Summary of WESCO INTERNATIONAL INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International Inc.'s Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its Current Report on Form 8-K dated July 27, 2009. Company Overview
We are a full-line distributor of electrical supplies and equipment and a provider of integrated supply procurement services. We have approximately 380 full service branches and seven distribution centers located in the United States, Canada, Mexico, the United Kingdom, Nigeria, United Arab Emirates, Singapore, Australia and China. We serve approximately 115,000 customers worldwide, offering over 1,000,000 products from more than 19,000 suppliers. Our diverse customer base includes a wide variety of industrial companies; contractors for industrial, commercial and residential projects; utility companies, and commercial, institutional and governmental customers. Approximately 85% of our net sales are generated from operations in the United States, 12% from Canada and the remainder from other countries.
Our financial results for the first nine months of 2009 reflect weak conditions in our markets served, lower commodity prices, unfavorable foreign currency exchange rates, and the absence of hurricane restoration activities, to which we responded with aggressive cost reduction actions. Sales decreased $1,189.8 million, or 25.4%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.4% and 80.3% for the first nine months of 2009 and 2008, respectively. Operating income decreased by $135.1 million, or 49.6%, primarily from the decrease in sales resulting from the decline in end market activity. Net income for the nine months ended September 30, 2009 and 2008 was $83.3 million and $164.4 million, respectively. Cash Flow
We generated $290.9 million in operating cash flow for the first nine months of 2009. Included in this amount was net income of $83.3 million, a decrease in trade and other receivables of $148.9 million, a decrease in inventory of $117.1 million and a decrease in accounts payable of $69.7 million. Investing activities were primarily comprised of capital expenditures, which totaled $10.5 million for the first nine months of 2009. Financing activities consisted of borrowings and repayments of $250.7 million and $243.2 million, respectively, related to our revolving credit facility, and net repayments of $245.0 million related to our Receivables Facility.
Financing Availability
As of September 30, 2009, we had $355.0 million in total available borrowing capacity. The available borrowing capacity under our revolving credit facility was $89.0 million, of which $25.5 million is the U.S. sub-facility borrowing limit and $63.5 million is the Canadian sub-facility borrowing limit. The revolving credit facility does not mature until November 1, 2013. The available borrowing capacity under the Receivables Facility, which was amended and restated on April 13, 2009, was $266.0 million at September 30, 2009. The Receivables Facility matures on April 13, 2012. In addition, on August 27, 2009, we completed an exchange offer pursuant to which we issued $345.0 million aggregate principal amount of the 2029 Debentures in exchange for approximately $299.7 million and $57.7 million aggregate principal amounts of our outstanding 2026 Debentures and 2025 Debentures, respectively. Our 2025 Debentures and 2029 Debentures cannot be redeemed or repurchased until October 2010 and September 2016, respectively. For further discussion related to the Debentures, refer to Notes 3 and 7 of the Notes to our Condensed Consolidated Financial Statements. We increased our cash by $25.0 million to $111.3 million at September 30, 2009, after taking into account $240.3 million of net debt repayments and $10.5 million of capital expenditures. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. For further discussion refer to "Liquidity and Capital Resources." Outlook
We believe that improvements made to our operations and capital structure and actions taken in 2008 and the first nine months of 2009, including the amendment and restatement of the Receivables Facility in April, and the convertible debt exchange in August, have helped position the Company to operate effectively in the lower level of activity being experienced in our end markets. In the fourth quarter of 2009, we anticipate continued contraction in the nonresidential construction market; however, we expect that our industrial end markets will begin to strengthen and that we will benefit from our sales and marketing initiatives. When these factors are combined with traditional fourth quarter market seasonality, we would expect a 4% to 6% sequential decline in quarterly sales. Despite competitive pressures, we expect to maintain fourth quarter gross margins at the levels experienced in the second and third quarters. While we will not reduce our focus on cost controls in the fourth quarter, we expect to experience some negative operating expense leverage due to lower sales.

