WESCO International, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. WESCO distributes electrical and industrial supplies and provides supply-chain services, primarily in North America.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,259.1 million | $1,159.2 million | $2,407.7 million | $2,338.8 million |
| Operating income | $51.4 million | $47.6 million | $89.6 million | $91.2 million |
| Net income | $27.8 million | $26.5 million | $47.0 million | $49.7 million |
| Diluted EPS | $0.60 | $0.62 | $1.04 | $1.17 |
| Gross margin | 19.3% | 19.3% | 19.5% | 19.8% |
| Operating margin | 4.1% | 4.1% | 3.7% | 3.9% |
For Q2, sales increased 8.6% year over year; management cited improving markets, higher product prices—especially commodity-related—and favorable foreign exchange. For the first half, sales rose 2.9%, but operating income fell 1.7% and net income fell 5.5%. First-half cost of goods sold was 80.5% of sales versus 80.2% a year earlier; inventory reserves and operating costs weighed on results.
- Cash flow: First-half operating cash flow was $68.8 million, down from $204.7 million. Receivables and inventory consumed $80.2 million and $21.8 million, respectively; higher accounts payable contributed $85.8 million.
- Investing and financing: Investing activities provided $38.9 million, including $40.0 million from the LADD interest sale and $15.0 million from collection of its promissory note; acquisition payments were $14.3 million and capital expenditures $6.0 million. Financing activities used $123.9 million. Cash declined $16.5 million to $95.8 million.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $579.8 million, versus $691.8 million at December 31, 2009. The revolving facility had $28.0 million drawn and $248.0 million available; the receivables facility had $263.0 million available. Management reported total available borrowing capacity of $511.0 million and stated liquidity of $576.2 million, including cash/invested funds. WESCO reported compliance with all covenants.
- Balance sheet: Total assets were $2.53 billion and stockholders’ equity $1.05 billion at June 30. Accounts receivable and inventory increased $95.6 million and $24.3 million, respectively, from year-end.
Material changes, outlook and risks
- WESCO completed the sale of its 40% LADD joint-venture interest to Deutsch on June 7 for $40.0 million, and collected the $15.0 million note plus accrued interest. The sale resulted in a total $3.8 million impairment charge in first-half SG&A; future earnings will no longer include LADD equity income.
- Management expected Q3 sales to be flat to slightly higher than Q2, gross margins somewhat improved, SG&A stable and operating margins somewhat higher. It described recovery as slow, with continued contraction expected in non-residential construction and utility markets and gradual recovery in industrial, international and government markets. July 2010 sales per workday were approximately 11% above July 2009; management cautioned that this might not continue in August and September.
- Management expected operating cash flow and financing access to meet current needs, with excess cash directed primarily to debt reduction. It noted no material changes in contractual obligations and stated there could be no assurance that liquidity would remain sufficient.
- A customer lawsuit in Indiana seeks $52 million over alleged defective products manufactured or remanufactured by others. WESCO denies liability, intends to defend the case and recorded no liability. Other litigation outcomes cannot be predicted.
- Unrecognized tax benefits were $8.5 million; management said $1.4 million could reasonably be resolved over the next 12 months. The company planned its annual goodwill and indefinite-lived intangible impairment testing for Q4 2010 and reported no Q2 event requiring interim testing.
- The 2025 Debentures could be redeemed or repurchased beginning October 2010; management said it believed it had ample capacity to fund that requirement if exercised. The filing also notes risks and uncertainties that could cause actual results to differ from forward-looking statements.
Key facts for investors to verify
- Whether sales growth and the projected Q3 margin improvement materialized, particularly across WESCO’s uneven end markets.
- Whether receivables and inventory growth converts to cash and operating cash flow recovers from the first-half decline.
- Debt maturities, facility availability, covenant headroom and the potential 2025 Debenture redemption or repurchase requirement.
- The status and potential financial impact of the $52 million Indiana lawsuit and the resolution of uncertain tax positions.
- The effect of the LADD divestiture on recurring earnings and the results of the planned Q4 impairment testing.
- The filing reports both $511.0 million of available borrowing capacity and $576.2 million of liquidity; verify the components and reconciliation of the stated liquidity figure.