WESCO International, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. WESCO distributes electrical, industrial and communications products and provides supply-chain services, primarily in North America. The filing is unaudited; interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,656.2 million | $1,580.4 million | $4,934.9 million | $4,536.2 million |
| Operating income | $103.0 million | $91.8 million | $282.6 million | $241.5 million |
| Net income attributable to WESCO | $63.4 million | $53.9 million | $175.3 million | $141.4 million |
| Diluted EPS | $1.25 | $1.11 | $3.43 | $2.84 |
| Operating cash flow | Not separately presented for the quarter | $189.7 million | $71.8 million |
Q3 sales rose 4.8%; management attributed the increase to acquisitions (+4.0%) and growth initiatives, partly offset by one fewer workday (-1.6%) and foreign exchange (-0.6%). Estimated pricing contributed approximately 0.5%. For the nine-month period, sales increased 8.8%; acquisitions contributed 2.9%, foreign exchange reduced sales by 0.5%, and estimated pricing added approximately 1.0%.
Q3 gross margin was approximately 20.5% versus 20.0%; operating margin was 6.2% versus 5.8%; and net margin attributable to WESCO was 3.8% versus 3.4%. For the first nine months, operating margin was 5.7% versus 5.3%, while net margin attributable to WESCO was 3.5% versus 3.1%. Management cited higher supplier volume rebates and acquisition mix for improved gross margin, and cost containment and operating leverage for lower SG&A as a share of sales.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $107.6 million; total debt, including short-term and current maturities, was approximately $721.7 million, compared with approximately $649.3 million at year-end 2011.
- WESCO reported $476.4 million of available borrowing capacity: $328.6 million under its revolving credit facility and $147.8 million under its receivables facility. Management separately cited total liquidity of $489.1 million including $12.7 million of invested cash.
- Nine-month operating cash flow was $189.7 million. Investing cash outflow was $220.5 million, including $201.1 million for acquisitions and $19.5 million of capital expenditures. Financing cash inflow was $74.4 million; cash increased by $43.8 million to $107.6 million.
- Management said the company complied with debt covenants and expected operating cash flow and available facilities to meet near-term needs. It planned to focus on working capital and direct excess cash primarily to debt reduction and acquisitions. The mortgage financing facility was due in early 2013; management intended to refinance it through existing facilities.
- The carrying value of the 2017 Notes and 2029 Convertible Debentures was $494.9 million, versus disclosed fair value of approximately $892.9 million.
Material changes, outlook and risks
- WESCO acquired RS Electronics in January, Trydor Industries in July and Conney Safety Products in July 2012. The company paid $201.1 million in aggregate; preliminary allocations included $114.9 million of goodwill and $57.0 million of intangible assets. Final purchase-price allocations for Trydor and Conney were pending.
- On October 15, 2012, WESCO agreed to acquire EECOL Electric for approximately CAD$1.14 billion. Closing was expected in Q4 2012, subject to conditions including Canadian Competition Act approval; proposed financing included a new institutional term loan and existing credit facilities. This was a subsequent event, not a completed acquisition at quarter-end.
- Interest expense declined 20.5% for the first nine months, partly because of lower borrowing rates and a $3.3 million favorable adjustment related to an IRS appeals settlement concerning tax years 2000–2006. The nine-month effective tax rate was 29.8%, versus 29.2%.
- A customer lawsuit in Indiana seeks approximately $50 million over allegedly defective products manufactured or remanufactured by others. WESCO denied liability, recorded no liability and said it could not estimate a possible loss or range.
- Cash held by some foreign subsidiaries could incur additional U.S. tax if repatriated. Management said domestic liquidity needs could be met without repatriation. Annual goodwill and indefinite-lived intangible impairment testing was planned for Q4; no interim impairment indicators were noted in Q3.
- No specific earnings or revenue guidance was provided. Management’s outlook emphasized liquidity, working-capital productivity and funding growth initiatives; it cautioned that forward-looking outcomes are subject to risks and uncertainties.
Important facts for investors to verify
- Whether the EECOL transaction closed as expected, its final purchase price and financing terms, and the resulting leverage and integration costs.
- How much reported sales and earnings growth came from acquired businesses versus organic growth, and whether acquisition margins and synergies are sustained.
- Working-capital conversion and operating cash flow, particularly receivables and inventory growth, alongside debt levels and facility availability.
- Developments and any estimated exposure in the Indiana litigation, and resolution of uncertain tax positions.
- The final purchase-price allocations for the 2012 acquisitions and results of the planned Q4 impairment tests.