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Article by DailyStocks_admin    (09-12-08 04:48 AM)

The Daily Magic Formula Stock for 09/11/2008 is WESCO International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.

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Intellectual Property
We currently have trademarks and service marks registered with the U.S. Patent and Trademark Office. The registered trademarks and service marks include: “WESCO ® “, our corporate logo, the running man logo, the running man in box logo, “WESCO Buyers Guide ® “, and “The Extra Effort People ® “. In 2005, we added the trademark, “C-B Only the Best is Good Enough ® ” as a result of the acquisition of Carlton-Bates Company. In addition, multiple trademarks and service marks were acquired in 2006 as a result of the Communications Supply Holdings, Inc. acquisition, including the primary marks of “CSC ® ” and “Liberty Wire & Cable ® “. “WESCO”, our corporate logo, the running man logo, and/or “WESCO Buyers Guide” trademarks and service mark applications for registration have been filed in various foreign jurisdictions, including Canada, Mexico, the United Kingdom, Singapore, China, Hong Kong, Thailand and the European Community. The foreign trademark for “WESCO Buyers Guide ® “ was registered in Canada in August 2006.
Environmental Matters
Our facilities and operations are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose strict, joint and several liabilities on certain persons for the cost of investigation or remediation of contaminated properties. These persons may include former, current or future owners or operators of properties and persons who arranged for the disposal of hazardous substances. Our owned and leased real property may give rise to such investigation, remediation and monitoring liabilities under environmental laws. In addition, anyone disposing of certain products we distribute, such as ballasts, fluorescent lighting and batteries, must comply with environmental laws that regulate certain materials in these products.
We believe that we are in compliance, in all material respects, with applicable environmental laws. As a result, we do not anticipate making significant capital expenditures for environmental control matters either in the current year or in the near future.
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are generally less than 2% below the sales of the remaining three quarters due to a reduced level of activity during the winter months of January and February. Sales typically increase beginning in March, with slight fluctuations per month through December. As a result, our reported sales and earnings in the first quarter are generally lower than in subsequent quarters.
Website Access
Our Internet address is www.wesco.com . Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge under the “Investors” heading on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as our Proxy Statements, as soon as reasonably practicable after such documents are electronically filed or furnished, as applicable, with the Securities and Exchange Commission (the “SEC”). You also may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers like us who file electronically with the SEC.
In addition, our charters for our Executive Committee, Nominating and Governance Committee, Audit Committee and Compensation Committee, as well as our Independence Standards, our Governance Guidelines and our Code of Ethics and Business Conduct for our directors, officers and employees, are all available on our website in the “Corporate Governance” link under the “Investors” heading.
Forward-Looking Information
This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain unknown risks and uncertainties, including, among others, those contained in Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Annual Report on Form 10-K, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, our statements regarding business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product and service introductions and liquidity and capital resources are based on 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. 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.


Roy W. Haley has been Chief Executive Officer of the Company since February 1994, and Chairman of the Board since 1998. From 1988 to 1993, Mr. Haley was an executive at American General Corporation, a diversified financial services company, where he served as Chief Operating Officer, as President and as a Director. Mr. Haley is also a Director of United Stationers, Inc. and Cambrex Corporation. He currently serves on the Federal Reserve Bank of Cleveland and was former Chairman of the Pittsburgh Branch of the Federal Reserve Bank of Cleveland.
John J. Engel has been Senior Vice President and Chief Operating Officer since July 2004. Mr. Engel served from 2003 to 2004 as Senior Vice President and General Manager of Gateway, Inc. From 1999 to 2002, Mr. Engel served as an Executive Vice President and Senior Vice President of Perkin Elmer, Inc. In addition, Mr. Engel was a Vice President and General Manager of Allied Signal from 1994 to 1999 and held various management positions in General Electric from 1985 to 1994.
Stephen A. Van Oss has been Senior Vice President and Chief Financial and Administrative Officer since July 2004 and, from 2000 to July 2004 served as the Vice President and Chief Financial Officer. Mr. Van Oss also served as our Director, Information Technology from 1997 to 2000 and as our Director, Acquisition Management in 1997. From 1995 to 1996, Mr. Van Oss served as Chief Operating Officer and Chief Financial Officer of Paper Back Recycling of America, Inc. He also held various management positions with Reliance Electric Corporation. Mr. Van Oss was also a director of Williams Scotsman International, Inc. and a member of its audit committee. Additionally, he is a trustee of Robert Morris University and serves on the finance and government committees.
Andrew J. Bergdoll has been Vice President Operations since December 2007. From March 2005 through December 2007, Mr. Bergdoll served as President for Liberty Wire & Cable, Inc. a subsidiary of Communications Supply Corporation, which WESCO acquired in November 2006. From 2001 to March 2005, Mr. Bergdoll served as Senior Vice President of USFilter, a subsidiary of Siemens AG, prior to its sale to Siemens in 2004.
Daniel A. Brailer has been Vice President, Treasurer, Legal and Investor Relations since May 2006 and previously was Treasurer and Director of Investor Relations since March 1999. From 1982 to 1999, Mr. Brailer held various positions at Mellon Financial Corporation, most recently as Senior Vice President.
William E. Cenk has been Vice President, Operations since April 2006. Mr. Cenk served as the Director of Marketing for us from 2000 to 2006. In addition, Mr. Cenk served in various leadership positions for our National Accounts and Marketing groups from 1994 through 1999.
Allan A. Duganier has been Director of Internal Audit since January 2006. Mr. Duganier served as the Corporate Operations Controller from 2001 to 2006 and was the Industrial/Construction Group Controller from 2000 to 2001.
William M. Goodwin has been Vice President, Operations since March 1994. From 1987 to 1994 Mr. Goodwin served as a branch, district and region manager in various locations and also served as Managing Director of WESCOSA, a former Westinghouse-affiliated manufacturing and distribution business in Saudi Arabia.
Timothy A. Hibbard has been Corporate Controller since July 2006. Mr. Hibbard served as Corporate Controller at Kennametal Inc. from 2002 to July 2006. From 2000 to February 2002, Mr. Hibbard served as Director of Finance of Advanced Materials Solutions Group, and he served from 1998 to September 2000 as President and Controller of Greenfield Industries, Inc.

