Business context and reporting period
WESCO International, Inc. distributes electrical, industrial and communications products and provides supply-chain and logistics services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance and liquidity
- Third-quarter revenue: $2.148 billion, up 3.9%; organic sales grew 3.4%, with acquisitions adding 0.9% and foreign exchange subtracting 0.4%.
- Third-quarter earnings: Operating income was $93.7 million, down from $97.5 million. Operating margin was 4.4% versus 4.7%; net income attributable to WESCO was $64.5 million versus $66.8 million. Diluted EPS rose to $1.52 from $1.41, with the lower share count following repurchases contributing to per-share results.
- Nine-month results: Revenue was $6.259 billion, up 1.5%; organic growth was 2.1%. Operating income was $262.4 million versus $261.9 million, and attributable net income was $170.3 million versus $169.2 million. Diluted EPS was $3.88 versus $3.56.
- Margins and costs: Third-quarter cost of goods sold was 81.4% of sales versus 80.8%, reflecting unfavorable mix and supplier price increases. Nine-month cost of goods sold was 81.0% versus 80.9%. SG&A was 13.5% of third-quarter sales and 14.1% for both nine-month periods.
- Cash flow: Operating cash flow for the first nine months was $116.7 million, down from $174.5 million. Receivables growth of $122.9 million and lower accrued payroll and benefits were significant cash uses. Capital expenditures were $30.3 million; acquisition payments were $27.7 million. Cash and equivalents ended the period at $138.2 million.
- Debt and liquidity: Debt, including discounts and issuance costs, was $1.382 billion; net debt was $1.243 billion. Net leverage was 3.0x, up from 2.7x at year-end 2018. Management reported $723 million of liquidity, comprising $551.5 million of revolving-facility availability, $110.0 million under the receivables facility and $61.5 million of available cash. The filing notes $106.1 million of cash was held by foreign subsidiaries.
Material changes, outlook and risks
- In September, WESCO replaced its revolving credit facility with a $600 million facility maturing in 2024 and increased and extended its receivables facility to $600 million, maturing in 2022. The company reported compliance with debt covenants.
- WESCO acquired Sylvania Lighting Services in March for $27.7 million in cash; the business had approximately $100 million in annual sales. Management cited the acquisition as contributing to SG&A expense growth.
- The company repurchased $150 million of stock through an accelerated share repurchase during the first nine months. Remaining authorization was $125 million at September 30.
- Management expects cash from operations and available facilities to meet foreseeable needs, plans to closely manage working capital, and expects 2019 capital expenditures to increase. Excess cash is expected to support growth, acquisitions, debt reduction and repurchases. No specific earnings or revenue guidance is provided.
- Third-quarter net interest and other included $3.7 million of noncash interest income from resolution of Canadian transfer-pricing matters. The effective tax rate rose to 19.8% from 17.2% for the quarter and to 21.0% from 19.3% for the nine months, primarily due to international tax provisions and expected remittances of Chinese earnings.
- Management said pending litigation is not expected to materially affect financial condition or liquidity, though a resolution in a particular period could materially affect results. A standby letter of credit of up to $7.3 million supports a WESTEC credit line; its outstanding loan balance was $6.4 million. Management considered the guarantee’s fair value nominal and recorded no liability.
- WESCO adopted the new lease standard in 2019, recognizing operating lease assets and liabilities; management said adoption did not materially affect income or cash flows. Management reported effective disclosure controls and internal control over financial reporting, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow recovers as receivables and working capital evolve.
- Whether gross-margin pressure from mix and supplier pricing persists, and whether organic sales growth continues.
- Debt, net leverage, covenant headroom and actual availability under the revolving and receivables facilities.
- How much cash is practically available domestically, given foreign-held cash and potential repatriation taxes.
- The effects of share repurchases, the SLS acquisition, and the unusual tax and interest items on future earnings and cash generation.