) recently announced second quarter earnings that missed the Zacks
Consensus estimate by 6 cents, or 5.0%. Despite revenue growth and
margin expansion, the higher tax rate worked against it in the last
WESCO reported revenue of $1.67 billion, increasing 4.2%
sequentially and 9.7% year over year.
The average revenue per employee was $892 million, up 1.4%
sequentially and down 0.5% year over year.
Acquisitions and currency positively impacted revenue by 2.2%
and 0.7%, respectively when compared with the year-ago quarter.
Additionally, pricing had a positive impact of 1% on organic
End Market Update
WESCO continued to see improving trends across all end markets.
Organic sales to utility and commercial, institutional &
government ("CIG") customers were up double-digits, while sales to
construction and industrial markets increased mid-to-high
single-digits. The trend also reversed in the datacom market, where
WESCO saw low single-digit growth after several quarters of
Growth in the
marketwas across MRO, OEM and capital project categories. The
global account model appears to be yielding positive results. The
model also includes some construction and utility customers, so the
benefit is split between all these markets. WESCO's acquisitions
(particularly the recently-acquired Conney Safety Products) is also
helping the higher-margin MRO segment of the industrial
WESCO stated business in the
market remains on an uptrend in both the U.S. and Canada, with
non-residential construction (mainly CIG) market now bottoming out
as we move through the year. Despite some leading indicators
pointing to persistent challenges in the market, WESCO's optimism
in this respect shows that the company is outdoing the market.
Therefore, execution remains solid.
business is expected to grow through the end of the year, with
WESCO's pickup relatively slow, since a lot of the spending remains
on the transmission side, while the company's focus has always been
on the distribution side. Construction markets typically provide
the impetus for greater spending by utilities, so any significant
growth at utilities is inevitably linked to the construction
market. WESCO has been increasing offerings on the transmission
side that has held up better during the downturn, although
traditionally these products have been sold directly.
The gross margin was 19.6%, up 16 basis points (bps)
sequentially and down 6 bps year over year. The sequential
improvement in the gross margin was due to a better execution and
mix of business. While the decline in copper prices meant that
WESCO could not recover a higher margin from customers, it did
lower raw material and therefore, inventory costs.
Operating expenses of $231.2 million were up 1.4% sequentially
and 7.9% from the year-ago quarter. Despite recent acquisitions
that drove up operating costs and employee merit increases that
amounted to $4 million in the last quarter, operating expenses
continued to decline as a percentage of sales. This is mainly due
to cost reduction programs initiated by WESCO. As a result, the
operating margin of 5.7% was a 54 bp increase from the previous
quarter and 16 bp increase from the year-ago quarter.
WESCO reported net income of $58.9 million, or a 3.5% net
margin, compared to $52.9 million, or 3.3%, in the previous quarter
and $50.2 million, or 3.3% in the year-ago quarter. There were no
special items in the last quarter. Therefore, the GAAP EPS was same
as the pro forma EPS of $1.15, up from $1.03 in the March 2012
quarter and $1.00 in the June quarter of 2011.
Inventories were up 2.7% sequentially, with inventory turns
increasing slightly from 8.2X to 8.3X. DSOs went down from 57 to
around 55. The cash balance at the end of the quarter was $72.2
million, up from $63.6 million at the end of the previous
WESCO generated $56.9 million in cash from operations and spent
$7.8 million on capex, resulting in free cash flow of $49.1 million
during the quarter. The net debt position at quarter-end was $511.9
million, down $43.0 million during the quarter.
WESCO expects the industrial and utility markets to continue
growing this year and construction to bottom out, which should lead
to a year-over-year revenue growth of 9-11%. Of this,
acquisition-related growth is expected to be 4%. The gross margin
is expected to be at or above 20%, operating margin at least 6%,
operating profit pull-through of 50% and an effective tax
rate of 30-32%.
Full-year revenue growth including acquisitions is expected to
be 7-11% over 2011 levels. The Conney and Trydor acquisitions are
expected to raise earnings by 15 cents.
WESCO's business appears to be undergoing a gradual turnaround
and we are encouraged by the strong guidance for next quarter, as
well as for the year.
WESCO has solid strategies, a good operating model, market
position and customer clout. However, results are impacted by
economic activity, given the company's exposure to core segments,
such as industrial, utility, construction and government. The GDP
growth rate is therefore a suitable barometer of the company's
performance, both in the past and the future.
Given moderate market conditions and WESCO's performance trends,
we think that the company will see gradual improvement in its
business right through the year. Therefore, similar to other
distributors, such as
) that also have broad exposure to core segments, WESCO shares have
a Zacks Rank of #3, implying a Hold recommendation in the next 1-3
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