WESCO International, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,580.4 | $1,324.6 | $4,536.2 | $3,732.3 |
| Income from operations | $91.8 | $61.2 | $241.5 | $150.9 |
| Net income | $53.9 | $33.7 | $141.4 | $80.7 |
| Diluted EPS | $1.11 | $0.74 | $2.84 | $1.79 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $71.8 | $75.5 |
- Q3 sales grew 19.3%; operating income rose 49.8% and net income rose 60.1% year over year. For the first nine months, sales grew 21.5%, operating income 60.1% and net income 75.4%.
- Gross margin was 20.0% in Q3 and the nine-month period, versus 19.5% in each 2010 comparison. Operating margin improved to 5.8% from 4.6% in Q3 and to 5.3% from 4.0% year to date. Net margin was 3.4% versus 2.5% in Q3, and 3.1% versus 2.2% year to date.
- SG&A was 13.7% of sales in Q3 versus 14.4%, and 14.2% year to date versus 15.0%. Management attributed the leverage to cost controls and fixed-cost absorption, despite higher payroll and operating costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $71.8 million, down from $75.5 million despite higher earnings. Receivables used $154.7 million and inventory used $44.2 million; the $110.6 million increase in accounts payable partly offset those uses.
- Investing cash outflow was $32.0 million, including $24.0 million of capital expenditures and $8.2 million of acquisition payments. Financing provided $5.2 million. Cash ended the period at $94.0 million, up from $53.6 million at year-end 2010.
- At September 30, current assets were $1,761.9 million and current liabilities $822.7 million, a current ratio of approximately 2.14. Total assets were $3,067.4 million; stockholders’ equity was $1,283.5 million.
- Reported current and long-term debt totaled approximately $730.9 million, including $5.2 million current debt; the balance sheet also included $40.6 million of bank overdrafts. The filing reports $370.0 million of receivables sold and corresponding borrowings under the securitization facility; investors should check the debt classification before combining amounts. No borrowings were outstanding under the new revolving credit facility at quarter-end.
- Available borrowing capacity was $365.0 million under the revolving facility and $80.0 million under the receivables facility. Together with cash, management reported liquidity of $486.1 million. The revolving facility matures in August 2016; the receivables facility was extended to August 2014.
Material changes, outlook and risks
- Management cited improving served markets, growth initiatives, acquisitions, higher product prices and favorable foreign exchange as contributors to sales growth. Acquisitions accounted for 6.9% of Q3 sales growth and 7.1% for the nine-month period. Pricing related to inflation represented approximately 3.3% of nine-month sales.
- WESCO completed a new $400 million revolving credit facility in August, with an accordion feature permitting up to $100 million of additional commitments. The receivables facility amendment lowered its interest spread and commitment fee and added an accordion feature. The new revolver resulted in $1.8 million of accelerated deferred-financing-fee expense.
- Management said operating cash flow and financing availability should cover current business needs, while noting there can be no assurance. It expected to focus on working-capital productivity and liquidity; excess cash was expected to go primarily to debt reduction and acquisitions. No numerical earnings or sales guidance was provided.
- On October 3, 2011, after quarter-end, WESCO acquired Canadian company Brews Supply Ltd., funded with cash and receivables-facility borrowings.
- A customer lawsuit in Indiana seeks approximately $50 million over allegedly defective products made or remanufactured by others. WESCO denies liability, intends to defend the case, and recorded no liability. Management said it did not believe pending matters were likely to materially affect financial condition or liquidity, though a resolution could materially affect results in a particular quarter.
- Foreign-currency translation reduced nine-month comprehensive income by $16.7 million. Management reported compliance with debt covenants and no Q3 events requiring an interim goodwill impairment review; annual impairment testing was planned for Q4.
Key facts for investors to verify
- Whether revenue growth and margin improvement persisted, and how much reflected organic volume versus pricing, acquisitions and currency.
- Working-capital needs and cash conversion, particularly receivables and inventory growth relative to sales.
- The precise debt treatment of receivables-facility borrowings, leverage and facility availability, and the effect of future acquisitions on liquidity.
- Developments in the Indiana litigation and the financial impact, if any, of the Brews Supply acquisition.
- Whether commodity-price increases were passed through to customers and whether management’s stated capital-allocation priorities changed.