| WESCO INTERNATIONAL INC Item 1A Risk Factors |
| The following factors, among others, could cause our actual results to differ materially from the forward-looking statements we make |
| All forward-looking statements attributable to us or persons working on our behalf are expressly qualified by the following cautionary statements: Our outstanding indebtedness requires debt service obligations that could adversely affect our ability to fulfill our obligations and could limit our growth and impose restrictions on our business |
| As of December 31, 2005, we had dlra403dtta6 million of consolidated indebtedness, including dlra150 million in aggregate principal amount of 7dtta50prca Senior Subordinated Notes due 2017 (the “2017 Notes”) and dlra150 million in aggregate principal amount of 2dtta625prca Convertible Senior Debentures due 2025 (the “Debentures”), and stockholders’ equity of dlra491 million |
| We and our subsidiaries may incur additional indebtedness in the future, subject to certain limitations contained in the instruments governing our indebtedness |
| These amounts exclude our accounts receivable securitization facility (the “Receivables Facility”), through which we sell up to dlra400 million of our accounts receivable to a third-party conduit and remove these receivables from our consolidated balance sheet |
| See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates |
| ” Our debt service obligations have important consequences, including but not limited to the following: • a substantial portion of cash flow from our operations will be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available for operations, future business opportunities and acquisitions and other purposes, and increasing our vulnerability to adverse general economic and industry conditions; • our ability to obtain additional financing in the future may be limited; • we may be hindered in our ability to adjust rapidly to changing market conditions; and • we may be required to incur additional interest due to the contingent interest feature of the Debentures, which is an embedded derivative |
| Our ability to make scheduled payments of principal and interest on our debt, refinance our indebtedness, make scheduled payments on our operating leases, fund planned capital expenditures or to finance acquisitions will depend on our future performance, which to a certain extent, is subject to economic, financial, competitive and other factors beyond our control |
| There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt, make necessary capital expenditures or meet other cash needs |
| If unable to do so, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing |
| Our Receivables Facility has a three-year term and is subject to renewal in May 2008 |
| There can be no assurance that available funding or any sale of assets or additional financing would be possible at the time of renewal in amounts or terms favorable to us, if at all |
| Over the next three years, we are obligated to pay approximately dlra58dtta9 million of which dlra29dtta0 million is related to our revolving credit facility, dlra23dtta4 million in notes payable associated with acquisitions, dlra4dtta0 million related to our mortgage credit facility and dlra2dtta5 million related to capital leases |
| Additionally, another acquisition agreement contains contingent consideration for the final acquisition payment which management has estimated will be dlra5dtta0 million and is reported as deferred acquisition payable |
| See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources |
| ” Our debt agreements contain restrictions that may limit our ability to operate our business |
| Our credit facilities and the indenture governing WESCO Distribution’s senior subordinated indebtedness contain, and any of our future debt agreements may contain, certain covenant restrictions that limit our ability to operate our business, including restrictions on our ability to: • incur additional debt or issue guarantees; • create liens; • make certain investments; 14 _________________________________________________________________ [69]Table of Contents • enter into transactions with our affiliates; • sell certain assets; • redeem capital stock or make other restricted payments; • declare or pay dividends or make other distributions to stockholders; and • merge or consolidate with any person |
| Our credit facilities also require us to maintain specific earnings to fixed expenses and debt to earnings ratios and to meet minimum net worth requirements |
| In addition, our credit facilities contain additional affirmative and negative covenants |
| Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions |
| As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us |
| In addition, our failure to comply with these covenants could result in a default under the Debentures, the 2017 Notes and our other debt, which could permit the holders to accelerate such debt |
| If any of our debt is accelerated, we may not have sufficient funds available to repay such debt |
| We may be unable to repurchase the Debentures or the 2017 Notes for cash when required by the holders, including following a fundamental change |
| Holders of the Debentures have the right to require us to repurchase the Debentures on specified dates or upon the occurrence of a fundamental change prior to maturity |
| The occurrence of a change of control would also constitute an event of default under our credit facilities, requiring repayment of amounts outstanding thereunder, and the occurrence of a change of control would also enable holders of the 2017 Notes to require WESCO Distribution to repurchase such 2017 Notes at a price equal to 101prca of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any |
| Any of our future debt agreements may contain similar provisions |
| We may not have sufficient funds to make the required repayments and repurchase at such time or the ability to arrange necessary financing on acceptable terms |
| In addition, our ability to repurchase the Debentures or the 2017 Notes in cash may be limited by law or the terms of other agreements relating to our debt outstanding at the time, including other credit facilities, which will limit our ability to purchase the Debentures or 2017 Notes for cash in certain circumstances |
| If we fail to repurchase the Debentures or 2017 Notes in cash as required by the respective indentures, it would constitute an event of default under the applicable indenture, which, in turn, would constitute an event of default under our credit facilities and the other indenture |
| In light of the financial stresses within the worldwide automotive industry, certain automakers and tier-one mirror customers have already declared bankruptcy or may be considering bankruptcy |
| Should one or more of our larger customers declare bankruptcy, it could adversely impact the collectibility of our accounts receivable, bad debt expense and net income |
