WESCO International, Inc. — Q2 2015 Form 10-Q
Business and period: WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,916.7 million | $2,005.2 million | $3,733.0 million | $3,816.0 million |
| Operating income | $90.3 million | $115.8 million | $177.4 million | $208.8 million |
| Operating margin | 4.7% | 5.7% | 4.8% | 5.4% |
| Net income attributable to WESCO | $51.7 million | $68.8 million | $98.8 million | $120.7 million |
| Diluted EPS | $1.00 | $1.29 | $1.90 | $2.26 |
Q2 cost of goods sold was 80.1% of sales versus 79.5% a year earlier; SG&A was 14.4% versus 13.9%. For the first half, those ratios were 79.9% versus 79.4% and 14.5% versus 14.3%, respectively.
Cash flow, liquidity and debt: First-half operating cash flow was $132.6 million, compared with $50.8 million in 2014; free cash flow was $120.0 million versus $39.0 million. Capital expenditures were $12.6 million. Cash and equivalents totaled $174.3 million at June 30. Management reported $433.4 million of available revolving-credit capacity and total liquidity of $526.9 million, including $93.5 million of invested cash. The company had no available capacity under its receivables facility. Long-term debt, net of discount, was $1,436.8 million; short-term debt and current long-term debt totaled $49.2 million. The financial leverage ratio was 3.3, up from 3.0 at year-end 2014. WESCO reported compliance with debt covenants.
Changes and management commentary
- Q2 sales declined 4.4%; normalized organic sales fell 3.0%. Foreign exchange reduced sales by 3.0%, while acquisitions added 1.6%.
- First-half sales declined 2.2%; normalized organic sales decreased 0.1%. Foreign exchange and fewer workdays reduced sales by 2.7% and 0.8%, respectively; acquisitions added 1.4%.
- Management attributed weaker operating results primarily to reduced demand in commodity-driven end markets, lower sales volume and supplier rebates, business mix, and competitive pricing. SG&A savings from headcount reductions, lower variable compensation and spending controls partly offset the pressure.
- First-half share repurchases included $75.0 million under the repurchase program. The company acquired Hill Country Electric Supply in May for approximately $68.5 million net of cash acquired; Hill Country had approximately $140 million in annual sales.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expected to focus on working-capital management and liquidity, with excess cash primarily directed toward debt reduction, acquisitions and share repurchases. Management stated that operating cash flow and financing availability should meet foreseeable needs, while noting there can be no assurance that liquidity will remain sufficient.
- Key operating pressures include foreign-exchange movements, commodity-driven demand, supplier rebates, business mix and competitive pricing.
- A Delaware unclaimed-property compliance audit is ongoing; the outcome cannot be predicted, and the company has recorded a liability based on currently known facts.
- A New York County District Attorney investigation into minority and disadvantaged-business contracting practices includes WESCO. The company is cooperating; potential impact and exposure could not be estimated.
- The AIH product-defect litigation was settled in April 2015. Insurers paid $35.8 million, and WESCO reversed the related liability and receivable, including accrued interest; the settlement had no net effect on financial condition or results.
- Foreign currency translation reduced first-half comprehensive income by $88.3 million. The company reported $137.5 million of cash held by foreign subsidiaries, which could incur additional U.S. tax if repatriated.
Investor verification priorities
- Verify the sources and sustainability of the improvement in first-half operating cash flow, including collections of previously accrued supplier rebates.
- Track organic sales, gross-margin pressure, supplier rebates and competitive pricing in subsequent quarters.
- Review leverage, debt maturities and borrowing availability, especially the revolving-credit and receivables facilities maturing in 2016.
- Monitor the Delaware audit and New York investigation for updated estimates, resolutions or financial impacts.
- Assess Hill Country integration and the returns on acquisitions and share repurchases.