) announced first-quarter earnings that missed the Zacks
Consensus Estimate by $0.05, or 4.3%.
WESCO reported revenue of $1.81 billion, which was up 10.0%
sequentially and 12.6% year over year.
The year-over-year increase was the positive impact of
acquisitions, which adding 16 percentage points of growth and was
partially offset by a lower number of working days and a
reduction in organic sales. The sequential increase was the
strongest in years, helped by the EECOL acquisition. The core
business performed in line with normal seasonality.
End Market Update
WESCO is seeing signs of strength across end markets, with a
swelling opportunity pipeline, higher bidding activity and
growing backlog. The Utilities market remains the strongest.
WESCO stated that
distributors remained conservative and even reduced inventories
in some cases. However, the OEM and MRO sides of the business
were consistent with the year-ago quarter. Year-over-year comps
were hard because of several ongoing industrial capital projects
last year that did not continue into the last quarter. Management
was optimistic about the opportunity pipeline, which continued to
expand. The One WESCO model helped sign up a major telecom
), which also reported at around the same time, WESCO is seeing a
market. However, WESCO is seeing improvement in Canada and most
other international markets. The U.S. market, though showing
improving trends, again had difficult comps because of more
conducive weather in the year-ago quarter that pulled some
construction business into the quarter. The residential
construction story remains positive, although WESCO's limited
exposure to the segment means that there will be no material
impact on its results.
business continues to see good growth, which management
attributed to WESCO's integrated supply model. The model is
particularly helpful for utilities looking for efficiency and
effectiveness in their supply chains. WESCO has steadily improved
its offerings on the transmission side, which has seen it through
the recession. However, the current strength is also attributable
to an improving distribution business. Construction markets
typically provide the impetus for greater spending by utilities,
so stronger construction markets will further add to this
Sales into the
market (schools, hospitals, property management firms, retailers,
financial institutions, cable companies and governmental
agencies) declined for the second straight quarter.The government
side of the business is weaker because of budget constraints and
deferral of project awards.
The gross margin was 21.1%, up 57 basis points (bps)
sequentially and down 117 bps year over year. WESCO has
maintained very steady gross margins over the past year or so,
which is the result of its integrated model and tight cost
Operating expenses of $280.3 million were up 33.5%
sequentially and 18.7% from the year-ago quarter. As a result,
the operating margin of 5.6% shrank 217 bps from the previous
quarter and expanded 37 bps from the year-ago quarter. WESCO took
a litigation charge of $36.1 million in the fourth quarter and a
gain of a similar amount in the last quarter (in recognition of
insurance coverage). The above comparisons exclude the
adjustments in the relevant quarters.
WESCO reported pro forma net income of $58.6 million, or a
3.2% net margin, compared to $90.7 million, or 5.5%, in the
previous quarter and $52.9 million, or 3.3% in the year-ago
quarter. Our calculation excludes the litigation-related
adjustments discussed above.
Excluding the special item, the GAAP net income was $80.6
million ($1.54 a share), compared to $48.6 million ($0.95 a
share) in the previous quarter and $53.0 million ($1.03 a share)
in the Mar quarter of 2012.
Inventories were flat sequentially, with inventory turns going
from 6.6X to 7.2X. DSOs were down from 57 to over 55. The cash
balance at the end of the quarter was $116.8 million, up $30.7
million during the quarter.
WESCO generated $80.4 million in cash from operations and
spent $6.0 million on capex, resulting in free cash flow of $74.4
million during the quarter. The net debt position at quarter-end
was $1.56 billion, down $90.9 million during the quarter.
For the second quarter of 2013, WESCO expects year-over-year
revenue increase of at least 13-16% (down 1% to up 2% excluding
the contribution from EECOL). The guidance indicates around 6%
sequential increase at the mid-point, better than the Zacks
Consensus and more or less in line with the normal level of a
mid-single-digit sequential increase. The gross margin is
expected to be at or above 20.9% and the operating margin at
least 6.0%. The tax rate is expected to be in the 26-28%
WESCO didn't update its guidance for the year, so we assume it
remains the same. Accordingly, sales are expected to be up 16-18%
on a consolidated basis (flat in the first half and up
mid-single-digits in the second half excluding EECOL). The gross
margin is expected to be at least 20.7%, with the operating
margin at or above 6.2% and the tax rate at 27-29%. All this is
expected to result in an EPS of $5.75 for the year (well below
the Zacks Consensus Estimate of $5.89).
WESCO's business is currently being driven by strengthening
end markets and its integrated supply model, which is increasing
efficiencies for its customers. The guidance is encouraging and
could be cautious, particularly so if end markets improve as we
move through the year. For the longer term, we continue to
believe in WESCO's solid strategies, good operating model, market
position and customer clout.
However, near-term results will continue to be impacted by
economic activity, given the company's exposure to core segments,
such as industrial, utility, construction and government that
should contain share price appreciation.
WESCO shares carry a Zacks Rank #4 (Sell). Other technology
distributors, such as
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