UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 1, 2018
WESCO International, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation) | 001-14989 (Commission File Number) | 25-1723342 (IRS Employer Identification No.) | ||
225 West Station Square Drive Suite 700 Pittsburgh, Pennsylvania (Address of principal executive offices) | 15219 (Zip Code) | |||
(412) 454-2200
(Registrant's telephone number, including area code)
Not applicable.
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). | ||||
Emerging growth company o | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | ||||
Item 2.02 | Results of Operations and Financial Condition. |
The information in this Item 2.02 is being furnished and shall not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. The information in this Item 2.02 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.
On November 1, 2018, WESCO International, Inc. (the “Company”) issued a press release announcing its financial results for the third quarter of 2018. A copy of the press release is attached hereto as Exhibit 99.1.
Item 7.01 | Regulation FD Disclosure. |
The information in this Item 7.01 is being furnished and shall not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. The information in this Item 7.01 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.
A slide presentation to be used by senior management of the Company in connection with its discussions with investors regarding the Company's financial results for the third quarter of 2018 is included in Exhibit 99.2 to this report and is being furnished in accordance with Regulation FD of the Securities and Exchange Commission.
Item 8.01 | Other Events. |
As previously disclosed, on December 7, 2017, the Board of Directors of the Company (the “Board”) approved the repurchase of up to $300 million of the Company’s common stock through December 31, 2020. On October 31, 2018, the Board approved an increase to the authorization from $300 million up to $400 million, inclusive of the $25 million shares purchased to date (leaving an available authorization of up to $375 million), for the purchase of shares of common stock of WESCO International, Inc. on the open market or otherwise for the period commencing on January 1, 2018 and ending on December 31, 2020. The number, price, structure and timing of the repurchases, if any, will be at the Company’s sole discretion, and future repurchases will be evaluated by the Company depending on market conditions, liquidity and other factors. The Board may suspend, modify or terminate this repurchase program at any time without prior notice.
Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits.
The following are furnished as exhibits to this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
WESCO International, Inc. | ||
(Registrant) | ||
November 1, 2018 | By: | /s/ David S. Schulz |
(Date) | David S. Schulz | |
Senior Vice President and Chief Financial Officer | ||
 | NEWS RELEASE |
WESCO International, Inc. / Suite 700, 225 West Station Square Drive / Pittsburgh, PA 15219 | |
WESCO International, Inc. Reports Third Quarter 2018 Results
Third quarter highlights:
• | Consolidated net sales of $2.1 billion, up 3% versus prior year |
– | Organic sales growth of 4% |
• | Cost of goods sold as a percentage of net sales of 80.8% |
– | Gross margin of 19.2%, up 20 basis points sequentially |
• | Operating profit of $97.5 million, up 10% versus prior year |
– | Operating margin of 4.7%, up 30 basis points versus prior year |
• | Earnings per diluted share of $1.41, up 26% versus prior year |
• | Operating cash flow of $87.7 million; free cash flow of $80.4 million, or 121% of net income |
• | Repurchased $25 million of shares; share repurchase authorization increased to $400 million |
PITTSBURGH, November 1, 2018 /PRNewswire/ -- WESCO International, Inc. (NYSE: WCC), a leading provider of electrical, industrial, and communications maintenance, repair and operating (MRO) and original equipment manufacturers (OEM) products, construction materials, and advanced supply chain management and logistics services, announces its results for the third quarter of 2018.
Mr. John J. Engel, WESCO's Chairman, President and CEO, commented, “We had another strong quarter and are pleased with our return to profitable growth in 2018. This is the third consecutive quarter that we delivered double-digit growth in operating profit and EPS. Organic sales growth was within our expected range for the quarter, with all end markets contributing. Operating margin expanded sequentially and year-over-year, reflecting the success of our value selling and margin improvement initiatives. Free cash flow generation was also very strong in the quarter, driven by effective working capital management. In addition, we have increased our current share repurchase authorization from $300 million to $400 million. After returning $25 million to shareholders in the third quarter via a share repurchase, we now plan on accelerating the pace of our share buyback program. The free cash flow generation capability of our business supports continued investment in our differentiated, services-oriented business model and One WESCO growth initiatives, including acquisitions, while providing us with the ability to return capital to our shareholders.”
