WESCO International, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
or
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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25-1723342
(I.R.S. Employer
Identification No.) |
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225 West Station Square Drive
Suite 700
Pittsburgh, Pennsylvania
(Address of principal executive offices)
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15219
(Zip Code) |
(412) 454-2200
(Registrants telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Class |
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Name of Exchange on which registered |
Common Stock, par value $.01 per share
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New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The registrant estimates that the aggregate market value of the voting shares held by
non-affiliates of the registrant was approximately $2,651.0 million as of June 30, 2007, the last
business day of the registrants most recently completed second fiscal quarter, based on the
closing price on the New York Stock Exchange for such stock.
As of
February 25, 2008, 42,832,207 shares of Common Stock, par value $.01 per share, of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates by reference portions of the registrants Proxy Statement
for its 2008 Annual Meeting of Stockholders.
WESCO INTERNATIONAL, INC.
Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 2007
TABLE OF CONTENTS
PART I
Item 1. Business.
In this Annual Report on Form 10-K, WESCO refers to WESCO International, Inc., and its
subsidiaries and its predecessors unless the context otherwise requires. References to we, us,
our and the Company refer to WESCO and its subsidiaries. Our subsidiaries include WESCO
Distribution, Inc. (WESCO Distribution) and WESCO Distribution Canada, Co. (WESCO Canada), both
of which are wholly owned by WESCO.
The Company
With sales of $6.0 billion in 2007, WESCO International, Inc., incorporated in 1993, is a
leading North American provider of electrical construction products and electrical and industrial
maintenance, repair and operating supplies, commonly referred to as MRO. We have more than 400
full service branches and seven distribution centers located in the United States, Canada, Mexico,
the United Kingdom, Nigeria, United Arab Emirates and Singapore. We serve approximately 110,000
customers globally, offering more than 1,000,000 products from more than 24,000 suppliers utilizing
a highly automated, proprietary electronic procurement and inventory replenishment system. At the
end of 2007, we had approximately 7,300 employees worldwide, of which approximately 6,300 were
located in the United States and approximately 1,000 in Canada and our other international
locations. Our leading market positions, experienced workforce, extensive geographic reach, broad
product and procurement solutions and acquisition program have enabled us to grow our market
position, expand margins and meet cost containment objectives.
Industry Overview
The electrical distribution industry serves customers in a number of markets including the
industrial, electrical contractors, utility, commercial, residential, government and institutional
markets. Electrical distributors provide logistical and technical services for customers along with
a wide range of products typically required for the construction and maintenance of electrical
supply networks, including wire, lighting, distribution and control equipment and a wide variety of
electrical supplies. Many customers demand that distributors provide a broader and more complex
package of services as they seek to outsource non-core functions and achieve cost savings in
purchasing, inventory and supply chain management.
Electrical Distribution. According to Electrical Wholesaling Magazine, the U.S. electrical
wholesale distribution industry had forecasted sales of approximately $93 billion in 2007.
According to published sources, our industry has grown at an approximate 6% compounded annual rate
over the past 20 years. This expansion has been driven by general economic growth, increased price
levels for key commodities, increased use of electrical products in businesses and industries, new
products and technologies and customers who are seeking to more efficiently purchase a broad range
of products and services from a single supplier, thereby eliminating the costs and expenses of
purchasing directly from manufacturers or multiple sources. The U.S. electrical distribution
industry is highly fragmented. In 2006, the latest year for which market share data is available,
the five national distributors, including us, accounted for approximately 25% of estimated total
industry sales.
Integrated Supply. The market for integrated supply services has grown rapidly in recent
years. Growth has been driven primarily by the desire of large industrial companies to reduce
operating expenses by implementing comprehensive third-party programs, which outsource and
consolidate cost-intensive procurement, stocking and administrative functions associated with the
purchase and consumption of MRO supplies. For some of our customers, we believe these costs can
account for up to 35% of the total costs for MRO products and services. We believe that significant
opportunities exist for further expansion of integrated supply services, as the total potential in
the United States for purchases of industrial MRO supplies and services through all channels is
currently estimated to be approximately $400 billion.
Business Strategy
Our goal is to grow earnings at a faster rate than sales by continuing to focus on margin
enhancement and continuous productivity improvement. Our growth strategy utilizes our existing
strengths and focuses on developing new market segment initiatives and enhanced sales management
programs to position us to grow at a faster rate than the industry.
Enhance Our Leadership Position in Electrical Distribution. We will continue to capitalize on
our extensive market presence and brand equity in the WESCO name to grow our market position in
electrical distribution. As a result of our extensive geographical coverage, effective information
systems and value-added products and services, we believe we have become a leader in serving
several important and growing markets. We are focusing our sales and marketing efforts in three
primary areas:
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expanding our product and service offerings to existing customers in industries we currently serve; |
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targeting new customers within vertical markets that provide significant growth opportunities; and |
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providing new and existing customers compliance solutions to government regulations and safety concerns. |
3
Continue to Grow Our Premier Position in National Accounts. From 2003 through 2007, revenue
from our national accounts program increased at a compound annual growth rate of approximately 12%.
Our objective is to continue to increase revenue from our national accounts program by:
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offering existing national account customers new products and services, such as our integrated supply services
and serving additional customer locations; |
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expanding our customer base by capitalizing on our existing industry expertise and supply chain capabilities; and |
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maintaining close coordination with multi-location contractor customers on their major project requirements. |
The typical national account customer is a Fortune 500 industrial company, a large utility or
other major customer, in each case with multiple locations. Our national accounts programs are
designed to provide customers with total supply chain cost reductions by coordinating purchasing
activity for MRO supplies and direct materials across multiple locations. Comprehensive
implementation plans establish jointly managed teams at the local and national level to prioritize
activities, identify key performance measures and track progress against objectives. We involve our
preferred suppliers early in the implementation process, where they can contribute expertise and
product knowledge to accelerate program implementation and the achievement of cost savings and
process improvements.
Extend Our Leadership Position in Integrated Supply Services. We provide a full complement of
outsourcing solutions, focusing on improving the supply chain management process for our customers
indirect purchases. We integrate our personnel, product and distribution expertise, electronic
technologies and service capabilities with the customers own internal resources to meet particular
service requirements. Each integrated supply program is uniquely configured to deliver a
significant reduction in the number of MRO suppliers, reduce total procurement costs, improve
operating controls and lower administrative expenses. Our integrated supply programs replace the
traditional multi-vendor, resource-intensive procurement process with a single, outsourced, fully
automated process. Our solutions range from timely product delivery to assuming full
responsibility for the entire procurement function. We believe that customers will increasingly
seek to utilize us as an integrator, responsible for selecting and managing the supply of a wide
range of MRO and original equipment manufacturers (OEM) products. We plan to expand our
leadership position as the largest integrated supply services provider in the United States by
building upon established relationships within our large customer base and premier supplier
network, to meet customers continued interest in outsourcing.
Gain Share in Fragmented Local Markets. We believe that significant opportunities exist to
gain market share in highly fragmented local markets. We intend to increase our market share in key
geographic markets through a combination of increased sales and marketing efforts at existing
branches, acquisitions that expand our product and customer base and new branch openings.
Expand our LEAN Initiative. LEAN driven continuous improvement is a company-wide, strategic
initiative to increase productivity across the entire enterprise, including sales, operations and
administrative processes. The basic principles behind LEAN are to rapidly identify and implement
improvements through simplification, elimination of waste and reducing errors throughout a defined
process. We have been highly successful in applying LEAN in a distribution environment, and have
developed and deployed numerous initiatives through the Kaizen approach. The initiatives are
primarily centered around our branch operations and target nine key areas: sales, pricing,
warehouse operations, transportation, purchasing, inventory, accounts receivable, accounts payable
and administrative processes. In 2008, our objective is to continue to implement the initiatives
across our branch locations and headquarters operations, consistent with our long-term strategy of
continuously refining and improving our processes to achieve both sales and operational excellence.
Pursue Strategic Acquisitions. Since 1995, we have completed 31 acquisitions. We believe that
the highly fragmented nature of the electrical and industrial MRO distribution industry will
continue to provide us with acquisition opportunities. We expect that any future acquisitions will
be financed with internally generated funds, additional debt and/or the issuance of equity
securities. However, our ability to make acquisitions will be subject to our compliance with
certain conditions under the terms of our revolving credit facility. See Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources, for a further description of the revolving credit facility.
Expand Product and Service Offerings. We have developed a service capability to assist
customers in improving their internal productivity and overall cost position. This service, which
we call Cost Reduction Solutions, is based on applying LEAN principles and practices in our
customers work environment. To date, we have worked with manufacturers, assemblers and contractors
to enhance supply chain operations and logistics. Our work on productivity projects, in cooperation
with our customers, significantly increases the breadth of products that can be supplied and
creates additional product opportunities in kitting, assembly and warehouse operations.
Additionally, we have demonstrated our ability to introduce new products and services to meet
existing customer demands and capitalize on new market opportunities.
4
Capitalize on Our Information System Capabilities. We intend to utilize our sophisticated
information technology capabilities to drive increased sales performance and market share. Our
information systems support targeted direct mail marketing campaigns, sales promotions, sales
productivity and profitability assessments and coordination with suppliers and overall supply chain
programs that improve customer profitability and enhance our working capital productivity. Our information
systems provide us with detailed, actionable information across all facets of our broad network,
allowing us to quickly and effectively identify and act on profitability and efficiency-related
initiatives.
Expand Our International Operations. We believe that there is significant additional demand
for our products and services outside the United States and Canada. Many of our multinational
domestic customers are seeking distribution, integrated supply and project management solutions
globally. We follow our established customers and pursue business that we believe utilizes and
extends our existing capabilities. We believe this strategy of working through well-developed
customer and supplier relationships significantly reduces risk and provides the opportunity to
establish profitable incremental business.
Competitive Strengths
We believe that we are one of the largest electrical distributor and the largest provider of
integrated supply services for MRO goods and services in the United States. We compete directly
with national, regional and local providers of electrical and other industrial MRO supplies.
Competition is primarily focused on the local service area, and is generally based on product line
breadth, product availability, service capabilities and price. Another source of competition is
buying groups formed by smaller distributors to increase purchasing power and provide some
cooperative marketing capability. While increased buying power may improve the competitive position
of buying groups locally, we believe these groups have not been able to compete effectively with us
for national account customers due to the difficulty in coordinating a diverse ownership group.
Although certain Internet-based procurement service companies, auction businesses and trade
exchanges remain in the marketplace, the impact on our business from these potential competitors
has been minimal to date.
We believe the following strengths are central to the successful execution of our business
strategy:
Market Leadership. Our ability to manage large construction projects, complex multi-site plant
maintenance programs, procurement projects that require special sourcing, technical advice,
logistical support and locally based service has enabled us to establish leadership positions in
our principal markets. We have utilized these skills to generate significant revenues in industries
with intensive use of electrical and MRO products, including electrical contracting, utilities, OEM
and process manufacturing and other commercial, institutional and governmental entities. We also
have extended our position within these industries to expand our customer base.
Value-added Services. We provide a wide range of services and procurement solutions that draw
on our product knowledge, supply and logistics expertise and systems capabilities, enabling our
customers with large operations and multiple locations to reduce supply chain costs and improve
efficiency. Our geographical coverage is essential to our ability to provide these services. We
have an extensive branch network which complements our national sales and marketing activities with
local customer service, product information and technical support, order fulfillment and a variety
of other on-site services.
Broad Product Offering. We provide our customers with a broad product selection consisting of
more than 1,000,000 electrical, industrial, data communications, MRO and utility products sourced
from more than 24,000 suppliers. Our broad product offering and stable source of supply enables us
to meet virtually all of a customers electrical product and MRO requirements.
Extensive Distribution Network. We are a full-line distributor of electrical supplies and
equipment with operations in the United States, Canada, Mexico, the United Kingdom, Nigeria, United
Arab Emirates and Singapore. We operate more than 400 branch locations and seven distribution
centers (four in the United States and two in Canada). In addition to consolidations in connection
with acquisitions, we occasionally open, close or consolidate existing branch locations to improve
market coverage and operating efficiency.
Our distribution centers add value for our branches, suppliers and customers through the
combination of a broad and deep selection of inventory, online ordering, same-day shipment and
central order handling and fulfillment. Our distribution center network reduces the lead-time and
cost of supply chain activities through automated replenishment and warehouse management systems
and economies of scale in purchasing, inventory management, administration and transportation.
This extensive network, which would be extremely difficult and expensive to duplicate, provides us
with a distinct competitive advantage and allows us to:
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maintain localized customer service, technical support and sales coverage; |
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tailor branch products and services to local customer needs; and |
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offer multi-site distribution capabilities to large customers and national accounts. |
5
Low Cost Operator. Our competitive position has been enhanced by our low cost position, which is
based on:
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extensive use of automation and technology; |
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centralization of functions such as purchasing, accounting and information systems; |
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strategically located distribution centers; |
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purchasing economies of scale; and |
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incentive programs that increase productivity and encourage entrepreneurship. |
As a result of these factors, we believe that our operating costs as a percentage of sales is
one of the lowest in our industry. Our selling, general and administrative expenses as a percentage
of revenues for 2007 were 13.2%, significantly below our peer group 2006 average of approximately
19.3% according to the National Association of Electrical Distributors. Our low cost position
enables us to generate a significant amount of net cash flow, as the amount of capital investment
required to maintain our business is relatively low. Consequently, more of the cash we generate is
available for continued investment in the growth of the business, strategic acquisitions and debt
reduction.
Products and Services
Products
Our network of branches and distribution centers stock more than 250,000 unique product stock
keeping units (SKUs). Each branch tailors its inventory to meet the needs of the customers in its
local market, stocking an average of approximately 2,500 SKUs. Our business allows our customers to
access more than 1,000,000 products.
Representative products and services that we offer include:
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Electrical Supplies. Wiring devices, fuses, terminals, connectors, boxes, enclosures, fittings, lugs, terminations,
tape, and splicing and marking equipment; |
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Industrial Supplies. Tools and testers, safety and security, fall protection, personal protection, consumables,
fasteners, janitorial and other MRO supplies; |
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Power Distribution. Circuit breakers, transformers, switchboards, panel boards, metering products and busway products; |
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Lighting. Lamps, fixtures, ballasts and lighting control products; |
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Wire and Conduit. Wire, cable, raceway, metallic and non-metallic conduit; |
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Control, Automation and Motors. Motor control devices, drives, surge and power protection, relays, timers,
pushbuttons and operator interfaces; and |
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Data Communications. Structured cabling systems, low voltage specialty systems and specialty wire and cable products. |
We purchase products from a diverse group of more than 24,000 suppliers. In 2007, our ten
largest suppliers accounted for approximately 28% of our purchases. The largest of these was Eaton
Corporation, through its Eaton Electrical division, accounting for approximately 10% of total
purchases. No other supplier accounted for more than 5% of total purchases.
Our supplier relationships are important to us, providing access to a wide range of products,
technical training and sales and marketing support. We have preferred supplier agreements with more
than 300 of our suppliers and purchase over 60% of our inventory pursuant to these agreements.
Consistent with industry practice, most of our agreements with suppliers, including both
distribution agreements and preferred supplier agreements, are terminable by either party on 60
days notice or less.
6
Services
In conjunction with product sales, we offer customers a wide range of services and procurement
solutions that draw on our product and supply management expertise and systems capabilities. These
services include national accounts programs, integrated supply programs and major project programs.
We are responding to the needs of our customers, particularly those in processing and manufacturing
industries, which require assistance in efficiently managing their MRO process. Our
range of supply management services, include:
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outsourcing of the entire MRO purchasing process; |
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providing technical support for manufacturing process improvements using state-of-the-art automated solutions; |
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implementing inventory optimization programs; |
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participating in joint cost savings teams; |
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assigning our employees as on-site support personnel; |
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recommending energy-efficient product upgrades; and |
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offering safety and product training for customer employees. |
Markets and Customers
We have a large base of approximately 110,000 customers diversified across our principal
markets. Our top ten customers accounted for approximately 11% of our sales in 2007. No customer
accounted for more than 4% of our total sales in 2007.
Industrial Customers. Sales to industrial customers, which include numerous manufacturing and
process industries, accounted for approximately 40% of our sales in 2007. We provide products and
services for MRO and OEM use. MRO products are needed to maintain and upgrade the electrical and
communications networks at industrial sites. Expenditures are greatest in the heavy process
industries, such as food processing, metals, pulp and paper and petrochemical. MRO product
categories in addition to electrical supplies include, among others, lubricants, pipe, valves and
fittings, fasteners, cutting tools and power transmission products. OEMs typically require a
reliable, high-volume supply of products or components to incorporate into their own products.
Customers in this market are particularly service and price sensitive due to the volume and the
critical nature of the product used, and they also expect value-added services such as design and
technical support, just-in-time supply and electronic commerce.
Electrical Contractors. Sales to electrical contractors accounted for approximately 38% of our
sales in 2007. We primarily serve large contractors; however, customers range from large
contractors for major industrial and commercial projects to small residential contractors.
Electrical products purchased by electrical subcontractors typically account for approximately 40%
to 50% of their installed project cost, making accurate cost estimates and competitive material
costs critical to a contractors success in obtaining profitable projects.
Utilities. Sales to utilities and specialty utility contractors accounted for approximately
16% of our sales in 2007. This market includes large investor-owned utilities, rural electric
cooperatives and municipal power authorities. We provide our utility customers with transmission
and distribution products and an extensive range of supplies to meet their power plant MRO and
capital projects needs. Full materials management and procurement outsourcing arrangements are also
important in this market as cost pressures and deregulation cause utility customers to streamline
purchasing and inventory control practices.
Commercial, Institutional and Governmental (CIG) Customers. Sales to CIG customers accounted
for approximately 6% of our sales in 2007. This fragmented market includes schools, hospitals,
property management firms, retailers and government agencies of all types. We have a platform to
sell integrated lighting control and distribution equipment in a single package for multi-site
specialty retailers, restaurant chains and department stores.
Sales Organization
Sales Force. Our general sales force is based at the local branches and is comprised of
approximately 2,700 of our employees, almost half of whom are outside sales representatives with
the remainder being inside sales and technical support personnel. They are responsible for making
direct customer calls, performing on-site technical support, generating new customer relations and
developing existing territories. The inside sales force is a key point of contact for responding to
routine customer inquiries such as price and availability requests and for entering and tracking
orders.
National Accounts. Our outside sales force is geographically oriented to target local and
vertical markets. We have a national accounts sales force comprised of an experienced group of
sales executives who negotiate and administer contracts, coordinate branch participation and
identify sales and service opportunities. National accounts managers efforts target specific
customer industries, including automotive, pulp and paper, petrochemical, metals and mining, food
processing, aerospace and defense.
Construction Management. We also have a sales management group, comprising our most
experienced construction management personnel, which focus on serving the complex needs of North
Americas largest engineering and construction firms and the top regional and national electrical
contractors. These contractors typically specialize in large, complex projects such as building
industrial sites, water treatment plants, airport expansions, healthcare facilities, correctional
institutions, sports stadiums and convention centers.
7
E-Commerce. To support our sales organization, we engage in various forms of e-commerce. Our
primary e-business strategy is to serve existing customers by tailoring our catalog and
Internet-based procurement applications to their internal systems or through their preferred
technology and trading exchange partnerships. We continue to expand our e-commerce capabilities,
meeting our customers requirements as they develop and implement their e-procurement business
strategies. We have strengthened our business and technology relationships with the trading
exchanges chosen by our customers as their e-procurement partners. We believe that we lead our
industry in rapid e-implementation to customers procurement systems and integrated procurement
functionality using punch-out technology, a direct system-to-system link with our customers.
We continue to enhance WESCO Express, a direct ship fulfillment operation responsible for
supporting smaller customers and select national account locations. Customers can order from more
than 65,000 electrical and data communications products stocked in our warehouses through a
centralized customer service center or over the Internet at www.WESCOdirect.com. We also use a
proactive sales approach utilizing catalogs, direct mail, e-mail and personal phone selling to
provide a high level of customer service. Our 2007-2008 WESCOs Buyers Guide ® was
produced and released in 2007.
International Operations
To serve the Canadian market, we operate a network of approximately 50 branches in nine
provinces. Branch operations are supported by two distribution centers located near Montreal and
Vancouver. With sales of approximately US$633 million, sales in Canada represented approximately
11% of our total sales in 2007. The Canadian market for electrical distribution is considerably
smaller than the U.S. market, with roughly US$5.6 billion in total sales in 2007, according to the
Canadian Distribution Council.
We also have six locations in Mexico, headquartered in Tlalnepantla, that serve all of
metropolitan Mexico City, the Federal District, Tobasco and the states of Campeche, Chihuahua,
Hidalgo, Mexico, Morelos and Nuevo Leon.
We sell to other international customers through domestic export sales offices located within
North America and sales offices in international locations. Our operations in Aberdeen, Scotland
and London, England support sales efforts in Europe, oil and gas customers on a global basis,
engineering procurement companies and the former Soviet Union. We have an operation in Nigeria to
serve West Africa, an office in United Arab Emirates to serve the Middle East and an office in
Singapore to support our sales to Asia and global oil and gas customers. All of the international
locations have been established to primarily serve our growing list of customers with global
operations referenced under National Accounts above.
The following table sets forth information about us by geographic area:
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Net Sales |
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Long-Lived Assets |
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Year Ended December 31, |
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December 31, |
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(In thousands) |
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2007 |
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2006 |
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2005 |
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2007 |
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2006 |
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2005 |
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United States |
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$ |
5,229,147 |
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$ |
4,606,783 |
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$ |
3,829,755 |
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$ |
107,711 |
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$ |
113,312 |
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$ |
102,266 |
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Foreign Operations |
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Canada |
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633,406 |
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599,244 |
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499,817 |
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13,122 |
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13,177 |
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12,375 |
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Other foreign |
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140,899 |
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114,576 |
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91,531 |
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406 |
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703 |
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1,546 |
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Subtotal
Foreign |
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Operations |
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774,305 |
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713,820 |
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591,348 |
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13,528 |
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13,880 |
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13,921 |
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Total U.S. and Foreign |
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$ |
6,003,452 |
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$ |
5,320,603 |
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$ |
4,421,103 |
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$ |
121,239 |
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$ |
127,192 |
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$ |
116,187 |
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Management Information Systems
We have implemented data processing systems to provide support for a full range of business
functions, such as customer service, inventory and logistics management, accounting and
administrative support. Many of our customers also leverage our eCommerce platforms to transact
business electronically either through standard electronic data interchange, direct
system-to-system integration, or through customized online buy sites.
Our integrated supply services are facilitated by state-of-the-art proprietary procurement and
inventory management systems. These systems provide a fully integrated, flexible supply chain
platform that currently handles over 95% of our integrated supply customers transactions
electronically. Our configuration options for a customer range from online linkages to the
customers business and purchasing systems, to total replacement of a customers procurement and
inventory management system for MRO supplies.
8
Intellectual Property
We currently have trademarks and service marks registered with the U.S. Patent and Trademark
Office. The registered trademarks and service marks include: WESCO ® , our corporate
logo, the running man logo, the running man in box logo, WESCO Buyers Guide ® , and
The Extra Effort People ® . In 2005, we added the trademark, C-B Only the Best is
Good Enough ® as a result of the acquisition of Carlton-Bates Company. In addition,
multiple trademarks and service marks were acquired in 2006 as a result of the
Communications Supply Holdings, Inc. acquisition, including the primary marks of CSC ®
and Liberty Wire & Cable ® . WESCO, our corporate logo, the running man logo,
and/or WESCO Buyers Guide trademarks and service mark applications for registration have been
filed in various foreign jurisdictions, including Canada, Mexico, the United Kingdom, Singapore,
China, Hong Kong, Thailand and the European Community. The foreign trademark for WESCO Buyers
Guide ® was registered in Canada in August 2006.
Environmental Matters
Our facilities and operations are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Some of these laws and
regulations may impose strict, joint and several liabilities on certain persons for the cost of
investigation or remediation of contaminated properties. These persons may include former, current
or future owners or operators of properties and persons who arranged for the disposal of hazardous
substances. Our owned and leased real property may give rise to such investigation, remediation and
monitoring liabilities under environmental laws. In addition, anyone disposing of certain products
we distribute, such as ballasts, fluorescent lighting and batteries, must comply with environmental
laws that regulate certain materials in these products.
We believe that we are in compliance, in all material respects, with applicable environmental
laws. As a result, we do not anticipate making significant capital expenditures for environmental
control matters either in the current year or in the near future.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the
first quarter are generally less than 2% below the sales of the remaining three quarters due to a
reduced level of activity during the winter months of January and February. Sales typically
increase beginning in March, with slight fluctuations per month through December. As a result, our
reported sales and earnings in the first quarter are generally lower than in subsequent quarters.
Website Access
Our Internet address is www.wesco.com. Information contained on our website is not
part of, and should not be construed as being incorporated by reference into, this Annual Report on
Form 10-K. We make available free of charge under the Investors heading on our website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), as well as our Proxy Statements, as soon as reasonably
practicable after such documents are electronically filed or furnished, as applicable, with the
Securities and Exchange Commission (the SEC). You also may read and copy any materials we file
with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213. You
may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers like us who file
electronically with the SEC.
In addition, our charters for our Executive Committee, Nominating and Governance Committee,
Audit Committee and Compensation Committee, as well as our Independence Standards, our Governance
Guidelines and our Code of Ethics and Business Conduct for our directors, officers and employees,
are all available on our website in the Corporate Governance link under the Investors heading.
Forward-Looking Information
This Annual Report on Form 10-K contains various forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain
unknown risks and uncertainties, including, among others, those contained in Item 1, Business,
Item 1A, Risk Factors, and Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations. When used in this Annual Report on Form 10-K, 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 managements
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. 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.
9
Executive Officers
Our executive officers and their respective ages and positions as of December 31, 2007 are set
forth below.
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Name |
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Age |
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Position |
|
Roy W. Haley
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|
|
61 |
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|
Chairman and Chief Executive Officer |
John J. Engel
|
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45 |
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Senior Vice President and Chief Operating Officer |
Stephen A. Van Oss
|
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53 |
|
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Senior Vice President and Chief Financial and Administrative Officer |
Andrew J. Bergdoll
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45 |
|
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Vice President, Operations |
Daniel A. Brailer
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50 |
|
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Vice President, Treasurer, Legal and Investor Relations |
William E. Cenk
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50 |
|
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Vice President, Operations |
Allan A. Duganier
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|
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52 |
|
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Director of Internal Audit |
William M. Goodwin
|
|
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62 |
|
|
Vice President, Operations |
Timothy A. Hibbard
|
|
|
51 |
|
|
Corporate Controller |
Robert J. Powell
|
|
|
46 |
|
|
Vice President, Human Resources |
Steven J. Riordan
|
|
|
54 |
|
|
Vice President, Operations |
Robert B. Rosenbaum
|
|
|
50 |
|
|
Vice President, Operations |
Donald H. Thimjon
|
|
|
64 |
|
|
Vice President, Operations |
Ronald P. Van, Jr.
|
|
|
47 |
|
|
Vice President, Operations |
Marcy Smorey-Giger
|
|
|
36 |
|
|
Corporate Counsel and Secretary |
Set forth below is biographical information for our executive officers listed above.
