WESCO Exceeds 3Q Earnings Expectations

PITTSBURGH — WESCO International, Inc. announces its results for the third quarter of 2017.

John J. Engel, WESCO's Chairman, President and CEO, commented, “Our third quarter results exceeded our expectations and reflect improving momentum in our business. Sales grew 9% organically, our highest growth rate in over five years, driven by all end markets and geographies. Hurricane activity accounted for less than one point of sales growth. Building on our return to growth in June, our sales momentum accelerated in July and remained consistently high throughout the quarter and into October. Backlog was flat sequentially in the quarter versus the typical seasonal decline. Operating margin was above the midpoint of our outlook range, as stable gross margins and favorable operating leverage more than offset increased temporary labor costs to support hurricane relief efforts and sharp increases in customer demand. Based upon our improving execution and favorable end market conditions, we have raised our full year expectations for sales to be up 3% to 4% and increased our EPS outlook to $3.75 to $3.95 per diluted share, while maintaining our margin outlook and adjusting our effective tax rate to approximately 26%. We continue to expect free cash flow generation for the year to be at least 90% of net income.”

The following are results for the three months ended September 30, 2017 compared to the three months ended September 30, 2016:

• Net sales were $2.00 billion for the third quarter of 2017, compared to $1.86 billion for the third quarter of 2016, an increase of 7.8%. Organic sales for the third quarter of 2017 grew by 8.6% as foreign exchange rates positively impacted net sales by 0.8% and were more than offset by a 1.6% impact from the number of workdays. Sequentially, net sales increased 4.7% and organic sales increased 4.8%. 
• Cost of goods sold for the third quarter of 2017 was $1.61 billion and gross profit was $385.4 million, compared to cost of goods sold and gross profit of $1.49 billion and $365.0 million for the third quarter of 2016, respectively. As a percentage of net sales, gross profit was 19.3% and 19.7% for the third quarter of 2017 and 2016, respectively. Sequentially, gross profit as a percentage of net sales increased 10 basis points from 19.2% for the second quarter of 2017. 
• Selling, general and administrative (“SG&A”) expenses were $280.0 million, or 14.0% of net sales, for the third quarter of 2017, compared to $255.5 million, or 13.8% of net sales, for the third quarter of 2016. 
• Operating profit was $89.3 million for the current quarter, compared to $92.6 million for the third quarter of 2016. Operating profit as a percentage of net sales was 4.5% for the third quarter of 2017, compared to 5.0% for the third quarter of 2016. Sequentially, operating profit as a percentage of net sales increased 10 basis points from 4.4% for the second quarter of 2017. 
• Interest expense, net for the third quarter of 2017 was $17.3 million, compared to $20.8 million for the third quarter of 2016. Non-cash interest expense for the third quarter of 2017 and 2016, which includes amortization of debt discounts and deferred financing fees, and interest related to uncertain tax positions, was $0.8 million and $1.9 million, respectively. 
• Loss on debt redemption of $123.9 million for the third quarter of 2016 was the result of a non-cash charge from the early redemption of the Company's 6.0% Convertible Senior Debentures due 2029 on September 15, 2016. 
• The effective tax rate for the current quarter was 25.5%, compared to 40.5% for the prior year third quarter. As adjusted, the effective tax rate for the third quarter of 2016 was 28.0%. 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 the result of favorable discrete items and the mix of income earned in jurisdictions with lower tax rates. 
• Net income attributable to WESCO International, Inc. was $53.7 million for the third quarter of 2017, compared to a net loss of $31.6 million for the third quarter of 2016. Adjusted net income attributable to WESCO International, Inc. was $51.1 million for the third quarter of 2016. 
• Earnings per diluted share was $1.12 for the third quarter of 2017, based on 47.8 million diluted shares, compared to a loss per diluted share of $0.73 for the third quarter of 2016, based on 43.4 million shares. Adjusted earnings per diluted share for the third quarter of 2016 was $1.05 based on 48.7 million diluted shares. 
• Operating cash flow for the third quarter of 2017 was $14.3 million, compared to $78.6 million for the third quarter of 2016. The reduction in operating cash flow was primarily driven by an increase in accounts receivable. Free cash flow for the third quarter of 2017 was $8.1 million, or 15% of net income, compared to $72.5 million, or 140% of adjusted net income, for the third quarter of 2016. Additionally, the Company repurchased $50 million of shares in the third quarter of 2017.

