WESCO International - 10-Q quarterly report FY2010 Q2

 

 

(Exact name of registrant as specified in its charter)

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

     As of July 29, 2010, WESCO International, Inc. had 42,453,342 shares of common stock outstanding.

 

 

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     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, Singapore, China, Australia, Africa and the United Arab Emirates. WESCO currently operates approximately 380 branch locations and seven distribution centers (four in the United States and three in Canada).

     Basis of Presentation

     The unaudited condensed consolidated financial statements of WESCO have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in WESCO’s 2009 Annual Report on Form 10-K filed with the SEC. The December 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

     The unaudited condensed consolidated balance sheet as of June 30, 2010, the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2010 and 2009, respectively, and the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2009, respectively, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair statement of the results of the interim periods. All adjustments reflected in the unaudited condensed consolidated financial statements are of a normal recurring nature unless indicated. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

     Recent Accounting Pronouncements

     Pronouncements issued by the Financial Accounting Standards Board (the “FASB”) or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to WESCO’s financial position, results of operations or cash flows.

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

     During the three and six month periods ended June 30, 2010 and 2009, WESCO granted the following stock-settled stock appreciation rights at the following weighted average assumptions:

     For the three and six months ended June 30, 2010, the weighted average fair value per stock-settled appreciation right granted was $17.07 and $15.08, respectively. For the three and six months ended June 30, 2009, the weighted average fair value per equity award granted was $10.86.

     WESCO recognized $3.6 million and $3.2 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended June 30, 2010 and 2009, respectively. WESCO recognized $7.1 million and $6.3 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, there was $13.3 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $5.0 million is expected to be recognized over the remainder of 2010, $6.4 million in 2011, $1.9 million in 2012 and less than $0.1 million in 2013.

     During the six months ended June 30, 2010 and 2009, the total intrinsic value of awards exercised was $1.7 million and $0.6 million, respectively, and the total amount of cash received from the exercise of options was $0.6 million and $0.3 million, respectively. The tax benefit associated with the exercise of awards for the six months ended June 30, 2010 and 2009 totaled $0.6 million and $0.2 million, respectively, and was recorded as a credit to additional capital.

     The following table sets forth a summary of stock options and stock-settled stock appreciation rights and related information for the six months ended June 30, 2010:

     The following table sets forth a summary of restricted stock units and related information for the six months ended June 30, 2010:

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

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

     For the three months ended June 30, 2010 and 2009, the computation of diluted earnings per share excluded 1.8 million and 2.6 million, respectively, of stock-settled stock appreciation rights at weighted average exercise prices of $52 per share and $47 per share, respectively. For the six months ended June 30, 2010 and 2009, the computation of diluted earnings per share excluded stock-settled stock appreciation rights of 1.8 million and 3.0 million, respectively, at weighted average exercise prices of $52 per share and $43 per share, respectively. These amounts were excluded because their effect would have been antidilutive.

     Because of WESCO’s obligation to settle the par value of the 2.625% Convertible Senior Debentures due 2025 (the “2025 Debentures”), the 1.75% Convertible Senior Debentures due 2026 (the “2026 Debentures”) and the 6.0% Convertible Senior Debentures due 2029 (the “2029 Debentures” and together with the 2025 Debentures and 2026 Debentures, 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 stock method of accounting for share dilution) would be included, which is based upon the amount by which the average stock price exceeds the conversion price. The conversion prices of the 2029 Debentures, 2026 Debentures and 2025 Debentures are $28.87, $88.15 and $41.86, respectively. Share dilution is limited to a maximum of 11,951,939 shares for the 2029 Debentures, 2,507 shares for the 2026 Debentures and 2,205,434 shares for the 2025 Debentures. Since the average stock prices for the three and six month periods ended June 30, 2010 were $37.52 per share and $34.13 per share, respectively, 2,756,454 shares and 1,843,267 shares, respectively, underlying the 2029 Debentures were included in the diluted share count, and the effect on diluted earnings per share for both periods was a decrease of approximately $0.04. There was no impact of the Debentures on diluted earnings per share for the three and six month periods ended June 30, 2009.

     At June 30, 2010, 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 includes a letter of credit sub-limit of up to $55 million. The facility matures on November 1, 2013 and is collateralized by the inventory of WESCO Distribution, Inc. (“WESCO Distribution”) and the inventory and accounts receivable of WESCO Distribution Canada, L.P. WESCO Distribution’s obligations under the revolving credit facility have been guaranteed by WESCO International, Inc. (“WESCO International”) and by certain of WESCO Distribution’s subsidiaries.

