WESCO International, Inc. - 10-Q Summary (Period Ended Sept 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for WESCO International, Inc., a full-line distributor of electrical supplies and equipment with operations in the U.S., Canada, and internationally. The report covers the three and nine months ended September 30, 2009. The company operates approximately 380 branches and serves roughly 115,000 customers.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 |
|---|---|---|
| Net Sales | $1,152.4 million | $3,491.2 million |
| Net Income | $33.6 million | $83.3 million |
| Diluted EPS | $0.79 | $1.95 |
| Operating Cash Flow (9mo) | $290.9 million | |
| Cash and Equivalents (Sept 30, 2009) | $111.3 million | |
| Total Debt (Long-term + Current) | ~$705 million (Long-term: $701.0M, Current: $3.9M) | |
| Available Liquidity | $439.2 million (Cash + Credit Facilities) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 29.2% ($475.7 million) in Q3 and 25.4% ($1.19 billion) for the nine-month period compared to 2008. Drivers included weak market conditions, lower commodity prices, unfavorable foreign currency, and the absence of hurricane restoration activity.
- Profitability: Net income dropped 47.2% in Q3 and 49.3% for the nine months. Operating income fell 53.1% in Q3 and 49.6% for the nine months.
- Cost Management: Selling, General, and Administrative (SG&A) expenses decreased significantly ($43.0 million in Q3, $104.0 million for nine months) due to aggressive cost reduction actions, including payroll reductions and lower travel/transportation costs.
- Balance Sheet: Total assets decreased by $221.1 million, primarily due to reductions in accounts receivable ($127.9 million) and inventory ($110.4 million). Total liabilities decreased by $427.4 million, driven by debt reduction.
- Debt Restructuring: On August 27, 2009, the company completed a debt exchange, issuing $345.0 million of 2029 Debentures to retire older 2025 and 2026 Debentures. This resulted in a $6.0 million gain on debt exchange.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued contraction in the nonresidential construction market in Q4 2009 but expects industrial end markets to strengthen. A sequential sales decline of 4% to 6% is expected for Q4 due to seasonality and market conditions.
- Margins: The company expects to maintain gross margins at levels experienced in Q2 and Q3, despite competitive pressures. Operating expense leverage is expected to be negative due to lower sales volumes.
- Liquidity: The company maintains ample liquidity with $439.2 million available (cash plus credit facilities). Credit ratings were affirmed as stable by Moody's and S&P following the debt exchange.
- Risks:
- Goodwill Impairment: Two reporting units with $284.6 million in goodwill and trademarks are sensitive to further declines in financial performance. Annual impairment testing is scheduled for Q4.
- Legal Proceedings: The company is a co-defendant in a lawsuit seeking $52 million in damages regarding alleged defective products. No liability is currently recorded.
- Joint Venture Note: A $15 million promissory note from a joint venture partner (Deutsch) is due in 2010; management believes it is collectible but notes discussions regarding potential modification of terms are ongoing.
Investor Verification Checklist
- Verify the sustainability of the 4-6% sequential sales decline forecast for Q4 2009.
- Monitor the outcome of the $52 million product liability lawsuit.
- Review the Q4 2009 goodwill impairment test results, specifically for the two sensitive reporting units.
- Confirm the collectability and repayment status of the $15 million promissory note from the LADD joint venture partner.
- Assess the impact of the new 2029 Debentures on future interest expense, noting the high effective interest rate (13.875%) due to the debt discount amortization.