Roy W. Haley has been Chief Executive Officer of the Company since February 1994, and Chairman
of the Board since 1998. From 1988 to 1993, Mr. Haley was an executive at American General
Corporation, a diversified financial services company, where he served as Chief Operating Officer,
as President and as a Director. Mr. Haley is also a Director of United Stationers, Inc. and Cambrex
Corporation. He currently serves on the Federal Reserve Bank of Cleveland and was former Chairman
of the Pittsburgh Branch of the Federal Reserve Bank of Cleveland.
John J. Engel has been Senior Vice President and Chief Operating Officer since July 2004. Mr.
Engel served from 2003 to 2004 as Senior Vice President and General Manager of Gateway, Inc. From
1999 to 2002, Mr. Engel served as an Executive Vice President and Senior Vice President of Perkin
Elmer, Inc. In addition, Mr. Engel was a Vice President and General Manager of Allied Signal from
1994 to 1999 and held various management positions in General Electric from 1985 to 1994.
Stephen A. Van Oss has been Senior Vice President and Chief Financial and Administrative
Officer since July 2004 and, from 2000 to July 2004 served as the Vice President and Chief
Financial Officer. Mr. Van Oss also served as our Director, Information Technology from 1997 to
2000 and as our Director, Acquisition Management in 1997. From 1995 to 1996, Mr. Van Oss served as
Chief Operating Officer and Chief Financial Officer of Paper Back Recycling of America, Inc. He
also held various management positions with Reliance Electric Corporation. Mr. Van Oss was also a
director of Williams Scotsman International, Inc. and a member of its audit committee.
Additionally, he is a trustee of Robert Morris University and serves on the finance and government
committees.
Andrew J. Bergdoll has been Vice President Operations since December 2007. From March 2005
through December 2007, Mr. Bergdoll served as President for Liberty Wire & Cable, Inc. a subsidiary
of Communications Supply Corporation, which WESCO acquired in November 2006. From 2001 to March
2005, Mr. Bergdoll served as Senior Vice President of USFilter, a subsidiary of Siemens AG, prior
to its sale to Siemens in 2004.
Daniel A. Brailer has been Vice President, Treasurer, Legal and Investor Relations since May
2006 and previously was Treasurer and Director of Investor Relations since March 1999. From 1982 to
1999, Mr. Brailer held various positions at Mellon Financial Corporation, most recently as Senior
Vice President.
William E. Cenk has been Vice President, Operations since April 2006. Mr. Cenk served as the
Director of Marketing for us from 2000 to 2006. In addition, Mr. Cenk served in various leadership
positions for our National Accounts and Marketing groups from 1994 through 1999.
Allan A. Duganier has been Director of Internal Audit since January 2006. Mr. Duganier served
as the Corporate Operations Controller from 2001 to 2006 and was the Industrial/Construction Group
Controller from 2000 to 2001.
William M. Goodwin has been Vice President, Operations since March 1994. From 1987 to 1994 Mr.
Goodwin served as a branch, district and region manager in various locations and also served as
Managing Director of WESCOSA, a former Westinghouse-affiliated manufacturing and distribution
business in Saudi Arabia.
Timothy A. Hibbard has been Corporate Controller since July 2006. Mr. Hibbard served as
Corporate Controller at Kennametal Inc. from 2002 to July 2006. From 2000 to February 2002, Mr.
Hibbard served as Director of Finance of Advanced Materials
Solutions Group, and he served from 1998 to September 2000 as President and Controller of
Greenfield Industries, Inc.
10
Robert J. Powell has been Vice President, Human Resources since September 2007. Mr. Powell
served from 2001 to September 2007 as Vice President, Human Resource Operations and Workforce
Planning of Archer Daniels Midland Company. From 2000 to 2001, Mr. Powell served as Vice
President, Human Resources-Southeast of AT&T Broadband, and he served from 1999 to 2000 as
Corporate Vice President Human Resources of Porex Corporation.
Steven J. Riordan has been Vice President, Operations since November 2006. From 1996 until
2006, Mr. Riordan was Chief Executive Officer and President of Communications Supply Holdings,
Inc., a fully integrated national distributor of network infrastructure products that we acquired
in November 2006.
Robert B. Rosenbaum has been Vice President, Operations since September 1998. From 1982 until
1998, Mr. Rosenbaum was the President of the Bruckner Supply Company, Inc., an integrated supply
company that we acquired in September 1998.
Donald H. Thimjon has been Vice President, Operations since March 1994. Mr. Thimjon served as
Vice President, Utility Group for us from 1991 to 1994 and as Regional Manager from 1980 to 1991.
Ronald P. Van, Jr. has been Vice President, Operations since October 1998. Mr. Van was a Vice
President and Controller of EESCO, an electrical distributor that we acquired in 1996.
Marcy Smorey-Giger has been Corporate Counsel and Secretary since May 2004. From 2002 to 2004,
Ms. Smorey-Giger served as Corporate Attorney and Manager, Compliance Programs. From 1999 to 2002,
Ms. Smorey-Giger served as Compliance and Legal Affairs Manager.
Item 1A. Risk Factors.
The following factors, among others, could cause our actual results to differ materially from
the forward-looking statements we make. All forward-looking statements attributable to us or
persons working on our behalf are expressly qualified by the following cautionary statements:
Our outstanding indebtedness requires debt service obligations that could adversely affect our
ability to fulfill our obligations and could limit our growth and impose restrictions on our
business.
As of December 31, 2007, we had $1.3 billion of consolidated indebtedness, including $150
million in aggregate principal amount of 7.50% Senior Subordinated Notes due 2017 (the 2017
Notes), $150 million in aggregate principal amount of 2.625% Convertible Senior Debentures due
2025 (the 2025 Debentures), and $300 million in aggregate principal amount of 1.75% Convertible
Senior Debentures due 2026 (the 2026 Debentures and together with the 2025 Debentures, the
Debentures), and stockholders equity of $608.5 million. We and our subsidiaries may incur
additional indebtedness in the future, subject to certain limitations contained in the instruments
governing our indebtedness. These amounts include our accounts receivable securitization facility
(the Receivables Facility), through which we sell up to $500 million of our accounts receivable
to a third-party conduit. See Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies and Estimates.
Our debt service obligations have important consequences, including but not limited to the
following:
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|
|
a substantial portion of cash flow from our operations will be dedicated to the
payment of principal and interest on our indebtedness, thereby reducing the funds
available for operations, future business opportunities and acquisitions and other
purposes, and increasing our vulnerability to adverse general economic and industry
conditions; |
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|
our ability to obtain additional financing in the future may be limited; |
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|
we may be hindered in our ability to adjust rapidly to changing market conditions; and |
|
|
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|
we may be required to incur additional interest due to the contingent interest
features of the Debentures, which are embedded derivatives. |
Our ability to make scheduled payments of principal and interest on our debt, refinance our
indebtedness, make scheduled payments on our operating leases, fund planned capital expenditures or
to finance acquisitions will depend on our future performance, which, to a certain extent, is
subject to economic, financial, competitive and other factors beyond our control. There can be no
assurance that our business will continue to generate sufficient cash flow from operations in the
future to service our debt, make necessary capital expenditures or meet other cash needs. If unable
to do so, we may be required to refinance all or a portion of our existing debt, to sell assets or
to obtain additional financing.
Our Receivables Facility has a three-year term and is subject to renewal in May 2010. There
can be no assurance that available funding or any sale of assets or additional financing would be
possible at the time of renewal in amounts or terms favorable to us, if at all.
11
Over the next three years, we are obligated to repay approximately $510.8 million of
indebtedness, of which $480.0 million is related to our Receivables Facility, $22.3 million is
related to our revolving credit facility, $4.4 million is related to our mortgage credit facility,
$3.8 million is related to capital leases, and $0.3 million is related to notes payable associated
with acquisitions. Additionally, various acquisition agreements contain contingent consideration for final acquisition
payments, which management has estimated will be approximately $2.5 million. See Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources.
Our debt agreements contain restrictions that may limit our ability to operate our business.
Our credit facilities and the indenture governing WESCO Distributions senior subordinated
indebtedness contain, and any of our future debt agreements may contain, certain covenant
restrictions that limit our ability to operate our business, including restrictions on our ability
to:
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incur additional debt or issue guarantees; |
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create liens; |
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make certain investments; |
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|
enter into transactions with our affiliates; |
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sell certain assets; |
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make capital expenditures; |
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redeem capital stock or make other restricted payments; |
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|
declare or pay dividends or make other distributions to stockholders; and |
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merge or consolidate with any person. |
Our credit facilities also require us to maintain specific earnings to fixed expenses and debt
to earnings ratios and to meet minimum net worth requirements. In addition, our credit facilities
contain additional affirmative and negative covenants. Our ability to comply with these covenants
is dependent on our future performance, which will be subject to many factors, some of which are
beyond our control, including prevailing economic conditions.
As a result of these covenants, our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be significantly restricted, and we
may be prevented from engaging in transactions that might otherwise be beneficial to us. In
addition, our failure to comply with these covenants could result in a default under the
Debentures, the 2017 Notes and our other debt, which could permit the holders to accelerate such
debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such
debt.
We may be unable to repurchase the Debentures or the 2017 Notes for cash when required by the
holders, including following a fundamental change.
Holders of the Debentures have the right to require us to repurchase the respective Debentures
on specified dates or upon the occurrence of a fundamental change prior to maturity. The occurrence
of a change of control would also constitute an event of default under our credit facilities,
requiring repayment of amounts outstanding thereunder, and the occurrence of a change of control
would also enable holders of the 2017 Notes to require WESCO Distribution to repurchase such 2017
Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and additional interest, if any. Any of our future debt agreements may contain similar provisions.
We may not have sufficient funds to make the required repayments and repurchases at such time or
the ability to arrange necessary financing on acceptable terms. In addition, our ability to
repurchase the Debentures or the 2017 Notes in cash may be limited by law or the terms of other
agreements relating to our debt outstanding at the time, including other credit facilities, which
may limit our ability to purchase the Debentures or 2017 Notes for cash in certain circumstances.
If we fail to repurchase the Debentures or 2017 Notes in cash as required by the respective
indentures, it would constitute an event of default under the applicable indenture, which, in turn,
would constitute an event of default under our credit facilities and the other indenture.
Provisions of the Debentures could discourage an acquisition of the Company by a third party.
Certain provisions of the Debentures could make it more difficult or more expensive for a
third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental
change, holders of the Debentures will have the right, at their option, to require us to repurchase
all of their Debentures or any portion of the principal amount of such Debentures in integral
multiples of $1,000. In addition, the occurrence of certain change of control transactions may
result in the Debentures becoming convertible for additional shares or result in antidilution
adjustments which may have an effect of making an acquisition of us less attractive. We may also be
required to issue additional shares upon conversion or provide for conversion into the acquirers
capital stock in the event of certain fundamental changes.
12
If the financial condition of our customers declines, our credit risk could increase.
Significant contraction in the residential housing market, coupled with tightened credit
availability and financial institution underwriting standards, could adversely affect certain of
our customers. Should one or more of our larger customers declare bankruptcy, it could adversely
affect the collectibility of our accounts receivable, bad debt and net income.
Downturns in the electrical distribution industry have had in the past, and may in the future have,
an adverse effect on our sales and profitability.
The electrical distribution industry is affected by changes in economic conditions, including
national, regional and local slowdowns in construction and industrial activity, which are outside
our control. Our operating results may also be adversely affected by increases in interest rates
that may lead to a decline in economic activity, particularly in the construction market, while
simultaneously resulting in higher interest payments under our revolving credit facility. In
addition, during periods of economic slowdown our credit losses could increase. There can be no
assurance that economic slowdowns, adverse economic conditions or cyclical trends in certain
customer markets will not have a material adverse effect on our operating results and financial
condition.
An increase in competition could decrease sales or earnings.
We operate in a highly competitive industry. We compete directly with national, regional and
local providers of electrical and other industrial MRO supplies. Competition is primarily focused
in the local service area and is generally based on product line breadth, product availability,
service capabilities and price. Other sources of competition are buying groups formed by smaller
distributors to increase purchasing power and provide some cooperative marketing capability.
Some of our existing competitors have, and new market entrants may have, greater financial and
marketing resources than us. To the extent existing or future competitors seek to gain or retain
market share by reducing prices, we may be required to lower our prices, thereby adversely
affecting financial results. Existing or future competitors also may seek to compete with us for
acquisitions, which could have the effect of increasing the price and reducing the number of
suitable acquisitions. In addition, it is possible that competitive pressures resulting from
industry consolidation could affect our growth and profit margins.
Loss of key suppliers or lack of product availability could decrease sales and earnings.
Most of our agreements with suppliers are terminable by either party on 60 days notice or
less. Our ten largest suppliers in 2007 accounted for approximately 28% of our purchases for the
period. Our largest supplier in 2007 was Eaton Corporation, through its Eaton Electrical division,
accounting for approximately 10% of our purchases. The loss of, or a substantial decrease in the
availability of, products from any of these suppliers, or the loss of key preferred supplier
agreements, could have a material adverse effect on our business. Supply interruptions could arise
from shortages of raw materials, labor disputes or weather conditions affecting products or
shipments, transportation disruptions, or other reasons beyond our control. In addition, certain of
our products, such as wire and conduit, are commodity-price-based products and may be subject to
significant price fluctuations which are beyond our control. An interruption of operations at any
of our distribution centers could have a material adverse effect on the operations of branches
served by the affected distribution center. Furthermore, we cannot be certain that particular
products or product lines will be available to us, or available in quantities sufficient to meet
customer demand. Such limited product access could cause us to be at a competitive disadvantage.
Acquisitions that we may undertake would involve a number of inherent risks, any of which could
cause us not to realize the benefits anticipated to result.
We have historically expanded our operations through selected acquisitions of businesses and
assets. Acquisitions involve various inherent risks, such as:
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uncertainties in assessing the value, strengths, weaknesses, contingent and
other liabilities and potential profitability of acquisition candidates; |
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the potential loss of key employees of an acquired business; |
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the ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other transaction; |
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problems that could arise from the integration of the acquired business; and |
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unanticipated changes in business, industry or general economic conditions
that affect the assumptions underlying the acquisition or other transaction
rationale. |
Any one or more of these factors could cause us not to realize the benefits anticipated to result
from the acquisition of businesses or assets.
13
Goodwill and intangible assets recorded as a result of our acquisitions could become impaired.
As of December 31, 2007, our goodwill and other intangible assets amounted to $1.1 billion,
net of accumulated amortization. To the extent we do not generate sufficient cash flows to recover
the net amount of any investments in goodwill and other intangible assets recorded, the investment
could be considered impaired and subject to write-off. We expect to record further goodwill and
other intangible assets as a result of future acquisitions we may complete. Future amortization of
such other intangible assets or impairments, if any, of goodwill or intangible assets would
adversely affect our results of operations in any given period.
A disruption of our information systems could increase expenses, decrease sales or reduce earnings.
A serious disruption of our information systems could have a material adverse effect on our
business and results of operations. Our computer systems are an integral part of our business and
growth strategies. We depend on our information systems to process orders, manage inventory and
accounts receivable collections, purchase products, ship products to our customers on a timely
basis, maintain cost-effective operations and provide superior service to our customers.
Our business may be harmed by required compliance with anti-terrorism measures and regulations.
Following the 2001 terrorist attacks on the United States, a number of federal, state and
local authorities have implemented various security measures, including checkpoints and travel
restrictions on large trucks, such as the ones that we and our suppliers use. If security measures
disrupt or impede the timing of our suppliers deliveries of the product inventory we need or our
deliveries of our product to our customers, we may not be able to meet the needs of our customers
or may incur additional expenses to do so.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Delaware law and of our certificate of incorporation and bylaws could make it
more difficult for a third-party to acquire control of us. For example, we are subject to Section
203 of the Delaware General Corporation Law, which would make it more difficult for another party
to acquire us without the approval of our Board of Directors. Our Board of Directors is divided
into three classes, with each class serving a three-year term. Additionally, our Restated
Certificate of Incorporation authorizes our Board of Directors to issue preferred stock without
requiring any stockholder approval, and preferred stock could be issued as a defensive measure in
response to a takeover proposal. These provisions could make it more difficult for a third-party to
acquire us even if an acquisition might be in the best interest of our stockholders.
There may be future dilution of our common stock.
To the extent options to purchase common stock under our stock option plans are exercised,
holders of our common stock will incur dilution. Additionally, our Debentures include contingent
conversion price provisions and options for settlement in shares, which would increase dilution to
our stockholders.
There is a risk that the market value of our common stock may decline.
Stock markets have experienced significant price and trading volume fluctuations, and the
market prices of companies in our industry have been volatile. It is impossible to predict whether
the price of our common stock will rise or fall. Trading prices of our common stock will be
influenced by our operating results and prospects and by economic, financial and other factors.
Future sales of our common stock in the public market or issuance of securities senior to our
common stock could adversely affect the trading price of our common stock and the value of the
Debentures and our ability to raise funds in new stock offerings.
Future sales of substantial amounts of our common stock or equity-related securities in the
public market, or the perception that such sales could occur, could adversely affect prevailing
trading prices of our common stock and the value of the Debentures and could impair our ability to
raise capital through future offerings of equity or equity-related securities. No prediction can be
made as to the effect, if any, that future sales of shares of common stock or the availability of
shares of common stock for future sale will have on the trading price of our common stock or the
value of the Debentures.
Item 1B. Unresolved Staff Comments.
Not applicable.
14
Item 2. Properties.
We have more than 400 branches, of which approximately 340 are located in the United States,
approximately 50 are located in Canada and the remainder are located in Mexico, the United Kingdom,
Nigeria, United Arab Emirates and Singapore. Approximately 20% of our branches are owned
facilities, and the remainder are leased.
The following table summarizes our distribution centers:
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|
Square Feet |
|
Leased/Owned |
Location |
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|
Warrendale, PA. |
|
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194,000 |
|
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Owned |
Sparks, NV |
|
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131,000 |
|
|
Leased |
Byhalia, MS |
|
|
148,000 |
|
|
Owned |
Little Rock, AR |
|
|
100,000 |
|
|
Leased |
Dorval, QE |
|
|
90,000 |
|
|
Leased |
Burnaby, BC |
|
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65,000 |
|
|
Owned |
Kettering, OH |
|
|
48,000 |
|
|
Leased |
We also lease our 69,000-square-foot headquarters in Pittsburgh, Pennsylvania. We do not
regard the real property associated with any single branch location as material to our operations.
We believe our facilities are in good operating condition and are adequate for their respective
uses.
Item 3. 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, based on
information presently available, 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 quarter of one or more of these matters may have a material adverse effect on our results of
operations for that period.
We are a co-defendant in a lawsuit filed in a state court in Indiana in which a customer
alleges that we sold defective products manufactured or remanufactured by others and is seeking
monetary damages in the amount of $52 million. We have denied any liability, believe that we have
meritorious defenses and will vigorously defend ourself against these allegations.
Information relating to legal proceedings is included in Note 15, Commitments and Contingencies of
the Notes to Consolidated Financial Statements and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our security holders during the fourth quarter of 2007.
15
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market, Stockholder and Dividend Information. Our common stock is listed on the New York
Stock Exchange under the symbol WCC. As of
February 25, 2008, there were 42,832,207 shares of
common stock outstanding held by approximately 23 holders of record. We have not paid dividends on
the common stock and do not presently plan to pay dividends in the foreseeable future. It is
currently expected that earnings will be retained and reinvested to support either business growth,
share repurchases or debt reduction. In addition, our revolving credit facility and the indenture
governing the 2017 Notes restrict our ability to pay dividends. See Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources. The following table sets forth the high and low sales prices per share of our common
stock, as reported on the New York Stock Exchange, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Sales Prices |
Quarter |
|
High |
|
Low |
2006 |
|
|
|
|
|
|
|
|
First |
|
$ |
69.19 |
|
|
$ |
43.00 |
|
Second |
|
|
80.29 |
|
|
|
54.14 |
|
Third |
|
|
70.65 |
|
|
|
55.36 |
|
Fourth |
|
|
71.10 |
|
|
|
56.68 |
|
2007 |
|
|
|
|
|
|
|
|
First |
|
$ |
69.67 |
|
|
$ |
56.76 |
|
Second |
|
|
66.59 |
|
|
|
59.82 |
|
Third |
|
|
64.40 |
|
|
|
37.65 |
|
Fourth |
|
|
51.00 |
|
|
|
37.94 |
|
Share Repurchase Plans. The following table provides a summary of all repurchases by us of
our common stock during the three-months ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Approximate Dollar Value of |
|
|
|
|
|
|
|
|
Purchased as Part of |
|
Shares That May Yet Be |
|
|
Total Number of |
|
Average Price |
|
Publicly Announced Plans or |
|
Purchased Under the Plans or |
|
|
Shares Purchased |
|
Paid Per |
|
Programs |
|
Programs |
Period |
|
(In Thousands)(3) |
|
Share |
|
(In Thousands) (1) |
|
(In Millions) (1)(2) |
|
|
|
October 2007 |
|
|
1.5 |
|
|
$ |
46.33 |
|
|
|
|
|
|
$ |
400.0 |
|
November 2007 |
|
|
0.8 |
|
|
$ |
41.58 |
|
|
|
|
|
|
$ |
400.0 |
|
December 2007 |
|
|
776.3 |
|
|
$ |
39.39 |
|
|
|
776.1 |
|
|
$ |
369.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
778.6 |
|
|
$ |
39.40 |
|
|
|
776.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On September 28, 2007, we announced that the $400 million stock repurchase program, reported
on February 1, 2007, had been completed. We also announced that our Board of Directors
authorized a new stock repurchase program in the amount of up to $400 million with an
expiration date of September 30, 2009. |
|
(2) |
|
Excludes commission fees of $23.3 thousand for the month of December. |
|
(3) |
|
Of the 0.8 million shares acquired, 2,548 shares were purchased from employees for
approximately $0.1 million in connection with the settlement of tax withholding obligations
arising from the exercise of stock-settled stock appreciation rights. |
16
Item 6. Selected Financial Data.
Selected financial data and significant events related to the Companys financial results for
the last five fiscal years are listed below. The financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in Item 8 and with Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
(Dollars in millions, except share data) |
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(1) |
|
$ |
6,003.5 |
|
|
$ |
5,320.6 |
|
|
$ |
4,421.1 |
|
|
$ |
3,741.3 |
|
|
$ |
3,286.8 |
|
Cost of goods sold (2) |
|
|
4,781.4 |
|
|
|
4,234.1 |
|
|
|
3,580.4 |
|
|
|
3,029.2 |
|
|
|
2,676.7 |
|
Selling, general and administrative
expenses |
|
|
791.1 |
|
|
|
692.9 |
|
|
|
612.8 |
|
|
|
544.5 |
|
|
|
501.5 |
|
Depreciation and amortization |
|
|
36.8 |
|
|
|
28.7 |
|
|
|
18.6 |
|
|
|
18.1 |
|
|
|
22.5 |
|
|
|
|
Income from operations |
|
|
394.2 |
|
|
|
364.9 |
|
|
|
209.3 |
|
|
|
149.5 |
|
|
|
86.1 |
|
Interest expense, net |
|
|
63.2 |
|
|
|
24.6 |
|
|
|
30.2 |
|
|
|
40.8 |
|
|
|
42.3 |
|
Loss on debt extinguishment (3) |
|
|
|
|
|
|
|
|
|
|
14.9 |
|
|
|
2.6 |
|
|
|
0.2 |
|
Other expenses(4) |
|
|
|
|
|
|
22.8 |
|
|
|
13.3 |
|
|
|
6.6 |
|
|
|
4.5 |
|
|
|
|
Income before income taxes |
|
|
331.0 |
|
|
|
317.5 |
|
|
|
150.9 |
|
|
|
99.5 |
|
|
|
39.1 |
|
Provision for income taxes(5) |
|
|
90.4 |
|
|
|
100.2 |
|
|
|
47.4 |
|
|
|
34.6 |
|
|
|
9.1 |
|
|
|
|
Net income(1) |
|
$ |
240.6 |
|
|
$ |
217.3 |
|
|
$ |
103.5 |
|
|
$ |
64.9 |
|
|
$ |
30.0 |
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.27 |
|
|
$ |
4.46 |
|
|
$ |
2.20 |
|
|
$ |
1.55 |
|
|
$ |
0.67 |
|
Diluted |
|
$ |
4.99 |
|
|
$ |
4.14 |
|
|
$ |
2.10 |
|
|
$ |
1.47 |
|
|
$ |
0.65 |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,699,537 |
|
|
|
48,724,343 |
|
|
|
47,085,524 |
|
|
|
41,838,034 |
|
|
|
44,631,459 |
|
Diluted |
|
|
48,250,329 |
|
|
|
52,463,694 |
|
|
|
49,238,436 |
|
|
|
44,109,153 |
|
|
|
46,349,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
16.1 |
|
|
$ |
18.4 |
|
|
$ |
14.2 |
|
|
$ |
12.1 |
|
|
$ |
8.4 |
|
Net cash provided by operating activities |
|
|
262.3 |
|
|
|
207.1 |
|
|
|
295.1 |
|
|
|
21.9 |
|
|
|
35.8 |
|
Net cash used by investing
activities (1) |
|
|
(48.0 |
) |
|
|
(555.9 |
) |
|
|
(291.0 |
) |
|
|
(46.3 |
) |
|
|
(9.2 |
) |
Net cash (used) provided by financing
activities |
|
|
(212.6 |
) |
|
|
400.1 |
|
|
|
(17.0 |
) |
|
|
30.7 |
|
|
|
(22.3 |
) |
Ratio of earnings to fixed charges
(6),(7) |
|
|
5.2x |
|
|
|
9.5x |
|
|
|
4.7x |
|
|
|
2.9x |
|
|
|
1.7X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,859.9 |
|
|
$ |
2,824.0 |
|
|
$ |
1,651.2 |
|
|
$ |
1,356.9 |
|
|
$ |
1,161.2 |
|
Total debt (including current portion and
short-term debt) |
|
|
1,316.3 |
|
|
|
1,140.3 |
|
|
|
403.6 |
|
|
|
417.6 |
|
|
|
422.2 |
|
Long-term obligations(8) |
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
2.0 |
|
|
|
53.0 |
|
Stockholders equity |
|
|
608.5 |
|
|
|
763.2 |
|
|
|
491.5 |
|
|
|
353.6 |
|
|
|
167.7 |
|
|
|
|
(1) |
|
Reflects the impact of acquisitions completed in 2007, 2006 and 2005. See Note 4 to the consolidated financial statements. |
|
(2) |
|
Excludes depreciation and amortization. |
|
(3) |
|
Represents charges relating to the write-off of unamortized debt issuance and other costs associated with the early extinguishment of debt. |
|
(4) |
|
Represents costs relating to the sale of accounts receivable pursuant to our Receivables Facility. Prior to the amendment and restatement
of the Receivables Facility, interest expense and other costs related to the facility were recorded as other expense in the consolidated
statement of income. See Note 7 to the consolidated financial statements. |
|
(5) |
|
Benefits of $8.5 million from the reversal of valuation allowances against deferred tax assets and $2.6 million from the resolution of
prior year tax contingencies in 2007 and 2003, respectively, resulted in unusually low provisions for income taxes. |
|
(6) |
|
For purposes of calculating the ratio of earnings to fixed charges, earnings represents income before income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of deferred financing costs and the component of rental expense that management
believes is representative of the interest component of rental expense. |
|
(7) |
|
Interest expense related to the Receivables Facility is included in the 2007calculation of earnings to fixed charges due to the amendment
and restatement of the facility in December 2006 (see Note 7 to the consolidated financial statements). |
|
(8) |
|
Includes amounts due under earnout agreements for past acquisitions. |
17
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the audited consolidated financial
statements and notes thereto included in Item 8 of this Annual Report on Form 10-K.