     On February 19, 2010, WESCO Distribution, along with certain of its subsidiaries, entered into a Limited Consent and Amendment No. 4 (the “Amendment”) to its Third Amended and Restated Revolving Credit Agreement, dated November 1, 2006 (the “Agreement”). The Amendment permits WESCO to complete certain legal entity restructuring actions, issue additional surety bonds and invest additional resources in foreign subsidiaries. In addition, the amendment enhances WESCO’s hedging capacities.

     Pursuant to the terms of the Amendment, WESCO agreed to modify the Applicable Margins (as defined in the Agreement) paid to the lenders on borrowings and letters of credit. Availability under the facility is limited to the amount of eligible U.S. and Canadian inventory and Canadian receivables applied against certain advance rates. Depending upon the amount of excess availability under the facility, interest will be calculated at LIBOR plus a margin that ranges between 2.25% and 2.875% or at the Index Rate (prime rate published by the Wall Street Journal) plus a margin that ranges between 1.00% and 1.625%. This change represented a 1.125% to 1.25% adjustment in borrowing margin over the previous rates. The fee for unused capacity associated with the facility was not changed and will range between 0.25% and 0.375%.

     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 WESCO’s fixed charge coverage ratio, as defined by 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 June 30, 2010, WESCO had $28.0 million outstanding under the facility.

     During the first quarter of 2008, WESCO and Deutsch Engineered Connecting Devices, Inc. (“Deutsch”) completed a transaction with respect to WESCO’s LADD operations, which resulted in a joint venture in which Deutsch owned a 60% interest and WESCO owned a 40% interest. WESCO accounted for its investment in the joint venture using the equity method of accounting. Accordingly, earnings from the joint venture were recorded as other income in the consolidated statement of income. Deutsch was entitled, but not obliged, to acquire the remaining 40% after January 1, 2010. Deutsch paid to WESCO aggregate consideration of approximately $75.0 million, consisting of $60.0 million in cash plus a $15.0 million promissory note for its 60% interest in the joint venture.

     On January 15, 2010, WESCO received $1.8 million in accrued interest related to the promissory note for the period from January 2, 2008 to January 2, 2010. In addition, Deutsch and WESCO entered into an amended promissory note agreement. The amendment extended the maturity date for the payment of principal and interest to the earlier of (a) the closing date of Deutsch’s option to acquire the remaining 40% joint venture interest or (b) the maturity date of Deutsch’s credit facility or mezzanine financing facility. Interest accrued at a rate of 8.5% compounded annually. Management believed this rate was commensurate with a market rate of interest; therefore, no reserve or allowance was recorded against the promissory note.

     On April 30, 2010, Deutsch notified WESCO it would exercise its option to purchase the remaining 40% of the LADD joint venture. The option price for Deutsch to acquire the remaining 40% of the joint venture was determined based upon a multiple of trailing earnings, with a minimum purchase price of $40.0 million and maximum purchase price of $50.0 million. The investment in the LADD joint venture at March 31, 2010 was $43.4 million, and the estimated option exercise price was $40.0 million. As a result, WESCO recorded a pre-tax impairment loss of $3.4 million to selling, general and administrative expenses during the first quarter of 2010. On June 7, 2010, WESCO completed the sale of its 40% interest in the LADD joint venture and recorded an additional impairment charge of $0.4 million to selling, general and administrative expenses. WESCO received $40.0 million for its 40% interest plus $15.0 million for the outstanding promissory note and $0.5 million for accrued interest.

     A majority of WESCO’s employees are covered by defined contribution retirement savings plans for their services rendered subsequent to WESCO’s formation. WESCO also offers a deferred compensation plan for select individuals. For U.S. participants, WESCO will make contributions in an amount equal to 50% of the participant’s total monthly contributions up to a maximum of 6% of eligible compensation. For Canadian participants, WESCO will make contributions in an amount ranging from 1% to 7% of the participant’s eligible compensation based on years of continuous service. In addition, employer contributions may be made at the discretion of the Board of Directors. For the six months ended June 30, 2010 and 2009, WESCO incurred charges of $11.0 million and $5.0 million, respectively, for all such plans. Effective January 1, 2010, WESCO reinstated all discretionary contributions that had been suspended since August 1, 2009 with the exception of a certain group of employees comprised of corporate officers and others. Reinstatement for these employees will be contingent upon WESCO reaching certain financial objectives. Contributions are made in cash to all employee retirement savings plan accounts, except for the deferred compensation plan. Employees then have the option to transfer balances allocated to their accounts into any of the available investment options, including WESCO common stock.

