WESCO International, Inc. — Q1 2014 Form 10-Q
Business context and period: WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services. This unaudited report covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. WESCO served more than 75,000 active customers through approximately 475 branches and nine distribution centers.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Net sales | $1,810.8 million | $1,808.1 million | Up 0.2%; organic sales +1.6%, acquisitions +0.5%, foreign exchange -1.9% |
| Cost of goods sold | $1,436.0 million; 79.3% of sales | $1,427.0 million; 78.9% | Supplier rebates and lower Canadian sales mix weighed on the rate |
| SG&A | $265.5 million; 14.7% of sales | $227.5 million; 12.6% | Prior-year quarter included a $36.1 million insurance recovery receivable |
| Operating income | $93.0 million; 5.1% margin | $136.9 million; 7.6% | Down 32.1% |
| Net income attributable to WESCO | $51.9 million | $84.0 million | Down 38.2% |
| EPS | Basic $1.17; diluted $0.97 | Basic $1.91; diluted $1.60 | Lower year over year |
| Operating cash flow / free cash flow | $46.7 million / $41.7 million | $80.4 million / $74.4 million | Lower operating cash generation and higher working-capital use |
Net sales were nearly flat as improving U.S. conditions were largely offset by severe winter weather in the United States and Canada. Sequential sales declined 3.7%, including a 3.1% decline in organic sales. The company reported no formal earnings or sales guidance in the filing. It noted that Q2–Q4 sales are generally 4%–6% above Q1, subject to economic conditions.
Balance sheet, debt and liquidity
- At March 31, 2014, cash and cash equivalents were $96.4 million, total assets $4.71 billion, total liabilities $2.94 billion, and stockholders’ equity $1.77 billion.
- Reported debt included $42.7 million short-term debt, $2.5 million current long-term debt and $1.46 billion long-term debt, net of discount. The company’s leverage presentation counted total debt including discounts of $1.68 billion; net of cash, debt was $1.58 billion.
- Trailing-twelve-month adjusted EBITDA was $504.4 million. The financial leverage ratio was 3.3x based on total debt and 3.1x on net debt, versus 3.2x and 3.0x, respectively, at December 31, 2013. WESCO said it was compliant with debt covenants.
- Available capacity was $447.0 million under the revolving credit facility and $21.9 million under the receivables facility. WESCO reported total liquidity of $524.5 million, including $55.6 million of invested cash under its liquidity definition.
- Approximately 51% of the debt portfolio was fixed rate. The company stated that operating cash flow and available facilities should meet foreseeable needs, while noting there can be no assurance. It expected excess cash to be directed mainly to debt reduction and acquisitions.
Material changes, outlook and other matters
- Acquisitions: WESCO acquired Canadian distributors LaPrairie on February 3 and Hazmasters on March 17. Cash paid, net of cash acquired, was $91.2 million. Their reported annual sales were approximately $30 million and $80 million, respectively; together they contributed 0.4% of consolidated Q1 revenue.
- Cash flow and working capital: Operating cash flow fell to $46.7 million from $80.4 million. The filing attributes 2014 cash uses principally to increased trade receivables and inventory, lower accrued payroll and benefits following incentive payments, and higher prepaid expenses. Acquisition payments drove investing cash use of $96.2 million.
- Prior-period comparison: Q1 2013 SG&A benefited from recording a $36.1 million insurance receivable associated with the ArcelorMittal litigation liability previously charged in 2012. Excluding that benefit, Q1 2013 SG&A was $263.6 million, or 14.6% of sales; therefore, the reported year-over-year operating-profit decline is substantially affected by this comparison.
- Litigation: WESCO is appealing the ArcelorMittal judgment. At March 31, 2014, it recorded a $7.1 million liability and corresponding insurance receivable for accrued prejudgment and post-judgment interest. The outcome of the appeal is uncertain.
- Currency and tax: Foreign-currency translation reduced comprehensive income by $46.5 million, versus a $23.5 million reduction in Q1 2013. The effective tax rate was 28.2%, compared with 26.9%, primarily reflecting a shift in income mix toward the United States.
- Other disclosures: The company revised prior balance-sheet tax classifications and certain consolidating schedules; management said the revisions were not material to the consolidated statements and did not change previously reported consolidated amounts. WESCO said it saw no conditions requiring an interim goodwill impairment evaluation. Disclosure controls were considered effective; acquired businesses were excluded from the quarter’s internal-control change assessment while their control environments were being assessed.
Important facts for investors to verify
- Whether underlying sales and margins improve after winter-related disruption, foreign-exchange effects and the acquisition contribution.
- How much of the earnings comparison reflects the $36.1 million Q1 2013 insurance recovery rather than operating trends.
- Working-capital conversion, free cash flow and progress against the stated priorities of debt reduction and acquisitions.
- The appellate outcome and insurance recovery for the ArcelorMittal judgment and accrued interest.
- Debt availability, covenant compliance, leverage and any restrictions or tax costs associated with repatriating foreign cash; the filing states that $59.4 million of cash was held by foreign subsidiaries and approximately $31.5 million was expected to be returned to acquisition sellers in Q2 2014.