WESCO International, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. WESCO distributes electrical, industrial and communications products and provides supply-chain services, serving more than 75,000 customers globally.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,005.2 million | $1,894.0 million | $3,816.0 million | $3,702.0 million |
| Income from operations | $115.8 million | $109.9 million | $208.8 million | $246.8 million |
| Net income attributable to WESCO | $68.8 million | $65.3 million | $120.7 million | $149.3 million |
| Diluted EPS | $1.29 | $1.25 | $2.26 | $2.85 |
- Q2 sales increased 5.9%; organic sales growth was 6.0%, acquisitions added 1.6%, and foreign exchange reduced sales 1.7%. Sequential sales rose 10.7% from Q1.
- Q2 gross margin was 20.5% versus 20.7% (cost of goods sold was 79.5% versus 79.3% of sales); operating margin was 5.7% versus 5.8%. SG&A was 13.9% of sales versus 14.0%.
- For the first half, sales increased 3.1%, including 3.9% organic growth, a 1.0% acquisition contribution, and a 1.8% foreign-exchange headwind. Gross margin was 20.6% versus 20.9%; operating margin was 5.4% versus 6.7%.
- Six-month operating cash flow was $50.8 million versus $119.7 million; free cash flow, as defined by the company, was $39.0 million versus $108.0 million. Working-capital investment—particularly receivables, inventory, and prepaid assets—used cash.
- Cash and cash equivalents were $101.6 million at June 30, 2014. Total debt including debt discount was $1.741 billion; net debt was $1.640 billion. Financial leverage was 3.4x debt to adjusted EBITDA, or 3.2x net debt to adjusted EBITDA, versus 3.2x and 3.0x at year-end 2013.
- Available borrowing capacity under the revolving credit facility was $490.8 million. Management reported $542.4 million of liquidity, comprising that capacity and $51.6 million of invested cash. The company said it complied with debt covenants.
Material changes and notable items
- First-half operating profit and earnings were below 2013, principally because Q1 2013 included a $36.1 million insurance recovery related to the ArcelorMittal litigation. Excluding that prior-year benefit, first-half SG&A was $529.1 million, or 14.3% of sales.
- Lower supplier volume rebates and a change in business mix raised cost of goods sold as a percentage of sales. First-half SG&A also increased due in part to acquisitions, higher employment levels, and related costs.
- WESCO paid $133.3 million, net of cash acquired, for three first-half acquisitions: LaPrairie, Hazmasters, and Hi-Line. Their annual sales were approximately $30 million, $80 million, and $30 million, respectively.
- Reported Q2 net income included a favorable foreign currency translation adjustment of $43.0 million; the six-month translation adjustment was negative $3.5 million.
Outlook, risks, and contingencies
- The filing gives no specific numerical sales or earnings guidance. Management expected to maintain working-capital productivity, prioritize excess cash for debt reduction and acquisitions, and focus near term on working capital, liquidity, and credit availability. It believed operating cash flow and financing capacity would meet current needs, while noting there could be no assurance this would continue.
- WESCO was appealing the ArcelorMittal judgment. At June 30, it recorded a $7.9 million liability and matching insurance receivable for accrued prejudgment and post-judgment interest; the judgment could change based on the appeal. The company said insurers had confirmed coverage.
- A third-party auditor was examining WESCO’s compliance with unclaimed-property laws. Management did not believe pending matters were likely to materially adversely affect financial condition or liquidity, but a resolution in a particular quarter could materially affect that period’s results.
- Of the $101.6 million in cash, $66.2 million was held by foreign subsidiaries. Approximately $31.5 million related to the EECOL acquisition was expected to be returned to sellers in Q3 2014 and was recorded as a liability. Some foreign cash could incur additional U.S. taxes if repatriated.
- Management reported no material second-quarter change in market-risk exposures. It also disclosed that the $344.9 million principal amount of 2029 convertible debentures had a carrying value of $175.8 million and an estimated fair value of approximately $1.1 billion.
Investor verification priorities
- Assess whether sales growth converts to cash: first-half operating cash flow and free cash flow fell materially, with working capital the principal use.
- Separate underlying earnings trends from the $36.1 million prior-year insurance recovery when comparing first-half operating expenses and profit.
- Review leverage, debt maturities, borrowing availability, and the impact of acquisitions on debt and goodwill.
- Monitor the ArcelorMittal appeal, the related insurance coverage and receivable, and the unclaimed-property examination.
- Verify the timing and treatment of the approximately $31.5 million expected payment to EECOL sellers and the accessibility and tax implications of foreign-held cash.