     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 intends to vigorously defend itself against these allegations. Accordingly, no liability is recorded for this matter as of June 30, 2010.

     The following tables set forth comprehensive income and its components:

     The effective tax rate for the three months ended June 30, 2010 and 2009 was 28.2% and 24.2%, respectively, and the effective tax rate for the six months ended June 30, 2010 and 2009 was 28.8% and 26.4%, respectively. WESCO’s three and six month effective tax rates are lower than the federal statutory rate of 35% primarily due to benefits resulting from the recapitalization of Canadian operations, which are partially offset by nondeductible expenses, state taxes and foreign rate differences. The effective tax rate for the six months ended June 30, 2010 reflects discrete adjustments totaling $1.2 million related to changes in uncertain tax positions and discrete adjustments totaling $0.5 million associated with prior years’ taxes. The effective tax rate for the six months ended June 30, 2009 included a discrete benefit of $0.2 million related to prior years’ taxes.

     The total amount of unrecognized tax benefits was $8.5 million and $8.1 million as of June 30, 2010 and December 31, 2009, respectively. If these tax benefits were recognized in the consolidated financial statements, the portion of these amounts that would reduce WESCO’s effective tax rate would be $7.4 million and $7.1 million, respectively. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will decrease by $1.4 million due to the resolution of federal, state and foreign tax examinations.

     WESCO records interest related to uncertain tax positions as a part of interest expense in the consolidated statement of income. As of June 30, 2010 and December 31, 2009, WESCO had an accrued liability for interest related to uncertain tax positions of $4.8 million and $4.5 million, respectively. Penalties are recognized as part of income tax expense. There were no penalties recorded during the six months ended June 30, 2010.

     WESCO Distribution, a wholly owned subsidiary of WESCO International, has outstanding $150.0 million in aggregate principal amount of 7.50% Senior Subordinated Notes due 2017 (the “2017 Notes”), and WESCO International has outstanding $92.3 million in aggregate principal amount of 2025 Debentures, $0.2 million in aggregate principal amount of 2026 Debentures and $345.0 million in aggregate principal amount of 2029 Debentures. The 2017 Notes are fully and unconditionally guaranteed by WESCO International on a subordinated basis to all existing and future senior indebtedness of WESCO International. The 2025 Debentures, 2026 Debentures and 2029 Debentures are fully and unconditionally guaranteed by WESCO Distribution on a senior subordinated basis to all existing and future senior indebtedness of WESCO Distribution.

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

     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 2009 Annual Report on Form 10-K. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as well as the Company’s other reports filed with the Securities and Exchange Commission.

     WESCO International, Inc., incorporated in 1993 and formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American distributor of products and provider of supply chain services used primarily in the industrial, construction, utility and commercial, institutional and government markets. We serve over 100,000 customers globally, including a majority of the Fortune 500, through approximately 380 full service branches and seven distribution centers located primarily in the United States, Canada and Mexico, with additional locations in the United Kingdom, Singapore, China, Australia, Africa and the United Arab Emirates. Approximately 83% of our net sales are generated from operations in the United States, 13% from Canada and the remainder from other countries.

     We sell electrical and industrial maintenance, repair and operating supplies, commonly referred to as “MRO”, and electrical and non-electrical construction and original equipment manufacturer (“OEM”) products and services. Our primary product categories include general electrical and industrial supplies, wire, cable and conduit, data communications, power distribution equipment, lighting and lighting control systems, control and automation and motors. We distribute more than 1,000,000 products from approximately 17,000 suppliers utilizing an automated, proprietary electronic procurement and inventory replenishment system. In addition, we offer a comprehensive portfolio of value-added services, which include supply chain management, logistics and transportation procurement, warehousing and inventory management as well as kitting and limited assembly of products. Our value-added capabilities, extensive geographic reach, experienced workforce and broad product and supply chain solutions have enabled us to grow our business and establish a leading position in North America.

