long-term debt
(1,081,323
)
 
(1,076,718
)
Repurchases of common stock (Note 7)
(27,055
)
 
(106,702
)
Other financing activities, net
(8,301
)
 
(4,380
)
Net cash used in financing activities
(124,820
)
 
(92,164
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,693
)
 
7,485

 
 
 
 
Net change in cash and cash equivalents
24,807

 
(16,048
)
Cash and cash equivalents at the beginning of period
117,953

 
110,131

Cash and cash equivalents at the end of period
$
142,760

 
$
94,083

Supplemental disclosures:
 
 
 
Cash paid for interest
$
37,138

 
$
35,344

Cash paid for income taxes
48,744

 
50,909


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 70,000 active customers globally through approximately 500 branches and 10 distribution centers located primarily in the United States and Canada, 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 2017 Annual Report on Form 10-K as filed with the SEC on February 22, 2018. The Condensed Consolidated Balance Sheet at December 31, 2017 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, 2018, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2018 and 2017, respectively, and the unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, 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.
Reclassifications
Effective January 1, 2018, WESCO adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The adoption of this ASU, as described below and in Note 8, resulted in the reclassification of amounts reported in the unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2017.
Recently Adopted Accounting Pronouncements
Effective January 1, 2018, WESCO adopted ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments (“Topic 606”) using the modified retrospective approach to all open contracts. There was no impact to WESCO’s previously reported consolidated financial statements and WESCO does not expect the adoption of Topic 606 to have a material impact on its revenue and results of operations on an ongoing basis.
WESCO’s significant accounting policies are disclosed in Note 2 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017. Changes to the Company’s significant accounting policies as a result of adopting Topic 606 are described in Note 3 below.
In August 2016, the Financial Accounting Standards Board (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 Company adopted this ASU in the first quarter of 2018. The adoption of this guidance did not have an impact on the unaudited condensed consolidated financial information presented herein.
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. This ASU requires that an employer disaggregate the service cost from the other components of net benefit cost. The Company adopted this guidance on a retrospective basis in the first quarter of 2018. See Note 8 for a description of the impact of this accounting standard on the unaudited Condensed Consolidated Statements of Income and Comprehensive Income presented herein. The adoption of this guidance did not have an impact on the Company's unaudited Condensed Consolidated Balance Sheets and the unaudited Condensed Consolidated Statements of Cash Flows presented herein.

6

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


In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU 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 Company adopted this ASU in the first quarter of 2018. The adoption of this guidance did not have an impact on the unaudited condensed consolidated financial information presented herein.
Recently Issued Accounting Pronouncements
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 in the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. During 2018, the FASB issued additional ASUs that address implementation issues and correct or improve certain aspects of the new accounting guidance for leases, including ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. These ASUs do not change the core principles in the leasing standard outlined above. The amendments in ASU 2018-11 provide an optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods will continue to be in accordance with current lease accounting guidance. Management established a cross-functional team to evaluate and implement the new standard. The team selected a third-party software solution to facilitate the accounting and financial reporting requirements of the new lease standard. Lease data elements have been gathered and are currently being migrated to the software solution. The new standard will be adopted in the first quarter of 2019 and the Company expects to use the optional transition method. While the Company has not yet completed its evaluation of the effects of adopting this ASU, right-of-use assets and lease liabilities will be recorded in the Consolidated Balance Sheets as of the effective date and thereafter.
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 this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its 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 of the goodwill impairment test. Under the amendments in this ASU, 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 expects to adopt this ASU in the fourth quarter of 2018 when the Company performs its annual impairment testing. The Company does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying and adding certain disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the disclosure requirements for all employers that sponsor defined benefit pension and other post retirement plans by removing and adding certain disclosures. The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
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.

7

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


3. REVENUE
WESCO’s revenue arrangements generally consist of single performance obligations to transfer a promised good or service, or a combination of goods and services. Revenue is recognized when control has transferred to the customer, which is generally when the product has shipped from a WESCO facility or directly from a supplier. For products that ship directly from suppliers to customers, WESCO acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue for integrated supply services is recognized over time based on hours incurred. This method reflects the transfer of control as the customer benefits from these services as they are being performed. WESCO generally satisfies its performance obligations within a year or less.
WESCO generally does not have significant financing terms associated with its contracts; payments are normally received within 60 days. There are no significant costs associated with obtaining customer contracts. WESCO generally passes through the warranties offered by the applicable manufacturer or supplier to its customers. Sales taxes (and value added taxes in foreign jurisdictions) collected from customers and remitted to governmental authorities are excluded from net sales.
The following tables disaggregate WESCO’s revenue by end market and geography:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
(In thousands)
2018
 
2017
 
2018
 
2017
Industrial
$
723,869

 
$
722,227

 
$
2,243,590

 
$
2,111,813

Construction
686,165

 
674,996

 
2,007,708

 
1,870,406

Utility
345,937

 
312,501

 
998,438

 
861,162

Commercial, Institutional and Government ("CIG")
311,274

 
290,435

 
915,418

 
838,994

Total by end market
$
2,067,245

 
$
2,000,159

 
$
6,165,154

 
$
5,682,375

 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
(In thousands)
2018
 
2017
 
2018
 
2017
United States
$
1,525,393

 
$
1,473,016

 
$
4,571,533

 
$
4,267,684

Other (1)
541,852

 
527,143

 
1,593,621

 
1,414,691

Total by geography
$
2,067,245

 
$
2,000,159

 
$
6,165,154

 
$
5,682,375

(1) 
Other primarily includes net sales originating in Canada.
WESCO distributes products and provides services to customers globally within the following end markets: (1) industrial, (2) construction, (3) utility, and (4) CIG. Revenue is measured as the amount of consideration WESCO expects to receive in exchange for transferring goods or providing services.
In accordance with certain contractual arrangements, WESCO receives payment from its customers in advance and recognizes such payment as deferred revenue. Revenue for advance payment is recognized when the performance obligation has been satisfied and control has transferred to the customer, which is generally upon shipment. Deferred revenue is usually recognized within a year or less from the date of the customer’s advance payment. At September 30, 2018 and December 31, 2017, $8.8 million and $15.5 million, respectively, of deferred revenue was recorded as a component of other current liabilities in the Condensed Consolidated Balance Sheets.
WESCO’s revenues are adjusted for variable consideration, which includes customer volume rebates, returns, and discounts. WESCO measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, as well as current and forecasted information. Measurement and recognition of variable consideration is reviewed by management on a monthly basis and revenue is adjusted accordingly. Variable consideration reduced revenue for the three months ended September 30, 2018 and 2017 by approximately $25.1 million and $24.2 million, respectively, and by approximately $74.5 million and $66.5 million for the nine months ended September 30, 2018 and 2017, respectively.
Shipping and handling costs are recognized in net sales when they are billed to the customer. These costs are recognized as a component of selling, general and administrative expenses when WESCO does not bill the customer. WESCO has elected to recognize shipping and handling costs as a fulfillment cost. Shipping and handling costs recorded as a component of selling, general

