WESCO International, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless otherwise noted. WESCO is a distributor of electrical, industrial and communications products and supply-chain services, serving more than 65,000 customers through approximately 400 branches and eight distribution centers.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,606.0 million | $1,431.3 million | +12.2% |
| Gross margin | 19.9% | 20.0% | -0.1 percentage point |
| Operating income | $83.5 million | $64.7 million | +29.0% |
| Operating margin | 5.2% | 4.5% | +0.7 percentage point |
| Net income attributable to WESCO | $53.0 million | $37.3 million | +41.9% |
| Diluted EPS | $1.03 | $0.74 | +$0.29 |
| Operating cash flow | $58.3 million | $31.8 million | +$26.6 million |
SG&A was $228.1 million, or 14.2% of sales, versus $213.8 million, or 15.0%, a year earlier. Net interest expense was $9.0 million versus $12.6 million; the 2012 figure included a $3.2 million benefit from a favorable IRS appeals settlement. The effective tax rate was 29.0%, compared with 28.4%.
Balance sheet, debt and liquidity
- At March 31, 2012, cash and cash equivalents were $63.6 million; current assets were $1.794 billion and current liabilities were $878.2 million.
- Total debt reported on the balance sheet was approximately $618.5 million, comprising short-term debt, current maturities and long-term debt. Bank overdrafts were a further $45.5 million. Total debt was down about $40.8 million from December 31, 2011.
- Available borrowing capacity was $356.7 million under the revolving credit facility and $198.8 million under the receivables facility, or $555.5 million combined. Management separately reported total liquidity of $571.9 million, including $16.4 million of invested cash.
- Cash flow from operations benefited from higher earnings and a $50.3 million increase in accounts payable, while growth-related receivables used $38.2 million and payment of prior-year incentive compensation used $25.9 million. Capital expenditures were $4.5 million.
- Investing cash outflow was $26.5 million, including $22.0 million for the RS Electronics acquisition. Financing cash outflow was $35.0 million. Cash ended the quarter at $63.6 million.
Changes, outlook and risks
- Management attributed sales growth to improved conditions in served markets, growth initiatives and acquisitions. Sales growth included a 2.6% contribution from acquisitions, 1.6% from one additional workday, and an estimated 1.5% price impact; foreign exchange had no significant effect.
- Operating income benefited from organic growth and recent acquisitions. Cost of goods sold increased slightly as a share of sales, primarily due to unfavorable shipment mix; SG&A grew more slowly than sales, reflecting cost controls and fixed-cost leverage.
- Management expected cash from operations and financing availability to meet business needs, and reported compliance with debt covenants. It expected to maintain working-capital productivity and direct excess cash primarily toward debt reduction and acquisitions. No earnings or revenue guidance was provided.
- Approximately $30.7 million of cash was held by foreign subsidiaries and could be subject to additional U.S. taxes if repatriated. Management said domestic liquidity was sufficient without repatriation.
- A customer lawsuit in Indiana seeks approximately $50 million over allegedly defective products manufactured or remanufactured by others. WESCO denied liability, intends to defend the case, recorded no liability, and said it could not reasonably estimate a possible loss range.
- Other notable items include $2.0 million of discrete tax adjustments in Q1 2012 and a decrease in accrued interest on uncertain tax positions following the IRS settlement. Management reported no material change in market-risk exposures and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth and margin improvement persist after separating organic growth, acquisitions, additional workdays and pricing effects.
- Working-capital conversion and cash-flow quality, especially receivables growth, accounts-payable funding and incentive-compensation payments.
- Debt balances, facility availability and covenant compliance; reconcile the filing’s $555.5 million borrowing capacity with its $571.9 million liquidity measure, which includes invested cash.
- Potential exposure and developments in the $50 million Indiana lawsuit, for which no loss estimate or accrual was recorded.
- The filing reports fair value of fixed-rate long-term debt of approximately $983.5 million against par value of $494.9 million; verify the instrument scope and valuation basis when assessing debt exposure.