Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Item 4. Controls and Procedures.
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
Exhibits
EX-31.1
wcc-1q19ex311.htm
EX-31.2
wcc-1q19ex312.htm
EX-32.1
wcc-1q19ex321.htm
EX-32.2
wcc-1q19ex322.htm
WESCO Earnings 2019-03-31
WCC 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 wcc-form10q1q2019.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-14989
WESCO International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
25-1723342
(I.R.S. Employer
Identification No.)
225 West Station Square Drive
Suite 700
Pittsburgh, Pennsylvania
(Address of principal executive offices)
15219
(Zip Code)
(412) 454-2200
(Registrant's telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class
Trading Symbol(s)
Name of Exchange on which registered
Common Stock, par value $.01 per share
WCC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 May 1, 2019, 44,856,784 shares of common stock, $0.01 par value, of the registrant were outstanding.
The interim financial information required by this item is set forth in the unaudited Condensed Consolidated Financial Statements and Notes thereto in this Quarterly Report on Form 10-Q, as follows:
Trade accounts receivable, net of allowance for doubtful accounts of $26,828 and $24,468 in 2019 and 2018, respectively
1,268,565
1,166,607
Other accounts receivable
75,326
96,984
Inventories
1,001,353
948,726
Prepaid expenses and other current assets
62,406
76,980
Total current assets
2,513,750
2,385,640
Property, buildings and equipment, net of accumulated depreciation of $290,883 and $291,811 in 2019 and 2018, respectively
166,688
160,878
Operating lease assets (Notes 2 and 4)
232,989
—
Intangible assets, net of accumulated amortization of $260,496 and $249,539 in 2019
and 2018, respectively
310,453
316,016
Goodwill
1,740,771
1,722,603
Other assets
19,987
19,899
Total assets
$
4,984,638
$
4,605,036
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
870,242
$
794,348
Accrued payroll and benefit costs
59,934
88,105
Short-term debt
27,313
30,785
Current portion of long-term debt, net of debt discount and debt issuance costs of $488 in 2018
1,159
25,429
Bank overdrafts
22,455
17,818
Other current liabilities (Note 4)
169,619
105,461
Total current liabilities
1,150,722
1,061,946
Long-term debt, net of debt discount and debt issuance costs of $8,508 and $9,243 in 2019 and 2018, respectively
1,214,276
1,167,311
Operating lease liabilities (Notes 2 and 4)
178,606
—
Deferred income taxes
145,501
143,967
Other noncurrent liabilities
99,171
102,086
Total liabilities
$
2,788,276
$
2,475,310
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $.01 par value; 210,000,000 shares authorized, 59,271,892 and 59,157,696 shares issued and 44,854,825 and 45,106,085 shares outstanding in 2019 and 2018, respectively
593
592
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2019 and 2018, respectively
43
43
Additional capital
1,015,563
993,666
Retained earnings
2,349,300
2,307,462
Treasury stock, at cost; 18,756,498 and 18,391,042 shares in 2019 and 2018, respectively
(777,216
)
(758,018
)
Accumulated other comprehensive loss
(385,918
)
(408,435
)
Total WESCO International, Inc. stockholders' equity
2,202,365
2,135,310
Noncontrolling interests
(6,003
)
(5,584
)
Total stockholders’ equity
2,196,362
2,129,726
Total liabilities and stockholders’ equity
$
4,984,638
$
4,605,036
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share data)
(unaudited)
Three Months Ended
March 31
2019
2018
Net sales (Note 3)
$
1,961,267
$
1,993,915
Cost of goods sold (excluding depreciation and
amortization)
1,578,771
1,613,966
Selling, general and administrative expenses
296,528
290,829
Depreciation and amortization
15,242
15,879
Income from operations
70,726
73,241
Net interest and other
17,120
19,783
Income before income taxes
53,606
53,458
Provision for income taxes
11,656
10,487
Net income
41,950
42,971
Less: Net loss attributable to noncontrolling interests
(419
)
(1,450
)
Net income attributable to WESCO International, Inc.
$
42,369
$
44,421
Other comprehensive income (loss):
Foreign currency translation adjustments
22,517
(28,800
)
Comprehensive income attributable to WESCO International, Inc.
$
64,886
$
15,621
Earnings per share attributable to WESCO International, Inc.
