WESCO Warns Weakness Continuing

WESCO International (WCC - Analyst Report) announced third-quarter earnings that exceeded the Zacks Consensus Estimate by 22 cents.

Revenue

Revenue for the period was $1.15 billion, down 0.6% sequentially and 29.2% year over year. Excluding the impact of currency, revenue was up 0.4% sequentially and down 28.5% from the year-ago quarter.

Recession-related weakness remained across all end markets, with the company lowering prices to keep up volumes. Lower commodity prices offset the negative impact of price cuts, resulting in better product margins. The average revenue per employee was $720 million, down 0.6% sequentially and 19.3% year over year.

Sales to Industrial, Construction and OEM Utilities markets all declined 29% from the year-ago quarter.

The Industrial business improved sequentially, although national account sales declined, driven by weak MRO demand, low capacity utilization and tight purchasing controls. Reduction in channel inventories continued.

Construction -- including commercial, industrial and government -- experienced broad-based weakness across all geographies.

Utilities spending remains restricted to maintenance activity, as industrial power consumption dropped to eight-year lows and domestic consumption also plummeted. Demand is currently focused on transmission-related alternative energy projects.

Margins

The gross margin was 18.6%, down 15 basis points (bps) sequentially and 42 bps year over year. The declines were on account of inventory management initiatives, as well as lower supplier rebate rates. However, the company saw no negative mix impact, which remained consistent with the third quarter of 2008.

Operating expenses of $168.3 million were up 0.9% sequentially, but down 19.1% year over year. The operating margin of 4.0% was down 37 bps sequentially and 224 bps from the Sep quarter of 2008. The decline was mostly related to lower volumes as a result of the recession, as well as the negative impact of currency.

Management has initiated cost reduction efforts, including plant closures and workforce reductions, the benefits of which should ultimately become evident.

Net Income

There were no special items in the quarter, other than a $5.9 million gain on the exchange of debt. Excluding this item, the company reported net income of $27.7 million, or 2.4% net margin, compared to $33.2 million, or 2.9%, in the previous quarter and $66.9 million, or 4.1%, in the year-ago quarter. The GAAP EPS of 79 cents was up from 62 cents in the June quarter and down from $1.48 in the Sept. quarter of 2008.

 

Balance Sheet

Inventories declined 4.1% to $495.3 million, with inventory turns increasing slightly from 7.3x to 7.6x. The cash balance at the end of the quarter was $111.3 million. The company generated $85.4 million in cash from operations and spent $4.3 million on capex. The net debt position at quarter-end was $589.7 million.

Guidance

Management expects fourth quarter revenue to decline 4-6% sequentially, gross margins at similar levels as in the second and thrid quarters and a tax rate of 24% (expected to be 30% for a few quarters after that).

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