WESCO International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. WESCO distributes electrical, communications, security and utility products and provides logistics and supply-chain services. It completed its acquisition of Anixter on June 22, 2020; Anixter’s results are included from that date, making year-over-year comparisons substantially affected by the acquisition.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $4.142 billion | $2.148 billion | $8.197 billion | $6.259 billion |
| Income from operations | $178.1 million | $93.7 million | $254.3 million | $262.4 million |
| Net income attributable to WESCO | $80.7 million | $64.5 million | $80.6 million | $170.3 million |
| Net income attributable to common stockholders | $66.2 million | $64.5 million | $64.8 million | $170.3 million |
| Diluted EPS attributable to common stockholders | $1.31 | $1.52 | $1.44 | $3.88 |
| Operating margin | 4.3% | 4.4% | 3.1% | 4.2% |
Q3 gross profit was $785.5 million, with cost of goods sold at 81.0% of sales versus 81.4% a year earlier. SG&A was 13.6% of sales versus 13.5%. For the first nine months, SG&A was 14.9% of sales versus 14.1%. Management reported adjusted diluted EPS, excluding specified merger-related items and the branch-sale gain, of $1.66 for Q3 and $3.17 for the nine-month period; these are non-GAAP measures.
- Cash flow: Operating cash flow was $418.9 million for the first nine months, compared with $116.7 million in 2019. Capital expenditures were $42.6 million. Acquisition-related investing outflow was $3.708 billion.
- Liquidity: At September 30, cash and cash equivalents were $352.2 million. Management reported $727.5 million available under the revolving facility and $135.0 million under the receivables facility, and stated total liquidity of $1.1 billion using $212.6 million of available cash. It believed cash flow and financing would cover needs for at least 12 months.
- Debt and leverage: Total debt was approximately $5.0 billion, compared with $1.3 billion at year-end 2019; debt net of cash was $4.645 billion. The pro forma financial leverage ratio was 5.3, versus 2.6 reported at year-end 2019. Approximately 75% of debt was fixed-rate. WESCO said it was in compliance with debt covenants.
- Preferred stock: Series A preferred shares issued in the Anixter transaction carry an initial cumulative dividend rate of 10.625%. Preferred dividends were $14.5 million in Q3 and $15.8 million for the nine-month period.
Material changes and management commentary
- Reported sales rose 92.8% in Q3 and 31.0% for the first nine months, primarily reflecting Anixter; management said pandemic-related weaker demand partly offset the increase. Q3 Anixter sales included in the statements were $2.2 billion.
- Nine-month operating income fell despite higher sales. Management cited pandemic impacts, acquisition-related costs and fair-value adjustments, and increased depreciation, amortization and interest expense. Adjusted nine-month operating income was $354.6 million versus reported $254.3 million; the adjustment included $92.1 million of merger-related costs, $28.0 million of merger-related fair-value adjustments, and a $19.8 million gain on sale of an operating branch.
- Management expected COVID-19’s negative effects to continue through the rest of 2020 and potentially longer, but gave no quantitative earnings or revenue guidance. Risks include customer demand and payment disruptions, supplier and transportation constraints, renewed restrictions and broader economic uncertainty. The company took cost-reduction measures and suspended its U.S. employer retirement-plan match from April 16 through September 30.
- WESCO planned to direct excess liquidity primarily toward debt reduction and merger integration. The company must divest its legacy Canadian Utility and Datacom businesses under a Competition Bureau of Canada agreement; the businesses had combined 2019 sales below $150 million. It expected to use proceeds to repay debt.
- Goodwill and indefinite-lived intangible assets were tested for impairment, with no impairment identified. However, the EES reporting unit’s estimated fair value exceeded carrying value by less than 10%, and management warned future impairment could arise if conditions or expected synergies deteriorate.
Investor verification points
- Assess comparable, organic performance separately from the partial-period Anixter contribution and review segment results under the newly reorganized EES, CSS and UBS reporting structure.
- Reconcile reported and adjusted earnings, including merger costs, purchase-accounting fair-value adjustments, the branch-sale gain, preferred dividends and the related tax effects.
- Track debt reduction, interest expense, leverage, available borrowing capacity and the difference between balance-sheet cash and cash counted in management’s stated liquidity.
- Monitor integration costs and realization of anticipated synergies, the Canadian divestiture’s timing and proceeds, and impairment sensitivity—especially for EES goodwill.
- Review the duration and financial effects of COVID-19, including demand, supply-chain, customer-credit and cybersecurity risks. The filing provides no clear quantified forecast for these effects.