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Critical Accounting Policies and Estimates Our critical accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2008 contained in our Current Report on Form 8-K dated July 27, 2009. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to our Condensed Consolidated Financial Statements for the period ended September 30, 2009. Results of Operations
Third Quarter of 2009 versus Third Quarter of 2008 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,
                                                           2009        2008(1)
        Net sales                                          100.0 %      100.0 %
        Cost of goods sold                                  80.8         80.5
        Selling, general and administrative expenses        14.6         13.0
        Depreciation and amortization                        0.6          0.4

        Income from operations                               4.0          6.1
        Interest expense                                     1.2          1.0
        Gain on debt exchange                               (0.5 )          -
        Other income                                        (0.1 )       (0.1 )

        Income before income taxes                           3.4          5.2
        Provision for income taxes                           0.5          1.3

        Net income                                           2.9 %        3.9 %

(1) As a result of the retrospective application of new FASB guidance related to convertible debt instruments on January 1, 2009, interest expense, income before income taxes, provision for income taxes and net income were revised for the three months ended September 30, 2008 (see Note 3 to the consolidated financial statements).

Net sales in the third quarter of 2009 totaled $1,152.4 million versus $1,628.1 million in the comparable period for 2008, a decrease of $475.7 million, or 29.2%, over the same period last year. Sales were negatively impacted by weak market conditions, lower commodity prices, the absence of hurricane restoration activity and unfavorable foreign currency exchange rates.
Cost of goods sold for the third quarter of 2009 was $931.5 million versus $1,311.7 million for the comparable period in 2008, and cost of goods sold as a percentage of net sales was 80.8% in 2009 versus 80.5% in 2008. The increase in the cost of goods sold percentage was primarily due to an increase in inventory reserves and lower supplier volume rebate rates.
Selling, general and administrative ("SG&A") expenses in the third quarter of 2009 totaled $168.3 million versus $211.3 million in last year's comparable quarter. The decrease in SG&A expenses is due to aggressive cost reduction actions. As a percentage of net sales, SG&A expenses were 14.6% in the third quarter of 2009 compared to 13.0% in the third quarter of 2008, reflecting a decrease in sales volume.
SG&A payroll expenses for the third quarter of 2009 of $111.1 million decreased by $30.6 million compared to the same quarter in 2008. The decrease in payroll expenses was primarily due to a decrease in commission and incentive costs of $13.0 million, a decrease in salaries and wages of $12.8 million, a decrease in benefit costs of $2.3 million and a decrease in temporary labor costs of $1.9 million. Other SG&A related payroll expenses decreased $0.6 million.
The remaining SG&A expenses for the third quarter of 2009 of $57.2 million decreased by approximately $12.8 million compared to same quarter in 2008. Included in this period's SG&A expenses was a decrease in travel costs of $3.2 million, a decrease in transportation costs of $2.5 million, and a decrease in other operating expenses of $2.3 million due to the decrease in sales volume. In addition, there was a $1.7 million reduction in bad debt expense due to a one time charge recorded in last years comparable period. Other SG&A expenses decreased $3.1 million.
Depreciation and amortization for the third quarter of 2009 was $6.4 million versus $6.5 million in last year's comparable quarter. The decrease is due to the reduction in capital expenditures in 2009.