The following are results for the three months ended September 30, 2018 compared to the three months ended September 30, 2017:
• | Net sales were $2.1 billion for the third quarter of 2018, compared to $2.0 billion for the third quarter of 2017, an increase of 3.4%. Organic sales for the third quarter of 2018 grew by 4.2% as foreign exchange rates negatively impacted net sales by 0.8%. Sequentially, net sales decreased 1.8% and organic sales increased 0.2%. |
• | Cost of goods sold for the third quarter of 2018 was $1.7 billion and gross profit was $397.2 million, compared to cost of goods sold and gross profit of $1.6 billion and $385.4 million, respectively, for the third quarter of 2017. As a percentage of net sales, gross profit was 19.2% and 19.3% for the third quarter of 2018 and 2017, respectively. Gross margin was 10 basis points higher than the third quarter of 2017 excluding the reclassification of certain labor costs from selling, general and administrative expenses to cost of goods sold. This reclassification was previously noted in the first and second quarters of 2018. |
• | Selling, general and administrative ("SG&A") expenses were $284.1 million, or 13.7% of net sales, for the third quarter of 2018, compared to $280.5 million, or 14.0% of net sales, for the third quarter of 2017. |
• | Operating profit was $97.5 million for the third quarter of 2018, compared to $88.8 million for the third quarter of 2017, an increase of 9.8%. Operating profit as a percentage of net sales was 4.7% for the third quarter of 2018, compared to 4.4% for the third quarter of 2017. |
1
• | Net interest and other for the third quarter of 2018 was $17.1 million, compared to $16.8 million for the third quarter of 2017. |
• | The effective tax rate for the third quarter of 2018 was 17.2%, compared to 25.5% for the third quarter of 2017. The lower effective tax rate in the current quarter is primarily due to the Tax Cuts and Jobs Act of 2017, which permanently reduced the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018. Also, the discrete benefits resulting from audit settlements favorably impacted the effective tax rate for the third quarter of 2018. |
• | Net income attributable to WESCO International, Inc. was $66.8 million for the third quarter of 2018, compared to $53.7 million for the third quarter of 2017, an increase of 24.4%. |
• | Earnings per diluted share for the third quarter of 2018 was $1.41, based on 47.5 million diluted shares, compared to $1.12 for the third quarter of 2017, based on 47.8 million diluted shares, an increase of 25.9%. |
• | Operating cash flow for the third quarter of 2018 was $87.7 million, compared to $14.3 million for the third quarter of 2017. Free cash flow for the third quarter of 2018 was $80.4 million, or 121% of net income, compared to $8.1 million, or 15% of net income, for the third quarter of 2017. Additionally, the Company repurchased $25 million of shares in the third quarter of 2018. |
The following are results for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017:
• | Net sales were $6.2 billion for the first nine months of 2018, compared to $5.7 billion for the first nine months of 2017, an increase of 8.5%. Organic sales for the first nine months of 2018 grew by 7.9% as foreign exchange rates positively impacted net sales by 0.6%. |
• | Cost of goods sold for the first nine months of 2018 was $5.0 billion and gross profit was $1.2 billion, compared to cost of goods sold and gross profit of $4.6 billion and $1.1 billion, respectively, for the first nine months of 2017. As a percentage of net sales, gross profit was 19.1% and 19.4% for the first nine months of 2018 and 2017, respectively. Contributing to the lower gross profit as a percentage of net sales for the first nine months of 2018 was the reclassification of certain labor costs from selling, general and administrative expenses to cost of goods sold. This reclassification was previously noted in the first and second quarters of 2018. |
• | Selling, general and administrative expenses were $867.8 million, or 14.1% of net sales, for the first nine months of 2018, compared to $815.7 million, or 14.4% of net sales, for the first nine months of 2017. SG&A expenses for the first nine months of 2018 included the restoration of incentive compensation of approximately $16.0 million. |
• | Operating profit was $262.0 million for the first nine months of 2018, compared to $238.0 million for the first nine months of 2017, an increase of 10.1%. Operating profit as a percentage of net sales was 4.2% for both the current and prior nine month periods. |
• | Net interest and other for the first nine months of 2018 was $54.6 million, compared to $49.4 million for the first nine months of 2017. For the nine months ended September 30, 2018, net interest and other includes a foreign exchange loss of $3.0 million from the remeasurement of a financial instrument, as well as accelerated amortization of debt discount and debt issuance costs totaling $0.8 million due to early repayments on our term loan facility. |
• | The effective tax rate for the first nine months of 2018 was 19.3%, compared to 25.3% for the first nine months of 2017. The lower effective tax rate in the current year is primarily due to the Tax Cuts and Jobs Act of 2017, which permanently reduced the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018. |
• | Net income attributable to WESCO International, Inc. was $169.2 million for the first nine months of 2018, compared to $140.9 million for the first nine months of 2017, an increase of 20.1%. |
• | Earnings per diluted share for the first nine months of 2018 was $3.56, based on 47.5 million diluted shares, compared to $2.90 for the first nine months of 2017, based on 48.6 million diluted shares, an increase of 22.8%. |
• | Operating cash flow for the first nine months of 2018 was $174.5 million, compared to $81.1 million for the first nine months of 2017. Free cash flow for the first nine months of 2018 was $150.8 million, or 90% of net income, compared to $65.1 million, or 46% of net income, for the first nine months of 2017. Additionally, the Company repurchased $25 million of shares in the first nine months of 2018. |
2
Mr. Engel continued, “We remain steadfast in our continued commitment to deliver profitable growth in 2018 and beyond. Based on our year-to-date results and our positive view of the end markets, we have narrowed the ranges for our full-year expectations for sales, operating margin and EPS and increased our expectations for free cash flow generation to be approximately 100% of net income.”
