Critical Accounting Policies and Estimates During the nine month period ended September 30, 2008, there were no significant changes to our Critical Accounting Policies and Estimates referenced in the 2007 Annual Report on Form 10-K.
Results of Operations
Third Quarter of 2008 versus Third Quarter of 2007 The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of income for the periods presented:

                                                          Three Months Ended
                                                            September 30,
                                                           2008         2007
        Net sales                                          100.0 %      100.0 %
        Cost of goods sold                                  80.6         79.7
        Selling, general and administrative expenses        13.0         12.6
        Depreciation and amortization                        0.4          0.6

        Income from operations                               6.0          7.1
        Interest expense                                     0.7          1.2
        Other income                                        (0.1 )          -

        Income before income taxes                           5.4          5.9
        Provision for income taxes                           1.4          1.3

        Net income                                           4.0 %        4.6 %

Net sales in the third quarter of 2008 totaled $1,628.1 million versus $1,545.6 million in the comparable period for 2007, an increase of $82.5 million, or 5.3%, over the same period last year. Sales were positively impacted by higher commodity prices, hurricane restoration activity, favorable exchange rates and the acquisitions completed in the second half of 2007. These increases were partially offset by the absence of $24.7 million of sales recognized in last year's comparable period for the LADD operations.
Cost of goods sold for the third quarter of 2008 was $1,311.7 million versus $1,232.5 million for the comparable period in 2007, and cost of goods sold as a percentage of net sales was 80.6% in 2008 versus 79.7% in 2007. The cost of goods sold percentage increased due to the divestiture of the LADD operations, the time lag associated with passing supplier price increases to our customers and an unfavorable sales mix.
Selling, general and administrative ("SG&A") expenses in the third quarter of 2008 totaled $211.3 million versus $194.8 million in last year's comparable quarter. As a percentage of net sales, SG&A expenses were 13.0% in the third quarter of 2008 compared to 12.6% in the third quarter of 2007, reflecting an increase in sales personnel, recent acquisitions, higher bad debt expense and the impact from foreign currency transactions. In the third quarter of 2007 foreign currency transaction gains reduced SG&A expenses by 0.3% of sales and in the third quarter of 2008 foreign currency transaction losses increased SG&A expenses by 0.1% of sales.
SG&A payroll expenses for the third quarter of 2008 of $141.7 million increased by $3.8 million compared to the same quarter in 2007. The increase in payroll expenses was primarily due to an increase in salaries and wages of $4.6 million and an increase in incentive costs of $0.6 million, offset by a decrease in temporary labor costs of $1.1 million. Other SG&A related payroll expenses decreased $0.3 million.
The remaining SG&A expenses for the third quarter of 2008 of $69.6 million increased by approximately $12.7 million compared to same quarter in 2007. Contributing to the increase was a foreign currency transaction loss of $1.9 million recognized in the current period and a foreign currency transaction gain of $4.6 million recognized in last year's comparable period. Also included in this period's SG&A expenses was an increase in bad debt expense of $3.3 million, related to an increase in customer defaults and collections issues, an increase in travel expenses of $1.2 million and an increase in other SG&A expenses of $1.7 million.
Depreciation and amortization for the third quarter of 2008 was $6.5 million versus $9.0 million in last year's comparable quarter. Of the $2.5 million decrease, $1.5 million is related to the recent divestiture.
Interest expense totaled $12.1 million for the third quarter of 2008 versus $17.6 million in last year's comparable quarter, a decrease of approximately 31.0%. Interest expense for the third quarter of 2008 was primarily impacted by the reduction in interest rates and the decrease in debt.

Other income totaled $2.3 million for the third quarter of 2008. As a result of selling a majority interest in our LADD operations, the investment in the new joint venture is accounted for on an equity basis, and earnings are reported as other income in the consolidated statement of income. There was no other income recorded for the third quarter of 2007.
Income tax expense totaled $22.8 million in the third quarter of 2008, and the effective tax rate was 25.7% compared to 21.8% in the same quarter in 2007. The increase in the effective tax rate is a result of an adjustment recorded in last year's comparable period to reverse a portion of the valuation allowance applied against deferred tax assets. The current quarter's effective tax rate differed from the statutory rate primarily as a result of a lower tax rate from foreign operations.
For the third quarter of 2008, net income decreased by $5.9 million to $65.9 million compared to $71.8 million in the third quarter of 2007. Diluted earnings per share was $1.53 for the third quarter of 2008 compared with $1.54 per diluted share for the third quarter of 2007. The decrease in net income was primarily due to the partial divestiture of the LADD operations, higher cost of goods sold resulting from supplier price increases, foreign currency transactions and the increase in the effective tax rate of 3.9%.
Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007 The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of income for the periods presented:

