WESCO International, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. WESCO distributes electrical, communications and security, utility and broadband products and provides logistics and supply-chain services through EES, CSS and UBS. Figures are in U.S. dollars; amounts are in millions except per-share data.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $5,644.4 | $5,445.9 | $16,911.8 | $15,861.6 |
| Income from operations | $380.5 | $401.6 | $1,090.7 | $1,056.3 |
| Net income attributable to common stockholders | $219.0 | $225.2 | $580.5 | $598.5 |
| Diluted EPS | $4.20 | $4.30 | $11.08 | $11.42 |
| Adjusted EBITDA, non-GAAP | $457.0 | $465.9 | $1,320.0 | $1,274.5 |
Q3 sales rose 3.6% as reported and 2.8% organically; nine-month sales increased 6.6% as reported and 5.3% organically. For the nine-month period, reported growth included a 2.6% contribution from the 2022 Rahi acquisition; pricing and volume contributed approximately 4% and 1%, respectively.
Q3 gross margin was 21.6%, versus 22.1% a year earlier, reflecting lower supplier volume rebates and sales mix, partly offset by value-driven pricing. Operating margin was 6.7% versus 7.4%; nine-month operating margin was 6.4% versus 6.7%. Q3 adjusted EBITDA margin was approximately 8.1% versus 8.6%; nine-month adjusted EBITDA margin was approximately 7.8% versus 8.0%. These adjusted measures are non-GAAP.
Net interest expense increased to $98.5 million in Q3 from $75.1 million and to $292.3 million for nine months from $207.1 million, which WESCO attributed to higher borrowings and variable interest rates. Reported net income and diluted EPS declined in both periods; nine-month adjusted diluted EPS was $11.94 versus $12.29.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $423.9 million, compared with cash used of $410.6 million in 2022. Working-capital movements included a $133.4 million increase in receivables, a $62.7 million increase in inventory and an $86.5 million decrease in accounts payable. WESCO also cited payment of approximately $154.4 million of prior-year management incentives.
- Capital expenditures were $63.6 million; net cash used in investing activities was $61.2 million. Financing activities used $253.4 million, including common and preferred dividends, $50.0 million of share repurchases and repayment of $58.6 million of notes due 2023.
- At September 30, cash and cash equivalents were $631.4 million. Total debt was approximately $5.434 billion and net debt was $4.808 billion. Financial leverage was 2.7x, down from 2.9x at December 31, 2022.
- WESCO reported $1.103 billion of available liquidity, comprising $366.4 million of cash counted for this measure, $661.3 million of revolver capacity and $75.0 million of receivables-facility capacity. It was in compliance with debt covenants. Approximately 52% of debt was fixed-rate.
Changes, outlook and risks
Performance varied by segment. Q3 EES sales fell 2.0% and adjusted EBITDA declined 15.2%, with margin down to 8.7% from 10.1%. CSS sales rose 11.0%, including acquisition contribution, and adjusted EBITDA increased 12.2%; UBS sales rose 4.2% and adjusted EBITDA increased 5.4%. For the first nine months, EES adjusted EBITDA fell 13.8%, while CSS and UBS increased 18.9% and 16.5%, respectively.
Management said supply-chain challenges had largely improved and become more manageable. It cited wage inflation, higher facility and volume-related costs, digital-transformation spending, and lower Q3 supplier rebates as pressures; integration synergies and sales growth provided offsets. The company gave no specific sales or earnings guidance in this filing. It expects excess liquidity over the next several quarters to support debt reduction, digital transformation, dividends, share repurchases or potential acquisitions, and expects liquidity to cover business needs for at least 12 months.
Key exposures include higher interest rates on variable-rate debt, demand volatility, inflation and cost pressures, supply-chain and logistics disruptions, cyber and IT risks, geopolitical developments, and execution and integration risks related to the Anixter and Rahi businesses. Pending commercial, product and employment claims are not expected by management to materially affect financial condition or liquidity, although a resolution in a period could materially affect that period’s results. No material changes to previously disclosed risk factors were reported.
Q3 tax expense benefited from discrete items, including a $11.9 million reversal of the valuation allowance against Brazilian deferred tax assets, $10.5 million of return-to-provision adjustments and $7.6 million related to stock awards. The 15.9% quarterly effective tax rate therefore includes benefits that may not recur. The Rahi acquisition’s preliminary tax-balance valuations may require further adjustments.
Important facts for investors to verify
- Whether pricing, underlying volume and segment demand sustain sales growth, particularly given EES weakness and lower broadband sales in some markets.
- Whether supplier rebates, mix, payroll, facility and digital-transformation costs affect gross and operating margins in future periods.
- Debt, variable-rate exposure, interest expense and working-capital trends; compare reported liquidity with the lower cash amount used in WESCO’s liquidity calculation.
- How much reported and adjusted earnings depend on discrete tax benefits and non-GAAP exclusions, including ongoing merger-related and restructuring costs.
- Progress on Rahi integration and final acquisition tax-balance adjustments, as well as cash allocation among debt reduction, investment, dividends, buybacks and acquisitions.