WESCO International, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. WESCO distributes products and provides logistics and supply-chain services. Its reportable segments are Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS). The results include Anixter, acquired June 22, 2020; therefore, reported year-over-year comparisons are not directly comparable.
Financial performance
- Sales: $4.041 billion, up 105.3% from $1.969 billion, primarily reflecting Anixter and growth across all segments. Sales were EES $1.721 billion (+54.4%), CSS $1.251 billion (+459.0%), and UBS $1.070 billion (+69.7%). For context, pro forma Q1 2020 sales assuming Anixter had been included were $4.040 billion.
- Margins and operating profit: Gross margin was 20.1%, versus 19.1%; reported operating income was $133.3 million (3.3% of sales), versus $60.9 million (3.1%). Adjusted operating income was $170.6 million (4.2% of sales), compared with $65.5 million (3.3%) in Q1 2020.
- Net income and EPS: Net income was $59.2 million, versus $34.2 million. Net income attributable to common stockholders was $44.8 million, or $0.87 diluted EPS, versus $34.4 million, or $0.82. Adjusted common net income and diluted EPS were $74.1 million and $1.43, respectively, versus $38.3 million and $0.91.
- Cash flow: Operating cash flow was $120.5 million, versus $31.5 million. Investing activities provided $44.5 million, including $54.1 million in Canadian divestiture proceeds; capital expenditures were $10.2 million. Financing activities used $312.2 million, including redemption of $500 million of notes and $14.4 million of preferred dividends. Cash and cash equivalents ended the quarter at $303.9 million.
- Debt and liquidity: Total debt was $4.687 billion; debt net of cash was $4.392 billion. Pro forma financial leverage was 4.9x, down from 5.3x at year-end 2020. Management reported $1.0 billion of liquidity, comprising $686.9 million of revolving-credit availability, $214.0 million of receivables-facility availability, and $136.5 million of cash counted for this measure. WESCO reported compliance with debt covenants.
- Other metrics: The effective tax rate was 9.9%, versus 23.1%, including an $8.3 million discrete tax benefit. Adjusted EBITDA was $216.5 million. The PPE inventory write-down reduced gross margin by approximately 20 basis points.
Material changes and notable items
- The Anixter acquisition substantially changed the scale and mix of the business. Management attributed performance to the merger, improving demand, margin initiatives, cost reductions, and integration synergies. Reported Q1 2020 sales exclude Anixter; pro forma Q1 2020 common-stockholder net income was $19.9 million.
- Q1 2021 SG&A included $46.3 million of merger-related costs and an $8.9 million gain on Canadian divestitures. Adjusted results exclude specified merger costs, the divestiture gain, and related tax effects; these non-GAAP measures are not equivalent to reported results.
- The company redeemed its $500 million 5.375% notes due 2021 in January, funding the redemption with cash and revolving-credit and receivables-facility borrowings. Management said it had reduced net debt by approximately $534 million since the merger, including use of Canadian divestiture proceeds.
Outlook, commentary, and risks
- Management reported a book-to-bill ratio above 1.0 and backlog growth in double digits since Q4 2020, indicating strong demand. It expected excess liquidity to be directed primarily toward debt reduction and merger integration, and forecast 2021 capital expenditures of $100 million to $120 million. The filing provides no specific revenue or EPS guidance.
- COVID-19-related uncertainty remained, including potential impacts on customer demand, projects, suppliers, supply chains, transportation, and collections. Management said the full effects could not be predicted.
- Risks include successful integration of Anixter, realizing expected synergies, elevated leverage, and supply or demand disruptions. A surplus of PPE products led to an $8.9 million inventory write-down.
- WESCO disclosed ordinary-course commercial, product, and employment claims; management did not expect pending matters to materially affect financial condition or liquidity, though a period’s results could be materially affected. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much segment growth reflects underlying demand versus the Anixter acquisition, using comparable or organic measures.
- Whether backlog and book-to-bill trends convert into sales and cash flow, and whether margin improvements persist.
- Progress on merger integration, realized synergies, and the costs and timing of achieving them.
- Debt reduction, leverage, facility availability, and covenant compliance as integration and capital spending continue.
- The scope of adjusted-result exclusions, the nonrecurring tax benefit, and any further PPE inventory or other unusual charges.