                                                           Nine Months Ended
                                                             September 30,
                                                           2008         2007
         Net sales                                          100.0 %     100.0 %
         Cost of goods sold                                  80.3        79.6
         Selling, general and administrative expenses        13.5        13.3
         Depreciation and amortization                        0.4         0.6

         Income from operations                               5.8         6.5
         Interest expense                                     0.8         1.0
         Other income                                        (0.2 )         -

         Income before income taxes                           5.2         5.5
         Provision for income taxes                           1.5         1.5

         Net income                                           3.7 %       4.0 %

Net sales in the first nine months of 2008 totaled $4,681.0 million versus $4,514.3 million in the comparable period for 2007, an increase of $166.8 million, or 3.7%, over the same period last year. Sales were positively impacted by higher commodity prices, favorable exchange rates, hurricane restoration activity and the acquisitions completed in the second half of 2007. These increases were partially offset by the absence of $75.5 million of sales recognized in last year's comparable period for the LADD operations.
Cost of goods sold for the first nine months of 2008 was $3,758.7 million versus $3,594.1 million for the comparable period in 2007, and cost of goods sold as a percentage of net sales was 80.3% in 2008 versus 79.6% in 2007. The cost of goods sold percentage increased due to the divestiture of the LADD operations and the time lag associated with passing supplier price increases to our customers.
SG&A expenses in the first nine months of 2008 totaled $629.7 million versus $597.6 million in last year's comparable period. As a percentage of net sales, SG&A expenses were 13.5% in the first nine months of 2008 compared to 13.3% in the first nine months of 2007, reflecting an increase in sales personnel, recent acquisitions and the impact from foreign currency transaction gains and losses, gains and losses on the disposition of assets and other non-recurring items.
SG&A payroll expenses for the first nine months of 2008 of $429.6 million increased by $13.2 million compared to the same period in 2007. The increase in payroll expenses was primarily due to an increase in salaries and wages of $15.0 million and an increase in incentive compensation costs of $1.1 million, offset by a decrease in temporary labor costs of $3.0 million. Other SG&A related payroll expenses increased $0.1 million.
The remaining SG&A expenses for the first nine months of 2008 of $200.1 million increased by approximately $18.9 million compared to same period in 2007. Contributing to the increase were offsetting amounts recognized in last year's comparable period which included a gain of $7.0 million related to foreign currency transactions and a charge of $6.7 million for a legal settlement. Included in this year's SG&A expenses were charges of $3.0 million for the partial sale of the LADD operations and $2.2 million for foreign currency transactions. These losses were partially offset by a gain of $2.2 million for the sale of assets. In addition, there was an increase in bad debt expense of $4.0 million related to an increase in customer defaults and collections issues, an increase in travel costs of $3.8 million, an increase in rent and insurance of $2.0 million, and an increase in other non-recurring SG&A expenses of $5.8 million.

