WESCO International, Inc. — Q1 2024 Form 10-Q
Business context and period. Wesco distributes electrical, communications, security, utility and broadband products, and provides logistics and supply-chain services. This unaudited report covers the three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted.
Financial performance and position
- Revenue: Net sales were $5.35 billion, down 3.1% reported and 3.2% organically. Management attributed the decline mainly to an estimated 4% volume decrease, partly offset by approximately 1% price increases.
- Profit and margins: Operating income fell 24.1% to $263.0 million; operating margin was 4.9%, versus 6.3%. Cost of goods sold was 78.7% of sales, compared with 78.1%, implying gross margin of approximately 21.3% versus 21.9%. Net income was $116.1 million, versus $197.2 million; diluted EPS was $1.95, versus $3.48. Adjusted diluted EPS, a non-GAAP measure, was $2.30 versus $3.75.
- Adjusted EBITDA: $340.4 million, down 19.1% from $420.7 million. Segment adjusted EBITDA margins were EES 7.9% (8.6% prior year), CSS 7.6% (9.0%), and UBS 10.7% (11.3%).
- Cash flow: Operating cash flow was $746.3 million, compared with cash use of $255.4 million. The increase was substantially driven by a $620.9 million rise in accounts payable, which management linked to a system conversion, purchase timing and a quarter-end bank holiday that delayed payments. Capital expenditures were $20.4 million; cash and cash equivalents were $984.1 million on the balance sheet at quarter-end.
- Debt and liquidity: Total debt was $5.26 billion and net debt was $4.27 billion; financial leverage was 2.6x, down from 2.8x at December 31, 2023. Management reported approximately $3.2 billion of liquidity, including $678.8 million of available cash, $1.7 billion of revolver capacity and $846.8 million of receivables-facility capacity. The company reported compliance with debt covenants.
- Other metrics: Interest expense was $94.4 million, broadly unchanged from $95.0 million. Other expense increased to $21.6 million from $10.1 million, including a $17.4 million foreign-currency loss. The effective tax rate was 21.0%, versus 18.3%.
Material changes versus Q1 2023
- Sales declined across all three segments: EES down 1.7%, CSS down 3.6% and UBS down 4.5%. Management cited weaker volume, especially in UBS broadband, CSS security and enterprise networking, and EES OEM markets.
- Operating income, net income attributable to common stockholders and diluted EPS declined. Management cited lower sales, margin contraction, wage inflation and higher facility costs; lower professional-services and transportation costs partly offset these pressures.
- Quarter-end cash flow improved sharply from the prior-year cash outflow, but the company identified the accounts-payable increase and payment timing as major drivers.
- Wesco issued $900 million of 6.375% notes due 2029 and $850 million of 6.625% notes due 2032. Proceeds initially repaid revolving and receivables-facility borrowings; Wesco intends to redeem its $1.5 billion of 7.125% notes due 2025 on or after June 15, 2024, using facility borrowings as needed.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management said cash from operations and financing, together with available liquidity, should meet operational and business needs for at least the next 12 months. It expects excess liquidity to support shareholder returns, debt reduction, digital initiatives or potential acquisitions.
- Wesco completed the sale of its Wesco Integrated Supply (WIS) business on April 1, 2024, for approximately $338.3 million. It expects to record an $88 million to $108 million gain in Q2 2024. WIS generated $11.5 million of pretax income in Q1 2024; the divestiture was not classified as discontinued operations.
- Unusual Q1 costs included $8.0 million of restructuring costs, $6.1 million of digital-transformation costs, $4.8 million of excise taxes on excess pension assets and $5.5 million of pension-settlement cost. The U.S. Anixter pension plan was settled using plan assets.
- Management noted that higher interest rates could increase costs on variable-rate debt; approximately 87% of debt was fixed-rate at quarter-end. Other identified risks include currency movements, demand and inflation volatility, supply-chain disruption, cybersecurity and technology execution, geopolitical developments, and risks associated with divestitures. Management said pending litigation is not expected to materially affect financial condition or liquidity, though a resolution could materially affect results in a period.
Important facts for investors to verify
- Whether sales volumes and segment margins stabilize, particularly in UBS broadband and CSS security and enterprise networking.
- How much Q1 operating cash flow reflects sustainable working-capital improvement versus delayed supplier payments and other timing effects.
- Completion and funding of the planned 2025-note redemption, including the resulting debt mix, borrowing costs and liquidity.
- The final WIS sale proceeds, purchase-price adjustments and recognized gain, as well as any retained obligations or transition costs.
- Reconciliation and consistency of the company’s non-GAAP adjusted earnings, EBITDA and leverage measures with GAAP results.