Robert J. Powell has been Vice President, Human Resources since September 2007. Mr. Powell served from 2001 to September 2007 as Vice President, Human Resource Operations and Workforce Planning of Archer Daniels Midland Company. From 2000 to 2001, Mr. Powell served as Vice President, Human Resources-Southeast of AT&T Broadband, and he served from 1999 to 2000 as Corporate Vice President Human Resources of Porex Corporation.
Steven J. Riordan has been Vice President, Operations since November 2006. From 1996 until 2006, Mr. Riordan was Chief Executive Officer and President of Communications Supply Holdings, Inc., a fully integrated national distributor of network infrastructure products that we acquired in November 2006.
Robert B. Rosenbaum has been Vice President, Operations since September 1998. From 1982 until 1998, Mr. Rosenbaum was the President of the Bruckner Supply Company, Inc., an integrated supply company that we acquired in September 1998.
Donald H. Thimjon has been Vice President, Operations since March 1994. Mr. Thimjon served as Vice President, Utility Group for us from 1991 to 1994 and as Regional Manager from 1980 to 1991.
Ronald P. Van, Jr. has been Vice President, Operations since October 1998. Mr. Van was a Vice President and Controller of EESCO, an electrical distributor that we acquired in 1996.
Marcy Smorey-Giger has been Corporate Counsel and Secretary since May 2004. From 2002 to 2004, Ms. Smorey-Giger served as Corporate Attorney and Manager, Compliance Programs. From 1999 to 2002, Ms. Smorey-Giger served as Compliance and Legal Affairs Manager.