8

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


and administrative expenses totaled $18.8 million and $15.5 million for the three months ended September 30, 2018 and 2017, respectively, and $55.6 million and $43.2 million for the nine months ended September 30, 2018 and 2017, respectively.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank overdrafts, and outstanding indebtedness. The reported carrying amounts of WESCO's financial instruments approximated their fair values as of September 30, 2018 and December 31, 2017.
The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the Company's debt instruments are classified as Level 2 within the fair value hierarchy.
5. GOODWILL
The following table sets forth the changes in the carrying value of goodwill:
 
Nine Months Ended
 
September 30
(In thousands)
2018
Beginning balance January 1
$
1,771,877

Foreign currency exchange rate changes
(16,585
)
Ending balance September 30
$
1,755,292

6. 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.
Effective January 1, 2018, performance-based awards are based on two equally-weighted performance measures, which include the three-year average growth rate of the Company’s fully diluted earnings per share and the three-year cumulative return on net assets. From 2015 to 2017, the two equally-weighted performance-based award metrics were the three-year average growth rate of WESCO's net income and WESCO's total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period.
During the three and nine months ended September 30, 2018 and 2017, 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
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Stock-settled stock appreciation rights granted
9,415

 
12,076

 
509,046

 
455,807

Weighted-average fair value
$
17.40

 
$
15.74

 
$
18.38

 
$
20.52

 
 
 
 
 
 
 
 
Restricted stock units granted
2,686

 
2,313

 
119,457

 
100,993

Weighted-average fair value
$
61.41

 
$
57.30

 
$
62.72

 
$
71.33

 
 
 
 
 
 
 
 
Performance-based awards granted

 

 
44,144

 
39,978

Weighted-average fair value
$

 
$

 
$
62.80

 
$
76.63


9

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


The fair value of stock-settled stock appreciation rights was estimated using the following weighted-average assumptions:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Risk free interest rate
2.8
%
 
1.8
%
 
2.5
%
 
1.9
%
Expected life (in years)
5

 
5

 
5

 
5

Expected volatility
28
%
 
28
%
 
28
%
 
29
%
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve 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 nine months ended September 30, 2018:
 
Awards
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term (In years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2017
2,238,607

 
$
57.75

 
 
 
 
     Granted
509,046

 
62.68

 
 
 
 
     Exercised
(186,662
)
 
40.73

 
 
 
 
     Forfeited
(168,824
)
 
69.12

 
 
 
 
Outstanding at September 30, 2018
2,392,167

 
59.32

 
6.3
 
$
16,779

Exercisable at September 30, 2018
1,476,763

 
$
58.03

 
4.9
 
$
13,566

The following table sets forth a summary of time-based restricted stock units and related information for the nine months ended September 30, 2018:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2017
290,054

 
$
58.11

     Granted
119,457

 
62.72

     Vested
(59,905
)
 
68.78

     Forfeited
(14,539
)
 
57.09

Unvested at September 30, 2018
335,067

 
$
57.89


10

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


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, 2018:
 
Awards
 
Weighted-
Average
Fair
Value
Unvested at December 31, 2017
148,508

 
$
60.23

     Granted
44,144

 
62.80

     Vested

 

     Forfeited
(52,342
)
 
65.15

Unvested at September 30, 2018
140,310

 
$
59.20

The fair value of the performance shares granted during the nine months ended September 30, 2018 and 2017 was estimated using the following weighted-average assumptions:
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
Grant date share price
$
62.80

 
$
71.65

WESCO expected volatility
n/a

 
29
%
Peer group median volatility
n/a

 
24
%
Risk-free interest rate
n/a

 
1.5
%
Correlation of peer company returns
n/a

 
114
%
The unvested performance-based awards in the table above include 48,805 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 91,505 shares of performance-based awards in the table above is dependent upon the achievement of certain performance targets, including 48,805 that are dependent upon the three-year average growth rate of WESCO's net income, 21,350 that are dependent upon the three-year average growth rate of the Company's fully diluted earnings per share, and 21,350 that are based upon the three-year cumulative return on net assets. 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 $3.5 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended September 30, 2018 and 2017, respectively. WESCO recognized $12.1 million and $11.3 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $22.9 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $4.1 million is expected to be recognized over the remainder of 2018, $11.8 million in 2019, $6.3 million in 2020 and $0.7 million in 2021.
7. 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.

11

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


The following table sets forth the details of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
(In thousands, except per share data)
2018
 
2017
 
2018
 
2017
Net income attributable to WESCO International
$
66,849

 
$
53,675

 
$
169,210

 
$
140,918

Weighted-average common shares outstanding used in computing basic earnings per share
47,010

 
47,415

 
47,044

 
48,134

Common shares issuable upon exercise of dilutive equity awards
476

 
389

 
503

 
508

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

47,486

 
47,804

 
47,547

 
48,642

Earnings per share attributable to WESCO International
 
 
 
 
 
 
 
Basic
$
1.42

 
$
1.13

 
$
3.60

 
$
2.93

Diluted
$
1.41

 
$
1.12

 
$
3.56

 
$
2.90

For the three and nine months ended September 30, 2018 the computation of diluted earnings per share attributable to WESCO International excluded stock-based awards of approximately 1.7 million and 1.5 million, respectively. For the three and nine months ended September 30, 2017, the computation of diluted earnings per share attributable to WESCO International excluded stock-based awards of approximately 1.5 million and 1.3 million, respectively. These amounts were excluded because their effect would have been antidilutive.
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 (the "2014 Repurchase Authorization"). During the nine months ended September 30, 2017, the Company repurchased 1,778,537 shares under the 2014 Repurchase Authorization for $100.0 million.
In December 2017, the Company's Board of Directors authorized the repurchase of up to $300 million of the Company's common stock through December 31, 2020 (the "2017 Repurchase Authorization"). On September 6, 2018, the Company entered into an accelerated stock repurchase agreement (the "ASR Transaction") with a financial institution to repurchase additional shares of its common stock pursuant to its 2017 Repurchase Authorization. In exchange for an up-front cash payment of $25.0 million, the Company received an initial share delivery of 351,821 shares. As of September 30, 2018, the ASR Transaction had not yet settled between the counterparties. The total number of shares ultimately delivered under the ASR Transaction will be 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. For purposes of computing earnings per share for the three and nine months ended September 30, 2018 and 2017, share repurchases were reflected as a reduction to common shares outstanding on the respective delivery dates. WESCO funded the repurchase with available cash and borrowings under the Company's accounts receivable securitization facility.
8. 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 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 nine months ended September 30, 2018 and 2017, WESCO incurred charges of $33.5 million and $20.3 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 September 30, 2018 and December 31, 2017, the Company's obligation under the deferred compensation plan was $23.8 million and $24.3 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.
The Company sponsors a contributory defined benefit plan covering substantially all Canadian employees of EECOL and a Supplemental Executive Retirement Plan (the "SERP") for certain executives of EECOL. During the three and nine months ended September 30, 2018, the Company contributed $0.1 million and $0.3 million, respectively, to the SERP.

