WESCO International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. WESCO distributes electrical, industrial and communications products and provides supply-chain services, primarily in North America.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,772.6 million | $1,776.0 million |
| Organic sales growth | (1.7)% | Not stated here |
| Income from operations | $67.1 million | $69.5 million |
| Operating margin | 3.8% | 3.9% |
| Net income attributable to WESCO | $37.7 million | $36.1 million |
| Diluted EPS | $0.76 | $0.77 |
| Operating cash flow | $47.6 million | $78.6 million |
| Free cash flow | $43.1 million | $75.0 million |
Gross margin was approximately 19.7%, versus 20.0%; SG&A was 15.1% of sales, versus 15.2%. Net income attributable to WESCO increased about 5%, while diluted EPS declined, reflecting a higher weighted-average share count. The 2016 comparison included dilution from convertible debentures that had been redeemed in September 2016.
Balance sheet, debt and liquidity
- At March 31, 2017, cash and cash equivalents were $103.0 million; total debt for the company’s leverage calculation was $1,355.4 million, down from $1,402.5 million at December 31, 2016. Financial leverage was 3.4x, compared with 3.5x.
- Current assets were $2,203.4 million and current liabilities $920.1 million. The filing reported $518.4 million available under the revolving credit facility and $153.8 million under the receivables facility. Including $55.0 million of cash available for its liquidity calculation, WESCO reported total liquidity of $727.2 million.
- Cash flow from operations fell year over year, with working-capital uses including higher inventory and trade receivables and payment of prior-year management incentives. Capital expenditures were $4.5 million.
- WESCO said it complied with debt covenants at quarter-end. Approximately 63% of debt was fixed-rate. Of reported cash, $70.6 million was held by foreign subsidiaries and could incur additional U.S. tax if repatriated.
Changes, outlook and risks
- Sales decreased 0.2%; acquisitions and foreign exchange added 0.9 and 0.6 percentage points, respectively, while organic sales declined 1.7%. Management described improving momentum in some end markets and geographies, alongside challenging pricing.
- Operating income declined as lower margins more than offset reduced SG&A. Cost savings from prior-year headcount reductions and branch closures/consolidations more than offset additional AED acquisition expenses. Interest expense declined 11.2%, primarily due to lower debt.
- The effective tax rate fell to 25.0% from 31.9%. Adoption of stock-compensation guidance produced a discrete tax benefit that reduced the rate by 3.1 percentage points; a settlement of a tax matter had raised the prior-year rate by 3.4 points.
- No specific full-year earnings or sales guidance was provided. Management said it expected operating cash flow and financing availability to cover current needs, planned to closely manage working capital, and expected excess cash to be directed primarily to acquisitions, debt reduction and share repurchases. It noted that second-, third- and fourth-quarter sales are generally 5–7% higher than first-quarter sales, subject to economic conditions.
- Contingencies include a Delaware unclaimed-property compliance audit, for which WESCO recorded a liability based on currently known facts, and a New York investigation involving contracting practices. The company could not predict the outcomes; it could not reasonably estimate potential exposure for the investigation. Management said routine litigation was not expected to materially affect financial condition or liquidity, though a resolution could affect results in a period.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures, and no material change in internal control over financial reporting. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether organic sales and margins improve despite the challenging pricing environment.
- Whether operating cash flow recovers as working-capital investment and incentive payments normalize.
- Debt reduction, covenant compliance, and continued availability under the revolving and receivables facilities.
- Developments, potential financial exposure and any recorded-liability changes related to the Delaware audit and New York investigation.
- Cash repatriation implications and the effects of the stock-award tax benefit on comparisons of future tax rates.