WESCO International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. WESCO distributes electrical, industrial and communications products and provides supply-chain services. It serves industrial, construction, utility, and commercial, institutional and government markets. Results reflect the initial effects of COVID-19, especially in the final two weeks of March.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1.969 billion | $1.961 billion |
| Income from operations | $60.9 million | $70.7 million |
| Net income attributable to WESCO | $34.4 million | $42.4 million |
| Diluted EPS | $0.82 | $0.93 |
| Operating cash flow | $31.5 million | $28.9 million |
- Sales increased 0.4%, but organic sales declined 1.7%; acquisitions contributed 0.5 percentage points and additional workdays 1.6 points. Foreign exchange had no reported impact.
- Gross margin was approximately 19.1%, versus 19.5%; operating margin was 3.1%, versus 3.6%. SG&A was 15.2% of sales, compared with 15.1%.
- Adjusted for $4.6 million of merger-related transaction costs and $0.5 million of related interest expense, WESCO reported adjusted operating income of $65.5 million and adjusted diluted EPS of $0.91. These are non-GAAP measures.
- By end market, industrial sales declined to $702.2 million from $736.9 million; construction rose to $636.5 million from $633.3 million; utility rose to $340.9 million from $308.3 million; and commercial, institutional and government rose to $289.0 million from $282.8 million.
Cash, debt and liquidity
- Cash and equivalents were $342.6 million at March 31, up from $150.9 million at year-end. Management reported $731.8 million of available liquidity, comprising $446.6 million of revolver availability and $285.2 million of available cash; it said $100 million was borrowed as a precaution amid COVID-19. No borrowing capacity remained under the receivables facility.
- Total debt for the leverage calculation was $1.575 billion, net debt was $1.233 billion, and the financial leverage ratio was 3.1x, versus 2.8x at December 31, 2019. Approximately 54% of debt was fixed-rate. The company reported compliance with debt covenants.
- Operating cash flow was $31.5 million; investing used $110.3 million, including the $100 million Anixter termination fee and $15.8 million of capital expenditures. Financing provided $278.7 million, primarily reflecting facility borrowings.
- Management stated that operating and financing cash flows should be adequate for at least the next 12 months. The Revolving Credit Facility matures in September 2024; the Receivables Facility matures in September 2022.
Material developments, outlook and risks
- COVID-19: Sales growth in the first ten weeks was offset by declines in the last two weeks of March. Branches remained operational under applicable directives, and the company reduced costs and cash expenditures and drew on credit facilities to preserve flexibility. Management said demand recovery could occur in the second half of 2020, but provided no formal earnings or sales guidance. The duration and financial effects of the pandemic remained uncertain.
- Anixter merger: The announced transaction consideration included $70 per Anixter share in cash, 0.2397 WESCO shares and 0.6356 depositary shares representing preferred stock, subject to agreement terms and adjustments. WESCO paid a $100 million termination fee on Anixter’s behalf, recorded as a current asset pending the merger. WESCO expected to complete the merger in Q2 or Q3 2020; Canadian antitrust clearance remained outstanding, with a supplementary information request issued April 14. Mexico approval was received April 30. The transaction and financing remained subject to conditions and uncertainty.
- WESCO planned permanent financing to replace its committed bridge facility and expected post-merger excess liquidity to support debt reduction and integration costs. Management cautioned that financing could differ from its anticipated plan and that merger completion was not contingent on completing the contemplated debt financing.
- The company recorded no goodwill or indefinite-lived intangible impairment after interim testing, but two reporting units—with goodwill of $261.3 million and $524.9 million—had estimated fair values less than 5% above carrying value. Further economic deterioration or a sustained share-price decline could lead to impairment.
- Management did not expect pending litigation to materially affect financial condition or liquidity, while noting that individual resolutions could materially affect results in a particular period. WESCO had a standby letter of credit of up to $7.3 million supporting WESTEC debt; its outstanding debt was $6.0 million and management considered the guarantee’s estimated fair value nominal.
Important facts for investors to verify
- Subsequent filings for Anixter merger completion, antitrust clearances, final consideration and financing terms.
- COVID-19 effects on organic sales, customer demand, margins, cash flows and the timing of any recovery.
- Available liquidity, facility usage, debt leverage and continued covenant compliance, including the difference between reported cash and management’s available-cash figure.
- Reporting-unit impairment headroom and any changes in the assumptions used for projected margins and discount rates.
- Reconciliation and assumptions behind adjusted, non-GAAP results when comparing performance across periods.