WESCO International, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services across industrial, construction, utility, and commercial, institutional and government markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,150.1 million | $2,104.0 million | $4,111.4 million | $4,097.9 million |
| Operating income | $98.0 million | $91.2 million | $168.7 million | $164.4 million |
| Net income attributable to WESCO | $63.5 million | $57.9 million | $105.8 million | $102.4 million |
| Diluted EPS | $1.45 | $1.22 | $2.37 | $2.15 |
| Operating margin | 4.6% | 4.3% | 4.1% | 4.0% |
- Q2 sales increased 2.2%; management reported organic growth of 1.9%, with acquisitions contributing 1.3% and foreign exchange reducing sales 1.0%. Six-month reported sales increased 0.3%, while organic growth was 1.5%; acquisitions contributed 0.8%, foreign exchange reduced sales 1.2%, and fewer workdays reduced sales 0.8%.
- Gross margin was 19.0% in Q2 and approximately 19.3% for the first half, based on reported cost of goods sold. Management said first-half margin improvement reflected ongoing initiatives; Q2 benefit from Sylvania Lighting Services (SLS) was partly offset by business mix.
- Q2 SG&A was $295.8 million, or 13.8% of sales, versus $292.9 million, or 13.9%. First-half SG&A was $592.4 million, or 14.4% of sales, versus $583.7 million, or 14.2%. The increase primarily reflected SLS and wage inflation, partly offset by lower variable compensation and benefit costs and the absence of a prior-year bad-debt charge.
- First-half net cash used in operating activities was $8.8 million, versus $86.8 million provided in 2018. Working-capital uses included a $157.4 million increase in trade receivables, a $39.7 million increase in inventory, and a $43.7 million reduction in accrued payroll and benefits. Capital expenditures were $21.4 million; acquisition payments were $27.7 million.
- At June 30, cash was $87.2 million, total debt was $1,434.9 million, and debt net of cash was $1,347.7 million. The reported financial leverage ratio was 3.4x, up from 3.0x at year-end 2018; net-of-cash leverage was 3.2x versus 2.7x.
- Available borrowing capacity was $504.8 million under the revolving credit facility and $55.0 million under the receivables facility. Management reported total liquidity of $586.7 million, including $26.9 million of available cash for this calculation, and stated the company was in compliance with debt covenants. Both facilities mature in September 2020.
Material changes and notable items
- WESCO acquired certain SLS assets and assumed certain liabilities on March 5, 2019. SLS provides energy-efficient lighting upgrade and retrofit services; the acquisition added $5.9 million of goodwill. WESCO reported annual SLS sales of approximately $100 million.
- First-half financing included $150.0 million paid under an accelerated stock repurchase (ASR) transaction. WESCO received 2,394,816 shares during Q2; the transaction had not settled by June 30 and additional shares were expected. Total first-half share repurchases were $152.7 million.
- Debt financing and repayments included $24.8 million to pay off the term loan facility. Long-term debt increased to $1,399.5 million from $1,167.3 million at December 31, 2018.
- Adoption of the new lease standard on January 1, 2019 recognized operating lease assets and liabilities; at June 30 these were $233.4 million and $238.2 million, respectively. Management said adoption did not materially affect income or cash flows.
- Cash and cash equivalents included $62.2 million held by foreign subsidiaries. The company stated remaining undistributed foreign earnings were indefinitely reinvested; future repatriation could incur additional taxes, which were not practicably determinable.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected 2019 capital expenditures to be similar to 2018 and planned to direct excess cash primarily toward growth initiatives, acquisitions, debt reduction and share repurchases. It expected operating cash flow and available facilities to meet foreseeable needs, while noting there could be no assurance this would continue.
- Management planned to closely manage working capital. It attributed the first-half operating cash outflow largely to receivables growth, incentive-compensation payments and inventory investment.
- For the first half, inflation-related pricing affected sales by approximately 2%. Sales are generally higher in the second, third and fourth quarters than in the first, though results can vary with economic conditions.
- Management did not believe pending lawsuits and claims were likely to materially affect financial condition or liquidity, but resolution in a particular period could materially affect results. No material changes to previously disclosed risk factors or market-risk exposures were reported.
- WESCO provided a standby letter of credit of up to $7.3 million supporting WESTEC’s line of credit; WESTEC’s outstanding balance was $6.0 million. Management considered the guarantee’s fair value nominal and recorded no liability.
- Management reported disclosure controls and internal control over financial reporting were effective at quarter-end. No subsequent events requiring recognition or disclosure were identified.
Important facts for investors to verify
- Whether operating cash flow recovers as receivables and inventory are converted to cash, and how working-capital needs affect borrowing.
- Debt and leverage trends, covenant headroom, and refinancing plans ahead of the revolving and receivables facilities’ September 2020 maturities.
- Final share delivery and settlement of the $150 million ASR, and the effect of repurchases on per-share results.
- Performance and integration of SLS, including its contribution to organic growth, margins and cash generation.
- Potential exposure from litigation, the WESTEC guarantee, foreign cash and any costs or taxes associated with repatriation.