Basic
$
0.94
$
0.94
Diluted
$
0.93
$
0.93
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)
Three Months Ended
March 31
2019
2018
Operating activities:
Net income
$
41,950
$
42,971
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
15,242
15,879
Deferred income taxes
893
2,736
Other operating activities, net
5,961
5,085
Changes in assets and liabilities:
Trade accounts receivable, net
(76,696
)
(37,509
)
Other accounts receivable
22,425
29,986
Inventories
(40,768
)
2,992
Prepaid expenses and other assets
15,074
4,817
Accounts payable
68,085
8,077
Accrued payroll and benefit costs
(27,851
)
(24,561
)
Other current and noncurrent liabilities
4,554
2,520
Net cash provided by operating activities
28,869
52,993
Investing activities:
Acquisition payments
(27,742
)
—
Capital expenditures
(10,828
)
(7,662
)
Other investing activities
53
(8,760
)
Net cash used in investing activities
(38,517
)
(16,422
)
Financing activities:
Proceeds from issuance of short-term debt
23,569
57,919
Repayments of short-term debt
(51,983
)
(52,220
)
Proceeds from issuance of long-term debt
423,666
493,000
Repayments of long-term debt
(377,825
)
(515,000
)
Repurchases of common stock
(2,572
)
(1,661
)
Increase (decrease) in bank overdrafts
4,639
(10,575
)
Other financing activities, net
(248
)
(290
)
Net cash used in financing activities
19,246
(28,827
)
Effect of exchange rate changes on cash and cash equivalents
159
(1,800
)
Net change in cash and cash equivalents
9,757
5,944
Cash and cash equivalents at the beginning of period
96,343
117,953
Cash and cash equivalents at the end of period
$
106,100
$
123,897
Supplemental disclosures:
Cash paid for interest
$
4,583
$
4,607
Cash paid for income taxes
5,018
5,505
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of dollars)
(unaudited)
Accumulated Other
Class B
Retained
Comprehensive
Common Stock
Common Stock
Additional
Earnings
Treasury Stock
Noncontrolling
Income
Amount
Shares
Amount
Shares
Capital
(Deficit)
Amount
Shares
Interests
(Loss)
Balance, December 31, 2018
$
592
59,157,696
$
43
4,339,431
$
993,666
$
2,307,462
$
(758,018
)
(18,391,042
)
$
(5,584
)
$
(408,435
)
Exercise of stock-based awards
1
156,760
(90
)
(54
)
(184
)
Stock-based compensation expense
4,665
Repurchases of common stock
19,144
(19,144
)
(365,272
)
Tax withholding related to vesting of restricted stock units and retirement of common stock
—
(42,564
)
(1,822
)
(531
)
Noncontrolling interests
(419
)
Net income attributable to WESCO
42,369
Translation adjustments
22,517
Balance, March 31, 2019
$
593
59,271,892
$
43
4,339,431
$
1,015,563
$
2,349,300
$
(777,216
)
(18,756,498
)
$
(6,003
)
$
(385,918
)
Accumulated Other
Class B
Retained
Comprehensive
Common Stock
Common Stock
Additional
Earnings
Treasury Stock
Noncontrolling
Income
Amount
Shares
Amount
Shares
Capital
(Deficit)
Amount
Shares
Interests
(Loss)
Balance, December 31, 2017
$
591
59,045,762
$
43
4,339,431
$
999,156
$
2,079,697
$
(647,158
)
(16,375,653
)
$
(3,596
)
$
(312,590
)
Exercise of stock-based awards
—
88,554
(67
)
(455
)
(5,521
)
Stock-based compensation expense
3,858
Tax withholding related to vesting of restricted stock units and retirement of common stock
—
(16,614
)
(1,153
)
417
Noncontrolling interests
(1,450
)
Net income attributable to WESCO
44,421
Translation adjustments
(28,800
)
Balance, March 31, 2018
$
591
59,117,702
$
43
4,339,431
$
1,001,794
$
2,124,535
$
(647,613
)
(16,381,174
)
$
(5,046
)
$
(341,390
)
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. ("WESCO International") and its subsidiaries (collectively, “WESCO” or the "Company"), headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of electrical, industrial and communications maintenance, repair and operating ("MRO") and original equipment manufacturer ("OEM") products, construction materials, and advanced supply chain management and logistics services used primarily in the industrial, construction, utility and commercial, institutional and government markets. WESCO serves approximately 70,000 active customers globally through approximately 500 branches primarily located in North America, with operations in 15 additional countries and 10 distribution centers located in the United States and Canada.
2. ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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 information should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in WESCO’s 2018 Annual Report on Form 10-K as filed with the SEC on February 27, 2019. The Condensed Consolidated Balance Sheet at December 31, 2018 was derived from the audited Consolidated Financial Statements as of that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America.
The unaudited Condensed Consolidated Balance Sheet as of March 31, 2019, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income, the unaudited Condensed Consolidated Statements of Cash Flows, and the unaudited Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2019 and 2018, 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 presented herein. All adjustments reflected in the unaudited condensed consolidated financial information are of a normal recurring nature unless indicated. The results for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, WESCO adopted Accounting Standards Update (ASU) 2016-02, Leases, and all the related amendments (“Topic 842”), a comprehensive new standard that amended various aspects of existing accounting guidance for leases. The adoption of Topic 842 resulted in the recognition of right-of-use assets and lease liabilities for operating leases of approximately $240 million and $245 million, respectively, in the Consolidated Balance Sheet as of January 1, 2019, most of which relate to real estate. The adoption of Topic 842 did not have a material impact on the Consolidated Statement of Income and Comprehensive Income or Consolidated Statement of Cash Flow for the three months ended March 31, 2019.