12

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


The following table sets forth the components of net periodic benefit costs for the defined benefit plans:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
(In thousands)
2018
 
2017
 
2018
 
2017
Service cost
$
1,296

 
$
1,118

 
$
3,955

 
$
3,234

Interest cost
1,026

 
1,007

 
3,131

 
2,915

Expected return on plan assets
(1,482
)
 
(1,432
)
 
(4,522
)
 
(4,144
)
Recognized actuarial gain
(11
)
 
(51
)
 
(35
)
 
(149
)
Net periodic benefit cost
$
829

 
$
642

 
$
2,529

 
$
1,856

In accordance with ASU 2017-07, as described in Note 2, the service cost of $1.3 million and $4.0 million for the three and nine months ended September 30, 2018, respectively, was reported as a component of selling, general and administrative expenses. The other components of net periodic benefit cost totaling a net benefit of $0.5 million and $1.4 million for the three and nine months ended September 30, 2018, respectively, were presented as a component of net interest and other, as described in Note 9 below. For the three and nine months ended September 30, 2017, the Company reclassified a net benefit of $0.5 million and $1.4 million, respectively, from selling, general and administrative expenses to net interest and other. The Company used the amounts disclosed in Note 7 of the Notes to Condensed Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 as the estimation basis for applying the retrospective presentation requirements.
9. NET INTEREST AND OTHER
Net interest and other includes interest expense, interest income, amortization of debt discount and debt issuance costs, the non-service cost components of net periodic benefit cost, and foreign exchange gains and losses from the remeasurement of certain financial instruments. For the three and nine months ended September 30, 2018, a foreign exchange gain of less than $0.1 million and a foreign exchange loss of $2.6 million, respectively, from the remeasurement of financial instruments were reported as a component of net interest and other. Foreign exchange gains and losses were not material for the three and nine months ended September 30, 2017.
10. COMMITMENTS AND CONTINGENCIES
From time to time, a number of lawsuits and claims have been or may be asserted against us relating to the conduct of our business, including routine litigation relating to commercial and employment matters. The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to us. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on our results of operations for that period.
11. INCOME TAXES
The effective tax rate for the three and nine months ended September 30, 2018 was 17.2% and 19.3%, respectively. The effective tax rate for the three and nine months ended September 30, 2017 was 25.5% and 25.3%, respectively. WESCO’s effective tax rate is typically impacted by the tax effect of intercompany financing, foreign tax rate differences, other nondeductible expenses and state income taxes. The effective tax rates for the current year periods are lower than the prior year periods primarily due to the Tax Cuts and Jobs Act of 2017 (the "TCJA"), which permanently reduced the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018. Also, the discrete benefits resulting from audit settlements favorably impacted the effective tax rate for the three months ended September 30, 2018.
The unaudited condensed consolidated financial information presented herein reflects provisional amounts for certain income tax effects of the TCJA for which the accounting is incomplete, but a reasonable estimate can be determined, based on enacted tax laws and rates as of September 30, 2018. Since the enactment of the TCJA on December 22, 2017, the Internal Revenue Service has issued proposed regulations and guidance regarding Section 965 of the Internal Revenue Code, as amended by the TCJA. We have reviewed the proposed regulations and guidance, and they do not materially impact the provisional amounts previously recorded for the one-time tax on the deemed repatriation of undistributed foreign earnings. Future adjustments (if any) resulting

13

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


from additional regulatory guidance will be recognized as discrete income tax expense or benefit in the period the adjustments are determined.
The total amount of unrecognized tax benefits was reduced from $4.3 million to $1.6 million during the nine months ended September 30, 2018 due to audit settlements. The $1.6 million could affect the effective tax rate if recognized in the consolidated financial statements. It is reasonably possible that this amount will decrease by approximately $0.2 million within the next twelve months due to the expiration of statutes of limitation and the settlement of state audits.
12. 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, WESCO Distribution and the non-guarantor subsidiaries is presented in the following tables.
 
Condensed Consolidating Balance Sheet
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
57,052

 
$
85,708

 
$

 
$
142,760

Trade accounts receivable, net

 

 
1,265,880

 

 
1,265,880

Inventories

 
411,252

 
515,516

 

 
926,768

Prepaid expenses and other current assets
4,943

 
42,568

 
132,620

 
(9,040
)
 
171,091

Total current assets
4,943

 
510,872

 
1,999,724

 
(9,040
)
 
2,506,499

Intercompany receivables, net

 

 
2,270,584

 
(2,270,584
)
 

Property, buildings and equipment, net

 
56,351

 
100,778

 

 
157,129

Intangible assets, net

 
2,291

 
331,735

 

 
334,026

Goodwill

 
257,623

 
1,497,669

 

 
1,755,292

Investments in affiliates
3,188,872

 
5,144,891

 

 
(8,333,763
)
 

Other assets

 
2,780

 
23,065

 

 
25,845

Total assets
$
3,193,815

 
$
5,974,808

 
$
6,223,555

 
$
(10,613,387
)
 
$
4,778,791

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
412,989

 
$
400,406

 
$

 
$
813,395

Short-term debt

 

 
31,125

 

 
31,125

Other current liabilities

 
72,762

 
143,286

 
(9,040
)
 
207,008

Total current liabilities

 
485,751

 
574,817

 
(9,040
)
 
1,051,528

Intercompany payables, net
952,642

 
1,317,942

 

 
(2,270,584
)
 

Long-term debt, net

 
864,779

 
364,535

 

 
1,229,314

Other noncurrent liabilities
3,820

 
117,464

 
144,828

 

 
266,112

Total WESCO International stockholders' equity
2,237,353

 
3,188,872

 
5,144,891

 
(8,333,763
)
 
2,237,353

Noncontrolling interests

 

 
(5,516
)
 

 
(5,516
)
Total liabilities and stockholders’ equity
$
3,193,815

 
$
5,974,808

 
$
6,223,555

 
$
(10,613,387
)
 