Company Overview
In 2007, we achieved organic growth, completed several acquisitions, executed new initiatives to reduce cost, and increased financing availability under our Receivables Facility. Our financial results reflect sales growth in our served markets, along with positive impact from our recent acquisitions and productivity initiatives. Sales increased 12.8% over the prior year, and our cost of goods sold as a percentage of net sales was 79.6% in 2007 and 2006. During 2007, sales from our operations acquired in the fourth quarter of 2006 and the latter half 2007 were $599.0 million and accounted for the majority of the sales increase. Favorable exchange rates also contributed to the higher revenues. Operating income increased 8.0% to $394.2 million primarily from our recent acquisitions and cost containment initiatives. The combination of all these factors led to net income of $240.6 million, an increase of 10.7% over the prior year. Diluted earnings per share increased 20.5% in 2007 to $4.99, compared with $4.14 in 2006.
Our end markets consist of industrial, construction, utility and commercial, institutional and governmental customers. Our sales to these markets can be categorized as stock, direct ship and special order. Stock orders are filled directly from existing inventory and represent approximately 49% of total sales. Approximately 41% of our total sales are direct ship sales. Direct ship sales are typically custom-built products, large orders or products that are too bulky to be easily handled and, as a result, are shipped directly to the customer from the supplier. Special orders are for products that are not ordinarily stocked in inventory and are ordered based on a customer’s specific request. Special orders represent the remainder of total sales.
We have historically financed our working capital requirements, capital expenditures, acquisitions, share repurchases and new branch openings through internally generated cash flow, borrowings under our credit facilities and funding through our Receivables Facility.
Cash Flow
We generated $262.3 million in operating cash flow during 2007. Included in this amount was net income of $240.6 million. Investing activities in 2007 included $32.4 million of acquisition related payments and $16.1 million of capital expenditures. Financing activities during 2007 consisted of borrowings and repayments of $891.4 million and $801.1 million, respectively, related to our revolving credit facility, $440.8 million related to stock repurchases and net borrowings of $89.5 million related to our Receivables Facility, whereby we sell, on a continuous basis, an undivided interest in all domestic accounts receivable to WESCO Receivables Corp., a wholly owned, special purpose entity (“SPE”).
Financing Availability
As of December 31, 2007, we had approximately $146.2 million in total available borrowing capacity under our revolving credit facility and had drawn $480.0 million under our Receivables Facility.
We believe that acquisitions and improvements in operations and our capital structure made in 2006 and 2007 have positioned us well for 2008. We continue to see macroeconomic data and input from internal sales management, customers and suppliers that suggest activity levels in our major end markets will be somewhat softer than that experienced in 2007. We believe that there are opportunities in the industrial and commercial construction end markets, and that we are well positioned to participate in these large fragmented markets. Our strong market position, combined with our continued focus on margin, productivity improvement, and selling and marketing initiatives, should provide us with a competitive advantage and enable us to perform well throughout 2008.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to supplier programs, bad debts, inventories, insurance costs, goodwill, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. If actual market conditions are less favorable than those projected by management, additional adjustments to reserve items may be required. We believe the following critical accounting policies affect our judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition
Revenues are recognized for product sales when title, ownership and risk of loss pass to the customer, or for services when the service is rendered. In the case of stock sales and special orders, a sale occurs at the time of shipment from our distribution point, as the terms of our sales are FOB shipping point. In cases where we process customer orders but ship directly from our suppliers, revenue is recognized once product is shipped and title has passed. For some of our customers, we provide services such as inventory management or other specific support. Revenues are recognized upon evidence of fulfillment of the agreed upon services. In all cases, revenue is recognized once the sales price to our customer is fixed or is determinable and we have reasonable assurance as to the collectibility in accordance with Staff Accounting Bulletin No.104.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We have a systematic procedure using estimates based on historical data and reasonable assumptions of collectibles made at the local branch level and on a consolidated corporate basis to calculate the allowance for doubtful accounts.
Excess and Obsolete Inventory
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. A systematic procedure is used to determine excess and obsolete inventory reflecting historical data and reasonable assumptions for the percentage of excess and obsolete inventory on a consolidated basis.
Supplier Volume Rebates
We receive rebates from certain suppliers based on contractual arrangements with them. Since there is a lag between actual purchases and the rebates received from the suppliers, we must estimate and accrue the approximate amount of rebates available at a specific date. We record the amounts as other accounts receivable on the balance sheet. The corresponding rebate income is recorded as a reduction of cost of goods sold. The appropriate level of such income is derived from the level of actual purchases made by us from suppliers, in accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue No. 02-16 , Accounting by a Reseller for Cash Consideration Received from a Vendor .
Goodwill and Indefinite Life Intangible Assets
We test goodwill and indefinite life intangible assets for impairment annually or more frequently when events or circumstances occur indicating that their carrying value may not be recoverable. The evaluation of impairment involves comparing the current fair value of goodwill to the recorded value. We estimate fair value using discounted cash flow analyses, which involves considerable management judgment. Assumptions used for these estimated cash flows are based on a combination of historical results and current internal forecasts. Two primary assumptions were an average long-term revenue growth ranging from 1.5% to 12% depending on the end market served and a discount rate of 7.8%. We cannot predict certain events that could adversely affect the reported value of goodwill and indefinite life intangible assets, which totaled $970.6 million and $977.4 million at December 31, 2007 and 2006, respectively.
Intangible Assets
We account for certain economic benefits purchased as a result of our acquisitions, including customer relations, distribution agreements and trademarks, as intangible assets. Except for trademarks, which have an indefinite life, we amortize intangible assets over a useful life determined by the expected cash flows produced by such intangibles and their respective tax benefits. Useful lives vary between 3 and 19 years, depending on the specific intangible asset.
Insurance Programs
We use commercial insurance for auto, workers’ compensation, casualty and health claims as a risk reduction strategy to minimize catastrophic losses. Our strategy involves large deductibles where we must pay all costs up to the deductible amount. We estimate our reserve based on historical incident rates and costs.
Income Taxes
We record our deferred tax assets at amounts that are expected to be realized. We evaluate future taxable income and potential tax planning strategies in assessing the potential need for a valuation allowance. Should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
During the first quarter of 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. The adoption of FIN 48 resulted in an increase of approximately $4.8 million in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. We frequently review tax issues and positions taken on tax returns to determine the need and amount of contingency reserves necessary to cover any probable audit adjustments.

