John J. Engel, WESCO’s Chairman, President and CEO, commented, “In these challenging times, we are committed to super-serving our customers while ensuring the integrity of their supply chains. All of our branches remain operational and we have taken the necessary steps to ensure the health and safety of our employees through implementing increased safety, sanitizing and social distancing protocols. Through the middle of March, our first quarter results were on track with our outlook. We had a strong start to the year with sales growth within our expected range and sequentially improving gross margins. In mid-March, the spread of the COVID-19 pandemic and government-imposed shutdowns impacted our customers and suppliers across all of our end markets. Through these difficult times, our top priority at WESCO is the health and safety of our employees and their families, our customers and supplier partners, our shareholders and the communities in which we operate. WESCO has been deemed an essential business and provides mission-critical electrical, industrial, utility and communications solutions that enable our customers to efficiently, effectively and safely operate their businesses. We have provided products to help maintain power to homes and essential businesses, connectors and cabling for broadband services to support virtual and remote work, and essential equipment for data center operations to meet the increased demand for bandwidth. We have also utilized our global scale and supply chain relationships to procure personal protective equipment for our customers and our employees. I would like to recognize and thank all of our WESCO associates for their inspirational dedication, commitment and hard work in managing through this crisis.”
Engel continued, “Integration planning activities for the transformational combination of WESCO and Anixter are accelerating and we are more excited than ever about our opportunity to create the premier electrical and datacom distribution and supply chain services company. Our integration teams, comprising both WESCO and Anixter personnel, are working on numerous value creation initiatives for launch upon closing. We are highly confident in exceeding our three-year cost savings, sales growth and cash generation synergy targets communicated last month. We continue to be on track to close the transaction in the second or third quarter. With the challenging economic cycle we’re facing near term, this strategic combination remains compelling as we’re doubling the size of our company and will transform the new enterprise through execution of the integration plan and delivery of the synergies.”
Engel concluded, “As we have in prior economic downturns, we are aggressively managing the business and have taken a series of cost reduction and cash management actions. We have successfully managed through every crisis we have faced over the last 25 years, and we will do so again. The duration of the current downturn and shape of the economic recovery remain uncertain, and as a result, we are withdrawing our prior guidance for the year. WESCO supports critical infrastructure needs and the essential businesses of our customers around the world, and benefits from the resiliency of our operating model and the counter-cyclical free cash flow generation of our business. We remain focused on what we can control — our strategy, our investments, our team, and our execution, and we are confident that we will emerge an even stronger company through this cycle, as we have in the past.”
The following are results for the three months ended March 31, 2020 compared to the three months ended March 31, 2019:
- Net sales were $2.0 billion for the first quarter of 2020 and 2019. Organic sales for the first quarter of 2020 declined by 1.7% as the number of workdays and acquisitions positively impacted net sales by 1.6% and 0.5%, respectively. Net sales growth through the first ten weeks of the quarter were offset by declines during the last two weeks of March.
- Cost of goods sold for the first quarter of 2020 and 2019 was $1.6 billion, and gross profit was $376.4 million and $382.5 million, respectively. As a percentage of net sales, gross profit was 19.1% and 19.5% for the first quarter of 2020 and 2019, respectively. Sequentially, gross profit as a percentage of net sales increased 50 basis points from 18.6%.
- Selling, general and administrative expenses were $299.4 million, or 15.2% of net sales, for the first quarter of 2020, compared to $296.6 million, or 15.1% of net sales, for the first quarter of 2019. SG&A expenses for the first quarter of 2020 include $4.6 million of costs related to WESCO’s merger with Anixter International, as announced on January 10, 2020. Adjusted for these costs, SG&A expenses were $294.8 million, or 15.0% of net sales, for the first quarter of 2020.
- Operating profit was $60.9 million for the first quarter of 2020, compared to $70.7 million for the first quarter of 2019. Operating profit as a percentage of net sales was 3.1% for the current quarter, compared to 3.6% for the first quarter of the prior year. Adjusted for merger-related costs of $4.6 million, operating profit was $65.5 million for the first quarter of 2020, or 3.3% of net sales.
- Net interest and other for the first quarter of 2020 was $16.5 million, compared to $17.1 million for the first quarter of 2019. Net interest and other for the first quarter of 2020 includes approximately $0.5 million of interest for borrowings against our accounts receivable securitization facility to fund the $100.0 million termination fee described below.
- The effective tax rate for the first quarter of 2020 was 23.1%, compared to 21.7% for the first quarter of 2019. The higher effective tax rate in the current quarter is primarily due to the unfavorable effect of discrete income tax expense associated with stock-based awards. The effective tax rate for the current period would have been 21.4% without this discrete impact.
- Net income attributable to WESCO International, Inc. was $34.4 million for the first quarter of 2020, compared to $42.4 million for the first quarter of 2019.
- Earnings per diluted share for the first quarter of 2020 was $0.82, based on 42.1 million diluted shares, compared to $0.93 for the first quarter of 2019, based on 45.5 million diluted shares. Adjusted earnings per diluted share for the first quarter of 2020 was $0.91.
- Operating cash flow for the first quarter of 2020 was $31.5 million, compared to $28.9 million for the first quarter of 2019. Free cash flow for the first quarter of 2020 was $15.8 million, or 46% of net income, compared to $18.0 million, or 43% of net income, for the first quarter of 2019.