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Interest expense totaled $13.6 million for the third quarter of 2009 versus $15.6 million in last year's comparable quarter, a decrease of 13.1%. Interest expense for the third quarter of 2009 was impacted by both the reduction in interest rates and the decrease in debt. On January 1, 2009, we retrospectively applied the provisions of new guidance concerning convertible debt instruments to our 2025 Debentures and 2026 Debentures, and on August 27, 2009 we applied the provisions of the new guidance to our 2029 Debentures. This change in accounting treatment results in an increase in non-cash interest reported in the financial statements. Interest expense for the Debentures totaled $6.5 million and $5.9 million for the three months ended September 30, 2009 and 2008, respectively, of which $2.9 million and $3.6 million, respectively, was non-cash interest.
Gain on debt exchange totaled $6.0 million for the third quarter of 2009. On August 27, 2009, we completed an exchange offer pursuant to which we issued $345.0 million aggregate principal amount of 2029 Debentures in exchange for approximately $299.7 million and $57.7 million aggregate principal amounts of our outstanding 2026 Debentures and 2025 Debentures, respectively. The gain included the write-off of debt issue costs.
Other income totaled $1.4 million for the third quarter of 2009 versus $2.3 million in the comparable period for 2008. We account for our investment in the LADD joint venture on an equity basis, and earnings are reported as other income in the consolidated statement of income. The decrease in other income is due to the decrease in the joint venture's income.
Income tax expense totaled $6.3 million in the third quarter of 2009, and the effective tax rate was 15.8% compared to 25.2% in the same quarter in 2008. The decrease in the effective tax rate is due to a reduction in projected income, the revaluation of deferred tax items and the impact from foreign jurisdictions.
For the third quarter of 2009, net income decreased by $30.1 million to $33.6 million compared to $63.7 million in the third quarter of 2008. Diluted earnings per share was $0.79 for the third quarter of 2009 compared with $1.48 per diluted share for the third quarter of 2008. The decrease in net income was primarily due to the decline in sales attributable to the weak market conditions.
Nine Months Ended September 30, 2009 versus Nine Months Ended September 30, 2008 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,
                                                           2009        2008(1)
         Net sales                                          100.0 %     100.0 %
         Cost of goods sold                                  80.4        80.3
         Selling, general and administrative expenses        15.1        13.5
         Depreciation and amortization                        0.6         0.4

         Income from operations                               3.9         5.8
         Interest expense                                     1.1         1.1
         Gain on debt exchange                               (0.2 )         -
         Other income                                        (0.1 )      (0.2 )

         Income before income taxes                           3.1         4.9
         Provision for income taxes                           0.7         1.4

         Net income                                           2.4 %       3.5 %

(1) As a result of the retrospective application of new FASB guidance related to convertible debt instruments on January 1, 2009, interest expense, income before income taxes, provision for income taxes and net income were revised for the nine months ended September 30, 2008 (see Note 3 to the consolidated financial statements).

Net sales in the first nine months of 2009 totaled $3,491.2 million versus $4,681.0 million in the comparable period for 2008, a decrease of $1,189.8 million, or 25.4%, over the same period last year. Sales were negatively impacted by weak market conditions, lower commodity prices, unfavorable foreign currency exchange rates, the absence of hurricane restoration activity and one less workday in the first nine months of 2009 compared to the same period in 2008.
Cost of goods sold for the first nine months of 2009 was $2,808.3 million versus $3,758.7 million for the comparable period in 2008, and cost of goods sold as a percentage of net sales was 80.4% in 2009 versus 80.3% in 2008. The increase in the cost of goods sold percentage was primarily due to lower supplier volume rebate rates.