Mr. Engel added, “As outlined last quarter, we are providing our first end market outlook for 2019 today. We expect all of our end markets to remain healthy and to continue to provide excellent profitable growth opportunities for WESCO. Our outlook includes above-market sales results, execution of our profitable growth initiatives, investments in our people and processes, and maintaining our cost and cash management discipline. As a result, we expect sales growth in the range of 3% to 6% for next year and will provide the balance of our 2019 outlook during our fourth quarter earnings call in January. Customers are seeking continuous improvement and supply chain stability in an increasingly complex and rapidly changing world. Our talented team of associates and our robust portfolio of products and value-added services continue to differentiate WESCO in providing our customers with complete solutions for their MRO, OEM and capital project needs.”
Webcast and Teleconference Access
WESCO will conduct a webcast and teleconference to discuss the third quarter of 2018 earnings as described in this News Release on Thursday, November 1, 2018, at 10:00 a.m. E.T. The call will be broadcast live over the internet and can be accessed from the Investor Relations page of the Company's website at www.wesco.investorroom.com. The call will be archived on this internet site for seven days.
WESCO International, Inc. (NYSE: WCC), a publicly traded Fortune 500 holding company headquartered in Pittsburgh, Pennsylvania, is a leading provider of electrical, industrial, and communications maintenance, repair and operating (MRO) and original equipment manufacturers (OEM) products, construction materials, and advanced supply chain management and logistic services. 2017 annual sales were approximately $7.7 billion. The company employs approximately 9,100 people, maintains relationships with over 26,000 suppliers, and serves approximately 70,000 active customers worldwide. Customers include commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. WESCO operates 10 fully automated distribution centers and approximately 500 branches in North America and international markets, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations.
The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as well as the Company's other reports filed with the Securities and Exchange Commission.
Contact Information:
Will Ruthrauff, Director, Investor Relations
(412) 454-4220
http://www.wesco.com
3
WESCO INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollar amounts in millions, except per share amounts)
(Unaudited)
Three Months Ended | |||||||||||
September 30, 2018 | September 30, 2017 | ||||||||||
Net sales | $ | 2,067.2 | $ | 2,000.2 | |||||||
Cost of goods sold (excluding | 1,670.0 | 80.8 | % | 1,614.8 | 80.7 | % | |||||
depreciation and amortization) | |||||||||||
Selling, general and administrative expenses (1) | 284.1 | 13.7 | % | 280.5 | 14.0 | % | |||||
Depreciation and amortization | 15.6 | 16.1 | |||||||||
Income from operations | 97.5 | 4.7 | % | 88.8 | 4.4 | % | |||||
Net interest and other (1) | 17.1 | 16.8 | |||||||||
Income before income taxes | 80.4 | 3.9 | % | 72.0 | 3.6 | % | |||||
Provision for income taxes | 13.8 | 18.4 | |||||||||
Net income | 66.6 | 3.2 | % | 53.6 | 2.7 | % | |||||
Net loss attributable to noncontrolling interests | (0.2 | ) | (0.1 | ) | |||||||
Net income attributable to WESCO International, Inc. | $ | 66.8 | 3.2 | % | $ | 53.7 | 2.7 | % | |||
Earnings per diluted common share | $ | 1.41 | $ | 1.12 | |||||||
Weighted-average common shares outstanding and common | |||||||||||
share equivalents used in computing earnings per diluted | |||||||||||
share (in millions) | 47.5 | 47.8 | |||||||||
(1) | The Company adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the first quarter of 2018. This ASU requires the disaggregation of service cost from the other components of net periodic benefit cost. For the three months ended September 30, 2018 and 2017, the non-service cost components of net periodic benefit cost aggregated to a benefit of $0.5 million and are included in net interest and other. |
4
WESCO INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollar amounts in millions, except per share amounts)
(Unaudited)
Nine Months Ended | |||||||||||
September 30, 2018 | September 30, 2017 | ||||||||||
Net sales | $ | 6,165.2 | $ | 5,682.4 | |||||||
Cost of goods sold (excluding | 4,988.1 | 80.9 | % | 4,580.9 | 80.6 | % | |||||
depreciation and amortization) | |||||||||||
Selling, general and administrative expenses (1) | 867.8 | 14.1 | % | 815.7 | 14.4 | % | |||||
Depreciation and amortization | 47.3 | 47.8 | |||||||||
Income from operations | 262.0 | 4.2 | % | 238.0 | 4.2 | % | |||||
Net interest and other (1) | 54.6 | 49.4 | |||||||||