$
4,778,791


14

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


 
Condensed Consolidating Balance Sheet
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Cash and cash equivalents
$

 
$
50,602

 
$
67,351

 
$

 
$
117,953

Trade accounts receivable, net

 

 
1,170,080

 

 
1,170,080

Inventories

 
430,092

 
526,056

 

 
956,148

Prepaid expenses and other current assets
4,730

 
42,547

 
152,531

 
(35,140
)
 
164,668

Total current assets
4,730

 
523,241

 
1,916,018

 
(35,140
)
 
2,408,849

Intercompany receivables, net

 

 
2,189,136

 
(2,189,136
)
 

Property, buildings and equipment, net

 
50,198

 
106,247

 

 
156,445

Intangible assets, net

 
2,770

 
364,334

 

 
367,104

Goodwill

 
257,623

 
1,514,254

 

 
1,771,877

Investments in affiliates
3,058,613

 
5,023,826

 

 
(8,082,439
)
 

Other assets

 
2,778

 
28,415

 

 
31,193

Total assets
$
3,063,343

 
$
5,860,436

 
$
6,118,404

 
$
(10,306,715
)
 
$
4,735,468

 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
417,690

 
$
381,830

 
$

 
$
799,520

Short-term debt

 

 
34,075

 

 
34,075

Other current liabilities

 
80,039

 
162,475

 
(35,140
)
 
207,374

Total current liabilities

 
497,729

 
578,380

 
(35,140
)
 
1,040,969

Intercompany payables, net
939,784

 
1,249,352

 

 
(2,189,136
)
 

Long-term debt, net

 
934,033

 
379,228

 

 
1,313,261

Other noncurrent liabilities
3,820

 
120,709

 
140,566

 

 
265,095

Total WESCO International stockholders' equity
2,119,739

 
3,058,613

 
5,023,826

 
(8,082,439
)
 
2,119,739

Noncontrolling interests

 

 
(3,596
)
 

 
(3,596
)
Total liabilities and stockholders’ equity
$
3,063,343

 
$
5,860,436

 
$
6,118,404

 
$
(10,306,715
)
 
$
4,735,468


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
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
899,994

 
$
1,206,174

 
$
(38,923
)
 
$
2,067,245

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
727,052

 
981,908

 
(38,923
)
 
1,670,037

Selling, general and administrative expenses

 
149,390

 
134,683

 

 
284,073

Depreciation and amortization

 
4,475

 
11,143

 

 
15,618

Results of affiliates’ operations
66,645

 
61,771

 

 
(128,416
)
 

Net interest and other

 
13,127

 
3,923

 

 
17,050

Income tax expense

 
1,076

 
12,746

 

 
13,822

Net income
66,645

 
66,645

 
61,771

 
(128,416
)
 
66,645

Net loss attributable to noncontrolling interests

 

 
(204
)
 

 
(204
)
Net income attributable to WESCO International
$
66,645

 
$
66,645

 
$
61,975

 
$
(128,416
)
 
$
66,849

Other comprehensive income:

 


 


 


 


Foreign currency translation adjustments
20,486

 
20,486

 
20,486

 
(40,972
)
 
20,486

Comprehensive income attributable to WESCO International
$
87,131

 
$
87,131

 
$
82,461

 
$
(169,388
)
 
$
87,335


16

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


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Nine Months Ended
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
2,703,468

 
$
3,578,653

 
$
(116,967
)
 
$
6,165,154

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
2,189,683

 
2,915,387

 
(116,967
)
 
4,988,103

Selling, general and administrative expenses

 
447,437

 
420,353

 

 
867,790

Depreciation and amortization

 
13,749

 
33,572

 

 
47,321

Results of affiliates’ operations
167,289

 
158,093

 

 
(325,382
)
 

Net interest and other

 
41,202

 
13,372

 

 
54,574

Income tax expense

 
2,201

 
37,876

 

 
40,077

Net income
167,289

 
167,289

 
158,093

 
(325,382
)
 
167,289

Net loss attributable to noncontrolling interests

 

 
(1,921
)
 

 
(1,921
)
Net income attributable to WESCO International
$
167,289

 
$
167,289

 
$
160,014

 
$
(325,382
)
 
$
169,210

Other comprehensive loss:

 


 


 


 


Foreign currency translation adjustments
(37,029
)
 
(37,029
)
 
(37,029
)
 
74,058

 
(37,029
)
Comprehensive income attributable to WESCO International
$
130,260

 
$
130,260

 
$
122,985

 
$
(251,324
)
 
$
132,181


17

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


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Three Months Ended
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
867,973

 
$
1,169,377

 
$
(37,191
)
 
$
2,000,159

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
697,896

 
954,109

 
(37,191
)
 
1,614,814

Selling, general and administrative expenses

 
140,638

 
139,859

 

 
280,497

Depreciation and amortization

 
4,475

 
11,599

 

 
16,074

Results of affiliates’ operations
53,576

 
42,726

 

 
(96,302
)
 

Net interest and other

 
25,436

 
(8,601
)
 

 
16,835

Income tax (benefit) expense

 
(136
)
 
18,499

 

 
18,363

Net income
53,576

 
42,390

 
53,912

 
(96,302
)
 
53,576

Net loss attributable to noncontrolling interests

 

 
(99
)
 

 
(99
)
Net income attributable to WESCO International
$
53,576

 
$
42,390

 
$
54,011

 
$
(96,302
)
 
$
53,675

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
51,148

 
51,148

 
51,148

 
(102,296
)
 
51,148

Comprehensive income attributable to WESCO International
$
104,724

 
$
93,538

 
$
105,159

 
$
(198,598
)
 
$
104,823

Reclassification
As described in Note 8, the Company reclassified a net benefit of $0.5 million from selling, general and administrative expenses to net interest and other in the previously reported Condensed Consolidated Statement of Income and Comprehensive Income of the non-guarantor subsidiaries for the three months ended September 30, 2017.



