WESCO International, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. WESCO distributes electrical, industrial and communications products and provides supply-chain services. Results include the impact of acquisitions, notably EECOL, acquired in December 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,894.0 million | $1,672.7 million | $3,702.0 million | $3,278.8 million |
| Operating income | $109.9 million | $96.1 million | $246.8 million | $179.6 million |
| Net income attributable to WESCO | $65.3 million | $58.9 million | $149.3 million | $111.9 million |
| Diluted EPS | $1.25 | $1.15 | $2.85 | $2.18 |
- Q2 sales rose 13.2%; acquisitions added 14.6%, foreign exchange reduced sales 0.2%, and organic sales declined 1.2%. For the first half, sales rose 12.9%, with acquisitions contributing 15.3%; organic sales declined 1.5%, one fewer workday reduced growth 0.8%, and FX reduced it 0.1%.
- Gross margin was 20.7% in Q2 versus 20.1% a year earlier, and 20.9% for the first half versus 20.0%. Operating margin was 5.8% versus 5.7% in Q2 and 6.7% versus 5.5% for the first half. Acquisition-related margin benefits and, for the first half, a litigation-insurance recovery contributed to performance.
- Interest expense increased to $21.8 million in Q2 from $11.5 million, and to $43.7 million for the first half from $20.4 million, reflecting higher cash interest and financing-related costs. Effective tax rates declined to 25.8% from 30.3% in Q2 and to 26.4% from 29.7% for the first half.
- First-half operating cash flow was $119.7 million versus $115.2 million; capital spending was $11.8 million, and reported free cash flow was $108.0 million versus $102.9 million (company-defined non-GAAP measure).
Balance sheet and liquidity
At June 30, 2013, cash and equivalents were $104.5 million, total debt was approximately $1.616 billion, and total stockholders’ equity was $1.643 billion. Debt was down from approximately $1.735 billion at December 31, 2012. Current assets of $2.195 billion exceeded current liabilities of $1.041 billion. WESCO reported $387.8 million of available revolving-credit capacity and $429.3 million of liquidity when combined with $41.5 million of invested cash. It reported compliance with all debt covenants; its financial leverage ratio was 3.9, down from 4.7 at year-end.
- Operating cash flow reflected working-capital investment, including a $105.0 million increase in receivables and a $27.7 million increase in inventory, partly offset by higher accounts payable.
- Management said it expected to maintain working-capital productivity and direct excess cash primarily toward debt reduction and acquisitions. The Receivables Facility was due to mature in August 2014; management intended to seek an extension.
- $63.2 million of cash was held by foreign subsidiaries and could incur additional U.S. taxes if repatriated. Management said domestic liquidity needs could be met without repatriation.
Material changes, outlook and risks
- The December 2012 EECOL acquisition materially affected comparability. Management attributed higher SG&A and depreciation and amortization partly to EECOL and other acquisitions. No specific numerical earnings or sales guidance was provided.
- First-half SG&A included a favorable $36.1 million insurance receivable relating to the AIH litigation liability recorded in 2012. Excluding that item, the company reported first-half SG&A of $529.1 million, or 14.3% of sales.
- In the AIH case, a jury awarded approximately $36.1 million; the court later awarded $3.9 million of prejudgment interest and ordered post-judgment interest at 8%. WESCO recorded an additional $4.7 million liability and corresponding insurance receivable for interest, and is appealing the final judgment. The appeal outcome is uncertain.
- Foreign-currency translation reduced comprehensive income by $44.4 million in Q2 and $67.8 million in the first half. Management reported no material change in market-risk exposures and no Q2 conditions requiring an interim goodwill impairment assessment.
- Disclosure controls were deemed effective. EECOL was excluded from the internal-control assessment while management evaluated its control environment; EECOL represented 28.6% of consolidated assets and 11.9% of Q2 revenue.
Key facts for investors to verify
- How much of reported sales growth and margin improvement is sustainable organically, apart from acquisitions?
- What are the ultimate costs and insurance recoveries from the AIH litigation after appeal?
- Can WESCO sustain working-capital discipline and reduce debt while funding growth and addressing the 2014 Receivables Facility maturity?
- How will EECOL integration and control-environment assessments affect future reporting and results?