Depreciation and amortization for the first nine months of 2008 was $20.2 million versus $27.2 million in last year's comparable period. Of the $7.0 million decrease, $4.6 million is related to the recent divestiture.
Interest expense totaled $39.2 million for the first nine months of 2008 versus $46.6 million in last year's comparable period, a decrease of approximately 15.8%. Included in last year's comparable period was a pre-tax gain of $2.4 million related to the change in the accounting treatment of the Receivables Facility. Interest expense for the first nine months of 2008 was primarily impacted by the reduction in interest rates and the decrease in debt.
Other income totaled $7.7 million for the first nine months of 2008. As a result of selling a majority interest in our LADD operations, the investment in the new joint venture is accounted for on an equity basis, and earnings are reported as other income in the consolidated statement of income. There was no other income recorded for the first nine months of 2007.
Income tax expense totaled $70.1 million for the first nine months of 2008, and the effective tax rate was 29.1% compared to 27.8% in the same period in 2007. The increase in the effective tax rate is a result of an adjustment recorded in last year's comparable period to reverse a portion of the valuation allowance applied against deferred tax assets. The current period's effective tax rate differed from the statutory rate primarily as a result of a lower tax rate from foreign operations.
For the first nine months of 2008, net income decreased by $8.8 million to $170.8 million compared to $179.6 million in the first nine months of 2007. Diluted earnings per share was $3.92 for the first nine months of 2008 compared with $3.65 per diluted share for the first nine months of 2007. The decrease in net income was primarily due to the partial divestiture of the LADD operations, higher cost of goods sold resulting from supplier price increases, and the increase in SG&A costs.
Liquidity and Capital Resources
Total assets at September 30, 2008 and December 31, 2007 were $2.9 billion. Total assets remained unchanged primarily as a result of the LADD divestiture, the impact of which was offset by an increase in accounts receivable. Total liabilities at September 30, 2008 compared to December 31, 2007 decreased by $47.5 million to $2.2 billion. Contributing to the decrease in total liabilities was a decrease in short-term and long-term debt of $138.8 million and a decrease in bank overdrafts of $25.2 million. These decreases were offset by an increase in accounts payable of $116.6 million due to the increase in the cost of sales. Stockholders' equity increased 17.8% to $717.0 million at September 30, 2008, compared with $608.5 million at December 31, 2007, primarily as a result of net earnings of $170.8 million and benefits of $14.8 million from the exercise of stock options and $9.7 million from stock-based compensation expense. These increases were partially offset by stock repurchases, which totaled $74.8 million for the nine months ended September 30, 2008 and foreign currency translation adjustments of $12.0 million.
Our liquidity needs arise from working capital requirements, capital expenditures, acquisitions and debt service obligations. As of September 30, 2008, we had $303.4 million in available borrowing capacity under our revolving credit facility, which combined with our invested cash provides us with liquidity of $348.3 million. Our available borrowing capacity under our revolving credit facility at September 30, 2008 increased $157.2 million from December 31, 2007 primarily due to debt repayments. We believe cash provided by operations and financing activities will be adequate to cover our current operational and business needs.
The worldwide financial turmoil has had significant impacts on global credit markets. We communicate on a regular basis with our lenders regarding our financial and working capital performance and liquidity position. We are in compliance with all covenants and restrictions as of September 30, 2008. In addition, on October 17, 2008 Moody's Investor Services affirmed our credit rating and stable outlook.
Over the next several quarters we expect to maintain working capital productivity, and it is expected that excess cash will be directed at debt reduction, share repurchases and accretive acquisitions. We believe our balance sheet and ability to generate ample cash flow provides us with a durable business model and should allows us to fund expansion needs and growth initiatives in this time of economic contraction while maintaining targeted levels of leverage. To the extent that operating cash flow is materially lower than current levels or external financing sources are not available on terms competitive with those currently available, including increases in interest rates, future liquidity may be adversely affected.

We finance our operating and investing needs as follows:
Accounts Receivable Securitization Facility We maintain a $500 million accounts receivable securitization program that has a three year term and is subject to renewal in May 2010. Under the Receivables Facility, 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.
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 September 30, 2008 and December 31, 2007, accounts receivable eligible for securitization totaled approximately $688.5 million and $604.0 million, respectively. The consolidated balance sheets as of September 30, 2008 and December 31, 2007 reflect $500.0 million and $480.0 million, respectively, of account receivable balances legally sold to third parties, as well as the related borrowings for equal amounts.
Mortgage Financing Facility
In February 2003, we finalized a $51 million mortgage financing facility, $42.6 million of which was outstanding as of September 30, 2008. Borrowings under the mortgage financing facility are collateralized by 75 domestic properties and are subject to a 22-year amortization schedule with a balloon payment due at the end of the 10-year term. Interest rates on borrowings under this facility are fixed at 6.5%.
Revolving Credit Facility
The revolving credit facility provides for an aggregate borrowing limit of up to $375 million and matures on November 1, 2013. During the first nine months of 2008, we borrowed $523.4 million and made repayments of $681.7 million in the aggregate. At September 30, 2008, we had $29.0 million outstanding under the facility, of which $25.0 million is classified as short-term debt. We were in compliance with all covenants and restrictions as of September 30, 2008. 7.50% Senior Subordinated Notes due 2017 At September 30, 2008, $150 million in aggregate principal amount of the 2017 Notes was outstanding. The 2017 Notes were issued by WESCO Distribution, 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 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. 2.625% Convertible Senior Debentures due 2025 At September 30, 2008, $150 million in aggregate principal amount of the 2025 Debentures was 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, Inc. 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 Hedging Activities("SFAS 133"), 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 September 30, 2008 or at December 31, 2007.

The 2025 Debentures are convertible into cash and, in certain circumstances, shares of WESCO International, Inc.'s common stock, $0.01 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, we 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 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 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. 1.75% Convertible Senior Debentures due 2026 At September 30, 2008, $300 million in aggregate principal amount of the 2026 Debentures was outstanding. The 2026 Debentures were issued by WESCO International, Inc. 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, Inc. 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. 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 . . .