Business context and reporting period
WESCO International, Inc. is a distributor of electrical, industrial and communications products and supply-chain services, serving industrial, construction, utility, and commercial, institutional and government customers. This Form 10-K covers the fiscal year ended December 31, 2012; fourth-quarter figures are also reported. WESCO operated about 475 branches and served more than 65,000 active customers. It completed four acquisitions during 2012, including EECOL Electric on December 14, its largest acquisition to date.
Key financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $6.579 billion | $6.126 billion |
| Gross profit margin | 20.2% | 20.2% |
| SG&A as a share of sales | 14.6% | 14.2% |
| Operating income / margin | $332.9 million / 5.1% | $333.0 million / 5.5% |
| Net income attributable to WESCO | $201.8 million | $196.3 million |
| Diluted EPS | $3.95 | $3.96 |
| Cash from operating activities | $288.2 million | $167.5 million |
| Capital expenditures | $23.1 million | $33.3 million |
| Cash and cash equivalents at year-end | $86.1 million | $63.9 million |
Sales grew 7.4%; management attributed 3.3 percentage points to acquisitions, negative 0.3 points to foreign exchange, and estimated organic growth at 4.4%, with approximately 1.0% from pricing. Net income increased 2.8%. Interest expense declined to $47.8 million from $53.6 million, while the effective tax rate fell to 28.4% from 29.8%.
Fourth quarter
Fourth-quarter sales were $1.644 billion versus $1.590 billion in 2011. Operating income fell to $50.4 million from $91.5 million, and net income attributable to WESCO declined to $26.5 million from $54.8 million. Diluted EPS was $0.52 versus $1.12. The 2012 quarter included a $36 million charge related to the ArcelorMittal jury verdict.
Debt, liquidity and cash flow
Year-end debt carrying value was $1.735 billion, compared with $649.3 million a year earlier; the filing separately reports $1.919 billion of principal debt obligations before debt discounts. The increase principally reflects borrowing to fund EECOL. WESCO reported $299.0 million of available liquidity, comprising $270.9 million of revolving-credit capacity, $2.6 million of receivables-facility capacity and $25.5 million of invested cash. It also reported $86.1 million of cash and cash equivalents. Management stated that the company was in compliance with debt covenants and believed operating cash flow and financing availability would meet current business needs.
Operating cash flow improved year over year. Investing cash outflow was $1.311 billion, including $1.289 billion of acquisition payments net of acquired cash. Financing cash inflow was $1.044 billion. Scheduled principal payments include $454.4 million in 2014, largely associated with the receivables facility, which matures in August 2014. The revolving facility matures in August 2016; the new term loans mature in 2019.
Changes, outlook and key risks
- Acquisitions and expansion: WESCO acquired RS Electronics, Trydor, Conney Safety and EECOL. EECOL cost approximately $1.1 billion and expanded operations into South America. The acquired businesses contributed to reported growth, but EECOL was consolidated only from December 14 and contributed $24.1 million of 2012 sales.
- Unusual litigation item: In February 2013, a jury awarded ArcelorMittal Indiana Harbor approximately $36 million in a product-defect case. WESCO had recorded a $36 million fourth-quarter 2012 charge, disputes the judgment, plans to appeal and submitted the claim to insurers. The final amount remains uncertain.
- Management priorities: WESCO expects 2013 capital expenditures to be similar to 2012 levels, intends to manage working capital and stated that excess cash would primarily support debt reduction and acquisitions. No specific revenue or earnings guidance is provided.
- Principal risks: Economic weakness and project delays; intense price competition; supplier concentration and possible supply interruptions; commodity-price volatility; integration and international operating risks following EECOL; substantial debt, refinancing and covenant constraints; and potential impairment of goodwill or intangible assets. Goodwill and indefinite-lived trademarks totaled $1.883 billion; no impairment was recorded in 2012, though two trademarks with a combined $18.1 million carrying value were identified as more sensitive to weaker performance.
- Controls and contingencies: Management and the auditor concluded internal control over financial reporting was effective, but EECOL and Conney were excluded from the 2012 assessment because of their recent acquisitions. Management did not expect pending legal matters generally to materially affect financial condition or liquidity, while noting a case’s resolution could materially affect a quarter’s results.
Important facts for investors to verify
- Reconcile reported debt carrying value of $1.735 billion with $1.919 billion of principal obligations, and review the near-term maturities and receivables-facility renewal.
- Track the ArcelorMittal appeal, potential damages, insurance recovery and any subsequent accounting effects.
- Assess EECOL and the other acquisitions’ ongoing sales, profitability, integration progress and international exposure; note that newly acquired entities were excluded from the control assessment.
- Monitor organic sales, gross margin, SG&A leverage and operating performance excluding the fourth-quarter litigation charge.
- Evaluate cash conversion and working-capital needs as sales grow, alongside the company’s stated debt-reduction and acquisition priorities.