WESCO INTERNATIONAL INC - Quarter Report: 2011 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2011

Or

FOR THE TRANSITION PERIOD from              to             

Commission file number 001-14989

WESCO International, Inc.

(Exact name of registrant as specified in its charter)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days.    Yes  x    No  ¨

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 such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 27, 2011, WESCO International, Inc. had 43,258,471 shares of common stock outstanding.

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

1

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

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

2

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

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

3

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

4

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION

WESCO International, Inc. and its subsidiaries (collectively, “WESCO”), headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of electrical, industrial and communications maintenance, repair and operating (“MRO”) and original equipment manufacturers (“OEM”) products, construction materials, and advanced supply chain management and logistics services used primarily in the industrial, construction, utility and commercial, institutional and government markets. We serve over 100,000 customers globally, through approximately 400 full service branches and seven distribution centers located primarily in the United States and Canada, with additional locations in Mexico, United Kingdom, Singapore, China, Australia and the United Arab Emirates and a commercial presence in six other countries.

2. ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of WESCO have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in WESCO’s 2010 Annual Report on Form 10-K filed with the SEC. The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

The unaudited condensed consolidated balance sheet as of September 30, 2011, the unaudited condensed consolidated statements of income for the nine months ended September 30, 2011 and 2010, respectively, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010, respectively, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair statement of the results of the interim periods. All adjustments reflected in the unaudited condensed consolidated financial statements are of a normal recurring nature unless indicated. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Fair Value of Financial Instruments

With the exception of fixed rate long-term debt, the reported carrying amounts of WESCO’s financial assets and liabilities approximate their fair values. At September 30, 2011, the par value of WESCO’s fixed rate long-term debt was $495.2 million and the fair value was approximately $640.4 million. At December 31, 2010, the par value of WESCO’s fixed rate long-term debt was $495.2 million and the fair value was approximately $860.2 million. The fair value of WESCO’s long-term debt was estimated based on market price quotes.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued new disclosure guidance related to the presentation of the statement of comprehensive income. This guidance provides an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity was eliminated. This accounting standard is effective for periods beginning on or after December 15, 2011. Other than the change in presentation, this accounting standard will not have an impact on WESCO’s financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance to amend and simplify the rules related to testing goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on WESCO’s financial position, results of operations or cash flows.

5

Table of Contents

In September 2011, the FASB issued an accounting update that requires additional qualitative and quantitative disclosures by employers that participate in multi-employer pension plans. The amendments are effective for annual periods for the fiscal years ending after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have a material impact on WESCO’s financial position, results of operations or cash flows.

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.

3. STOCK-BASED COMPENSATION

WESCO’s stock-based employee compensation plans are comprised of stock options, stock-settled stock appreciation rights and restricted stock units. Compensation cost for all stock-based awards is measured at fair value on the date of grant, and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair value of stock options and stock-settled appreciation rights is determined using the Black-Scholes valuation model. The fair value of restricted stock units is determined by the grant-date closing price of WESCO’s common stock. The forfeiture assumption is based on WESCO’s historical employee behavior that is reviewed on an annual basis. No dividends are assumed.

During the three and nine month periods ended September 30, 2011 and 2010, WESCO granted the following stock-settled stock appreciation rights and restricted stock units at the following weighted average assumptions:

For the three and nine months ended September 30, 2011, the weighted average fair value per stock-settled appreciation right granted was $16.42 and $26.47, respectively. For the three and nine months ended September 30, 2010, the weighted average fair value per stock-settled appreciation right granted was $14.69 and $14.71, respectively. For the nine months ended September 30, 2011, the weighted average fair value per restricted stock unit granted was $60.05. For the three and nine months ended September 30, 2010, the weighted average fair value per restricted stock unit granted was $33.05.

WESCO recognized $2.9 million and $4.3 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended September 30, 2011 and 2010, respectively. WESCO recognized $12.4 million and $11.5 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there was $19.7 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $3.0 million is expected to be recognized over the remainder of 2011, $10.0 million in 2012, $6.1 million in 2013 and $0.6 million in 2014.

During the nine months ended September 30, 2011 and 2010, the total intrinsic value of awards exercised was $12.0 million and $2.2 million, respectively, and the total amount of cash received from the exercise of options was $0.2 million and $0.7 million, respectively. The tax benefit associated with the exercise of awards for the nine months ended September 30, 2011 and 2010 totaled $3.5 million and $0.6 million, respectively, and was recorded to additional capital.

6

Table of Contents

The following table sets forth a summary of stock options and stock-settled stock appreciation rights and related information for the nine months ended September 30, 2011:

The following table sets forth a summary of restricted stock units and related information for the nine months ended September 30, 2011:

4. EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding during the periods. Diluted earnings per share are computed by dividing net income by the weighted average common shares and common share equivalents outstanding during the periods. The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury stock method, which includes consideration of stock-based compensation and convertible debt.

