WESCO International, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
WESCO is a global business-to-business distributor and supply-chain services provider, operating through Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS). This unaudited 10-Q covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance and key metrics
- Q2 revenue: $5.484 billion, up 19.3% reported and 20.9% organically year over year. Management said inflation-related pricing contributed approximately 8% to sales. Segment organic growth: EES 23.1%, CSS 11.5%, UBS 28.6%.
- Q2 earnings: Operating income was $370.7 million, up 69.4%; operating margin was 6.8%, versus 4.8%. Net income attributable to WESCO was $220.7 million. Common-stockholder diluted EPS was $3.95, versus $2.02; adjusted diluted EPS was $4.19, versus $2.64.
- Q2 profitability: Cost of goods sold was 78.3% of sales versus 79.0%; SG&A was 14.1% versus 15.2%. Adjusted EBITDA was $444.5 million, or 8.1% of sales, versus $309.2 million, or 6.7%.
- First-half results: Revenue was $10.416 billion, up 20.6% reported and 21.0% organically. Operating income was $654.7 million versus $352.1 million; net income attributable to WESCO was $401.9 million versus $178.4 million. Diluted EPS was $7.15 versus $2.89; adjusted diluted EPS was $7.82 versus $4.06.
- Cash flow: First-half operating cash flow was negative $304.5 million, compared with positive $102.8 million in 2021. Working-capital uses included a $716.8 million increase in receivables and $530.8 million increase in inventory, partly offset by a $534.3 million increase in accounts payable. Capital expenditures were $31.6 million.
- Debt and liquidity: Total debt on the balance sheet was $5.166 billion at June 30, versus $4.773 billion at year-end; cash and equivalents were $236.8 million. Net debt used in management’s leverage calculation was $4.937 billion, and financial leverage was 3.4x, down from 3.9x at December 31. Management reported $571.4 million of liquidity, including $429.1 million of revolver availability, $25.0 million under the receivables facility, and $117.3 million of available cash. WESCO was in compliance with its financial covenants.
Material changes versus the prior comparable period
Sales growth, improved gross margin, and integration synergies drove stronger operating results. Adjusted operating margin for the first half rose to 6.7% from 5.0%. Reported results include merger and integration costs and accelerated trademark amortization; 2021 also included a gain on Canadian business divestitures. First-half operating cash flow weakened as sales growth and inventory investment absorbed working capital. Debt increased, while reported leverage declined as trailing adjusted EBITDA increased.
Outlook, commentary, risks, and unusual items
- Management cited strong customer demand, secular growth trends, pricing, and expanded offerings. It also reported supplier delays and supply constraints, including backlogs, material and labor shortages, and transportation challenges.
- WESCO expected supply-chain challenges and inflationary pressures to continue through the remainder of 2022 and potentially into 2023; it said future impacts could not then be reasonably estimated. The filing provides no quantified earnings or revenue guidance.
- Management said it was increasing inventory to serve customers and actively managing inflation. COVID-19 uncertainty and possible pandemic resurgence remain risks. The company also cited potential effects from Russia’s invasion of Ukraine, sanctions, cyber incidents, demand volatility, and integration execution.
- On March 1, 2022, WESCO amended and expanded its receivables and revolving credit facilities, extended their maturities, and transitioned rate options from LIBOR to SOFR. On August 2, after quarter-end, it further increased the receivables purchase limit to $1.525 billion and revolver commitments to $1.525 billion.
- Merger and integration costs were $13.4 million in Q2 and $39.0 million in the first half of 2022. Accelerated trademark amortization was $9.0 million in the first half. Management said pending litigation was not expected to materially affect financial condition or liquidity, though a period’s results could be affected.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist if inflation-related pricing moderates or demand weakens.
- Whether receivables and inventory growth convert to cash, and how working-capital investment affects future operating cash flow.
- Debt maturities, variable-rate exposure, facility availability, covenant headroom, and the sustainability of the 3.4x leverage measure.
- How much adjusted performance reflects recurring operations versus excluded integration costs, trademark amortization, and other adjustments.
- Whether supply-chain constraints, inflation, COVID-19, and geopolitical risks materially change costs, sales, or the outlook.