WESCO INTERNATIONAL INC quarterly report, Q2 FY2020

WESCO International, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Results are unaudited. WESCO completed its acquisition of Anixter on June 22; reported results include only nine days of Anixter operations, limiting comparison with prior periods.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Net sales	$2,086.7 million	$2,150.1 million	$4,055.4 million	$4,111.4 million
Income (loss) from operations	$15.3 million	$98.0 million	$76.2 million	$168.7 million
Net income (loss) attributable to common stockholders	($35.8) million	$63.5 million	($1.4) million	$105.8 million
Diluted earnings (loss) per share	($0.84)	$1.45	($0.03)	$2.37

Q2 gross profit was $393.8 million, versus $409.0 million a year earlier. Gross margin was 18.9%, compared with 19.0%; SG&A was 17.2% of sales versus 13.8%.
Reported Q2 SG&A included $73.3 million of merger transaction costs. Net interest and other was $60.6 million, including $44.7 million of merger-related financing and interest costs, $33.5 million of which was non-recurring.
Management’s non-GAAP adjusted diluted EPS was $1.36 for Q2 and $2.28 for the first half, excluding specified merger costs and preferred dividends. Further excluding the nine days of Anixter results, adjusted EPS was $1.04 and $1.95, respectively. These measures are not directly comparable to reported GAAP EPS.
Organic sales declined 12.3% in Q2 and 7.3% in the first half; acquisition contribution partly offset weaker underlying sales. Q2 consolidated sales declined 2.9%, and first-half sales declined 1.4%.
Six-month operating cash flow was $132.7 million, compared with cash used of $8.8 million in the prior-year period. Capital expenditures were $27.2 million. Acquisition cash outflow, net of cash acquired, was $3.708 billion.
At June 30, cash and equivalents were $265.2 million; total debt was $5.181 billion and long-term debt, net of issuance costs and discounts, was $5.069 billion. The company reported $3.1 billion of equity. Pro forma net-debt leverage was 5.7x, versus reported 2.6x at December 31, 2019.
Available borrowing capacity was $584.8 million under the revolving credit facility and $65.0 million under the receivables facility. Management reported total liquidity of $818.5 million, using $168.7 million of available cash in that calculation. Approximately 72% of debt was fixed-rate; WESCO said it was in compliance with debt covenants.

Material changes and transaction effects

The Anixter acquisition substantially expanded the balance sheet and debt: total assets were $11.732 billion at June 30, versus $5.018 billion at year-end 2019. Preliminary purchase accounting recorded $1.368 billion of Anixter goodwill and $1.833 billion of identifiable intangible assets.
WESCO issued $1.5 billion of 7.125% notes due 2025 and $1.325 billion of 7.250% notes due 2028, and entered a $1.1 billion revolving facility. The receivables facility limit increased to $1.025 billion and matures in June 2023; the revolving facility matures in June 2025.
The merger consideration included cash, WESCO common shares, and Series A preferred shares. The preferred stock has an initial 10.625% cumulative dividend rate; $1.3 million of preferred dividends was recorded in the quarter and first half.
WESCO’s 2020 first-half results also reflected COVID-19 disruption and cost-reduction actions. Excluding the merger’s nine days, legacy WESCO reported operating income of $135.8 million for the first half, per management’s supplemental presentation.

Outlook, risks and contingencies

Management expected COVID-19’s negative effects to continue into Q3 and potentially longer, with demand, supplier availability, supply-chain operations, customer payment capacity, and restrictions all uncertain. No specific full-year revenue or earnings guidance is provided in the filing.
Management said operating cash flow and financing resources should cover operational and business needs for at least the next 12 months. It expected excess liquidity over coming quarters to be directed primarily to debt reduction and integration, and anticipated 2020 capital spending sufficient to support business initiatives.
On August 6, 2020, WESCO agreed with the Canadian Competition Bureau to divest legacy WESCO Utility and Datacom businesses in Canada, with approximately $150 million of 2019 sales. Proceeds are intended for debt repayment; timing and terms remain uncertain.
Integration costs, realization and timing of synergies, elevated leverage, and potential disruption to customers, suppliers, or employees are material risks. The acquisition purchase-price allocation is preliminary and could change during the measurement period.
WESCO recorded no impairment in its March 2020 interim goodwill and indefinite-lived intangible asset test, but warned that ongoing macroeconomic uncertainty could affect future recoverability. Ordinary-course litigation was not expected by management to materially affect financial condition or liquidity, though a resolution could materially affect results in a particular period.
WESCO suspended its U.S. employer retirement-plan match effective April 16, 2020, indefinitely, citing pandemic-related effects. A July 2020 shareholder rights plan and the Canadian divestiture agreement were disclosed as subsequent events.

Most important facts for investors to verify

Underlying sales trends and margins, separating legacy WESCO performance from Anixter and from merger-related charges.
Post-acquisition debt, interest expense, leverage, covenant headroom, and progress toward debt reduction.
Integration costs, realized synergies, and any changes to the preliminary Anixter purchase-price allocation.
COVID-19 effects on demand, supply chains, customer collections, and liquidity, along with the Canadian divestiture’s completion, proceeds, and operational impact.
Whether future impairment testing, cash flows, and refinancing needs support the carrying values of goodwill and intangible assets and management’s liquidity outlook.