WESCO International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. WESCO distributes electrical, industrial and communications products and provides supply-chain services. Results include the effects of acquisitions, including EECOL, acquired in December 2012.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Net sales | $1,808.1 million | $1,606.0 million | Up 12.6%; acquisitions contributed 16.0%, while one fewer workday reduced sales 1.6%. Organic sales declined 2.1% sequentially. |
| Gross margin | 21.1% | 19.9% | Improved 1.2 percentage points; management cited acquisition mix and core-business margin initiatives. |
| Operating income | $136.9 million | $83.5 million | Up 63.9%; includes a $36.1 million insurance-related benefit recorded in SG&A. |
| Operating margin | 7.6% | 5.2% | Q1 2013 includes the $36.1 million benefit; excluding it, management reported SG&A of $263.6 million, or 14.6% of sales. |
| Net income attributable to WESCO | $84.0 million | $53.0 million | Up from prior year; Q1 2013 reported diluted EPS of $1.60 versus $1.03. |
| Interest expense, net | $21.9 million | $9.0 million | Up 144.7%; management attributed the increase primarily to higher cash interest expense. |
| Operating cash flow | $80.4 million | $58.3 million | Higher earnings were partly offset by working-capital investment, including increased receivables. |
| Capital expenditures | $6.0 million | $4.5 million | Investing cash flow was a $1.0 million use, versus a $26.5 million use in Q1 2012, which included acquisition payments. |
Balance sheet, debt and liquidity
- At March 31, 2013, cash and cash equivalents were $116.8 million; $67.5 million was held by foreign subsidiaries and could incur additional U.S. taxes if repatriated.
- Total debt, including short-term debt and current maturities, was approximately $1.675 billion, compared with approximately $1.735 billion at December 31, 2012. Long-term debt, net of discount, was $1.635 billion.
- Available Revolving Credit Facility capacity was $311.5 million. Management reported total liquidity of $373.7 million, comprising available capacity and $62.2 million of invested cash. WESCO said it was in compliance with debt covenants.
- Current assets were $2.177 billion and current liabilities were $1.039 billion. Stockholders’ equity was $1.617 billion, up from $1.554 billion at year-end 2012.
- Financing cash flow was a $49.1 million use. The quarter included repayments that extinguished the mortgage financing facility, alongside borrowing and repayment activity under revolving and receivables facilities.
Changes, outlook and risks
- Comparability and earnings quality: Acquisition contributions drove reported sales growth. The $36.1 million insurance-related receivable offset a previously recorded litigation liability and reduced Q1 SG&A. Excluding that benefit, SG&A increased, mainly due to acquisitions. Depreciation and amortization also rose to $16.7 million from $8.1 million, primarily because of acquired intangible assets.
- Acquisition comparison: Unaudited pro forma Q1 2012 results including EECOL were sales of $1,815.3 million and net income of $58.4 million, compared with Q1 2013 sales of $1,808.1 million and net income of $84.0 million. The filing cautions that pro forma results are not necessarily indicative.
- Management outlook: No specific revenue or earnings guidance is provided. Management expected to maintain working-capital productivity, focus near-term on working capital and liquidity, and direct excess cash primarily to debt reduction and acquisitions. It believed operating cash flow and available facilities would meet foreseeable needs, while noting there can be no assurance.
- Litigation: A jury awarded ArcelorMittal Indiana Harbor approximately $36.1 million in February 2013. WESCO challenged the verdict, planned to appeal after post-trial rulings, and noted that the award could change, including through a request for additional interest. Insurers confirmed coverage; the company recorded an insurance receivable equal to the previously recorded liability.
- Other matters: Net unrecognized tax benefits were $23.5 million; up to $16.6 million could decrease over the next 12 months through examinations or statute expirations, with management not expecting an effective-tax-rate impact. Management reported no material change in market-risk exposure and no Q1 goodwill impairment indicators. EECOL was excluded from the quarter’s internal-control assessment while its control environment was being assessed.
- Results may be affected by economic conditions, sales and working-capital fluctuations, acquisition integration, litigation outcomes, foreign currency and other risks described in the company’s 2012 Form 10-K and subsequent filings. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable after separating acquisition effects, organic performance and the $36.1 million insurance benefit.
- The final outcome and insurance recovery for the ArcelorMittal litigation, including any interest or changes to the judgment.
- Debt maturities, borrowing capacity, covenant terms and the company’s ability to reduce debt while funding working capital and acquisitions.
- EECOL integration, purchase-price allocation and the status of its internal-control assessment.
- Foreign cash availability and potential tax consequences of repatriation, as well as developments in uncertain tax positions.