PITTSBURGH — WESCO International, Inc. announces its results for the second quarter of 2016.
Mr. John J. Engel, WESCO’s Chairman, President and CEO, commented, “Our second quarter results were in line with our expectations. Sales were flat to prior year and margins were stable. While the industrial end market continues to pressure our top-line, all three of our other end markets posted positive organic sales growth in the quarter, including construction. Earnings per share grew in the quarter, and free cash flow remained strong, again exceeding 100% of net income.”
The following are results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015:
- Net sales were $1,911.6 million for the second quarter of 2016, compared to $1,916.7 million for the second quarter of 2015, a decrease of 0.3%. Acquisitions had a 3.7% positive impact on net sales and were partially offset by a 0.9% impact from foreign exchange rates, resulting in a 3.1% decrease in normalized organic sales. Sequentially, net sales increased 7.6% and normalized organic sales increased 4.8%.
- Cost of goods sold for the second quarter of 2016 was $1,532.1 million and gross profit was $379.5 million, compared to cost of goods sold and gross profit of $1,535.1 million and $381.6 million for the second quarter of 2015, respectively. As a percentage of net sales, gross profit was 19.9% for the second quarter of 2016 and 2015.
- Selling, general and administrative (“SG&A”) expenses were $274.5 million, or 14.4% of net sales for the second quarter of 2016, compared to $275.2 million, or 14.4% of net sales, for the second quarter of 2015.
Operating profit was $88.0 million for the current quarter, compared to $90.3 million for the second quarter of 2015. Operating profit as a percentage of net sales was 4.6% for the second quarter of 2016, compared to 4.7% for the second quarter of 2015. - Interest expense for the second quarter of 2016 was $19.5 million, compared to $18.6 million for the second quarter of 2015. Non-cash interest expense for the second quarter of 2016 and 2015, which includes amortization of debt discounts and deferred financing fees, interest related to uncertain tax positions, and accrued interest, was $1.2 million and $1.6 million, respectively.
- The effective tax rate for the current quarter was 27.3%, compared to 29.3% for the prior year second quarter. The decrease in the effective tax rate in the second quarter of 2016 as compared to the prior year’s comparable quarter was primarily due to the relative amounts of income earned in the United States and foreign jurisdictions, primarily Canada, and the tax rates in these jurisdictions.
- Net income attributable to WESCO International, Inc. was $49.8 million for the current quarter, compared to $51.8 million for the second quarter of 2015.
- Earnings per diluted share for the second quarter of 2016 of $1.02 per share, based on 48.6 million diluted shares, increased 2.0% from $1.00 per share for the second quarter of 2015, based on 51.9 million diluted shares.
- Operating cash flow for the second quarter of 2016 was $60.0 million, compared to $42.5 million for the second quarter of 2015. Free cash flow for the second quarter of 2016 of $56.5 million, or 113% of net income, increased 62% from $34.9 million, or 68% of net income for the second quarter of 2015.
The following are results for the six months ended June 30, 2016 compared to the six months ended June 30, 2015:
- Net sales were $3,687.5 million for the first six months of 2016, compared to $3,733.0 million for the first six months of 2015, a decrease of approximately 1.2%. Acquisitions and workdays had positive impacts on net sales of 3.8% and 1.6%, respectively, and were partially offset by a 1.7% impact from foreign exchange rates, resulting in a 4.9% decrease in normalized organic sales growth.
- Cost of goods sold for the first six months of 2016 was $2,952.9 million and gross profit was $734.6 million, compared to cost of goods sold and gross profit of $2,983.7 million and $749.3 million for the first six months of 2015, respectively. As a percentage of net sales, gross profit was 19.9% and 20.1% for the first six months of 2016 and 2015, respectively.
- Selling, general and administrative (“SG&A”) expenses were $543.8 million, or 14.7% of net sales for the first six months of 2016, compared to $539.8 million, or 14.5% of net sales, for the first six months of 2015.
Operating profit was $157.5 million for the first six months of 2016, compared to $177.4 million for the first six months of 2015. Operating profit as a percentage of net sales was 4.3% for the first six months of 2016, compared to 4.8% for the first six months of 2015. - Interest expense for the first six months of 2016 was $38.3 million, compared to $39.5 million for the first six months of 2015. Non-cash interest expense for the first six months of 2016 and 2015, which includes amortization of debt discounts and deferred financing fees, interest related to uncertain tax positions, and accrued interest, was $5.0 million and $7.0 million, respectively.
- The effective tax rate for the first six months of 2016 was 29.2%, compared to 29.4% for the first six months of 2015.
- Net income attributable to WESCO International, Inc. was $85.9 million for the first six months of 2016, compared to $98.7 million for the first six months of 2015.
- Earnings per diluted share for the first six months of 2016 was $1.79 per share, based on 47.8 million diluted shares, compared to $1.90 per share for the first six months of 2015, based on 52.1 million diluted shares.
- Operating cash flow for the first six months of 2016 was $138.6 million, compared to $132.6 million for the first six months of 2015. Free cash flow for the first six months of 2016 was $131.5 million, or 156% of net income, compared to $120.0 million, or 123% of net income for the first six months of 2015.
Convertible Debt Redemption
Engel continued, “As previously announced, in June 2016 we issued $350 million aggregate principal amount of 5.375% senior notes due 2024 (the “2024 Notes”). We intend to use the net proceeds from the 2024 Notes to repay our 6.0% Convertible Senior Debentures due 2029 (the “2029 Debentures”), which are redeemable on or after September 15, 2016.
- “Upon redemption of the 2029 Debentures, we expect to incur a non-cash, non-recurring charge, the amount of which depends on the carrying value of the 2029 Debentures and debt market conditions on the redemption date. If debt market conditions are similar to those prevailing as of June 30, 2016, we estimate that the charge would be approximately $120 million on a pre-tax basis, or an approximate $1.70 unfavorable impact to EPS.
- “Shares underlying the 2029 Debentures would be removed from our diluted share calculation and newly issued shares resulting from the conversion would be added to our basic shares, which we estimate would result in no net change to our fully diluted share count.
“Redeeming our convertible bonds simplifies our capital structure and eliminates future EPS dilution associated with these debt instruments,” Engel said. “We also expect an ongoing benefit from reduced interest expense as a result of replacing the 2029 Debentures with lower-cost debt.”
Outlook
Engel concluded, “We expect weakness in commodity-driven end markets and foreign exchange headwinds to continue into the second half of this year. However, we are maintaining our current outlook for 2016 within the original guidance we provided last December. We have narrowed our full year outlook for sales to be down 2% to flat and EPS to be $3.85 to $4.10 per diluted share, while increasing our free cash flow to at least 100% of net income. Our full year outlook excludes any impact from the potential redemption of the convertible bonds previously discussed. We remain focused on executing our One WESCO strategy to deliver above-market sales growth, improve profitability, generate strong free cash flow, and increase shareholder value. In this challenging environment, our One WESCO value proposition is more important than ever in providing the comprehensive product and service solutions customers need to cost-effectively meet their MRO, OEM, and capital project management requirements.”
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