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WCC > SEC Filings for WCC > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for WESCO INTERNATIONAL INC

Form 10-Q for WESCO INTERNATIONAL INC


6-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International, Inc.'s Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 2013 Annual Report on Form 10-K. 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, 2013, as well as the Company's other reports filed with the Securities and Exchange Commission.

Company Overview
WESCO International, Inc. ("WESCO International"), incorporated in 1993 and effectively formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American based distributor of products and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility and commercial, institutional and government ("CIG") markets. We are 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. Our primary product categories include general electrical and industrial supplies, wire, cable and conduit, data and broadband communications, power distribution equipment, lighting and lighting control systems, control and automation, motors, and safety.
We serve over 75,000 active customers globally through approximately 475 full service branches and nine distribution centers located in the United States, Canada, and Mexico with offices in 15 additional countries. The Company employs approximately 9,200 employees worldwide. We distribute over 1,000,000 products, grouped into six categories, from more than 25,000 suppliers utilizing a highly automated, proprietary electronic procurement and inventory replenishment system.
In addition, we offer a comprehensive portfolio of value-added capabilities, which includes supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting, limited assembly of products and system installation. Our value-added capabilities, extensive geographic reach, experienced workforce and broad product and supply chain solutions have enabled us to grow our business and establish a leading position in North America.
Our financial results for the first three months of 2014 reflect an improving U.S. economy, largely offset by the impact of the severe winter weather conditions in both the U.S. and Canada. Net sales increased $2.8 million, or 0.2%, over the same period last year. Cost of goods sold as a percentage of net sales was 79.3% and 78.9% for the first three months of 2014 and 2013, respectively. Selling, general, and administrative ("SG&A") expenses as a percentage of net sales were 14.7% and 12.6% for the first three months of 2014 and 2013, respectively. The increase in SG&A expenses as a percentage of net sales was primarily due to the $36.1 million ArcelorMittal litigation recovery receivable recorded in the first quarter of 2013 related to a fourth quarter 2012 liability and charge for the same amount. Operating profit was $93.0 million for the current quarter, compared to $136.9 million for the first quarter of 2013. Operating profit decreased primarily from the reduced SG&A expenses in the first quarter of 2013 due to recording the $36.1 million receivable. Net income attributable to WESCO International for the three months ended March 31, 2014 and 2013 was $51.9 million and $84.0 million, respectively.

Cash Flow
We generated $46.7 million in operating cash flow for the first three months of 2014. Included in this amount was income from operations partially offset by an investment in working capital to support sales growth. Investing activities included payments of $91.2 million for the acquisition of LaPrairie and Hazmasters in the first quarter of 2014. Financing activities consisted of borrowings and repayments of $374.7 million and $346.6 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), borrowings and repayments of $30.2 million and $38.8 million, respectively, related to our accounts receivable securitization facility (the "Receivables Facility"), and repayments of $4.8 million applied to the Company's term loan facility (the "Term Loan Facility"). Financing activities in 2014 also included borrowings and repayments on our various international lines of credit of approximately $18.5 million and $13.2 million, respectively. Free cash flow for the first three months of 2014 and 2013 was $41.7 million and $74.4 million, respectively.


The following table sets forth the components of free cash flow:

                                     Three Months Ended
                                         March 31,
Free Cash Flow:                       2014          2013
(In millions)
 Cash flow provided by operations $    46.7       $ 80.4
 Less: Capital expenditures            (5.0 )       (6.0 )
  Free cash flow                  $    41.7       $ 74.4

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 provide a source of funds for any of the Company's financing needs.

Financing Availability
As of March 31, 2014, we had $447.0 million in total available borrowing capacity under our Revolving Credit Facility, which has a maturity date in August 2016, and and $21.9 million in available borrowing capacity under our Receivables Facility which has a maturity date in September 2016. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. For further discussion refer to "Liquidity and Capital Resources."

