WCC

WESCO International, Inc. - 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, and the six months ended on that date. WESCO International, Inc. is a full-line distributor of electrical supplies and equipment and a provider of integrated supply procurement services. The company operates approximately 370 branch locations and seven distribution centers across the United States, Canada, Mexico, and other international locations. Approximately 87% of net sales are generated from U.S. operations.

Key Financial Metrics

(All figures in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 26.7% ($548.6 million) for the six months ended June 30, 2006, compared to the same period in 2005. This growth was driven by organic market share growth, higher commodity prices, hurricane rebuilding activity, and contributions from two acquisitions completed in late 2005 (Carlton-Bates and Fastec Industrial), which accounted for $214 million of sales.
• Profitability: Net income more than doubled to $99.6 million from $38.8 million. Operating income increased 96% to $171.7 million. Gross margin expanded to 20.1% from 18.5% due to margin improvement initiatives and higher-margin acquisitions.
• Expenses: Selling, General, and Administrative (SG&A) expenses increased to $339.4 million (13.0% of sales) from $284.7 million (13.9% of sales), reflecting cost containment and sales leverage. Interest expense decreased 25% to $12.0 million due to the redemption of higher-interest notes in 2005.
• Cash Flow: Operating cash flow decreased to $59.6 million from $135.2 million. This decline was primarily due to a $17 million reduction in the receivables facility balance and increased working capital requirements (receivables and inventory) to support sales growth.

Guidance, Outlook, and Risks

• Outlook: Management believes the company is well-positioned for 2006 following 2005 acquisitions and capital structure improvements. They anticipate continued macroeconomic activity in major end markets and plan to focus on market share growth, pricing initiatives, and cost containment.
• Legal Proceedings: WESCO is a defendant in a Florida state court lawsuit where a former supplier seeks damages in excess of $17 million for alleged failure to fulfill commercial obligations. A trial is scheduled for October 2006. Management believes it has meritorious defenses.
• Bankruptcy Exposure: Dana Corporation filed for Chapter 11 reorganization in March 2006. WESCO had $10.9 million in accounts receivable due from Dana's U.S. entities and established a $2.0 million reserve.
• Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, requiring fair value measurement of stock-based compensation. This resulted in a reclassification of $24.2 million in excess tax benefits from operating to financing cash flows.

Investor Verification Checklist

• Acquisition Integration: Verify the ongoing integration and performance of the Carlton-Bates and Fastec Industrial acquisitions, which contributed significantly to sales and margin growth.
• Working Capital Trends: Monitor the increase in trade receivables and inventory levels relative to sales growth to ensure efficient capital management.
• Legal Contingencies: Track the outcome of the $17 million lawsuit in Florida and the recovery status of the $10.9 million receivable from Dana Corporation.
• Debt Structure: Review the terms of the $150 million 2017 Notes and $150 million Convertible Debentures, noting the exchange offer completed in July 2006 for the 2017 Notes.
• Stock-Based Compensation: Assess the impact of the new SFAS 123R accounting standard on future non-cash expenses and cash flow classifications.