WESCO International, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Amounts below are in millions of dollars, except per-share data. WESCO distributes electrical construction, industrial MRO and related products and provides supply-chain services. It serves more than 100,000 customers through approximately 380 branches and seven distribution centers.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,324.6 | $1,152.4 | $3,732.3 | $3,491.2 |
| Income from operations | $61.2 | $46.2 | $150.9 | $137.4 |
| Net income | $33.7 | $33.6 | $80.7 | $83.3 |
| Diluted EPS | $0.74 | $0.79 | $1.79 | $1.95 |
| Operating margin | 4.6% | 4.0% | 4.0% | 3.9% |
| Net margin | 2.5% | 2.9% | 2.2% | 2.4% |
- Revenue and margins: Q3 sales increased 14.9%; management attributed growth to improving served markets, higher product prices, favorable currency effects and a second-quarter acquisition. For the first nine months, sales rose 6.9%. Q3 cost of goods sold fell to 80.5% of sales from 80.8%; nine-month cost of goods sold was 80.5% versus 80.4%.
- Cash flow: Operating cash flow was $75.5 for the first nine months, down from $290.9 a year earlier. Higher receivables used $149.6 and higher inventory used $40.9, partly offset by a $118.4 increase in accounts payable. Capital expenditures were $10.1. Investing cash flow was positive $35.5, including LADD-related proceeds; financing cash flow used $122.9. Cash ended at $103.1, versus $112.3 at year-end 2009.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $580.3 at September 30, down from $691.8 at December 31, 2009. Revolver borrowings were $18.0; receivables-facility borrowings were $110.0. The company reported $247.8 of revolver availability and $270.8 of receivables-facility availability, and stated that it had $518.6 of total available borrowing capacity. It also reported liquidity of $582.0 including invested cash; this figure does not reconcile to the stated facility availability plus reported cash and merits verification. WESCO said it was in compliance with all covenants.
- Interest and taxes: Q3 interest expense was $13.7, compared with $13.6; nine-month expense was $41.7, compared with $39.9. Effective tax rates increased to 29.1% from 15.8% for Q3 and to 28.9% from 22.5% for nine months, including effects of prior-year convertible-debt tax adjustments and 2010 discrete items.
Changes, outlook and notable items
- Operating income increased 32.6% in Q3 and 9.8% for the first nine months. Net income was nearly flat in Q3 but fell 3.2% for nine months; diluted EPS declined in both comparisons, partly reflecting higher tax rates and dilution from convertible debentures. The 2009 comparisons included a $6.0 debt-exchange gain.
- SG&A increased in dollars as commissions and incentives rose and temporary cost reductions were restored; SG&A as a share of sales improved slightly. Nine-month results included a $3.8 impairment charge on WESCO’s LADD joint-venture interest.
- WESCO sold its remaining 40% LADD interest in June for $40.0 and collected a $15.0 promissory note. The sale ends future LADD equity income. The company also made $14.3 in acquisition payments for Potelcom Supply.
- The receivables facility was amended in September: fees were reduced and maturity extended to September 2013. Management expected the changes to benefit future interest expense. The revolver matures in November 2013.
- Management expected operating cash flow and available facilities to support business needs, planned to maintain working-capital productivity, and expected excess cash to go mainly toward debt reduction and acquisitions. It identified cost management, liquidity and credit availability as near-term priorities. No quantified earnings or revenue guidance was provided.
- Risk and contingency: A customer lawsuit seeks $52.0 in damages over allegedly defective products made or remanufactured by others. WESCO denies liability, intends to defend the case, and recorded no liability. Management said the outcome of litigation is uncertain and that a resolution could materially affect results in a quarter.
- Other matters include inflation-related pricing estimated to contribute $90.0 to nine-month sales, seasonally lower sales generally in the first and fourth quarters, and an announced fourth-quarter annual goodwill and indefinite-lived-intangible impairment test. Management reported no Q3 event requiring an interim impairment review.
Important facts for investors to verify
- Reconcile the disclosed $582.0 liquidity figure with $518.6 of borrowing availability and $103.1 of cash, and confirm facility availability and covenant headroom.
- Track receivables and inventory growth and their effect on operating cash flow as sales expand.
- Assess whether the sales growth and improved Q3 operating margin persist, given the contribution from pricing, currency and acquisition activity.
- Monitor debt service, refinancing and potential dilution from convertible debentures; holders tendered only an incidental amount of 2025 Debentures for repurchase in October 2010.
- Follow the $52.0 lawsuit, tax uncertainties, and the scheduled annual impairment testing.