The following are results for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016:

• Net sales were $5.68 billion for the first nine months of 2017, compared to $5.54 billion for the first nine months of 2016, an increase of 2.5%. Organic sales for the first nine months of 2017 grew by 2.7% as acquisitions had a positive impact on net sales of 0.3% and were more than offset by a 0.5% impact from the number of workdays. 
• Cost of goods sold for the first nine months of 2017 was $4.58 billion and gross profit was $1.10 billion, compared to cost of goods sold and gross profit of $4.44 billion and $1.10 billion for the first nine months of 2016, respectively. As a percentage of net sales, gross profit was 19.4% and 19.8% for the first nine months of 2017 and 2016, respectively. 
• Selling, general and administrative (“SG&A”) expenses were $814.3 million, or 14.3% of net sales, for the first nine months of 2017, compared to $799.4 million, or 14.4% of net sales, for the first nine months of 2016. 
• Operating profit was $239.4 million for the first nine months of 2017, compared to $250.0 million for the first nine months of 2016. Operating profit as a percentage of net sales was 4.2% for the first nine months of 2017, compared to 4.5% for the first nine months of 2016. 
• Interest expense, net for the first nine months of 2017 was $50.8 million, compared to $59.1 million for the first nine months of 2016. Non-cash interest expense for the first nine months of 2017 and 2016, which includes amortization of debt discounts and deferred financing fees, and interest related to uncertain tax positions, was $3.0 million and $6.1 million, respectively. 
• Loss on debt redemption of $123.9 million for the first nine months of 2016 was the result of a non-cash charge from the early redemption of the Company's 6.0% Convertible Senior Debentures due 2029 on September 15, 2016. 
• The effective tax rate for the first nine months of 2017 was 25.3%, compared to 20.4% for the first nine months of 2016. As adjusted, the effective tax rate for the first nine months of 2016 was 28.8%. The current year's effective tax rate is lower than the prior year's adjusted effective tax rate primarily due to favorable discrete items, including a benefit from the exercise and vesting of stock-based awards, as well as the mix of income earned in jurisdictions with lower tax rates. 
• Net income attributable to WESCO International, Inc. was $140.9 million for the first nine months of 2017, compared to $54.2 million for the first nine months of 2016. Adjusted net income attributable to WESCO International, Inc. was $136.9 million for the first nine months of 2016. 
• Earnings per diluted share for the first nine months of 2017 was $2.90, based on 48.6 million diluted shares, compared to $1.13 for the first nine months of 2016, based on 48.0 million diluted shares. Adjusted earnings per diluted share for 2016 was $2.85. 
• Operating cash flow for the first nine months of 2017 was $81.1 million, compared to $217.2 million for the first nine months of 2016. The reduction in operating cash flow was primarily driven by an increase in accounts receivable. Free cash flow for the first nine months of 2017 was $65.1 million, or 46% of net income, compared to $204.0 million, or 150% of adjusted net income, for the first nine months of 2016. Additionally, the Company repurchased $100 million of shares in the first nine months of 2017.

Engel continued, “We remain focused on executing our strategies to deliver above-market sales growth, improve profitability, generate strong cash flow, and increase shareholder value. The free cash flow generation capability of our business remains intact and 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. Our efforts remain centered on providing excellent customer service and delivering value to our customers' operations and supply chains by providing comprehensive product and service solutions that meet their capital project, MRO, and OEM needs.”