Income before income taxes | 207.4 | 3.4 | % | 188.6 | 3.3 | % | |||||
Provision for income taxes | 40.1 | 47.7 | |||||||||
Net income | 167.3 | 2.7 | % | 140.9 | 2.5 | % | |||||
Net loss attributable to noncontrolling interests | (1.9 | ) | — | ||||||||
Net income attributable to WESCO International, Inc. | $ | 169.2 | 2.7 | % | $ | 140.9 | 2.5 | % | |||
Earnings per diluted common share | $ | 3.56 | $ | 2.90 | |||||||
Weighted-average common shares outstanding and common | |||||||||||
share equivalents used in computing earnings per diluted | |||||||||||
share (in millions) | 47.5 | 48.6 | |||||||||
(1) | For the nine months ended September 30, 2018 and 2017, the non-service cost components of net periodic benefit cost aggregated to a benefit of $1.4 million and are included in net interest and other. |
5
WESCO INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in millions)
(Unaudited)
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 142.8 | $ | 118.0 | |||
Trade accounts receivable, net | 1,265.9 | 1,170.1 | |||||
Inventories | 926.8 | 956.1 | |||||
Other current assets | 171.0 | 164.7 | |||||
Total current assets | 2,506.5 | 2,408.9 | |||||
Other assets | 2,272.3 | 2,326.6 | |||||
Total assets | $ | 4,778.8 | $ | 4,735.5 | |||
Liabilities and Stockholders' Equity | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 813.4 | $ | 799.5 | |||
Short-term borrowings and current debt | 32.3 | 35.3 | |||||
Other current liabilities | 205.8 | 206.2 | |||||
Total current liabilities | 1,051.5 | 1,041.0 | |||||
Long-term debt, net | 1,229.3 | 1,313.3 | |||||
Other noncurrent liabilities | 266.2 | 265.1 | |||||
Total liabilities | 2,547.0 | 2,619.4 | |||||
Stockholders' Equity | |||||||
Total stockholders' equity | 2,231.8 | 2,116.1 | |||||
Total liabilities and stockholders' equity | $ | 4,778.8 | $ | 4,735.5 | |||
6
WESCO INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in millions)
(Unaudited)
Nine Months Ended | |||||||
September 30, 2018 | September 30, 2017 | ||||||
Operating Activities: | |||||||
Net income | $ | 167.3 | $ | 140.9 | |||
Add back (deduct): | |||||||
Depreciation and amortization | 47.3 | 47.8 | |||||
Deferred income taxes | 12.2 | 8.4 | |||||
Change in trade receivables, net | (104.2 | ) | (174.7 | ) | |||
Change in inventories | 23.2 | (86.7 | ) | ||||
Change in accounts payable | 18.2 | 138.3 | |||||
Other | 10.5 | 7.1 | |||||
Net cash provided by operating activities | 174.5 | 81.1 | |||||
Investing Activities: | |||||||
Capital expenditures | (23.7 | ) | (16.0 | ) | |||
Other | 3.6 | 3.5 | |||||
Net cash used in investing activities | (20.1 | ) | (12.5 | ) | |||
Financing Activities: | |||||||
Debt (borrowings) repayments, net | (90.4 | ) | 17.8 | ||||
Equity activity, net | (27.1 | ) | (106.7 | ) | |||
Other | (7.4 | ) | (3.2 | ) | |||
Net cash used in financing activities | (124.9 | ) | (92.1 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (4.7 | ) | 7.5 | ||||
Net change in cash and cash equivalents | 24.8 | (16.0 | ) | ||||
Cash and cash equivalents at the beginning of the period | 118.0 | 110.1 | |||||
Cash and cash equivalents at the end of the period | $ | 142.8 | $ | 94.1 | |||
7
NON-GAAP FINANCIAL MEASURES
This earnings release includes certain non-GAAP financial measures. These financial measures include organic sales growth, gross profit, financial leverage, earnings before interest, taxes, depreciation and amortization (EBITDA), and free cash flow. The Company believes that these non-GAAP measures are useful to investors as they provide a better understanding of sales performance, and the use of debt and liquidity on a comparable basis. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.
8
WESCO INTERNATIONAL, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(dollar amounts in millions, except organic sales data)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||
Organic Sales Growth: | September 30, 2018 | September 30, 2018 | |||
Change in net sales | 3.4 | % | 8.5 | % | |
Impact from acquisitions | — | % | — | % | |
Impact from foreign exchange rates | (0.8 | )% | 0.6 | % | |
Impact from number of workdays | — | % | — | % | |
Organic sales growth | 4.2 | % | 7.9 | % | |
Three Months Ended | ||
Organic Sales Growth - Sequential: | September 30, 2018 | |
Change in net sales | (1.8 | )% |
Impact from acquisitions | — | % |
Impact from foreign exchange rates | (0.4 | )% |
Impact from number of workdays | (1.6 | )% |
Organic sales growth | 0.2 | % |
Note: Organic sales growth is a measure of sales performance. Organic sales growth is calculated by deducting the percentage impact from acquisitions in the first year of ownership, foreign exchange rates and number of workdays from the overall percentage change in consolidated net sales.
