WESCO International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. WESCO distributes electrical, industrial, communications, and construction products and supply-chain services, serving more than 80,000 active customers through approximately 500 branches.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net sales | $1,776.0 million | $1,816.3 million | Down 2.2% |
| Gross margin | 20.0% | 20.2% | Lower, primarily due to reduced supplier volume rebates |
| Operating income | $69.5 million | $87.2 million | Operating margin: 3.9% vs. 4.8% |
| Net income attributable to WESCO | $36.1 million | $47.0 million | Down; diluted EPS was $0.77 vs. $0.90 |
| Net interest expense | $18.8 million | $20.9 million | Down 9.9% |
| Operating cash flow | $78.6 million | $90.1 million | Down $11.5 million |
| Free cash flow | $75.0 million | $85.1 million | Operating cash flow less capital expenditures; company-defined non-GAAP measure |
SG&A was $269.3 million, or 15.2% of sales, versus $264.6 million, or 14.6%. The effective tax rate increased to 31.9% from 29.4%, including a discrete tax-settlement item that raised the Q1 2016 rate by 3.4 percentage points.
Liquidity, debt, and balance sheet
- At March 31, cash and cash equivalents were $147.8 million, current assets $2,274.4 million, and current liabilities $983.3 million.
- Total debt, including debt discount and deferred financing fees for the company’s leverage calculation, was $1,620.9 million, compared with $1,665.4 million at year-end 2015. Long-term debt on the balance sheet was $1,391.2 million; short-term debt and current long-term debt totaled $49.5 million.
- Trailing-twelve-month EBITDA was $421.5 million and the reported financial leverage ratio was 3.8x, unchanged from December 31, 2015. WESCO reported compliance with debt covenants.
- Management reported $407.3 million available under the revolving credit facility and $21.4 million under the receivables facility. Its stated liquidity figure was $524.9 million, using $96.2 million of cash; the filing separately reports total cash of $147.8 million.
- Foreign subsidiaries held $118.0 million of cash, some of which could incur additional U.S. tax if repatriated. Management said domestic liquidity needs could be met without repatriation.
Changes, management commentary, and outlook
- Management attributed the quarter’s results to continued weakness in commodity-driven end markets and foreign-exchange headwinds, partly offset by cost reductions and organizational streamlining. Normalized organic sales declined 6.7%; reported sales also reflected a 2.6% negative foreign-exchange impact, 3.9% positive acquisition impact, and 3.2% positive workday impact.
- Operating income fell primarily due to lower sales volume, lower supplier rebates, and higher variable compensation costs; cost controls partly offset these pressures. SG&A also reflected acquisitions, partly offset by headcount reductions, branch actions, and discretionary spending controls.
- WESCO acquired Atlanta Electrical Distributors, LLC on March 14, 2016. The business had approximately $85 million in annual sales; net cash paid was $50.3 million. Preliminary purchase accounting included $41.1 million of goodwill and $13.7 million of intangible assets.
- Management said it expected operating cash flow and financing availability to cover foreseeable business needs, while noting there can be no assurance. It planned to manage working capital and direct excess cash primarily to debt reduction, acquisitions, and share repurchases, with near-term emphasis on liquidity and credit availability. The filing provides no specific earnings or sales guidance.
- Cash flow from operations was lower year over year. Working-capital movements included a $17.5 million inventory increase and a $14.5 million decrease in accrued payroll and benefits; investing cash outflow included the AED acquisition. Capital expenditures were $3.6 million.
Risks, contingencies, and unusual items
- WESCO disclosed a Delaware compliance audit concerning unclaimed or abandoned property; a liability was recorded based on currently known facts, but the outcome is uncertain.
- The company is included in a New York County District Attorney investigation concerning minority and disadvantaged business contracting practices. WESCO is cooperating; it could not predict the outcome or reasonably estimate potential exposure.
- Management noted weak market conditions could negatively affect estimates used in goodwill and indefinite-lived intangible asset impairment testing. No Q1 triggering event requiring interim impairment testing was identified.
- After quarter-end, WESCO announced that its CFO would resign effective May 31, 2016; an interim CFO was appointed and a search began.
- Foreign-currency translation adjustments added $82.3 million to other comprehensive income, compared with a $113.8 million loss in Q1 2015. This materially affected reported comprehensive income but not net income.
Important facts for investors to verify
- Whether weak end-market demand, foreign exchange, and reduced supplier rebates continued to pressure organic sales and margins after Q1.
- The final AED purchase-price allocation, contingent consideration, and acquired-business contribution to results.
- Debt, covenant headroom, facility availability, and the distinction between reported cash and the cash amount used in management’s liquidity calculation.
- Developments and potential financial exposure from the Delaware unclaimed-property audit and New York investigation.
- The CFO transition and any subsequent changes to management’s capital-allocation priorities or outlook.