The Company used the optional effective date transition method and therefore did not adjust the prior comparative periods presented herein. There was no cumulative-effect adjustment to beginning retained earnings as a result of using this method. In addition, the Company elected the package of practical expedients that allowed the adoption of Topic 842 without reassessing arrangements that commenced prior to the effective date. Additional qualitative and quantitative information about the Company's leases is disclosed in Note 4.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces new guidance for the accounting for credit losses on certain financial instruments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying and adding certain disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
7
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the disclosure requirements for all employers that sponsor defined benefit pension and other post retirement plans by removing and adding certain disclosures. The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements and notes thereto.
Other pronouncements issued by 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.
3. REVENUE
WESCO distributes products and provides services to customers globally within the following end markets: (1) industrial, (2) construction, (3) utility, and (4) commercial, institutional and government. Revenue is measured as the amount of consideration WESCO expects to receive in exchange for transferring goods or providing services.
The following tables disaggregate WESCO’s revenue by end market and geography:
Three Months Ended
March 31
(In thousands)
2019
2018
Industrial
$
736,906
$
758,976
Construction
633,288
637,800
Utility
308,269
315,546
Commercial, Institutional and Government
282,804
281,593
Total by end market
$
1,961,267
$
1,993,915
Three Months Ended
March 31
(In thousands)
2019
2018
United States
$
1,460,991
$
1,482,718
Canada (1)
384,596
398,738
Other International (1)
115,680
112,459
Total by geography
$
1,961,267
$
1,993,915
(1)
The prior period has been reclassified to conform to the current period presentation.
In accordance with certain contractual arrangements, WESCO receives payment from its customers in advance and recognizes such payment as deferred revenue. Revenue for advance payment is recognized when the performance obligation has been satisfied and control has transferred to the customer, which is generally upon shipment. Deferred revenue is usually recognized within a year or less from the date of the customer’s advance payment. At March 31, 2019 and December 31, 2018, $8.8 million and $11.8 million, respectively, of deferred revenue was recorded as a component of other current liabilities in the Condensed Consolidated Balance Sheets.
WESCO’s revenues are adjusted for variable consideration, which includes customer volume rebates, returns, and discounts. WESCO measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, as well as current and forecasted information. Measurement and recognition of variable consideration is reviewed by management on a monthly basis and revenue is adjusted accordingly. Variable consideration reduced revenue for the three months ended March 31, 2019 and 2018 by approximately $25.5 million and $23.8 million, respectively.
8
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Shipping and handling costs are recognized in net sales when they are billed to the customer. These costs are recognized as a component of selling, general and administrative expenses when WESCO does not bill the customer. WESCO has elected to recognize shipping and handling costs as a fulfillment cost. Shipping and handling costs recorded as a component of selling, general and administrative expenses totaled $17.0 million and $18.2 million for the three months ended March 31, 2019 and 2018, respectively.
4. LEASES
WESCO leases real estate, automobiles, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company has elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to its leased automobiles and trucks. WESCO accounts for these nonlease components separately from the associated lease components. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. The Company uses the interest rate implicit in its leases to discount lease payments at the lease commencement date. When the implicit rate is not readily available, the Company uses its incremental borrowing rate.
The Company's finance leases, which are recorded in the Condensed Consolidated Balance Sheet as of March 31, 2019 as a component of property, buildings and equipment, current portion of long-term debt and long-term debt, respectively, are not material to the consolidated financial statements and notes thereto. Accordingly, finance leases have not been disclosed herein.
The following table sets forth supplemental balance sheet information related to operating leases for the period presented:
As of
(In thousands)
March 31, 2019
Operating lease assets
$
232,989
Current operating lease liabilities
59,236
Noncurrent operating lease liabilities
178,606
Total operating lease liabilities
$
237,842
The following table sets forth the Company's total lease cost, which is recorded as a component of selling, general and administrative expenses, for the period presented:
Three Months Ended
March 31
(In thousands)
2019
Operating lease cost
$
18,003
Short-term lease cost
11
Variable lease cost
5,321
Total lease cost
$
23,335
Variable lease cost consists of the non-lease components described above, as well as taxes and insurance for WESCO's leased real estate.
