WESCO International, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. WESCO distributes electrical, industrial, and communications products and provides supply-chain and logistics services. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,672.7 million | $1,524.5 million | $3,278.8 million | $2,955.8 million |
| Operating income | $96.1 million | $85.0 million | $179.6 million | $149.7 million |
| Net income attributable to WESCO | $58.9 million | $50.2 million | $111.9 million | $87.5 million |
| Diluted EPS | $1.15 | $1.00 | $2.18 | $1.74 |
| Gross margin | 20.1% | 20.1% | 20.0% | 20.1% |
| Operating margin | 5.7% | 5.6% | 5.5% | 5.1% |
| Net margin attributable to WESCO | 3.5% | 3.3% | 3.4% | 3.0% |
Cash flow: First-half operating cash flow was $115.2 million, versus $22.5 million in 2011. Investing used $34.3 million, including $22.0 million for the RS Electronics acquisition and $12.3 million of capital expenditures. Financing used $72.7 million. Working-capital investment included $59.1 million of cash used for receivables and $17.4 million for inventory; increased payables provided $61.2 million.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $72.2 million; total assets were $3.19 billion; total liabilities were $1.72 billion; and stockholders’ equity was $1.47 billion. Reported short- and long-term debt, including current maturities, totaled approximately $584.2 million, down from approximately $649.3 million at year-end 2011. Available borrowing capacity was $612.5 million ($367.5 million revolving credit facility and $245.0 million receivables facility). Management separately cited $642.3 million of liquidity including $29.8 million of invested cash. WESCO reported compliance with debt covenants. Cash held by foreign subsidiaries was $35.0 million and could incur additional U.S. taxes if repatriated.
Changes and drivers versus prior periods
- Q2 sales increased 9.7%; first-half sales increased 10.9%. Management attributed growth to its initiatives and acquisitions, with pricing also contributing. First-half sales included a 2.4% acquisition impact, 0.8% from an additional workday, and a negative 0.5% foreign-exchange impact; estimated pricing impact was 1.2%.
- First-half operating income rose 19.9%, and net income attributable to WESCO increased by $24.3 million. SG&A declined as a share of sales year over year, partly reflecting fixed-cost leverage, while cost of goods sold as a share of sales edged up to 80.0% from 79.9%.
- Interest expense fell 23.1% in the first half, reflecting lower debt levels and interest rates and a favorable IRS appeals settlement that reduced interest related to uncertain tax positions.
- Receivables and inventory rose $74.6 million and $24.9 million, respectively, from year-end, largely in connection with business growth. Equity increased 9.1% from year-end.
Outlook, risks, and notable items
- No specific full-year revenue or earnings guidance is provided. Management expects to maintain working-capital productivity and ample liquidity; it expects excess cash to be directed primarily to debt reduction and acquisitions. It believes operating cash flow and borrowing capacity will meet foreseeable needs, while cautioning that this is not assured.
- WESCO completed the Trydor Industries (Canada) acquisition on July 5, 2012; the business had approximately $35 million in annual sales. It completed the Conney Safety Products acquisition on July 10; that business had approximately $85 million in annual sales. Both purchases were funded with facility borrowings.
- A customer lawsuit in Indiana alleges defective products made or remanufactured by others and seeks approximately $50 million. WESCO denies liability, intends to defend the case, recorded no liability, and cannot reasonably estimate a possible loss or range.
- Management reported no second-quarter event requiring an interim goodwill impairment evaluation; annual impairment testing was planned for Q4 2012. The filing reported no material change in market-risk exposures and no material change in contractual obligations requiring an update.
- Fixed-rate long-term debt had $494.9 million par value and an estimated $916.6 million fair value at June 30, 2012. The filing attributes the fair value to quoted market prices; investors may wish to review the debt terms and valuation context.
Key facts for investors to verify
- Whether sales growth and margin trends persist, and how much growth reflects acquisitions, pricing, and organic demand.
- Working-capital conversion and operating cash flow as receivables and inventory grow.
- Debt balances, facility availability, covenant headroom, and borrowing used to fund the post-quarter acquisitions.
- Developments in the $50 million product-defect litigation and any resulting change to the company’s loss assessment.
- Acquisition performance and integration, as well as the reported fair-value premium over par for fixed-rate debt.