WESCO International, Inc. - 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009, and the six months ended June 30, 2009. WESCO International, Inc. is a full-line distributor of electrical supplies and equipment with approximately 400 branches globally. The company operates in the United States, Canada, and various international markets. The financial results reflect weak market conditions, lower commodity prices, and unfavorable foreign currency exchange rates.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $1,159.2 million | $2,338.8 million |
| Net Income | $26.5 million | $49.7 million |
| Diluted EPS | $0.62 | $1.17 |
| Operating Cash Flow (6mo) | $204.7 million | |
| Cash and Equivalents (End of Period) | $103.3 million | |
| Total Debt (Short + Long Term) | $933.8 million | |
| Working Capital | $779.5 million |
Note: Prior year figures have been revised due to the retrospective application of FSP APB 14-1 regarding convertible debt instruments.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 27.0% in the second quarter and 23.4% for the first six months compared to 2008, driven by weak end-market activity, lower commodity prices, and unfavorable foreign currency rates.
- Profitability: Net income dropped 54.4% in the quarter and 50.6% for the six-month period. Operating income decreased 50.8% in the quarter and 47.6% for the six months.
- Cost Management: Selling, general, and administrative (SG&A) expenses decreased significantly ($36.9 million in the quarter) due to aggressive cost reduction actions, including payroll reductions and lower travel/transportation costs.
- Balance Sheet: Total assets decreased by $200.3 million, primarily due to reductions in accounts receivable ($110.9 million) and inventory ($88.9 million). Total liabilities decreased by $266.8 million, largely due to debt repayments.
- Accounting Change: The company retrospectively applied FSP APB 14-1, resulting in increased non-cash interest expense and a reclassification of convertible debt components.
Outlook, Risks, and Unusual Items
- Outlook: Management expects activity levels in major end markets to remain significantly weaker in 2009 compared to 2008. The focus remains on cost structure, right-sizing the business, and maintaining liquidity.
- Subsequent Event (Exchange Offer): On July 27, 2009, WESCO commenced an exchange offer to exchange its 2025 and 2026 Convertible Senior Debentures for new 6.00% Convertible Senior Debentures due 2029. This offer is subject to conditions and expires August 21, 2009.
- Stock Repurchase Suspension: The previously authorized $400 million stock repurchase plan was temporarily suspended as a result of the exchange offer.
- Liquidity: The company maintains $321.1 million in total available borrowing capacity (revolving credit and receivables facility) and believes cash flow will be adequate for current needs.
- Legal Contingency: WESCO is a co-defendant in a lawsuit seeking $52 million in damages regarding alleged defective products. The company denies liability and has recorded no provision.
- Goodwill Risk: Management notes that goodwill and trademarks ($901.1 million) could be sensitive to further declines in financial performance or market capitalization.
Investor Verification Checklist
- Verify the status and acceptance rates of the July 2009 exchange offer for the 2025 and 2026 Debentures.
- Monitor the impact of the temporary suspension of the stock repurchase program on share count and EPS.
- Assess the sustainability of SG&A cost reductions as sales volumes remain depressed.
- Review the outcome of the $52 million product liability lawsuit.
- Track the utilization of the $321.1 million available borrowing capacity against working capital needs.
- Confirm the effective tax rate trends, noting the significant impact of foreign jurisdictions.