WESCO International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. 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 | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,993.9 million | $1,772.6 million |
| Operating income | $73.2 million | $66.6 million |
| Net income attributable to WESCO | $44.4 million | $37.7 million |
| Diluted EPS | $0.93 | $0.76 |
| Operating cash flow | $53.0 million | $47.6 million |
| Capital expenditures | $7.7 million | $4.5 million |
| Free cash flow (non-GAAP) | $45.3 million | $43.1 million |
Sales rose 12.5% year over year, including 10.9% organic growth and a 1.6% favorable foreign-exchange impact. Sales increased across all end markets and geographies. Gross margin was approximately 19.1%, versus 19.7%; operating margin was 3.7% in both periods. The effective tax rate declined to 19.6% from 25.0%, primarily reflecting the U.S. federal tax-rate reduction under the Tax Cuts and Jobs Act.
Balance sheet and liquidity
At March 31, 2018, cash and cash equivalents were $123.9 million and total debt, including debt discounts and issuance costs, was approximately $1.35 billion, down from $1.36 billion at year-end 2017. The company reported a 3.5x financial leverage ratio, compared with 3.6x at year-end, and said it complied with all debt covenants. Available capacity was $576.4 million under the revolving credit facility and $160.0 million under the receivables facility. Management reported total liquidity of $813.0 million using $76.6 million of available cash in its liquidity calculation.
Changes, outlook and risks
- Operating income increased primarily on higher sales volume. SG&A fell as a share of sales, but cost of goods sold rose as a share of sales due to business mix, challenging pricing, and labor-cost reclassification.
- Net interest and other expense increased to $19.8 million from $16.3 million, mainly due to a $3.0 million foreign-exchange loss on a financial instrument. Foreign currency translation reduced comprehensive income by $28.8 million.
- Operating cash flow benefited from collecting prior-year supplier rebates, while higher receivables and payment of prior-year incentive compensation were cash uses. Investing cash use included an $8.8 million purchase of a foreign financial instrument.
- Management expects 2018 capital expenditures to exceed 2017 levels and plans to manage working capital; excess cash may go toward growth initiatives, acquisitions, debt reduction and share repurchases. Management believes operating cash flow and available credit will meet foreseeable needs, but gives no quantified earnings or sales guidance.
- Management noted that sales are typically 6–8% higher in the second through fourth quarters than in the first, though results can vary. Inflation-related pricing had an approximately 2% impact on Q1 sales.
- Routine commercial and employment litigation is pending; management does not expect pending matters to materially affect financial condition or liquidity, though a period’s results could be affected. The filing reports no material changes to previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- Whether organic sales growth and margin performance persist given the disclosed pricing pressure and unfavorable business mix.
- Whether working-capital movements, including receivables and incentive-compensation payments, affect future cash conversion.
- Debt, covenant headroom, and continued availability of revolving and receivables-facility capacity.
- How foreign-exchange movements and the potential repatriation of $69.7 million held by foreign subsidiaries affect results, cash availability and taxes.
- Actual 2018 capital spending and any material developments in litigation or the company’s outlook.