Three Months Ended | Nine Months Ended | ||||||||||||||
Gross Profit: | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||
Net sales | $ | 2,067.2 | $ | 2,000.2 | $ | 6,165.2 | $ | 5,682.4 | |||||||
Cost of goods sold (excluding depreciation and amortization) | 1,670.0 | 1,614.8 | 4,988.1 | 4,580.9 | |||||||||||
Gross profit | $ | 397.2 | $ | 385.4 | $ | 1,177.1 | $ | 1,101.5 | |||||||
Gross margin | 19.2 | % | 19.3 | % | 19.1 | % | 19.4 | % | |||||||
Note: Gross profit is a financial measure commonly used within the distribution industry. Gross profit is calculated by deducting cost of goods sold, excluding depreciation and amortization, from net sales. Gross margin is calculated by dividing gross profit by net sales.
9
WESCO INTERNATIONAL, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(dollar amounts in millions)
(Unaudited)
Twelve Months Ended | |||||||
Financial Leverage: | September 30, 2018 | December 31, 2017 | |||||
Income from operations (1) | $ | 342.9 | $ | 319.2 | |||
Depreciation and amortization | 63.6 | 64.0 | |||||
EBITDA | $ | 406.5 | $ | 383.2 | |||
September 30, 2018 | December 31, 2017 | ||||||
Short-term borrowings and current debt | $ | 32.3 | $ | 35.3 | |||
Long-term debt | 1,229.3 | 1,313.3 | |||||
Debt discount and debt issuance costs (2) | 10.6 | 14.2 | |||||
Total debt | 1,272.2 | 1,362.8 | |||||
Less: cash and cash equivalents | 142.8 | 118.0 | |||||
Total debt, net of cash | $ | 1,129.4 | $ | 1,244.8 | |||
Financial leverage ratio | 3.1 | 3.6 | |||||
Financial leverage ratio, net of cash | 2.8 | 3.2 | |||||
(1) | Due to the adoption of ASU 2017-07 on a retrospective basis in the first quarter of 2018, the Company classified the non-service cost components of net periodic benefit cost as part of net interest and other for the twelve months ended September 30, 2018 and December 31, 2017. These components aggregated to a benefit of $1.9 million and $1.8 million, respectively. |
(2) | Long-term debt is presented in the condensed consolidated balance sheets net of debt discount and debt issuance costs. |
Note: Financial leverage measures the use of debt. Financial leverage ratio is calculated by dividing total debt, including debt discount and debt issuance costs, by EBITDA. Financial leverage ratio, net of cash is calculated by dividing total debt, including debt discount and debt issuance costs, net of cash, by EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization.
Three Months Ended | Nine Months Ended | ||||||||||||||
Free Cash Flow: | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||
Cash flow provided by operations | $ | 87.7 | $ | 14.3 | $ | 174.5 | $ | 81.1 | |||||||
Less: Capital expenditures | (7.3 | ) | (6.2 | ) | (23.7 | ) | (16.0 | ) | |||||||
Free cash flow | $ | 80.4 | $ | 8.1 | $ | 150.8 | $ | 65.1 | |||||||
Percentage of net income | 121 | % | 15 | % | 90 | % | 46 | % | |||||||
Note: Free cash flow is a measure of liquidity. Capital expenditures are deducted from operating cash flow to determine free cash flow. Free cash flow is available to fund investing and financing activities.
10
Q3 2018 Earnings Webcast Presentation – November 1, 2018
Safe Harbor Statement All statements made herein that are not historical facts should be considered as “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to: adverse economic conditions; disruptions in operations or information technology systems; increase in competition; expansion of business activities; supply chain disruptions, changes in supplier strategy or loss of key suppliers; personnel turnover or labor cost increases; risks related to acquisitions, including the integration of acquired businesses; tax law changes or challenges to tax matters, including uncertainties in the interpretation and application of the Tax Cuts and Jobs Act of 2017; exchange rate fluctuations; debt levels, terms, financial market conditions or interest rate fluctuations; stock market, economic or political instability; legal or regulatory matters; litigation, disputes, contingencies or claims; and other factors described in detail in the Form 10-K for WESCO International, Inc. for the year ended December 31, 2017 and any subsequent filings with the Securities & Exchange Commission. The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be found in the appendix and obtained via WESCO’s website, www.wesco.com. 2 Q3 2018 Earnings Webcast 11/1/18