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SG&A expenses in the first nine months of 2009 totaled $525.7 million versus $629.7 million in last year's comparable period. The decrease in SG&A expenses is due to aggressive cost reduction actions. As a percentage of net sales, SG&A expenses were 15.1% in the first nine months of 2009 compared to 13.5% in the first nine months of 2008, reflecting a decrease in sales volume.
SG&A payroll expenses for the first nine months of 2009 of $357.1 million decreased by $72.4 million compared to the same period in 2008. The decrease in payroll expenses was primarily due to a decrease in commission and incentive costs of $26.7 million, a decrease in salaries and wages of $25.9 million, a decrease in benefit costs of $13.2 million and a decrease in temporary labor costs of $5.3 million. Other SG&A related payroll expenses decreased $1.3 million.
The remaining SG&A expenses for the first nine months of 2009 of $168.6 million decreased by approximately $32.3 million compared to same period in 2008. Included in this period's SG&A expenses was a decrease in transportation costs of $9.3 million, a decrease in travel costs of $8.9 million, a decrease in other operating expenses of $6.5 million and a decrease in supplies costs of $3.0 million due to the decrease in sales volume. Other SG&A expenses decreased $4.6 million.
Depreciation and amortization for the first nine months of 2009 was $19.9 million versus $20.2 million in last year's comparable period. The decrease is due to the reduction in capital expenditures in 2009.
Interest expense totaled $39.9 million for the first nine months of 2009 versus $49.8 million in last year's comparable period, a decrease of 19.9%. Interest expense for the first nine months of 2009 was impacted by both the reduction in interest rates and the decrease in debt. On January 1, 2009, we retrospectively applied the provisions of new guidance concerning convertible debt instruments to our 2025 Debentures and 2026 Debentures, and on August 27, 2009 we applied the provisions of the new guidance to our 2029 Debentures. This change in accounting treatment results in an increase in non-cash interest reported in the financial statements. Interest expense for the Debentures totaled $18.8 million and $17.8 million for the nine months ended September 30, 2009 and 2008, respectively, of which $10.6 million and $10.9 million, respectively, was non-cash interest.
Gain on debt exchange totaled $6.0 million for the third quarter of 2009. On August 27, 2009, we completed an exchange offer pursuant to which we issued $345.0 million aggregate principal amount of 2029 Debentures in exchange for approximately $299.7 million and $57.7 million aggregate principal amounts of our outstanding 2026 Debentures and 2025 Debentures, respectively. The gain included the write-off of debt issue costs.
Other income totaled $4.1 million for the first nine months of 2009 versus $7.7 million in the comparable period for 2008. We account for our investment in the LADD joint venture on an equity basis, and earnings are reported as other income in the consolidated statement of income. The decrease in other income is due to the decrease in the joint venture's income.
Income tax expense totaled $24.1 million for the first nine months of 2009, and the effective tax rate was 22.5% compared to 28.6% in the same period in 2008. The decrease in the effective tax rate is due to the revaluation of deferred tax items and the impact from foreign jurisdictions.
For the first nine months of 2009, net income decreased by $81.1 million to $83.3 million compared to $164.4 million for the first nine months of 2008. Diluted earnings per share was $1.95 for the first nine months of 2009 compared with $3.77 per diluted share for the first nine months of 2008. The decrease in net income was primarily due to the decline in sales attributable to the weak market conditions.
Liquidity and Capital Resources
Total assets were $2.5 billion at September 30, 2009, compared to $2.7 billion at December 31, 2008. The $221.1 million decrease in total assets was principally attributable to the decrease in accounts receivable and inventory of $127.9 million and $110.4 million, respectively. These reductions were due to the decrease in sales activity. Total liabilities at September 30, 2009 compared to December 31, 2008 decreased by $427.4 million to $1.5 billion. Contributing to the decrease in total liabilities was a decrease in short-term and long-term debt of $395.3 million; a decrease in accounts payable of $61.7 million due to reduced purchasing activity; and a decrease in accrued payroll and benefit costs of $21.1 million due to staffing reductions and the payment of the 2008 management incentive compensation. These decreases were partially offset by an increase in deferred income taxes of $62.7 million due to the convertible debt exchange. Stockholders' equity increased 27.3% to $961.4 million at September 30, 2009, compared with $755.1 million at December 31, 2008, primarily as a result of the convertible debt exchange which resulted in a net increase to additional capital of $91.6 million. Also contributing to the increase in stockholder's equity was net earnings of $83.3 million, foreign currency translation adjustments of $21.4 million and stock-based compensation expense of $9.8 million.