     Our financial results for the first six months of 2010 reflect slowly improving conditions in our markets served, higher product prices and favorable foreign currency exchange rates. Sales increased $68.9 million, or 2.9%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.5% and 80.2% for the first six months of 2010 and 2009, respectively. Operating income decreased by $1.6 million, or 1.7%, primarily from the increase in operating expenses and the impairment charge recorded in connection with our 40% investment in the LADD joint venture. Refer to Note 6 of our notes to the condensed consolidated financial statements for additional information regarding the LADD joint venture. Net income for the six months ended June 30, 2010 and 2009 was $47.0 million and $49.7 million, respectively.

     We generated $68.8 million in operating cash flow for the first six months of 2010. Included in this amount was net income of $47.0 million, an increase in accounts payable of $85.8 million and an increase in trade and other receivables of $80.2 million. Investing activities were primarily comprised of proceeds from the sale of our 40% interest in the LADD joint venture. Proceeds included $40.0 million for our 40% interest, plus $15.0 million for the collection of a promissory note. Investing activities for the first six months of 2010 also included $14.3 million for acquisition payments and $6.0 million for capital expenditures. Financing activities consisted of borrowings and repayments of $125.0 million and $293.5 million, respectively, related to our revolving credit facility, and net borrowings of $55.0 million related to our accounts receivable securitization facility (the “Receivables Facility”).

     As of June 30, 2010, we had $511.0 million in total available borrowing capacity. The available borrowing capacity under our revolving credit facility, which has a maturity date of November 1, 2013, was $248.0 million, of which $185.6 million is the U.S. sub-facility borrowing limit and $62.4 million is the Canadian sub-facility borrowing limit. The available borrowing capacity under the Receivables Facility, which was amended and restated in April 2009 to, among other things, extend the maturity date to April 13, 2012, was $263.0 million at June 30, 2010. In addition, in August 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 or repurchased in October 2010, we believe that we will have ample financial capacity to handle such funding requirement. 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.”

     We believe that improvements made to our operations and capital structure and decisive actions taken over the past two years have positioned us to operate effectively as we continue to move through the recovery phase of this economic cycle. We expect the economic recovery to be slow, and we believe that market trends point towards continued contraction in the non-residential construction and utility markets and gradual recovery in the industrial, international and government markets. We anticipate third quarter sales to trend with historical seasonality, and therefore we believe sales will be flat to slightly higher than in the second quarter. We expect gross margins to improve somewhat from second quarter levels and selling, general and administrative expenses to be stable. We expect third quarter operating margins to be somewhat higher than second quarter margins. Sales per workday in July 2010 was approximately 11.0% greater than sales per workday in July 2009, although there can be no assurance that sales will continue to increase over the prior year in August and September. We remain focused on actions to improve margins, provide superior customer service, maintain our cost leadership position, strengthen our team and produce improved shareholder returns.

     During the six month period ended June 30, 2010, there were no significant changes to our critical accounting policies and estimates referenced in the 2009 Annual Report on Form 10-K.

     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:

     Net sales in the second quarter of 2010 totaled $1,259.1 million versus $1,159.2 million in the comparable period for 2009, an increase of $99.9 million, or 8.6%, over the same period last year. Sales were positively impacted by growth in our markets served, higher product prices due primarily to rising commodity prices and favorable foreign currency exchange rates.

     Cost of goods sold for the second quarter of 2010 was $1,016.2 million versus $935.3 million for the comparable period in 2009, and cost of goods sold as a percentage of net sales was 80.7% in 2010 and 2009. The cost of goods sold percentage was unchanged as an improved sales mix was offset by an increase in inventory reserves due to higher inventory levels.

     Selling, general and administrative (“SG&A”) expenses in the second quarter of 2010 totaled $186.0 million versus $169.9 million in last year’s comparable quarter. The increase in SG&A expenses is primarily due to the restoration of temporary cost reductions taken in the prior year. As a percentage of net sales, SG&A expenses were 14.8% in the second quarter of 2010 and 14.7% in the second quarter of 2009, primarily reflecting the impact of the reinstatement of discretionary benefits, the absence of mandatory unpaid leave of absences in the current year, and an increase in operating expenses driven by the increase in sales, partially offset by the impact of headcount cost reduction actions taken in the prior year.