Company Overview
In 2007, we achieved organic growth, completed several acquisitions, executed new initiatives
to reduce cost, and increased financing availability under our Receivables Facility. Our financial
results reflect sales growth in our served markets, along with positive impact from our recent
acquisitions and productivity initiatives. Sales increased 12.8% over the prior year, and our cost
of goods sold as a percentage of net sales was 79.6% in 2007 and 2006. During 2007, sales from our
operations acquired in the fourth quarter of 2006 and the latter half 2007 were $599.0 million and
accounted for the majority of the sales increase. Favorable exchange rates also contributed to the
higher revenues. Operating income increased 8.0% to $394.2 million primarily from our recent
acquisitions and cost containment initiatives. The combination of all these factors led to net
income of $240.6 million, an increase of 10.7% over the prior year. Diluted earnings per share
increased 20.5% in 2007 to $4.99, compared with $4.14 in 2006.
Our end markets consist of industrial, construction, utility and commercial, institutional and
governmental customers. Our sales to these markets can be categorized as stock, direct ship and
special order. Stock orders are filled directly from existing inventory and represent approximately
49% of total sales. Approximately 41% of our total sales are direct ship sales. Direct ship sales
are typically custom-built products, large orders or products that are too bulky to be easily
handled and, as a result, are shipped directly to the customer from the supplier. Special orders
are for products that are not ordinarily stocked in inventory and are ordered based on a customers
specific request. Special orders represent the remainder of total sales.
We have historically financed our working capital requirements, capital expenditures,
acquisitions, share repurchases and new branch openings through internally generated cash flow,
borrowings under our credit facilities and funding through our Receivables Facility.
Cash Flow
We generated $262.3 million in operating cash flow during 2007. Included in this amount was
net income of $240.6 million. Investing activities in 2007 included $32.4 million of acquisition
related payments and $16.1 million of capital expenditures. Financing activities during 2007
consisted of borrowings and repayments of $891.4 million and $801.1 million, respectively, related
to our revolving credit facility, $440.8 million related to stock repurchases and net borrowings of
$89.5 million related to our Receivables Facility, whereby we sell, on a continuous basis, an
undivided interest in all domestic accounts receivable to WESCO Receivables Corp., a wholly owned,
special purpose entity (SPE).
Financing Availability
As of December 31, 2007, we had approximately $146.2 million in total available borrowing
capacity under our revolving credit facility and had drawn $480.0 million under our Receivables
Facility.
Outlook
We believe that acquisitions and improvements in operations and our capital structure made in
2006 and 2007 have positioned us well for 2008. We continue to see macroeconomic data and input
from internal sales management, customers and suppliers that suggest activity levels in our major
end markets will be somewhat softer than that experienced in 2007. We believe that there are
opportunities in the industrial and commercial construction end markets, and that we are well
positioned to participate in these large fragmented markets. Our strong market position, combined
with our continued focus on margin, productivity improvement, and selling and marketing
initiatives, should provide us with a competitive advantage and enable us to perform well
throughout 2008.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those related to supplier programs, bad
debts, inventories, insurance costs, goodwill, income taxes, contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. If actual market conditions are less favorable than
those projected by management, additional adjustments to reserve items may be required. We believe
the following critical accounting policies affect our judgments and estimates used in the preparation of our
consolidated financial statements.
18
Revenue Recognition
Revenues are recognized for product sales when title, ownership and risk of loss pass to the
customer, or for services when the service is rendered. In the case of stock sales and special
orders, a sale occurs at the time of shipment from our distribution point, as the terms of our
sales are FOB shipping point. In cases where we process customer orders but ship directly from our
suppliers, revenue is recognized once product is shipped and title has passed. For some of our
customers, we provide services such as inventory management or other specific support. Revenues are
recognized upon evidence of fulfillment of the agreed upon services. In all cases, revenue is
recognized once the sales price to our customer is fixed or is determinable and we have reasonable
assurance as to the collectibility in accordance with Staff Accounting Bulletin No.104.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. We have a systematic procedure using estimates based on
historical data and reasonable assumptions of collectibles made at the local branch level and on a
consolidated corporate basis to calculate the allowance for doubtful accounts.
Excess and Obsolete Inventory
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. A systematic procedure is used to determine excess and
obsolete inventory reflecting historical data and reasonable assumptions for the percentage of
excess and obsolete inventory on a consolidated basis.
Supplier Volume Rebates
We receive rebates from certain suppliers based on contractual arrangements with them. Since
there is a lag between actual purchases and the rebates received from the suppliers, we must
estimate and accrue the approximate amount of rebates available at a specific date. We record the
amounts as other accounts receivable on the balance sheet. The corresponding rebate income is
recorded as a reduction of cost of goods sold. The appropriate level of such income is derived from
the level of actual purchases made by us from suppliers, in accordance with the provisions of
Emerging Issues Task Force (EITF) Issue No. 02-16 , Accounting by a Reseller for Cash
Consideration Received from a Vendor .
Goodwill and Indefinite Life Intangible Assets
We test goodwill and indefinite life intangible assets for impairment annually or more
frequently when events or circumstances occur indicating that their carrying value may not be
recoverable. The evaluation of impairment involves comparing the current fair value of goodwill to
the recorded value. We estimate fair value using discounted cash flow analyses, which involves
considerable management judgment. Assumptions used for these estimated cash flows are based on a
combination of historical results and current internal forecasts. Two primary assumptions were an
average long-term revenue growth ranging from 1.5% to 12% depending on the end market served and a
discount rate of 7.8%. We cannot predict certain events that could adversely affect the reported
value of goodwill and indefinite life intangible assets, which totaled $970.6 million and $977.4
million at December 31, 2007 and 2006, respectively.
Intangible Assets
We account for certain economic benefits purchased as a result of our acquisitions, including
customer relations, distribution agreements and trademarks, as intangible assets. Except for
trademarks, which have an indefinite life, we amortize intangible assets over a useful life
determined by the expected cash flows produced by such intangibles and their respective tax
benefits. Useful lives vary between 3 and 19 years, depending on the specific intangible asset.
Insurance Programs
We use commercial insurance for auto, workers compensation, casualty and health claims as a
risk reduction strategy to minimize catastrophic losses. Our strategy involves large deductibles
where we must pay all costs up to the deductible amount. We estimate our reserve based on
historical incident rates and costs.
Income Taxes
We record our deferred tax assets at amounts that are expected to be realized. We evaluate
future taxable income and potential tax planning strategies in assessing the potential need for a
valuation allowance. Should we determine that we would not be able to realize all or part of our
deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
During the first quarter of 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting for uncertainty in income taxes. The adoption of FIN 48 resulted in an
increase of approximately $4.8 million in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance of retained earnings. We frequently
review tax issues and positions taken on tax returns to determine the need and amount of
contingency reserves necessary to cover any probable audit adjustments.
19
Stock-Based Compensation
Our stock-based employee compensation plans are comprised of fixed stock options and
stock-settled stock appreciation rights. Beginning January 1, 2006, we adopted SFAS No. 123
(revised 2004) (SFAS 123R), Share-Based Payment, using the modified prospective method. Stock
options awarded prior to 2006 were accounted for using the measurement provisions of SFAS No. 123
(SFAS 123), Accounting for Stock-Based Compensation.
Under SFAS 123R, compensation cost for all stock-based awards is measured at fair value on
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-based awards is determined using the
Black-Scholes valuation model. Expected volatilities are based on historical volatility of our
common stock. We estimate the expected life of the option or stock settled appreciation right using
historical data pertaining to option exercises and employee terminations. The risk-free rate is
based on the U.S. Treasury yields in effect at the time of grant. The forfeiture assumption is
based on our historical employee behavior, which we review on an annual basis. No dividends are
assumed.
We recognized $14.4 million, $11.7 million, and $8.6 million of non-cash stock-based
compensation expense, which is included in selling, general and administrative expenses, in 2007,
2006 and 2005, respectively.
As of December 31, 2007, there was $19.6 million of total unrecognized compensation expense
related to non-vested stock-based compensation arrangements for all awards previously made of which
approximately $10.9 million is expected to be recognized in 2008, $6.5 million in 2009 and $2.2
million in 2010.
Accounts Receivable Securitization Facility
Under our Receivables Facility, we sell, on a continuous basis, all domestic accounts
receivable to WESCO Receivables Corporation, a wholly owned 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 form of over collateralization, in
a portion of the receivables.
We account for the Receivables Facility in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140).
Prior to December 2006, we accounted for transfers of receivables pursuant to the facility as a
sale and removed them from our balance sheet. Expenses associated with the facility were reported
as other expense in the statement of income. In December 2006, the Receivables Facility was amended
and restated such that we effectively maintain control of receivables transferred pursuant to the
facility; therefore the transfers no longer qualify for sale treatment under SFAS No. 140. As a
result, the transferred receivables remain on our balance sheet as trade receivables, and we
recognize the related secured borrowing. Beginning in 2007, expenses associated with the
Receivables Facility were classified as interest expense in the statement of income.
20
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items in
our consolidated statements of income for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
79.6 |
|
|
|
79.6 |
|
|
|
81.0 |
|
Selling, general and administrative expenses |
|
|
13.2 |
|
|
|
13.0 |
|
|
|
13.9 |
|
Depreciation and amortization |
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
|
Income from operations |
|
|
6.6 |
|
|
|
6.9 |
|
|
|
4.7 |
|
Interest expense |
|
|
1.1 |
|
|
|
0.5 |
|
|
|
0.7 |
|
Loss on debt extinguishment |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.3 |
|
Other expenses |
|
|
0.0 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
|
Income before income taxes |
|
|
5.5 |
|
|
|
6.0 |
|
|
|
3.4 |
|
Provision for income taxes |
|
|
1.5 |
|
|
|
1.9 |
|
|
|
1.1 |
|
|
|
|
Net income |
|
|
4.0 |
% |
|
|
4.1 |
% |
|
|
2.3 |
% |
|
|
|
2007 Compared to 2006
Net Sales. Sales in 2007 increased 12.8% to $6,003.5 million, compared with $5,320.6 million
in 2006, primarily as a result of acquisitions and sales productivity initiatives. Sales from our
recent acquisitions were $599.1 million and accounted for the majority of the sales increase. Sales
in 2007 also benefited from favorable foreign currency exchange rates.
Cost of Goods Sold. Cost of goods sold increased 12.9% in 2007 to $4,781.3 million, compared
with $4,234.1 million in 2006 and cost of goods sold as a percentage of net sales was 79.6% in 2007
and 2006. The cost of goods sold was positively impacted by lower cost of goods sold as a
percentage of net sales from the acquisition completed in the fourth quarter of 2006, offset by an
unfavorable sales mix and the absence of $18.4 million of commodity based pricing inventory
benefits realized in last years comparable period.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses include costs associated
with personnel, shipping and handling, travel, advertising, facilities, utilities and bad debts.
SG&A expenses increased by $98.3 million, or 14.2%, to $791.1 million in 2007. As a percentage of
net sales, SG&A expenses increased to 13.2% of sales, compared with 13.0% in 2006, reflecting the
impact of the recent acquisitions and a legal settlement in the first quarter of 2007, partially
offset by foreign currency transaction gains. SG&A payroll expenses for 2007 of $553.4 million
increased by $59.6 million compared to 2006, which in the aggregate was less than the $60.0 million
increase that resulted from the recent acquisitions. Contributing to the remaining change in
payroll expenses was the decrease in temporary labor costs of $4.0, the decrease in healthcare and
benefit costs of $3.0 million driven by the decrease in discretionary benefit costs, and the
decrease in other SG&A related payroll expenses of $0.5 million. These decreases were offset by
an increase in salaries and variable commission costs of $4.4 million and an increase in
stock-based compensation costs of $2.7 million. Bad debt expense decreased to $2.2 million in
2007, compared with $3.8 million for 2006, reflecting increased scrutiny relative to credit
advances and the account receivable collection process. Shipping and handling expenses included in
SG&A expenses was $62.0 million in 2007, compared with $48.9 million in 2006. The $13.1 million
increase in shipping and handling expenses was due to the recent acquisitions and the continued
increase in transportation and fuel costs.
Depreciation and Amortization. Depreciation and amortization increased $8.1 million to $36.8
million in 2007, compared with $28.7 million in 2006. The increase in depreciation and amortization
related to acquisitions completed in 2006 and 2007 was $5.7 million. Depreciation from operations
excluding acquisitions, increased by $2.4 million compared to 2006 primarily as a result of
increased capital expenditures.
Income from Operations. Income from operations increased by $29.2 million, or 8.0%, to $394.2
million in 2007, compared with $365.0 million in 2006. The increase in operating income was
primarily attributable to higher sales, cost containment initiatives and foreign currency
transaction gains.
Interest Expense. Interest expense totaled $63.2 million in 2007, compared with $24.6 million
in 2006, an increase of 157%. This increase is primarily due to the amendment and restatement of
the Receivables Facility in December 2006, which required the reclassification of expenses related
to the facility. Prior to December 2006, interest expense and other costs related to the
Receivables Facility were recorded as other expense in the consolidated statement of income.
Interest expense and other costs related to the Receivables Facility totaled $28.3 million in 2007,
compared to $22.8 million in 2006. The 24.1% increase was primarily attributable to elevated
borrowings under the Receivable Facility to fund our share repurchase program. Also contributing
to the increase in interest expense was the increase in borrowings under the revolving credit
facility to fund the share repurchase program, the issuance of the 2026 Debentures in November
2006, and the increase in interest rates.
21
Loss on Debt Extinguishment. There was no debt extinguished during 2007 or 2006.
Other Expenses. There was no other expense recorded in 2007, a decrease of $22.8 million
from last years comparable period. As mentioned above, cost associated with the Receivables
Facility are no longer classified as other expense.
Income Taxes. Our effective income tax rate decreased to 27.3% in 2007, compared with 31.6% in
2006, primarily as a result of a one time benefit related to the reversal of a valuation allowance
against deferred tax assets for tax net operating loss carryforwards. Also contributing to the
decrease were non-recurring benefits related to export tax incentives and a change in foreign
deferred income taxes.
Net Income. Net income and diluted earnings per share on a consolidated basis totaled $240.6
million and $4.99 per share, respectively, in 2007, compared with $217.3 million and $4.14 per
share, respectively, in 2006.
2006 Compared to 2005
Net Sales. Sales in 2006 increased 20.3% to $5,320.6 million, compared with $4,421.1 million
in 2005, primarily as a result of strong growth in our markets served, acquisitions and sales
productivity initiatives. Sales from our recent acquisitions were $506.6 million and accounted for
approximately 9.1% of the 2006 sales increase. Sales in 2006 also benefited by approximately 6.0%
over 2005 from price increases which kept pace with rising cost of sales, approximately 1.0% from
favorable currency exchange rates and the remaining 4.2% from higher sales volume, offset by
decreased hurricane related activity. Sales volume in 2006 grew faster than that of our end markets
served.
Cost of Goods Sold. Cost of goods sold increased 18.3% in 2006 to $4,234.1 million, compared
with $3,580.4 million in 2005, and cost of goods sold as a percentage of net sales was 79.6% in
2006 and 81.0% in 2005. The cost of goods sold was positively impacted by cost containment
initiatives and lower cost of goods sold as a percentage of net sales from acquisitions completed
in 2005 and 2006.
Selling, General and Administrative Expenses. SG&A expenses include costs associated with
personnel, shipping and handling, travel, advertising, facilities, utilities and bad debts. SG&A
expenses increased by $80.1 million, or 13.1%, to $692.9 million in 2006. As a percentage of net
sales, SG&A expenses decreased to 13.0% of sales, compared with 13.9% in 2005, reflecting the
positive impact of cost-containment initiatives and the leverage of higher sales volume. Also
contributing to this decrease is the reduction in legal costs due to a significant legal settlement
which was finalized in 2005. SG&A payroll expenses for 2006 of $493.8 million increased by $83.0
million compared to 2005, of which $45.5 million resulted from the 2005 and 2006 acquisitions. Of
the remaining $37.5 million increase in payroll expenses, $28.4 million resulted from increased
salaries and variable commissions and incentive compensation costs resulting from increased sales,
$4.7 million was from increased healthcare and benefit costs, $3.1 million was from increased stock
option expense ($.1 million attributable to the implementation of SFAS 123R) and $1.3 million was
from increased other SG&A related payroll expenses. Bad debt expense decreased to $3.8 million in
2006, compared with $8.6 million for 2005, reflecting increased scrutiny relative to credit
advances and the account receivable collection process. Shipping and handling expense, included in
SG&A expenses, was $48.9 million in 2006, compared with $44.8 million in 2005. The $4.1 million
increase in 2006 shipping and handling expense included a $5.1 million increase due to acquisitions
offset by $1 million related to cost containment initiatives.
Depreciation and Amortization. Depreciation and amortization increased $10.1 million to $28.7
million in 2006, compared with $18.6 million in 2005. The increase in depreciation and amortization
related to acquisitions completed in 2005 and 2006 was $9.1 million. Depreciation from operations
excluding acquisitions increased by $1.0 million from 2005 amounts as a result of the increase in
capital expenditures. Depreciation and amortization are expected to increase in 2007 due to the
acquisition of Communications Supply Holdings, Inc.
Income from Operations. Income from operations increased by $155.7 million, or 74.4%, to
$365.0 million in 2006, compared with $209.3 million in 2005. The increase in operating income
resulted from higher sales and control over SG&A expenses.
Interest Expense. Interest expense totaled $24.6 million in 2006, compared with $30.2 million
in 2005. The decrease was due primarily to redemptions of the 9.125% Senior Subordinated Notes due
2008 (the 2008 Notes), which occurred in 2005, and to comparatively lower interest rates on the
2017 Notes and our Debentures.
Loss on Debt Extinguishment. There was no debt extinguished during 2006. Loss on debt
extinguishment in 2005 was $14.9 million, reflecting redemptions of $324 million in aggregate
principal amount of 2008 Notes.
Other Expenses. Other expenses increased in 2006 to $22.8 million, compared to $13.3 million
in 2005, as a result of higher interest rates and increased borrowing under our Receivables
Facility in 2006.
Income Taxes. Our effective income tax rate increased to 31.6% in 2006, compared with 31.4% in
2005, as a result of higher state taxes offset by tax planning initiatives, which included U.S. tax
benefits from foreign operations and U.S. tax credits.
Net Income. Net income and diluted earnings per share on a consolidated basis totaled $217.3
million and $4.14 per share, respectively, in 2006, compared with $103.5 million and $2.10 per
share, respectively, in 2005.
22
Liquidity and Capital Resources
Total assets were approximately $2.9 billion at December 31, 2007, compared to $2.8 billion at
December 31, 2006. The increase in total assets was principally attributable to the recent
acquisitions and investments in working capital. Total liabilities at December
31, 2007 compared to December 31, 2006 increased by $190.7 million to $2.3 billion. Contributing
to the increase in total liabilities was the increase in short-term and long-term debt of $176.0
million related to additional borrowings under our revolving credit facility and Receivables
Facility to finance our stock repurchase program; increase in accounts payable of $36.0 million as
a result of increased cost of sales; increase in bank overdrafts of $31.1 million; and an increase
in other noncurrent liabilities of $16.6 million primarily related to the adoption of FIN 48. The
increase in total liabilities was offset by a decrease in deferred income taxes of $31.6 million as
result of purchase price adjustments to our 2006 acquisition and the reversal of a valuation
allowance; a decrease in accrued salaries and wages of $18.5 million as a result of reduced
incentive compensation and discretionary benefit costs; and a decrease in other current liabilities
of $16.7 million due to a change in taxes payable. Stockholders equity decreased by 20.3% to
$608.5 million at December 31, 2007, compared with $763.2 million at December 31, 2006, primarily
as a result of stock repurchases, which totaled $430.8 million. Also contributing to the change in
stockholders equity was net earnings of $240.6 million offset by a charge of $4.8 million related
to the adoption of FIN 48, $14.4 million related to stock-based compensation expense, $14.3 million
related to exercises of stock options, and $11.3 million from foreign currency translation
adjustments.
The following table sets forth our outstanding indebtedness:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2007 |
|
2006 |
|
|
|
|
|
(In thousands) |
Revolving credit facility |
|
$ |
187,300 |
|
|
$ |
97,000 |
|
Mortgage financing facility |
|
|
43,638 |
|
|
|
44,925 |
|
Acquisition related notes: |
|
|
|
|
|
|
|
|
Fastec |
|
|
|
|
|
|
3,329 |
|
Other |
|
|
552 |
|
|
|
666 |
|
Capital leases |
|
|
4,797 |
|
|
|
3,894 |
|
7.50% Senior Subordinated Notes due 2017 |
|
|
150,000 |
|
|
|
150,000 |
|
2.625% Convertible Senior Debentures due 2025 |
|
|
150,000 |
|
|
|
150,000 |
|
1.75% Convertible Senior Debentures due 2026 |
|
|
300,000 |
|
|
|
300,000 |
|
Accounts Receivable Securitization Facility |
|
|
480,000 |
|
|
|
390,500 |
|
|
|
|
|
|
|
1,316,287 |
|
|
|
1,140,314 |
|
Less current portion |
|
|
(2,676 |
) |
|
|
(5,927 |
) |
Less short-term debt |
|
|
(502,300 |
) |
|
|
(390,500 |
) |
|
|
|
|
|
$ |
811,311 |
|
|
$ |
743,887 |
|
|
|
|
The required annual principal repayments for all indebtedness for the next five years and
thereafter, as of December 31, 2007 is set forth in the following table:
|
|
|
|
|
(in thousands) |
|
|
|
|
2008 |
|
$ |
504,976 |
|
2009 |
|
|
3,032 |
|
2010 |
|
|
2,793 |
|
2011 |
|
|
2,460 |
|
2012 |
|
|
2,120 |
|
Thereafter |
|
|
800,906 |
|
|
|
|
|
|
|
$ |
1,316,287 |
|
|
|
|
|
Our liquidity needs arise from fluctuations in our working capital requirements, capital
expenditures, share repurchases, acquisitions and debt service obligations.
In 2008, we anticipate capital expenditures to increase by approximately $5.9 million from
2007 capital expenditures of approximately $16.1 million, with the increase in spending expected to
occur in our information technology area and on facility improvements. Also, we intend to incur
costs related to our stock repurchase program (see note 9 to the consolidated financial
statements).
23
9.125% Senior Subordinated Notes due 2008
In June 1998 and August 2001, WESCO Distribution, Inc. completed offerings of $300 million and
$100 million, respectively, in aggregate principal amount of 2008 Notes. The 2008 Notes were issued
at an average issue price of 98% of par, and net proceeds received from the sales of the 2008 Notes
were approximately $376 million in the aggregate. During 2003 and 2004, we repurchased $21.1
million and $55.3 million, respectively, in aggregate principal amount of 2008 Notes and recorded a
net loss of $2.6 million in 2004 and a net gain of $0.6 million in 2003. We redeemed all of the
remaining principal amount of the 2008 Notes during 2005, incurring a charge of $14.9 million. The
charge included the payment of a redemption price at 101.521% of par and the write-off of
unamortized original issue discount and debt issue costs.
Accounts Receivable Securitization Facility
We maintain a Receivables Facility under which we sell, on a continuous basis, an undivided
interest in all domestic accounts receivable to WESCO Receivables Corporation, a wholly owned 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
a portion of the receivables, in the form of overcollateralization. We have 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.
On February 22, 2007, we amended the Receivables Facility. The amendment increased the
purchase commitment under the Receivables Facility from $400 million to $500 million, included
Communications Supply Corporation and its subsidiaries as originators under the Receivables
Facility and extended the term of the Receivables Facility to May 9, 2010.
Prior to December 2006, we accounted for transfers of receivables pursuant to the Receivables
Facility as a sale and removed them from the consolidated balance sheet. In December 2006, the
Receivables Facility was amended and restated such that we effectively maintain control of
receivables transferred pursuant to the Receivables Facility; therefore the transfers no longer
qualify for sale treatment under SFAS No. 140. As a result, all transfers are accounted for as
secured borrowings and the receivables sold pursuant to the Receivables Facility are included on
the balance sheet as trade receivables, along with our retained subordinated undivided interest in
those receivables.
As of December 31, 2007 and 2006, accounts receivable eligible for securitization totaled
approximately $604.0 million and $531.3 million, respectively. The consolidated balance sheets as
of December 31, 2007 and 2006 reflect $480.0 million and $390.5 million, respectively, of account
receivable balances legally sold to third parties, as well as the related borrowings for equal
amounts.
Effective with the amendment in December 2006, we regained control of previously transferred
accounts receivable balances. EITF 02-09, Accounting for Changes that Result in a Transferor
Regaining Control of Financial Assets Sold, requires that re-recognized assets be recorded at fair
value. Accordingly, we reflected re-recognized trade receivables with an estimated fair value of
$390.5 million in the balance sheet at December 31, 2006, along with the retained subordinated
undivided interest of $137.9 million. As a result of this change in accounting treatment, we
recognized a pre-tax gain of $2.4 million during the three months ended March 31, 2007.
Interest expense and other costs associated with the Receivables Facility totaled $28.3
million, $22.8 million and $13.3 million in 2007, 2006 and 2005, respectively. Prior to the
amendment and restatement, interest expense and other costs related to the Receivables Facility
were recorded as other expense in the consolidated statement of income. At December 31, 2007, the
interest rate on borrowings under this facility was approximately 5.7%.
Mortgage Financing Facility
In 2003, we finalized a mortgage financing facility of $51.0 million, $43.6 million of which
was outstanding as of December 31, 2007. Total borrowings under the mortgage financing facility are
subject to a 22-year amortization schedule, with a balloon payment due at the end of the 10-year
term. The interest rate on borrowings under this facility is fixed at 6.5%.
Revolving Credit Facility
At December 31, 2007, the aggregate borrowing capacity under our revolving credit facility was
$375 million. The revolving credit facility consists of two separate sub-facilities: (i) a U.S.
sub-facility and (ii) a Canadian sub-facility and is collateralized by the inventory of WESCO
Distribution and the inventory and accounts receivable of WESCO Distribution Canada, L.P. WESCO
Distributions obligations under the revolving credit facility have been guaranteed by WESCO
International and by certain of WESCO Distributions subsidiaries.
On December 14, 2007, we amended the facility. The amendment increased the borrowing limit
under the Canadian sub-facility from $65 million to $75 million, increased the letter of credit
sub-facility from $50 million to $55 million, allowed for the disposition of our LADD operations, a
part of Carlton Bates Company, which was acquired in September 2005, and extended the maturity date
of the Revolving Credit Facility to November 1, 2013.
Availability under the facility is limited to the amount of eligible inventory and eligible
accounts receivable and Canadian inventory and receivables applied against certain advance rates.
Depending upon the amount of excess availability under the facility, interest is calculated at
LIBOR plus a margin that ranges between 1.0% and 1.75% or at the Index Rate (prime rate published
by the Wall Street Journal) plus a margin that ranges between (0.25%) and 0.50%. As long as the
average daily excess availability for both the preceding and projected succeeding 90-day period is
greater than $50 million, we would be permitted to make acquisitions and repurchase outstanding
public stock and bonds.
24
The above permitted transactions would also be allowed if such excess availability is between
$25 million and $50 million and our fixed charge coverage ratio, as defined by the revolving credit
agreement, is at least 1.25 to 1.0 after taking into consideration the permitted transaction.
