WESCO International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. WESCO distributes electrical, industrial and communications products and provides supply-chain services, primarily in North American markets.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $1.816 billion | $1.811 billion | Up 0.3% reported; normalized organic sales growth was 3.2% |
| Gross margin | 20.2% | 20.7% | Cost of goods sold rose to 79.8% of sales from 79.3% |
| SG&A | $264.6 million; 14.6% of sales | $265.5 million; 14.7% of sales | Lower headcount, variable compensation and discretionary costs |
| Operating income / margin | $87.2 million / 4.8% | $93.0 million / 5.1% | Lower operating income |
| Net income attributable to WESCO | $47.0 million | $51.9 million | Down $4.9 million |
| EPS attributable to WESCO | $1.06 basic; $0.90 diluted | $1.17 basic; $0.97 diluted | Diluted EPS declined $0.07 |
| Operating cash flow | $90.1 million | $46.7 million | Free cash flow, as defined by WESCO, was $85.1 million versus $41.7 million |
| Cash and cash equivalents | $154.4 million | $128.3 million at Dec. 31, 2014 | About $127.9 million held by foreign subsidiaries |
| Total debt, including debt discount | $1.557 billion | $1.586 billion at Dec. 31, 2014 | Net debt was $1.403 billion |
Liquidity, capital and material changes
- WESCO reported $624.5 million of liquidity: $484.8 million available under its revolving credit facility, $51.3 million under its receivables facility, and $88.4 million of invested cash for this calculation. Management said operating cash flow and financing capacity should cover current needs.
- Financial leverage was 2.9x based on total debt and trailing-twelve-month EBITDA, versus 3.0x at year-end; net-debt leverage was 2.7x. The company reported compliance with debt covenants.
- Reported sales growth included 1.2% contribution from acquisitions, offset by foreign exchange (-2.5%) and fewer workdays (-1.6%). Management cited organic growth, reduced demand in commodity-driven markets, winter weather and unfavorable currency effects.
- Operating income fell primarily due to lower supplier volume rebates, business mix and competitive pricing pressure; cost controls partly offset those factors. Equity declined $90.8 million from year-end, largely reflecting $113.8 million of foreign-currency translation losses and share repurchases, partly offset by net income.
- Q1 financing included a $25 million accelerated share repurchase, funded with revolving-credit borrowings. The agreement settled April 23, 2015, with additional shares delivered.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance was provided. Management expected to maintain working-capital productivity, focus on liquidity and credit availability, and direct excess cash primarily to debt reduction, acquisitions and share repurchases. It stated cash generation and borrowing capacity should fund foreseeable needs, while noting there can be no assurance.
- Management cited economic and market uncertainty, competition, commodity-sensitive demand, foreign-exchange exposure and working-capital needs. It said no material changes to previously disclosed risk factors or market-risk exposures occurred during the quarter.
- A Delaware unclaimed-property compliance audit was ongoing; the outcome could not be predicted. A New York investigation into disadvantaged-business contracting practices was also ongoing; WESCO said it was cooperating and could not estimate potential exposure.
- An Indiana customer lawsuit was settled after quarter-end: insurers paid $35.8 million on April 30, 2015, resolving the judgment and appeal. WESCO stated the settlement had no effect on its financial condition or results of operations.
- On May 1, 2015, WESCO completed its acquisition of Hill Country Electric Supply, a Texas distributor with approximately $140 million in annual sales, funded with cash and borrowings. Purchase-price allocation was pending.
- Currency translation adjustments were a significant other-comprehensive loss ($113.8 million), reducing comprehensive income attributable to WESCO to a loss of $66.8 million despite positive net income.
Key facts for investors to verify
- Whether organic growth and margin performance improve as currency, weather, commodity-market demand and pricing pressures evolve.
- Cash-flow sustainability and the working-capital drivers behind the Q1 increase in operating cash flow.
- Debt, facility availability, covenant compliance and planned allocation of excess cash among debt reduction, acquisitions and repurchases.
- Developments and potential financial exposure from the Delaware audit and New York investigation.
- Integration and financing effects of the Hill Country acquisition, and the final purchase-price allocation.