WESCO International is a distributor of products and supply chain services for the industrial, construction, utility, commercial, and government markets. With 400 full-service branches and over 1M products, WESCO is a major player in the distribution market. Due to a number of factors, including softening demand in construction markets, rising commodity prices, and an eight-year low in industrial demand for power, WESCO experienced somewhat disappointing margin performance in 2009, leading management to engage in a series of strategic cuts, including reducing headcount by 16%, reducing the number of branches, and enacting a number of discretionary spending freezes.
Despite the challenging market conditions and overall reduction in SG&A, management invested aggressively in the front end of the business, expanding the sales force by 5% in 4Q09. WESCO generates more revenue per employee compared to its industry peer group. Additionally, management organized a dedicated group to identifying opportunities to capitalize on the federal stimulus. WESCO also expanded international operations by establishing subsidiaries in China, Australia, and Africa. Overall, analysts are optimistic about the company’s future financial performance, growth opportunities, and overall direction and management.
WESCO has a strong history of deal activity. Due in large part to the overall trend in the distribution market towards increased consolidation, WESCO has been active, completing 34 deals since 1998, seven of which have been completed since 2004. Currently, WESCO holds 7% market share. Management notes that the economic downturn has negatively impacted the smaller players in the distribution industry, who may be looking to WESCO as a potential buyer. While the company remains open to accretive acquisitions, management is also firm in their stance that any potential deal must meet their profit expectations. WESCO is not currently engaged in an ongoing acquisition.
Revenue in 2009 was down 24% compared to 2008, due in large part to serious declines in WESCO’s major markets. Operating margins declined to 3.8% in 2009 from 5.4% the previous year. While gross margin was steady QoQ at 19.2%, this was down 70bps from the previous year, due largely to inventory reduction and less volume rebates. SG&A was down $140M from 2008, a 17% decrease. While some of this reduction was due to discretionary spending freezes on bonuses and similar line items that are expected to return in 2010, the company did manage to realize savings of approximately $70M in net permanent structural cost reductions. WESCO’s liquidity is solid, with analysts estimating the company is capable of generating approximately $75M in free cash flow in 2010. Management anticipates 2010 capital expenditures will be approximately $20M for growth initiatives. Additionally, management intends to convert 85% to 90% of 2010 net income to free cash flow.
Tags: Distribution M&A, M&A, mergers and accqusitions, selling a business, Wholesale M&A, Wholesalers, Wyatt Matas