WESCO International, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Wesco distributes electrical, communications, security, utility and broadband products and provides logistics and supply-chain services through EES, CSS and UBS. Comparisons are with 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $5,745.5 million | $5,483.5 million | $11,267.4 million | $10,415.7 million |
| Income from operations | $363.8 million | $370.7 million | $710.2 million | $654.7 million |
| Net income attributable to common stockholders | $178.7 million | $206.3 million | $361.5 million | $373.2 million |
| Diluted EPS | $3.41 | $3.95 | $6.90 | $7.15 |
| Adjusted EBITDA (non-GAAP) | $442.3 million | $444.4 million | $863.0 million | $808.5 million |
| Operating cash flow | Not separately stated for Q2 | $62.2 million | $(304.5) million |
Q2 reported sales rose 4.8%; organic sales growth was 2.8%, reflecting roughly 3% price growth and no material overall volume contribution. Six-month sales grew 8.2% reported and 6.6% organically, with approximately 4% price and 3% volume growth. Q2 gross margin was approximately 21.6% (cost of goods sold was 78.4% of sales), versus 21.7% a year earlier; operating margin was approximately 6.3%, versus 6.8%. Adjusted EBITDA margin was approximately 7.7%, versus 8.1%.
Q2 net interest expense increased 44.2% to $98.8 million, attributed to higher borrowings and variable rates. For the first half, it rose 46.7% to $193.8 million. Six-month cash from operations improved year over year, but remained modest relative to net income; working-capital movements included higher receivables and inventory, lower payables, and incentive-compensation payments. Capital expenditures were $44.3 million for the half-year.
Financial position and liquidity
At June 30, 2023, cash and cash equivalents were $529.0 million; total debt was $5,576.5 million, compared with $5,467.3 million at year-end 2022. Net debt for the company’s leverage calculation was $5,053.7 million. Financial leverage was 2.8x, down from 2.9x at December 31, 2022. Current assets were $8,583.4 million and current liabilities $3,581.7 million.
Management reported $903.0 million of liquidity, comprising $313.8 million of cash included in its liquidity measure, $514.2 million available under the revolving facility and $75.0 million under the receivables facility. Approximately 51% of debt was fixed-rate. The company was in compliance with financial covenants. It repaid $58.6 million of 5.50% notes due in March 2023 using revolving-facility borrowings.
Material changes and segment trends
- EES: Q2 sales decreased 5.6% reported and 4.7% organically; adjusted EBITDA declined to $189.0 million from $235.4 million, and margin fell to 8.6% from 10.1%. Management cited volume contraction in construction and manufactured structures, partly offset by industrial demand and pricing.
- CSS: Q2 sales grew 15.5% reported and 6.9% organically; adjusted EBITDA rose to $179.5 million from $150.0 million, with margin improving to 9.7%. Growth included the Rahi acquisition and stronger network infrastructure and security demand.
- UBS: Q2 sales grew 9.2% reported and 9.6% organically; adjusted EBITDA rose to $188.6 million from $169.0 million, with margin improving to 11.1%. Utility demand and pricing supported growth; broadband weakness, particularly in Canada, was a partial offset.
- Reported six-month growth included a 2.7% contribution from Rahi, acquired in November 2022, and a 1.1% foreign-exchange headwind. Q2 Rahi sales were $150.3 million; its operating income contribution was described as immaterial.
Despite higher sales and operating income for the first half, common-stockholder net income and diluted EPS declined. Higher interest expense was a significant offset. Adjusted first-half diluted EPS was $7.47 versus $7.82 in 2022; these company-defined non-GAAP figures exclude specified merger, restructuring, trademark-amortization and tax effects.
Outlook, risks and unusual items
No specific numerical sales, earnings or EPS guidance is provided in the filing. Management said it expects to maintain adequate liquidity and that operating cash flow and financing sources should cover business needs for at least the next 12 months. Excess liquidity is expected to be directed primarily to debt reduction, integration, dividends, the existing repurchase authorization or potential acquisitions.
Management said supply-chain challenges had largely improved and become manageable, but persisted for certain EES and UBS products. The filing highlights exposure to rising interest rates, inflation and labor costs, demand volatility, supply-chain and logistics disruptions, cybersecurity and IT risks, geopolitical developments, and the execution and integration of the Anixter and Rahi businesses. Higher wages, facilities costs and digital-transformation spending pressured expenses. Q2 included $10.9 million of merger-related and integration costs and $9.8 million of restructuring costs; the first half also included $0.8 million of accelerated trademark amortization. First-half tax expense reflected $22.1 million of discrete tax benefits related to stock-based awards.
Wesco disclosed commercial, product and employment-related lawsuits and claims. Management did not expect pending matters, in aggregate, to materially affect financial condition or liquidity, while noting that resolutions could materially affect results in a particular period. The company reported no material changes to previously disclosed risk factors and stated its disclosure controls and internal control over financial reporting were effective.
Key facts investors should verify
- Whether cash conversion improves as receivables, inventory, payables and incentive-compensation cash timing normalize.
- Whether higher interest rates and borrowings continue to pressure earnings, and how debt reduction affects leverage and liquidity.
- Whether EES demand and margins stabilize, and whether CSS and UBS growth can offset weakness in exposed end markets.
- How much reported growth reflects organic demand, pricing, Rahi acquisition contributions and customer-account transfers between segments.
- The sustainability and comparability of adjusted EBITDA and adjusted EPS, including recurring integration, restructuring and digital-transformation costs.
- Developments in supply-chain constraints, legal claims, covenant compliance and management’s stated liquidity expectations.