Critical Accounting Policies and Estimates During the three months ended March 31, 2014, there were no significant changes to our critical accounting policies and estimates referenced in our 2013 Annual Report on Form 10-K.
Results of Operations
First Quarter of 2014 versus First Quarter of 2013 The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of income for the periods presented:

                                                          Three Months Ended
                                                               March 31,
                                                           2014         2013
Net sales                                                 100.0 %       100.0 %
Cost of goods sold                                         79.3          78.9
Selling, general and administrative expenses               14.7          12.6
Depreciation and amortization                               0.9           0.9
Income from operations                                      5.1           7.6
Interest expense                                            1.1           1.2
Income before income taxes                                  4.0           6.4
Provision for income taxes                                  1.1           1.7
   Net income attributable to WESCO International, Inc.     2.9 %         4.7 %

Net sales were $1,810.8 million for the first quarter of 2014, compared to $1,808.1 million for the first quarter of 2013, an increase of 0.2%. Organic sales increased 1.6%, acquisitions positively impacted sales by 0.5%, and foreign exchange negatively impacted sales by 1.9%. Sequentially, sales decreased 3.7%, and organic sales decreased 3.1%.


The following table sets forth normalized organic sales growth:

                                             Three Months Ended
                                                  March 31,
Normalized Organic Sales:                     2014         2013
  Change in net sales                         0.2  %       12.6  %
  Less: Impact from acquisitions              0.5  %       16.0  %
  Less: Impact from foreign exchange rates   (1.9 )%          -  %
  Less: Impact from number of workdays          -  %       (1.6 )%
    Normalized organic sales growth           1.6  %       (1.8 )%

Note: Organic sales growth is provided by the Company as an additional financial measure to provide a better understanding of the Company's sales growth trends. Organic sales growth is calculated by deducting the percentage impact on net sales from acquisitions, foreign exchange rates and number of workdays from the overall percentage change in consolidated net sales.

Cost of goods sold for the first quarter of 2014 and 2013 was $1.4 billion, and was 79.3% and 78.9% as a percentage of net sales in 2014 and 2013, respectively. Lower supplier volume rebates in the first quarter of 2014 as compared to the prior year increased cost of goods sold as a percent of sales by 20 basis points. The remaining increase in cost of goods sold as a percent of sales was primarily the result of lower sales in Canada, where cost of goods sold as a percent of sales is relatively lower than in the U.S.

SG&A expenses in the first quarter of 2014 totaled $265.5 million versus $227.5 million in last year's comparable quarter. As a percentage of net sales, SG&A expenses were 14.7% in the first quarter of 2014 compared to 12.6% in the first quarter of 2013. The increase in SG&A expenses was primarily due to a favorable impact of $36.1 million in first quarter 2013 SG&A expenses resulting from recording an insurance recovery receivable relating to a litigation-related liability and charge recorded in the fourth quarter of 2012. Excluding the impact of this favorable item, SG&A expenses were $263.6 million, or 14.6% of sales in 2013.

SG&A payroll expenses for the first quarter of 2014 of $186.2 million decreased by $2.5 million compared to the same quarter in 2013. The decrease in SG&A payroll expenses was primarily due to a decrease in benefit costs of $5.6 million and a decrease in commissions and incentives of $2.7 million, partially offset by an increase in salaries and wages of $4.7 million.

Depreciation and amortization for the first quarter of 2014 was $16.4 million versus $16.7 million in last year's comparable quarter.

Interest expense totaled $20.7 million for the first quarter of 2014 versus $21.9 million in last year's comparable quarter, a decrease of 5.6%. The following table sets forth the components of interest expense:

                                                  Three Months Ended
                                                      March 31,
                                                    2014           2013
(In millions)
Amortization of convertible debt discount    $      1.0           $  1.1
Amortization of deferred financing fees             1.1              1.2
Interest related to uncertain tax provisions        0.4                -
 Non-Cash Interest Expense                          2.5              2.3
  Cash Interest Expense                            18.2             19.6
                                             $     20.7           $ 21.9

Income tax expense totaled $20.4 million in the first quarter of 2014 compared to $30.9 million in last year's comparable quarter, and the effective tax rate was 28.2% compared to 26.9% in the same quarter in 2013. The increase in the effective tax rate is primarily due to a shift in the geographic mix of income from lower rate tax jurisdictions to the U.S.
For the first quarter of 2014, net income decreased by $32.2 million to $51.9 million compared to $84.1 million in the first quarter of 2013.


A net loss of less than $0.1 million was attributable to the noncontrolling interest for the first quarter of 2014, and net income of $0.1 million was attributable to the noncontrolling interest for the first quarter of 2013. Net income and diluted earnings per share attributable to WESCO International was $51.9 million and $0.97 per share, respectively, for the first quarter of 2014, compared with $84.0 million and $1.60 per share, respectively, for the first quarter of 2013.

