WESCO International, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in North America. It reported approximately 70,000 active customers, 500 branches and 9,100 employees.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $8.177 billion | $7.679 billion |
| Operating income | $352.4 million | $319.0 million |
| Net income | $225.4 million | $163.1 million |
| Net income attributable to WESCO | $227.3 million | $163.5 million |
| Diluted EPS attributable to WESCO | $4.82 | $3.38 |
| Operating cash flow | $296.7 million | $149.1 million |
| Capital expenditures | $36.2 million | $21.5 million |
| Free cash flow (non-GAAP) | $260.5 million | $127.6 million |
- Sales rose 6.5%; foreign exchange contributed 0.3 percentage points, for organic growth of 6.2%. Management reported growth across all end markets and geographies.
- Operating margin improved to 4.3% from 4.2%; SG&A was 14.1% of sales versus 14.3%. Cost of goods sold increased to 80.8% of sales from 80.7%, reflecting, among other factors, labor-cost reclassification.
- Effective tax rate fell to 19.8% from 35.4%. The 2017 comparison included $26.4 million of discrete TCJA-related tax expense. Management attributed higher 2018 earnings primarily to sales growth and lower taxes.
- Fourth-quarter sales were $2.011 billion versus $1.997 billion; operating income was $90.5 million versus $81.4 million, and diluted EPS was $1.26 versus $0.47. The prior-year quarter’s EPS was affected by the TCJA charge.
Cash, debt and liquidity
- Cash and cash equivalents were $96.3 million at year-end, compared with $118.0 million a year earlier. Operating cash flow increased substantially; growth in receivables and inventory were cash uses.
- Total debt was $1.233 billion, down from $1.362 billion. The company reported a 3.0x financial leverage ratio, down from 3.6x, and compliance with debt covenants.
- Reported available borrowing capacity was $515.9 million under the revolving facility and $275.0 million under the receivables facility. Together with $33.1 million of cash used in management’s liquidity calculation, reported liquidity was $824.0 million.
- Debt maturities include $56.7 million in 2019, $326.6 million in 2020 and $500 million in 2021. The revolving and receivables facilities mature in September 2020.
- WESCO repurchased $127.2 million of shares during 2018, including $125.0 million under its repurchase authorization, which the board increased to $400 million. The company paid no common-stock dividend and said it did not currently plan to do so.
Changes, outlook and notable matters
- Management described 2018 as a record-sales year, citing higher volume, operating leverage, efficiency initiatives and cost discipline. Growth was broad across end markets; sales mix was 36% industrial, 33% construction, 16% utility and 15% commercial, institutional and government.
- Management expected 2019 capital expenditures to be similar to 2018 and said excess cash would be directed primarily to growth initiatives, acquisitions, debt reduction and share repurchases. The filing provides no quantified sales or earnings guidance.
- WESCO completed its accounting for the TCJA in 2018; additional regulatory guidance could still affect tax expense. The company reported $43.2 million of remaining transition-tax liability, payable over eight years.
- A Canadian customer that ceased operations led to a bad-debt charge within 2018 SG&A; the filing does not provide a clear amount for that specific charge. Foreign-currency translation reduced other comprehensive income by $99.6 million, and a $2.8 million foreign-exchange loss was recorded in net interest and other.
- WESCO announced in January 2019 an agreement to acquire certain assets of Sylvania Lighting Solutions, with closing expected in March 2019. The filing does not state the purchase price.
- Key risks include economic and customer-market weakness, competition and pricing pressure, supplier concentration and availability, commodity-price volatility, cybersecurity and operational disruptions, acquisition execution, foreign exchange, taxes, and debt service/refinancing. The ten largest suppliers represented 32% of purchases; Eaton alone represented 11%. Management said pending legal matters were not expected to materially affect financial condition or liquidity, while acknowledging individual-period earnings could be affected.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective at year-end.
Investor verification priorities
- Assess whether sales growth and margin performance can continue, particularly as cost of goods sold edged up as a share of sales.
- Review refinancing plans and liquidity ahead of the September 2020 facility maturities and the $500 million 2021 Notes maturity.
- Reconcile reported cash of $96.3 million with the $33.1 million cash included in management’s liquidity calculation, including the location and availability of foreign cash.
- Verify the impact of the Canadian customer default, supplier concentration, and any further changes in commodity prices or foreign exchange.
- Monitor final costs, closing and integration of the Sylvania Lighting Solutions asset acquisition, and the execution of announced capital-allocation priorities.
- Review the 2019 adoption of the lease standard: WESCO anticipated recording $200 million to $250 million of right-of-use assets and lease liabilities, primarily for real estate.