9
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth supplemental cash flow information related to operating leases for the period presented:
Three Months Ended
March 31
(In thousands)
2019
Operating cash flows from operating leases
$
18,012
Right-of-use assets obtained in exchange for new operating lease liabilities
8,092
For the three months ended March 31, 2019, the weighted-average remaining lease term for operating leases was 5.5 years and the weighted-average discount rate used to measure operating lease assets and liabilities was 4.6%.
The following table sets forth the maturities of the Company's operating lease liabilities and reconciles the respective undiscounted payments to the operating lease liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2019:
(In thousands)
2019
$
59,033
2020
61,233
2021
49,587
2022
36,767
2023
27,547
Thereafter
45,701
Total undiscounted operating lease payments
279,868
Less: interest
(42,026
)
Total operating lease liabilities
$
237,842
The following table sets forth the future minimum rental payments for operating leases accounted for in accordance with Accounting Standards Codification Topic 840, Leases, as of December 31, 2018:
Years ending December 31
(In thousands)
2019
$
71,640
2020
59,594
2021
47,264
2022
34,490
2023
24,493
Thereafter
40,302
5. ACQUISITIONS
The following table sets forth the consideration paid for acquisitions:
Three Months Ended
March 31
2019
(In thousands)
Fair value of assets acquired
$
34,812
Fair value of liabilities assumed
7,070
Cash paid for acquisitions
$
27,742
10
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Sylvania Lighting Services Corp.
On March 5, 2019, WESCO Distribution, Inc. ("WESCO Distribution"), through its WESCO Services, LLC subsidiary, acquired certain assets and assumed certain liabilities of Sylvania Lighting Services Corp. ("SLS"). Headquartered in Wilmington, Massachusetts, SLS offers a full spectrum of energy-efficient lighting upgrade, retrofit, and renovation solutions with annual sales of approximately $100 million and approximately 220 employees across the U.S. and Canada. WESCO Distribution funded the purchase price paid at closing with borrowings under its accounts receivable securitization facility. The purchase price was allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date, resulting in goodwill of $5.5 million, which is deductible for tax purposes.
6. GOODWILL
The following table sets forth the changes in the carrying value of goodwill:
Three Months Ended
March 31
(In thousands)
2019
Beginning balance January 1
$
1,722,603
Foreign currency exchange rate changes
12,642
Additions to goodwill for acquisitions
5,526
Ending balance March 31
$
1,740,771
7. STOCK-BASED COMPENSATION
WESCO’s stock-based employee compensation plans are comprised of stock-settled stock appreciation rights, restricted stock units and performance-based awards. 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-settled stock appreciation rights and performance-based awards with market conditions is determined using the Black-Scholes and Monte Carlo simulation models, respectively. The fair value of restricted stock units and performance-based awards with performance conditions 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. For stock-settled stock appreciation rights that are exercised and for restricted stock units and performance-based award that vest, shares are issued out of WESCO's outstanding common stock.
Stock-settled stock appreciation rights vest ratably over a three-year period and terminate on the tenth anniversary of the grant date unless terminated sooner under certain conditions. Vesting of restricted stock units is based on a minimum time period of three years. Vesting of performance-based awards is based on a three-year performance period, and the number of shares earned, if any, depends on the attainment of certain performance levels. Outstanding awards would vest upon the consummation of a change in control transaction and performance-based awards would vest at the target level.
Performance-based awards granted in 2019 were based on two equally-weighted performance measures, which include the three-year average growth rate of WESCO's net income and the three-year cumulative return on net assets. Performance-based awards granted in 2018 were based on two equally-weighted performance measures, which include the three-year average growth rate of the Company’s fully diluted earnings per share and the three-year cumulative return on net assets. From 2015 to 2017, the two equally-weighted performance-based award metrics were the three-year average growth rate of WESCO's net income and WESCO's total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period.
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
During the three months ended March 31, 2019 and 2018, WESCO granted the following stock-settled stock appreciation rights, restricted stock units and performance-based awards at the following weighted-average fair values:
Three Months Ended
March 31, 2019
March 31, 2018
Stock-settled stock appreciation rights granted
213,618
491,229
Weighted-average fair value
$
16.36
$
18.40
Restricted stock units granted
175,544
114,269
Weighted-average fair value
$
54.64
$
62.81
Performance-based awards granted
126,874
44,144
Weighted-average fair value
$
54.64
$
62.80
The fair value of stock-settled stock appreciation rights was estimated using the following weighted-average assumptions:
Three Months Ended
March 31, 2019
March 31, 2018
Risk free interest rate
2.5
%
2.5
%
Expected life (in years)
5
5
Expected volatility
29
%
28
%
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve as of the grant date. The expected life is based on historical exercise experience and the expected volatility is based on the volatility of the Company's daily stock prices over a five-year period preceding the grant date.
