WESCO International, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Wesco distributes electrical, communications, security, utility and broadband products and provides logistics and supply-chain services. Results include Anixter, acquired June 22, 2020; therefore, 2021 versus 2020 comparisons are materially affected by 2020 including only a half-year of Anixter operations.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $18.218 billion | $12.326 billion |
| Income from operations | $801.9 million; 4.4% of sales | $347.0 million; 2.8% of sales |
| Net income | $466.4 million | $100.0 million |
| Net income attributable to common stockholders | $408.0 million | $70.4 million |
| Diluted EPS | $7.84 | $1.51 |
| Adjusted diluted EPS (non-GAAP) | $9.98 | $4.37 |
| Operating cash flow | $67.1 million | $543.9 million |
| Free cash flow (non-GAAP) | $93.5 million | $586.1 million |
| Total debt at year-end | $4.8 billion | $5.0 billion |
- Sales rose 47.8%, reflecting the Anixter acquisition, stronger demand and inflation-related pricing, which management said added approximately 3% to sales. Supply constraints were estimated to have reduced sales by approximately 1%.
- Cost of goods sold declined to 79.2% of sales from 81.1% (a 190-basis-point improvement), supporting operating margin expansion. Adjusted operating margin was 5.4% versus 4.2%; adjusted EBITDA was $1.176 billion versus $660.3 million, with adjusted EBITDA margin of 6.5% versus 5.4%.
- All segments reported higher sales and operating income. FY2021 segment sales: EES $7.621 billion, CSS $5.715 billion and UBS $4.881 billion. Segment adjusted EBITDA margins were 7.9%, 8.4% and 8.8%, respectively.
- Net interest expense increased to $268.1 million from $226.6 million, reflecting merger-related financing. The effective tax rate was 19.9%, versus 18.6%.
- Operating cash flow fell mainly because growth and inventory-building absorbed working capital: receivables increased $531.8 million and inventory increased $530.7 million, partly offset by accounts payable growth of $449.6 million. Capital expenditures were $54.7 million.
Liquidity, debt and capital
- At year-end, reported liquidity was $664.4 million: $564.8 million available under the revolving facility, $30.0 million under the receivables facility and $69.6 million of qualifying available cash. Balance-sheet cash and equivalents were $212.6 million.
- Net debt was $4.568 billion and the company-reported financial leverage ratio was 3.9, down from a pro forma 5.3 for year-end 2020. Wesco was in compliance with its debt covenants.
- Wesco redeemed its $500 million 2021 notes and $350 million 2024 notes during 2021, funding the redemptions with cash and facility borrowings. The filing identifies approximately $1.3 billion of debt to repay or refinance over the next three years; scheduled principal repayments include $1.273 billion in 2024 and $2.105 billion in 2025.
- Management expects excess liquidity to be directed primarily toward debt reduction, merger integration and potential acquisitions. It believes operating cash flow and financing resources will meet needs for at least the next 12 months. Planned 2022 capital expenditures are approximately $45 million, mainly for IT and facilities.
Changes, outlook and notable items
- Management attributed improved operating results to sales growth, margin improvement, merger synergies and structural cost reductions, partly offset by higher volume-related costs and payroll expenses.
- Supply constraints, product delays, backlogs, labor and transportation shortages, and inflationary pressures were expected to continue into 2022. Management said it would continue actively managing inflation, but could not reasonably estimate future impacts. No specific sales or earnings guidance is provided in the filing.
- FY2021 included $158.5 million of merger and integration costs, $32.0 million of accelerated trademark amortization related to the new master-brand strategy, an $8.9 million gain on Canadian business divestitures, and a $36.6 million pension curtailment gain. Adjusted measures exclude specified items and are non-GAAP.
- The Canadian divestitures generated $56.0 million in cash proceeds and fulfilled merger-related regulatory commitments. FY2020 included a $18.9 million out-of-period inventory cost-absorption adjustment; management concluded it was not material to previously filed periods.
- COVID-19 continued to create uncertainty around suppliers, customers, workforce availability and logistics. The company also cited merger-integration execution, supplier concentration, customer project timing, competition, foreign-exchange exposure, cybersecurity, and high debt and interest-rate sensitivity as risks. A 100-basis-point rate change was estimated to affect annual interest expense by approximately $18.9 million.
- Management did not believe pending litigation was likely to materially affect financial condition or liquidity, though an individual period’s results could be affected. A Mexican tax assessment of approximately $26 million was appealed; the company said it expected any remaining liability to be immaterial and recorded no reserve. No material data breaches were reported in 2021.
Important facts for investors to verify
- How much of sales and earnings growth reflects comparable or organic growth, rather than the acquisition and inflationary pricing.
- Whether working-capital investment converts into cash as supply conditions and customer demand evolve, given the steep decline in operating cash flow and free cash flow.
- Progress on merger synergies and integration, including the level and duration of remaining integration costs.
- Debt repayment and refinancing plans, covenant headroom, variable-rate exposure and the timing of the large 2024–2025 maturities.
- Whether inflation, product availability, freight costs and customer project delays affect margins or service levels beyond management’s current expectations.
- Assumptions underlying adjusted non-GAAP measures, goodwill and intangible-asset valuations, pension estimates, and tax contingencies.