WESCO International, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. WESCO distributes electrical, communications, security, utility and broadband products and provides logistics and supply-chain services. The June 2020 acquisition of Anixter materially affects year-over-year comparisons: Anixter was consolidated beginning June 22, 2020, so prior-year periods do not include a comparable full period of its results.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $4.596 billion | $2.087 billion | $8.637 billion | $4.055 billion |
| Gross margin | 21.0% | 18.9% | 20.6% | 19.0% |
| Income from operations | $218.9 million | $15.3 million | $352.1 million | $76.2 million |
| Operating margin | 4.8% | 0.7% | 4.1% | 1.9% |
| Net income (loss) attributable to WESCO | $119.2 million | $(34.5) million | $178.4 million | $(0.1) million |
| Common diluted EPS | $2.02 | $(0.84) | $2.89 | $(0.03) |
| Operating cash flow | Not separately reported | Not separately reported | $102.8 million | $132.7 million |
Management reported six-month adjusted operating income of $432.3 million and adjusted diluted EPS of $4.06, versus $154.1 million and $2.25, respectively, in the prior-year period. These are non-GAAP measures; adjustments include merger costs and other specified items. Reported Q2 adjusted diluted EPS was $2.64 versus $1.33.
For the first six months, sales increased 113.0%, primarily reflecting the Anixter acquisition as well as broad-based demand growth. Segment sales were EES $3.644 billion, CSS $2.712 billion and UBS $2.282 billion. Gross margin improved 160 basis points year over year, which the company attributed mainly to margin initiatives; a $16.9 million PPE inventory write-down reduced six-month margin by approximately 20 basis points. SG&A was 15.5% of sales versus 16.3%, reflecting integration synergies and cost actions, partly offset by higher payroll, variable compensation and benefits.
Debt, liquidity and cash flow
- At June 30, total debt was approximately $4.741 billion and cash and cash equivalents were $287.9 million; debt net of cash was approximately $4.461 billion. The pro forma financial leverage ratio was 4.5, down from 5.3 at December 31, 2020. WESCO reported compliance with debt covenants.
- Management reported $873.1 million of available revolving-credit capacity, $120.0 million under the receivables facility and $118.1 million of available cash, for stated liquidity of approximately $1.1 billion. The filing does not explain in this summary why available cash is below the balance-sheet cash figure.
- Six-month operating cash flow was $102.8 million, with working-capital investment a significant use: receivables increased $372.3 million and inventory increased $268.3 million, partly offset by a $474.9 million increase in accounts payable. Capital expenditures were $20.2 million; investing cash flow was positive $32.4 million, including $54.3 million of Canadian divestiture proceeds.
- WESCO redeemed $500 million of 2021 notes in January, funded with cash and facility borrowings. It redeemed $350 million of 2024 notes on July 2, after quarter-end, using receivables and revolver borrowings. The company expected this redemption and the receivables-facility amendment to reduce interest expense by about $2 million in 2021 and $18 million annually thereafter at then-current rates.
Outlook, commentary and risks
- Management expected operating cash flow and financing availability to cover operational and business needs for at least the next 12 months, and planned to direct excess liquidity primarily toward debt reduction and merger integration.
- WESCO expected 2021 capital expenditures and cloud-based initiatives of $100 million to $120 million. The filing provides no full-year revenue or earnings guidance.
- Management cited strong demand, improving economic conditions, margin initiatives, integration synergies and structural cost reductions. It also noted higher compensation and benefit costs as salaries and retirement-plan matching contributions reinstated after pandemic-related reductions.
- COVID-19 remained a source of uncertainty, including potential effects on supply chains, product availability and delivery, employee operations, customer demand and collections. Other key risks include successful integration of Anixter, realization and timing of synergies, and elevated leverage.
- Merger-related costs were $37.7 million in Q2 and $84.0 million for six months. Other notable items included the $8.9 million gain on Canadian business divestitures, $5.0 million of accelerated trademark amortization following a brand-strategy change, and PPE inventory write-downs. Management said pending litigation was not expected to materially affect financial condition or liquidity, though a period’s results could be affected. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Separate acquisition-driven growth from underlying organic demand; the filing’s headline comparisons are not like-for-like.
- Track cash conversion and working capital, especially receivables and inventory growth relative to accounts payable.
- Assess progress on debt reduction, leverage, refinancing costs and the impact of the July 2021 note redemption.
- Monitor whether integration synergies and margin improvements persist, and whether merger costs and other adjustments decline.
- Review the company’s COVID-19, supply-chain and customer-demand exposures, and the assumptions behind its $100–$120 million investment plan.