     SG&A payroll expenses for the second quarter of 2010 of $125.7 million increased by $11.2 million compared to the same quarter in 2009. The increase in payroll expenses was primarily due to the reinstatement of 401K discretionary contributions and the absence of mandatory unpaid leave of absences in the current quarter, partially offset by severance costs recorded in the second quarter of 2009. The net impact of these temporary cost and discretionary benefit changes increased payroll expense by $10.4 million. Other SG&A related payroll expenses increased $0.8 million.

     The remaining SG&A expenses for the second quarter of 2010 of $60.3 million increased by $4.9 million compared to same quarter in 2009. Included in this period’s SG&A expenses was an increase in various operating expenses of $4.5 million due to the increase in business activity levels and an additional charge of $0.4 million related to the impairment of our 40% interest in the LADD joint venture.

     Depreciation and amortization for the second quarter of 2010 was $5.6 million versus $6.4 million in last year’s comparable quarter. The decrease is due to the reduction in capital expenditures in 2009.

     Interest expense totaled $14.4 million for the second quarter of 2010 versus $13.8 million in last year’s comparable quarter, an increase of 4.2%. Interest expense for the second quarter of 2010 was impacted by the increase in interest rates, which was a result of amending both the Receivables Facility and revolving credit facility in April 2009 and February 2010, respectively. The application of the provisions of guidance concerning convertible debt instruments as of January 1, 2009 resulted in non-cash interest expense of $1.3 million in 2010 and $3.8 million in 2009.

     Other income totaled $1.8 million for the second quarter of 2010 versus $1.1 million in the comparable period for 2009. The increase in other income is due to the increase in the joint venture’s income. We accounted for our investment in the LADD joint venture on an equity basis, and earnings were reported as other income in the consolidated statement of income. On June 7, 2010, we announced that we completed the sale of our 40% interest in the LADD joint venture to Deutsch, previously the 60% owner of the LADD joint venture. We received equity income through May 31, 2010 and distributions through April 30, 2010, the date Deutsch notified WESCO of its exercise of its option to purchase the remaining 40% of the LADD joint venture. As a result of this transaction, in the future there will be no other income reported for the LADD joint venture.

     Income tax expense totaled $10.9 million in the second quarter of 2010, and the effective tax rate was 28.2% compared to 24.2% in the same quarter in 2009. The increase in the effective tax rate is due to the impact from foreign jurisdictions.

     For the second quarter of 2010, net income increased by $1.3 million to $27.8 million compared to $26.5 million in the second quarter of 2009. Diluted earnings per share was $0.60 for the second quarter of 2010 compared with $0.62 per diluted share for the second quarter of 2009. The increase in net income was primarily due to the increase in sales attributable to improved market conditions.

     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:

     Net sales in the first six months of 2010 totaled $2,407.7 million versus $2,338.8 million in the comparable period for 2009, an increase of $68.9 million, or 2.9%, over the same period last year. Sales were positively impacted by improved conditions in our markets served, higher product prices due primarily to rising commodity prices and favorable foreign currency exchange rates.

     Cost of goods sold for the first six months of 2010 was $1,937.4 million versus $1,876.8 million for the comparable period in 2009, and cost of goods sold as a percentage of net sales was 80.5% in 2010 and 80.2% in 2009. The increase in the cost of goods sold percentage was primarily due to an increase in inventory reserves due to higher inventory levels partially offset by an improved sales mix.

     SG&A expenses in the first six months of 2010 totaled $369.0 million versus $357.3 million in last year’s comparable period. The increase in SG&A expenses is primarily due to the restoration of temporary cost reductions taken in the prior year. As a percentage of net sales, SG&A expenses were 15.3% in the first six months of 2010 and 2009, primarily reflecting the impact of the reinstatement of discretionary benefits, the absence of mandatory unpaid leave of absences in the current year, an increase in operating expenses driven by the increase in sales and an impairment charge related to our 40% interest in the LADD joint venture, offset by the impact of headcount cost reduction actions taken in the prior year.

     SG&A payroll expenses for the first six months of 2010 of $250.5 million increased by $4.4 million compared to the same period in 2009. The increase in payroll expenses was primarily due to the reinstatement of 401K discretionary contributions and the absence of mandatory unpaid leave of absences in the first six months of 2010, partially offset by severance costs recorded in the first six months of 2009. The net impact of these temporary cost and discretionary benefit changes increased payroll expense by $8.9 million. Other SG&A related payroll expenses decreased $4.5 million due to headcount cost reduction actions taken in the comparable prior year period.

