WCC

WESCO International, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

Company: WESCO International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: WESCO is a full-line distributor of electrical supplies and equipment and a provider of integrated supply procurement services. Operations span the U.S., Canada, Mexico, and other international locations with approximately 365 branch locations and seven distribution centers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18.7% in Q3 and 23.9% for the nine-month period compared to 2005. Growth was driven by organic market share expansion, higher commodity prices, hurricane rebuilding activity, and contributions from 2005 acquisitions (Carlton-Bates and Fastec Industrial).
• Margin Expansion: Gross margin improved to 20.3% for the nine months ended Sep 30, 2006, up from 18.5% in the prior year, due to margin improvement initiatives and higher-margin acquisitions.
• Profitability: Net income for the nine months ended Sep 30, 2006, more than doubled to $159.0 million from $63.8 million in 2005. This was aided by a $10.1 million loss on debt extinguishment in 2005 that did not recur in 2006.
• Operating Expenses: SG&A expenses as a percentage of sales decreased to 12.9% (9mo 2006) from 13.9% (9mo 2005), reflecting cost containment and leverage from higher sales volume.
• Cash Flow: Operating cash flow decreased significantly year-over-year ($65.1M vs $166.1M) primarily due to an $82 million reduction in the receivables securitization facility and increased working capital requirements (receivables and inventory).

Guidance, Outlook, and Risks

• Outlook: Management believes the company is well-positioned for the remainder of 2006 due to acquisitions and capital structure improvements made in 2005 and 2006. They anticipate continued macroeconomic activity in major end markets.
• Subsequent Events:
  • Debt Issuance: On Nov 2, 2006, issued $300 million of 1.75% Convertible Senior Debentures due 2026.
  • Acquisition: On Nov 3, 2006, completed the acquisition of Communications Supply Holdings, Inc. for approximately $525 million.
  • Credit Facility: On Nov 1, 2006, entered into an amended $440 million revolving credit facility.
• Risks and Contingencies:
  • Litigation: Defendant in a Florida lawsuit seeking over $17 million in damages regarding commercial obligations; trial scheduled for March 2007.
  • Customer Bankruptcy: Dana Corporation filed for Chapter 11 bankruptcy. WESCO sold $10.8 million of Dana receivables in September 2006, incurring a $1.7 million loss.
  • Accounting Changes: Adoption of SFAS 123R (stock-based compensation) and upcoming adoption of FIN 48 (income tax uncertainty) and SFAS 157 (fair value measurements).

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and margin improvements from the 2005 acquisitions (Carlton-Bates, Fastec) and the new 2006 acquisition (Communications Supply).
• Working Capital Trends: Monitor the significant increase in trade receivables and inventory levels relative to sales growth to ensure efficient capital deployment.
• Debt Structure: Review the impact of the new $300 million convertible debentures and the $525 million acquisition financing on future interest obligations and dilution.
• Legal Exposure: Track the outcome of the Florida litigation and the resolution of the Dana Corporation bankruptcy receivables.
• Receivables Facility: Assess the utilization and costs associated with the $400 million accounts receivable securitization facility.