18

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


 
Condensed Consolidating Statement of Income and Comprehensive Income
 
Nine Months Ended
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Entries
 
Consolidated
Net sales
$

 
$
2,490,102

 
$
3,289,693

 
$
(97,420
)
 
$
5,682,375

Cost of goods sold (excluding depreciation and
 
 
 
 
 
 
 
 
 
amortization)

 
2,002,708

 
2,675,608

 
(97,420
)
 
4,580,896

Selling, general and administrative expenses

 
410,624

 
405,029

 

 
815,653

Depreciation and amortization

 
13,811

 
33,947

 

 
47,758

Results of affiliates’ operations
140,915

 
117,907

 

 
(258,822
)
 

Net interest and other

 
74,961

 
(25,492
)
 

 
49,469

Income tax (benefit) expense

 
(3,034
)
 
50,718

 

 
47,684

Net income
140,915

 
108,939

 
149,883

 
(258,822
)
 
140,915

Net loss attributable to noncontrolling interests

 

 
(3
)
 

 
(3
)
Net income attributable to WESCO International
$
140,915

 
$
108,939

 
$
149,886

 
$
(258,822
)
 
$
140,918

Other comprehensive income:

 


 


 


 


Foreign currency translation adjustments
96,097

 
96,097

 
96,097

 
(192,194
)
 
96,097

Post retirement benefit plan adjustments, net of tax
252

 
252

 
252

 
(504
)
 
252

Comprehensive income attributable to WESCO International
$
237,264

 
$
205,288

 
$
246,235

 
$
(451,520
)
 
$
237,267

Reclassification
As described in Note 8, the Company reclassified a net benefit of $1.4 million from selling, general and administrative expenses to net interest and other in the previously reported Condensed Consolidated Statement of Income and Comprehensive Income of the non-guarantor subsidiaries for the nine months ended September 30, 2017.

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, 2018
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash provided by operating activities
$
14,198

 
$
62,439

 
$
97,823

 
$

 
$
174,460

Investing activities:

 

 

 

 

Capital expenditures

 
(12,831
)
 
(10,918
)
 

 
(23,749
)
Dividends received from subsidiaries

 
118,271

 

 
(118,271
)
 

Other

 
(81,128
)
 
3,609

 
81,128

 
3,609

Net cash provided by (used in) investing activities

 
24,312

 
(7,309
)
 
(37,143
)
 
(20,140
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
12,857

 
246,323

 
933,046

 
(81,128
)
 
1,111,098

Repayments

 
(318,323
)
 
(882,239
)
 

 
(1,200,562
)
Repurchases of common stock
(27,055
)
 

 

 

 
(27,055
)
Dividends paid by subsidiaries

 

 
(118,271
)
 
118,271

 

Other

 
(8,301
)
 

 

 
(8,301
)
Net cash used in financing activities
(14,198
)
 
(80,301
)
 
(67,464
)
 
37,143

 
(124,820
)
Effect of exchange rate changes on cash and cash equivalents

 

 
(4,693
)
 

 
(4,693
)
Net change in cash and cash equivalents

 
6,450

 
18,357

 

 
24,807

Cash and cash equivalents at the beginning of period

 
50,602

 
67,351

 

 
117,953

Cash and cash equivalents at the end of period
$

 
$
57,052

 
$
85,708

 
$

 
$
142,760


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, 2017
 
 
 
 
 
 
 
 
 
 
(In thousands)
WESCO
International,
Inc.
 
WESCO
Distribution,
Inc.
 
Non-Guarantor
Subsidiaries
 
Consolidating
and Eliminating
Entries
 
Consolidated
Net cash (used in) provided by operating activities
$
(28,740
)
 
$
168,603

 
$
(58,752
)
 
$

 
$
81,111

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(7,435
)
 
(8,535
)
 

 
(15,970
)
Dividends received from subsidiaries

 
51,561

 

 
(51,561
)
 

Other

 
(174,032
)
 
16,711

 
160,811

 
3,490

Net cash (used in) provided by investing activities

 
(129,906
)
 
8,176

 
109,250

 
(12,480
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings
135,442

 
557,391

 
691,682

 
(173,907
)
 
1,210,608

Repayments

 
(587,485
)
 
(617,301
)
 
13,096

 
(1,191,690
)
Repurchases of common stock
(106,702
)
 

 

 

 
(106,702
)
Dividends paid by subsidiaries

 

 
(51,561
)
 
51,561

 

Other

 
(4,380
)
 

 

 
(4,380
)
Net cash provided by (used in) financing activities
28,740

 
(34,474
)
 
22,820

 
(109,250
)
 
(92,164
)
Effect of exchange rate changes on cash and cash equivalents

 

 
7,485

 

 
7,485

Net change in cash and cash equivalents

 
4,223

 
(20,271
)
 

 
(16,048
)
Cash and cash equivalents at the beginning of period

 
41,552

 
68,579

 

 
110,131

Cash and cash equivalents at the end of period
$

 
$
45,775

 
$
48,308

 
$

 
$
94,083

13. SUBSEQUENT EVENTS
On October 31, 2018, the Company's Board of Directors approved an increase to the 2017 Repurchase Authorization from $300 million to $400 million, inclusive of the $25 million repurchase disclosed in Note 7 of these Notes to Condensed Consolidated Financial Statements.

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 audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2017 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 WESCO International, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as well as WESCO International, Inc.’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 70,000 active customers globally through approximately 500 branches located primarily in the United States and Canada, with operations in 16 additional countries and 10 distribution centers located in the United States and Canada. We employ approximately 9,100 employees worldwide. We distribute over 1,000,000 products, grouped into six categories, from more than 26,000 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 2018 reflect sales growth, improved profitability as a result of favorable operating leverage, strong cash flow generation, as well as cost discipline and effective capital deployment. Net sales increased $482.8 million, or 8.5%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.9% and 80.6% for the first nine months of 2018 and 2017, respectively. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 14.1% and 14.4% for the first nine months of 2018 and 2017, respectively. Operating profit was $261.9 million for the current nine month period, compared to $238.1 million for the first nine months of 2017. Operating profit increased primarily due to higher sales volume and cost control initiatives. Net income attributable to WESCO International for the nine months ended September 30, 2018 and 2017 was $169.2 million and $140.9 million, respectively.
Cash Flow
We generated $174.5 million of operating cash flow for the first nine months of 2018. Investing activities mostly consisted of $23.7 million of capital expenditures. Financing activities were comprised of borrowings and repayments of $504.3 million and $516.3 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $490.0 million and $505.0 million, respectively, related to our accounts receivable securitization facility (the “Receivables Facility”) and repayments of $60.0 million applied to our term loan facility (the "Term Loan Facility"). Financing activities for the first nine months of 2018 also included borrowings and repayments on our various international lines of credit of approximately $116.8 million and $119.2 million, respectively. Additionally, financing activities for the first nine months of 2018 included the repurchase of $25.0 million of the Company's common stock pursuant to the share repurchase plan announced on December 13, 2017. Free cash flow for the first nine months of 2018 and 2017 was $150.8 million and $65.1 million, respectively.