The following table sets forth a summary of stock-settled stock appreciation rights and related information for the three months ended March 31, 2019:
Awards
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term (In years)
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2018
2,351,633
$
59.26
Granted
213,618
54.63
Exercised
(51,635
)
35.11
Forfeited
(26,236
)
70.00
Outstanding at March 31, 2019
2,487,380
59.25
6.3
$
9,222
Exercisable at March 31, 2019
1,815,662
$
58.38
5.3
$
9,217
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth a summary of time-based restricted stock units and related information for the three months ended March 31, 2019:
Awards
Weighted-
Average
Fair
Value
Unvested at December 31, 2018
327,798
$
57.87
Granted
175,544
54.64
Vested
(112,500
)
43.58
Forfeited
(1,565
)
57.49
Unvested at March 31, 2019
389,277
$
60.48
Performance shares are awards for which the vesting will occur based on market or performance conditions. The following table sets forth a summary of performance-based awards for the three months ended March 31, 2019:
Awards
Weighted-
Average
Fair
Value
Unvested at December 31, 2018
138,896
$
59.33
Granted
126,874
54.64
Vested
(25,696
)
42.44
Forfeited
(35,486
)
50.79
Unvested at March 31, 2019
204,588
$
60.11
The unvested performance-based awards in the table above include 17,507 shares in which vesting of the ultimate number of shares is dependent upon WESCO's total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period. These awards are accounted for as awards with market conditions; compensation cost is recognized over the service period, regardless of whether the market conditions are achieved and the awards ultimately vest.
Vesting of the remaining 187,081 shares of performance-based awards in the table above is dependent upon the achievement of certain performance targets, including 80,944 that are dependent upon the three-year average growth rate of WESCO's net income, 21,350 that are dependent upon the three-year average growth rate of the Company's fully diluted earnings per share, and 84,787 that are based upon the three-year cumulative return on net assets. These awards are accounted for as awards with performance conditions; compensation cost is recognized over the performance period based upon WESCO's determination of whether it is probable that the performance targets will be achieved.
WESCO recognized $4.7 million and $3.9 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was $36.6 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements for all awards previously made, of which approximately $15.4 million is expected to be recognized over the remainder of 2019, $13.5 million in 2020, $7.0 million in 2021 and $0.7 million in 2022.
8. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to WESCO International by the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is computed by dividing net income attributable to WESCO International 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 equity awards.
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth the details of basic and diluted earnings per share:
Three Months Ended
March 31
(In thousands, except per share data)
2019
2018
Net income attributable to WESCO International
$
42,369
$
44,421
Weighted-average common shares outstanding used in computing basic earnings per share
45,076
47,038
Common shares issuable upon exercise of dilutive equity awards
415
570
Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share
45,491
47,608
Earnings per share attributable to WESCO International
Basic
$
0.94
$
0.94
Diluted
$
0.93
$
0.93
For the three months ended March 31, 2019 and 2018, the computation of diluted earnings per share attributable to WESCO International excluded stock-based awards of approximately 1.8 million and 1.5 million, respectively. These amounts were excluded because their effect would have been antidilutive.
In December 2017, the Company's Board of Directors authorized the repurchase of up to $300 million of the Company's common stock through December 31, 2020. In October 2018, the Board approved an increase to this repurchase authorization from $300 million to $400 million. On November 6, 2018, the Company entered into an accelerated stock repurchase agreement (the "ASR Transaction") with a financial institution to repurchase additional shares of its common stock. In exchange for an up-front cash payment of $100.0 million, the Company received a total of 1,953,167 shares, 365,272 of which were received during the three months ended March 31, 2019. WESCO funded the repurchase with borrowings under its accounts receivable securitization and revolving credit facilities.
The total number of shares ultimately delivered under the ASR Transaction was determined by the average of the volume-weighted average price of the Company's common stock for each exchange business day during the settlement valuation period. For purposes of computing earnings per share for the three months ended March 31, 2019, shares received under the ASR Transaction were reflected as a reduction to common shares outstanding on the respective delivery dates.
9. EMPLOYEE BENEFIT PLANS
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 matches contributions made by employees at an amount equal to 50% of participants' total monthly contributions up to a maximum of 6% of eligible compensation. For Canadian participants, WESCO makes contributions in amounts ranging from 3% to 5% of participants' eligible compensation based on years of continuous service. WESCO may also make, subject to the Board of Directors' approval, a discretionary contribution to the defined contribution retirement savings plan covering U.S. participants if certain predetermined profit levels are attained. For the three months ended March 31, 2019 and 2018, WESCO incurred charges of $12.6 million and $10.7 million, respectively, for all such plans. Contributions are made in cash to employee retirement savings plan accounts. The deferred compensation plan is an unfunded plan. As of March 31, 2019 and December 31, 2018, the Company's obligation under the deferred compensation plan was $23.1 million and $21.9 million, respectively. Employees have the option to transfer balances allocated to their accounts in the defined contribution retirement savings plan and the deferred compensation plan into any of the available investment options.
