WESCO International, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in North American industrial, construction, utility and commercial markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,911.6 million | $1,916.7 million | $3,687.5 million | $3,733.0 million |
| Operating income | $88.0 million | $90.3 million | $157.5 million | $177.4 million |
| Net income attributable to WESCO | $49.8 million | $51.7 million | $85.9 million | $98.8 million |
| Basic / diluted EPS | $1.18 / $1.02 | $1.18 / $1.00 | $2.03 / $1.79 | $2.23 / $1.90 |
- Margins: Q2 cost of goods sold was 80.1% of sales in both years; operating margin was 4.6% versus 4.7%. For the six-month period, cost of goods sold was 80.1% versus 79.9%, SG&A was 14.7% versus 14.5%, and operating margin was 4.3% versus 4.8%.
- Cash flow: Six-month operating cash flow was $138.6 million versus $132.6 million. Capital expenditures were $7.1 million versus $12.6 million; company-defined free cash flow was $131.5 million versus $120.0 million. Cash and cash equivalents were $160.3 million at June 30.
- Debt and liquidity: Balance-sheet short-term debt and current long-term debt totaled $44.7 million; long-term debt, net, was $1,360.7 million. The company’s leverage calculation reported total debt of $1,589.4 million, including debt discount and financing fees, and a 3.8x financial leverage ratio. Available capacity was $507.7 million under the revolving credit facility and $374.9 million under the receivables facility. Management cited total liquidity of $997.2 million, using $114.6 million of available cash in that calculation.
Changes and notable developments
- Six-month sales declined 1.2%; normalized organic sales declined 4.9%, after adjusting for acquisitions (+3.8%), foreign exchange (-1.7%) and workdays (+1.6%). Q2 normalized organic sales declined 3.1%; acquisitions contributed 3.7% and foreign exchange reduced sales by 0.9%.
- Management attributed lower operating income primarily to unfavorable business mix. Cost controls, headcount reductions, branch closures and discretionary spending controls partly offset acquisition-related and payroll costs. Six-month SG&A increased to $543.8 million from $539.8 million.
- On March 14, WESCO acquired Atlanta Electrical Distributors, with approximately $85 million in annual sales. Six-month net acquisition payments were $50.9 million.
- In June, WESCO issued $350 million of 5.375% senior notes due 2024. It intends to use the proceeds to repay its 6.0% convertible debentures due 2029, redeemable on or after September 15, 2016; proceeds were temporarily used to reduce other debt facilities pending repayment.
- Foreign currency translation increased six-month other comprehensive income by $80.5 million. Of the $160.3 million of cash reported, $132.6 million was held by foreign subsidiaries; some foreign cash could incur additional U.S. tax if repatriated.
Outlook, risks and contingencies
- The filing provides no numerical earnings or sales guidance. Management described a challenging market environment and said it expects to manage working capital closely, directing excess cash primarily to debt reduction, acquisitions and share repurchases. It believes operating cash flow and borrowing facilities will meet foreseeable needs, while noting there is no assurance this will continue.
- WESCO was undergoing a Delaware unclaimed-property compliance audit; the outcome was uncertain. The company also disclosed a New York County District Attorney investigation concerning minority and disadvantaged business contracting practices. It could not estimate potential liability; fines, penalties or other adverse consequences are possible.
- Management reported compliance with debt covenants and no material changes to previously disclosed risk factors or market-risk exposures. Disclosure controls and internal control over financial reporting were assessed as effective at quarter-end.
- The company reported no triggering event requiring interim goodwill or indefinite-lived intangible impairment testing; annual testing was planned for the fourth quarter. The fair value of the 2029 debentures was approximately $625.1 million against a carrying value of $180.1 million at June 30.
Important facts for investors to verify
- Whether weak normalized organic sales and unfavorable business mix persist, and how acquisition contributions compare with underlying demand.
- Completion and terms of the planned 2029 debenture redemption, the resulting debt mix, interest costs and leverage.
- Availability and terms of revolving and receivables-facility capacity, and the distinction between reported cash and management’s lower available-cash figure.
- Developments in the Delaware audit and New York investigation, including any change in estimated exposure or recorded liabilities.
- The effect of foreign exchange, foreign-held cash, and any future impairment testing on reported results and liquidity.