22


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


The following table sets forth the components of free cash flow:
 
Nine Months Ended
(In millions)
September 30,
2018
 
September 30,
2017
Cash flow provided by operations
$
174.5

 
$
81.1

Less: Capital expenditures
(23.7
)
 
(16.0
)
Free cash flow
$
150.8

 
$
65.1

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 investing and financing activities.
Financing Availability
As of September 30, 2018, we had $562.8 million in total available borrowing capacity under our Revolving Credit Facility, which was comprised of $380.3 million of availability under the U.S. sub-facility and $182.5 million of availability under the Canadian sub-facility. Available borrowing capacity under our Receivables Facility was $185.0 million. The Revolving Credit Facility and the Receivables Facility both mature in September 2020.
Critical Accounting Policies and Estimates
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and all the related amendments, ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as well as certain other ASUs. See Note 2 of our Notes to the unaudited Condensed Consolidated Financial Statements for information regarding our critical accounting policies.
Results of Operations
Third Quarter of 2018 versus Third Quarter of 2017
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income and Comprehensive Income for the periods presented:
 
Three Months Ended
 
September 30
 
2018
 
2017
Net sales
100.0
%
 
100.0
%
Cost of goods sold (excluding depreciation and amortization)
80.8

 
80.7

Selling, general and administrative expenses (1)
13.7

 
14.0

Depreciation and amortization
0.8

 
0.8

Income from operations
4.7

 
4.5

Net interest and other (1)
0.8

 
0.9

Income before income taxes
3.9

 
3.6

Provision for income taxes
0.7

 
0.9

     Net income attributable to WESCO International
3.2
%
 
2.7
%
(1) 
As described in Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements, we adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the first quarter of 2018. This ASU requires the disaggregation of service cost from the other components of net periodic benefit cost. For the three months ended September 30, 2018 and 2017, the non-service cost components of net periodic benefit cost aggregated to a benefit of $0.5 million and are included in net interest and other.

23


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


Net sales were $2.1 billion for the third quarter of 2018, compared to $2.0 billion for the third quarter of 2017, an increase of 3.4%. Organic sales for the third quarter of 2018 grew by 4.2% as foreign exchange rates negatively impacted net sales by 0.8%.
The following table sets forth organic sales growth for the period presented:
 
Three Months Ended
 
September 30, 2018
Change in net sales
3.4
 %
Impact from acquisitions
 %
Impact from foreign exchange rates
(0.8
)%
Impact from number of workdays
 %
Organic sales growth
4.2
 %
Note: Organic sales growth is a non-GAAP financial measure of sales performance. Organic sales growth is calculated by deducting the percentage impact from acquisitions in the first year of ownership, foreign exchange rates and number of workdays from the overall percentage change in consolidated net sales.
Cost of goods sold for the third quarter of 2018 was $1.7 billion, compared to $1.6 billion for the third quarter of 2017. As a percentage of net sales, cost of goods sold was 80.8% and 80.7%, respectively. Cost of goods sold as a percentage of net sales for the third quarter of 2018 reflects margin improvement initiatives, which were more than offset by a reclassification of certain labor costs from SG&A to cost of goods sold.
SG&A expenses for the third quarter of 2018 totaled $284.1 million versus $280.5 million for the third quarter of 2017. As a percentage of net sales, SG&A expenses were 13.7% and 14.0%, respectively. SG&A expenses reflect higher payroll expenses and increased costs driven by sales volume growth, partially offset by gains from the sale of certain long-lived assets.
SG&A payroll expenses for the third quarter of 2018 of $204.8 million increased by $6.9 million compared to the same period in 2017 primarily due to higher sales volume and variable compensation expense, partially offset by a reclassification of certain labor costs from SG&A to cost of goods sold.
Depreciation and amortization for the third quarter of 2018 and 2017 was $15.6 million and $16.1 million, respectively.
Net interest and other totaled $17.1 million for the third quarter of 2018 compared to $16.8 million for the third quarter of 2017.
Income tax expense totaled $13.8 million for the third quarter of 2018 compared to $18.4 million in last year's comparable period and the effective tax rate was 17.2% and 25.5%, respectively. The lower effective tax rate in the current quarter is primarily due to the Tax Cuts and Jobs Act of 2017 (the "TCJA"), which permanently reduced the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018. Also, the discrete benefits resulting from audit settlements favorably impacted the effective tax rate for the third quarter of 2018.
Net income for the third quarter of 2018 was $66.6 million, compared to net income of $53.6 million for the third quarter of 2017.
Net loss of $0.2 million and $0.1 million was attributable to noncontrolling interests for the third quarter of 2018 and 2017, respectively. The change in loss attributable to noncontrolling interests was primarily due to the effect of foreign currency.
Net income and diluted earnings per share attributable to WESCO International were $66.8 million and $1.41 per share, respectively, for the third quarter of 2018, compared with net income and diluted earnings per share of $53.7 million and $1.12 per share, respectively, for the third quarter of 2017.

24


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


Nine Months Ended September 30, 2018 versus Nine Months Ended September 30, 2017
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income and Comprehensive Income for the periods presented:
 
Nine Months Ended
 
September 30
 
2018
 
2017
Net sales
100.0
%
 
100.0
%
Cost of goods sold (excluding depreciation and amortization)
80.9

 
80.6

Selling, general and administrative expenses (1)
14.1

 
14.4

Depreciation and amortization
0.8

 
0.8

Income from operations
4.2

 
4.2

Net interest and other (1)
0.8

 
0.9

Income before income taxes
3.4

 
3.3

Provision for income taxes
0.7

 
0.8

     Net income attributable to WESCO International
2.7
%
 
2.5
%
(1) 
As described in Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements, we adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the first quarter of 2018. This ASU requires the disaggregation of service cost from the other components of net periodic benefit cost. For the nine months ended September 30, 2018 and 2017, the non-service cost components of net periodic benefit cost aggregated to a benefit of $1.4 million and are included in net interest and other.
Net sales were $6.2 billion for the first nine months of 2018, compared to $5.7 billion for the first nine months of 2017, an increase of 8.5%. Organic sales for the first nine months of 2018 grew by 7.9% as foreign exchange rates positively impacted net sales by 0.6%.
The following table sets forth organic sales growth for the period presented:
 
Nine Months Ended
 
September 30, 2018
Change in net sales
8.5
%
Impact from acquisitions
%
Impact from foreign exchange rates
0.6
%
Impact from number of workdays
%
Organic sales growth
7.9
%
Note: Organic sales growth is a non-GAAP financial measure of sales performance. Organic sales growth is calculated by deducting the percentage impact from acquisitions in the first year of ownership, foreign exchange rates and number of workdays from the overall percentage change in consolidated net sales.
Cost of goods sold for the first nine months of 2018 was $5.0 billion, compared to $4.6 billion for the first nine months of 2017. As a percentage of net sales, cost of goods sold was 80.9% and 80.6%, respectively. The increase in cost of goods sold as a percentage of net sales was primarily due to geographic and end market business mix and a reclassification of certain labor costs from SG&A to cost of goods sold.
SG&A expenses for the first nine months of 2018 totaled $867.8 million versus $815.7 million for the first nine months of 2017. As a percentage of net sales, SG&A expenses were 14.1% and 14.4%, respectively. SG&A expenses reflect higher payroll expenses, increased costs driven by sales volume growth, a bad debt charge related to a Canadian customer that ceased operations, partially offset by gains from the sale of certain long-lived assets.
SG&A payroll expenses for the first nine months of 2018 of $608.7 million increased by $35.5 million compared to the same period in 2017 primarily due to higher sales volume and variable compensation expense, which was partially offset by a reclassification of certain labor costs from SG&A to cost of goods sold.