Stock-Based Compensation
Our stock-based employee compensation plans are comprised of fixed stock options and stock-settled stock appreciation rights. Beginning January 1, 2006, we adopted SFAS No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment , using the modified prospective method. Stock options awarded prior to 2006 were accounted for using the measurement provisions of SFAS No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation .
Under SFAS 123R, compensation cost for all stock-based awards is measured at fair value on date of grant and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair value of stock-based awards is determined using the Black-Scholes valuation model. Expected volatilities are based on historical volatility of our common stock. We estimate the expected life of the option or stock settled appreciation right using historical data pertaining to option exercises and employee terminations. The risk-free rate is based on the U.S. Treasury yields in effect at the time of grant. The forfeiture assumption is based on our historical employee behavior, which we review on an annual basis. No dividends are assumed.
We recognized $14.4 million, $11.7 million, and $8.6 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, in 2007, 2006 and 2005, respectively.
As of December 31, 2007, there was $19.6 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements for all awards previously made of which approximately $10.9 million is expected to be recognized in 2008, $6.5 million in 2009 and $2.2 million in 2010.
Accounts Receivable Securitization Facility
Under our Receivables Facility, we sell, on a continuous basis, all domestic accounts receivable to WESCO Receivables Corporation, a wholly owned SPE. The SPE sells, without recourse, a senior undivided interest in the receivables to third-party conduits and financial institutions for cash while maintaining a subordinated undivided interest, in the form of over collateralization, in a portion of the receivables.
We account for the Receivables Facility in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). Prior to December 2006, we accounted for transfers of receivables pursuant to the facility as a “sale” and removed them from our balance sheet. Expenses associated with the facility were reported as other expense in the statement of income. In December 2006, the Receivables Facility was amended and restated such that we effectively maintain control of receivables transferred pursuant to the facility; therefore the transfers no longer qualify for “sale” treatment under SFAS No. 140. As a result, the transferred receivables remain on our balance sheet as trade receivables, and we recognize the related secured borrowing. Beginning in 2007, expenses associated with the Receivables Facility were classified as interest expense in the statement of income.

Results of Operations

2007 Compared to 2006
Net Sales. Sales in 2007 increased 12.8% to $6,003.5 million, compared with $5,320.6 million in 2006, primarily as a result of acquisitions and sales productivity initiatives. Sales from our recent acquisitions were $599.1 million and accounted for the majority of the sales increase. Sales in 2007 also benefited from favorable foreign currency exchange rates.
Cost of Goods Sold. Cost of goods sold increased 12.9% in 2007 to $4,781.3 million, compared with $4,234.1 million in 2006 and cost of goods sold as a percentage of net sales was 79.6% in 2007 and 2006. The cost of goods sold was positively impacted by lower cost of goods sold as a percentage of net sales from the acquisition completed in the fourth quarter of 2006, offset by an unfavorable sales mix and the absence of $18.4 million of commodity based pricing inventory benefits realized in last year’s comparable period.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses include costs associated with personnel, shipping and handling, travel, advertising, facilities, utilities and bad debts. SG&A expenses increased by $98.3 million, or 14.2%, to $791.1 million in 2007. As a percentage of net sales, SG&A expenses increased to 13.2% of sales, compared with 13.0% in 2006, reflecting the impact of the recent acquisitions and a legal settlement in the first quarter of 2007, partially offset by foreign currency transaction gains. SG&A payroll expenses for 2007 of $553.4 million increased by $59.6 million compared to 2006, which in the aggregate was less than the $60.0 million increase that resulted from the recent acquisitions. Contributing to the remaining change in payroll expenses was the decrease in temporary labor costs of $4.0, the decrease in healthcare and benefit costs of $3.0 million driven by the decrease in discretionary benefit costs, and the decrease in other SG&A related payroll expenses of $0.5 million. These decreases were offset by an increase in salaries and variable commission costs of $4.4 million and an increase in stock-based compensation costs of $2.7 million. Bad debt expense decreased to $2.2 million in 2007, compared with $3.8 million for 2006, reflecting increased scrutiny relative to credit advances and the account receivable collection process. Shipping and handling expenses included in SG&A expenses was $62.0 million in 2007, compared with $48.9 million in 2006. The $13.1 million increase in shipping and handling expenses was due to the recent acquisitions and the continued increase in transportation and fuel costs.
Depreciation and Amortization. Depreciation and amortization increased $8.1 million to $36.8 million in 2007, compared with $28.7 million in 2006. The increase in depreciation and amortization related to acquisitions completed in 2006 and 2007 was $5.7 million. Depreciation from operations excluding acquisitions, increased by $2.4 million compared to 2006 primarily as a result of increased capital expenditures.
Income from Operations. Income from operations increased by $29.2 million, or 8.0%, to $394.2 million in 2007, compared with $365.0 million in 2006. The increase in operating income was primarily attributable to higher sales, cost containment initiatives and foreign currency transaction gains.
Interest Expense. Interest expense totaled $63.2 million in 2007, compared with $24.6 million in 2006, an increase of 157%. This increase is primarily due to the amendment and restatement of the Receivables Facility in December 2006, which required the reclassification of expenses related to the facility. Prior to December 2006, interest expense and other costs related to the Receivables Facility were recorded as other expense in the consolidated statement of income. Interest expense and other costs related to the Receivables Facility totaled $28.3 million in 2007, compared to $22.8 million in 2006. The 24.1% increase was primarily attributable to elevated borrowings under the Receivable Facility to fund our share repurchase program. Also contributing to the increase in interest expense was the increase in borrowings under the revolving credit facility to fund the share repurchase program, the issuance of the 2026 Debentures in November 2006, and the increase in interest rates.

