WESCO International, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. WESCO distributes electrical, industrial and communications products and supply-chain services through approximately 475 branches and serves more than 65,000 active customers. Results include the impact of acquisitions, notably EECOL, acquired in December 2012.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,931.3 million | $1,656.2 million | $5,633.3 million | $4,934.9 million |
| Operating income | $123.6 million | $103.0 million | $370.4 million | $282.6 million |
| Net income attributable to WESCO | $69.2 million | $63.4 million | $218.4 million | $175.3 million |
| Diluted EPS | $1.32 | $1.25 | $4.17 | $3.43 |
| Operating cash flow | Quarterly figure not clearly stated in financial statements | Quarterly figure not clearly stated in financial statements | $179.7 million | $189.7 million |
- Q3 sales rose 16.6%; acquisitions contributed 14.1%, organic sales increased 3.2%, and foreign exchange reduced sales 0.7%. After adjusting for one extra workday, normalized organic growth was 1.6%.
- Nine-month sales rose 14.2%, primarily from acquisitions: acquisitions added 14.9%, while organic sales declined 0.4% and foreign exchange reduced sales 0.3%.
- Q3 operating margin was 6.4% versus 6.2%; net margin attributable to WESCO was 3.6% versus 3.8%. For nine months, operating margin improved to 6.6% from 5.7%, and attributable net margin rose to 3.9% from 3.5%.
- Cost of goods sold was 79.5% of sales in both Q3 periods and 79.2% versus 79.9% for nine months. SG&A was 13.2% versus 13.6% in Q3 and 13.3% versus 13.9% for nine months; the latter comparison includes a $36.1 million insurance recovery in 2013.
- Interest expense increased to $21.3 million from $12.7 million in Q3 and to $65.0 million from $33.1 million for nine months.
- Cash provided by operations was $179.7 million for nine months, versus $189.7 million. Capital expenditures were $20.5 million; company-defined free cash flow was $180.3 million, including an add-back for a non-recurring $21.1 million pension contribution.
Balance sheet and liquidity
- At September 30, cash and equivalents were $98.6 million; total assets were $4.68 billion, total liabilities $2.94 billion, and stockholders’ equity $1.74 billion.
- Current assets were $2.22 billion and current liabilities $1.04 billion. Debt comprised $32.4 million of short-term debt, $9.6 million of current long-term debt, and $1.54 billion of long-term debt, net of discount.
- WESCO reported $477.2 million of available Revolving Credit Facility capacity and $546.0 million of total liquidity including $68.8 million of invested cash. It stated that it was in compliance with debt covenants.
- Reported financial leverage was 3.6x at September 30, versus 4.7x at December 31, 2012. The company said excess cash would primarily go to debt reduction and acquisitions and that it might refinance part of its term loan in the near term.
Material changes, outlook and risks
- Q3 included a $2.3 million loss on the sale and complete divestiture of EECOL’s Argentina operations. Depreciation and amortization increased, largely from acquired intangible assets.
- Nine-month SG&A benefited from a $36.1 million receivable recorded for insurance coverage of the ArcelorMittal litigation charge. The company also recorded corresponding receivables for covered interest. It is appealing the judgment; the final amount may change, and appellate outcomes are uncertain.
- WESCO made a $21.1 million non-recurring contribution to EECOL’s Canadian defined-benefit plan under the acquisition agreement. The sellers facilitated it through a direct reduction in purchase price.
- The receivables facility was amended in September: its limit increased from $475 million to $500 million, with an option for up to $100 million more; maturity was extended to September 2016, and pricing was reduced.
- Management said operating cash flow and borrowing capacity should meet current needs, while emphasizing working-capital management amid sales growth and maintaining liquidity. No quantitative earnings or sales guidance was provided. Management planned annual goodwill and indefinite-lived intangible impairment testing in Q4; it reported no Q3 event requiring interim goodwill impairment testing.
- Risks highlighted include uncertain litigation outcomes, foreign cash that could incur additional U.S. tax if repatriated, forward-looking uncertainties, and the possibility that liquidity sources may not remain sufficient. Cash and cash equivalents included $58.8 million held by foreign subsidiaries.
- The filing states that prior-period consolidating financial statements were revised for presentation and allocation matters; these revisions did not affect consolidated amounts or obligations under the 2029 Debentures. Disclosure controls were deemed effective; EECOL was excluded from management’s internal-control assessment while its control environment was being assessed.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects acquisitions versus underlying organic demand, particularly given the nine-month organic sales decline.
- The resolution, insurance recovery and any remaining exposure from the ArcelorMittal judgment and appeal.
- Debt terms, refinancing progress, covenant headroom and the cost of higher interest expense.
- Working-capital requirements and cash conversion as sales grow, including the effect of receivables financing and the Canadian pension contribution.
- Whether the planned impairment testing or assessment of EECOL’s internal controls identifies material issues.