Q3 2018 Highlights July 5% Aug 5% • Continued strong results in the third quarter Organic Growth Sept 3% ‒ Double digit EBIT and EPS growth versus prior year (%) ‒ Gross margin and operating margin expansion, both 10.9 10.1 sequentially and year-over-year 8.6 9.0 • Continued positive business momentum and growth across all end markets • Reported sales were up 3%, organic sales were up 4%: Up 4% in the U.S. 4.2 ‒ ‒ Up 8% in Canada 1.0 ‒ Down 3% in International (1.7) • Q3 monthly organic sales were up 13% each month on a two year (3.1) (3.6) stack basis • Estimated pricing impact +2% (6.7) (6.2) • October preliminary workday adjusted sales up low single digits • Q3 backlog at record levels, up 7% versus prior year Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 • Free cash flow at 121% of net income in Q3 and at 90% of net 2016 2017 2018 income YTD Note: Organic growth excludes the impact of: acquisitions in the first year of • Repurchased $25 million of shares in Q3; increased current ownership, foreign exchange rates and number of workdays. See appendix for authorization to $400M non-GAAP reconciliations. …double digit operating profit, net income and EPS growth versus prior year 3 Q3 2018 Earnings Webcast 11/1/18
Industrial End Market Organic Sales Growth versus Prior Year • Q3 2018 Sales − Organic sales were up 1% versus prior year • Global Accounts (up 3% in the U.S. and up 4% in Canada in local 37% • Integrated Supply • OEM currency) • General Industrial Industrial 13.9% − Down 3% sequentially 11.2% 10.4% • Industrial recovery continues with positive customer sentiment driven by increasing production and capacity 2017 utilization; labor constraints support higher capital 8.0% 6.0% 5.8% spending • Global Account and Integrated Supply opportunity 1.2% 0.8% pipeline and bidding activity levels remain strong • Customer trends include continued high expectations Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 for supply chain process improvements, cost Note: See appendix for non-GAAP reconciliations. reductions, and supplier consolidation Awarded a multi-year contract to provide an integrated supply solution to support a large oil and gas customer’s upstream operations in the United States. 4 Q3 2018 Earnings Webcast 11/1/18
Construction End Market Organic Sales Growth versus Prior Year • Q3 2018 Sales − Organic sales were up 3% versus prior year 33% • Non-Residential • Contractors (flat in the U.S. and up 12% in Canada in local Construction currency) 8.9% 9.4% 7.9% 6.0% − Up 2% sequentially 2.8% • Strong backlog and business momentum continues 2017 with construction/contractor customers 1.7% • Backlog up 7% versus prior year and down 3% from Q2 (in line with normal seasonality) (3.6%) • Expecting moderate growth and uptrend in non- (4.4%) residential construction market to continue Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Note: See appendix for non-GAAP reconciliations. As a follow-on to winning the electrical materials scope, we were awarded a contract to provide data communications for the construction of a new medical center in Canada. 5 Q3 2018 Earnings Webcast 11/1/18
Utility End Market Organic Sales Growth versus Prior Year • Q3 2018 Sales − Organic sales were up 11% versus prior year (up 13% in the U.S. and down 4% in Canada in local • Investor Owned 17.9% 18.8% 16% • Public Power currency) • Utility Contractors Utility − Up 4% sequentially 11.0% 8.6% 9.1% • Continued scope expansion and value creation with investor owned utility, public power, and generation customers 2017 2.3% • Continued interest in Integrated Supply solution offerings (4.5%)(4.4%) • Favorable economic conditions, continued improvement in construction market, renewables growth, and Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 consolidation trend within Utility industry remain positive catalysts for future spending Note: See appendix for non-GAAP reconciliations. Entered into a multi-year renewal of a contract to provide an integrated supply solution for the generation and transmission operations of a U.S. utility. 6 Q3 2018 Earnings Webcast 11/1/18
CIG End Market Organic Sales Growth versus Prior Year • Q3 2018 Sales − Organic sales were up 8% versus prior year • Commercial (flat in the U.S. and up 12% in Canada in local 14% • Institutional currency; balance of growth in International) • Government CIG − Down 1% sequentially 9.4% 9.0% 8.5% 7.4% 7.7% • Technical expertise and supply chain solutions 2017 4.8% driving positive momentum in datacenter, 4.8% broadband, and cloud technology projects • Continued strong momentum seen in LED lighting retrofits, FTTX deployments, broadband build outs, (2.0%) and cyber and physical security for critical infrastructure protection Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Note: See appendix for non-GAAP reconciliations. Awarded a contract to provide lighting and electrical materials for an upgrade to an airport in the United States. 7 Q3 2018 Earnings Webcast 11/1/18