Loss on Debt Extinguishment. There was no debt extinguished during 2007 or 2006.
Other Expenses . There was no “other expense” recorded in 2007, a decrease of $22.8 million from last year’s comparable period. As mentioned above, cost associated with the Receivables Facility are no longer classified as other expense.
Income Taxes. Our effective income tax rate decreased to 27.3% in 2007, compared with 31.6% in 2006, primarily as a result of a one time benefit related to the reversal of a valuation allowance against deferred tax assets for tax net operating loss carryforwards. Also contributing to the decrease were non-recurring benefits related to export tax incentives and a change in foreign deferred income taxes.
Net Income. Net income and diluted earnings per share on a consolidated basis totaled $240.6 million and $4.99 per share, respectively, in 2007, compared with $217.3 million and $4.14 per share, respectively, in 2006.


Results of Operations
Second Quarter of 2008 versus Second Quarter of 2007

Net sales in the second quarter of 2008 totaled $1,587.8 million versus $1,518.1 million in the comparable period for 2007, an increase of $69.7 million, or 4.6 %, over the same period last year. Sales were positively impacted by higher commodity prices, 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 second quarter of 2008 was $1,277.4 million versus $1,210.0 million for the comparable period in 2007, and cost of goods sold as a percentage of net sales was 80.5% in 2008 versus 79.7% in 2007. The cost of goods sold percentage increased due to the divestiture of the LADD operations, an unfavorable sales mix and the time lag associated with passing supplier price increases to our customers.
Selling, general and administrative (“SG&A”) expenses in the second quarter of 2008 totaled $206.8 million versus $195.3 million in last year’s comparable quarter. As a percentage of net sales, SG&A expenses were 13.0% in the second quarter of 2008 compared to 12.9% in the second quarter of 2007, reflecting an increase in sales personnel, the impact from the recent acquisitions and the foreign currency transaction gain recognized in last years comparable period.
SG&A payroll expenses for the second quarter of 2008 of $142.8 million increased by $5.2 million compared to the same quarter in 2007. The increase in payroll expenses was primarily due to an increase in salaries and wages of $5.4 million and an increase in benefit costs of $0.9 million, offset by a decrease in incentive compensation costs of $0.9 million. Other SG&A related payroll expenses decreased $0.2 million.
The remaining SG&A expenses for the second quarter of 2008 of $64.0 million increased by approximately $6.3 million compared to same quarter in 2007. Contributing to the increase was a gain of $4.0 million recognized in last year’s comparable period for a foreign currency transaction adjustment. Included in this year’s SG&A expenses was an increase in transportation and travel expenses of $2.5 million, an increase in rent and insurance expenses of $1.0 million and an increase in other non-recurring SG&A expenses of $1.0 million. These increases were offset by a gain of $2.2 million recognized in the second quarter of 2008 for the sale of assets.
Depreciation and amortization for the second quarter of 2008 was $6.7 million versus $9.2 million in last year’s comparable quarter. Of the $2.5 million decrease, $1.6 million is related to the recent divestiture.
Interest expense totaled $12.5 million for the second quarter of 2008 versus $16.8 million in last year’s comparable quarter, a decrease of approximately 25.3%. Interest expense for the second quarter of 2008 was primarily impacted by the reduction in interest rates.

Other income totaled $2.6 million for the second 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 second quarter of 2007.
Income tax expense totaled $26.8 million in the second quarter of 2008, and the effective tax rate was 30.8% compared to 31.3% in the same quarter in 2007. 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 second quarter of 2008, net income increased by $0.5 million to $60.1 million, or $1.38 per diluted share, compared with $59.6 million, or $1.22 per diluted share, for the second quarter of 2007. The increase in net income was primarily due to the increase in sales and a decrease in the effective tax rate of 0.5%.


Daniel A. Brailer - Vice President, Treasurer, Legal and Investor Relations

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the second quarter 2008 financial results. This morning participating in the earnings conference call are Mr. Roy Haley. WESCO's Chairman and Chief Executive officer; Mr. John Engel, Senior Vice President and Chief Operating Officer; and Mr. Steve Van Oss, WESCO’s Senior Vice President and Chief Financial and Administrative Officer.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replay to this conference call will be archived and available for seven days. This conference call may include forward-looking statements and therefore actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's annual report on Form 10-K for the fiscal year ended December 31, 2007, including the risk factors described therein, as well as other reports filed with the SEC.

The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G with the respect to such non-GAAP financial measures can be obtained via WESCO's web site at www.wesco.com.

I would now like to turn the conference call over to Roy Haley.

Roy W. Haley - Chairman and Chief Executive Officer

Hello, everyone, and thank you for joining us. In a few minutes, Steve will provide a recap of performance for the quarter, and John will describe activity levels in our key customer segments. But, I'd like to open the meeting with a brief update on a couple of areas of company-wide emphasis and priority.

Last year during our second quarter earnings call, we announced a new initiative to combine a program of continuous sales force development with our ongoing commitment to productivity and performance enhancements driven by the application of lean methodologies.

