WESCO International, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, principally in North America.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $7.679 billion | $7.336 billion |
| Gross margin | 19.3% | 19.7% |
| Operating income / margin | $320.9 million / 4.2% | $332.1 million / 4.5% |
| Net income attributable to WESCO | $163.5 million | $101.6 million |
| Diluted EPS | $3.38 | $2.10 |
| Operating cash flow | $149.1 million | $300.2 million |
| Free cash flow | $127.6 million | $282.2 million |
| Total debt at year-end | $1.362 billion | $1.402 billion |
Sales rose 4.7%, including 4.5% organic growth. Reported net income increased substantially, but the comparison is affected by a $123.9 million debt-redemption loss in 2016. WESCO reported adjusted diluted EPS of $3.93 for 2017 versus $3.80 for 2016; these are non-GAAP measures. The 2017 effective tax rate was 35.4%, including a provisional $26.4 million net tax expense related to the Tax Cuts and Jobs Act (TCJA). Excluding that item, management stated the rate would have been 24.9%.
Fourth quarter: Sales were $1.997 billion versus $1.793 billion in Q4 2016; operating income was $81.4 million versus $82.0 million. Net income attributable to WESCO was $22.5 million and diluted EPS was $0.47, with the quarter affected by the $26.4 million provisional TCJA expense.
Changes and financial position
- Sales returned to growth after declining in 2016. Management attributed growth to improved momentum across end markets and geographies.
- Gross margin declined 0.4 percentage points, primarily due to geographic mix and competition. Operating income fell despite higher sales, reflecting lower gross margin and restored incentive and discretionary compensation.
- Operating cash flow and free cash flow were materially lower, principally as higher sales and customer backlog increased trade receivables and inventory.
- Year-end cash and cash equivalents were $118.0 million; stockholders’ equity was $2.12 billion. Financial leverage was 3.5x adjusted EBITDA, and the company reported compliance with debt covenants.
- WESCO reported $562.9 million of available revolving-credit capacity and $170.0 million under its receivables facility. Its liquidity discussion states total liquidity of $793.8 million using $60.9 million of cash, which differs from the $118.0 million balance-sheet cash figure; the filing does not clearly reconcile this difference.
- Debt maturities include $392.2 million in 2020 and $500 million of 5.375% notes in 2021. Revolving and receivables facilities mature in September 2020.
Outlook, risks and unusual items
- No specific numeric sales or earnings guidance is provided. Management expected 2018 capital expenditures to be higher than 2017 and said excess cash would primarily support growth initiatives, acquisitions, debt reduction and share repurchases.
- The TCJA accounting was provisional and incomplete. WESCO recorded $82.8 million of transition-tax expense, partly offset by a $56.4 million deferred-tax remeasurement benefit, and accrued a net $65.0 million transition-tax liability payable over eight years. Management was still evaluating the law’s future effects, including repatriation and GILTI.
- Key risks include economic sensitivity in customer markets, competition and pricing pressure, supplier concentration and commodity-price volatility, execution and integration of acquisitions, cybersecurity and IT disruption, foreign-exchange exposure, debt service and refinancing, and changes in tax law. Eaton represented approximately 11% of purchases; the ten largest suppliers represented approximately 33%.
- Routine litigation was not expected by management to materially affect financial condition or liquidity, though outcomes in a particular period could affect results. The company reached agreements in principle on a Delaware escheatment audit and a New York contracting-practices investigation; settlement amounts were described as not material.
- The company revised its December 31, 2016 balance sheet for prior-period tax-account errors it judged immaterial to previously issued statements; revised total assets and equity decreased by $59.1 million and $46.4 million, respectively. The auditor gave unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Reconcile the $60.9 million cash amount used in the stated liquidity calculation with $118.0 million of reported cash and the $78.5 million held by foreign subsidiaries.
- Track final TCJA accounting, transition-tax payments, and any changes to management’s indefinite-reinvestment or repatriation position.
- Assess working-capital conversion and the sustainability of cash flow as receivables and inventory expanded.
- Review refinancing and liquidity plans ahead of the 2020 facility maturities and 2021 notes, alongside the 3.5x leverage ratio.
- Monitor gross-margin trends, pricing competition, supplier concentration, and execution of stated growth and capital-investment plans.