WESCO International (WCC) announced first-quarter earnings that exceeded the Zacks Consensus Estimate by $0.11, or 28.2%.
Revenue
Revenue for the period was $1.15 billion, up 1.4% sequentially and down 2.6% year over year. This was better than the 1-3% decline forecasted by management and also better than the normal seasonal decline of 2-5%.
Favorable product pricing had a 1.7% positive impact on the year-over-year comparisons. The average revenue per employee was $753 million, up 1.4% sequentially and 8.5% year over year. Revenues continued to strengthen throughout the quarter.
End Market Update
Industrial markets strengthened in the last quarter, with sales to industrial customers increasing 9% sequentially and 13% over the year-ago quarter. Government and datacom customers were also up 31% and 6%, respectively, from the year-ago quarter. However, seasonality and recessionary pressures combined to pull down sales to construction and utility customers both sequentially and on a year-over-year basis.
Industrial market strength was driven by the higher MRO spending, as well as inventory restocking at some OEM customers. Particularly encouraging was the global account bid activity levels that were up over 40% from the year-ago quarter, indicating possible strength going forward. Of course the global account system now includes some construction and utility customers, so some of this bid activity could relate to those markets as well. The company signed up six new customers across four industries. The strength in industrial is expected to moderate as we move through the year, since the benefit from inventory replenishment will not continue into ensuing quarters.
Construction, including commercial, industrial and government, was a mixed bag. As expected, sales to the government sector continued to strengthen in the last quarter; the positive result of focused management actions. Government stimulus funded projects are expected to add to strength in the area, since the company booked around $40 million in orders for qualified projects in 2009. Retrofit projects also picked up, although non-residential construction contractors were weaker than in the year-ago quarter.
Utilities spending remains restricted mainly due to weak demand, as commercial markets were soft in comparison to the year-ago quarter, which resulted in lower occupancy rates. As a result, spending on both capital and maintenance activities were sluggish in comparison to the year-ago quarter. The good news is that some stability appears to be returning when considered on a sequential basis.
The gross margin was 19.3%, up 65 basis points (bps) sequentially and down 32 bps year over year. The sequential improvement was due to cost control actions, better mix, positive seasonality and a benefit from more normal levels of inventory and rebates.
Operating expenses of $179.6 million were up 6.7% sequentially, but down 4.2% from the year-ago quarter. There have been double-digit declines in operating expense dollars in each of the preceding four quarters, as a result of cost reduction programs initiated by management, which resulted in the elimination of 1200 positions. The increase in the last quarter was partly due to higher variable costs, related to the higher level of sales. The operating margin of 3.6% slid another 13 bps sequentially and 6 bps from the March quarter of 2009, as the higher operating expenses offset the higher gross margin.
Net Income
The company reported net income of $21.7 million, or 1.9% net margin, compared to $21.8 million, or 1.9%, in the previous quarter and $23.3 million, or 2.0%, in the year-ago quarter. There were no special items in the last quarter. Therefore, the GAAP EPS was the same as the pro forma EPS at $0.50, down from $0.51 in the Dec 2009 quarter and $0.55 in the March quarter of 2009.
Balance Sheet
Inventories were flat sequentially, with inventory turns constant at 7.3X. Management stated that inventories are currently at more normal levels. DSOs increased from 51 to 54. The cash balance at the end of the quarter was $121.1 million. The company generated $68.7 million in cash from operations and spent $2.2 million on capex, resulting in free cash flow of $66.5 million during the quarter. The net debt position at quarter-end was $419.9 million, down 65.7 million during the quarter. Short term debt was flat at around $94.7 million, as the company reclassified its 2025 debentures as short term in the December 2009 quarter, expecting them to be put to the company in the fourth quarter of 2010.
Guidance
Management expects revenue in the second quarter of 2010 to be up 2-4% sequentially, with gross margin and SG&A at levels similar to the first quarter. The operating margin is expected to be around 4.0%.
Additionally, the full year forecast was raised from a decline of 3-5% to revenues that are flat to down 2%. However, management continues to expect weakness in the non-residential construction market, with the growth in industrial moderating and utilities stabilizing. The government vertical should improve.
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