I'm pleased to report that WESCO's personnel have made excellent progress on both of these initiatives. We've now surpassed 70% of our initial target of adding 200 net new customer facing sales personnel over an 18- to 24-month period, and programs that we launched to upgrade recruiting capabilities, maintain information on local market talent and deploy new training programs are rapidly gaining momentum.

I am confident that we'll reach our target of expanding the sales and service organization by almost 10%, but more importantly we are changing the dynamic of historically reacting to attrition and making selective additions to a well supported and long-term strategy of continuous recruitment in sales force development.

Elaine [ph] is an important and critical part of this process because new sales personnel are naturally going to be producing at a below average level during their first 6 to 18 months in a new position. Additionally, new infrastructures required to support training, recruiting and on boarding. We couldn't accomplish all of this while maintaining our little cost structure without achieving productivity gains across the entire organization.

As you’ve seen in our report, our SG&A expenses are well controlled despite a variety of cost pressures and our overall productivity parameter of sales and earnings per employee has again hit best ever performance levels. Now, you might ask, is all of this sustainable? Personally I believe that our performance gains in positive momentum are sustainable.

As other companies and industries, we too have taken some big hits with weakness in selected market segments, increasing product and commodity costs and escalating fuel and delivery costs. But because of our operating reach, our highly diversified and well-balanced customer base and operating discipline, we're able to absorb and adjust to market conditions.

Our business model is resilient and we’ve achieved a level of size and scope, profitability and cash flow to continue to invest in organizational capabilities, marketing and customer development programs and new talent.

As you can tell, we are committed to building a bigger and stronger organization. Even in weak economic conditions, we see expansion opportunities in markets and product categories where we may not have been as focused in the past and with existing customers looking for operational efficiencies, energy cost savings, and technology driven solutions. We are confident that the increased attention we're giving to our already very strong sales organization will pay dividends over time.

Well, with that opening, let me now turn it over to Steve and to John.

Stephen A. Van Oss - Senior Vice President, Chief Financial and Administrative Officer

Thanks, Roy. Good morning, everyone. Before we get into a more detail look at results, I think it's appropriate to provide a few comments to put the quarter’s performance into context.

First, we produced our best-ever top line performance and our second best-ever earnings per share results. Cost controls were effective, as we've reduced our overall employment levels during the quarter while continuing to add to our sales force. Working capital performance improved sequentially. Although we experienced gross margin contraction due to mix and the time lag associated with pushing supplier price increases due to channel and like others, we are dealing with the rapid run-up and transportation costs. We are confident in our ability to regain and improve our gross margin performance.

Overall, our organization produced solid results for the quarter and is now better positioned for continued growth in both the near and longer term.

Looking back a little, we previously communicated that on the first of this year, we created a joint venture and sold a majority interest in our LADD operation to its primary supplier, Deutsch’s Industrial Products Division. Effective with this year's first quarter, we no longer report the LADD results in our financial statements as revenue, cost, operating profit, etc. Our 40% interest in the new joint venture is now reported on an equity basis as other income below the operating profit line.

The LADD operation is an excellent business and our partnership with Deutsch has further strengthened the operation. Financial results for the first six months are ahead of last year. And lastly, for comparison purposes in the second quarter of 2007, we've recorded a non-cash benefit of $4 million in SG&A expenses due to favorable foreign exchange gains associated with our Canadian operations, which we considered to be of a one time in nature. This compares to the second quarter of this year where we had a net benefit to SG&A expenses of approximately $1 million for items of a one-time nature.

On a consolidated basis, earnings per share for the second quarter of 2008 was $1.38 versus $1.22 last year, an improvement of $0.16 per share. Our share repurchase program was designed to capitalize on our earnings and strong free cash flow and deliver sustainable earnings accretion. The program is working.

Since 2007 when we announced the first of two $400 million share repurchase authorizations, we have repurchased 8.7 million shares or 17% of our outstanding shares for a total of $492 million. Despite incurring additional debt in interest expense associated with the share repurchases, the earnings per share impacted this program on the second quarter of 2008 results was favorable at $0.15.

And looking at the first quarter little more directly, as indicated, we posted company best ever quarter sales results. Adjusting for LADD, consolidated sales were up 6.3% over last year’s second quarter and organic sales were up approximately 5.7% in the face of tight end markets, primarily in our utility, manufacturing, housing and recreational vehicle end markets, which have been directly impacted by the continued residential construction slowdown.

Strong net income and improvements in working capital performance absorbed the cash requirements associated with a higher sales volume and resulted in free cash flow of $38 million. Free cash flow was utilized to repurchase over 900,000 shares of WESCO stock for approximately $36 million under our current authorization program.

Investments of approximately $157 million in share repurchases and $25 million on acquisitions have been made during the last 12 months. Return on invested capital, which we define as reported net operating profit after-tax in relation to our total unadjusted capital base, including the three acquisitions completed in the last half of the 2007, was 15%, and reflects continued growth in earnings and high asset efficiency.