Liquidity and Capital Resources
Total assets were $4.7 billion and $4.6 billion at March 31, 2014 and December 31, 2013, respectively. Total liabilities were $2.9 billion at March 31, 2014 and December 31, 2013. Stockholders' equity was essentially flat at $1.8 billion at March 31, 2014 and December 31, 2013. Net income of $51.9 million was largely offset by foreign currency translation adjustments of $46.5 million.
Our liquidity needs generally arise from fluctuations in our working capital requirements, capital expenditures, acquisitions and debt service obligations. As of March 31, 2014, we had $447.0 million in available borrowing capacity under our Revolving Credit Facility and $21.9 million in available borrowing capacity under our Receivables Facility, which combined with our invested cash of $55.6 million, provided liquidity of $524.5 million. Invested cash included in our determination of liquidity represents cash deposited in interest bearing accounts. We believe cash provided by operations and financing activities will be adequate to cover our current operational and business needs. In addition, the Company regularly reviews its mix of fixed and variable rate debt, and the Company may, from time to time, issue or retire borrowings, including through refinancings, in an effort to mitigate the impact of interest rate fluctuations and to maintain a cost-effective capital structure consistent with its anticipated capital requirements. At March 31, 2014, approximately 51% of the Company's debt portfolio was comprised of fixed rate debt.
We communicate on a regular basis with our lenders regarding our financial and working capital performance, liquidity position and financial leverage. We are in compliance with all covenants and restrictions contained in our debt agreements as of March 31, 2014. Our financial leverage ratio as of March 31, 2014 and December 31, 2013 was 3.3 and 3.2, respectively.
The following table sets forth the Company's financial leverage ratio as of March 31, 2014 and December 31, 2013:

                                                     March 31,           December 31,
Twelve months ended                                     2014                 2013
(Dollar amounts in millions)
  Income from operations                         $          437.1     $          481.0
  ArcelorMittal litigation recovery                             -                (36.1 )
  Depreciation and amortization                              67.3                 67.6
    Adjusted EBITDA                              $          504.4     $          512.5

                                                     March 31,           December 31,
                                                        2014                 2013
Current debt                                     $           45.2     $           40.1
Long-term debt                                            1,457.6              1,447.6
Debt discount related to convertible debentures
and term loan(1)                                            173.6                174.7
  Total debt including debt discount                      1,676.4              1,662.4
    Less: Cash and cash equivalents                          96.4                123.7
  Total debt including debt discount, net of
cash                                             $        1,580.0     $        1,538.7

Financial leverage ratio based on total debt                  3.3                  3.2
Financial leverage ratio based on total debt,
net of cash                                                   3.1                  3.0

Note: Financial leverage is a non-GAAP financial measure provided by the Company as an indicator of capital structure position. Financial leverage ratio based on total debt is calculated by dividing total debt, including debt discount, by Adjusted EBITDA. Financial leverage ratio based on total debt, net of cash, is calculated by dividing total debt, including debt discount, net of cash, by Adjusted EBITDA. Adjusted EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization, excluding the ArcelorMittal litigation recovery. Financial leverage ratio based on total net debt is calculated by dividing total debt, including debt discount less cash and cash equivalents, by Adjusted EBITDA.


