WESCO International, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in North America.
Financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $8.359 billion | $8.177 billion |
| Income from operations | $346.2 million | $352.4 million |
| Net income attributable to WESCO | $223.4 million | $227.3 million |
| Diluted EPS | $5.14 | $4.82 |
| Operating cash flow | $224.4 million | $296.7 million |
| Free cash flow | $180.3 million | $260.5 million |
- Annual sales increased 2.2%; organic sales growth was 2.6%, after negative impacts from foreign exchange (0.8%) and workdays (0.4%), partly offset by acquisitions (0.8%).
- Gross margin declined to approximately 18.9% from 19.2%, reflecting challenging pricing and business mix. Operating margin fell to 4.1% from 4.3%. SG&A as a share of sales improved slightly, to 14.0% from 14.1%.
- Net income attributable to WESCO declined about 1.7%, while diluted EPS increased as weighted-average diluted shares fell to 43.5 million from 47.2 million, including the effect of share repurchases.
- Fourth-quarter sales were $2.099 billion versus $2.011 billion a year earlier; operating income was $83.8 million versus $90.5 million, and attributable net income was $53.1 million versus $58.1 million. Diluted EPS was $1.26 in both quarters.
- At year-end, total debt was $1.293 billion, net debt was $1.142 billion, and the reported financial leverage ratio was 2.8x EBITDA, compared with 2.7x in 2018. Cash and cash equivalents were $150.9 million. Stockholders’ equity was $2.259 billion.
- Reported available capacity was $563.8 million under the revolving credit facility and $185.0 million under the receivables facility. The filing’s liquidity discussion gives total liquidity of $823.2 million using $74.4 million of available cash; that cash figure differs from the balance-sheet cash amount and should be reconciled.
Cash, capital allocation and balance sheet
- Operating cash flow decreased by $72.4 million year over year; higher inventory and lower accrued payroll and benefits were among the 2019 cash uses. Capital expenditures were $44.1 million, up from $36.2 million.
- Investing cash outflow was $60.8 million, including $27.6 million for the Sylvania Lighting Services acquisition. Financing cash outflow was $109.8 million and included $150.0 million of share repurchases.
- WESCO had repurchased 5.46 million shares for $275.0 million under its authorization by year-end. It had not paid common dividends and did not then plan to do so.
- Debt included $500 million of 5.375% notes due 2021 and $350 million of 5.375% notes due 2024. Principal repayments disclosed for 2020–2022 include approximately $26.7 million in 2020, $500.9 million in 2021 and $415.0 million in 2022.
Outlook, material events and risks
- On January 10, 2020, WESCO agreed to acquire Anixter in a transaction valued at approximately $4.5 billion. Consideration includes $70 cash, 0.2397 WESCO common shares and 0.6356 depositary shares representing preferred stock for each Anixter share, subject to agreement terms. WESCO anticipated closing in the second or third quarter of 2020, subject to Anixter stockholder and regulatory approvals and other conditions.
- WESCO disclosed a potential $190 million reverse termination fee payable to Anixter in specified circumstances, including certain failures to obtain regulatory clearances; specified terminations could instead require Anixter to pay WESCO a $100 million fee. The company expected to finance the transaction with new debt, existing and new credit facilities, and additional common or equity-linked securities.
- Management expected excess cash and receivables-facility availability to help fund the merger, planned to use excess cash for debt reduction between signing and closing, and expected post-close liquidity to support debt reduction and integration costs. 2020 capital expenditures were expected to be similar to 2019. No specific earnings or sales guidance is provided in the filing.
- Key risks include acquisition approval, financing and integration; higher post-merger debt and interest expense; economic weakness and project delays; competition and pricing pressure; supplier concentration and product availability; commodity and foreign-exchange volatility; cyber and operational disruptions; and tax, regulatory, litigation and environmental exposures.
- Management reported compliance with debt covenants at year-end and stated that pending legal matters were not expected to materially affect financial condition or liquidity, while noting a resolution could materially affect results in a particular period. The 2019 annual goodwill impairment test identified no impairment; goodwill was $1.759 billion, and the auditor identified that assessment as a critical audit matter due to valuation judgment.
- WESCO adopted the new lease accounting standard in 2019, recognizing operating lease assets of approximately $235.8 million and liabilities of $241.9 million at year-end. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the $74.4 million of cash used in management’s liquidity calculation with $150.9 million of balance-sheet cash, including any restrictions or exclusions.
- Track Anixter merger approvals, final financing and equity terms, closing timing, transaction costs, integration progress, realized synergies and resulting leverage.
- Assess the 2021 and 2022 debt maturities and WESCO’s ability to refinance or repay them while preserving liquidity.
- Monitor gross-margin trends, organic sales growth and cash conversion, particularly given lower 2019 operating cash flow and free cash flow.
- Review sensitivity of goodwill valuation to operating forecasts and discount rates, as well as supplier concentration and exposure to economic, pricing and currency changes.