The Company sponsors a contributory defined benefit plan covering substantially all Canadian employees of EECOL and a Supplemental Executive Retirement Plan (the "SERP") for certain executives of EECOL. During the three months ended March 31, 2019, the Company contributed $0.1 million to the SERP.
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth the components of net periodic benefit costs for the defined benefit plans:
Three Months Ended
March 31
(In thousands)
2019
2018
Service cost
$
1,149
$
1,347
Interest cost
1,089
1,066
Expected return on plan assets
(1,422
)
(1,540
)
Recognized actuarial gain
(16
)
(12
)
Net periodic benefit cost
$
800
$
861
The service cost of $1.1 million and $1.3 million for the three months ended March 31, 2019 and 2018 was reported as a component of selling, general and administrative expenses. The other components of net periodic benefit cost totaling a net benefit of $0.3 million and $0.5 million for the three months ended March 31, 2019 and 2018 were presented as a component of net interest and other.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank overdrafts, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of WESCO's financial instruments approximated their fair values as of March 31, 2019 and December 31, 2018.
11. COMMITMENTS AND CONTINGENCIES
From time to time, a number of lawsuits and claims have been or may be asserted against the Company relating to the conduct of its business, including litigation relating to commercial, product and employment matters. The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to WESCO. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on WESCO's financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on WESCO's results of operations for that period.
In an effort to expand the Company's footprint in the Middle East, WESCO has been doing business since 2009 with WESTEC Supplies General Trading (“WESTEC”), an industrial equipment supplier headquartered in the United Arab Emirates. WESTEC has a line of credit with a maximum borrowing capacity of approximately $6.8 million to support its working capital requirements and joint sales efforts with WESCO. Due to the nature of WESCO’s arrangement with WESTEC, WESCO has provided a standby letter of credit under its revolving credit facility of up to $7.3 million as security for WESTEC’s line of credit. As of March 31, 2019, WESTEC had an outstanding loan balance of $6.5 million. Management currently believes the estimated fair value of the noncontingent guarantee on the line of credit is nominal and therefore a liability has not been recorded as of March 31, 2019.
12. INCOME TAXES
The effective tax rate for the three months ended March 31, 2019 and 2018 was 21.7% and 19.6%, respectively. WESCO’s effective tax rate is typically impacted by the tax effect of intercompany financing, foreign tax rate differences, nondeductible expenses and state income taxes. The higher effective tax rate for the three months ended March 31, 2019 was primarily due to the full application of the international provisions of U.S. tax reform. There have been no material adjustments to liabilities for uncertain tax positions since the last annual disclosure for the year ended December 31, 2018.
15
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
WESCO Distribution has outstanding $500 million in aggregate principal amount of 5.375% Senior Notes due 2021 (the "2021 Notes") and $350 million in aggregate principal amount of 5.375% Senior Notes due 2024 (the "2024 Notes"). The 2021 Notes and 2024 Notes are unsecured senior obligations of WESCO Distribution and are fully and unconditionally guaranteed on a senior unsecured basis by WESCO International.
Condensed consolidating financial information for WESCO International, WESCO Distribution and the non-guarantor subsidiaries is presented in the following tables.
Condensed Consolidating Balance Sheet
March 31, 2019
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Cash and cash equivalents
$
—
$
38,774
$
67,326
$
—
$
106,100
Trade accounts receivable, net
—
—
1,268,565
—
1,268,565
Inventories
—
453,738
547,615
—
1,001,353
Prepaid expenses and other current assets
1,127
22,341
118,406
(4,142
)
137,732
Total current assets
1,127
514,853
2,001,912
(4,142
)
2,513,750
Intercompany receivables, net
—
—
2,400,124
(2,400,124
)
—
Property, buildings and equipment, net
—
68,829
97,859
—
166,688
Operating lease assets
—
139,397
93,592
—
232,989
Intangible assets, net
—
1,974
308,479
—
310,453
Goodwill
—
257,623
1,483,148
—
1,740,771
Investments in affiliates
3,252,590
5,202,712
—
(8,455,302
)
—
Other assets
—
2,717
17,270
—
19,987
Total assets
$
3,253,717
$
6,188,105
$
6,402,384
$
(10,859,568
)
$
4,984,638
