WESCO International, Inc. :WCC-US: Earnings Analysis: Q2, 2017 By the Numbers : August 29, 2017

WESCO International, Inc. reports financial results for the quarter ended June 30, 2017.

We analyze the earnings along side the following peers of WESCO International, Inc. – W.W. Grainger, Inc., Anixter International Inc., Houston Wire & Cable Company, Avnet, Inc., MSC Industrial Direct Co., Inc. Class A, Fastenal Company, Genuine Parts Company and Applied Industrial Technologies, Inc. (GWW-US, AXE-US, HWCC-US, AVT-US, MSM-US, FAST-US, GPC-US and AIT-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 1,909.62 million, Net Earnings of USD 49.51 million.
  • Gross margins narrowed from 18.96% to 18.35% compared to the same period last year, operating (EBITDA) margins now 5.18% from 5.49%.
  • Year-on-year change in operating cash flow of -68.14% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-06-30 2017-03-31 2016-12-31 2016-09-30 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 1909.62 1772.59 1793.3 1855.21 1911.58
Revenue Growth (%YOY) -0.1 -0.19 -3.66 -3.57 -0.27
Earnings (mil) 49.51 37.73 47.4 -31.61 49.8
Earnings Growth (%YOY) -0.58 4.65 -2.07 -149.78 -3.76
Net Margin (%) 2.59 2.13 2.64 -1.7 2.61
EPS 1.02 0.76 0.96 -0.73 1.02
Return on Equity (%) 2.38 1.86 2.37 -1.61 2.6
Return on Assets (%) 4.34 3.35 4.17 -2.72 4.25

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Market Share Versus Profits

Revenues History
Earnings History

WCC-US‘s change in revenue this period compared to the same period last year of -0.10% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that WCC-US is holding onto its market share. Also, for comparison purposes, revenues changed by 7.73% and earnings by 31.23% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 18.96% to 18.35%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 5.49% to 5.18% in this time frame. For comparison, gross margins were 18.85% and EBITDA margins were 4.69% in the previous period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

WCC-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 62.53 days, compared to last year’s level of 62.52 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

WCC-US‘s change in operating cash flow of -68.14% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 4.60% to 4.35% and (2) one-time items that contributed to a decrease in pretax margins from 3.59% to 3.47%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

WESCO International, Inc. engages in the provision of electrical, industrial, and communications maintenance, repair & operating, and original equipment manufacturers products, construction materials, and advanced supply chain management and logistics services. Its products include: general electrical and industrial supplies, wire, cable and conduit, data and broadband communications, power distribution equipment, lighting and lighting control systems, control and automation, motors and safety. The company was founded in 1993 and is headquartered in Pittsburgh, PA.

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