Consolidated gross margins at 19.5% were down 80 basis points from last year and 70 basis points from this year's first quarter. LADD and mix accounted for approximately 50 of the 80 basis points decline from last quarter. Mix accounted for approximately 20 of the 70 basis points difference from the first quarter of this year.

SG&A expense as a percent of sales improved by 140 basis points sequentially and was up only slightly over the second quarter of 2007 even with the headcount growth associated with our sales force expansion. Cost associated with the sales force expansion was approximately $3 million in the quarter. We're continuing to invest in marketing programs and sales personnel, which we feel will provide superior growth as we move forward.

We will drive our cost containment programs utilizing LEAN and for the remainder of the year, we are targeting a net reduction of personnel from current levels while still maintaining a bias towards sales additions.

Our all-in borrowing costs are low at approximately 3.7% and along with good working capital performance have allowed the company to reduce interest expense by over $2 million sequentially and by over $4 million from last year's second quarter.

With liquidity at over $300 million and strong free cash flow projected, we continue to have ample capacity to fund organic growth, purchase additional stock, and make accretive acquisitions while maintaining targeted levels of leverage.

Let's now focus on the first quarter top line results. We said before consolidated sales were up 6.3% with sale from core operations up 5.7%, above our initial expectations for the quarter. Sales for workday increased sequentially throughout the quarter and we are at record levels in June.

Adjusting for price inflation and a positive impact of foreign exchange, we believe our real sales were up 2% to 2.5% for the quarter. We're seeing good momentum in our end markets that are not significantly impacted by residential construction. In our core sales, growth rate outside of these markets was almost 8% for the quarter reflecting the success of our ongoing sales and marketing initiatives.

Backlog, which consisted firm orders for future delivery, increased more than 15% over both last year's second quarter and year-end. The increase in backlog was well balanced over most end markets. This signals what we believe to be sustainable demand for our construction end markets to the next several quarters. Sales to customers in industrial and commercial construction end markets were up in the mid to high single-digit range. We continued to see the negative impact of residential construction market slowdown as sales in manufacturing, housing, and recreational vehicle markets were down low double-digits and sales to customers and utility end markets trended positively which showed only modest growth.

So far in July, our consolidated sales month-to-date are up mid single-digit. Actions to increase the capacity of our sales force have been effective as discussed by Roy and we’ve added approximately 145 sales or sales related support personnel since the third quarter of 2007 with over two-thirds of those positions being added this year. While this has added to our SG&A costs, we believe this course of action will allow us to outperform the market and to gain share in the upcoming quarters and years ahead.

At this time, John Engel, our Chief Operating Officer, will provide additional commentary on our end markets and initiatives that we are taking to strengthen our organic growth. John?

John J. Engel - Senior Vice President and Chief Operating Officer

Thanks, Steve, and good morning, everyone. Starting out with a summary of our performance for each of our major end markets, construction sales were up 7%, industrial sales were up 6%, and utility sales were up 1% versus the second quarter of last year. All three of these major end market segments also showed improved sales momentum versus the first quarter of 2008.

Our emphasis and focus in '08 remains on sales and marketing execution and in investing in our total capacity expansion, initiating the second half of '07 while keeping tight controls of our overall cost structure.

Now shifting to commentary on our major end markets. First starting with utility. Sales of the utility customers showed good improvement in the second quarter reversing the trend experienced in the previous four quarters. Overall, utility sales were up 1% versus last year and were up double digits sequentially, for investor on utility, public power and utility contracts or customers versus the second quarter of last year, sales to IOUs were up double digits offset by declines with public power customers.

Utility spending continues in spite of the residential construction downturn. The customers are shifted a higher percentage of our capital spend towards transmission related and alternative energy projects, which were primarily being served direct by manufacturers.

Customers are reporting that the surplus inventory that was build up in a supply chain in 2007 has in a large part being corrected. So we anticipate that end market levels in the second half of this year will be consistent with the first half. The market remains active with bid request and interest in our national account and integrated supply capabilities remaining time.

We are confident that our share in this market is steady and we remain well positioned to capitalize on the forecasted future increases in spending on maintenance expansion and automation of the nation’s electric power grid infrastructure.

Now shifting to construction. We saw positive momentum in the quarter with sales to constructions customers up 7% versus last year and up double digits sequentially across since the first quarter. Construction sales results were well balanced with all geographic regions posting positive sales growth versus last year and last quarter.

Backlog strengthened in the quarter and ended up 16% versus year-end and 4% versus the end of the first quarter. Despite forecast of the decline in construction starts this year, non-residential construction continues to present project opportunities across the major market segments that WESCO serves.

Tight lending conditions, high commercial office vacancy rates, rising commodity prices, and contraction in the residential construction market are continuing to raise concerns across commercial segment. Infrastructure-related construction segments, which are longer cycles such as power, energy, communications, and medical are expected to show continued demand in 2008.

As evidenced in our results, we are continuing to gain traction with national and regional contractors, including engineering procurement construction companies or EPCs by applying our national accounts model to service their project management and supply chain needs across their many locations.