25


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


Depreciation and amortization for the first nine months of 2018 and 2017 was $47.3 million and $47.8 million, respectively.
Net interest and other totaled $54.6 million for the first nine months of 2018 compared to $49.4 million for the first nine months of 2017. The increase was primarily due to a foreign exchange loss of $2.6 million from the remeasurement of financial instruments, as well as accelerated amortization of debt discount and debt issuance costs related to early repayments on our term loan facility.
Income tax expense totaled $40.1 million for the first nine months of 2018 compared to $47.7 million in last year's comparable period and the effective tax rate was 19.3% and 25.3%, respectively. The lower effective tax rate in the current year is primarily due to the TCJA, which permanently reduced the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018.
Net income for the first nine months of 2018 was $167.3 million, compared to net income of $140.9 million for the first nine months of 2017.
Net loss of $1.9 million and less than $0.1 million was attributable to noncontrolling interests for the first nine months of 2018 and 2017, respectively. The change in net loss attributable to noncontrolling interests was primarily due to the effect of foreign currency.
Net income and diluted earnings per share attributable to WESCO International were $169.2 million and $3.56 per share, respectively, for the first nine months of 2018, compared with net income and diluted earnings per share of $140.9 million and $2.90 per share, respectively, for the first nine months of 2017.
Liquidity and Capital Resources
Total assets were $4.8 billion and $4.7 billion at September 30, 2018 and December 31, 2017, respectively. Total liabilities were $2.6 billion at September 30, 2018 and December 31, 2017. Total stockholders' equity was $2.2 billion at September 30, 2018 and $2.1 billion at December 31, 2017.
Our liquidity needs generally arise from fluctuations in our working capital requirements, capital expenditures, acquisitions and debt service obligations. As of September 30, 2018, we had $562.8 million in available borrowing capacity under our Revolving Credit Facility and $185.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of $79.8 million, provided liquidity of $827.6 million. Cash included in our determination of liquidity represents cash in deposit and interest bearing investment accounts. We believe cash provided by operations and financing activities will be adequate to cover our current operational and business needs. In addition, we regularly review our mix of fixed versus variable rate debt, and we may, from time to time, issue or retire borrowings and/or refinance existing debt in an effort to mitigate the impact of interest rate and foreign exchange rate fluctuations, and to maintain a cost-effective capital structure consistent with our anticipated capital requirements. At September 30, 2018, approximately 67% of our debt portfolio was comprised of fixed rate debt.
We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. We also communicate on a regular basis with our lenders regarding our financial and working capital performance, liquidity position and financial leverage. Our financial leverage ratio was 3.1 and 3.6 as of September 30, 2018 and December 31, 2017, respectively. In addition, we are in compliance with all covenants and restrictions contained in our debt agreements as of September 30, 2018.

26


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


The following table sets forth our financial leverage ratio as of September 30, 2018 and December 31, 2017:
 
Twelve months ended
(In millions of dollars, except ratio)
September 30,
2018
 
December 31,
2017
Income from operations (1)
$
342.9

 
$
319.2

Depreciation and amortization
63.6

 
64.0

EBITDA
$
406.5

 
$
383.2

 
 
 
 
 
September 30,
2018
 
December 31,
2017
Short-term borrowings and current debt
$
32.3

 
$
35.3

Long-term debt
1,229.3

 
1,313.3

Debt discount and debt issuance costs (2)
10.6

 
14.2

Total debt
1,272.2

 
1,362.8

Less: cash and cash equivalents
142.8

 
118.0

Total debt, net of cash
$
1,129.4

 
$
1,244.8

 
 
 
 
Financial leverage ratio
3.1

 
3.6

Financial leverage ratio, net of cash
2.8

 
3.2

(1) 
Due to the adoption of ASU 2017-07 on a retrospective basis in the first quarter of 2018, we classified the non-service cost components of net periodic benefit cost as part of net interest and other for the twelve months ended September 30, 2018 and December 31, 2017. These components aggregated to a benefit of $1.9 million and $1.8 million, respectively.
(2) 
Long-term debt is presented in the condensed consolidated balance sheets net of debt discount and debt issuance costs.
Note: Financial leverage is a non-GAAP measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, including debt discount and debt issuance costs, by EBITDA. Financial leverage ratio, net of cash is calculated by dividing total debt, including debt discount and debt issuance costs, net of cash, by EBITDA. EBITDA, which is also a non-GAAP financial measure, is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization.
At September 30, 2018, we had cash and cash equivalents totaling $142.8 million, of which $94.5 million was held by foreign subsidiaries. The cash held by our foreign subsidiaries could be subject to additional income taxes if repatriated. We continue to believe that we are able to maintain a sufficient level of liquidity for our domestic operations and commitments without repatriation of the cash held by these foreign subsidiaries. However, as a result of the TCJA, we are reevaluating our intent and ability to repatriate foreign cash based upon the available liquidity and cash flow needs of our foreign subsidiaries and will disclose in future filings any change in our intention to repatriate undistributed foreign earnings and any resulting income tax impacts.
We did not note any triggering events or substantive changes during the first nine months of 2018 that would require an interim evaluation of impairment of goodwill or indefinite-lived intangible assets. We will perform our annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter.
Over the next several quarters, we plan to closely manage working capital, and it is expected that excess cash will be directed primarily at growth initiatives, acquisitions, debt reduction, and share repurchases. We remain focused on maintaining ample liquidity and credit availability. We anticipate capital expenditures in 2018 to be higher than 2017 as we continue to invest in our business. We believe our balance sheet and ability to generate ample cash flow provides us with a durable business model and should allow us to fund growth initiatives and expansion needs.