Additionally, if excess availability under the Revolving Credit Facility is less than $60 million,
then we must maintain a fixed charge coverage ratio of 1.1 to 1.0. At December 31, 2007, the
interest rate was 6.2%. We were in compliance with all covenants as of December 31, 2007.
During 2007, we borrowed $891.4 million in the aggregate under the revolving credit facility
and made repayments in the aggregate amount of $801.1 million. During 2006, aggregate borrowings
and repayments were $507.6 million and $439.6 million, respectively. At December 31, 2007, we had
an outstanding balance under the facility of $187.3 million. We had approximately $146.2 million
available under the facility at December 31, 2007, after giving effect to an outstanding letter of
credit, as compared to approximately $326.9 million at December 31, 2006.
7.50% Senior Subordinated Notes due 2017
At December 31, 2007, $150 million in aggregate principal amount of the 2017 Notes were
outstanding. The 2017 Notes were issued by WESCO Distribution under an indenture dated as of
September 27, 2005, with The Bank of New York, as successor to J.P. Morgan Trust Company, National
Association, as trustee, and are unconditionally guaranteed on an unsecured senior basis by WESCO
International, Inc. The 2017 Notes accrue interest at the rate of 7.50% per annum and are payable
in cash semi-annually in arrears on each April 15 and October 15.
At any time on or after October 15, 2010, WESCO Distribution may redeem all or a part of the
2017 Notes. Between October 15, 2010 and October 14, 2011, WESCO Distribution may redeem all or a
part of the 2017 Notes at a redemption price equal to 103.750% of the principal amount. Between
October 15, 2011 and October 14, 2012, WESCO Distribution may redeem all or a part of the 2017
Notes at a redemption price equal to 102.500% of the principal amount. On and after October 15,
2013, WESCO Distribution may redeem all or a part of the 2017 Notes at a redemption price equal to
100% of the principal amount.
If WESCO Distribution undergoes a change of control prior to maturity, holders of 2017 Notes
will have the right, at their option, to require WESCO Distribution to repurchase for cash some or
all of their 2017 Notes at a repurchase price equal to 101% of the principal amount of the 2017
Notes being repurchased, plus accrued and unpaid interest to, but not including, the repurchase
date.
2.625% Convertible Senior Debentures due 2025
At December 31, 2007, $150 million in aggregate principal amount of the 2025 Debentures were
outstanding. The 2025 Debentures were issued by WESCO International, Inc. under an indenture dated
as of September 27, 2005, with The Bank of New York, as successor to J.P. Morgan Trust Company,
National Association, as Trustee, and are unconditionally guaranteed on an unsecured senior
subordinated basis by WESCO Distribution. The 2025 Debentures accrue interest at the rate of 2.625%
per annum and are payable in cash semi-annually in arrears on each April 15 and October 15.
Beginning with the six-month interest period commencing October 15, 2010, we also will pay
contingent interest in cash during any six-month interest period in which the trading price of the
2025 Debentures for each of the five trading days ending on the second trading day immediately
preceding the first day of the applicable six-month interest period equals or exceeds 120% of the
principal amount of the 2025 Debentures. During any interest period when contingent interest shall
be payable, the contingent interest payable per $1,000 principal amount of 2025 Debentures will
equal 0.25% of the average trading price of $1,000 principal amount of the 2025 Debentures during
the five trading days immediately preceding the first day of the applicable six-month interest
period. As defined in SFAS No. 133, Accounting for Derivative Instruments and Hedge Activities,
the contingent interest feature of the 2025 Debentures is an embedded derivate that is not
considered clearly and closely related to the host contract. The contingent interest component had
no significant value at December 31, 2007 or December 31, 2006.
The 2025 Debentures are convertible into cash and, in certain circumstances, shares of the
Companys common stock at any time on or after October 15, 2023, or prior to October 15, 2023 in
certain circumstances. The 2025 Debentures will be convertible based on an initial conversion rate
of 23.8872 shares of common stock per $1,000 principal amount of the 2025 Debentures (equivalent to
an initial conversion price of approximately $41.86 per share). The conversion rate and the
conversion price may be adjusted under certain circumstances.
At any time on or after October 15, 2010, we may redeem all or part of the 2025 Debentures at
a redemption price equal to 100% of the principal amount of the 2025 Debentures plus accrued and
unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the redemption date. Holders of 2025 Debentures may require us to repurchase all or a
portion of their 2025 Debentures on October 15, 2010, October 15, 2015 and October 15, 2020 at a
cash repurchase price equal to 100% of the principal amount of the 2025 Debentures, plus accrued
and unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the repurchase date. If we undergo certain fundamental changes, as defined in the
indenture governing the 2025 Debentures, prior to maturity, holders of 2025 Debentures will have
the right, at their option, to require us to repurchase for cash some or all of their 2025
Debentures at a repurchase price equal to 100% of the principal amount of the 2025 Debentures being
repurchased, plus accrued and unpaid interest (including contingent interest and additional
interest, if any) to, but not including, the repurchase date.
25
1.75% Convertible Senior Debentures due 2026
At December 31, 2007, $300 million in aggregate principal amount of the 2026 Debentures were
outstanding. The 2026 Debentures were issued by WESCO International under an indenture dated as of
November 2, 2006, with The Bank of New York, as Trustee, and are unconditionally guaranteed on an
unsecured senior subordinated basis by WESCO Distribution. The 2026 Debentures accrue interest at
the rate of 1.75% per annum and are payable in cash semi-annually in arrears on each May 15 and
November 15, commencing May 15, 2007. Beginning with the six-month interest period commencing
November 15, 2011, we also will pay contingent interest in cash during any six-month interest
period in which the trading price of the 2026 Debentures for each of the five
trading days ending on the second trading day immediately preceding the first day of the applicable
six-month interest period equals or exceeds 120% of the principal amount of the 2026 Debentures.
During any interest period when contingent interest shall be payable, the contingent interest
payable per $1,000 principal amount of 2026 Debentures will equal 0.25% of the average trading
price of $1,000 principal amount of the 2026 Debentures during the five trading days immediately
preceding the first day of the applicable six-month interest period. As defined in SFAS No. 133,
Accounting for Derivative Instruments and Hedge Activities, the contingent interest feature of the
2026 Debentures is an embedded derivate that is not considered clearly and closely related to the
host contract. The contingent interest component had no significant value at December 31, 2007 or
December 31, 2006.
The 2026 Debentures are convertible into cash and, in certain circumstances, shares of the
Companys common stock, $0.01 par value, at any time on or after November 15, 2024, or prior to
November 15, 2024 in certain circumstances. The 2026 Debentures will be convertible based on an
initial conversion rate of 11.3437 shares of common stock per $1,000 principal amount of the 2026
Debentures (equivalent to an initial conversion price of approximately $88.15 per share). The
conversion rate and the conversion price may be adjusted under certain circumstances.
At any time on or after November 15, 2011, we may redeem all or a part of the 2026 Debentures
at a redemption price equal to 100% of the principal amount of the 2026 Debentures plus accrued and
unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the redemption date. Holders of 2026 Debentures may require us to repurchase all or a
portion of their 2026 Debentures on November 15, 2011, November 15, 2016 and November 15, 2021 at a
cash repurchase price equal to 100% of the principal amount of the 2026 Debentures, plus accrued
and unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the repurchase date. If we undergo certain fundamental changes, as defined in the
indenture governing the 2026 Debentures, prior to maturity, holders of 2026 Debentures will have
the right, at their option, to require us to repurchase for cash some or all of their 2026
Debentures at a repurchase price equal to 100% of the principal amount of the 2026 Debentures being
repurchased, plus accrued and unpaid interest (including contingent interest and additional
interest, if any) to, but not including, the repurchase date.
Covenant Compliance
We were in compliance with all relevant covenants contained in our debt agreements as of
December 31, 2007.
Cash Flow
An analysis of cash flows for 2007 and 2006 follows:
Operating Activities. Cash provided by operating activities for 2007 totaled $262.3 million,
compared with $207.1 million of cash generated in 2006, primarily as a result of net income of
$240.6 million, adjusted for, among other items, depreciation and amortization of $36.8 million, of
which $5.7 million is related to the 2006 and 2007 acquisitions, and stock-based compensation of
$14.4 million. Additional items generating cash flow in 2007 were accounts payable of $19.4 million
resulting from increased sales volume and deferred income taxes of $11.1 million resulting
primarily from tax benefits received for the goodwill and Debentures. Primary uses of cash in 2007
were $33.6 million for investment in inventories, $19.7 million for accrued payroll and benefit
costs and $18.4 million for excess tax benefits from stock-based compensation expense. In 2006,
primary sources of cash were net income of $217.3 million; prepaid and other current assets of
$30.0 million, resulting from increased stock option activity; accrued payroll and benefit costs of
$18.7 million, reflecting the impact of the 2006 and 2005 acquisitions; and deferred income taxes
of $18.5 million resulting primarily from tax benefits received for the goodwill and Debentures.
Cash used by operating activities in 2006 included: $27.9 million in accounts payable; $27.7
million for investments in inventories; $11.8 million for receivables; and $6.5 million from our
Receivables Facility, which was accounted as an off-balance arrangement prior to December 2006.
Investing Activities. Net cash used by investing activities was $48.0 million in 2007,
compared to $555.9 million in 2006. Included in these amounts for 2007 and 2006 were acquisition
related expenditures of $32.4 million and $540.4 million, respectively. The capital expenditures
were $16.1 million in 2007 and $18.4 million in 2006 and were primarily for computer equipment and
software, and branch and distribution center facility improvements.
Financing Activities. Net cash used by financing activities in 2007 was $212.6 million,
compared with $400.1 million of net cash provided in 2006. During 2007, borrowings and repayments
of long-term debt of $891.4 million and $801.1 million, respectively, were related to our revolving
credit facility. Borrowings and repayments of $134.5 million and $45.0 million respectively, were
related to our Receivables Facility, and repayments of $1.3 million were related to our mortgage
financing facility. As previously mentioned, the Receivables Facility was amended and restated in
December 2006 such that transactions under the facility no longer qualify for off-balance sheet
treatment and as a result are accounted for as secured borrowings. In addition, during 2007 we
purchased approximately 7.1 million shares of our common stock for $430.6 million under our
previously announced share repurchase program. We also received $6.0 million from employees for
the exercise of stock-based compensation arrangements. Cash provided by financing activities in
2006 included $300 million from the issuance of the 2026 Debentures and $507.6 million from
borrowings under our revolving credit facility. We also received $6.9 million from employees for
the exercise of stock-based compensation arrangements. Uses of cash included payments of $439.6
million to reduce our revolving credit facility; payment of $20.0 million related to an acquisition
note payable; and payments of $1.3 million related to our mortgage financing facility. We also paid
$9.5 million for debt issuance costs of which $8.0 million was related to our 2026 Debentures.
26
Contractual Cash Obligations and Other Commercial Commitments
The following summarizes our contractual obligations, including interest, at December 31, 2007
and the effect such obligations are expected to have on liquidity and cash flow in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 to |
|
2011 to |
|
2013 |
|
|
|
|
|
|
2008 |
|
2010 |
|
2012 |
|
After |
|
Total |
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual cash obligations (including interest): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility(1) |
|
$ |
33.9 |
|
|
$ |
23.1 |
|
|
$ |
23.1 |
|
|
$ |
176.5 |
|
|
$ |
256.6 |
|
Mortgage financing facility |
|
|
4.2 |
|
|
|
8.4 |
|
|
|
8.4 |
|
|
|
36.4 |
|
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.50% Senior Subordinated Notes due 2017 |
|
|
11.3 |
|
|
|
22.5 |
|
|
|
22.5 |
|
|
|
206.2 |
|
|
|
262.5 |
|
2.625% Convertible Senior Debentures due 2025 |
|
|
3.9 |
|
|
|
7.9 |
|
|
|
7.9 |
|
|
|
201.2 |
|
|
|
220.9 |
|
1.75% Convertible Senior Debentures due 2026 |
|
|
5.3 |
|
|
|
10.5 |
|
|
|
10.5 |
|
|
|
373.5 |
|
|
|
399.8 |
|
Accounts Receivable Securitization Facility(2) |
|
|
507.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507.4 |
|
Non-cancelable operating and capital leases |
|
|
38.2 |
|
|
|
54.4 |
|
|
|
24.9 |
|
|
|
11.4 |
|
|
|
128.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other acquisition notes |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.7 |
|
Acquisition agreements |
|
|
2.1 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
2.9 |
|
Carlton-Bates restructure charges |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
Communication Supply restructure charges |
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
607.6 |
|
|
$ |
127.6 |
|
|
$ |
97.6 |
|
|
$ |
1,005.6 |
|
|
$ |
1,838.4 |
|
|
|
|
|
|
|
(1) |
|
Includes interest due under the facility for each of the respective years. Interest was calculated using the rate at December 31, 2007. |
|
(2) |
|
Includes interest due under the facility for 2008. Interest was calculated using the rate at December 31, 2007. |
Purchase orders for inventory requirements and service contracts are not included in the table
above. Generally, our purchase orders and contracts contain clauses allowing for cancellation. We
do not have significant agreements to purchase material or goods that would specify minimum order
quantities. Also, we do not consider obligations to taxing authorities to be contractual
obligations requiring disclosure due to the uncertainty surrounding the ultimate settlement and
timing of these obligations. As such, we have not included $10.0 million of such liability in the
table above.
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. There can be
no assurance, however, that this will be or will continue to be the case.
Inflation
The rate of inflation, as measured by changes in the consumer price index, did not have a
material effect on our sales or operating results during the periods presented. However, inflation
in the future could affect our operating costs. Overall, price changes from suppliers have
historically been consistent with inflation and have not had a material impact on the results of
operations. In recent years, prices of certain commodities have increased much faster than
inflation. In most cases we have been able to pass through a majority of these increases to
customers.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the
first quarter are generally less than 2% below the sales of the remaining three quarters due to a
reduced level of activity during the winter months of January and February. Sales increase
beginning in March with slight fluctuations per month through December.
Impact of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (the FASB) issued SFAS No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) SFAS
No. 157-2, Effective Date of SFAS No. 157. The FSP amends SFAS 157, to delay the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring basis (that is, at least
annually) to fiscal years beginning after November 15, 2008. We are currently evaluating the
effect that the implementation of SFAS 157 will have on our financial position, results of
operations and cash flows.
27
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities (SFAS 159) which provides companies with an option to report certain financial assets
and liabilities at fair value, with changes in value recognized in earnings each reporting period.
SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not
anticipate that the adoption of SFAS 159 will have an impact on our financial position, results of
operations, or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R) which establishes additional principles and requirements for how the acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date
fair value. SFAS 141R is designed to improve the relevance, representational faithfulness and
comparability of the financial information that a reporting entity provides in its financial
reports about a business combination and its effects. SFAS 141R applies prospectively to business
combinations for which the acquisition date is in or after the beginning of the first annual
reporting period beginning after December 15, 2008. We are currently evaluating the effect that
the implementation of SFAS 141R will have on our financial position, results of operations and cash
flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160). This statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements (ARB 51) to establish accounting and
reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are
currently evaluating the effect that the implementation of SFAS 160 will have on our financial
position, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
Foreign Currency Risks
Approximately 90% of our sales are denominated in U.S. dollars and are primarily from
customers in the United States. As a result, currency fluctuations are currently not material to
our operating results. We do have foreign subsidiaries located in North America, Europe and Asia
and may establish additional foreign subsidiaries in the future. Accordingly, we may derive a more
significant portion of our sales from international operations, and a portion of these sales may be
denominated in foreign currencies. As a result, our future operating results could become subject
to fluctuations in the exchange rates of those currencies in relation to the U.S. dollar.
Furthermore, to the extent that we engage in international sales denominated in U.S. dollars, an
increase in the value of the U.S. dollar relative to foreign currencies could make our products
less competitive in international markets. We have monitored and will continue to monitor our
exposure to currency fluctuations.
Interest Rate Risk
Fixed Rate Borrowings: Approximately 50% of our debt portfolio is comprised of fixed rate
debt. At various times, we have refinanced our debt to mitigate the impact of interest rate
fluctuations. In 2005, we reduced our borrowing rate on a major portion of our fixed-rate debt,
redeeming $323.5 million in aggregate principal amount of our 2008 Notes at 9.125%, and issuing
$150 million aggregate principal amount of our 2017 Notes at 7.5% and $150 million aggregate
principal amount of our 2025 Debentures at 2.625%. In 2006, we issued additional lower-cost debt,
which included $300 million aggregate principal amount of 2026 Debentures at 1.75%. As these
borrowings were issued at fixed rates, interest expense would not be impacted by interest rate
fluctuations, although market value would be. The aggregate fair value of these debt instruments
was $563.8 million at December 31, 2007. Interest expense on our other fixed rate debt also would
not be impacted by changes in market interest rates, and for this debt, fair value approximated
carrying value (see note 7 to the consolidated financial statements).
Floating Rate Borrowings: Our variable rate borrowings at December 31, 2007 of $667.3 million
include $480.0 million from the Receivables Facility and $187.3 million from the revolving credit
facility. We borrow under our revolving credit facility for general corporate purposes, including
working capital requirements and capital expenditures. During 2007, our average daily borrowing
under the facility was $145.3 million. Borrowings under our facility bear interest at the
applicable LIBOR or base rate and therefore we are subject to fluctuations in interest rates.
Additionally, we borrow under our Receivables Facility, which bears interest at the 30 day
commercial paper rate plus applicable margin. A 100 basis point increase or decrease in interest
rates would not have a significant impact on future earnings under our current capital structure.
28
Item 8. Financial Statements and Supplementary Data.
The information required by this item is set forth in our Consolidated Financial Statements
contained in this Annual Report on Form 10-K. Specific financial statements can be found at the
pages listed below:
WESCO International, Inc.
29
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of WESCO International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, stockholders equity and cash flows present fairly, in all material respects,
the financial position of WESCO International, Inc. and its subsidiaries (the Company) at
December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these financial statements, and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report on Internal Control Over Financial
Reporting appearing under Item 9a. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in
which it accounts for stock-based compensation as of January 1, 2006.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Pittsburgh, Pennsylvania
February 29, 2008
30
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2007 |
|
2006 |
|
|
|
|
|
(Dollars in thousands, |
|
|
except share data) |
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
72,297 |
|
|
$ |
73,395 |
|
Trade accounts receivable, net of allowance for
doubtful accounts of $17,418 and $12,641 in
2007 and 2006, respectively (Note 7) |
|
|
844,514 |
|
|
|
829,962 |
|
Other accounts receivable |
|
|
44,783 |
|
|
|
43,011 |
|
Inventories, net |
|
|
666,027 |
|
|
|
613,569 |
|
Current deferred income taxes (Note 10) |
|
|
4,026 |
|
|
|
14,991 |
|
Income taxes receivable |
|
|
38,793 |
|
|
|
34,016 |
|
Prepaid expenses and other current assets |
|
|
10,059 |
|
|
|
9,068 |
|
|
|
|
Total current assets |
|
|
1,680,499 |
|
|
|
1,618,012 |
|
Property, buildings and equipment, net (Note 6) |
|
|
104,119 |
|
|
|
107,016 |
|
Intangible assets, net (Note 3) |
|
|
133,791 |
|
|
|
147,550 |
|
Goodwill (Note 3) |
|
|
924,358 |
|
|
|
931,229 |
|
Other assets |
|
|
17,120 |
|
|
|
20,176 |
|
|
|
|
Total assets |
|
$ |
2,859,887 |
|
|
$ |
2,823,983 |
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
626,293 |
|
|
$ |
590,304 |
|
Accrued payroll and benefit costs (Note 13) |
|
|
51,415 |
|
|
|
69,945 |
|
Short-term debt (Note 7) |
|
|
502,300 |
|
|
|
390,500 |
|
Current portion of long-term debt (Note 7) |
|
|
2,676 |
|
|
|
5,927 |
|
Deferred acquisition payable (Note 4) |
|
|
1,285 |
|
|
|
3,453 |
|
Bank overdrafts |
|
|
58,948 |
|
|
|
27,833 |
|
Other current liabilities |
|
|
49,008 |
|
|
|
65,710 |
|
|
|
|
Total current liabilities |
|
|
1,291,925 |
|
|
|
1,153,672 |
|
Long-term debt (Note 7) |
|
|
811,311 |
|
|
|
743,887 |
|
Deferred income taxes (Note 10) |
|
|
118,084 |
|
|
|
149,677 |
|
Other noncurrent liabilities |
|
|
30,091 |
|
|
|
13,520 |
|
|
|
|
Total liabilities |
|
$ |
2,251,411 |
|
|
$ |
2,060,756 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Note 8 and 9): |
|
|
|
|
|
|
|
|
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, 54,663,418 and 53,789,918
shares issued and 43,144,032 and 49,545,506
shares outstanding in 2007 and 2006,
respectively |
|
|
546 |
|
|
|
538 |
|
Class B nonvoting convertible common stock,
$.01 par value; 20,000,000 shares authorized,
4,339,431 shares issued in 2007 and 2006; no
shares outstanding in 2007 and 2006 |
|
|
43 |
|
|
|
43 |
|
Additional capital |
|
|
808,739 |
|
|
|
769,948 |
|
Retained earnings |
|
|
284,794 |
|
|
|
48,988 |
|
Treasury stock, at cost; 15,858,817 and
8,583,843 shares in 2007 and 2006, respectively |
|
|
(511,478 |
) |
|
|
(70,820 |
) |
Accumulated other comprehensive income |
|
|
25,832 |
|
|
|
14,530 |
|
|
|
|
Total stockholders equity |
|
|
608,476 |
|
|
|
763,227 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,859,887 |
|
|
$ |
2,823,983 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
31
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands, except share data) |
Net sales |
|
$ |
6,003,452 |
|
|
$ |
5,320,603 |
|
|
$ |
4,421,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding depreciation and amortization below) |
|
|
4,781,336 |
|
|
|
4,234,079 |
|
|
|
3,580,398 |
|
Selling, general and administrative expenses |
|
|
791,133 |
|
|
|
692,881 |
|
|
|
612,780 |
|
Depreciation and amortization |
|
|
36,759 |
|
|
|
28,660 |
|
|
|
18,639 |
|
|
|
|
Income from operations |
|
|
394,224 |
|
|
|
364,983 |
|
|
|
209,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
63,196 |
|
|
|
24,622 |
|
|
|
30,183 |
|
Loss on debt extinguishment, net (Note 7) |
|
|
|
|
|
|
|
|
|
|
14,914 |
|
Other expenses (Note 7) |
|
|
|
|
|
|
22,795 |
|
|
|
13,305 |
|
|
|
|
Income before income taxes |
|
|
331,028 |
|
|
|
317,566 |
|
|
|
150,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes (Note 10) |
|
|
90,397 |
|
|
|
100,246 |
|
|
|
47,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
240,631 |
|
|
$ |
217,320 |
|
|
$ |
103,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.27 |
|
|
$ |
4.46 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
4.99 |
|
|
$ |
4.14 |
|
|
$ |
2.10 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
32
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B |
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Other |
|
(Dollars in thousands, except |
|
Comprehensive |
|
|
Common Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Earnings |
|
|
Treasury Stock |
|
|
Comprehensive |
|
per share data) |
|
Income |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Capital |
|
|
(Deficit) |
|
|
Amount |
|
|
Shares |
|
|
Income (Loss) |
|
Balance, December 31, 2004 |
|
|
|
|
|
$ |
505 |
|
|
|
50,483,970 |
|
|
$ |
43 |
|
|
|
4,339,431 |
|
|
$ |
676,465 |
|
|
$ |
(271,858 |
) |
|
$ |
(61,449 |
) |
|
|
(8,407,790 |
) |
|
$ |
9,847 |
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of $13,815 |
|
|
|
|
|
|
13 |
|
|
|
1,306,755 |
|
|
|
|
|
|
|
|
|
|
|
22,347 |
|
|
|
|
|
|
|
(372 |
) |
|
|
(10,817 |
) |
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
103,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
3,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
107,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
|
|
|
|
518 |
|
|
|
51,790,725 |
|
|
|
43 |
|
|
|
4,339,431 |
|
|
|
707,407 |
|
|
|
(168,332 |
) |
|
|
(61,821 |
) |
|
|
(8,418,607 |
) |
|
|
13,635 |
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of $34,966 |
|
|
|
|
|
|
20 |
|
|
|
1,999,193 |
|
|
|
|
|
|
|
|
|
|
|
50,807 |
|
|
|
|
|
|
|
(8,999 |
) |
|
|
(165,236 |
) |
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
217,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
318,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
|
|
|
|
538 |
|
|
|
53,789,918 |
|
|
|
43 |
|
|
|
4,339,431 |
|
|
|
769,948 |
|
|
|
48,988 |
|
|
|
(70,820 |
) |
|
|
(8,583,843 |
) |
|
|
14,530 |
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of $18,360 |
|
|
|
|
|
|
8 |
|
|
|
873,500 |
|
|
|
|
|
|
|
|
|
|
|
24,395 |
|
|
|
|
|
|
|
(10,077 |
) |
|
|
(150,841 |
) |
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
187 |
|
|
|
22,656 |
|
|
|
|
|
Adoption of FIN 48, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchase program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430,768 |
) |
|
|
(7,146,789 |
) |
|
|
|
|
Net income |
|
$ |
240,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
11,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
251,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
|
|
|
$ |
546 |
|
|
|
54,663,418 |
|
|
$ |
43 |
|
|
|
4,339,431 |
|
|
$ |
808,739 |
|
|
$ |
284,794 |
|
|
$ |
(511,478 |
) |
|
|
(15,858,817 |
) |
|
$ |
25,832 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
33
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
240,631 |
|
|
$ |
217,320 |
|
|
$ |
103,526 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment, (net of premium in 2005 of $6,803) |
|
|
|
|
|
|
|
|
|
|
1,446 |
|
Depreciation and amortization |
|
|
36,759 |
|
|
|
28,660 |
|
|
|
18,639 |
|
Accretion and amortization of original issue discounts and
purchase discounts, respectively |
|
|
|
|
|
|
|
|
|
|
1,218 |
|
Amortization of gain on interest rate swap |
|
|
|
|
|
|
|
|
|
|
(3,118 |
) |
Stock option expense |
|
|
14,403 |
|
|
|
11,734 |
|
|
|
8,595 |
|
Amortization of debt issuance costs |
|
|
4,192 |
|
|
|
2,520 |
|
|
|
1,263 |
|
Gain on sale of property, buildings and equipment |
|
|
(371 |
) |
|
|
(2,607 |
) |
|
|
(36 |
) |
Excess tax benefit from stock-based compensation |
|
|
(18,360 |
) |
|
|
(34,966 |
) |
|
|
|
|
Interest related to uncertain tax positions |
|
|
1,097 |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
11,147 |
|
|
|
18,523 |
|
|
|
3,560 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in receivables facility |
|
|
|
|
|
|
(6,500 |
) |
|
|
189,000 |
|
Trade and other account receivables, net |
|
|
4,462 |
|
|
|
(11,832 |
) |
|
|
(83,660 |
) |
Inventories, net |
|
|
(33,632 |
) |
|
|
(27,673 |
) |
|
|
(60,220 |
) |
Prepaid expenses and other current assets |
|
|
(2,618 |
) |
|
|
30,030 |
|
|
|
12,386 |
|
Accounts payable |
|
|
19,436 |
|
|
|
(27,873 |
) |
|
|
95,657 |
|
Accrued payroll and benefit costs |
|
|
(19,716 |
) |
|
|
18,725 |
|
|
|
6,700 |
|
Other current and noncurrent liabilities |
|
|
4,848 |
|
|
|
(8,978 |
) |
|
|
141 |
|
|
|
|
Net cash provided by operating activities |
|
|
262,278 |
|
|
|
207,083 |
|
|
|
295,097 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(16,118 |
) |
|
|
(18,359 |
) |
|
|
(14,154 |
) |
Acquisition payments, net of cash acquired |
|
|
(32,398 |
) |
|
|
(540,447 |
) |
|
|
(278,829 |
) |
Proceeds from sale of assets |
|
|
487 |
|
|
|
4,624 |
|
|
|
|
|
Other investing activities |
|
|
|
|
|
|
(1,745 |
) |
|
|
2,014 |
|
|
|
|
Net cash used by investing activities |
|
|
(48,029 |
) |
|
|
(555,927 |
) |
|
|
(290,969 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
1,025,900 |
|
|
|
807,604 |
|
|
|
643,000 |
|
Repayments of long-term debt |
|
|
(850,717 |
) |
|
|
(462,918 |
) |
|
|
(662,641 |
) |
Debt issuance costs |
|
|
(754 |
) |
|
|
(9,464 |
) |
|
|
(9,043 |
) |
Proceeds from exercise of options |
|
|
6,043 |
|
|
|
6,862 |
|
|
|
8,173 |
|
Excess tax benefit from stock-based compensation |
|
|
18,360 |
|
|
|
34,966 |
|
|
|
|
|
Repurchase of common stock |
|
|
(440,845 |
) |
|
|
|
|
|
|
|
|
Increase in bank overdrafts |
|
|
31,116 |
|
|
|
24,138 |
|
|
|
3,695 |
|
Payments on capital lease obligations |
|
|
(1,709 |
) |
|
|
(1,073 |
) |
|
|
(215 |
) |
|
|
|
Net cash (used) provided by financing activities |
|
|
(212,606 |
) |
|
|
400,115 |
|
|
|
(17,031 |
) |
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2,741 |
) |
|
|
(1 |
) |
|
|
505 |
|
Net change in cash and cash equivalents |
|
|
(1,098 |
) |
|
|
51,270 |
|
|
|
(12,398 |
) |
Cash and cash equivalents at the beginning of period |
|
|
73,395 |
|
|
|
22,125 |
|
|
|
34,523 |
|
Cash and cash equivalents at the end of period |
|
$ |
72,297 |
|
|
$ |
73,395 |
|
|
$ |
22,125 |
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
62,426 |
|
|
$ |
44,952 |
|
|
$ |
29,606 |
|
Cash paid for taxes |
|
|
52,501 |
|
|
|
55,139 |
|
|
|
28,917 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment acquired through capital leases |
|
|
2,599 |
|
|
|
2,144 |
|
|
|
2,000 |
|
Deferred acquisition payable related to acquisitions |
|
|
|
|
|
|
1,107 |
|
|
|
5,000 |
|
Note issued in connection with acquisition |
|
|
|
|
|
|
|
|
|
|
3,329 |
|
Issuance of treasury stock |
|
|
187 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
34
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, WESCO), headquartered in
Pittsburgh, Pennsylvania, is a full-line distributor of electrical supplies and equipment and is a
provider of integrated supply procurement services with operations in the United States, Canada,
Mexico, the United Kingdom, Nigeria, United Arab Emirates and Singapore. WESCO currently operates
approximately 400 branch locations and seven distribution centers (five in the United States and
two in Canada).
2. ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of WESCO International, Inc.
(WESCO International) and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying
disclosures. Although these estimates are based on managements best knowledge of current events
and actions WESCO may undertake in the future, actual results may ultimately differ from the
estimates.
Revenue Recognition
Revenues are recognized for product sales when title, ownership and risk of loss pass to the
customer, or for services when the service is rendered. In the case of stock sales and special orders, a sale occurs at the time of shipment from
our distribution point, as the terms of WESCOs sales are FOB shipping point. In cases where we
process customer orders but ship directly from our suppliers, revenue is recognized once product is
shipped and title has passed. For some of our customers, we provide services such as inventory
management or other specific support. Revenues are recognized upon evidence of fulfillment of the
agreed upon services. In all cases, revenue is recognized once the sales price to our customer is
fixed or is determinable and WESCO has reasonable assurance as to the collectibility in accordance
with Staff Accounting Bulletin No.104.
Supplier Volume Rebates
WESCO receives rebates from certain suppliers based on contractual arrangements with such
suppliers. An asset, included within other accounts receivable on the balance sheet, represents the
estimated amounts due to WESCO under the rebate provisions of such contracts. The corresponding
rebate income is recorded as a reduction of cost of goods sold. The appropriate level of such
income is derived from the level of actual purchases made by WESCO from suppliers, in accordance
with the provisions of Emerging Issues Task Force (EITF) Issue No. 02-16 , Accounting by a
Reseller for Cash Consideration Received from a Vendor . Receivables under the supplier rebate
program were $40.0 million at December 31, 2007 and $35.9 million at December 31, 2006. The total
amount recorded as a reduction to cost of goods sold was $59.2 million, $54.1 million and $47.2
million for 2007, 2006 and 2005, respectively.
Shipping and Handling Costs and Fees
WESCO records the majority of costs and fees associated with transporting its products to
customers as a component of selling, general and administrative expenses. These costs totaled $62.0
million, $48.9 million and $44.5 million in 2007, 2006 and 2005, respectively.
Cash Equivalents
Cash equivalents are defined as highly liquid investments with original maturities of 90 days
or less when purchased.
Asset Securitization
WESCO accounts for its Receivables Facility in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140).
Prior to December 2006, WESCO accounted for transfers of receivables pursuant to the facility as a
sale and removed them from the consolidated balance sheet. Expenses associated with the facility
were reported as other expense in the statement of income. In December 2006, the Receivables
Facility was amended and restated such that WESCO effectively maintains control of receivables
transferred pursuant to the facility; therefore the transfers no longer qualify for sale
treatment under SFAS No. 140. As a result, the transferred receivables remain on the balance sheet,
and WESCO recognizes the related secured borrowing. Beginning in 2007, expenses associated with the
Receivables Facility were reported as interest expense in the statement of income.
35
Allowance for Doubtful Accounts
WESCO maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. WESCO has a systematic procedure using
estimates based on historical data and reasonable assumptions of collectibility made at the local
branch level and on a consolidated corporate basis to calculate the allowance for doubtful
accounts. If the financial condition of WESCOs customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. The allowance
for doubtful accounts was $17.4 million at December 31, 2007 and $12.6 million at December 31,
2006. The total amount recorded as selling, general and administrative expense related to bad debts
was $2.2 million, $3.8 million and $8.6 million for 2007, 2006 and 2005, respectively.
Inventories
Inventories primarily consist of merchandise purchased for resale and are stated at the lower
of cost or market. Cost is determined principally under the average cost method. WESCO makes
provisions for obsolete or slow-moving inventories as necessary to reflect reduction in inventory
value. Reserves for excess and obsolete inventories were $20.3 million and $23.0 million at
December 31, 2007 and 2006, respectively. The total expense related to excess and obsolete
inventories, included in cost of goods sold, was $8.0 million, $4.8 million and $4.1 million for
2007, 2006 and 2005, respectively. WESCO absorbs into the cost of inventory the general and
administrative expenses related to inventory such as purchasing, receiving and storage and at
December 31, 2007 and 2006 $42.8 million and $38.7 million, respectively, of these costs were
included in the ending inventory.
Other Assets
WESCO amortizes deferred financing fees over the term of the various debt instruments.
Deferred financing fees in the amount of $0.8 million related to amended financing was incurred
during the year ending December 31, 2007. As of December 31, 2007 and 2006, the amount of other
assets related to unamortized deferred financing fees was $16.3 million and $19.7 million,
respectively.
Property, Buildings and Equipment
Property, buildings and equipment are recorded at cost. Depreciation expense is determined
using the straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over either their respective lease terms or their estimated lives,
whichever is shorter. Estimated useful lives range from five to forty years for buildings and
leasehold improvements and three to ten years for furniture, fixtures and equipment.
Computer software is accounted for in accordance with Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized computer
software costs are amortized using the straight-line method over the estimated useful life,
typically three to five years, and are reported at the lower of unamortized cost or net realizable
value.
Expenditures for new facilities and improvements that extend the useful life of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or
otherwise disposed of, the cost and the related accumulated depreciation are removed from the
accounts and any related gains or losses are recorded and reported as selling, general and
administrative expenses.
WESCO assesses its long-lived assets for impairment by periodically reviewing operating
performance by branch and respective utilization of real and tangible assets at such sites; and by
comparing fair values of real properties against market values of similar properties. Upon closure
of any branch, asset usefulness and remaining life are evaluated and any charges taken as
appropriate. Of its $104.1 million net book value of property, plant and equipment as of December
31, 2007, $63.4 million consists of land, buildings and leasehold improvements and are
geographically dispersed among WESCOs 400 branches and seven distribution centers, mitigating the
risk of impairment. Approximately $16.5 million of assets consist of computer equipment and
capitalized software and are evaluated for use and serviceability relative to carrying value. The
remaining fixed assets, mainly of furniture and fixtures, warehousing equipment and transportation
equipment, are similarly evaluated for serviceability and use.
Goodwill and Indefinite Life Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite
life intangible assets are tested annually for impairment or more frequently if events or
circumstances occur indicating that their carrying value may not be recoverable. The evaluation of
impairment involves comparing the current fair value of goodwill to the recorded value. WESCO
estimates fair value using discounted cash flow analyses, which involves considerable management
judgment. Assumptions used for these estimated cash flows are based on a combination of historical
results and current internal forecasts. No impairment losses were identified in 2007 as a result
of this review. At December 31, 2007 and 2006 goodwill and indefinite life intangible assets
totaled $970.6 million and $977.4 million, respectively.
Definite Lived Intangible Assets
Intangible assets are amortized over 3 to 19 years. A portion of intangible assets related to
customer relationships are amortized using an accelerated method whereas all other intangible
assets subject to amortization use a straight-line method which reflects the pattern in which the
economic benefits of the respective assets are consumed or otherwise used. Intangible assets are
tested for
impairment if events or circumstances occur indicating that the respective asset might be impaired.
36
Insurance Programs
WESCO uses commercial insurance for auto, workers compensation, casualty and health claims as
a risk-reduction strategy to minimize catastrophic losses. Our strategy involves large deductibles
where WESCO must pay all costs up to the deductible amount. WESCO estimates our reserve based on
historical incident rates and costs. The assumptions included in developing this accrual include
the period of time from incurrence of a claim until the claim is paid by the insurance provider.
Presently, this period is estimated to be eight weeks. The total liability related to the insurance
programs was $10.0 million at December 31, 2007 and $9.5 million at December 31, 2006.
Income Taxes
Income taxes are accounted for under the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances, if any, are provided when a portion or all of a deferred
tax asset may not be realized.
During the first quarter of 2007, WESCO adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting for uncertainty in income taxes. The adoption of FIN 48 resulted in an
increase of approximately $4.8 million in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance of retained earnings. WESCO reviews
uncertain tax positions and assesses the need and amount of contingency reserves necessary to cover
any probable audit adjustments.
Foreign Currency
The local currency is the functional currency for all of WESCOs operations outside the United
States. Assets and liabilities of these operations are translated to U.S. dollars at the exchange
rate in effect at the end of each period. Income statement accounts are translated at the average
exchange rate prevailing during the period. Translation adjustments arising from the use of
differing exchange rates from period to period are included as a component of other comprehensive
income within stockholders equity. Gains and losses from foreign currency transactions are
included in net income for the period.
Stock-Based Compensation
The Companys stock-based employee compensation plans are comprised of fixed stock options and
stock-settled stock appreciation rights. Beginning January 1, 2006, WESCO adopted SFAS No. 123
(revised 2004) (SFAS 123R), Share-Based Payment, using the modified prospective method. Stock
options awarded prior to 2006 were accounted for using the measurement provisions of SFAS No. 123
(SFAS 123), Accounting for Stock-Based Compensation.
Under SFAS 123R, compensation cost for all stock-based awards is measured at fair value on
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-based awards is determined using the
Black-Scholes valuation model, which is consistent with the valuation techniques previously
utilized for stock-based awards in footnote disclosures required under SFAS 123. Expected
volatilities are based on historical volatility of WESCOs common stock. The expected life of the
option or stock settled appreciation right is estimated using historical data pertaining to option
exercises and employee terminations. The risk-free rate is based on the U.S. Treasury yields in
effect at the time of grant. The forfeiture assumption is based on WESCOs historical employee
behavior that is reviewed on an annual basis. No dividends are assumed.
WESCO granted the following stock-settled stock appreciation rights at the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
Stock-settled appreciation rights granted |
|
|
628,237 |
|
|
|
463,132 |
|
|
|
908,889 |
|
Risk free interest rate |
|
|
4.9 |
% |
|
|
4.9 |
% |
|
|
3.0 |
% |
Expected life |
|
4 years |
|
4 years |
|
4 years |
Expected volatility |
|
|
40 |
% |
|
|
50 |
% |
|
|
59 |
% |
The weighted average fair value per equity award granted was $22.71, $30.72 and $15.23 for the
years ended December 31, 2007, 2006 and 2005, respectively. WESCO recognized $14.4 million, $11.7
and $8.6 million of non-cash stock-based compensation expense, which is included in selling,
general and administrative expenses, in 2007, 2006 and 2005, respectively.
37
For the year ended December 31, 2005, WESCOs pro forma net income and earnings per share
would have been adjusted to the amounts indicated below to reflect the additional fair value
compensation, net of tax, as if the fair-value based method of accounting for stock-based awards
had been applied to all outstanding awards:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
Dollars in thousands, except per share amounts |
|
2005 |
|
Net income reported |
|
$ |
103,526 |
|
Add: Stock-based compensation expense
included in reported net income, net of
related tax |
|
|
5,896 |
|
Deduct: Stock-based employee compensation
expense determined under SFAS No. 123 for all
awards net of related tax |
|
|
(6,404 |
) |
|
|
|
|
Pro forma net income |
|
$ |
103,018 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic as reported |
|
$ |
2.20 |
|
Basic pro forma |
|
$ |
2.19 |
|
Diluted as reported |
|
$ |
2.10 |
|
Diluted pro forma |
|
$ |
2.09 |
|
Treasury Stock
Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue,
the treasury stock account is reduced by the cost of such stock, with cost determined on a weighted
average basis.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and other accrued liabilities, a revolving line of credit, a mortgage financing
facility, notes payable, debentures and other long-term debt. The estimated fair value of the
Companys outstanding indebtedness described in Note 7 at December 31, 2007 and 2006 was $1,280.1
million and $1,214.0 million respectively. The fair values of the senior notes and debentures are
estimated based upon market price quotes. The carrying values of WESCOs other long-term debt,
which include the mortgage facility and revolving credit facility are considered to approximate
fair value, based upon market price quotes and market comparisons available for instruments with
similar terms and maturities. For all remaining WESCO financial instruments, carrying values are
considered to approximate fair value due to their short maturities.
Environmental Expenditures
WESCO has facilities and operations that distribute certain products that must comply with
environmental regulations and laws. Expenditures for current operations are expensed or
capitalized, as appropriate. Expenditures relating to existing conditions caused by past
operations, and that do not contribute to future revenue, are expensed. Liabilities are recorded
when remedial efforts are probable and the costs can be reasonably estimated.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (the FASB) issued SFAS No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) SFAS
No. 157-2, Effective Date of SFAS No. 157. The FSP amends SFAS 157, to delay the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring basis (that is, at least
annually) to fiscal years beginning after November 15, 2008. WESCO is currently evaluating the
effect that the implementation of SFAS 157 will have on its financial position, results of
operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities (SFAS 159) which provides companies with an option to report certain financial assets
and liabilities at fair value, with changes in value recognized in earnings each reporting period.
SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. WESCO does
not anticipate that the adoption of SFAS 159 will have an impact on its financial position, results
of operations, or cash flows.
38
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R) which establishes additional principles and requirements for how the acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date
fair value. SFAS 141R is designed to improve the relevance, representational faithfulness, and
comparability of the financial information that a reporting entity provides in its financial
reports about a business combination and its effects. SFAS 141R applies prospectively to business
combinations for which the acquisition date is in or after the beginning of the first annual
reporting period beginning after December 15, 2008. WESCO is currently evaluating the effect that
the implementation of SFAS 141R will have on its financial position, results of operations and cash
flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160). This statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements (ARB 51) to establish accounting and
reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. WESCO is
currently evaluating the effect that the implementation of SFAS 160 will have on its financial
position, results of operations and cash flows.
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table sets forth the changes in the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Beginning balance January 1 |
|
$ |
931,229 |
|
|
$ |
542,217 |
|
Adjustments to goodwill for prior acquisitions: (1) |
|
|
|
|
|
|
|
|
Communications Supply Holding, Inc. |
|
|
(26,454 |
) |
|
|
|
|
Fastec Industrial Corp. |
|
|
|
|
|
|
26 |
|
Carlton-Bates Company. |
|
|
|
|
|
|
8,000 |
|
Additions to goodwill for acquisitions: |
|
|
|
|
|
|
|
|
Communications Supply Holding, Inc. |
|
|
|
|
|
|
380,977 |
|
Cascade Controls Corporation |
|
|
1,418 |
|
|
|
|
|
J-Mark Inc |
|
|
11,548 |
|
|
|
|
|
Monti Electric Supply, Inc. |
|
|
6,269 |
|
|
|
|
|
Foreign currency translation |
|
|
348 |
|
|
|
9 |
|
|
|
|
Ending balance December 31 |
|
$ |
924,358 |
|
|
$ |
931,229 |
|
|
|
|
|
|
|
(1) |
|
Represents final purchase price adjustments. |
Intangible Assets
The components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Useful |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands) |
|
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
Indefinite |
|
$ |
46,200 |
|
|
|
|
|
|
$ |
46,200 |
|
|
$ |
46,200 |
|
|
|
|
|
|
$ |
46,200 |
|
Non-compete agreements |
|
|
3-5 |
|
|
|
6,445 |
|
|
$ |
(5,173 |
) |
|
|
1,272 |
|
|
|
6,445 |
|
|
$ |
(4,529 |
) |
|
|
1,916 |
|
Customer relationships |
|
|
4-19 |
|
|
|
76,000 |
|
|
|
(16,714 |
) |
|
|
59,286 |
|
|
|
76,000 |
|
|
|
(7,306 |
) |
|
|
68,694 |
|
Distribution agreements |
|
|
5-19 |
|
|
|
33,500 |
|
|
|
(6,467 |
) |
|
|
27,033 |
|
|
|
33,500 |
|
|
|
(2,760 |
) |
|
|
30,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
162,145 |
|
|
$ |
(28,354 |
) |
|
$ |
133,791 |
|
|
$ |
162,145 |
|
|
$ |
(14,595 |
) |
|
$ |
147,550 |
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets totaled $13.1 million, $9.2 million and $2.2
million for the years ended December 31, 2007, 2006 and 2005, respectively.
39
The following table sets forth the estimated amortization expense for intangibles for the next five
years (in thousands):
|
|
|
|
|
|
|
Estimated |
|
|
Amortization |
|
|
Expense |
For the year ended December 31, |
|
|
|
|
2008 |
|
$ |
7,377 |
|
2009 |
|
|
7,380 |
|
2010 |
|
|
7,174 |
|
2011 |
|
|
5,755 |
|
2012 |
|
|
3,507 |
|
4. ACQUISITIONS
The following table sets forth the consideration paid for acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
Details of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
32,207 |
|
|
$ |
684,005 |
|
|
$ |
331,302 |
|
Amounts earned under acquisition agreements |
|
|
|
|
|
|
|
|
|
|
5,560 |
|
Fair value of liabilities assumed |
|
|
(5,146 |
) |
|
|
(147,784 |
) |
|
|
(48,673 |
) |
Deferred acquisition payable |
|
|
|
|
|
|
(1,107 |
) |
|
|
(5,000 |
) |
Deferred acquisition payments and note conversion |
|
|
1,727 |
|
|
|
4,872 |
|
|
|
1,013 |
|
Note issued to seller |
|
|
|
|
|
|
|
|
|
|
(3,329 |
) |
Final purchase price adjustment |
|
|
3,610 |
|
|
|
5,500 |
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
$ |
32,398 |
|
|
$ |
545,486 |
|
|
$ |
280,873 |
|
|
|
|
Supplemental cash flow disclosure related to acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
$ |
32,398 |
|
|
$ |
545,486 |
|
|
$ |
280,873 |
|
Less: cash acquired |
|
|
|
|
|
|
(5,039 |
) |
|
|
(2,044 |
) |
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
$ |
32,398 |
|
|
$ |
540,447 |
|
|
$ |
278,829 |
|
|
|
|
Acquisitions were accounted for under the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. Accordingly, the purchase price for each business acquired
has been allocated based on managements estimate of the fair value of assets acquired and
liabilities assumed with the excess being recorded primarily as goodwill as of the effective date
of the acquisition.
Acquisition of Communications Supply Holdings, Inc.
On November 3, 2006, WESCO International completed its acquisition of Communications Supply
Holdings, Inc. (Communications Supply). On that day, a wholly-owned subsidiary of WESCO
Distribution, Inc. (WESCO Distribution) merged with and into Communications Supply, which became
a wholly-owned subsidiary of WESCO Distribution. WESCO paid at closing a cash merger price of
approximately $530.1 million, net of $5.0 million of cash acquired and $1.1 million of deferred
payments, of which $17.0 million was held in escrow to address post-closing adjustments relating to
working capital and potential indemnification claims. To fund the merger price paid at closing,
WESCO Distribution borrowed $105.0 million under its Receivables Facility and $102.0 million under
its revolving credit facility and used the borrowings, together with the $292.5 million of net
proceeds from the offering of the 2026 Debentures and approximately $30.6 million of other
available cash.
During 2007, WESCO evaluated the calculation of the acquired working capital, along with the
calculation of various direct acquisition costs. These calculations resulted in an increase to the
purchase price in the amount of approximately $4.0 million. WESCO made payments totaling $4.0
million, which included purchase price adjustments totaling $3.6 million and a deferred payment of
$0.4 million to the previous owners of Communications Supply.
In addition, during the three months ended September 30, 2007, WESCO finalized a plan for the
integration of Communications Supply into the WESCO operations. Pursuant to EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination, charges totaling approximately $0.7 million were recognized as a part of the
purchase price allocation. These charges relate to termination benefit costs and are expected to
be paid over the next 15 month period.
40
The final allocation of assets acquired and liabilities assumed for the 2006 acquisition is
summarized below.
|
|
|
|
|
|
|
Communications |
|
|
|
Supply Holdings, |
|
|
|
Inc. |
|
|
|
(Final) |
|
|
|
(In thousands) |
|
Assets Acquired |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
5,039 |
|
Trade accounts receivable |
|
|
102,582 |
|
Inventories |
|
|
84,868 |
|
Deferred income taxes short-term |
|
|
7,199 |
|
Other accounts receivable |
|
|
8,286 |
|
Prepaid expenses |
|
|
1,491 |
|
Income taxes receivable |
|
|
15,925 |
|
Property, buildings and equipment |
|
|
5,493 |
|
Intangible assets |
|
|
71,295 |
|
Goodwill |
|
|
354,522 |
|
Other noncurrent assets |
|
|
849 |
|
|
|
|
|
Total assets acquired |
|
|
657,549 |
|
|
|
|
|
|
Liabilities Assumed |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
45,241 |
|
Accrued and other current liabilities |
|
|
37,592 |
|
Deferred acquisition payable |
|
|
1,107 |
|
Restructure reserve |
|
|
687 |
|
Deferred income taxes long-term |
|
|
32,140 |
|
Other noncurrent liabilities |
|
|
554 |
|
|
|
|
|
Total liabilities assumed |
|
|
117,321 |
|
|
|
|
|
|
Fair value of net assets acquired, including intangible assets |
|
$ |
540,228 |
|
|
|
|
|
Communications Supply is a national distributor of wire, cable, network infrastructure, and
low voltage specialty system products for data, voice and security network communication
applications. Communications Supply sells it products through its 37 branches and sales offices
located throughout the United States. Communications Supply also adds new product categories, new
strategic supplier relationships and provides acquisition opportunities to penetrate further into
the low voltage specialty systems and industrial OEM and MRO markets.
The final purchase price was allocated to the respective assets and liabilities based upon
their estimated fair values as of the acquisition date. The fair value of the intangible assets was
estimated by management and the allocation resulted in intangible assets of $71.3 million and
goodwill of $354.5 million, of which $11.7 million is deductible for tax purposes. The goodwill is
primarily being generated by the trained and assembled workforce and their ability to create and
develop a highly diversified customer base. The intangible assets include supplier relationships
of $21.4 million amortized over a range of 12 to 19 years, customer relationships of $21.4 million
amortized over a range of 4 to 7 years, non-compete agreements of $0.7 million amortized over 3
years, and trademarks of $27.8 million. Trademarks have an indefinite life and are not being
amortized. No residual value is estimated for the depreciable intangible assets.
The operating results of Communications Supply have been included in WESCOs consolidated
financial statements since November 3, 2006. Unaudited pro forma results of operations (in
thousands, except per share data) for the year ended December 31, 2006 are included below as if the
acquisition occurred on the first day of the respective period. This summary of the unaudited pro forma results of operations is not necessarily indicative of what WESCOs results of
operations would have been had Communications Supply been acquired at the beginning of 2006, nor
does it purport to represent results of operations for any future periods. Seasonality of sales is
not a significant factor to these pro forma combined results of operations.
41
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2006 |
|
|
(In thousands, except per share |
|
|
amounts) |
Net sales |
|
$ |
5,837,625 |
|
Net income |
|
$ |
228,192 |
|
Earnings per common share: |
|
|
|
|
Basic |
|
$ |
4.72 |
|
Diluted |
|
$ |
4.38 |
|
Acquisition of Carlton-Bates Company
On September 29, 2005, WESCO acquired Carlton-Bates Company (Carlton-Bates), headquartered
in Little Rock, Arkansas. As part of the acquisition, WESCO developed a plan for the integration
of Carlton-Bates into the WESCO operations. This plan was finalized during the three-month period
ended September 30, 2006. Pursuant to EITF Issue No. 95-3, certain charges related to the
Carlton-Bates acquisition integration were recognized as a part of the purchase price allocation.
During the three-months ended September 30, 2007, WESCO determined that charges totaling
approximately $0.5 million were no longer required. As a result, these charges were removed from
the restructure reserve and recorded to other income. A summary of the charges for the year ended
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
December 31, |
Amounts in thousands |
|
2006 |
|
Cash Payments |
|
Adjustments |
|
2007 |
Termination Benefits |
|
$ |
24 |
|
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
|
|
Cost of closing redundant facilities |
|
|
1,392 |
|
|
|
123 |
|
|
|
493 |
|
|
|
776 |
|
Other |
|
|
104 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,520 |
|
|
$ |
250 |
|
|
$ |
494 |
|
|
$ |
776 |
|
|
|
|
|
|
|
|
|
|
Acquisition of Fastec Industrial Corp.
On July 29, 2005, WESCO acquired the assets and business of Fastec Industrial Corp. To
consummate this acquisition, WESCO issued a $3.3 million promissory note. The note was paid in
full in January 2007.
5. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT SUPPLIERS
WESCO distributes its products and services and extends credit to a large number of customers
in the industrial, construction, utility and manufactured structures markets. WESCOs largest
supplier accounted for approximately 10%, 12% and 12% of WESCOs purchases for each of the three
years, 2007, 2006 and 2005, respectively and therefore, WESCO could potentially incur risk due to
supplier concentration. Based upon WESCOs broad customer base, the Company has concluded that it
has no credit risk due to customer concentration.
6. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth the components of property, buildings and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(in thousands) |
Buildings and leasehold improvements |
|
$ |
76,684 |
|
|
$ |
73,382 |
|
Furniture, fixtures and equipment |
|
|
117,774 |
|
|
|
117,214 |
|
Software costs |
|
|
49,187 |
|
|
|
44,566 |
|
|
|
|
|
|
|
243,645 |
|
|
|
235,162 |
|
Accumulated depreciation and amortization |
|
|
(162,897 |
) |
|
|
(149,327 |
) |
|
|
|
|
|
|
80,748 |
|
|
|
85,835 |
|
Land |
|
|
20,115 |
|
|
|
19,053 |
|
Construction in progress |
|
|
3,256 |
|
|
|
2,128 |
|
|
|
|
|
|
$ |
104,119 |
|
|
$ |
107,016 |
|
|
|
|
42
Depreciation expense was $19.0 million, $15.7 million and $14.5 million, and capitalized
software amortization was $4.7 million, $3.8 million and $4.1 million, in 2007, 2006 and 2005,
respectively. The unamortized software cost was $7.9 million as of December 31, 2007 and 2006.
Furniture, fixtures and equipment include capitalized leases of $6.0 million and $3.7 million and
related accumulated amortization of $1.2 million and $0.5 million as of December 31, 2007 and 2006,
respectively.
7. DEBT
The following table sets forth WESCOs outstanding indebtedness:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Revolving credit facility |
|
$ |
187,300 |
|
|
$ |
97,000 |
|
Mortgage financing facility |
|
|
43,638 |
|
|
|
44,925 |
|
Acquisition related notes: |
|
|
|
|
|
|
|
|
Fastec |
|
|
|
|
|
|
3,329 |
|
Other |
|
|
552 |
|
|
|
666 |
|
Capital leases |
|
|
4,797 |
|
|
|
3,894 |
|
7.50% Senior Subordinated Notes due 2017 |
|
|
150,000 |
|
|
|
150,000 |
|
2.625% Convertible Senior Debentures due 2025 |
|
|
150,000 |
|
|
|
150,000 |
|
1.75% Convertible Senior Debentures due 2026 |
|
|
300,000 |
|
|
|
300,000 |
|
Accounts Receivable Securitization Facility |
|
|
480,000 |
|
|
|
390,500 |
|
|
|
|
|
|
|
1,316,287 |
|
|
|
1,140,314 |
|
Less current portion |
|
|
(2,676 |
) |
|
|
(5,927 |
) |
Less short-term debt |
|
|
(502,300 |
) |
|
|
(390,500 |
) |
|
|
|
|
|
$ |
811,311 |
|
|
$ |
743,887 |
|
|
|
|
9.125% Senior Subordinated Notes due 2008
In June 1998 and August 2001, WESCO Distribution, Inc. completed offerings of $300 million and
$100 million, respectively, in aggregate principal amount of 9.125% Senior Subordinated Notes due
2008 (the 2008 Notes). The 2008 Notes were issued at an average issue price of 98% of par, and
net proceeds received from the sales of the 2008 Notes were approximately $376 million in the
aggregate. During 2003 and 2004, WESCO repurchased $21.1 million and $55.3 million, respectively,
in aggregate principal amount of 2008 Notes and recorded a net loss of $2.6 million in 2004 and a
net gain of $0.6 million in 2003. WESCO redeemed all of the remaining principal amount of the 2008
Notes during 2005, incurring a charge of $14.9 million. The charge included the payment of a
redemption price at 101.521% of par and the write-off of unamortized original issue discount and
debt issue costs.
Accounts Receivable Securitization Facility
WESCO maintains an accounts receivable securitization program (the Receivables Facility)
under which it sells, on a continuous basis, an undivided interest in all domestic accounts
receivable to WESCO Receivables Corporation, a wholly owned special purpose entity (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 a
portion of 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.
On February 22, 2007, WESCO amended the Receivables Facility. The amendment increased the
purchase commitment under the Receivables Facility from $400 million to $500 million, included
Communications Supply Corporation and its subsidiaries as originators under the Receivables
Facility and extended the term of the Receivables Facility to May 9, 2010.
Prior to December 2006, WESCO accounted for transfers of receivables pursuant to the
Receivables Facility as a sale and removed them from the consolidated balance sheet. In December
2006, the Receivables Facility was amended and restated such that WESCO effectively maintains
control of receivables transferred pursuant to the Receivables Facility; therefore the transfers no
longer qualify for sale treatment under SFAS No. 140. As a result, all transfers are accounted
for as secured borrowings and the receivables sold pursuant to the Receivables Facility are
included on the balance sheet as trade receivables, along with WESCOs retained subordinated
undivided interest in those receivables.
As of December 31, 2007 and 2006, accounts receivable eligible for securitization totaled
approximately $604.0 million and $531.3 million, respectively. The consolidated balance sheets as
of December 31, 2007 and 2006 reflect $480.0 million and $390.5 million, respectively, of account
receivable balances legally sold to third parties, as well as the related borrowings for equal
amounts.
43
Effective with the amendment in December 2006, WESCO regained control of previously
transferred accounts receivable balances. EITF 02-09, Accounting for Changes that Result in a
Transferor Regaining Control of Financial Assets Sold, requires that re-recognized assets be
recorded at fair value. Accordingly, WESCO reflected re-recognized trade receivables with an
estimated fair value of $390.5 million in the balance sheet at December 31, 2006, along with the
retained subordinated undivided interest of $137.9 million. As a result of this change in
accounting treatment, WESCO recognized a pre-tax gain of $2.4 million during the three months ended
March 31, 2007.
Interest expense and other costs associated with the Receivables Facility totaled $28.3
million, $22.8 million and $13.3 million in 2007, 2006 and 2005, respectively. Prior to the
amendment and restatement, interest expense and other costs related to the Receivables Facility
were recorded as other expense in the consolidated statement of income. At December 31, 2007, the
interest rate on borrowings under this facility was approximately 5.7%.
Mortgage Financing Facility
In February 2003, WESCO finalized a mortgage financing facility of $51 million, $43.6 million
of which was outstanding as of December 31, 2007. Total borrowings under the mortgage financing
facility are subject to a 22-year amortization schedule, with a balloon payment due at the end of
the 10-year term. The interest rate on borrowings under this facility is fixed at 6.5%.
Revolving Credit Facility
At December 31, 2007, the aggregate borrowing capacity under the revolving credit facility was
$375 million. The revolving credit facility consists of two separate sub-facilities: (i) a U.S.
sub-facility and (ii) a Canadian sub-facility and is collateralized by the inventory of WESCO
Distribution and the inventory and accounts receivable of WESCO Distribution Canada, L.P. WESCO
Distributions obligations under the revolving credit facility have been guaranteed by WESCO
International and by certain of WESCO Distributions subsidiaries.
On December 14, 2007, WESCO Distribution amended the facility. The amendment increased the
borrowing limit under the Canadian sub-facility from $65 million to $75 million, increased the
letter of credit sub-facility from $50 million to $55 million, allowed for the disposition of
WESCOs LADD operations, a part of Carlton Bates Company, which was acquired in September 2005, and
extended the maturity date of the Revolving Credit Facility to November 1, 2013.
Availability under the facility is limited to the amount of eligible inventory and eligible
accounts receivable and Canadian inventory and receivables applied against certain advance rates.
Depending upon the amount of excess availability under the facility, interest is calculated at
LIBOR plus a margin that ranges between 1.0% and 1.75% or at the Index Rate (prime rate published
by the Wall Street Journal) plus a margin that ranges between (0.25%) and 0.50%. As long as the
average daily excess availability for both the preceding and projected succeeding 90-day period is
greater than $50 million, WESCO would be permitted to make acquisitions and repurchase outstanding
public stock and bonds.
The above permitted transactions would also be allowed if such excess availability is between
$25 million and $50 million and WESCOs fixed charge coverage ratio, as defined by the revolving
credit agreement, is at least 1.25 to 1.0 after taking into consideration the permitted
transaction. Additionally, if excess availability under the revolving credit facility is less than
$60 million, then WESCO must maintain a fixed charge coverage ratio of 1.1 to 1.0. At December 31,
2007, the interest rate was 6.2%. WESCO was in compliance with all covenants as of December 31,
2007.
During 2007, WESCO borrowed $891.4 million in the aggregate under the Revolving Credit
Facility and made repayments in the aggregate amount of $801.1 million. During 2006, aggregate
borrowings and repayments were $507.6 million and $439.6 million, respectively. At December 31,
2007, WESCO had an outstanding balance under the facility of $187.3 million. WESCO had
approximately $146.2 million available under the facility at December 31, 2007, after giving effect
to an outstanding letter of credit, as compared to approximately $326.9 million at December 31,
2006.
7.50% Senior Subordinated Notes due 2017
At December 31, 2007, $150 million in aggregate principal amount of the 7.50% Senior
Subordinated Notes due 2017 (the 2017 Notes) was outstanding. The 2017 Notes were issued by WESCO
Distribution in an indenture dated as of September 27, 2005 with The Bank of New York, as successor
to J.P. Morgan Trust Company, National Association, as trustee, and are unconditionally guaranteed
on an unsecured basis by WESCO International, Inc. The 2017 Notes accrue interest at the rate of
7.50% per annum and are payable in cash semi-annually in arrears on each April 15 and October 15.
At any time on or after October 15, 2010, WESCO Distribution may redeem all or a part of the
2017 Notes. Between October 15, 2010 and October 14, 2011, WESCO Distribution may redeem all or a
part of the 2017 Notes at a redemption price equal to 103.750% of the principal amount. Between
October 15, 2011 and October 14, 2012, WESCO Distribution may redeem all or a part of the 2017
Notes at a redemption price equal to 102.500% of the principal amount. On and after October 15,
2013, WESCO Distribution may redeem all or a part of the 2017 Notes at a redemption price equal
to 100% of the principal amount.
44
If WESCO Distribution undergoes a change of control prior to maturity, holders of 2017 Notes
will have the right, at their option, to require WESCO Distribution to repurchase for cash some or
all of their 2017 Notes at a repurchase price equal to 101% of the principal amount of the 2017
Notes being repurchased, plus accrued and unpaid interest to, but not including, the repurchase
date.
2.625% Convertible Senior Debentures due 2025
At December 31, 2007, $150 million in aggregate principal amount of 2.625% Convertible Senior
Debentures due 2025 (the 2025 Debentures) was outstanding. The 2025 Debentures were issued by
WESCO International under an indenture dated as of September 27, 2005 with The Bank of New York, as
successor to J.P. Morgan Trust Company, National Association, as Trustee, and are unconditionally
guaranteed on an unsecured senior subordinated basis by WESCO Distribution. The 2025 Debentures
accrue interest at the rate of 2.625% per annum and are payable in cash semi-annually in arrears on
each April 15 and October 15. Beginning with the six-month interest period commencing October 15,
2010, WESCO will also pay contingent interest in cash during any six-month interest period in which
the trading price of the 2025 Debentures for each of the five trading days ending on the second
trading day immediately preceding the first day of the applicable six-month interest period equals
or exceeds 120% of the principal amount of the 2025 Debentures. During any interest period when
contingent interest shall be payable, the contingent interest payable per $1,000 principal amount
of 2025 Debentures will equal 0.25% of the average trading price of $1,000 principal amount of the
2025 Debentures during the five trading days immediately preceding the first day of the applicable
six-month interest period. As defined in SFAS No. 133, Accounting for Derivative Instruments and
Hedge Activities, the contingent interest feature of the 2025 Debentures is an embedded derivate
that is not considered clearly and closely related to the host contract. The contingent interest
component had no significant value at December 31, 2007 or 2006.
The 2025 Debentures are convertible into cash and, in certain circumstances, shares of WESCO
Internationals common stock, $0.1 par value, at any time on or after October 15, 2023, or prior to
October 15, 2023 in certain circumstances. The 2025 Debentures will be convertible based on an
initial conversion rate of 23.8872 shares of common stock per $1,000 principal amount of the 2025
Debentures (equivalent to an initial conversion price of approximately $41.86 per share). The
conversion rate and the conversion price may be adjusted under certain circumstances
At any time on or after October 15, 2010, WESCO International may redeem all or a part of the
2025 Debentures at a redemption price equal to 100% of the principal amount of the 2025 Debentures
plus accrued and unpaid interest (including contingent interest and additional interest, if any)
to, but not including, the redemption date. Holders of 2025 Debentures may require WESCO to
repurchase all or a portion of their 2025 Debentures on October 15, 2010, October 15, 2015 and
October 15, 2020 at a cash repurchase price equal to 100% of the principal amount of the 2025
Debentures, plus accrued and unpaid interest (including contingent interest and additional
interest, if any) to, but not including, the repurchase date. If WESCO International undergoes
certain fundamental changes, as defined in the indenture governing the 2025 Debentures, prior to
maturity, holders of 2025 Debentures will have the right, at their option, to require WESCO
International to repurchase for cash some or all of their 2025 Debentures at a repurchase price
equal to 100% of the principal amount of the 2025 Debentures being repurchased, plus accrued and
unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the repurchase date.
1.75% Convertible Senior Debentures due 2026
On November 2, 2006, WESCO International issued $300 million in aggregate principal amount of
1.75% Convertible Senior Debentures due 2026 (the 2026 Debentures). The 2026 Debentures were
issued by WESCO International under an indenture dated as of November 2, 2006 with The Bank of New
York, as Trustee, and are unconditionally guaranteed on an unsecured senior subordinated basis by
WESCO Distribution. The 2026 Debentures accrue interest at the rate of 1.75% per annum and are
payable in cash semi-annually in arrears on each May 15 and November 15, commencing May 15, 2007.
Beginning with the six-month interest period commencing November 15, 2011, WESCO will also pay
contingent interest in cash during any six-month interest period in which the trading price of the
2026 Debentures for each of the five trading days ending on the second trading day immediately
preceding the first day of the applicable six-month interest period equals or exceeds 120% of the
principal amount of the 2026 Debentures. During any interest period when contingent interest shall
be payable, the contingent interest payable per $1,000 principal amount of 2026 Debentures will
equal 0.25% of the average trading price of $1,000 principal amount of the 2026 Debentures during
the five trading days immediately preceding the first day of the applicable six-month interest
period. As defined in SFAS No. 133, Accounting for Derivative Instruments and Hedge Activities, the
contingent interest feature of the 2026 Debentures is an embedded derivate that is not considered
clearly and closely related to the host contract. The contingent interest component had no
significant value at December 31, 2007 or 2006.
The 2026 Debentures are convertible into cash and, in certain circumstances, shares of WESCO
Internationals common stock, $0.01 par value, at any time on or after November 15, 2024, or prior
to November 15, 2024 in certain circumstances. The 2026 Debentures will be convertible based on an
initial conversion rate of 11.3437 shares of common stock per $1,000 principal amount of the 2026
Debentures (equivalent to an initial conversion price of approximately $88.15 per share). The
conversion rate and the conversion price may be adjusted under certain circumstances.
45
At any time on or after November 15, 2011, WESCO International may redeem all or a part of the
2026 Debentures at a redemption price equal to 100% of the principal amount of the 2026 Debentures
plus accrued and unpaid interest (including contingent interest and additional interest, if any)
to, but not including, the redemption date. Holders of 2026 Debentures may require WESCO to
repurchase all or a portion of their 2026 Debentures on November 15, 2011, November 15, 2016 and
November 15, 2021 at a cash repurchase price equal to 100% of the principal amount of the 2026
Debentures, plus accrued and unpaid interest (including contingent interest and additional
interest, if any) to, but not including, the repurchase date. If WESCO International undergoes
certain fundamental changes, as defined in the indenture governing the 2026 Debentures, prior to
maturity, holders of 2026 Debentures will have the right, at their option, to require WESCO
International to repurchase for cash some or all of their 2026 Debentures at a repurchase price
equal to 100% of the principal amount of the 2026 Debentures being repurchased, plus accrued and
unpaid interest (including contingent interest and additional interest, if any) to, but not
including, the repurchase date.
Covenant Compliance
WESCO was in compliance with all relevant covenants contained in its debt agreements as of
December 31, 2007.
The following table sets forth the aggregate principal repayment requirements for all
indebtedness for the next five years and thereafter (in thousands):
|
|
|
|
|
2008 |
|
$ |
504,976 |
|
2009 |
|
|
3,032 |
|
2010 |
|
|
2,793 |
|
2011 |
|
|
2,460 |
|
2012 |
|
|
2,120 |
|
Thereafter |
|
|
800,906 |
|
|
|
|
|
|
|
$ |
1,316,287 |
|
|
|
|
|
WESCOs credit agreements contain various restrictive covenants that, among other things,
impose limitations on (i) dividend payments or certain other restricted payments or investments;
(ii) the incurrence of additional indebtedness and guarantees or issuance of additional stock;
(iii) creation of liens; (iv) mergers, consolidation or sales of substantially all of WESCOs
assets; (v) certain transactions among affiliates; (vi) payments by certain subsidiaries to WESCO;
and (vii) capital expenditures. In addition, the revolving credit agreement requires WESCO to meet
certain fixed charge coverage tests depending on availability.
8. CAPITAL STOCK
Preferred Stock
There are 20 million shares of preferred stock authorized at a par value of $.01 per share.
The Board of Directors has the authority, without further action by the stockholders, to issue all
authorized preferred shares in one or more series and to fix the number of shares, designations,
voting powers, preferences, optional and other special rights and the restrictions or
qualifications thereof. The rights, preferences, privileges and powers of each series of preferred
stock may differ with respect to dividend rates, liquidation values, voting rights, conversion
rights, redemption provisions and other matters.
Common Stock
There are 210 million shares of common stock and 20 million shares of Class B common stock
authorized at a par value of $.01 per share. The Class B common stock is identical to the common
stock, except for voting and conversion rights. The holders of Class B common stock have no voting
rights. With certain exceptions, Class B common stock may be converted, at the option of the
holder, into the same number of shares of common stock.
Under the terms of the Revolving Credit Facility, WESCO International is restricted from
declaring or paying dividends and as such, at December 31, 2007 and 2006, no dividends had been
declared, and therefore no retained earnings were reserved for dividend payments.
9. SHARE REPURCHASE PLANS
On September 28, 2007, WESCO announced that the $400 million stock repurchase program,
reported on February 1, 2007, had been completed. WESCO also announced that its Board of Directors
authorized a new stock repurchase program in the amount of up to $400 million with an expiration
date of September 30, 2009. The shares may be repurchased from time to time in the open market or
through privately negotiated transactions. The stock repurchase program may be implemented or
discontinued at any time by WESCO. During the three and twelve month periods ended December 31,
2007, WESCO repurchased approximately 0.8 million shares for $30.6 million and approximately 7.1
million shares for $430.6 million, respectively.
In addition, during 2007, WESCO purchased approximately 0.2 million shares from employees for
$10.1 million in connection with the settlement of tax withholding obligations arising from the
exercise of common stock units and stock-settled stock appreciation rights.
46
10. INCOME TAXES
The following table sets forth the components of the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
66,986 |
|
|
$ |
63,859 |
|
|
$ |
18,141 |
|
State |
|
|
25,438 |
|
|
|
11,581 |
|
|
|
1,699 |
|
Foreign |
|
|
(13,174 |
) |
|
|
6,552 |
|
|
|
6,212 |
|
|
|
|
Total current. |
|
|
79,250 |
|
|
|
81,992 |
|
|
|
26,052 |
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
19,815 |
|
|
|
16,938 |
|
|
|
20,734 |
|
State |
|
|
(9,859 |
) |
|
|
2,101 |
|
|
|
2,567 |
|
Foreign |
|
|
1,191 |
|
|
|
(785 |
) |
|
|
(1,995 |
) |
|
|
|
Total deferred |
|
|
11,147 |
|
|
|
18,254 |
|
|
|
21,306 |
|
|
|
|
|
|
$ |
90,397 |
|
|
$ |
100,246 |
|
|
$ |
47,358 |
|
|
|
|
The following table sets forth the components of income before income taxes by jurisdiction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
United States |
|
$ |
357,426 |
|
|
$ |
270,081 |
|
|
$ |
126,098 |
|
Foreign |
|
|
(26,398 |
) |
|
|
47,485 |
|
|
|
24,786 |
|
|
|
|
|
|
$ |
331,028 |
|
|
$ |
317,566 |
|
|
$ |
150,884 |
|
|
|
|
47
The following table sets forth the reconciliation between the federal statutory income tax
rate and the effective rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal tax benefit |
|
|
3.3 |
|
|
|
2.8 |
|
|
|
1.8 |
|
Nondeductible expenses |
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.7 |
|
Domestic tax benefit from foreign operations |
|
|
(2.0 |
) |
|
|
(3.2 |
) |
|
|
(3.1 |
) |
Foreign tax rate differences(1) |
|
|
(7.0 |
) |
|
|
(3.3 |
) |
|
|
(3.3 |
) |
Federal tax credits(2) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.8 |
) |
Domestic production activity deduction |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
|
|
Section 965 dividend(3) |
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Adjustment related to uncertain tax positions |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Adjustment related to foreign currency exchange gains(4) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
Change in valuation allowance(5) |
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
27.3 |
% |
|
|
31.6 |
% |
|
|
31.4 |
% |
|
|
|
|
|
|
(1) |
|
Includes tax benefit of $21.2 million, $10.0 million and $5.1 million in 2007, 2006 and 2005 respectively from
recapitalization of WESCOs Canadian operations. |
|
(2) |
|
Represents a benefit of $0.6 million and $1.2 million in 2007 and 2005, respectively, from research and development credits. |
|
(3) |
|
The Amercian Jobs Creation Act (the Jobs Act) was established on October 22, 2004. One provision of the Jobs Act
effectively reduces the tax rate on qualifying repatriation of earnings held by foreign-based subsidiaries to approximately
5.25 percent. Normally, such repatriations would be taxed at a rate of 35 percent. In the fourth quarter of 2005, WESCO
elected to repatriate approximately $23.0 million under the Jobs Act. This repatriation of earnings triggered a U.S. federal
tax payment of approximately $1.0 million. This amount is reflected in the current income tax expense. Prior to the Jobs Act,
WESCO did not provide deferred taxes on undistributed earnings of foreign subsidiaries as WESCO intended to utilize these
earnings through expansion of its business operations outside the United States for an indefinite period of time. |
|
(4) |
|
Includes a benefit of $1.8 million in 2007 from foreign exchange gains related to the recapitalization of Canadian operations. |
|
(5) |
|
WESCO recorded an $8.5 million reversal of valuation allowances against deferred tax assets for net operating loss
carryforwards. The reversal was recorded as a discrete tax benefit in the third quarter of 2007. |
As of December 31, 2007 and 2006, WESCO had state tax benefits derived from net operating loss
carryforwards of approximately $9.3 million ($6.0 million, net of federal income tax) and $13.1
million ($8.5 million, net of federal income tax), respectively. The amounts will begin expiring in
2008. The net deferred tax asset of $13.1 million at December 31, 2006 was fully offset by a
valuation allowance. During 2007, WESCO recorded a reversal of this valuation allowance based on
achieving substantial profitability and a favorable assessment of expected future operating results
in jurisdictions in which WESCOs net operating losses may be utilized in future periods.
Utilization of WESCOs state net operating loss carryforwards is subject to annual limitations
imposed by state statute. Such annual limitations could result in the expiration of the net
operating loss and tax credit carryforwards before utilization.
As of December 31, 2007, WESCO had approximately $33.8 million of undistributed earnings
related to its foreign subsidiaries. Management believes that these earnings will be indefinitely
reinvested in foreign jurisdiction; accordingly, WESCO has not provided for U.S. federal income
taxes related to these earnings.
48
The following table sets forth deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
Accounts receivable |
|
$ |
6,419 |
|
|
$ |
|
|
|
$ |
8,962 |
|
|
$ |
|
|
Inventory |
|
|
|
|
|
|
3,880 |
|
|
|
|
|
|
|
269 |
|
Other |
|
|
21,159 |
|
|
|
19,671 |
|
|
|
13,603 |
|
|
|
7,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax |
|
|
27,578 |
|
|
|
23,552 |
|
|
|
22,565 |
|
|
|
7,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
|
|
|
|
120,105 |
|
|
|
|
|
|
|
141,168 |
|
Property, buildings and equipment |
|
|
|
|
|
|
7,006 |
|
|
|
|
|
|
|
7,289 |
|
Other |
|
|
13,366 |
|
|
|
4,339 |
|
|
|
340 |
|
|
|
1,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax |
|
$ |
13,366 |
|
|
$ |
131,450 |
|
|
$ |
340 |
|
|
$ |
150,017 |
|
|
|
|
11. ACCOUNTING FOR UNCERTAIN TAX POSITIONS
On January 1, 2007, WESCO adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). As a result of the
implementation of FIN 48, WESCO recognized an increase of $4.8 million in the liability for
unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of
retained earnings.
The Company is currently under examination in several tax jurisdictions, both within the
United States and outside the United States, and remains subject to examination until the statute
of limitations expires for the respective tax jurisdictions. The following summary sets forth the
tax years that remain open in the companys major tax jurisdictions:
|
|
|
United States Federal
|
|
1999 and forward |
United States States
|
|
2003 and forward |
Canada
|
|
1996 and forward |
The following table sets forth the reconciliation of gross unrecognized tax benefits:
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
(In thousands) |
|
|
|
|
Beginning balance January 1 |
|
$ |
8,418 |
|
Additions based on tax positions related to the current year |
|
|
1,941 |
|
Additions for tax positions of prior years |
|
|
1,117 |
|
Reductions for tax positions of prior years |
|
|
(226 |
) |
Settlements |
|
|
(652 |
) |
Lapse in statute of limitations |
|
|
(583 |
) |
|
|
|
|
Ending balance December 31 |
|
$ |
10,015 |
|
|
|
|
|
The total amount of unrecognized tax benefits were $10.0 million and $8.4 million as of
December 31, 2007 and January 1, 2007, respectively. If these tax benefits were recognized in the
consolidated financial statements, the portion of these amounts that would reduce the Companys
effective tax rate would be $8.1 million and $6.5 million, respectively. We do not anticipate any
material change in the total amount of unrecognized tax benefits to occur within the next twelve
months.
WESCO records interest related to uncertain tax positions as a part of interest expense in the
consolidated statement of income. Any penalties are recognized as part of income tax expense. As
of December 31, 2007 and January 1, 2007, WESCO had an accrued liability of $4.4 million and $3.3
million, respectively, for interest related to uncertain tax positions. As of January 1, 2007,
WESCO recorded a liability for tax penalties of $0.5 million.
12. 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 required by SFAS No. 123 (R) and SFAS No. 128, Earnings Per Share.
