WESCO International, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. WESCO distributes electrical, industrial, communications, construction and safety products and provides supply-chain services. It serves more than 75,000 customers through approximately 475 branches and nine distribution centers.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2.078 billion | $1.931 billion | $5.894 billion | $5.633 billion |
| Income from operations | $133.2 million | $123.6 million | $342.0 million | $370.4 million |
| Net income attributable to WESCO | $80.8 million | $69.2 million | $201.5 million | $218.4 million |
| Diluted EPS | $1.52 | $1.32 | $3.78 | $4.17 |
| Operating margin | 6.4% | 6.4% | 5.8% | 6.6% |
- Q3 sales rose 7.6%; organic sales increased 6.7%, acquisitions added 1.8%, and foreign exchange reduced sales 0.9%. Sequential sales increased 3.6%.
- For the nine months, sales rose 4.6%; organic sales grew 4.8%, acquisitions contributed 1.3%, and foreign exchange reduced sales 1.5%.
- Gross margin was approximately 20.3% in Q3 versus 20.5% a year earlier, and 20.5% year to date versus 20.8%. Management cited business mix and lower supplier volume rebates.
- Q3 net income improved year over year, helped in part by the absence of the prior-year $2.3 million Argentina divestiture loss. Nine-month operating profit and net income fell, primarily because Q1 2013 included a $36.1 million insurance recovery related to the ArcelorMittal litigation. Excluding that benefit, nine-month SG&A was $784.3 million, or 13.9% of sales, compared with $815.9 million, or 13.8%, in 2014.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $139.8 million, down from $179.7 million. Higher receivables, inventory and prepaid expenses absorbed cash as sales grew.
- Capital expenditures were $16.0 million. Company-defined free cash flow was $123.8 million versus $180.3 million; the 2013 figure included a $21.1 million adjustment for a non-recurring pension contribution.
- Investing cash outflow was $149.4 million, including $138.8 million paid for acquisitions. The company acquired LaPrairie, Hazmasters and Hi-Line Utility Supply.
- At September 30, cash and equivalents were $110.4 million; current assets were $2.450 billion and current liabilities $1.127 billion. Management reported $485.8 million of revolver availability and $538.9 million of liquidity using its measure, which includes $53.1 million of invested cash.
- Long-term debt, net of discount, was $1.472 billion; short-term debt was $43.0 million and current long-term debt $2.4 million. Disclosed leverage was 3.2 times Adjusted EBITDA on total debt and 3.0 times net of cash. The company said it complied with debt covenants; about 50% of debt was fixed-rate.
- Cash and equivalents declined from $123.7 million at year-end 2013. Of September cash, $82.3 million was held by foreign subsidiaries and could incur additional U.S. tax if repatriated.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expected to maintain working-capital productivity, prioritize debt reduction and acquisitions for excess cash, and preserve liquidity while managing growth-related working capital.
- Management believed operating cash flow and available credit would meet foreseeable needs, while noting there can be no assurance. The company had $485.8 million of revolver capacity; the facility matures in August 2016.
- In October 2014, the company was notified it was included in a New York County District Attorney investigation of disadvantaged-business contracting practices. WESCO began an internal review and said it would cooperate. It could not estimate potential exposure, but did not believe the matter was likely to materially affect its financial condition or liquidity.
- WESCO continues to appeal the ArcelorMittal judgment. At quarter-end it recorded an $8.7 million liability and matching insurance receivable for accrued interest; the judgment may change based on the appeal.
- The company was also under examination concerning unclaimed-property compliance and had accrued an amount based on known facts; the filing does not provide a clear value. Goodwill and indefinite-lived intangible impairment testing was planned for Q4 2014.
- Risks highlighted by the filing include sales and working-capital variability, foreign-exchange effects, supplier rebates and product mix, potential tax costs on repatriated cash, litigation and regulatory outcomes, and acquisition integration. Management said there were no material changes to market-risk disclosures.
Important facts for investors to verify
- Whether sales growth and organic demand continue, and whether gross-margin pressure from mix and supplier rebates persists.
- Whether working-capital investment converts to cash flow and free cash flow improves after acquisition spending.
- Debt reduction, covenant compliance, revolver availability and the 2016 revolver maturity.
- Outcomes and potential financial exposure from the New York investigation, ArcelorMittal appeal and unclaimed-property examination.
- Acquisition performance and the Q4 2014 goodwill and indefinite-lived intangible impairment review.