WESCO International, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services across industrial, construction, utility, commercial and other markets.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,524.5m | $1,259.1m | $2,955.8m | $2,407.7m |
| Income from operations | $85.0m | $51.4m | $149.7m | $89.6m |
| Net income | $50.2m | $27.8m | $87.5m | $47.0m |
| Diluted EPS | $1.00 | $0.60 | $1.74 | $1.04 |
| Operating margin | 5.6% | 4.1% | 5.1% | 3.7% |
| Net margin | 3.3% | 2.2% | 3.0% | 1.9% |
Q2 sales rose 21.1% year over year; six-month sales rose 22.8%. Management attributed growth to improving served markets, growth initiatives, acquisitions (7.4% of Q2 sales growth; 7.2% of six-month growth), higher product prices and favorable currency effects. Cost of goods sold fell to 79.9% of sales from 80.7% in Q2 and from 80.5% for the six-month comparison. SG&A declined as a share of sales to 14.0% from 14.8% in Q2 and 14.5% from 15.3% year to date. Management cited acquisitions, higher supplier rebates and lower inventory reserves as contributors to gross-margin improvement, and cost controls and fixed-cost leverage for lower SG&A ratios.
Cash flow, debt and liquidity
- Six-month operating cash flow was $22.5m, down from $68.8m. Higher earnings were offset mainly by increased receivables ($106.5m) and inventory ($40.8m), partly funded by higher accounts payable ($80.9m).
- Investing cash outflow was $24.1m, including $15.9m of capital expenditures and $8.3m of acquisition payments. Prior-year investing cash flow included $40.0m from the LADD interest sale and $15.0m from collection of a note.
- Financing activities provided $24.7m; cash increased $25.0m to $78.6m during the six months.
- At June 30, cash was $78.6m and total debt, including current debt, was approximately $758.4m, versus approximately $729.9m at December 31, 2010. Long-term debt is reported net of a $177.2m discount; the filing states fixed-rate debt with $495.2m par value had an estimated fair value of approximately $871.4m.
- Available borrowing capacity was $361.7m: $291.7m under the revolving credit facility and $70.0m under the receivables facility. Including cash, management reported liquidity of $414.1m. The company said it was in compliance with covenants at quarter-end.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. Management expects operating cash flow and available facilities to cover current needs, plans to focus on cost management and liquidity, and expects excess cash to go primarily toward debt reduction and acquisitions. It also stated that annual goodwill and indefinite-lived intangible impairment testing would occur in Q4 2011; no Q2 impairment indicator was noted.
- Management said recent commodity price increases were expected to be passed through to customers; inflation-related pricing contributed an estimated $78.0m of first-half sales. Actual pass-through and margin effects remain relevant uncertainties.
- WESCO is a co-defendant in an Indiana customer lawsuit seeking approximately $50m over allegedly defective products made or remanufactured by others. WESCO denies liability, intends to defend the case, and recorded no liability at June 30, 2011.
- Q2 2011 included no LADD joint-venture income; prior-year Q2 included $1.8m. The LADD interest was sold in June 2010. First-half 2010 SG&A also included a $3.8m impairment charge related to that investment.
- Cash-flow conversion weakened as working capital funded growth. Other risks include economic and market conditions, execution of growth initiatives, commodity pricing, litigation outcomes and forward-looking-statement uncertainties. Management reported no material change in market-risk exposures and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth and improved margins persist after separating organic growth, acquisition contribution, pricing and currency effects.
- Whether receivables and inventory growth convert into operating cash flow, and whether borrowing capacity and covenant compliance remain adequate.
- The debt’s terms, maturity and dilution implications, including convertible debentures; diluted EPS includes material convertible-debt share equivalents.
- Developments in the approximately $50m lawsuit and any resulting change to the company’s no-accrual assessment.