7

Table of Contents

The following table sets forth the details of basic and diluted earnings per share:

For the three months ended months ended September 30, 2011 and 2010, the computation of diluted earnings per share excluded 1.3 million and 2.5 million, respectively, of stock-settled stock appreciation rights at weighted average exercise prices of $62 per share and $47 per share, respectively. For the nine months ended months ended September 30, 2011 and 2010, the computation of diluted earnings per share excluded 1.2 million and 2.5 million, respectively, of stock-settled stock appreciation rights at weighted average exercise prices of $62 per share and $47 per share, respectively. These amounts were excluded because their effect would have been antidilutive.

Because of WESCO’s obligation to settle the par value of the 1.75% Convertible Senior Debentures due 2026 (the “2026 Debentures”), the 6.0% Convertible Senior Debentures due 2029 (the “2029 Debentures”) and the previously outstanding 2.625% Convertible Senior Debentures due 2025 (the “2025 Debentures” and together with the 2026 Debentures and 2029 Debentures, the “Debentures”) in cash upon conversion, WESCO is not required to include any shares underlying the Debentures in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds the conversion price of the respective Debentures. At such time, only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) would be included, which is based upon the amount by which the average stock price exceeds the conversion price. The conversion prices of the 2029 Debentures and 2026 Debentures are $28.87 and $88.15, respectively. Share dilution is limited to a maximum of 11,951,939 shares for the 2029 Debentures and 2,507 shares for the 2026 Debentures. For the three and nine months ended September 30, 2011, the effect of the Debentures on diluted earnings per share was a decrease of $0.11 and $0.35, respectively. For the three and nine months ended September 30, 2010, the effect of the Debentures on diluted earnings per share was a decrease of approximately $0.04 and $0.08, respectively.

8

Table of Contents

5. REVOLVING CREDIT FACILITY

On August 22, 2011, WESCO Distribution, Inc. (“WESCO Distribution”) entered into a new Revolving Credit Facility, which has an aggregate borrowing capacity of $400 million and includes a letter of credit sub-facility of up to $80 million. The Revolving Credit Facility consists of two separate sub-facilities: (i) a U.S. sub-facility with a borrowing limit at any given time of up to $400 million less the amount of outstanding borrowings under the Canadian sub-facility at that time and (ii) a Canadian sub-facility with a borrowing limit of up to $175 million. The new facility also contains an accordion feature, allowing WESCO Distribution to request increases to the borrowing commitments under the facility of up to $100 million in the aggregate. The facility matures in August 2016 and is collateralized by the inventory and certain other assets of WESCO Distribution and certain of its domestic subsidiaries and the inventory, accounts receivable, and certain other assets of WESCO Distribution Canada, L.P. WESCO Distribution’s obligations under the Revolving Credit Facility have been guaranteed by WESCO International, Inc. (“WESCO International”) and by certain of WESCO International’s subsidiaries. The completion of the new facility resulted in $1.8 million of accelerated amortization expense related to the deferred financing fees from the previous facility.

Availability under the facility is based upon the amount of eligible U.S. and Canadian inventory and Canadian receivables applied against certain advance rates. Depending upon the amount of excess availability under the facility, interest will be calculated at LIBOR plus a margin that ranges between 1.50% and 2.00% or at the Alternative Rate (prime rate) plus a margin that ranges between 0.50% and 1.00%. The interest rate margin is reduced by 0.25% if WESCO’s leverage ratio, as calculated under the Revolving Credit Facility, falls below a ratio of 2.5 to 1.0.

As long as the pro forma combined availability for the preceding 60-day period, up to and including the transaction date, under the facility and WESCO Distribution’s accounts receivable securitization facility (the “Receivables Facility”) is greater than $125 million, WESCO is permitted, subject to certain specified conditions, to make acquisitions and repurchase WESCO International’s outstanding capital stock and WESCO outstanding indebtedness. At September 30, 2011, there were no borrowings outstanding under the facility.

6. ACCOUNTS RECEIVABLE SECURITIZATION FACILITY

On August 22, 2011, WESCO Distribution entered into an amendment of the Receivables Facility, pursuant to the terms and conditions of the Fourth Amendment to Third Amended and Restated Receivables Purchase Agreement, dated as of April 13, 2009 (the “Agreement”), by and among WESCO Receivables Corp., WESCO Distribution, the Purchasers and Purchaser Agents party thereto and PNC Bank, National Association, as Administrator. The Amendment adds an accordion feature, allowing WESCO Distribution to request increases to the purchase commitments under the Receivables Facility of up to $100 million in the aggregate. The Amendment also lowers the interest rate spread from 1.75% to 1.10%, the commitment fee from 0.75% to 0.55%, and extends the term of the Receivables Facility to August 2014. Substantially all other terms and conditions of the Receivables Facility remain unchanged.

