WCC

WESCO International, Inc. - 10-Q Summary (Period Ended June 30, 2008)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, and the six months ended on that date. WESCO International, Inc. is a full-line distributor of electrical supplies and equipment with over 400 branch locations across North America, Europe, Africa, and Asia. The company serves approximately 110,000 customers, with 87% of net sales generated in the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.6% in Q2 and 2.8% for the six-month period compared to 2007. Growth was driven by higher commodity prices, favorable exchange rates, and prior-year acquisitions, partially offset by the absence of LADD operations sales.
• Margin Compression: Operating income decreased 6.6% for the six-month period. COGS as a percentage of sales increased from 79.5% to 80.2% due to the divestiture of LADD operations, unfavorable sales mix, and a lag in passing supplier price increases to customers.
• Divestiture Impact: The company completed a transaction in Q1 2008 selling a majority interest in its LADD operations to Deutsch Engineering. This resulted in a $60 million cash inflow and a recognized after-tax loss of approximately $2.1 million. The remaining 40% interest is accounted for using the equity method.
• Interest Expense: Interest expense decreased 25.3% in Q2 and 6.6% for the six-month period, primarily due to lower interest rates.

Outlook, Risks, and Management Commentary

• Outlook: Management anticipates activity levels in major end markets to be "somewhat softer" than in 2007. However, they believe the company is well-positioned in industrial and commercial construction markets and expects to improve performance through margin focus and productivity initiatives.
• Capital Structure: The company maintains a $500 million accounts receivable securitization facility (fully utilized at $500 million) and a $375 million revolving credit facility with $243.6 million available. Significant debt instruments include $150 million in 7.50% Senior Notes due 2017 and $450 million in convertible debentures due 2025 and 2026.
• Share Repurchases: Under a $400 million program authorized in September 2007, the company repurchased approximately 1.6 million shares for $60.8 million during the first six months of 2008. An additional $10.3 million in repurchases occurred in August 2008.
• Risks and Contingencies:
  • Legal: WESCO is a co-defendant in an Indiana lawsuit alleging sale of defective products, with damages sought of $52 million. Management denies liability and intends to defend vigorously.
  • Tax: The company is under examination in several jurisdictions. Unrecognized tax benefits totaled $10.5 million as of June 30, 2008.
  • Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 141R, FSP FAS 142-3, FSP APB 14-1) which may affect future reporting of business combinations, intangible assets, and convertible debt.

Investor Verification Checklist

• Verify the extent of the "time lag" in passing supplier price increases to customers and its potential impact on future margins.
• Monitor the status of the $52 million product liability lawsuit in Indiana.
• Assess the impact of the LADD divestiture on future revenue streams and the performance of the remaining 40% joint venture interest.
• Review the utilization of the $500 million Receivables Facility and the $375 million Revolving Credit Facility to gauge liquidity flexibility.
• Confirm the effectiveness of cost-control measures given the increase in SG&A expenses (13.7% of sales for six months vs. 13.6% prior year).