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Our liquidity needs arise from working capital requirements, capital expenditures, acquisitions and debt service obligations. As of September 30, 2009, we had $89.0 million in available borrowing capacity under our revolving credit facility, which combined with our $266.0 million of available borrowing capacity under our Receivables Facility and our invested cash provides us with liquidity of $439.2 million. 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 were in compliance with all covenants and restrictions as of September 30, 2009. On April 13, 2009, we entered into a $400 million amended and restated receivables purchase agreement. As previously mentioned, the amended and restated Receivables Facility is not subject to renewal until April 2012. In addition, on August 27, 2009, we completed an exchange offer pursuant to which we issued $345.0 million aggregate principal amount of the 2029 Debentures in exchange for approximately $299.7 million and $57.7 million aggregate principal amounts of our outstanding 2026 Debentures and 2025 Debentures, respectively. Our 2025 Debentures and 2029 Debentures cannot be redeemed or repurchased until October 2010 and September 2016, respectively. In the event that our 2025 Debentures are redeemed in October 2010, we believe that we will have ample financial capacity to handle such funding requirement. In conjunction with the convertible debt exchange, Moody's Investor Services and Standard & Poor's affirmed our credit rating and stable outlook.
We did not note any conditions or events during the third quarter of 2009 requiring an interim evaluation of impairment of goodwill. We will perform our annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter.
A possible indicator of impairment is the relationship of a company's market capitalization to its book value. As of September 30, 2009, our market capitalization exceeded our book value. The persistence or further acceleration of the recent downturn in the global economic conditions and turbulence in financial markets could have a further negative impact on our market capitalization and/or financial performance. Two reporting units comprised of recent acquisitions, which have goodwill and trademarks totaling $284.6 million, are sensitive to a further decline in financial performance. We are taking actions to improve our future financial performance; however, we cannot predict whether or not there will be certain events that could adversely affect the reported value of goodwill and trademarks, which totaled $901.2 million and $900.7 million at September 30, 2009 and December 31, 2008, respectively.
Over the next several quarters, we expect to maintain working capital productivity, and it is expected that excess cash will be directed primarily at debt reduction. Our near term focus will continue to be on our cost structure, right sizing of the business and maintaining ample liquidity and credit availability. We believe our balance sheet and ability to generate ample cash flow provides us with a durable business model and should allow us to fund expansion needs and growth initiatives in this time of economic contraction. 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.
Cash Flow
Operating Activities. Cash provided by operating activities for the first nine months of 2009 totaled $290.9 million compared with $226.9 million of cash generated for the first nine months of 2008. Cash provided by operating activities in the first nine months of 2009 included net income of $83.3 million and adjustments to net income totaling $43.6 million. The increased level of cash flow is primarily attributable to a decrease in trade and other receivables of $148.9 million and a decrease in inventory of $117.1 million resulting from the decrease in sales. Cash used by operating activities in the first nine months of 2009 included: $69.7 million for the decrease in accounts payable, resulting from the decrease in purchasing activity; $21.4 million for the decrease in accrued payroll and benefit costs; $8.6 million for the increase in prepaid expenses and other current assets; and $2.3 million for the decrease in other current and noncurrent liabilities. In the first nine months of 2008, primary sources of cash were net income of $164.4 million and adjustments to net income totaling $27.1 million; an increase in accounts payable of $129.8 million, resulting from the increase in the cost of sales; and a reduction in prepaid and other current assets of $23.3 million. Cash used by operating activities in the first nine months of 2008 included: $99.4 million for the increase in trade and other receivables, resulting from the increase in sales; $14.3 million for the increase in inventory; $2.7 million for the decrease in accrued payroll and benefit costs; and $1.3 million for the decrease in other current and noncurrent liabilities.

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Investing Activities. Net cash used by investing activities for the first nine months of 2009 was $9.3 million, compared with $33.6 million of net cash provided during the first nine months of 2008. Included in 2008 were proceeds of $60.0 million from the partial divestiture of the LADD operations. Capital expenditures were $10.5 million and $26.9 million in the first nine months of 2009 and 2008, respectively. The decrease in capital expenditures in 2009 was due to cash management initiatives.
Financing Activities. Net cash used by financing activities for the first nine months of 2009 and 2008 was $265.2 million and $226.0 million, respectively. During the first nine months of 2009, borrowings and repayments of long-term debt of $250.7 million and $245.2 million, respectively, were made to our revolving credit facility. Borrowings and repayments of $55.0 million and $300.0 million, respectively, were applied to our Receivables Facility, and there were repayments of $1.1 million to our mortgage financing facility. During the first nine months of 2008, borrowings and repayments of long-term debt of $523.4 million and $681.7 million, respectively, were made to our revolving credit facility. Borrowings and repayments of $100.0 million and $80.0 million, respectively, were applied to our Receivables Facility, and there were repayments of $1.0 million to our mortgage financing facility. In addition, during the first nine months of 2008, we purchased shares of our common stock under our share repurchase plan for approximately $74.8 million. The exercise of stock-based compensation arrangements resulted in proceeds of $0.3 million and $9.4 million during the first nine months of 2009 and 2008, respectively. Contractual Cash Obligations and Other Commercial Commitments There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our Current Report on Form 8-K dated July 27, 2009, other than the Receivables Facility disclosure in Note 6 and the convertible debt disclosure in Note 7 to the condensed consolidated financial statements. Management believes that cash generated from operations, together with amounts available under our . . .