Accounts payable
$
—
$
426,015
$
444,227
$
—
$
870,242
Short-term debt
—
—
27,313
—
27,313
Other current liabilities
—
82,527
174,782
(4,142
)
253,167
Total current liabilities
—
508,542
646,322
(4,142
)
1,150,722
Intercompany payables, net
1,051,352
1,348,772
—
(2,400,124
)
—
Long-term debt, net
—
841,554
372,722
—
1,214,276
Operating lease liabilities
—
110,998
67,608
—
178,606
Other noncurrent liabilities
—
125,649
119,023
—
244,672
Total WESCO International stockholders' equity
2,202,365
3,252,590
5,202,712
(8,455,302
)
2,202,365
Noncontrolling interests
—
—
(6,003
)
—
(6,003
)
Total liabilities and stockholders’ equity
$
3,253,717
$
6,188,105
$
6,402,384
$
(10,859,568
)
$
4,984,638
16
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Condensed Consolidating Balance Sheet
December 31, 2018
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Cash and cash equivalents
$
—
$
35,931
$
60,412
$
—
$
96,343
Trade accounts receivable, net
—
—
1,166,607
—
1,166,607
Inventories
—
440,422
508,304
—
948,726
Prepaid expenses and other current assets
1,123
57,586
124,523
(9,268
)
173,964
Total current assets
1,123
533,939
1,859,846
(9,268
)
2,385,640
Intercompany receivables, net
—
—
2,403,704
(2,403,704
)
—
Property, buildings and equipment, net
—
63,506
97,372
—
160,878
Intangible assets, net
—
2,131
313,885
—
316,016
Goodwill
—
257,623
1,464,980
—
1,722,603
Investments in affiliates
3,182,469
5,137,783
—
(8,320,252
)
—
Other assets
—
2,905
16,994
—
19,899
Total assets
$
3,183,592
$
5,997,887
$
6,156,781
$
(10,733,224
)
$
4,605,036
Accounts payable
$
—
$
404,373
$
389,975
$
—
$
794,348
Short-term debt
—
—
30,785
—
30,785
Other current liabilities
—
86,600
159,481
(9,268
)
236,813
Total current liabilities
—
490,973
580,241
(9,268
)
1,061,946
Intercompany payables, net
1,048,282
1,355,422
—
(2,403,704
)
—
Long-term debt, net
—
842,093
325,218
—
1,167,311
Other noncurrent liabilities
—
126,930
119,123
—
246,053
Total WESCO International stockholders' equity
2,135,310
3,182,469
5,137,783
(8,320,252
)
2,135,310
Noncontrolling interests
—
—
(5,584
)
—
(5,584
)
Total liabilities and stockholders’ equity
$
3,183,592
$
5,997,887
$
6,156,781
$
(10,733,224
)
$
4,605,036
17
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Condensed Consolidating Statement of Income and Comprehensive Income
Three Months Ended
March 31, 2019
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Net sales
$
—
$
857,982
$
1,142,394
$
(39,109
)
$
1,961,267
Cost of goods sold (excluding depreciation and
amortization)
—
689,556
928,324
(39,109
)
1,578,771
Selling, general and administrative expenses
—
152,429
144,099
—
296,528
Depreciation and amortization
—
4,555
10,687
—
15,242
Results of affiliates’ operations
41,950
42,413
—
(84,363
)
—
Net interest and other
—
12,034
5,086
—
17,120
Income tax expense
—
(129
)
11,785
—
11,656
Net income
41,950
41,950
42,413
(84,363
)
41,950
Net loss attributable to noncontrolling interests
—
—
(419
)
—
(419
)
Net income attributable to WESCO International
$
41,950
$
41,950
$
42,832
$
(84,363
)
$
42,369
Other comprehensive loss:
Foreign currency translation adjustments
22,517
22,517
22,517
(45,034
)
22,517
Comprehensive income attributable to WESCO International
$
64,467
$
64,467
$
65,349
$
(129,397
)
$
64,886
Condensed Consolidating Statement of Income and Comprehensive Income
Three Months Ended
March 31, 2018
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Net sales
$
—
$
882,399
$
1,150,110
$
(38,594
)
$
1,993,915
Cost of goods sold (excluding depreciation and
amortization)
—
716,258
936,302
(38,594
)
1,613,966
Selling, general and administrative expenses
—
150,482
140,347
—
290,829
Depreciation and amortization
—
4,616
11,263
—
15,879
Results of affiliates’ operations
42,971
45,200
—
(88,171
)
—
Net interest and other
—
13,816
5,967
—
19,783
Income tax (benefit) expense
—
(544
)
11,031
—
10,487
Net income
42,971
42,971
45,200
(88,171
)
42,971
Net loss attributable to noncontrolling interests
—
—
(1,450
)
—
(1,450
)
Net income attributable to WESCO International
$
42,971
$
42,971
$
46,650
$
(88,171
)
$
44,421
Other comprehensive loss:
Foreign currency translation adjustments
(28,800
)
(28,800
)
(28,800
)
57,600
(28,800
)
Comprehensive income attributable to WESCO International
$
14,171
$
14,171
$
17,850
$
(30,571
)
$
15,621
18
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Three Months Ended
March 31, 2019
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and Eliminating
Entries
Consolidated
Net cash (used in) provided by operating activities
$
5,157
$
27,122
$
(3,410
)
$
—
$
28,869
Investing activities:
Acquisition payments
—
(27,742
)
—
—
(27,742
)
Capital expenditures
—
(2,513
)
(8,315
)
—
(10,828
)
Dividends received from subsidiaries
