WESCO International, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Wesco distributes electrical, communications, security, utility and broadband products and provides logistics and supply-chain services through EES, CSS and UBS.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Net sales | $5.446B | $4.728B | $15.862B | $13.366B |
| Income from operations | $401.6M | $229.5M | $1.056B | $581.6M |
| Net income | $240.2M | $120.2M | $643.0M | $298.6M |
| Net income attributable to common stockholders | $225.3M | $105.2M | $598.5M | $254.9M |
| Diluted EPS | $4.30 | $2.02 | $11.42 | $4.91 |
| Operating margin | 7.4% | 4.9% | 6.7% | 4.4% |
- Q3 reported sales rose 15.2%; organic sales growth was 16.9%. Inflation-related pricing contributed approximately 8% to sales. Foreign exchange reduced reported growth by 1.7%.
- Q3 segment sales growth: EES 12.7%, CSS 7.6%, UBS 28.0%. UBS benefited from demand associated with electrification, grid modernization, green energy and broadband development.
- Q3 cost of goods sold was 77.9% of sales versus 78.7% a year earlier; SG&A was 14.0% versus 15.3%. Management attributed margin improvement to pricing, inflation-cost pass-through, gross-margin initiatives and integration synergies.
- Q3 adjusted EBITDA, a non-GAAP measure, was $465.9M, with an 8.6% margin, versus $330.3M and 7.0% a year earlier. Adjusted diluted EPS was $4.49 versus $2.74. Adjustments included merger/integration costs and accelerated trademark amortization.
- For the first nine months, adjusted EBITDA was $1.274B versus $856.1M; adjusted diluted EPS was $12.29 versus $6.80. These are non-GAAP measures and exclude specified items.
Cash flow, debt and liquidity
- Operating cash flow was a use of $410.6M for the first nine months, compared with $172.7M provided in 2021. Working capital was the primary drain: inventory increased $886.3M and trade receivables increased $737.6M, partly offset by a $479.6M increase in accounts payable. Wesco said inventory investment supported customer demand, supply-chain resilience and sales backlog.
- Capital expenditures were $59.4M, versus $25.2M in the prior-year period. Investing cash outflow was $57.2M. Financing activities provided $477.3M; cash ended the period at $234.1M.
- Total debt was approximately $5.32B at September 30, versus $4.77B at year-end 2021. Net debt was $5.09B. The company reported a 3.2x financial leverage ratio, down from 3.9x at year-end 2021, and approximately 54% of debt was fixed-rate.
- Reported liquidity was $685.0M: $600.3M of available revolving capacity plus $84.7M of cash included in management’s liquidity calculation. Wesco reported compliance with debt covenants and said it expected adequate liquidity for at least the next 12 months.
- Net interest expense in Q3 rose to $75.1M from $69.7M, reflecting higher borrowings and variable interest rates.
Changes, outlook and risks
- Growth and operating-profit improvement were broad-based across all three segments. Nine-month sales increased 18.7% and operating income increased 81.6% year over year. Management cited strong demand, cross-selling, secular growth and integration synergies; higher payroll, volume-related expenses and digital-transformation costs partly offset gains.
- Management reported supplier delays and other supply-chain constraints, including backlogs, shortages, labor and transportation challenges, and higher costs. It expected these issues and inflationary pressures to persist through the remainder of 2022 and potentially into 2023, while noting that future effects could not be reasonably estimated. No specific full-year earnings or revenue guidance is provided in the filing text.
- On October 31, after quarter-end, Wesco increased the purchase limit of its receivables facility to $1.625B and revolving commitments to $1.725B. On November 1 it completed the $217M acquisition of Rahi Systems, funded with cash and facility borrowings.
- Other risks include rising rates on variable-rate debt, foreign-exchange movements, continued COVID-19 uncertainty, integration and synergy execution, and geopolitical uncertainty related to Russia’s invasion of Ukraine. The company said operations had not been materially adversely affected by the conflict to date. Pending lawsuits and claims were not expected by management to materially affect financial condition or liquidity, though a resolution could affect results in a particular period.
Important facts for investors to verify
- Whether working-capital investment converts to cash as inventory and receivables normalize, and whether customer demand and backlog remain strong.
- Whether margin gains, integration synergies and reported growth persist after inflation, supply-chain constraints and foreign-exchange effects.
- Debt, variable-rate exposure, borrowing capacity and leverage following the Rahi acquisition and subsequent facility amendments.
- The assumptions behind adjusted EBITDA, adjusted EPS and leverage, which are non-GAAP measures, and the impact of merger costs, trademark amortization and discrete tax items.