WESCO International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. WESCO distributes products and provides logistics and supply-chain services through Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS). Results include Anixter, acquired in June 2020; year-to-date comparisons are therefore not like-for-like.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $4.728 billion | $4.142 billion | $13.366 billion | $8.197 billion |
| Income from operations | $229.5 million | $178.1 million | $581.6 million | $254.3 million |
| Operating margin | 4.9% | 4.3% | 4.4% | 3.1% |
| Net income attributable to WESCO | $119.6 million | $80.7 million | $298.0 million | $80.6 million |
| Net income attributable to common stockholders | $105.2 million | $66.2 million | $254.9 million | $64.8 million |
| Diluted EPS | $2.02 | $1.31 | $4.91 | $1.44 |
- Q3 reported sales rose 14.2%; organic growth was 13.6%, with foreign exchange adding 1.4 percentage points and divestitures reducing growth by 0.8 points. All three segments grew organically: EES 19.0%, CSS 6.2%, and UBS 14.8%.
- Gross margin improved: cost of goods sold was 78.7% of sales in Q3 versus 81.0% a year earlier, and 79.2% versus 81.0% for the nine-month periods. Margin initiatives helped, partly offset by inventory write-downs.
- Q3 adjusted EPS, a non-GAAP measure excluding specified items, was $2.74 versus $1.66. Nine-month adjusted EPS was $6.80 versus $3.17. These measures exclude merger costs and other adjustments; see filing reconciliations.
- Nine-month operating cash flow was $172.7 million, down from $418.9 million. Higher receivables ($521.5 million increase) and inventory ($428.4 million increase) absorbed cash, partly offset by higher accounts payable ($550.9 million increase). Capital expenditures were $25.2 million.
- Cash and cash equivalents were $251.8 million at September 30, 2021, versus $449.1 million at year-end 2020. Total debt was approximately $4.65 billion; debt net of cash was $4.41 billion. The reported financial leverage ratio was 4.1, compared with pro forma 5.3 at December 31, 2020.
- Management reported $844.6 million of liquidity: $623.0 million available under the revolving credit facility, $115.0 million under the receivables facility, and $106.6 million of cash included in its liquidity calculation. WESCO said it was compliant with debt covenants.
Material changes and notable items
- Nine-month reported sales increased 63.1%, primarily reflecting the inclusion of Anixter for a longer period in 2021, as well as improved demand. This comparison is materially affected by the acquisition timing.
- WESCO redeemed $500 million of 2021 notes and $350 million of 2024 notes. The 2024-note redemption and related facility amendment are expected, at then-current rates, to reduce interest expense by about $2 million in 2021 and $18 million annually thereafter. The 2024 redemption generated a $6.9 million extinguishment loss.
- Canadian divestitures required by the competition regulator closed in February 2021 for $56.0 million in proceeds; WESCO recorded an $8.9 million net gain and used the proceeds to repay debt.
- Merger-related costs were $35.8 million in Q3 and $119.8 million year to date. Accelerated trademark amortization related to the brand migration was $15.1 million in Q3 and $20.2 million year to date.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in the filing. Management expected to spend approximately $100 million on 2021 capital expenditures and cloud-based solutions, primarily to align systems and enhance digital tools.
- Management said supply-chain constraints—including product delays, backlogs, shortages, labor and transportation challenges, and higher costs—were expected to persist through the rest of 2021 and potentially into 2022. These issues were estimated to have reduced Q3 sales by approximately 1%–2%; future effects could not be reasonably estimated.
- Inflation-related pricing increased Q3 sales by approximately 5%, but management said pricing had no material operating-profit impact because of offsetting product-cost increases. It said it would continue managing inflation’s effects.
- Management cited sales growth, margin initiatives, integration synergies, and structural cost reductions as positive factors, partly offset by higher payroll, benefits, variable compensation, and volume-related costs. It expected excess liquidity to be directed mainly toward debt reduction and integration activity, and believed available cash and financing would meet needs for at least 12 months.
- COVID-19 uncertainty and potential effects on suppliers, employees, carriers, customers, and demand remained risks. The filing also identifies integration and synergy execution, leverage, inflation, and supply-chain disruption as risks. Pending commercial, product, and employment matters were not expected by management to materially affect financial condition or liquidity, though period-specific operating results could be affected.
Investor verification priorities
- Assess organic growth and segment trends separately from the acquisition-driven increase in reported year-to-date sales.
- Track cash conversion and working-capital needs as receivables and inventory rise; compare operating cash flow with earnings and debt-service requirements.
- Verify debt balances, facility availability, leverage, and interest-rate exposure, including the assumptions behind management’s liquidity and interest-savings estimates.
- Evaluate whether margin gains and integration synergies persist after merger costs, accelerated amortization, inventory write-downs, and other non-GAAP adjustments.
- Monitor whether supply constraints, inflation, and COVID-19 disruptions affect sales, costs, customer demand, or the stated outlook.