—
22,095
—
(22,095
)
—
Other
—
(19,510
)
53
19,510
53
Net cash used in investing activities
—
(27,670
)
(8,262
)
(2,585
)
(38,517
)
Financing activities:
Borrowings
—
139,134
330,196
(22,095
)
447,235
Repayments
(2,585
)
(140,134
)
(289,674
)
2,585
(429,808
)
Repurchases of common stock
(2,572
)
—
—
—
(2,572
)
Dividends paid by subsidiaries
—
—
(22,095
)
22,095
—
Increase in bank overdrafts
—
4,639
—
—
4,639
Other
—
(248
)
—
—
(248
)
Net cash provided by (used in) financing activities
(5,157
)
3,391
18,427
2,585
19,246
Effect of exchange rate changes on cash and cash equivalents
—
—
159
—
159
Net change in cash and cash equivalents
—
2,843
6,914
—
9,757
Cash and cash equivalents at the beginning of period
—
35,931
60,412
—
96,343
Cash and cash equivalents at the end of period
$
—
$
38,774
$
67,326
$
—
$
106,100
19
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Three Months Ended
March 31, 2018
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and Eliminating
Entries
Consolidated
Net cash provided by (used in) operating activities
$
5,497
$
57,694
$
(10,198
)
$
—
$
52,993
Investing activities:
Capital expenditures
—
(2,954
)
(4,708
)
—
(7,662
)
Dividends received from subsidiaries
—
22,744
—
(22,744
)
—
Other
—
(18,908
)
(8,760
)
18,908
(8,760
)
Net cash provided by (used in) investing activities
—
882
(13,468
)
(3,836
)
(16,422
)
Financing activities:
Borrowings
—
58,000
515,663
(22,744
)
550,919
Repayments
(3,836
)
(90,000
)
(477,220
)
3,836
(567,220
)
Repurchases of common stock
(1,661
)
—
—
—
(1,661
)
Dividends paid by subsidiaries
—
—
(22,744
)
22,744
—
Decrease in bank overdrafts
—
(10,575
)
—
—
(10,575
)
Other
—
(290
)
—
—
(290
)
Net cash (used in) provided by financing activities
(5,497
)
(42,865
)
15,699
3,836
(28,827
)
Effect of exchange rate changes on cash and cash equivalents
—
—
(1,800
)
—
(1,800
)
Net change in cash and cash equivalents
—
15,711
(9,767
)
—
5,944
Cash and cash equivalents at the beginning of period
—
50,602
67,351
—
117,953
Cash and cash equivalents at the end of period
$
—
$
66,313
$
57,584
$
—
$
123,897
14. SUBSEQUENT EVENTS
The Company evaluated subsequent events and concluded that no subsequent events have occurred that would require recognition in the unaudited Condensed Consolidated Financial Statements or disclosure in the Notes thereto.
20
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International, Inc.’s audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2018 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 WESCO International, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as well as WESCO International, Inc.’s other reports filed with the Securities and Exchange Commission.
Company Overview
WESCO International, Inc. (“WESCO International”), incorporated in 1993 and effectively formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American-based distributor of products and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility, and commercial, institutional and government (“CIG”) markets. We are a leading provider of electrical, industrial, and communications maintenance, repair and operating ("MRO") and original equipment manufacturer ("OEM") products, construction materials, and advanced supply chain management and logistics services. Our primary product categories include general supplies, wire, cable and conduit, communications and security, electrical distribution and controls, lighting and sustainability, and automation, controls and motors.
We serve approximately 70,000 active customers globally through approximately 500 branches primarily located in North America, with operations in 15 additional countries and 10 distribution centers located in the United States and Canada. We employ approximately 9,300 employees worldwide. We distribute over 1,000,000 products, grouped into six categories, from approximately 30,000 suppliers, utilizing a highly automated, proprietary electronic procurement and inventory replenishment system.
In addition, we offer a comprehensive portfolio of value-added capabilities, which includes supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting, limited assembly of products and system installation. 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 three months of 2019 reflect gross margin expansion, as well as the impact of foreign exchange headwinds, adverse weather, and one less work day. Net sales decreased $32.6 million, or 1.6%, over the same period last year. Cost of goods sold as a percentage of net sales was 80.5% and 80.9% for the first three months of 2019 and 2018, respectively. Selling, general and administrative ("SG&A") expenses as a percentage of net sales were 15.1% and 14.6% for the first three months of 2019