WESCO International, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. WESCO distributes electrical, industrial and communications products and supply-chain services, primarily across North America. It reported approximately 400 branches, seven distribution centers and more than 100,000 customers.
Financial performance
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $5,063.9 million | $4,624.0 million | +9.5% |
| Gross margin | 19.7% | 19.5% | +0.2 percentage points |
| Operating income | $210.9 million | $180.0 million | +17.2% |
| Operating margin | 4.1% | 3.9% | +0.2 percentage points |
| Net income | $115.5 million | $105.1 million | +9.9% |
| Diluted EPS | $2.50 | $2.46 | +$0.04 |
| Operating cash flow | $127.3 million | $291.7 million | Down $164.4 million |
Fourth-quarter 2010 sales were $1,331.6 million, operating income $60.0 million and net income $34.8 million; diluted EPS was $0.72. In fourth-quarter 2009, these were $1,132.7 million, $42.6 million, $21.8 million and $0.51, respectively.
Cash and cash equivalents were $53.6 million at year-end, versus $112.3 million a year earlier. Capital expenditures were $15.1 million. Operating cash flow fell as higher receivables and inventory absorbed cash during the sales recovery.
Reported debt was $729.9 million on the balance sheet, net of convertible-debt discount; aggregate principal debt excluding that discount was $908.3 million. WESCO had $276.7 million available under its revolving credit facility and $48.8 million under its receivables facility. Total stockholders’ equity was $1,148.6 million. The current ratio, calculated from reported current assets and liabilities, was approximately 2.14.
Material changes and notable items
- Sales recovery reflected improving served markets, higher product prices, favorable foreign exchange and 2010 acquisitions. U.S. sales were 83% of the total; Canada was 13%.
- Cost of goods sold declined to 80.3% of sales from 80.5%, helped by higher supplier rebate rates. SG&A rose 10.0% and increased slightly as a share of sales, to 15.1% from 15.0%.
- WESCO acquired TVC Communications in December and Potelcom during 2010, paying $265.4 million in total net acquisition cash outflows. TVC contributed $6.9 million of reported 2010 revenue after acquisition; its purchase accounting added $109.2 million of goodwill and $86.4 million of intangible assets.
- WESCO sold its 40% interest in the LADD joint venture for $40.0 million and collected a $15.0 million promissory note. It recorded a $3.8 million impairment charge related to the investment.
- The company redeemed its remaining 2025 convertible debentures in 2010; holders converted $89.8 million principal, receiving cash and 340,213 shares. The 2029 debentures remained outstanding at $345 million principal, with a $178.4 million accounting discount.
Outlook, risks and contingencies
Management said operating cash flow and financing capacity should support current business needs. It expected 2011 capital expenditures to increase by approximately $10 million to $25 million, with excess cash directed mainly toward debt reduction and acquisitions. No specific earnings or revenue guidance was provided. Management emphasized cost control, working-capital productivity, liquidity and continued growth initiatives.
Key risks include economic weakness or project delays, pricing competition, supplier concentration and interruptions, commodity-price volatility, acquisition integration, and debt service and covenant constraints. The receivables and revolving facilities mature in 2013; debt principal repayments scheduled for 2013 total approximately $406.3 million. WESCO reported covenant compliance at year-end. Dividends were not planned and are restricted by debt agreements.
A customer lawsuit in Indiana seeks $52 million over allegedly defective products made by others. WESCO denied liability, intends to defend the case and recorded no liability. Management stated that routine litigation was not expected to materially affect financial condition or liquidity, while noting that a resolution could affect a particular quarter’s results. Environmental compliance was considered adequate, with no significant near-term environmental capital expenditures anticipated.
Management and the auditor concluded that internal control over financial reporting was effective at year-end; however, TVC Communications was excluded from their assessments because it was acquired in December 2010. The auditor issued an unqualified opinion on the financial statements.
Key facts for investors to verify
- Whether sales and margins continued to improve, and how much growth came from organic activity, price increases, foreign exchange and acquisitions.
- Whether working-capital demands and acquisition spending support a recovery in operating cash flow.
- How WESCO plans to address 2013 facility maturities and the associated refinancing or repayment requirements.
- Whether TVC and Potelcom deliver the expected returns, and whether goodwill or acquired intangibles remain recoverable.
- Developments in the $52 million lawsuit, supplier rebate levels, and the integration of TVC into financial controls.