     The remaining SG&A expenses for the first six months of 2010 of $118.5 million increased by approximately $7.3 million compared to same period in 2009. Included in this period’s SG&A expenses was a charge of $3.8 million related to the impairment of our 40% interest in the LADD joint venture and an increase in various operating expenses of $3.5 million due to the increase in business activity levels.

     Depreciation and amortization for the first six months of 2010 was $11.7 million versus $13.5 million in last year’s comparable period. The decrease is due to the reduction in capital expenditures in 2009.

     Interest expense totaled $27.9 million for the first six months of 2010 versus $26.4 million in last year’s comparable period, an increase of 6.0%. Interest expense for the first six months of 2010 was impacted by the increase in interest rates, which was a result of amending both the Receivables Facility and revolving credit facility in April 2009 and February 2010, respectively. The application of the provisions of guidance concerning convertible debt instruments as of January 1, 2009 resulted in non-cash interest expense of $2.6 million in 2010 and $7.7 million in 2009.

     Other income totaled $4.3 million for the first six months of 2010 versus $2.7 million in the comparable period for 2009. The increase in other income is due to the increase in the joint venture’s income. We accounted for our investment in the LADD joint venture on an equity basis, and earnings were reported as other income in the consolidated statement of income. On June 7, 2010, we announced that we completed the sale of our 40% interest in the LADD joint venture to Deutsch, previously the 60% owner of the LADD joint venture. We received equity income through May 31, 2010 and distributions through April 30, 2010, the date Deutsch notified WESCO of its exercise of its option to purchase the remaining 40% of the LADD joint venture. As a result of this transaction, in the future there will be no other income reported for the LADD joint venture.

     Income tax expense totaled $19.0 million in the first six months of 2010, and the effective tax rate was 28.8% compared to 26.4% in the same period in 2009. The increase in the effective tax rate is due to the impact from foreign jurisdictions.

     For the first six months of 2010, net income decreased by $2.7 million to $47.0 million compared to $49.7 million in the first six months of 2009. Diluted earnings per share was $1.04 for the first six months of 2010 compared with $1.17 per diluted share for the first six months of 2009. The decrease in net income was primarily due to the increase in operating costs partially offset by the increase in sales attributable to improved market conditions.

     Total assets at June 30, 2010 and December 31, 2009 were $2.5 billion. Total assets remained unchanged primarily as a result of the increase in accounts receivable of $95.6 million and the increase in inventory of $24.3 million, which was mostly offset by the decrease in investment in subsidiary of $44.0 million related to the sale of our 40% interest in the LADD joint venture, the decrease in cash of $16.5 million, the decrease in other accounts receivable of $15.5 million and the decrease in other assets of $12.4 million related to the collection of the LADD joint venture promissory note. Total liabilities at June 30, 2010 and December 31, 2009 were $1.5 billion. Total liabilities remained unchanged primarily as a result of the decrease in long-term debt of $112.1 million, which was partially offset by the increase in accounts payable of $87.6 million. Stockholders’ equity increased 5.5% to $1,051.4 million at June 30, 2010, compared with $996.3 million at December 31, 2009, primarily as a result of net earnings of $47.0 million and stock-based compensation expense of $7.1 million.

     Our liquidity needs generally arise from working capital requirements, capital expenditures, acquisitions and debt service obligations. As of June 30, 2010, we had $248.0 million in available borrowing capacity under our revolving credit facility, which, combined with our $263.0 million of available borrowing capacity under our Receivables Facility and our invested cash, provides us with liquidity of $576.2 million. During the current quarter, we used the proceeds from the sale of our 40% interest in the LADD joint venture, net of payments for the acquisition of the business of Potelcom Supply, Inc., to pay down our variable rate debt. We believe cash provided by operations and financing activities will be adequate to cover our current operational and business needs.

     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 June 30, 2010.

     We did not note any conditions or events during the second quarter of 2010 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 of 2010.

     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 be managing our cost structure as we resume sales growth 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 recovery.

