WESCO INTERNATIONAL INC annual report, FY2015

WESCO International, Inc. — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with fiscal 2014. This is an annual report, not a standalone fourth-quarter filing. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in North America.

Financial performance

Metric	2015	2014
Net sales	$7.518 billion	$7.890 billion
Income from operations	$373.7 million	$466.2 million
Net income attributable to WESCO	$210.7 million	$275.9 million
Diluted EPS attributable to WESCO	$4.18	$5.18
Operating cash flow	$283.1 million	$251.2 million
Free cash flow, company-defined non-GAAP	$261.4 million	$230.7 million

• Sales fell 4.7%; management reported normalized organic sales down 3.3%, foreign exchange headwinds of 3.4%, and acquisition contribution of 2.0%. Management estimated price had no measurable effect.
• Gross margin, calculated from reported sales and cost of goods sold, was approximately 19.9%, versus 20.4% in 2014. Operating margin was 5.0%, versus 5.9%; net income attributable to WESCO was 2.8% of sales, versus 3.5%.
• Operating income declined $92.5 million. WESCO attributed the decrease mainly to lower sales, lower supplier volume rebates and business mix. SG&A fell 2.0% to $1.055 billion, but increased to 14.0% of sales from 13.6%. The company reported a 5.0% headcount reduction, excluding acquisitions.
• Interest expense declined to $69.8 million from $82.1 million. The 2015 tax provision was $95.5 million and the effective tax rate was 31.4%, up from 28.3%; resolution of transfer-pricing matters contributed $11.7 million of tax expense, partly offset by $9.4 million of non-cash interest income.
• At year-end, total assets were $4.587 billion and stockholders’ equity was $1.774 billion. Reported debt was $1.501 billion net of debt discount; debt including the discount was $1.665 billion. Cash and cash equivalents on the balance sheet were $160.3 million.
• Year-end gross financial leverage was 3.8x EBITDA and net leverage was 3.4x, compared with 3.0x and 2.7x, respectively, in 2014. WESCO reported compliance with its debt covenants.

Cash, liquidity and capital allocation

• Operating cash flow increased by $31.9 million year over year. Acquisition payments, net of acquired cash, were $151.6 million; capital expenditures were $21.7 million. The company repurchased $155.8 million of stock during the year, including $150.0 million under its authorization.
• WESCO reported $438.7 million of available revolving-credit capacity and $10.9 million under its receivables facility. Its liquidity discussion states that cash was $96.5 million and total liquidity was $546.1 million, which does not match the $160.3 million cash balance elsewhere in the filing; see investor verification items.
• The $600 million revolving credit facility was amended in September 2015 and matures in September 2020. The receivables facility limit increased to $550 million and matures in September 2018; $525 million was outstanding at year-end. The filing’s debt repayment schedule shows $525.4 million due in 2018, largely associated with the receivables facility.
• WESCO said it expected operating cash flow and financing activities to cover current needs, planned to prioritize ample liquidity and credit availability, and expected 2016 capital expenditures to be similar to 2015. Excess cash was expected to be directed primarily to debt reduction, acquisitions and share repurchases. The company reported no current plan to pay common-stock dividends.

Material changes and notable items

• Weakness in commodity-driven markets, particularly oil and gas, and unfavorable currency movements weighed on 2015 results. Canada’s share of sales declined to 21% from 24%; U.S. sales rose to 75% of total from 71%, reflecting both currency effects and changes in sales.
• WESCO acquired Hill Country Electric Supply and Needham Electric Supply in 2015, with reported acquisition payments of $151.6 million net of acquired cash. The acquisitions focused on commercial construction and lighting markets.
• Stockholders’ equity fell 8.0%, primarily reflecting a $225.8 million foreign-currency translation loss and share repurchases, partly offset by earnings.
• WESCO completed amendments to its revolving-credit and receivables facilities in September 2015. It also repaid the Canadian term-loan sub-facility during the year.
• The annual goodwill impairment test identified no impairment. Most reporting units’ estimated fair values exceeded carrying values by at least 25%; one unit with $186.7 million of goodwill had an estimated cushion of approximately 5%.

Outlook, risks and contingencies

• No quantified sales, earnings or margin guidance is provided in the filing. Management’s stated strategy emphasizes organic growth, acquisitions, LEAN cost and productivity initiatives, and expansion of global-account, integrated-supply, construction, utility, industrial MRO, safety and communications offerings.
• Key risks include economic weakness and project delays in commodity-sensitive end markets; foreign-exchange exposure; commodity-price deflation and margin pressure; supplier concentration and short-termination supplier agreements; competition; acquisition integration; cybersecurity or IT disruption; and the company’s substantial debt and refinancing requirements.
• Debt covenants restrict certain additional borrowing, liens, investments, asset sales, capital expenditures, dividends and other actions. Management reported covenant compliance at year-end. The filing identifies approximately $570.6 million of debt repayments over the following three years, including $525 million related to the receivables facility.
• Contingencies include a Delaware unclaimed-property compliance audit and a New York investigation into minority and disadvantaged business contracting practices. WESCO said it could not predict the outcome or reasonably estimate potential exposure for the New York matter. Management did not believe pending litigation was likely to materially affect financial condition or liquidity, but acknowledged a quarterly earnings impact could occur.
• A prior customer product-liability case was settled in April 2015, with insurers paying $35.8 million; the settlement had no net effect on WESCO’s financial condition or results. Environmental compliance was reported as adequate, with no significant near-term environmental capital expenditures anticipated.
• Auditor PricewaterhouseCoopers LLP gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2015.

Important facts for investors to verify

• Reconcile the liquidity discussion’s stated $96.5 million of cash with the balance-sheet cash of $160.3 million and the reported $546.1 million total liquidity.
• Review the 2018 maturity concentration, receivables-facility renewal terms and access to refinancing, particularly given gross leverage of 3.8x EBITDA.
• Assess whether the 2015 deterioration in organic sales, gross margin and operating margin persisted after the reporting period; this filing provides no quantified 2016 earnings or sales guidance.
• Monitor the Delaware unclaimed-property audit and New York contracting investigation for developments, potential liabilities or effects on operating results.
• Evaluate the sensitivity of goodwill valuation, especially the reporting unit with only an approximately 5% fair-value cushion, to weaker forecasts or higher discount rates.