WESCO International, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. WESCO distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in industrial, construction, utility, and commercial, institutional and government markets. The company reported approximately 70,000 active customers globally.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $2.104 billion | $1.910 billion | $4.098 billion | $3.682 billion |
| Operating income | $91.2 million | $82.7 million | $164.4 million | $149.3 million |
| Net income attributable to WESCO | $57.9 million | $49.5 million | $102.4 million | $87.2 million |
| Diluted EPS | $1.22 | $1.02 | $2.15 | $1.78 |
- Q2 sales increased 10.2%; organic growth was 9.0%, with foreign exchange contributing 1.2%. First-half sales increased 11.3%; organic growth was 9.9%, with foreign exchange contributing 1.4%. Acquisitions and workday changes had no reported impact.
- First-half gross margin was approximately 19.0%, versus 19.4% a year earlier, as cost of goods sold rose to 81.0% of sales from 80.6%. Q2 cost of goods sold was 81.0% of sales versus 80.8%. SG&A improved as a share of sales: 14.2% versus 14.5% for the first half, and 13.9% versus 14.0% for Q2.
- Operating margin was 4.3% in Q2 versus 4.4%; first-half operating margin was 4.0% versus 4.1%. First-half effective tax rate declined to 20.7% from 25.1%, primarily reflecting the 2017 Tax Cuts and Jobs Act.
- Revenue grew across all end markets in the first half: industrial $1.520 billion, construction $1.322 billion, utility $652.5 million, and CIG $604.1 million. U.S. revenue was $3.046 billion; other geographies, primarily Canada, contributed $1.052 billion.
Cash flow, debt and liquidity
- First-half operating cash flow was $86.8 million, up from $66.8 million; capital expenditures were $16.4 million versus $9.8 million. Company-defined free cash flow was $70.4 million versus $57.0 million.
- Cash and equivalents were $110.9 million at June 30, 2018, compared with $118.0 million at year-end 2017. The company reported $1.262 billion of long-term debt, $35.5 million of short-term debt, and $1.2 million of current long-term debt. Its leverage calculation reported total debt of $1.310 billion and net debt of $1.199 billion.
- Financial leverage was 3.3x, down from 3.6x at year-end; net-of-cash leverage was 3.0x versus 3.2x. Approximately 65% of debt was fixed-rate. WESCO said it was in compliance with debt covenants.
- Available borrowing capacity was $559.8 million under the revolving credit facility and $155.0 million under the receivables facility. WESCO reported total liquidity of $772.4 million using available capacity and $57.6 million of available cash. Both facilities mature in September 2020.
Changes, outlook and risks
- Management attributed first-half operating income growth primarily to higher sales volume and described favorable operating leverage, partly offset by unfavorable business mix. Cost pressure reflected geographic and end-market mix, product cost inflation, and reclassification of certain labor costs from SG&A to cost of goods sold.
- SG&A included a $2.5 million bad-debt charge tied to a Canadian customer that ceased operations. First-half net interest and other increased to $37.5 million from $32.6 million, primarily due to a $2.6 million foreign-exchange loss and $0.8 million accelerated amortization related to early term-loan repayments.
- Management expected 2018 capital expenditures to exceed 2017 levels and planned to manage working capital, directing excess cash primarily toward growth initiatives, acquisitions, debt reduction and share repurchases. It believed operating cash flow and borrowing capacity would meet foreseeable needs; no specific earnings or revenue guidance was provided.
- Inflation-related pricing affected sales by approximately 2% in the first half. The company held $71.4 million of cash at foreign subsidiaries, which could incur additional income taxes if repatriated; management was reassessing its intentions following the tax-law changes. Certain tax effects of the law remained provisional, and proposed IRS regulations concerning Section 965 were under review.
- Routine commercial and employment claims were disclosed; management did not expect pending matters to materially affect financial condition or liquidity, though a resolution could materially affect results in a particular period. No material changes to previously disclosed risk factors or market-risk exposures were reported. Controls were deemed effective.
Important facts for investors to verify
- Whether sales growth and operating leverage persist, given lower gross-margin percentages and the contribution from foreign exchange and inflation-related pricing.
- Working-capital conversion, particularly the $102.6 million first-half cash use from higher trade receivables, and the sustainability of free cash flow.
- Debt reduction, covenant headroom, and the availability and September 2020 maturities of the revolving and receivables facilities.
- Potential tax consequences of repatriating foreign cash and any adjustments to provisional Tax Cuts and Jobs Act accounting.
- Credit exposure and collection risks, including the reported Canadian customer charge, as well as foreign-exchange effects.