Q3 2018 Results Outlook Actual YOY Sales 3% to 6% $2.1B Up 3.4% Gross Margin 19.2% Up 10 bps (1) SG&A $284M, 13.7% Up 1%, improved 30 bps Operating Profit $98M Up 10% Operating Margin 4.5% to 4.8% 4.7% Up 30 bps Effective Tax Rate ~21% 17.2% Down 830 bps EPS $1.41 Up 26% 170 bps 260 bps $2.1B 10 bps $2.0B 80 bps 4.2% 3.5% 8.2% (2.6)% 3.4% Organic Growth Growth Growth Growth Growth Q3 2017 U.S. Canada International Foreign Q3 2018 Sales Exchange Sales Note: See appendix for non-GAAP reconciliations. (1) On a reported basis, gross margin was down 10 basis points. As previously noted in the first and second quarters of 2018, the Company reclassified certain labor costs from selling, general and administrative expenses to cost of goods sold. Excluding this reclassification, gross margin for the third quarter of 2018 was 10 basis points higher than the third quarter of 2017. …margins expanding with positive operating profit pull through 8 Q3 2018 Earnings Webcast 11/1/18
Diluted EPS Walk Q3 2017 $1.12 Core operations 0.17) Foreign exchange (0.03) Tax 0.14) Share count 0.01) 2018 $1.41 …26% EPS growth versus prior year 9 Q3 2018 Earnings Webcast 11/1/18
Free Cash Flow & Leverage Free Cash Flow Leverage ($ Millions) (Total Debt to TTM EBITDA) ~ $1.2B of free 4.0x cash flow over Target last 5 years Leverage $150.8 3.5x 2.0x – 3.5x 3.1X 3.0x 2.5x $65.1 2.0x 46% 90% of net of net 1.5x income income Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 YTD 2018 YTD 2016 2017 2018 Note: See appendix for non-GAAP reconciliations. …strong free cash flow generation and financial leverage improvement in Q3 10 Q3 2018 Earnings Webcast 11/1/18
Effective Capital Allocation Consistent Cash Deployment Priorities Increased Share Repurchase Authorization • Support organic growth • Up to $400M through end of 2020 − $100M increase in authorization • Fund accretive acquisitions − utilized $25M in 3Q18 − anticipate utilizing additional $175M of • Manage financial leverage authorization through first half of 2019 (subject to market conditions) • Repurchase shares • Authorization enables WESCO to: − offset dilution from annual equity awards − make opportunistic purchases …strong cash flow permits simultaneous investment across all priorities 11 Q3 2018 Earnings Webcast 11/1/18
2018 Outlook FY FY Q4 (Current) (Previous) Sales 1% to 4% 6% to 8% 6% to 9% Operating Margin 4.3% to 4.6% 4.2% to 4.4% 4.2% to 4.5% Effective Tax Rate ~ 21% 19% to 21% 21% to 23% Diluted EPS $4.70 to $4.90 $4.60 to $5.00 Free Cash Flow ~ 100% of net income > 90% of net income Notes: Excludes unannounced acquisitions. Assumes a CAD/USD exchange rate of 0.77. See appendix for non-GAAP reconciliations. 12 Q3 2018 Earnings Webcast 11/1/18
2019 Sales Outlook Sales Outlook End markets in U.S. and Canada LSD to MSD growth in all end markets End Market Sales Growth 2% to 5% Market outperformance 1% to 2% Foreign currency slightly unfavorable Consolidated WESCO 3% to 6% Note: Excludes future acquisitions …another year of market outperformance in 2019 13 Q3 2018 Earnings Webcast 11/1/18
Appendix NON-GAAP FINANCIAL MEASURES This presentation includes certain non-GAAP financial measures. These financial measures include organic sales growth, gross margin, financial leverage, earnings before interest, taxes, depreciation and amortization (EBITDA), and free cash flow. Management believes that these non-GAAP measures are useful to investors as they provide a better understanding of sales performance, and the use of debt and liquidity on a comparable basis. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above. 14 Q3 2018 Earnings Webcast 11/1/18
WESCO Profile 2018 Markets & Customers Products & Services 8% 14% 10% 40% 16% 37% 12% 33% 15% 15% Industrial Global Accounts | Integrated Supply General Supplies OEM | General Industrial Communications & Security Construction Wire, Cable & Conduit Non-Residential | Contractors Utility Lighting & Sustainability Investor Owned | Public Power Electrical Distribution & Controls Utility Contractors Automation, Controls & Motors CIG Commercial | Institutional | Government Note: Markets & Customers and Products & Services percentages reported on a TTM consolidated basis. 15 Q3 2018 Earnings Webcast 11/1/18
Sales Growth (%) 2016 2017 2018 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Change in Net Sales (2.2) (0.3) (3.6) (3.7) (2.4) (0.2) (0.1) 7.8 11.3 4.7 12.5 10.2 3.4 Acquisition Impact 3.9 3.7 2.9 1.8 3.1 0.9 0.2 Core (6.1) (4.0) (6.5) (5.5) (5.5) (1.1) (0.1) 7.8 11.3 4.5 12.5 10.2 3.4 FX Impact (2.6) (0.9) (0.3) (0.3) (1.0) 0.6 (1.1) 0.8 1.2 0.4 1.6 1.2 (0.8) Workday Impact 3.2 (1.6) 0.4 (1.6) (0.4) Organic (6.7) (3.1) (6.2) (3.6) (4.9) (1.7) 1.0 8.6 10.1 4.5 10.9 9.0 4.2 Note: Core sales growth excludes acquisitions during the first year of ownership. 16 Q3 2018 Earnings Webcast 11/1/18