     Operating Activities. Cash provided by operating activities for the first six months of 2010 totaled $68.8 million compared with $204.7 million of cash generated for the first six months of 2009. Cash provided by operating activities in the first six months of 2010 included net income of $47.0 million and adjustments to net income totaling $19.4 million. Cash flow generated from the changes in assets and liabilities was attributable to an increase in accounts payable of $85.8 million, an increase in other current and noncurrent liabilities of $7.9 million, an increase in accrued payroll and benefit costs of $7.5 million due to the increase in commissions and benefit costs and an increase in prepaid expenses and other current assets of $3.2 million. Cash used by operating activities in the first six

months of 2010 included: $80.2 million for the increase in trade and other receivables, resulting from an increase in sales; and $21.8 million for the increase in inventory. During the first six months of 2009, primary sources of cash were net income of $49.7 million and adjustments to net income totaling $35.7 million; a decrease in trade and other receivables of $132.9 million, resulting from the decrease in sales; and a decrease in inventory of $92.0 million. Cash used by operating activities in the first six months of 2009 included: $72.6 million for the decrease in accounts payable, resulting from the decrease in purchasing activity; $23.8 million for the decrease in accrued payroll and benefit costs, resulting from the payment of the 2008 management incentive compensation; $5.6 million for the increase in prepaid expenses and other current assets and $3.6 million for the decrease in other current and noncurrent liabilities.

     Investing Activities. Net cash provided by investing activities for the first six months of 2010 was $38.9 million, compared with $5.2 million of net cash used during the first six months of 2009. Included in 2010 were proceeds from the sale of our 40% interest in the LADD joint venture. Proceeds included $40.0 million for our 40% interest, plus $15.0 million for the collection of a promissory note. Investing activities for the first six months of 2010 also included payments of $14.3 million related to the acquisition of the business of Potelcom Supply, Inc. Capital expenditures were $6.0 million and $6.2 million in the first six months of 2010 and 2009, respectively.

     Financing Activities. Net cash used by financing activities for the first six months of 2010 and 2009 was $123.9 million and $185.5 million, respectively. During the first six months of 2010, borrowings and repayments of long-term debt of $125.0 million and $293.5 million, respectively, were made to our revolving credit facility. Borrowings and repayments of $185.0 million and $130.0 million, respectively, were applied to our Receivables Facility, and there were repayments of $0.8 million to our mortgage financing facility. During the first six months of 2009, borrowings and repayments of long-term debt of $193.2 million and $196.2 million, respectively, were made to our revolving credit facility. Borrowings and repayments of $55.0 million and $225.0 million, respectively, were applied to our Receivables Facility, and there were repayments of $0.8 million to our mortgage financing facility.

     There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our 2009 Annual Report on Form 10-K, other than the revolving credit facility disclosure in Note 5 to the condensed consolidated financial statements. Management believes that cash generated from operations, together with amounts available under our revolving credit facility and the Receivables Facility, will be sufficient to meet our working capital, capital expenditures and other cash requirements for the foreseeable future. However, there can be no assurances that this will continue to be the case.

     The rate of inflation affects different commodities, the cost of products purchased and ultimately the pricing of our different products and product classes to our customers. On an overall basis, our pricing related to inflation comprised an estimated $60.0 million of our sales revenue for the six months ended June 30, 2010.

     Our operating results are not significantly affected by certain seasonal factors. Sales during the first and fourth quarters are generally below the sales of the second and third quarters due to reduced level of activity during the winter months of December, January and February. Sales typically increase beginning in March with slight fluctuations per month through December.

     See Note 2 of our notes to the condensed consolidated financial statements for information regarding the effect of new accounting pronouncements.

     From time to time in this report and in other written reports and oral statements, references are made to expectations regarding our future performance. When used in this context, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements including, but not limited to, our statements regarding business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product and service introductions and liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by and information currently available to, management, and involve various risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from those expressed in any forward-looking statement made by us or on our behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. Certain of these risks are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as well as the Company’s other reports filed with the Securities and Exchange Commission. We have undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     There have not been any material changes to our exposures to market risk during the quarter ended June 30, 2010 that would require an update to the disclosures provided in our 2009 Annual Report on Form 10-K.

     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.

     Changes in Internal Control Over Financial Reporting

     During the second quarter of 2010, there were no changes in our internal control over financial reporting identified in connection with management’s evaluation of the effectiveness of our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     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.

     As initially reported in our 2008 Annual Report on Form 10-K, 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, continue to believe that we have meritorious defenses and intend to vigorously defend ourselves against these allegations. Accordingly, no liability is recorded for this matter as of June 30, 2010.

     Information relating to legal proceedings is included in Note 8, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements and is incorporated herein by reference.

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