Under the Receivables Facility, WESCO sells, on a continuous basis, an undivided interest in all domestic accounts receivable to WESCO Receivables Corp., a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided interest in the receivables to third-party conduits and financial institutions for cash while maintaining a subordinated undivided interest in the receivables, in the form of overcollateralization. WESCO has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at market rates; accordingly, no servicing asset or liability has been recorded.

The consolidated balance sheets as of September 30, 2011 and December 31, 2010 both reflect $370.0 million of accounts receivable balances legally sold to third parties, as well as borrowings for equal amounts. At September 30, 2011, the interest rate on borrowings under this facility was approximately 1.4%.

7. EMPLOYEE BENEFIT PLANS

A majority of WESCO’s employees are covered by defined contribution retirement savings plans for their services rendered subsequent to WESCO’s formation. WESCO also offers a deferred compensation plan for select individuals. For U.S. participants, WESCO will make contributions in an amount equal to 50% of the participant’s total monthly contributions up to a maximum of 6% of eligible compensation. For Canadian participants, WESCO will make contributions in an amount ranging from 1% to 7% of the participant’s eligible compensation based on years of continuous service. In addition, employer contributions may be made at the discretion of the Board of Directors. For the nine months ended September 30, 2011 and 2010, WESCO incurred charges of $19.5 million and $17.9 million, respectively, for all such plans. Contributions are made in cash to all employee retirement savings plan accounts, except for the deferred compensation plan. Employees have the option to transfer balances allocated to their accounts into any of the available investment options, including WESCO common stock.

9

Table of Contents

8. COMMITMENTS AND CONTINGENCIES

As initially reported in WESCO’s 2008 Annual Report on Form 10-K, WESCO is a co-defendant in a lawsuit filed in a state court in Indiana in which a customer alleges that WESCO sold defective products manufactured or remanufactured by others and is seeking monetary damages in the amount of approximately $50 million. The discovery process is on-going in this matter. WESCO has denied any liability, believes that it has meritorious defenses and intends to vigorously defend itself against these allegations. Accordingly, no liability is recorded for this matter as of September 30, 2011.

9. COMPREHENSIVE INCOME

The following tables set forth comprehensive income and its components:

10. INCOME TAXES

The effective tax rate for the three months ended September 30, 2011 and 2010 was 29.7% and 29.1% respectively, and the effective tax rate for the nine months ended September 30, 2011 and 2010 was 29.2% and 28.9%, respectively. WESCO’s three and nine month effective tax rates are lower than the federal statutory rate of 35% primarily due to benefits resulting from the recapitalization of Canadian operations, which are partially offset by nondeductible expenses, state taxes and foreign rate differences. The effective tax rate for the nine months ended September 30, 2011 reflects discrete adjustments totaling $2.1 million, primarily related to changes in uncertain tax positions. The effective tax rate for the nine months ended September 30, 2010 reflects discrete adjustments totaling $1.8 million primarily related to changes in uncertain tax positions.

The total amount of net unrecognized tax benefits was $1.0 million and $3.4 million as of September 30, 2011 and December 31, 2010, respectively. If these tax benefits were recognized in the consolidated financial statements, the portion of these amounts that would affect WESCO’s effective tax rate would be $0.5 million and $1.9 million, respectively. During the next twelve months, WESCO anticipates an immaterial change in the net unrecognized tax benefits.

WESCO records interest related to uncertain tax positions as a part of interest expense in the consolidated statement of income. Penalties are recognized as part of income tax expense. During the nine months ended September 30, 2011 and 2010, WESCO recognized interest expense of $1.6 million and $0.6 million, respectively. As of September 30, 2011 and December 31, 2010, WESCO had an accrued liability for interest related to uncertain tax positions of $11.1 million and $9.5 million, respectively. There were no material penalties recorded during the nine months ended September 30, 2011 or 2010.

10

Table of Contents

11. OTHER FINANCIAL INFORMATION

WESCO Distribution, a 100% owned subsidiary of WESCO International, has outstanding $150.0 million in aggregate principal amount of 7.50% Senior Subordinated Notes due 2017 (the “2017 Notes”), and WESCO International has outstanding $0.2 million in aggregate principal amount of 2026 Debentures and $345.0 million in aggregate principal amount of 2029 Debentures. The 2017 Notes are fully and unconditionally guaranteed by WESCO International on a subordinated basis to all existing and future senior indebtedness of WESCO International. The 2026 Debentures and 2029 Debentures are fully and unconditionally guaranteed by WESCO Distribution on a senior subordinated basis to all existing and future senior indebtedness of WESCO Distribution.

Condensed consolidating financial information for WESCO International, WESCO Distribution and the non-guarantor subsidiaries is as follows:

11

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(unaudited)

12

Table of Contents

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(unaudited)