WESCO Earnings Report Shows Revenue Drop for 2016

PITTSBURGH — WESCO International, Inc. announces its results for the fourth quarter and full year 2016.

John J. Engel, WESCO’s Chairman and Chief Executive Officer, stated, “Fourth quarter results were in line with our expectations, and results for the full year were within the outlook range provided in December 2015. Normalized organic sales declined versus prior year but grew sequentially, reflecting improving momentum in our business, and our first Q4 sequential sales growth in five years. Operating margin was also in line with our expectations, as we took additional actions to reduce our costs and improve productivity. Free cash flow generation remained strong, enabling us to reduce our debt and get back within our target financial leverage range.”

The following are results for the three months ended December 31, 2016 compared to the three months ended December 31, 2015:

• Net sales were $1.79 billion for the fourth quarter of 2016, compared to $1.86 billion for the fourth quarter of 2015, a decrease of 3.7%. Acquisitions had a 1.8% positive impact on net sales and were offset by a 1.6% impact from number of workdays and a 0.3% impact from foreign exchange rates, resulting in a 3.6% decrease in normalized organic sales. Sequentially, net sales decreased 3.3% and normalized organic sales increased 0.3%.
• Cost of goods sold for the fourth quarter of 2016 was $1.44 billion and gross profit was $348.6 million, compared to cost of goods sold and gross profit of $1.50 billion and $363.5 million for the fourth quarter of 2015, respectively. As a percentage of net sales, gross profit was 19.4% and 19.5% for the fourth quarters of 2016 and 2015, respectively.
• Selling, general, and administrative (“SG&A”) expenses were $249.9 million, or 13.9% of net sales for the fourth quarter of 2016, compared to $256.9 million, or 13.8% of net sales, for the fourth quarter of 2015.
• Operating profit was $82.1 million for the current quarter, compared to $90.0 million for the fourth quarter of 2015. Operating profit as a percentage of net sales was 4.6% for the fourth quarter of 2016, compared to 4.8% for the fourth quarter of 2015.
• Interest expense for the fourth quarter of 2016 was $17.5 million, compared to $9.9 million for the fourth quarter of 2015. Non-cash interest expense for the fourth quarter of 2016 and 2015, which includes amortization of debt discounts and deferred financing fees, and interest related to uncertain tax positions, was expense of $1.7 million and income of $6.5 million, respectively. In the fourth quarter of 2015, the resolution of transfer pricing matters associated with previously filed tax positions resulted in non-cash interest income.
• The effective tax rate for the current quarter was 26.0%, compared to 39.3% for the prior year fourth quarter. The resolution of the transfer pricing matter described above increased the effective tax rate for the fourth quarter of 2015.
• Net income attributable to WESCO International, Inc. was $47.4 million for the fourth quarter of 2016, compared to net income of $48.4 million for the fourth quarter of 2015.
• Earnings per diluted share was $0.96 for the fourth quarter of 2016, based on 49.2 million diluted shares, compared to earnings per diluted share of $1.03 for the fourth quarter of 2015, based on 47.2 million diluted shares.
• Operating cash flow for the fourth quarter of 2016 was $83.0 million, compared to $107.1 million for the fourth quarter of 2015. Free cash flow for the fourth quarter of 2016 was $78.2 million, or 164% of net income, compared to $101.6 million, or 209% of net income for the fourth quarter of 2015.

The following are results for the year ended December 31, 2016 compared to the year ended December 31, 2015:

• Net sales were $7.34 billion for 2016, compared to $7.52 billion for 2015, a decrease of 2.4%. Acquisitions and number of workdays had positive impacts on net sales of 3.1% and 0.4%, respectively, and were partially offset by a 1.0% impact from foreign exchange rates, resulting in a 4.9% decrease in normalized organic sales.
• Cost of goods sold for 2016 was $5.89 billion and gross profit was $1.45 billion, compared to cost of goods sold and gross profit of $6.02 billion and $1.49 billion for 2015, respectively. As a percentage of net sales, gross profit was 19.7% and 19.9% for 2016 and 2015, respectively.
• Selling, general, and administrative (“SG&A”) expenses were $1.0 billion, or 14.3% of net sales for 2016, compared to $1.1 billion, or 14.0% of net sales, for 2015.
• Operating profit was $332.0 million for 2016, compared to $373.7 million for 2015. Operating profit as a percentage of net sales was 4.5% for 2016, compared to 5.0% for 2015.
• Interest expense for 2016 was $76.6 million, compared to $69.8 million for 2015. Non-cash interest expense for 2016 and 2015, which includes amortization of debt discounts and deferred financing fees, and interest related to uncertain tax positions, was $7.8 million and $3.5 million, respectively. In 2015, the resolution of transfer pricing matters associated with previously filed tax positions resulted in non-cash interest income.
• Loss on debt redemption of $123.9 million for 2016 was the result of a non-cash charge from the early redemption of the Company’s 6.0% Convertible Senior Debentures due 2029 in the third quarter of 2016.
• The effective tax rate for 2016 was 23.1%, compared to 31.4% for 2015. The effective tax rate for the current year was positively impacted by the loss on debt redemption, whereas the resolution of the transfer pricing matter described above resulted in incremental income tax expense in 2015.
• Net income attributable to WESCO International, Inc. was $101.6 million for 2016, compared to $210.7 million for 2015. Adjusted net income attributable to WESCO International, Inc. for 2016 was $184.3 million.
• Earnings per diluted share for 2016 was $2.10 per share, based on 48.3 million diluted shares, compared to $4.18 per share for 2015, based on 50.4 million diluted shares. Adjusted earnings per diluted share for 2016 was $3.80.
• Operating cash flow for 2016 was $300.2 million, compared to $283.1 million for 2015. Free cash flow for 2016 of $282.2 million, or 154% of adjusted net income, compared to $261.4 million, or 125% of net income for 2015.

Engel continued, “On a full year basis, our 2016 results reflect the challenging economic and end market environment, as well as the impact of political uncertainty on spending in the industries we serve. We responded to these challenges by reducing our costs and streamlining our organization while ensuring continued strong free cash flow generation. These actions partially mitigated the impact of lower sales and business mix on earnings per share. We remain focused on executing our One WESCO strategy, and as a result of our organizational changes and continued execution of our business initiatives, we are entering 2017 with a stronger team focused on driving increased profitability as our end markets return to growth. The free cash flow generation capability of our business supports continued investment in our One WESCO growth initiatives, including acquisitions, along with our other cash allocation priorities. We reaffirm our expectation of 2017 sales in the range of flat to up 4%, EPS of $3.60 to $4.00 per diluted share, and free cash flow generation of at least 90% of net income, as we outlined in our investor outlook call in December.”

Engel added, “After two years of industry sales declines and talk of an industrial recession, we are pleased to hear increased optimism from customers and see the beginning signs of a recovery. In this period of change and uncertainty, customers and suppliers need strong and reliable supply chain partners. WESCO provides leading supply chain solutions supported by our broad portfolio of products and value-added services. Our efforts are centered on providing outstanding customer service and delivering value to our customers’ operations and supply chains. I am very proud of the extra effort demonstrated by all WESCO associates in serving our customers last year, and I am confident in our team’s ability to improve our performance in 2017.”