Business Context and Reporting Period
This Form 8-K, filed on March 30, 2007, by WESCO International, Inc., discloses historical unaudited financial statements for Communications Supply Holdings, Inc. (CSC) and unaudited pro forma combined financial information. The filing reflects WESCO's acquisition of CSC, which was completed on November 3, 2006. The historical data covers the nine months ended September 29, 2006, for CSC, while the pro forma data presents the combined entity as if the acquisition and a related $300 million convertible debenture issuance occurred on January 1, 2006.
Key Financial Metrics
Historical Performance (CSC - Nine Months Ended Sept 29, 2006)
- Net Sales: $449.5 million
- Gross Profit: $114.1 million (25.4% margin)
- Income from Operations: $31.2 million
- Net Income: $10.0 million
- Operating Cash Flow: $5.0 million
- Total Debt: Approximately $180.5 million (including $50.1 million in senior subordinated notes)
- Cash and Equivalents: $1.2 million
Pro Forma Combined Performance (WESCO + CSC - Year Ended Dec 31, 2006)
- Net Sales: $5.84 billion
- Income from Operations: $403.7 million
- Net Income: $229.7 million
- Basic EPS: $4.71
- Diluted EPS: $4.38
Material Changes and Acquisitions
CSC executed two significant acquisitions in 2006 prior to its own acquisition by WESCO:
- Calvert Wire & Cable Corporation: Acquired March 3, 2006, for approximately $32.9 million. This expanded CSC's footprint in the Ohio River Valley.
- Liberty Wire & Cable, Inc.: Acquired May 5, 2006, for approximately $36.2 million. This added a platform in the residential and commercial audio/video markets.
WESCO's acquisition of CSC was funded through borrowings under its revolving credit facility, a receivables facility, and the issuance of $300 million in 1.75% Convertible Senior Debentures due 2026. The pro forma adjustments reflect the elimination of CSC's historical debt and the addition of interest expense related to the new financing.
Outlook, Risks, and Contingencies
Management Commentary and Pro Forma Assumptions: The pro forma financial information is for informational purposes only and does not reflect anticipated operating efficiencies or cost savings from the merger. It assumes the transaction occurred on January 1, 2006.
Debt and Interest Rate Risk: The combined entity carries significant debt. WESCO utilizes interest rate swaps and collars to manage exposure to floating rate debt. A 1% change in interest rates on revolving credit and accounts receivable facilities would impact interest expense by approximately $2.1 million annually.
Contingencies:
- Earnout Payments: CSC is obligated to make potential earnout payments of up to $1 million to the sellers of Calvert Wire & Cable based on future financial performance targets.
- Legal Proceedings: The company is involved in ordinary course litigation, which management does not believe will have a material adverse effect.
- Accounting Changes: The company is evaluating the impact of FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes and SFAS No. 157 regarding fair value measurements.
Investor Verification Checklist
- Verify the final purchase price allocation for the CSC acquisition, specifically the valuation of goodwill ($381 million preliminary) and intangible assets ($71.2 million preliminary).
- Confirm the terms and covenants of the $300 million Convertible Senior Debentures issued to fund the acquisition.
- Monitor the achievement of performance targets for the Calvert Wire & Cable earnout payments.
- Review the impact of the new debt load on WESCO's liquidity and interest coverage ratios in subsequent quarterly reports.
- Assess the integration progress and realization of anticipated cost synergies not reflected in the pro forma data.