49
The following table sets forth the details of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(Dollars in thousands, except share data) |
|
|
|
|
Net income |
|
$ |
240,631 |
|
|
$ |
217,320 |
|
|
$ |
103,526 |
|
|
|
|
|
Weighted average
common shares
outstanding used in
computing basic
earnings per share |
|
|
45,699,537 |
|
|
|
48,724,343 |
|
|
|
47,085,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
issuable upon
exercise of
dilutive stock
options |
|
|
1,691,102 |
|
|
|
2,569,798 |
|
|
|
2,152,912 |
|
|
|
|
|
Common shares
issuable from
contingently
convertible
debentures (see
note below for
basis of
calculation) |
|
|
859,690 |
|
|
|
1,169,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares
outstanding and
common share
equivalents used in
computing diluted
earnings per share |
|
|
48,250,329 |
|
|
|
52,463,694 |
|
|
|
49,238,436 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.27 |
|
|
$ |
4.46 |
|
|
$ |
2.20 |
|
|
|
|
|
Diluted |
|
$ |
4.99 |
|
|
$ |
4.14 |
|
|
$ |
2.10 |
|
|
|
|
|
Stock-settled stock appreciation rights (SARs) of 0.3 million, 0.1 million and 1.7 million
at a weighted average exercise price of $65.90, $68.79 and $28.00 per share were outstanding as of
December 31, 2007, 2006 and 2005, respectively, were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the years ending December 31,
2007, 2006, and 2005.
Under EITF Issue No. 04-8 The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share, and EITF Issue No. 90-19 Convertible Bonds with Issuer Option to Settle for
Cash upon Conversion , and because of WESCOs obligation to settle the par value of the 2025
Debentures and 2026 Debentures (collectively, the Debentures) in cash, 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 method of accounting for share dilution) will be included, which is based upon the
amount by which the average stock exceeds the conversion price. The conversion prices of the 2026
Debentures and 2025 Debentures are $88.15 and $41.86, respectively. Share dilution is limited to a
maximum of 3,403,110 shares for the 2026 Debentures and 3,583,080 shares for the 2025 Debentures.
Since the average stock price for twelve-month period ending December 31, 2007 was approximately
$55.0 per share, 859,690 shares underlying the 2025 Debentures were included in the diluted share
count. For the periods ended December 31, 2007 and 2006, the effect of the 2025 Debentures on
diluted earnings per share was a decrease of $0.09 and $0.10, respectively.
13. EMPLOYEE BENEFIT PLANS
A majority of WESCOs employees are covered by defined contribution retirement savings plans
for their service rendered subsequent to WESCOs 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 participants 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 participants eligible compensation based on years of continuous
service. In addition, employer contributions may be made at the discretion of the Board of
Directors and can be based on WESCOs financial performance. Discretionary employer contributions
were made in the amount of $7.3 million, $12.8 million and $10.4 million in 2007, 2006 and 2005,
respectively. For the years ended December 31, 2007, 2006 and 2005, WESCO contributed to all such
plans $17.8 million, $21.5 million and $17.5 million, respectively, which was charged to expense.
Contributions are made in cash to employee retirement savings plan accounts. Employees then have
the option to transfer into any of their investment options, including WESCO stock.
14. STOCK-BASED COMPENSATION
Stock Purchase Plans
In connection with the 1998 recapitalization, WESCO established a stock purchase plan (1998
Stock Purchase Plan) under which certain employees may be granted an opportunity to purchase
WESCOs common stock. The maximum number of shares available for purchase may not exceed 427,720.
There were no shares issued in 2007, 2006 or 2005.
50
Stock Option Plans
WESCO has sponsored four stock option plans: the 1999 Long-Term Incentive Plan (LTIP), the
1998 Stock Option Plan, the
Stock Option Plan for Branch Employees and the 1994 Stock Option Plan. The LTIP was designed to be
the successor plan to all prior plans. Outstanding options under prior plans will continue to be
governed by their existing terms, which are substantially similar to the LTIP. Any remaining shares
reserved for future issuance under the prior plans are available for issuance under the LTIP. The
LTIP and predecessor plans are administered by the Compensation Committee of the Board of
Directors.
An initial reserve of 6,936,000 shares of common stock has been authorized for issuance under
the LTIP. This reserve automatically increases by (i) the number of shares of common stock covered
by unexercised options granted under prior plans that are canceled or terminated after the
effective date of the LTIP, and (ii) the number of shares of common stock surrendered by employees
to pay the exercise price and/or minimum withholding taxes in connection with the exercise of stock
options granted under our prior plans. As of December 31, 2007, 3.9 million shares of common stock
were reserved under the LTIP for future equity award grants.
Awards granted vest and become exercisable once criteria based on time or financial
performance are achieved. If the financial performance criteria are not met, all the awards will
vest after nine years and nine months. All awards vest immediately in the event of a change in
control. Each award terminates on the tenth anniversary of its grant date unless terminated sooner
under certain conditions.
As of December 31, 2007, there was $19.6 million of total unrecognized compensation expense
related to non-vested stock-based compensation arrangements for all awards previously made of which
approximately $10.9 million is expected to be recognized in 2008, $6.5 million in 2009 and $2.2
million in 2010.
The total intrinsic value of awards exercised during the years ended December 31, 2007 and
2006 was $50.8 million and $109.9 million, respectively. The total amount of cash received from the
exercise of options was $6.0 million and $15.9 million, respectively. The tax benefit associated
with the exercise of stock options and SARs was determined using the tax law ordering approach and
totaled $18.4 million and $35.0 million in 2007 and 2006, respectively. The tax benefit was
recorded as a credit to additional paid-in capital. In accordance with SFAS 123R, WESCO presents
all tax benefits resulting from the exercise of stock options and SARs as financing cash flows in
the Consolidated Statements of Cash Flows.
The following table sets forth a summary of both stock options and stock appreciation rights
and related information for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
Intrinsic |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
Value |
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Awards |
|
Price |
|
(In Thousands) |
|
Awards |
|
Price |
|
Awards |
|
Price |
Beginning of year |
|
|
4,578,822 |
|
|
$ |
20.78 |
|
|
|
|
|
|
|
6,303,936 |
|
|
$ |
14.02 |
|
|
|
7,217,473 |
|
|
$ |
10.26 |
|
Granted |
|
|
628,237 |
|
|
|
59.67 |
|
|
|
|
|
|
|
467,132 |
|
|
|
68.84 |
|
|
|
908,889 |
|
|
|
31.85 |
|
Exercised |
|
|
(935,156 |
) |
|
|
10.10 |
|
|
|
|
|
|
|
(2,125,913 |
) |
|
|
11.25 |
|
|
|
(1,328,954 |
) |
|
|
7.08 |
|
Cancelled |
|
|
(58,040 |
) |
|
|
27.38 |
|
|
|
|
|
|
|
(66,333 |
) |
|
|
|
|
|
|
(493,472 |
) |
|
|
10.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
4,213,863 |
|
|
|
28.85 |
|
|
$ |
71,139 |
|
|
|
4,578,822 |
|
|
|
20.78 |
|
|
|
6,303,936 |
|
|
|
14.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end
of year |
|
|
2,133,280 |
|
|
|
20.79 |
|
|
$ |
44,412 |
|
|
|
2,332,360 |
|
|
$ |
11.84 |
|
|
|
1,805,305 |
|
|
$ |
10.83 |
|
The following table sets forth exercise prices for equity awards outstanding as of December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Awards |
|
Awards |
|
Contractual |
Range of exercise price |
|
Outstanding |
|
Exercisable |
|
Life |
$0.00 - $10.00 |
|
|
822,504 |
|
|
|
822,504 |
|
|
|
4.6 |
|
$10.00 - $20.00 |
|
|
1,092,660 |
|
|
|
249,250 |
|
|
|
1.8 |
|
$20.00 - $30.00 |
|
|
511,853 |
|
|
|
511,853 |
|
|
|
6.7 |
|
$30.00 - $40.00 |
|
|
699,824 |
|
|
|
398,328 |
|
|
|
7.5 |
|
$40.00 - $50.00 |
|
|
39,854 |
|
|
|
8,744 |
|
|
|
9.2 |
|
$50.00 - $60.00 |
|
|
2,650 |
|
|
|
884 |
|
|
|
8.2 |
|
$60.00 - $70.00 |
|
|
1,044,518 |
|
|
|
141,717 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,213,863 |
|
|
|
2,133,280 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
15. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases, primarily for real property
that have noncancelable lease terms in excess of one year as of December 31, 2007, are as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
36,569 |
|
2009 |
|
|
29,276 |
|
2010 |
|
|
22,895 |
|
2011 |
|
|
13,794 |
|
2012 |
|
|
10,520 |
|
Thereafter |
|
|
11,356 |
|
Rental expense for the years ended December 31, 2007, 2006 and 2005 was $47.3 million, $38.7
million and $33.2 million, respectively.
From time to time, a number of lawsuits and claims have been or may be asserted against WESCO
relating to the conduct of its business, including routine litigation relating to commercial and
employment matters. The outcomes of litigation cannot be predicted with certainty, and some
lawsuits may be determined adversely to WESCO. However, management does not believe that the
ultimate outcome is likely to have a material adverse effect on WESCOs financial condition or
liquidity, although the resolution in any fiscal quarter of one or more of these matters may have a
material adverse effect on WESCOs results of operations for that period.
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 $52 million. WESCO has denied any liability, believes that it
has meritorious defenses and will vigorously defend itself against these allegations.
16. SEGMENTS AND RELATED INFORMATION
WESCO provides distribution of product and services through its nine operating segments which
have been aggregated as one reportable segment. The sale of electrical products and maintenance
repair and operating supplies represents more than 90% of the consolidated net sales, income from
operations and assets for 2007, 2006 and 2005. WESCO has over 250,000 unique product stock keeping
units and markets more than 1,000,000 products for customers. It is impractical to disclose net
sales by product, major product group or service group. There were no material amounts of sales or
transfers among geographic areas and no material amounts of export sales.
The following table sets forth information about WESCO by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
Long-Lived Assets |
|
|
Year Ended December 31, |
|
December 31, |
(In thousands) |
|
2007 |
|
2006 |
|
2005 |
|
2007 |
|
2006 |
|
2005 |
United States |
|
$ |
5,229,147 |
|
|
$ |
4,606,783 |
|
|
$ |
3,829,755 |
|
|
$ |
107,711 |
|
|
$ |
113,312 |
|
|
$ |
102,266 |
|
Foreign operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
633,406 |
|
|
|
599,244 |
|
|
|
499,817 |
|
|
|
13,122 |
|
|
|
13,177 |
|
|
|
12,375 |
|
Other foreign |
|
|
140,899 |
|
|
|
114,576 |
|
|
|
91,531 |
|
|
|
406 |
|
|
|
703 |
|
|
|
1,546 |
|
|
|
|
|
|
|
Subtotal foreign
operations |
|
|
774,305 |
|
|
|
713,820 |
|
|
|
591,348 |
|
|
|
13,528 |
|
|
|
13,880 |
|
|
|
13,921 |
|
|
|
|
|
|
|
Total U.S. and
Foreign |
|
$ |
6,003,452 |
|
|
$ |
5,320,603 |
|
|
$ |
4,421,103 |
|
|
$ |
121,239 |
|
|
$ |
127,192 |
|
|
$ |
116,187 |
|
|
|
|
|
|
|
17. OTHER FINANCIAL INFORMATION
WESCO Distribution issued $150 million in aggregate principal amount of 2017 Notes, and WESCO
International issued $150 million in aggregate principal amount of 2025 Debentures and $300 million
in aggregate principal amount of 2026 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 2025 Debentures and 2026 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,
Inc. and the non-guarantor subsidiaries is as follows:
52
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
WESCO |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
International, Inc |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Cash and cash equivalents |
|
$ |
(7 |
) |
|
$ |
32,140 |
|
|
$ |
40,164 |
|
|
$ |
|
|
|
$ |
72,297 |
|
Trade accounts receivable |
|
|
|
|
|
|
|
|
|
|
844,514 |
|
|
|
|
|
|
|
844,514 |
|
Inventories |
|
|
|
|
|
|
433,641 |
|
|
|
232,386 |
|
|
|
|
|
|
|
666,027 |
|
Other current assets |
|
|
(16 |
) |
|
|
35,956 |
|
|
|
61,721 |
|
|
|
|
|
|
|
97,661 |
|
|
|
|
Total current assets |
|
|
(23 |
) |
|
|
501,737 |
|
|
|
1,178,785 |
|
|
|
|
|
|
|
1,680,499 |
|
Intercompany receivables, net |
|
|
|
|
|
|
(1,352,902 |
) |
|
|
1,806,458 |
|
|
|
(453,556 |
) |
|
|
|
|
Property, buildings and equipment,
net |
|
|
|
|
|
|
33,642 |
|
|
|
70,477 |
|
|
|
|
|
|
|
104,119 |
|
Intangible assets, net |
|
|
|
|
|
|
10,368 |
|
|
|
123,423 |
|
|
|
|
|
|
|
133,791 |
|
Goodwill and other intangibles, net |
|
|
|
|
|
|
393,263 |
|
|
|
531,095 |
|
|
|
|
|
|
|
924,358 |
|
Investments in affiliates and
other noncurrent assets |
|
|
1,512,055 |
|
|
|
2,912,423 |
|
|
|
2,822 |
|
|
|
(4,410,180 |
) |
|
|
17,120 |
|
|
|
|
Total assets |
|
$ |
1,512,032 |
|
|
$ |
2,498,531 |
|
|
$ |
3,713,060 |
|
|
$ |
(4,863,736 |
) |
|
$ |
2,859,887 |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
467,859 |
|
|
|
158,434 |
|
|
|
|
|
|
|
626,293 |
|
Short-term debt |
|
|
|
|
|
|
22,300 |
|
|
|
480,000 |
|
|
|
|
|
|
|
502,300 |
|
Other current liabilities |
|
|
|
|
|
|
96,180 |
|
|
|
67,152 |
|
|
|
|
|
|
|
163,332 |
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
586,339 |
|
|
|
705,586 |
|
|
|
|
|
|
|
1,291,925 |
|
Intercompany payables, net |
|
|
453,556 |
|
|
|
|
|
|
|
|
|
|
|
(453,556 |
) |
|
|
|
|
Long-term debt |
|
|
450,000 |
|
|
|
318,608 |
|
|
|
42,703 |
|
|
|
|
|
|
|
811,311 |
|
Other noncurrent liabilities |
|
|
|
|
|
|
90,468 |
|
|
|
57,707 |
|
|
|
|
|
|
|
148,175 |
|
Stockholders equity |
|
|
608,476 |
|
|
|
1,503,116 |
|
|
|
2,907,064 |
|
|
|
(4,410,180 |
) |
|
|
608,476 |
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
1,512,032 |
|
|
$ |
2,498,531 |
|
|
$ |
3,713,060 |
|
|
$ |
(4,863,736 |
) |
|
$ |
2,859,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
WESCO |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
International, Inc |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Cash and cash equivalents |
|
$ |
(2 |
) |
|
$ |
27,622 |
|
|
$ |
45,775 |
|
|
$ |
|
|
|
$ |
73,395 |
|
Trade accounts receivable |
|
|
|
|
|
|
|
|
|
|
829,962 |
|
|
|
|
|
|
|
829,962 |
|
Inventories |
|
|
|
|
|
|
402,082 |
|
|
|
211,487 |
|
|
|
|
|
|
|
613,569 |
|
Other current assets |
|
|
|
|
|
|
42,242 |
|
|
|
58,844 |
|
|
|
|
|
|
|
101,086 |
|
|
|
|
Total current assets |
|
|
(2 |
) |
|
|
471,946 |
|
|
|
1,146,068 |
|
|
|
|
|
|
|
1,618,012 |
|
Intercompany receivables, net |
|
|
|
|
|
|
(1,487,030 |
) |
|
|
1,559,778 |
|
|
|
(72,748 |
) |
|
|
|
|
Property, buildings and equipment,
net |
|
|
|
|
|
|
34,472 |
|
|
|
72,544 |
|
|
|
|
|
|
|
107,016 |
|
Intangible assets, net |
|
|
|
|
|
|
11,314 |
|
|
|
136,236 |
|
|
|
|
|
|
|
147,550 |
|
Goodwill and other intangibles, net |
|
|
|
|
|
|
374,026 |
|
|
|
557,203 |
|
|
|
|
|
|
|
931,229 |
|
Investments in affiliates and
other noncurrent assets |
|
|
1,285,977 |
|
|
|
2,693,146 |
|
|
|
2,604 |
|
|
|
(3,961,551 |
) |
|
|
20,176 |
|
|
|
|
Total assets |
|
$ |
1,511,254 |
|
|
$ |
2,497,750 |
|
|
$ |
3,684,345 |
|
|
$ |
(4,816,772 |
) |
|
$ |
2,876,577 |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
434,092 |
|
|
|
156,212 |
|
|
|
|
|
|
|
590,304 |
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
390,500 |
|
|
|
|
|
|
|
390,500 |
|
Other current liabilities |
|
|
|
|
|
|
64,631 |
|
|
|
108,237 |
|
|
|
|
|
|
|
172,868 |
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
498,723 |
|
|
|
654,949 |
|
|
|
|
|
|
|
1,153,672 |
|
Intercompany payables, net |
|
|
72,748 |
|
|
|
|
|
|
|
|
|
|
|
(72,748 |
) |
|
|
|
|
Long-term debt |
|
|
450,000 |
|
|
|
250,002 |
|
|
|
43,885 |
|
|
|
|
|
|
|
743,887 |
|
Other noncurrent liabilities |
|
|
|
|
|
|
74,472 |
|
|
|
88,725 |
|
|
|
|
|
|
|
163,197 |
|
Stockholders equity |
|
|
763,227 |
|
|
|
1,274,677 |
|
|
|
2,686,874 |
|
|
|
(3,961,551 |
) |
|
|
763,227 |
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
1,285,975 |
|
|
$ |
2,097,874 |
|
|
$ |
3,474,433 |
|
|
$ |
(4,034,299 |
) |
|
$ |
2,823,983 |
|
|
|
|
53
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
WESCO |
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
International, |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net sales |
|
$ |
|
|
|
$ |
4,161,129 |
|
|
$ |
1,842,323 |
|
|
$ |
|
|
|
$ |
6,003,452 |
|
Cost of goods sold, excluding
depreciation and amortization |
|
|
|
|
|
|
3,371,101 |
|
|
|
1,410,235 |
|
|
|
|
|
|
|
4,781,336 |
|
Selling, general and
administrative expenses |
|
|
11 |
|
|
|
646,309 |
|
|
|
144,813 |
|
|
|
|
|
|
|
791,133 |
|
Depreciation and amortization |
|
|
|
|
|
|
17,223 |
|
|
|
19,536 |
|
|
|
|
|
|
|
36,759 |
|
Results of affiliates operations |
|
|
221,160 |
|
|
|
211,698 |
|
|
|
|
|
|
|
(432,858 |
) |
|
|
|
|
Interest expense (income), net |
|
|
(36,311 |
) |
|
|
44,384 |
|
|
|
55,123 |
|
|
|
|
|
|
|
63,196 |
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
16,829 |
|
|
|
72,650 |
|
|
|
918 |
|
|
|
|
|
|
|
90,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
240,631 |
|
|
$ |
221,160 |
|
|
$ |
211,698 |
|
|
$ |
(432,858 |
) |
|
$ |
240,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
WESCO |
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
International, |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net sales |
|
$ |
|
|
|
$ |
4,096,952 |
|
|
$ |
1,223,651 |
|
|
$ |
|
|
|
$ |
5,320,603 |
|
Cost of goods sold, excluding
depreciation and amortization |
|
|
|
|
|
|
3,306,356 |
|
|
|
927,723 |
|
|
|
|
|
|
|
4,234,079 |
|
Selling, general and
administrative expenses |
|
|
26 |
|
|
|
536,535 |
|
|
|
156,320 |
|
|
|
|
|
|
|
692,881 |
|
Depreciation and amortization |
|
|
|
|
|
|
14,597 |
|
|
|
14,063 |
|
|
|
|
|
|
|
28,660 |
|
Results of affiliates operations |
|
|
194,374 |
|
|
|
102,051 |
|
|
|
|
|
|
|
(296,425 |
) |
|
|
|
|
Interest expense (income), net |
|
|
(38,552 |
) |
|
|
34,775 |
|
|
|
28,399 |
|
|
|
|
|
|
|
24,622 |
|
Other (income) expense |
|
|
|
|
|
|
53,390 |
|
|
|
(30,595 |
) |
|
|
|
|
|
|
22,795 |
|
Provision for income taxes |
|
|
15,580 |
|
|
|
58,976 |
|
|
|
25,690 |
|
|
|
|
|
|
|
100,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
217,320 |
|
|
$ |
194,374 |
|
|
$ |
102,051 |
|
|
$ |
(296,425 |
) |
|
$ |
217,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
WESCO |
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
International, |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net sales |
|
$ |
|
|
|
$ |
3,664,618 |
|
|
$ |
756,485 |
|
|
$ |
|
|
|
$ |
4,421,103 |
|
Cost of goods sold, excluding
depreciation and amortization |
|
|
|
|
|
|
2,983,739 |
|
|
|
596,659 |
|
|
|
|
|
|
|
3,580,398 |
|
Selling, general and
administrative expenses |
|
|
7 |
|
|
|
543,009 |
|
|
|
69,764 |
|
|
|
|
|
|
|
612,780 |
|
Depreciation and amortization |
|
|
|
|
|
|
15,994 |
|
|
|
2,645 |
|
|
|
|
|
|
|
18,639 |
|
Results of affiliates operations |
|
|
87,431 |
|
|
|
89,849 |
|
|
|
|
|
|
|
(177,280 |
) |
|
|
|
|
Interest expense (income), net |
|
|
(25,443 |
) |
|
|
43,939 |
|
|
|
11,687 |
|
|
|
|
|
|
|
30,183 |
|
Loss on debt extinguishment, net |
|
|
|
|
|
|
14,914 |
|
|
|
|
|
|
|
|
|
|
|
14,914 |
|
Other (income) expense |
|
|
|
|
|
|
41,528 |
|
|
|
(28,223 |
) |
|
|
|
|
|
|
13,305 |
|
Provision for income taxes |
|
|
9,341 |
|
|
|
23,913 |
|
|
|
14,104 |
|
|
|
|
|
|
|
47,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
103,526 |
|
|
$ |
87,431 |
|
|
$ |
89,849 |
|
|
$ |
(177,280 |
) |
|
$ |
103,526 |
|
|
|
|
54
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
WESCO |
|
WESCO |
|
Non-Guarantor |
|
Eliminating |
|
|
|
|
International, Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net cash provided (used) by operating
activities |
|
$ |
36,094 |
|
|
$ |
226,157 |
|
|
$ |
27 |
|
|
$ |
|
|
|
$ |
262,278 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(14,547 |
) |
|
|
(1,571 |
) |
|
|
|
|
|
|
(16,118 |
) |
Acquisitions |
|
|
|
|
|
|
(32,398 |
) |
|
|
|
|
|
|
|
|
|
|
(32,398 |
) |
Other |
|
|
|
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
487 |
|
|
|
|
Net cash used by investing activities |
|
|
|
|
|
|
(46,458 |
) |
|
|
(1,571 |
) |
|
|
|
|
|
|
(48,029 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) |
|
|
380,808 |
|
|
|
(204,337 |
) |
|
|
(1,288 |
) |
|
|
|
|
|
|
175,183 |
|
Equity transactions |
|
|
(416,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(416,442 |
) |
Other |
|
|
(465 |
) |
|
|
29,156 |
|
|
|
(38 |
) |
|
|
|
|
|
|
28,653 |
|
|
|
|
Net cash provided (used) by
financing activities |
|
|
(36,099 |
) |
|
|
(175,181 |
) |
|
|
(1,326 |
) |
|
|
|
|
|
|
(212,606 |
) |
|
|
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
(2,741 |
) |
|
|
|
|
|
|
(2,741 |
) |
|
|
|
Net change in cash and cash equivalents |
|
|
(5 |
) |
|
|
4,518 |
|
|
|
(5,611 |
) |
|
|
|
|
|
|
(1,098 |
) |
Cash and cash equivalents at beginning of
period |
|
|
(2 |
) |
|
|
27,622 |
|
|
|
45,775 |
|
|
|
|
|
|
|
73,395 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
(7 |
) |
|
$ |
32,140 |
|
|
$ |
40,164 |
|
|
$ |
|
|
|
$ |
72,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
WESCO |
|
WESCO |
|
Non-Guarantor |
|
Eliminating |
|
|
|
|
International, Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net cash provided (used) by operating
activities |
|
$ |
(61,824 |
) |
|
$ |
221,154 |
|
|
$ |
47,753 |
|
|
$ |
|
|
|
$ |
207,083 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(16,730 |
) |
|
|
(1,629 |
) |
|
|
|
|
|
|
(18,359 |
) |
Acquisitions |
|
|
|
|
|
|
(540,447 |
) |
|
|
|
|
|
|
|
|
|
|
(540,447 |
) |
Other |
|
|
|
|
|
|
(1,745 |
) |
|
|
2,592 |
|
|
|
|
|
|
|
847 |
|
|
|
|
Net cash used by investing activities |
|
|
|
|
|
|
(558,922 |
) |
|
|
963 |
|
|
|
|
|
|
|
(557,959 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) |
|
|
328,209 |
|
|
|
48,551 |
|
|
|
(6,977 |
) |
|
|
|
|
|
|
369,783 |
|
Equity transactions |
|
|
(258,172 |
) |
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
41,828 |
|
Other |
|
|
(8,215 |
) |
|
|
(1,249 |
) |
|
|
|
|
|
|
|
|
|
|
(9,464 |
) |
|
|
|
Net cash provided (used) by
financing activities |
|
|
61,822 |
|
|
|
347,302 |
|
|
|
(6,977 |
) |
|
|
|
|
|
|
402,147 |
|
|
|
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
Net change in cash and cash equivalents |
|
|
(2 |
) |
|
|
9,534 |
|
|
|
41,738 |
|
|
|
|
|
|
|
51,270 |
|
Cash and cash equivalents at beginning of
period |
|
|
|
|
|
|
18,088 |
|
|
|
4,037 |
|
|
|
|
|
|
|
22,125 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
(2 |
) |
|
$ |
27,622 |
|
|
$ |
45,775 |
|
|
$ |
|
|
|
$ |
73,395 |
|
|
|
|
55
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
WESCO |
|
WESCO |
|
Non-Guarantor |
|
and Eliminating |
|
|
|
|
International, Inc. |
|
Distribution, Inc. |
|
Subsidiaries |
|
Entries |
|
Consolidated |
|
|
|
Net cash provided (used) by operating
activities |
|
$ |
38,901 |
|
|
$ |
272,483 |
|
|
$ |
(16,287 |
) |
|
$ |
|
|
|
$ |
295,097 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(13,026 |
) |
|
|
(1,128 |
) |
|
|
|
|
|
|
(14,154 |
) |
Acquisitions |
|
|
|
|
|
|
(278,829 |
) |
|
|
|
|
|
|
|
|
|
|
(278,829 |
) |
Other |
|
|
|
|
|
|
2,014 |
|
|
|
|
|
|
|
|
|
|
|
2,014 |
|
|
|
|
Net cash used by investing activities |
|
|
|
|
|
|
(289,841 |
) |
|
|
(1,128 |
) |
|
|
|
|
|
|
(290,969 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) |
|
|
(42,975 |
) |
|
|
24,299 |
|
|
|
(1,180 |
) |
|
|
|
|
|
|
(19,856 |
) |
Equity transactions |
|
|
8,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,173 |
|
Other |
|
|
(4,100 |
) |
|
|
(4,827 |
) |
|
|
3,579 |
|
|
|
|
|
|
|
(5,348 |
) |
|
|
|
Net cash provided (used) by
financing activities |
|
|
(38,902 |
) |
|
|
19,472 |
|
|
|
2,399 |
|
|
|
|
|
|
|
(17,031 |
) |
|
|
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
505 |
|
|
|
|
|
|
|
505 |
|
|
|
|
Net change in cash and cash equivalents |
|
|
(1 |
) |
|
|
2,114 |
|
|
|
(14,511 |
) |
|
|
|
|
|
|
(12,398 |
) |
Cash and cash equivalents at beginning of
period |
|
|
1 |
|
|
|
15,974 |
|
|
|
18,548 |
|
|
|
|
|
|
|
34,523 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
18,088 |
|
|
$ |
4,037 |
|
|
$ |
|
|
|
$ |
22,125 |
|
|
|
|
56
18. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth selected quarterly financial data for the years ended December
31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,450,556 |
|
|
$ |
1,518,108 |
|
|
$ |
1,545,607 |
|
|
$ |
1,489,181 |
|
Cost of goods sold |
|
|
1,151,533 |
|
|
|
1,210,022 |
|
|
|
1,232,520 |
|
|
|
1,187,261 |
|
Income from
operations |
|
|
82,535 |
|
|
|
103,605 |
|
|
|
109,296 |
|
|
|
98,788 |
|
Income before
income taxes |
|
|
70,315 |
|
|
|
86,820 |
|
|
|
91,727 |
|
|
|
82,166 |
|
|
Net income |
|
|
48,158 |
(A),(D) |
|
|
59,667 |
(A),(D) |
|
|
71,774 |
(A),(B), (C),(D) |
|
|
61,032 |
(A),(D) |
Basic earnings per
share
(I) |
|
|
0.98 |
|
|
|
1.30 |
|
|
|
1.62 |
|
|
|
1.39 |
|
Diluted earnings
per share
(J) |
|
|
0.93 |
|
|
|
1.22 |
|
|
|
1.54 |
|
|
|
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,265,508 |
|
|
$ |
1,335,976 |
|
|
$ |
1,343,066 |
|
|
$ |
1,376,053 |
|
Cost of goods sold |
|
|
1,012,403 |
|
|
|
1,065,422 |
|
|
|
1,067,406 |
|
|
|
1,088,848 |
|
Income from
operations |
|
|
76,925 |
|
|
|
94,728 |
|
|
|
100,177 |
|
|
|
93,153 |
|
Income before
income taxes |
|
|
65,473 |
|
|
|
82,851 |
|
|
|
89,269 |
|
|
|
79,973 |
|
Net income |
|
|
44,450 |
(E),(G) |
|
|
55,178 |
(E),(G) |
|
|
59,385 |
(E),(G) |
|
|
58,307 |
(E),(F),(G) |
Basic earnings per
share
(H) |
|
|
0.93 |
|
|
|
1.13 |
|
|
|
1.21 |
|
|
|
1.18 |
|
Diluted earnings
per share
(I) |
|
|
0.86 |
|
|
|
1.05 |
|
|
|
1.13 |
|
|
|
1.10 |
|
|
|
|
(A) |
|
Income tax benefits from the recapitalization of the
Canadian operations for the first, second, third and fourth
quarters of 2007 were $3.6 million, $5.3 million, $5.5
million and $6.8 million, respectively. The fourth quarter
reflects benefits realized as a result of a change in
estimate related to Canadian interest expense. |
|
(B) |
|
An income tax benefit of $1.8 million from a foreign
currency exchange gain related to the recapitalization of
Canadian operations was recorded in the third quarter of
2007. |
|
(C) |
|
Pursuant to SFAS 109, Accounting for Income Taxes, an $8.5
million valuation allowance reversal was recorded against
deferred tax assets for net operating loss carryforwards.
