Wesco 3Q Exceeds Expectations

PITTSBURGH, Pa. — WESCO International, Inc. announced its results for the third quarter of 2018.

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.
• 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.

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.”

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.”