WESCO International, Inc. — FY 2014 Form 10-K
Business and period: WESCO distributes electrical, industrial and communications products and provides supply-chain services, principally in North American industrial, construction, utility and commercial markets. This annual report covers the fiscal year ended December 31, 2014; it also provides unaudited fourth-quarter results. The company operated about 485 branches and served more than 75,000 active customers.
Financial results
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $7.890 billion | $7.513 billion |
| Income from operations | $466.2 million | $481.0 million |
| Net income attributable to WESCO | $275.9 million | $276.4 million |
| Diluted EPS attributable to WESCO | $5.18 | $5.25 |
| Operating cash flow | $251.2 million | $315.1 million |
| Capital expenditures | $20.5 million | $27.8 million |
| Free cash flow (company-defined, non-GAAP) | $230.7 million | $308.4 million |
Sales grew 5.0% year over year: organic growth contributed 5.6% and acquisitions 1.4%, partly offset by foreign exchange (-1.6%) and fewer workdays (-0.4%). Gross margin was approximately 20.4% versus 20.6%; reported operating margin was 5.9% versus 6.4%. The 2013 results included a $36.1 million insurance recovery related to litigation. Excluding that item, 2013 adjusted operating income was $444.9 million, adjusted operating margin was 5.9%, adjusted net income attributable to WESCO was $254.4 million, and adjusted diluted EPS was $4.82. On that adjusted comparison, 2014 operating income rose 4.8% and diluted EPS rose to $5.18.
Fourth quarter: Sales were $1.995 billion versus $1.880 billion in Q4 2013; operating income was $124.2 million versus $110.6 million; net income attributable to WESCO was $74.4 million versus $58.0 million; diluted EPS was $1.40 versus $1.09.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $128.3 million; reported total debt carrying value was $1.416 billion. Principal debt including debt discounts was $1.586 billion. The company reported $637.7 million of total liquidity, comprising $497.5 million of revolving-credit availability, $70.0 million of receivables-facility availability and $70.2 million of invested cash.
- Debt included $500 million of 5.375% notes due 2021, $344.9 million principal of 6.0% convertible debentures due 2029, a $252.3 million term loan and $430.0 million drawn under the receivables facility. Financial leverage was 3.0x total debt/adjusted EBITDA, or 2.7x net of cash. WESCO said it was in compliance with debt covenants.
- Operating cash flow declined by $63.9 million, with working-capital investment—including increases in receivables and inventory—among the uses of cash. Investing cash outflow was $144.2 million, primarily reflecting $133.8 million paid for three acquisitions. Financing cash outflow was $95.5 million.
- Stockholders’ equity rose to $1.928 billion from $1.765 billion. Foreign-currency translation reduced other comprehensive income by $120.3 million. WESCO paid no common dividends and reported no purchases under its newly authorized $300 million share-repurchase program through year-end.
Changes, outlook and material matters
- WESCO acquired LaPrairie, Hazmasters and Hi-Line in 2014, investing $133.8 million net of acquired cash. Management said the acquisitions were accretive and highlighted renewed organic growth, integration progress and increased profitability.
- Management’s stated priorities were working-capital productivity, maintaining liquidity, and directing excess cash primarily toward debt reduction, acquisitions and share repurchases. 2015 capital expenditures were expected to be similar to 2014. The filing provides no quantified revenue or EPS guidance.
- Key risks include economic and customer-project weakness, competition and pricing pressure, supplier concentration and product availability, commodity-price and foreign-exchange movements, cyber or operational disruption, acquisition integration, and debt service and covenant constraints. The revolving credit facility matures in August 2016 and the receivables facility in September 2016.
- Litigation: the Indiana appeals court reversed a $3.9 million prejudgment-interest award in the ArcelorMittal case but otherwise affirmed the underlying judgment; further review was sought. WESCO recorded a $9.5 million liability and matching insurance receivable for accrued interest at year-end. The company also disclosed a Delaware unclaimed-property audit and a New York County District Attorney investigation concerning contracting practices; it could not estimate exposure for the latter.
- Other notable exposures include $596.6 million of foreign subsidiary earnings considered permanently reinvested; the filing estimates an unrecognized deferred U.S. tax liability of approximately $208.8 million if those earnings were repatriated. The company reported no goodwill impairment and said reporting-unit fair values exceeded carrying values by at least 25%.
Important facts for investors to verify
- Whether organic sales growth and margin performance continue, particularly after separating acquisition, currency and workday effects.
- Working-capital conversion and the reasons operating cash flow and free cash flow fell year over year.
- Debt maturities, refinancing plans for the 2016 facilities, covenant headroom and the treatment of convertible-debt dilution.
- Developments and potential financial exposure in the ArcelorMittal litigation, Delaware unclaimed-property audit and New York investigation.
- Acquisition integration and returns, foreign-exchange exposure, and any tax consequences if foreign earnings are repatriated.
The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. The auditor reported effective internal controls as of December 31, 2014.