WESCO International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services across industrial, construction, utility, and commercial, institutional and government markets. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,961.3 million | $1,993.9 million |
| Gross margin | 19.5% | 19.1% |
| SG&A as % of sales | 15.1% | 14.6% |
| Operating income | $70.7 million | $73.2 million |
| Net income attributable to WESCO | $42.4 million | $44.4 million |
| Diluted EPS | $0.93 | $0.93 |
| Operating cash flow | $28.9 million | $53.0 million |
| Free cash flow | $18.1 million | $45.3 million |
- Cash and cash equivalents were $106.1 million at quarter-end. Total debt, as presented in management’s leverage calculation, was $1,251.3 million; debt net of cash was $1,145.2 million.
- Trailing-twelve-month EBITDA was $412.3 million. The financial leverage ratio was 3.0x, or 2.8x net of cash. WESCO reported compliance with its debt covenants.
- Available borrowing capacity was $533.7 million under the revolving credit facility and $210.0 million under the receivables facility. Management’s stated liquidity total was $780.9 million, including $37.2 million of cash counted as available for this calculation.
- Current assets were $2,513.8 million and current liabilities were $1,150.7 million. Total stockholders’ equity was $2,196.4 million.
Changes versus the prior comparable period
- Reported sales declined 1.6%. Management reported organic sales growth of 1.0%; foreign exchange reduced sales by 1.3%, fewer workdays by 1.6%, and acquisitions added 0.3%.
- Gross margin improved by 0.4 percentage points, which management attributed primarily to margin initiatives. However, SG&A rose $5.7 million, including acquisition-related and higher payroll costs, and increased as a share of sales.
- Operating income decreased 3.4% and attributable net income decreased 4.6%; diluted EPS was unchanged at $0.93. Lower net interest and other expense partly offset higher tax expense and lower operating income.
- Operating cash flow fell to $28.9 million, with working-capital uses including higher receivables and inventory. Free cash flow declined to $18.1 million.
- Results were affected by foreign-exchange headwinds, adverse weather and one fewer workday. Sales were down in industrial, construction and utility markets; commercial, institutional and government sales were slightly higher.
Outlook, commentary and risks
- WESCO provided no specific earnings or sales guidance in the supplied filing text. Management expected 2019 capital expenditures to be similar to 2018 and planned to direct excess cash toward growth initiatives, acquisitions, debt reduction and share repurchases while managing working capital and maintaining liquidity.
- Management stated that operating cash flow and available financing should cover foreseeable business needs, while cautioning that this cannot be assured. It reported that 68% of debt was fixed-rate.
- On March 5, 2019, WESCO acquired certain assets and assumed certain liabilities of Sylvania Lighting Services for $27.7 million in cash. SLS had approximately $100 million in annual sales and 220 employees; the purchase-price allocation included $5.5 million of goodwill.
- WESCO adopted the new lease accounting standard on January 1, 2019, recording approximately $240 million of operating lease assets and $245 million of lease liabilities at adoption. At March 31, operating lease assets were $233.0 million and liabilities were $237.8 million. The company said adoption did not materially affect quarterly earnings or cash flow; prior-period comparisons were not restated.
- The effective tax rate rose to 21.7% from 19.6%, primarily due to full application of international provisions of U.S. tax reform. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
- Routine commercial, product and employment claims remain possible; management did not expect pending matters to materially affect financial condition or liquidity, but a period’s results could be affected. WESCO also guaranteed a standby letter of credit of up to $7.3 million supporting WESTEC’s credit line; WESTEC’s outstanding loan was $6.5 million, and management considered the guarantee’s fair value nominal.
Investor verification points
- Check whether organic growth, margin improvement and the effects of weather, foreign exchange and workdays persist in subsequent quarters.
- Track working-capital conversion and cash generation, particularly receivables and inventory, and compare reported liquidity with cash available for domestic needs.
- Review debt levels, leverage, facility availability and covenant compliance, including the facilities’ September 2020 maturities.
- Assess the integration and contribution of the SLS acquisition, as well as acquisition-related costs and goodwill.
- Monitor tax-rate developments, lease obligations, share repurchases and the WESTEC guarantee; the filing provides no specific earnings guidance.