WESCO Announces Record Net Sales, Reaffirms 2019 Outlook

PITTSBURGH — WESCO International, Inc. announces its results for the fourth quarter and full year 2018.

John J. Engel, WESCO’s Chairman, President and CEO, commented, “After returning to sales growth in 2017, I’m pleased to report that we executed our top priorities of delivering margin expansion, strong profitable growth and increased cash generation in 2018. We strengthened our business, growing in all end markets and geographies, while operating against an economic backdrop that was more challenging than expected. We improved gross margin as we moved through the year and delivered double digit growth in operating profit and EPS in all four quarters. Free cash flow generation was also very strong at over 115% of net income and remains a hallmark of WESCO across the economic cycle. After paying down debt and accelerating the pace of our share repurchases, we exited last year with financial leverage at the lowest level since early 2015.”

The following are results for the three months ended December 31, 2018 compared to the three months ended December 31, 2017:

• Net sales were $2.0 billion for the fourth quarter of 2018 and 2017. Organic sales for the fourth quarter of 2018 grew by 1.5% as foreign exchange rates negatively impacted net sales by 0.8%.
• Cost of goods sold for the fourth quarter of 2018 and 2017 was $1.6 billion, and gross profit was $390.3 million and $383.1 million, respectively. As a percentage of net sales, gross profit was 19.4% and 19.2% for the fourth quarter of 2018 and 2017, respectively. Gross margin for the fourth quarter of 2018 was 40 basis points higher than the fourth 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 three quarters of 2018.
• Selling, general and administrative (“SG&A”) expenses were $284.2 million, or 14.1% of net sales, for the fourth quarter of 2018 compared to $285.9 million, or 14.3% of net sales, for the fourth quarter of 2017.
• Operating profit was $90.5 million for the fourth quarter of 2018, compared to $80.9 million for the fourth quarter of 2017, an increase of 11.9%. Operating profit as a percentage of net sales was 4.5% for the fourth quarter of 2018, compared to 4.1% for the fourth quarter of 2017.
• Net interest and other for the fourth quarter of 2018 was $16.8 million, compared to $17.1 million for the fourth quarter of 2017.
• The effective tax rate for the fourth quarter of 2018 was 21.2%, compared to 65.2% for the fourth quarter of 2017. As adjusted for the application of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), the effective tax rate in the prior year’s fourth quarter was 23.9%. The lower effective tax rate in the current quarter as compared to the adjusted effective tax rate for the prior year’s comparable quarter is primarily due to the permanent reduction of the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018, and the completion of the accounting for the income tax effects of the TCJA.
• Net income attributable to WESCO International, Inc. was $58.2 million and $22.5 million for the fourth quarter of 2018 and 2017, respectively. Net income attributable to WESCO International, Inc. for the current quarter increased 19.0% as compared to adjusted net income attributable to WESCO International, Inc. of $48.9 million for the prior year’s fourth quarter.
• Earnings per diluted share for the fourth quarter of 2018 was $1.26, based on 46.2 million diluted shares, compared to $0.47 for the fourth quarter of 2017, based on 47.5 million diluted shares. Earnings per diluted share for the current quarter increased 22.3% as compared to adjusted earnings per diluted share of $1.03 for the fourth quarter of 2017.
• Operating cash flow for the fourth quarter of 2018 was $122.2 million, compared to $68.0 million for the fourth quarter of 2017. Free cash flow for the fourth quarter of 2018 was $109.7 million, or 189% of net income. Additionally, the Company repurchased $100 million of shares in the fourth quarter of 2018.

The following are results for the year ended December 31, 2018 compared to the year ended December 31, 2017:

• Net sales were $8.2 billion for 2018, compared to $7.7 billion for 2017, an increase of 6.5%. Organic sales for 2018 grew by 6.2% as foreign exchange rates positively impacted net sales by 0.3%.
• Cost of goods sold for 2018 was $6.6 billion and gross profit was $1.6 billion, compared to cost of goods sold and gross profit of $6.2 billion and $1.5 billion, respectively, for 2017. As a percentage of net sales, gross profit was 19.2% and 19.3% for 2018 and 2017, respectively. Gross margin for 2018 was flat compared to 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 three quarters of 2018.
• Selling, general and administrative expenses were $1.2 billion, or 14.1% of net sales, for 2018 compared to $1.1 billion, or 14.3% of net sales, for 2017.
• Operating profit was $352.5 million for 2018, compared to $319.1 million for 2017, an increase of 10.5%. Operating profit as a percentage of net sales was 4.3% for 2018, compared to 4.2% for 2017.
• Net interest and other for 2018 was $71.4 million, compared to $66.6 million for 2017. For the year ended December 31, 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 2018 was 19.8%, compared to 35.4% for 2017. As adjusted for the application of the TCJA in the fourth quarter of 2017, the effective tax rate for the prior year was 24.9%. The lower effective tax rate in the current year as compared to the adjusted effective tax rate for the prior year is primarily due to the permanent reduction of the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018, and the completion of the accounting for the income tax effects of the TCJA.
• Net income attributable to WESCO International, Inc. was $227.4 million and $163.5 million for 2018 and 2017, respectively. Net income attributable to WESCO International, Inc. for the current year increased 19.7% as compared to adjusted net income attributable to WESCO International, Inc. of $189.9 million for the prior year.
• Earnings per diluted share for 2018 was $4.82, based on 47.2 million diluted shares, compared to $3.38 for 2017, based on 48.4 million diluted shares. Earnings per diluted share for the current year increased 22.6% as compared to adjusted earnings per diluted share of $3.93 for 2017.
• Operating cash flow for 2018 was $296.7 million, compared to $149.1 million for 2017. Free cash flow for 2018 was $260.5 million, or 116% of net income. Additionally, the Company repurchased $125 million of shares in 2018.

Engel continued, “As mentioned last quarter, we provided our initial end market sales outlook and expect all of our end markets to remain healthy and to continue to provide profitable growth opportunities for WESCO. Our 2019 plan builds on the positive momentum generated in our business last year and includes continued execution of our growth initiatives, investments in our people and processes, and maintaining our cost and cash management discipline. As a result, we reaffirm our 2019 full year outlook for sales growth in the range of 3% to 6%, and provide our full year outlook for operating margin of 4.3% to 4.7%, EPS of $5.10 to $5.70 per diluted share, and free cash flow generation of at least 90% of net income.”

Engel added, “Customers are seeking continuous improvement in their operations and supply chains 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 by providing our customers with complete solutions for their MRO, OEM and capital project needs. We are very well positioned and remain steadfast in our commitment to deliver increased value for our customers, suppliers, associates and shareholders in 2019 and beyond.”