WESCO International, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited results compared with the three months ended March 31, 2022. Wesco is a global business-to-business distributor and supply-chain solutions provider, operating through Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $5,521.9 million | $4,932.2 million | +12.0%; organic growth 10.8% |
| Income from operations | $346.4 million | $284.0 million | +22.0% |
| Operating margin | 6.3% | 5.8% | +0.5 percentage points |
| Net income attributable to common stockholders | $182.7 million | $166.8 million | +9.5% |
| Diluted EPS | $3.48 | $3.19 | +9.1% |
| Adjusted diluted EPS (non-GAAP) | $3.75 | $3.63 | +3.3% |
| Net cash used in operating activities | $255.4 million | $172.0 million | Greater cash outflow |
Cost of goods sold was 78.1% of sales versus 78.7%, implying gross margin of 21.9% versus 21.3%. SG&A was $817.7 million, or 14.8% of sales, compared with $718.1 million, or 14.6%. Net interest expense increased 49.4% to $95.0 million, primarily reflecting higher borrowings and variable interest rates. Other expense was $10.1 million, including a $9.5 million foreign-currency loss. The effective tax rate was 18.3% versus 17.2%.
Sales by segment were EES $2,135.1 million (+2.2% reported; +3.9% organic), CSS $1,732.0 million (+20.8%; +13.3% organic), and UBS $1,654.8 million (+17.5%; +18.2% organic). Segment adjusted EBITDA margins were 8.6% for EES, 9.0% for CSS, and 11.3% for UBS; respective prior-year margins were 9.2%, 8.6%, and 9.7%. Adjusted EBITDA and adjusted EPS are non-GAAP measures.
Balance sheet, cash flow and liquidity
- At March 31, 2023, cash and cash equivalents were $349.1 million, total debt was $5,650.3 million, and reported long-term debt, net, was $5,595.1 million. Net debt under the company’s leverage calculation was $5,307.7 million, up from $4,946.8 million at year-end 2022.
- Financial leverage was 3.0x, compared with 2.9x at December 31, 2022. The company reported compliance with debt covenants.
- Liquidity was reported as $654.8 million, comprising $500.3 million available under the revolving credit facility and $154.5 million of available cash. The Receivables Facility had no available capacity; international lines had $12.6 million available.
- Operating cash outflow was $255.4 million; investing cash outflow was $12.6 million, including $13.9 million in capital expenditures; financing provided $88.6 million. Cash declined by $178.2 million to $349.1 million.
- Working-capital uses included inventory growth of $223.8 million, higher trade receivables of $133.5 million, lower accounts payable of $86.5 million, and a $149.6 million decrease in accrued payroll and benefits, primarily due to incentive compensation payments.
- Wesco repaid $58.6 million of 5.50% Anixter Senior Notes at maturity, funded by revolving-credit borrowings. It paid $19.2 million in common dividends and $14.4 million in preferred dividends during the quarter.
Material changes and management commentary
Management attributed sales growth to price inflation, higher volumes, secular demand, cross-selling, improved supply availability, and the Rahi Systems acquisition, partly offset by foreign exchange. Inflation-related pricing contributed an estimated five percentage points to sales growth. Rahi contributed 2.8 percentage points to consolidated reported growth and 9.5 percentage points to CSS growth; it generated $136.3 million of Q1 sales and an immaterial amount of operating income.
Operating income benefited from sales growth, improved cost of goods sold as a percentage of sales, integration synergies, and lower incentive compensation expense. Offsetting pressures included wage inflation, increased headcount, commissions, transportation and facility costs, and digital-transformation spending. Merger-related and integration costs were $19.5 million in Q1 2023 versus $25.6 million in Q1 2022. Adjusted EPS comparisons also exclude $5.3 million of accelerated trademark amortization in the 2022 quarter.
Outlook, risks and contingencies
The filing provides no specific quarterly or full-year earnings or sales guidance. Management expected excess liquidity to be directed primarily toward debt reduction, integration, shareholder returns, or potential acquisitions, and believed cash from operations and financing would meet business needs for at least 12 months. It anticipated ongoing supply-chain uncertainty and inflationary pressures, while noting some improvement in supply conditions.
Risks highlighted include rising interest rates and borrowing costs, supply-chain disruption, inflation, demand volatility, integration and synergy execution, foreign exchange, cyber and IT disruption, geopolitical developments, and pandemic-related uncertainty. Management said pending commercial, product, and employment claims were not expected to materially affect financial condition or liquidity, though litigation outcomes could materially affect results in a particular period. No material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether organic growth and margin performance persist as inflation, pricing, volumes, and supply conditions change.
- How working-capital investment and incentive-payment timing affect cash generation in subsequent quarters.
- Debt, variable-rate exposure, and liquidity capacity; the filing reports about 50% of debt was fixed-rate.
- Rahi integration progress, contribution to results, and any changes to preliminary acquisition accounting.
- The extent to which adjusted results exclude recurring or integration-related costs and how non-GAAP measures reconcile to GAAP.
- Developments in litigation and other risks discussed in the filing; management states outcomes cannot be predicted with certainty.