| Downturns in the electrical distribution industry have had in the past, and may in the future have, an adverse effect on our sales and profitability |
| The electrical distribution industry is affected by changes in economic conditions, including national, regional and local slowdowns in construction and industrial activity, which are outside our control |
| Our operating results may also be adversely affected by increases in interest rates that may lead to a decline in economic activity, particularly in the construction market, while simultaneously resulting in higher interest payments under the revolving credit facility |
| In addition, during periods of economic slowdown such as the one we recently experienced, our credit losses, based on history, could increase |
| There can be no assurance that economic slowdowns, adverse economic conditions or cyclical trends in certain customer markets will not have a material adverse effect on our operating results and financial condition |
| 15 _________________________________________________________________ [70]Table of Contents An increase in competition could decrease sales or earnings |
| We operate in a highly competitive industry |
| We compete directly with national, regional and local providers of electrical and other industrial MRO supplies |
| Competition is primarily focused in the local service area and is generally based on product line breadth, product availability, service capabilities and price |
| Other sources of competition are buying groups formed by smaller distributors to increase purchasing power and provide some cooperative marketing capability |
| Some of our existing competitors have, and new market entrants may have, greater financial and marketing resources than us |
| To the extent existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices for current services, thereby adversely affecting financial results |
| Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of suitable acquisitions |
| In addition, it is possible that competitive pressures resulting from industry consolidation could affect our growth and profit margins compared to the industry |
| Loss of key suppliers or lack of product availability could decrease sales and earnings |
| Most of our agreements with suppliers are terminable by either party on 60 days’ notice or less |
| Our ten largest suppliers in 2005 accounted for approximately 34prca of our purchases for the period |
| Our largest supplier in 2005 was Eaton Corporation, through its Eaton Electrical division, accounting for approximately 12prca of our purchases |
| The loss of, or a substantial decrease in the availability of, products from any of these suppliers, or the loss of key preferred supplier agreements, could have a material adverse effect on our business |
| Supply interruptions could arise from shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions, or other reasons beyond our control |
| In addition, certain of our products, such as wire and conduit, are commodity-price-based products and may be subject to significant price fluctuations which are beyond our control |
| An interruption of operations at any of our distribution centers could have a material adverse effect on the operations of branches served by the affected distribution center |
| Furthermore, we cannot be certain that particular products or product lines will be available to us, or available in quantities sufficient to meet customer demand |
| Such limited product access could cause us to be at a competitive disadvantage |
| Acquisitions that we may undertake would involve a number of inherent risks, any of which could cause us not to realize the benefits anticipated to result |
| We have historically expanded our operations through selected acquisitions of businesses and assets |
| Acquisitions involve various inherent risks, such as: • uncertainties in assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; • the potential loss of key employees of an acquired business; • problems that could arise from the integration of the acquired business; and • unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale |
| Any one or more of these factors could cause us not to realize the benefits anticipated to result from the acquisition of businesses or assets |
| Goodwill and intangible assets recorded as a result of our acquisitions could become impaired |
| As of December 31, 2005, our goodwill and other intangible assets amounted to dlra626dtta1 million, net of accumulated amortization |
| To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other intangible assets recorded, the investment could be considered impaired and subject to write-off |
| We expect to record further goodwill and other intangible assets as a result of future acquisitions we may complete |
| Future amortization of such other intangible assets or impairments, if any, of goodwill or intangible assets would adversely affect our results of operations in any given period |
| A disruption of our information systems could increase expenses, decrease sales or reduce earnings |
| A serious disruption of our information systems could have a material adverse effect on our business and results of operations |
| Our computer systems are an integral part of our business and growth strategies |
| We depend on our information systems to process orders, manage inventory and accounts receivable collections, purchase products, ship products to our customers on a timely basis, maintain cost-effective operations and provide superior service to our customers |
| 16 _________________________________________________________________ [71]Table of Contents Our business may be harmed by required compliance with anti-terrorism measures and regulations |
| Following the 2001 terrorist attacks on the United States, a number of federal, state and local authorities have implemented various security measures, including checkpoints and travel restrictions on large trucks, such as the ones that we and our suppliers use |
| If security measures disrupt or impede the timing of our suppliers’ deliveries of the product inventory we need or our deliveries of our product to our customers, we may not be able to meet the needs of our customers or may incur additional expenses to do so |
| There may be future dilution of our common stock |
| Additionally, our Debentures include a contingent conversion price provision and the option for a settlement in shares which will increase dilution to our stockholders |
| There is a risk that the market value of our common stock may decline |
| Stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies in our industry have been volatile |
| It is impossible to predict whether the price of our common stock will rise or fall |
| Trading prices of our common stock will be influenced by our operating results and prospects and by economic, financial and other factors |