WESCO International(WCC) - 2020 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited Condensed Consolidated Financial Statements for Q1 2020, including balance sheets, income, cash flow, and equity statements Condensed Consolidated Balance Sheet Highlights (As of March 31, 2020) | Account | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $5,230,956 | $5,017,635 | | Total Current Assets | $2,777,478 | $2,540,411 | | Goodwill | $1,717,963 | $1,759,040 | | Total Liabilities | $3,028,830 | $2,758,964 | | Total Current Liabilities | $1,040,505 | $1,084,059 | | Long-term Debt, net | $1,542,602 | $1,257,067 | | Total Stockholders' Equity | $2,202,126 | $2,258,671 | Condensed Consolidated Statement of Income (Three Months Ended March 31) | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net Sales | $1,968,647 | $1,961,267 | | Income from Operations | $60,913 | $70,726 | | Net Income | $34,175 | $41,950 | | Net Income Attributable to WESCO | $34,407 | $42,369 | | Diluted EPS | $0.82 | $0.93 | Condensed Consolidated Statement of Cash Flows (Three Months Ended March 31) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $31,528 | $28,869 | | Net cash used in investing activities | ($110,265) | ($38,517) | | Net cash provided by financing activities | $278,691 | $19,246 | | Net change in cash and cash equivalents | $191,658 | $9,757 | Note 3. Revenue Q1 2020 revenue was $1.97 billion, with growth in Utility, Construction, and CIG markets, and US sales increasing Revenue by End Market (Three Months Ended March 31) | End Market | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Industrial | $702,214 | $736,906 | | Construction | $636,503 | $633,288 | | Utility | $340,945 | $308,269 | | Commercial, Institutional and Government | $288,985 | $282,804 | | Total | $1,968,647 | $1,961,267 | Revenue by Geography (Three Months Ended March 31) | Geography | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | United States | $1,478,491 | $1,460,991 | | Canada | $377,419 | $384,596 | | Other International | $112,737 | $115,680 | | Total | $1,968,647 | $1,961,267 | Note 4. Acquisitions Details the pending Anixter International Inc. merger, including a $100 million termination fee and expected Q2/Q3 2020 closing - On January 10, 2020, WESCO entered into a merger agreement with Anixter International Inc[41] - WESCO paid a $100 million termination fee to CD&R on behalf of Anixter, recorded as a prepaid expense for the merger consideration[43] - The merger is expected to close in Q2 or Q3 2020, pending Canadian antitrust clearance[44][45] Note 5. Goodwill Q1 2020 interim goodwill impairment test found no losses, but two units with $786.2 million goodwill face heightened future impairment risk - COVID-19 and market capitalization decline triggered an interim goodwill impairment test in Q1 2020[47] - No impairment losses were identified from the interim test[48] - Two reporting units, with combined goodwill of $786.2 million, had fair values less than 5% above carrying values, indicating significant future impairment risk[48] Note 7. Earnings Per Share Basic and diluted EPS for Q1 2020 were $0.82, down from Q1 2019 due to lower net income, partially offset by share repurchases Earnings Per Share Calculation (Three Months Ended March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net income attributable to WESCO (in thousands) | $34,407 | $42,369 | | Weighted-average basic shares (in thousands) | 41,837 | 45,076 | | Weighted-average diluted shares (in thousands) | 42,075 | 45,491 | | Basic EPS | $0.82 | $0.94 | | Diluted EPS | $0.82 | $0.93 | - Approximately 2.3 million stock-based awards were excluded from Q1 2020 diluted EPS calculation due to their antidilutive effect[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2020 net sales increased 0.4% to $2.0 billion, with operating profit decreasing to $60.9 million due to merger costs and COVID-19 Results of Operations Q1 2020 net sales were flat at $2.0 billion, with organic sales declining 1.7%, gross margin contracting, and income from operations falling Q1 2020 vs. Q1 2019 Performance | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Sales | $2.0B | $2.0B | | Organic Sales Growth | (1.7)% | N/A | | Cost of Goods Sold (% of sales) | 80.9% | 80.5% | | SG&A Expenses (% of sales) | 15.2% | 15.1% | | Income from Operations | $60.9M | $70.7M | | Net Income Attributable to WESCO | $34.4M | $42.4M | - Q1 2020 SG&A expenses included $4.6 million in Anixter merger transaction costs, with adjusted SG&A at 15.0% of net sales[97] Adjusted Earnings Per Diluted Share Reconciliation (Q1 2020) | Metric | Amount | | :--- | :--- | | Reported Net Income Attributable to WESCO | $38,347 (in thousands) | | Diluted Shares | 42,075 (in thousands) | | Adjusted EPS | $0.91 | Liquidity and Capital Resources Total liquidity was $731.8 million as of March 31, 2020, with a $100 million precautionary draw, and leverage increased to 3.1x - Total liquidity was $731.8 million as of March 31, 2020, including $446.6 million borrowing capacity and $285.2 million cash[107] - The company drew $100 million from its Revolving Credit Facility in March as a precautionary measure due to COVID-19 uncertainty[107] Financial Leverage Ratio | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | EBITDA (TTM, in millions) | $399.4 | $408.4 | | Total Debt, net of cash (in millions) | $1,232.7 | $1,141.7 | | Financial Leverage Ratio | 3.1 | 2.8 | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks from the 2019 10-K are reported, with updates found in the MD&A and Risk Factors sections - No material changes to market risks from the 2019 10-K are noted, with relevant updates in the MD&A and Risk Factors sections of this report[144] Item 4. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2020 - Management concluded that disclosure controls and procedures and internal control over financial reporting were effective as of the report's end[145] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company faces various lawsuits and claims, but management expects no material adverse effect on financial condition or liquidity - Various lawsuits and claims are ongoing, but management anticipates no material adverse effect on financial condition or liquidity[148] Item 1A. Risk Factors A new risk factor highlights the uncertain duration and extent of the COVID-19 pandemic's impact on business and financial condition - A new risk factor addresses the COVID-19 pandemic, which has adversely affected the company's business, suppliers, and customers[150] - The pandemic's uncertain duration and extent could materially affect the company's business, financial condition, operations, cash flows, and stock price[151][152] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO and CFO certifications and the Interactive Data File (XBRL) - Exhibits include Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications by the CEO and CFO, and the Cover Page Interactive Data File (Inline XBRL)[155][156]