27


WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


Cash Flow
Operating Activities. Net cash provided by operating activities for the first nine months of 2018 totaled $174.5 million, compared with $81.1 million of cash generated for the first nine months of 2017. Net cash provided by operating activities included net income of $167.3 million and adjustments to net income totaling $67.1 million. Other sources of cash in the first nine months of 2018 included a decrease in inventories of $23.2 million, a decrease in other accounts receivable of $19.9 million, an increase in accounts payable of $18.2 million, an increase in accrued payroll and benefit costs of $2.8 million, and an increase other current and noncurrent liabilities of $2.3 million. Primary uses of cash in the first nine months of 2018 included: an increase in trade accounts receivable of $104.2 million resulting from higher sales; and, an increase in prepaid expenses and other assets of $22.1 million.
Net cash provided by operating activities for the first nine months of 2017 totaled $81.1 million, which included net income of $140.9 million and adjustments to net income totaling $68.8 million. Other sources of cash in 2017 included an increase in accounts payable of $138.3 million, a decrease in other accounts receivable of $4.4 million, and an increase in accrued payroll and benefit costs of $2.4 million. Primary uses of cash in 2017 included: an increase in trade accounts receivable of $174.7 million resulting from higher sales in the latter part of the first nine months of 2017; an increase in inventories of $86.7 million; an increase in prepaid expenses and other assets of $8.5 million; and, a decrease in other current and noncurrent liabilities of $3.8 million.
Investing Activities. Net cash used in investing activities for the first nine months of 2018 was $20.1 million, compared with $12.5 million used during the first nine months of 2017. Capital expenditures were $23.7 million for the nine month period ended September 30, 2018, compared to $16.0 million for the nine month period ended September 30, 2017.
Financing Activities. Net cash used in financing activities for the first nine months of 2018 was $124.9 million, compared to $92.2 million used in the first nine months of 2017. During the first nine months of 2018, financing activities consisted of borrowings and repayments of $504.3 million and $516.3 million, respectively, related to our Revolving Credit Facility, borrowings and repayments of $490.0 million and $505.0 million, respectively, related to our Receivables Facility and repayments of $60.0 million applied to our Term Loan Facility. Financing activities for the first nine months of 2018 also included borrowings and repayments on our various international lines of credit of approximately $116.8 million and $119.2 million, respectively. Additionally, financing activities for the first nine months of 2018 included the repurchase of $25.0 million of the Company's common stock pursuant to the share repurchase plan announced on December 13, 2017.
During the first nine months of 2017, financing activities consisted of borrowings and repayments of $589.5 million and $561.5 million, respectively, related to our Revolving Credit Facility, borrowings and repayments of $490.2 million and $470.2 million, respectively, related to our Receivables Facility, and repayments of $45.0 million applied to our Term Loan Facility. Financing activities for the first nine months of 2017 also included borrowings and repayments on our various international lines of credit of approximately $130.9 million and $115.0 million, respectively. Additionally, financing activities for the nine months ended September 30, 2017 included the repurchase of $106.7 million of the Company's common stock, of which $100.0 million was pursuant to the share repurchase plan announced on December 17, 2014.
Contractual Cash Obligations and Other Commercial Commitments
There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our 2017 Annual Report on Form 10-K. Management believes that cash generated from operations, together with amounts available under our Revolving Credit Facility and the Receivables Facility, will be sufficient to meet our working capital, capital expenditures and other cash requirements for the foreseeable future. However, there can be no assurances that this will continue to be the case.
Inflation
The rate of inflation, as measured by changes in the producer price index, affects different commodities, the cost of products purchased and ultimately the pricing of our different products and product classes to our customers. For the nine months ended September 30, 2018, pricing related to inflation impacted our sales by approximately 2%.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are usually affected by a reduced level of activity. Sales during the second, third and fourth quarters are generally 6 - 8% higher than the first quarter. Sales typically increase beginning in March, with slight fluctuations per month through October. During periods of economic expansion or contraction, our sales by quarter have varied significantly from this pattern.

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Impact of Recently Issued Accounting Standards
See Note 2 of our Notes to Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements.
Forward-Looking Statements
From time to time in this report and in other written reports and oral statements, references are made to expectations regarding our future performance. When used in this context, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements including, but not limited to, our statements regarding business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product and service introductions and liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by and information currently available to management, and involve various risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from those expressed in any forward-looking statement made by us or on our behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. Certain of these risks are set forth in the WESCO International’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as well as WESCO International’s other reports filed with the Securities and Exchange Commission. We have undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3.    Quantitative and Qualitative Disclosures about Market Risks.
There have not been any material changes to our exposures to market risk during the quarterly period ended September 30, 2018 that would require an update to the relevant disclosures provided in our 2017 Annual Report on Form 10-K.
Item 4.    Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by this report.
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments. Although the adoption of this new revenue standard had no impact on our results of operations, financial position or cash flows, we did expand our controls related to revenue recognition. However, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, a number of lawsuits and claims have been or may be asserted against us relating to the conduct of our business, including routine litigation relating to commercial and employment matters. The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to us. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on our results of operations for that period.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in Item 1A. to Part 1 of WESCO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth all issuer purchases of common stock during the three months ended September 30, 2018, including those made pursuant to publicly announced plans or programs:
Period
 
Total Number of Shares Purchased (2)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
(In Millions)
July 1 – July 31, 2018
 
60

 
$
58.25

 

 
$
300.0

August 1 – August 31, 2018
 
1,701

 
$
60.13

 

 
$
300.0

September 1 – September 30, 2018
 
352,785

 
$
60.40

 
351,821

 
$
275.0

Total
 
354,546

 
$
60.40

 
351,821

 
 
(1) 
On December 13, 2017, WESCO announced that its Board of Directors approved, on December 7, 2017, the repurchase of up to $300 million of the Company's common stock through December 31, 2020.
(2) 
There were 2,725 shares purchased in the period that were not part of the publicly announced share repurchase program. These shares were surrendered by stock-based compensation plan participants to satisfy tax withholding obligations arising from the exercise of stock-settled stock appreciation rights and vesting of restricted stock units.

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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


Item 6.    Exhibits.
(a)Exhibits
(10)    Material Contracts
(1) Seventh Amendment to Fourth Amended and Restated Receivables Purchase Agreement, dated as of April 23, 2018
(31)    Rule 13a-14(a)/15d-14(a) Certifications
(1) Certification of Chief Executive Officer pursuant to Rules 13a-14(a) promulgated under the Exchange Act.
(2) Certification of Chief Financial Officer pursuant to Rules 13a-14(a) promulgated under the Exchange Act.
(32)    Section 1350 Certifications
(1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.






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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
WESCO International, Inc.
 
 
(Registrant)
November 2, 2018
By:
/s/ David S. Schulz
(Date)
 
David S. Schulz
 
 
Senior Vice President and Chief Financial Officer



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