(1)The convertible debentures and term loan are presented in the consolidated balance sheets in long-term debt net of the unamortized discount. At March 31, 2014, we had cash and cash equivalents totaling $96.4 million, of which $59.4 million was held by foreign subsidiaries. Included in cash held by foreign subsidiaries is approximately $31.5 million which was obtained in connection with the acquisition of EECOL on December 14, 2012. This amount is expected to be returned to the sellers in the second quarter of 2014 and is recorded as a liability at March 31, 2014. The cash held by some of our foreign subsidiaries could be subject to additional U.S. income taxes if repatriated. We believe that we are able to maintain a sufficient level of liquidity for our domestic operations and commitments without repatriation of the cash held by these foreign subsidiaries. We did not note any conditions or events during the first quarter of 2014 requiring an interim evaluation of impairment of goodwill. We will perform our annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter of 2014. Over the next several quarters, we expect to maintain working capital productivity, and it is expected that excess cash will be directed primarily at debt reduction and acquisitions. Our near term focus will be managing our working capital as we experience sales growth and maintaining ample liquidity and credit availability. We believe our balance sheet and ability to generate ample cash flow provides us with a durable business model and should allow us to fund expansion needs and growth initiatives. Cash Flow
Operating Activities. Cash provided by operating activities for the first three months of 2014 totaled $46.7 million, compared with $80.4 million of cash generated for the first three months of 2013. Cash provided by operating activities included net income of $51.9 million and adjustments to net income totaling $26.4 million. Other sources of cash in 2014 were generated from an increase in accounts payable of $43.6 million due to the increase in purchasing activity, an increase in other accounts receivable of $22.9 million, and an increase in other current and noncurrent liabilities of $11.1 million. Primary uses of cash in 2014 included: $55.3 million for the increase in trade receivables, resulting from the increase in sales in the latter part of the quarter; $22.9 million for the increase in other receivables; $17.4 million for the increase in inventories; $16.9 million for the decrease in accrued payroll and benefit costs resulting primarily from the payment of the 2013 management incentive compensation; and $19.7 million for the increase in prepaid expenses and other current assets.
Cash provided by operating activities for the first three months of 2013 totaled $80.4 million which included net income of $84.1 million and adjustments to net income totaling $39.6 million. Other sources of cash in 2013 were generated from an increase in accounts payable of $41.8 million due to the increase in purchasing activity and a decrease in prepaid expenses and other current assets of $30.2 million. Primary uses of cash in 2013 included: $61.8 million for the increase in trade receivables, resulting from the increase in sales; $22.3 million for the decrease in accrued payroll and benefit costs resulting from the payment of the 2012 management incentive compensation; $16.3 million for the decrease in other current and noncurrent liabilities; $12.5 million for the increase in other receivables; and $2.4 million for the increase in inventory. Investing Activities. Net cash used by investing activities for the first three months of 2014 was $96.2 million, compared with $1.0 million of net cash used during the first three months of 2013. Included in the first three months of 2014 were payments of $91.2 million related to the acquisition of LaPrairie and Hazmasters. Capital expenditures were $5.0 million and $6.0 million in the first three months of 2014 and 2013, respectively.
Financing Activities. Net cash provided by financing activities for the first three months of 2014 was $23.5 million. Net cash used in financing activities for the first three months of 2013 was $49.1 million. During the first three months of 2014, borrowings and repayments of $374.7 million and $346.6 million, respectively, were made to our Revolving Credit Facility. Borrowings and repayments of $30.2 million and $38.8 million respectively, were applied to our Receivables Facility, and there were repayments of $4.8 million were applied to our Term Loan Facility. Financing activities in 2014 also included borrowings and repayments on our various international lines of credit of approximately $18.5 million and $13.2 million, respectively.
During the first three months of 2013, borrowings and repayments of $245.2 million and $270.8 million, respectively, were made to our Revolving Credit Facility. Borrowings and repayments of $29.9 million and $28.0 million respectively, were applied to our Receivables Facility, and there were repayments of $26.4 million which extinguished our mortgage financing facility in the first quarter of 2013. Financing activities in 2013 also included borrowings on our various international lines of credit of approximately $6.9 million.
Contractual Cash Obligations and Other Commercial Commitments There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our 2013 Annual Report on Form 10-K. Management believes that cash generated from operations, together with amounts available under our Revolving Credit Facility and the Receivables Facility will be sufficient to meet our working capital, capital expenditures and other cash requirements for the foreseeable future. However, there can be no assurances that this will continue to be the case.


Inflation
The rate of inflation affects different commodities, the cost of products purchased, and ultimately the pricing of our different products and product classes to our customers. Our pricing related to inflation was approximately 0.5% of our sales revenue in the three months ended March 31, 2014. Historically, price changes from suppliers have been consistent with inflation and have not had a material impact on the results of operations. Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are affected by a reduced level of activity. Sales during the second, third and fourth quarters are generally 4-6% higher than the first quarter. Sales typically increase beginning in March, with slight fluctuations per month through October. During periods of economic expansion or contraction our sales by quarter have varied significantly from this seasonal pattern.
Impact of Recently Issued Accounting Standards See Note 2 of our Notes to the Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements. Forward-Looking Statements
From time to time in this report and in other written reports and oral statements, references are made to expectations regarding our future performance. When used in this context, the words "anticipates," "plans," "believes," "estimates," "intends," "expects," "projects," "will" and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements including, but not limited to, our statements regarding business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product and service introductions and liquidity and capital resources are based on management's beliefs, as well as on assumptions made by and information currently available to, management, and involve various risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from those expressed in any forward-looking statement made by us or on our behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. Certain of these risks are set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as the Company's other reports filed with the Securities and Exchange Commission. We have undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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