The reversal was recorded as a discrete tax benefit in the
third quarter of 2007. |
|
(D) |
|
Stock option expense for the first, second, third and
fourth quarters of 2007 was $3.3 million, $3.3 million,
$4.7 million and $3.2 million, respectively. |
|
(E) |
|
Income tax benefits from the recapitalization of the
Canadian operations for the first, second, third and fourth
quarters of 2006 were $2.1 million, $2.2 million, $2.1
million and $3.6 million, respectively. The fourth quarter
reflects increased utilization of foreign tax credits. |
|
(F) |
|
On November 3, 2006, Communications Supply Holdings, Inc.
was acquired and the sales resulting from this acquisition
for the fourth quarter of 2006 were $95.6 million. |
|
(G) |
|
Stock option expense for the first, second, third and
fourth quarters of 2006 was $2.6 million, $2.5 million,
$3.4 million and $3.2 million, respectively. |
|
(H) |
|
Earnings per share (EPS) in each quarter is computed using
the weighted average number of shares outstanding during
that quarter while EPS for the full year is computed by
taking the average of the weighted average number of shares
outstanding each quarter. Thus, the sum of the four
quarters EPS may not equal the full-year EPS. |
|
(I) |
|
Diluted earnings per share (DEPS) in each quarter is
computed using the weighted average number of shares
outstanding during that quarter while DEPS for the full
year is computed by taking the average of the weighted
average number of shares outstanding each quarter. Thus,
the sum of the four quarters DEPS may not equal the
full-year DEPS. |
57
19. SUBSEQUENT EVENTS
On December 14, 2007, WESCO announced that it had entered into a strategic arrangement with
Deutsch Engineered Connecting Devices, Inc. (Deutsch) with respect to its LADD operations. On
January 2, 2008, WESCO and Deutsch completed the transaction which resulted in a joint venture in
which Deutsch owns a 60% interest and WESCO owns a 40% interest. Deutsch paid to WESCO aggregate
consideration of approximately $75 million. Deutsch is entitled, but not obliged, to acquire the
remaining 40% after January 1, 2010. As a result of the transaction, WESCO recognized a pre-tax
gain of approximately $3.0 million.
At the end of December, WESCO repurchased approximately 0.3 million shares under its
previously announced share repurchase program. WESCO settled the transaction in January for
approximately $13.3 million.
58
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure 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 such term is defined under Rule 13a-15(e) promulgated under the Exchange
Act. Based on this evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this report.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control Integrated Framework , our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.
The effectiveness of the Companys internal control over financial reporting as of December
31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
During the last fiscal quarter of 2007, there were no changes in the Companys internal
control over financial reporting identified in connection with managements evaluation of the
effectiveness of the Companys internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Item 9B. Other Information.
None.
59
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information set forth under the captions Board of Directors and Executive Officers in
our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders is incorporated herein
by reference.
Codes of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct (Code of Conduct) that applies to our
Directors, officers and employees that is available on our website at www.wesco.com by selecting
the Investors tab followed by the Corporate Governance heading. Any amendment or waiver of the
Code of Conduct for our officers or Directors will be disclosed promptly at that location on our
website.
We also have adopted a Senior Financial Executive Code of Business Ethics and Conduct (Senior
Financial Executive Code) that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing these functions. The
Senior Financial Executive Code is also available at that same location on our website. We intend
to timely disclose any amendment or waiver of the Senior Financial Executive Code on our website
and will retain such information on our website as required by applicable SEC rules.
A copy of the Code of Conduct and/or Senior Financial Executive Code may also be obtained upon
request by any stockholder, without charge, by writing to us at WESCO International, Inc., 225 West
Station Square Drive, Suite 700, Pittsburgh, Pennsylvania 15219, Attention: Corporate Secretary.
The information required by Item 10 that relates to our Directors and executive officers is
incorporated by reference from the information appearing under the captions Corporate Governance
and Board and Committee Meetings in our definitive Proxy Statement that is to be filed with the
SEC pursuant to the Exchange Act within 120 days of the end of our fiscal year on December 31,
2007.
Information included on our website is not a part of this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The information set forth under the captions Compensation Discussion and Analysis and
Director Compensation in our definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .
The information set forth under the caption Security Ownership in our definitive Proxy
Statement for our 2008 Annual Meeting of Stockholders is incorporated herein by reference.
The following table provides information as of December 31, 2007 with respect to the shares of
our common stock that may be issued under our existing equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
Number of securities to be |
|
Weighted average |
|
remaining available for |
|
|
issued upon exercise of |
|
exercise price of |
|
future issuance under |
|
|
outstanding options, |
|
outstanding options, |
|
equity compensation |
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
plans |
|
Equity compensation plans approved by security holders |
|
|
4,213,863 |
|
|
$ |
28.85 |
|
|
|
3,864,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,213,863 |
|
|
$ |
28.85 |
|
|
|
3,864,043 |
|
|
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information set forth under the captions Transactions with Related Persons and
Corporate Governance in our definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information set forth under the caption Independent Registered Public Accounting Firm
Fees and Services in our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders is
incorporated herein by reference.
60
PART IV
Item 15. Exhibits and Financial Statement Schedule.
The financial statements, financial statement schedule and exhibits listed below are filed as part
of this annual report:
(a) |
|
(1) Financial Statements |
|
|
|
The list of financial statements required by this item is set forth in
Item 8, Financial Statements and Supplementary Data, and is
incorporated herein by reference. |
|
(2) |
|
Financial Statement Schedule |
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
(b) |
|
Exhibits |
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
Prior Filing or Sequential Page Number |
2.1
|
|
Recapitalization Agreement, dated as of
March 27, 1998, among Thor Acquisitions
L.L.C., WESCO International, Inc. (formerly
known as CDW Holding Corporation) and
certain security holders of WESCO
International, Inc.
|
|
Incorporated by reference to Exhibit
2.1 to WESCOs Registration Statement
on Form S-4 (No. 333-43225) |
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation of
WESCO International, Inc.
|
|
Incorporated by reference to Exhibit
3.1 to WESCOs Registration Statement
on Form S-4 (No. 333-70404) |
|
|
|
|
|
3.2
|
|
By-laws of WESCO International, Inc.
|
|
Incorporated by reference to Exhibit
3.2 to WESCOs Registration Statement
on Form S-4 (No. 333-70404) |
|
|
|
|
|
4.1
|
|
Indenture, dated as of September 22, 2005,
by and among WESCO International, Inc.,
WESCO Distribution, Inc. and J.P. Morgan
Trust Company, National Association, as
Trustee.
|
|
Incorporated by reference to Exhibit
4.1 to WESCOs Current Report on Form
8-K, dated September 21, 2005 |
|
|
|
|
|
4.2
|
|
Form of 2.625% Convertible Senior Debenture
due 2025 (included in Exhibit 4.1).
|
|
Incorporated by reference to Exhibit
4.3 to WESCOs Current Report on Form
8-K, dated September 21, 2005 |
|
|
|
|
|
4.3
|
|
Indenture, dated as of September 22, 2005,
by and among WESCO International, Inc.,
WESCO Distribution, Inc. and J.P. Morgan
Trust Company, National Association, as
Trustee.
|
|
Incorporated by reference to Exhibit
4.4 to WESCOs Current Report on Form
8-K, dated September 21, 2005 |
|
|
|
|
|
4.4
|
|
Form of 7.50% Senior Subordinated Note due
2017, (included in Exhibit 4.3).
|
|
Incorporated by reference to Exhibit
4.6 to WESCOs Current Report on Form
8-K, dated September 21, 2005 |
|
|
|
|
|
10.1
|
|
CDW Holding Corporation Stock Purchase Plan.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.2
|
|
Form of Stock Subscription Agreement.
|
|
Incorporated by reference to Exhibit
10.2 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
61
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
Prior Filing or Sequential Page Number |
10.3
|
|
CDW Holding Corporation Stock Option Plan.
|
|
Incorporated by reference to Exhibit
10.3 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.4
|
|
Amendment to CDW Holding Corporation Stock
Option Plan
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Current Report on
Form 8-K, dated March 2, 2006 |
|
|
|
|
|
10.5
|
|
Form of Stock Option Agreement.
|
|
Incorporated by reference to Exhibit
10.4 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.6
|
|
Form of Amendment to Stock Option Agreement.
|
|
Incorporated by reference to Exhibit
10.2 to WESCOs Current Report on
Form 8-K, dated March 2, 2006 |
|
|
|
|
|
10.7
|
|
CDW Holding Corporation Stock Option Plan
for Branch Employees.
|
|
Incorporated by reference to Exhibit
10.5 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.8
|
|
Amendment to CDW Holding Corporation Stock
Option Plan for Branch Employees.
|
|
Incorporated by reference to Exhibit
10.3 to WESCOs Current Report on
Form 8-K, dated March 2, 2006 |
|
|
|
|
|
10.9
|
|
Form of Branch Stock Option Agreement.
|
|
Incorporated by reference to Exhibit
10.6 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.10
|
|
Form of Amendment to Branch Stock Option
Agreement.
|
|
Incorporated by reference to Exhibit
10.4 to WESCOs Current Report on
Form 8-K, dated March 2, 2006 |
|
|
|
|
|
10.11
|
|
WESCO International, Inc. 1998 Stock Option
Plan.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1998 |
|
|
|
|
|
10.12
|
|
Amendment to WESCO International, Inc. 1998
Stock Option Plan.
|
|
Incorporated by reference to Exhibit
10.5 to WESCOs Current Report on
Form 8-K dated March 2, 2006 |
|
|
|
|
|
10.13
|
|
Form of Management Stock Option Agreement.
|
|
Incorporated by reference to Exhibit
10.2 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1998 |
|
|
|
|
|
10.14
|
|
Form of Amendment to Management Stock
Option Agreement.
|
|
Incorporated by reference to Exhibit
10.6 to WESCOs Current Report on
Form 8-K dated March 2, 2006 |
|
|
|
|
|
10.15
|
|
1999 Deferred Compensation Plan for
Non-Employee Directors.
|
|
Incorporated by reference to Exhibit
10.22 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 1998 |
|
|
|
|
|
10.16
|
|
1999 Long-Term Incentive Plan.
|
|
Incorporated by reference to Exhibit
10.22 to WESCOs Registration
Statement on Form S-1 (No. 333-73299) |
|
|
|
|
|
62
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
Prior Filing or Sequential Page Number |
10.17
|
|
Office Lease
Agreement, dated as
of May 24, 1995, by
and between Commerce
Court Property
Holding Trust, as
Landlord, and WESCO
Distribution, Inc.,
as Tenant, as amended
by First Amendment to
Lease, dated as of
June 1995 and by
Second Amendment to
Lease, dated as of
December 29, 1995.
|
|
Incorporated by reference to Exhibit
10.10 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.18
|
|
Lease, dated as of
April 1, 1992, by and
between The E.T.
Hermann and Jane D.
Hermann 1978 Living
Trust and
Westinghouse Electric
Corporation, as
renewed by the
renewal letter, dated
as of December 13,
1996, from WESCO
Distribution, Inc.,
as successor in
interest to
Westinghouse Electric
Corporation, to Utah
State Retirement
Fund, as successor in
interest to The E.T.
Hermann and Jane D.
Hermann 1978 Living
Trust.
|
|
Incorporated by reference to Exhibit
10.11 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.19
|
|
Third Amendment to
Lease, dated as of
December 22, 2004, by
and between US
Institutional Real
Estate Equities,
L.P., as successor in
interest to Utah
State Retirement Fund
and The E.T. Hermann
and Jane D. Hermann
1978 Living Trust,
and WESCO
Distribution, Inc.,
as successor in
interest to
Westinghouse Electric
Corporation.
|
|
Incorporated by reference to Exhibit
10.19 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2005 |
|
|
|
|
|
10.20
|
|
Agreement of Lease,
dated as of September
3, 1998, by and
between Atlantic
Construction, Inc.,
as landlord, and
WESCO
Distribution-Canada,
Inc., as tenant, as
renewed by the
Renewal Agreement,
dated April 14, 2004,
by and between
Atlantic
Construction, Inc.,
as landlord, and
WESCO
Distribution-Canada,
Inc., as tenant.
|
|
Incorporated by reference to Exhibit
10.20 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2005 |
|
|
|
|
|
10.21
|
|
Lease dated December
13, 2002 between
WESCO Distribution,
Inc. and WESCO Real
Estate IV, LLC.
|
|
Incorporated by reference to Exhibit
10.27 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
|
|
|
|
|
10.22
|
|
Lease Guaranty dated
December 13, 2002 by
WESCO International,
Inc. in favor of
WESCO Real Estate IV,
LLC.
|
|
Incorporated by reference to Exhibit
10.28 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
|
|
|
|
|
10.23
|
|
Amended and Restated
Registration and
Participation
Agreement, dated as
of June 5, 1998,
among WESCO
International, Inc.
and certain security
holders of WESCO
International, Inc.
named therein.
|
|
Incorporated by reference to Exhibit
10.19 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.24
|
|
Employment Agreement,
dated as of June 5,
1998, between WESCO
Distribution, Inc.
and Roy W. Haley.
|
|
Incorporated by reference to Exhibit
10.20 to WESCOs Registration
Statement on Form S-4 (No. 333-43225) |
|
|
|
|
|
10.25
|
|
Employment Agreement,
dated as of July 29,
2004, between WESCO
International, Inc.
and John Engel.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 2004 |
|
|
|
|
|
10.26
|
|
Employment Agreement,
dated as of December
15, 2005, between
WESCO International,
Inc. and Stephen A.
Van Oss.
|
|
Incorporated by reference to Exhibit
10.26 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2005 |
63
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
Prior Filing or Sequential Page Number |
10.27
|
|
Amended and Restated
Credit Agreement,
dated as of September
28, 2005, by and
among WESCO
Distribution, Inc.,
the other credit
parties signatory
thereto from time to
time, General
Electric Capital
Corporation, as Agent
and U.S. Lender, GECC
Capital Markets
Group, as Lead
Arranger, GE Canada
Finance Holding
Company, as Canadian
Agent and a Canadian
Lender, Bank of
America, N.A., as
Syndication Agent,
and The CIT
Group/Business
Credit, Inc. and
Citizens Bank of
Pennsylvania, as
Co-Documentation
Agents.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Current Report on
Form 8-K, September 28, 2005 |
|
|
|
|
|
10.28
|
|
Intercreditor
Agreement, dated as
of March 19, 2002,
among PNC Bank,
National Association,
General Electric
Capital Corporation,
WESCO Receivables
Corp., WESCO
Distribution, Inc.,
Fifth Third Bank,
N.A., Mellon Bank,
N.A., The Bank of
Nova Scotia, Herning
Enterprises, Inc. and
WESCO Equity
Corporation.
|
|
Incorporated by reference to Exhibit
10.21 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2001 |
|
|
|
|
|
10.29
|
|
Second Amended and
Restated Receivables
Purchase Agreement
dated as of September
2, 2003 among WESCO
Receivables Corp.,
WESCO Distribution,
Inc., and the Lenders
identified therein.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 2003 |
|
|
|
|
|
10.30
|
|
Second Amendment to
Second Amended and
Restated Receivables
Purchase Agreement
and Waiver, dated
August 31, 2004.
|
|
Incorporated by reference to Exhibit
10.4 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 2004 |
|
|
|
|
|
10.31
|
|
Third Amendment to
Second Amended and
Restated Receivables
Purchase Agreement,
dated September 23,
2004.
|
|
Incorporated by reference to Exhibit
10.5 to WESCOs Quarterly Report on
Form 10-Q for the quarter ended
September 30, 2004 |
|
|
|
|
|
10.32
|
|
Sixth Amendment to
Second Amended and
Restated Receivables
Purchase Agreement,
dated October 4,
2005.
|
|
Incorporated by reference to Exhibit
10.2 to WESCOs Current Report on
Form 8-K, September 28, 2005 |
|
|
|
|
|
10.33
|
|
Seventh Amendment to
Second Amended and
Restated Receivables
Purchase Agreement,
dated December 29,
2006.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Current Report on
Form 8-K, December 29, 2006 |
|
|
|
|
|
10.34
|
|
Eighth Amendment to
Second Amended and
Restated Receivables
Purchase Agreement,
dated February 22,
2007.
|
|
Incorporated by reference to Exhibit
10.1 to WESCOs Current Report on
Form 8-K, February 22, 2007 |
|
|
|
|
|
10.35
|
|
Loan Agreement
between Bear Stearns
Commercial Mortgage,
Inc. and WESCO Real
Estate IV, LLC, dated
December 13, 2002.
|
|
Incorporated by reference to Exhibit
10.26 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
|
|
|
|
|
10.36
|
|
Guaranty of
Non-Recourse
Exceptions Agreement
dated December 13,
2002 by WESCO
International, Inc.
in favor of Bear
Stearns Commercial
Mortgage, Inc.
|
|
Incorporated by reference to Exhibit
10.29 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
|
|
|
|
|
10.37
|
|
Environmental
Indemnity Agreement
dated December 13,
2002 made by WESCO
Real Estate IV, Inc.
and WESCO
International, Inc.
in favor of Bear
Stearns Commercial
Mortgage, Inc.
|
|
Incorporated by reference to Exhibit
10.30 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
64
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
Prior Filing or Sequential Page Number |
10.38
|
|
Asset Purchase Agreement, dated as of
September 11, 1998, among Bruckner
Supply Company, Inc. and WESCO
Distribution, Inc.
|
|
Incorporated by reference to Exhibit
2.01 to WESCOs Current Report on
Form 8-K, dated September 11, 1998 |
|
|
|
|
|
10.39
|
|
Amendment dated March 29, 2002 to
Asset Purchase Agreement, dated as of
September 11, 1998, among Bruckner
Supply Company, Inc. and WESCO
Distribution, Inc.
|
|
Incorporated by reference to Exhibit
10.25 to WESCOs Annual Report on
Form 10-K for the year ended December
31, 2002 |
|
|
|
|
|
10.40
|
|
Agreement and Plan of Merger, dated
August 16, 2005, by and among
Carlton-Bates Company, the
shareholders of Carlton-Bates Company
signatory thereto, the Company
Representative (as defined therein),
WESCO Distribution, Inc. and C-B
WESCO, Inc.
|
|
Incorporated by reference to Exhibit
10.3 to WESCOs Current Report on
Form 8-K, dated September 28, 2005 |
|
|
|
|
|
10.41
|
|
First Amendment to the Third Amended
and Restated Credit Agreement dated
November 15, 2007.
|
|
Filed herewith |
|
|
|
|
|
10.42
|
|
Second Amendment to the Third Amended
and Restated Credit Agreement dated
December 14, 2007.
|
|
Filed herewith |
|
|
|
|
|
12.1
|
|
Statement re computation of ratios.
|
|
Filed herewith |
|
|
|
|
|
21.1
|
|
Significant Subsidiaries of WESCO.
|
|
Filed herewith |
|
|
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
Filed herewith |
|
|
|
|
|
31.1
|
|
Certification of Chief Executive
Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
|
|
Filed herewith |
|
|
|
|
|
31.2
|
|
Certification of Chief Financial
Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
|
|
Filed herewith |
|
|
|
|
|
32.1
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith |
|
|
|
|
|
32.2
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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Filed herewith |
The registrant hereby agrees to furnish supplementally to the Commission, upon request, a copy of
any omitted schedule to any of the agreements contained herein.
Copies of exhibits may be retrieved electronically at the Securities and Exchange Commissions home
page at www.sec.gov. Exhibits will also be furnished without charge by writing to Stephen A. Van
Oss, Senior Vice President and Chief Financial and Administrative Officer, 225 West Station Square
Drive, Suite 700, Pittsburgh, Pennsylvania 15219. Requests may also be directed to (412) 454-2200.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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WESCO INTERNATIONAL, INC.
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By: |
/s/ ROY W. HALEY
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Name: |
Roy W. Haley |
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Title: |
Chairman of the Board and
Chief Executive Officer |
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Date: |
February 29, 2008
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature |
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Title |
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Date |
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/s/ ROY W. HALEY
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Chairman and Chief Executive Officer |
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Roy W. Haley
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(Principal Executive Officer)
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February 29, 2008 |
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/s/ STEPHEN A. VAN OSS
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Senior Vice President and Chief Financial
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February 29, 2008 |
Stephen A. Van Oss
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and Administrative Officer
(Principal Financial and Accounting Officer) |
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/s/ JAMES L. SINGLETON
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Director
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February 29, 2008 |
James L. Singleton |
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/s/ ROBERT J. TARR, JR.
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Director
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February 29, 2008 |
Robert J. Tarr, Jr. |
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/s/ KENNETH L. WAY
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Director
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February 29, 2008 |
Kenneth L. Way |
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/s/ GEORGE L. MILES, JR.
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Director
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February 29, 2008 |
George L. Miles, Jr. |
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/s/ SANDRA BEACH LIN
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Director
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February 29, 2008 |
Sandra Beach Lin |
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/s/ WILLIAM J. VARESCHI
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Director
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February 29, 2008 |
William J. Vareschi |
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/s/ STEVEN A. RAYMUND
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Director
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February 29, 2008 |
Steven A. Raymund |
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/s/ LYNN M. UTTER
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Director
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February 29, 2008 |
Lynn M. Utter |
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66
Schedule IIValuation and Qualifying Accounts
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Col. C |
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Col.
A |
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(In thousands) |
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Balance at |
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Col.
B |
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Charged to |
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Col.
E |
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Beginning |
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Charged to |
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Other |
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Col.
D |
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Balance at |
(in thousands) |
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of Period |
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Expense |
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Accounts(1) |
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Deductions(2) |
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End of Period |
Allowance for doubtful accounts: |
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Year ended December 31, 2007
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$ |
12,641 |
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$ |
2,182 |
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$ |
5,526 |
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$ |
(2,931 |
) |
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$ |
17,418 |
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Year ended December 31, 2006
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12,609 |
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3,810 |
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8,971 |
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(12,749 |
) |
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12,641 |
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Year ended December 31, 2005
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12,481 |
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8,601 |
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$ |
1,543 |
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(10,016 |
) |
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12,609 |
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(1) |
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Represents allowance for doubtful accounts in connection with certain acquisitions and the
on-balance sheet treatment of the AR Securitization Facility. |
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(2) |
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Includes a reduction in the allowance for doubtful accounts due to write-off of accounts receivable. |
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Col. C |
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Col.
A |
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(In thousands) |
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Balance at |
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Col.
B |
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Charged to |
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Col.
E |
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Beginning |
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Charged to |
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Other |
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Col.
D |
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Balance at |
(in thousands) |
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of Period |
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Expense |
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Accounts(1) |
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Deductions(2) |
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End of Period |
Inventory reserve: |
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Year ended December 31, 2007
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$ |
22,978 |
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$ |
8,023 |
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$ |
7 |
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$ |
(10,729 |
) |
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$ |
20,279 |
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Year ended December 31, 2006
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12,466 |
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5,967 |
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12,296 |
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(7,751 |
) |
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22,978 |
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Year ended December 31, 2005
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10,070 |
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4,081 |
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1,840 |
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(3,525 |
) |
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12,466 |
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(1) |
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Represents inventory reserves in connection with certain acquisitions. |
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(2) |
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Includes a reduction in the inventory reserve due to disposal of inventory. |
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Col. C |
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Col.
A |
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(In thousands) |
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Balance at |
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Col.
B |
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Charged to |
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Col.
E |
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Beginning |
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Charged to |
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Other |
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Col.
D |
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Balance at |
(in thousands) |
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of Period |
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Expense |
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Accounts(1) |
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Deductions(2) |
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End of Period |
Income tax valuation allowance: |
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Year ended December 31, 2007
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$ |
13,055 |
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$ |
(13,055 |
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$ |
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$ |
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$ |
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Year ended December 31, 2006
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15,693 |
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(2,638 |
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13,055 |
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Year ended December 31, 2005
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13,439 |
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2,254 |
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15,693 |
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67