Q3 2018 Organic Sales Growth by Geography (%) U.S. Canada International WESCO Change in net sales (USD) 3.5 4.8 (4.2) 3.4 Impact from acquisitions - - - - Impact from foreign exchange rates - (3.4) (1.6) (0.8) Impact from number of workdays - - - - Organic sales growth 3.5 8.2 (2.6) 4.2 17 Q3 2018 Earnings Webcast 11/1/18
Sales Growth by End Market ($ Millions) Q3 2018 vs. Q3 2017 Q3 2018 vs. Q2 2018 Q3 2018 Q3 2017 % Growth Q3 2018 Q2 2018 % Growth Industrial Core $727 $726 0.2% $727 $764 -4.8% Construction Core 689 678 1.6% 689 686 0.4% Utility Core 347 314 10.6% 347 338 2.7% CIG Core 312 292 7.1% 312 324 -3.5% Total Core Gross Sales $2,075 $2,009 3.3% $2,075 $2,112 -1.7% Total Gross Sales from Acquisitions - - - - Total Gross Sales $2,075 $2,009 3.3% $2,075 $2,112 -1.7% Gross Sales Reduction/Discounts (8) (9) (8) (8) Total Net Sales $2,067 $2,000 3.4% $2,067 $2,104 -1.7% Note: The prior period end market amounts noted above may contain reclassifications to conform to current period presentation. 18 Q3 2018 Earnings Webcast 11/1/18
Q3 2018 Organic Sales by End Market (%) Industrial Construction Utility CIG WESCO Core Sales Growth 0.2 1.6 10.6 7.1 3.4 FX Impact (0.6) (1.2) (0.4) (0.6) (0.8) Workday Impact - - - - - Organic Growth 0.8 2.8 11.0 7.7 4.2 19 Q3 2018 Earnings Webcast 11/1/18
Gross Margin ($ Millions) Three Months Ended September 30, September 30, 2018 2017 Net sales $2,067 $2,000 Cost of goods sold (excluding depreciation and amortization) 1,670 1,615 Gross profit (1) $397 $385 Gross margin (1) 19.2% 19.3% (1) Gross profit is calculated by deducting cost of goods sold, excluding depreciation and amortization, from net sales. Gross margin is calculated by dividing gross profit by net sales. Note: For gross margin in prior periods, see quarterly earnings webcasts as previously furnished to the Securities & Exchange Commission, which can be obtained from the Investor Relations page of WESCO’s website at www.wesco.com. 20 Q3 2018 Earnings Webcast 11/1/18
Capital Structure ($ Millions) Outstanding at Outstanding at Debt December 31, 2017 September 30, 2018 Maturity Schedule AR Revolver (V) 380 365 2020 Inventory Revolver (V) 12 - 2020 2019 Term Loans (V) 85 25 2019 2021 Senior Notes (F) 500 500 2021 2024 Senior Notes (F) 350 350 2024 Other (V) 36 32 N/A Total Debt 1,363 1,272 Key Financial Metrics YE 2017 Q3 2018 Cash 118 143 Capital Expenditures 22 7 Free Cash Flow (1) 128 80 Liquidity (2) 794 828 (V) Variable Rate Debt (1) Cash flow provided by operations less capital expenditures. (F) Fixed Rate Debt (2) Total availability under asset-backed credit facilities plus cash in investment accounts. 21 Q3 2018 Earnings Webcast 11/1/18
Financial Leverage ($ Millions) Twelve Months Ended September 30, 2018 Income from operations (1) $343 Depreciation and amortization 64 EBITDA $407 September 30, 2018 Short-term borrowings and current debt $32 Long-term debt 1,229 Debt discount and debt issuance costs (2) 11 Total debt $1,272 Less: cash and cash equivalents 143 Total debt, net of cash $1,129 Financial leverage ratio 3.1X Financial leverage ratio, net of cash 2.8X (1) Due to the adoption of ASU 2017-07 on a retrospective basis in the first quarter of 2018, the Company classified the non-service cost components of net periodic benefit cost as part of net interest and other for the twelve months ended September 30, 2018. These components aggregate to a benefit of $1.9 million. (2) Long-term debt is presented in the condensed consolidated balance sheet as of September 30, 2018 net of debt discount and debt issuance costs. Note: For financial leverage ratio in prior periods, see quarterly earnings webcasts as previously furnished to the Securities & Exchange Commission, which can be obtained from the Investor Relations page of WESCO’s website at www.wesco.com. 22 Q3 2018 Earnings Webcast 11/1/18
Free Cash Flow Reconciliation ($ Millions) YTD YTD 2017 2018 Cash flow provided by operations $81.1 $174.5 Less: Capital expenditures (16.0) (23.7) Free cash flow 65.1 150.8 Net income $140.9 $167.3 Percentage of net income 46% 90% Note: Free cash flow is provided by the Company as an additional liquidity measure. Capital expenditures are deducted from operating cash flow to determine free cash flow. Free cash flow is available to fund investing and financing activities. 23 Q3 2018 Earnings Webcast 11/1/18
Work Days Q1 Q2 Q3 Q4 FY 2016 64 64 64 62 254 2017 64 64 63 62 253 2018 64 64 63 62 253 2019 63 64 63 62 252 24 Q3 2018 Earnings Webcast 11/1/18