And finally, we're continuing our capacity expansion program to add sales personnel and increased our sales coverage in attractive growth verticals and geographies while executing senior management sales engagement program to drive additional penetration at new and existing customers.

We also saw growth in the second quarter in data communications sales. They grew low single-digits, driven by strong sales to government, education, and data center customers, partially offset by softness and low voltage audiovisual products. Our sales and marketing initiatives remain focused on the combining CSC's expertise and network infrastructure, data communication, audiovisual, and Internet technology-based physical security product with WESCO’s electrical and power capabilities, geographic footprint, and national account positions to provide solutions for both construction and industrial customers.

We are making good progress and are encouraged by second quarter wins in multiple industries, including energy producers, food processing, financial services, and others. Our outlook is for increasing demand... is for increasing demand for bandwidth in commercial, government, and residential fiber-to-the-premise applications as customers migrate to higher capacity network architectures such as 10-gigabit Ethernet and invest in data centers and improve the security of their facilities and IT networks.

Now moving to industrial. Sales to national accounts and integrated supply customers also showed good strength in the quarter and were up 13% and 7%, respectively. Despite the recent performance in the ISM index and the GDP rate, feedback from our customers in the industrial MRO market is generally positive, consistent with our high levels of capacity utilization and industrial production.

Bid activity levels remains high, and the national account opportunity pipeline remains at an all-time record level. Our national accounts business model continues to demonstrate its effectiveness with two major customer renewals in the quarter and two new Fortune 500 customer wins in the quarter.

We're continuing to place the priority on providing value-added services to our customers and selling the complete WESCO portfolio of products to serve their needs in electrical and non-electrical MRO, capital projects, and OEM materials and value-added services.

In summary, we consider most of our end markets to be in recently good shape except for utility and manufactured structures, which continued to be impacted by the lower residential construction activity.

We're encouraged by improved sales momentum in the first half of 2008. As we enter the second half of the year, we're continuing to make the necessary adjustments, including more aggressive sales execution, margin improvement, and cost management actions and are confident in our ability to execute in a tougher economic environment.

Now back to Steve.

Stephen A. Van Oss - Senior Vice President, Chief Financial and Administrative Officer

Thanks, John. Couple of quick comments on commodity pricing and then we'll look at the third quarter. Our best estimate of the top-line impact of overall price inflations for the quarter is in the range of 2.5% to 3%. Commodity prices are relatively stable during the last two quarters of 2007, but ramped up in the first half of this year prompting an acceleration of price increases from our suppliers. Copper prices averaged $3.22 a pound last year and have averaged around $3.67 a pound for the first half of 2008.

While the commodity spot market has been quite volatile, the street price of copper based products did not fluctuate as rapidly as this spot market. Steel prices most have risen this year. Sales of copper and steel-based products are up sequentially and on a quarter-over-quarter basis. While we continue our practice of aggressively marking up our inventory at current market levels and push supplier increases through the channel, we are unable to realize meaningful inventory profits during the quarter. Margins for these product sets are up slightly over the first quarter of this year and basically flat to last year's second quarter.

With the remainder of the year, typically our seasonality such as the first quarter has the least sales, the second and third quarters are similar and the strongest, and the fourth quarter is down sequentially from the third quarter, but higher than the first quarter.

Economic data pertinent to our end markets continues to be mixed. The current weakness in the credit market and softness in residential construction markets have the potential to weaken future end market activity levels.

At this time, the consensus view is overall market activity levels will be somewhat slower for the remainder of the year. We are confident that our sales and marketing initiatives and our strong market position will enable our company to perform better in the second half of 2008 than in the first half of the year.

For the third quarter, we expect to see sales growth rates quarter-over-quarter in a range of 4% to 5% after adjusting for the LADD joint venture accounting. LADD sales were approximately $25 million in the third quarter of 2007. Gross margin percentage should show a slight improvement sequentially, but we will be facing challenges with additional anticipated supplier price increases and higher delivery cost. SG&A as a percent of sales and joint venture income should be similar to what we saw in the second quarter of 2008.

Operating margins are expected to improve sequentially and anticipated to be in the range of 6.3% to 6.6%. Our tax planning initiatives have been very effective. At the present time, we anticipate that 2008 full-year tax rate will be around 32%. Working capital productivity should be maintained and free cash flow over the next several quarters will be directed at debt reduction and WESCO share repurchases. Based on share repurchases to-date, share count for third quarter 2008 is anticipated to be approximately 44 million shares.

In summary, we had a strong quarter and are encouraged by our progress on sales initiatives and are working hard on the margin front. We are looking forward to setting record-breaking performance and best ever earnings per share for the year. Our view for the remainder of 2008 calls for more aggressive action on the sales front, and will require us to continue capitalize on sales opportunities to meet our growth objectives. We are confident in our ability to execute in a tougher environment and expect to grow our core business in a low-to-mid single digit range for the year even given a more difficult environment in 2007.

Karisa, could you please open the call for the question-and-answer session?

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