WESCO INTERNATIONAL INC annual report, FY2011

WESCO International, Inc. — FY2011 Form 10-K

Reporting period: Year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services. It serves more than 65,000 customers through approximately 400 branches and eight distribution centers.

Financial performance

MetricFY2011FY2010Change
Net sales$6,125.7 million$5,063.9 million+21.0%
Gross margin20.2%19.7%+0.5 percentage points
Operating income$333.0 million$210.9 million+57.9%
Operating margin5.4%4.2%+1.2 percentage points
Net income$196.2 million$115.5 million+69.9%
Diluted EPS$3.96$2.50+58.4%
Cash from operations$167.5 million$127.3 million+$40.3 million

Revenue growth reflected improved served-market conditions, organic growth initiatives, acquisitions adding an estimated 6.8% to sales, favorable currency effects of 0.8%, and estimated price effects of 3.0%. Cost of goods sold fell to 79.8% of sales from 80.3%; SG&A fell to 14.2% from 15.1% of sales. Management attributed margin improvement partly to acquisition mix and higher supplier rebates.

Fourth-quarter 2011 sales were $1,589.5 million, up from $1,331.6 million in Q4 2010. Operating income was $91.5 million versus $60.0 million; net income was $54.8 million versus $34.8 million; diluted EPS was $1.12 versus $0.72.

Cash, debt and liquidity

  • Cash and cash equivalents were $63.9 million at year-end, including $34.8 million held by foreign subsidiaries; some foreign cash could incur additional U.S. tax if repatriated.
  • Operating cash flow was $167.5 million. Working-capital investment included $143.5 million of increased receivables and $33.8 million of increased inventory. Capital expenditures were $33.3 million, compared with $15.1 million in 2010.
  • Balance-sheet debt was $649.3 million, including the $175.9 million unamortized discount on convertible debentures. Contractual principal debt was $825.2 million. Debt declined from $729.9 million on a balance-sheet carrying-value basis in 2010.
  • Available borrowing capacity was $499.3 million across the revolving credit and receivables facilities; including $11.5 million of invested cash, management stated liquidity of $510.8 million. The company reported compliance with debt covenants.
  • Repayment requirements include approximately $250.3 million in 2014, principally associated with the receivables facility, and a roughly $36.0 million mortgage balloon payment due in Q1 2013. The receivables facility matures in August 2014; the revolving facility matures in August 2016.

Material changes and management outlook

  • WESCO acquired RECO and Brews Supply in 2011 for net cash payments of $48.1 million. A subsequent event: it acquired RS Electronics on January 3, 2012; purchase price allocation was not yet complete.
  • End-market mix shifted: industrial rose to 43% of sales from 42%; construction declined to 35% from 38%; utility fell to 11% from 13%; commercial, institutional and government increased to 11% from 7%.
  • Management expects 2012 capital expenditures to be similar to 2011 levels. It said excess cash would be directed primarily to debt reduction and acquisitions, with near-term emphasis on working-capital productivity, liquidity and credit availability. The filing provides no specific revenue or earnings forecast.
  • The company does not plan to pay common-stock dividends in the foreseeable future, citing reinvestment priorities and debt-agreement restrictions.

Risks, contingencies and unusual items

  • Risks include economic weakness or customer project delays, intense price competition, supplier concentration and product-cost or availability changes, acquisition integration, operational and cyber disruption, foreign exchange, and debt service and covenant constraints. The ten largest suppliers represented about 28% of purchases; the largest accounted for about 10%.
  • A customer lawsuit in Indiana seeks approximately $50 million over allegedly defective products manufactured or remanufactured by others. WESCO denies liability, recorded no liability, and said it could not reasonably estimate a possible loss range.
  • Goodwill and indefinite-lived trademarks totaled approximately $1.055 billion. No impairment was recorded in 2011; two trademarks valued at $18.1 million were identified as sensitive to further declines in financial performance.
  • The effective tax rate rose to 29.8% from 26.7%, primarily due to higher U.S. taxable income. Unrecognized tax benefits were $20.9 million, including transfer-pricing matters; management expected a possible decrease in the coming year, largely offset by a deferred tax asset.
  • The 2029 convertible debentures carry a 6.0% cash coupon but are accounted for using a 13.875% effective rate. Their conversion terms may cause dilution; diluted EPS included a 5.2 million-share equivalent effect in 2011.
  • The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Brews Supply, acquired in October, was excluded from the 2011 internal-control assessment.

Important facts for investors to verify

  • Whether sales and margin gains persist after separating organic growth, pricing, currency and acquisition contributions.
  • Whether working-capital growth converts into sustained operating cash flow, and whether receivables and inventory remain well controlled.
  • How WESCO will refinance or repay the 2014 receivables-facility maturity and manage the 2013 mortgage balloon payment.
  • Acquisition performance and integration, including the 2012 RS Electronics transaction and related purchase-price allocation.
  • Potential exposure from the $50 million lawsuit, tax examinations and sensitive trademarks, along with dilution implications of convertible debt.