PITTSBURGH — Wesco International, a leading provider of business-to-business distribution, logistics services and supply chain solutions, announces its results for the third quarter of 2022.
“Our third quarter results provide demonstrable evidence of the substantial value creation capability of the new Wesco. We once again set new company records for margin, profitability and backlog, and further reduced our leverage ratio in the third quarter. The power of our increased scale, expanded portfolio, and industry-leading positions is clearly evident in our continued strong performance,” said John Engel, Chairman, President and CEO.
Engel continued, “Strong demand and operational improvements continue to underpin the record-setting performance of each of our strategic business units. Each strategic business unit again delivered strong organic sales and profit growth in the quarter driven by the breakthrough results of our enterprise-wide cross selling and margin improvement programs. Our increased profitability continues to fuel our investment in advanced digital capabilities that will transform our relationship with our customers and supplier partners. The recent acquisition of Rahi Systems underscores our strategy to maximize our exposure to attractive secular growth trends. Our profitable execution against these sustainable trends and our investment in Wesco’s digital transformation supports a virtuous cycle which should result in an even higher level of performance, operating efficiency and customer loyalty.”
Engel added, “As you recall, after delivering excellent results in each of the first and second quarters, we substantially increased our outlook for the year. Our outstanding results in the third quarter and the continued strong execution across our business support the full year outlook for 2022 previously provided. We are maintaining our organic growth targets but adjusting our reported sales to reflect the unprecedented strong dollar performance throughout 2022. We now expect reported sales to increase 15% to 17% versus our prior outlook of 16% to 18% with the change entirely driven by foreign exchange rates. We are maintaining our record-setting profit forecast and now expect adjusted EBITDA margin to expand to 7.9% to 8.0% of sales, equating to approximately $1.68 billion of adjusted EBITDA at the midpoint of our outlook range. And we are narrowing our outlook for adjusted EPS to a range of $15.80 to $16.20. Given our strong growth, record backlog and investment in inventory to support that backlog, we now expect full year 2022 free cash flow to be approximately 10% of adjusted net income.”
Engel concluded, “The demonstrated strength of our business model and the success of our integration efforts over the last nine quarters have established a track record of superior results for our company. By providing resilient and critical supply chain solutions for our customers around the world, the new Wesco is demonstrating the benefit of our exposure to sustainable secular trends that are deep and will drive our future sales and profitability. As we conveyed during our recent Investor Day, we are excited because there is still substantial value embedded in the transformational combination of Wesco and Anixter. We look forward with great confidence to a future of sustained growth and market outperformance.”
The following are results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021:
- Net sales were $5.4 billion for the third quarter of 2022 compared to $4.7 billion for the third quarter of 2021, an increase of 15.2%, reflecting price inflation, continued strong demand, secular growth trends, and execution of our cross-sell program. Organic sales for the third quarter of 2022 grew 16.9% as fluctuations in foreign exchange rates negatively impacted reported net sales by 1.7%. Sequentially, net sales declined 0.7% and organic sales were flat as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.7%. Backlog at the end of the third quarter of 2022 increased more than 60% to a record level compared to the end of the third quarter of 2021. Sequentially, backlog grew approximately 5%, marking the seventh consecutive quarter of sequential growth.
- Cost of goods sold for the third quarter of 2022 was $4.2 billion compared to $3.7 billion for the third quarter of 2021, and gross profit was $1.2 billion and $1.0 billion, respectively. As a percentage of net sales, gross profit was 22.1% and 21.3% for the third quarter of 2022 and 2021, respectively. Gross profit as a percentage of net sales for the third quarter of 2022 reflects our focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program. The third quarter of 2021 included a write-down to the carrying value of certain personal protective equipment inventories that unfavorably impacted gross profit as a percentage of net sales by approximately 10 basis points. Sequentially, gross profit as a percentage of net sales increased 40 basis points from 21.7% for the second quarter of 2022.
- Selling, general and administrative (“SG&A”) expenses were $760.2 million, or 14.0% of net sales, for the third quarter of 2022, compared to $721.8 million, or 15.3% of net sales, for the third quarter of 2021. SG&A expenses for the third quarter of 2022 and 2021 include merger-related and integration costs of $13.2 million and $35.8 million, respectively. Adjusted for these amounts, SG&A expenses were $747.0 million, or 13.7% of net sales, for the third quarter of 2022 and $686.0 million, or 14.5% of net sales, for the third quarter of 2021. SG&A expenses for the third quarter of 2022 reflect higher salaries, as well as higher volume-related costs driven by significant sales growth. In addition, digital transformation initiatives contributed to higher expenses in the third quarter of 2022. These increases were partially offset by the realization of integration cost synergies, as well as lower professional and consulting fees associated with integration activities.
- Depreciation and amortization for the third quarter of 2022 was $42.7 million compared to $56.7 million for the third quarter of 2021, a decrease of $14.0 million. In connection with an integration initiative to review the Company’s brand strategy, certain legacy trademarks are migrating to a master brand architecture, which resulted in $0.4 million and $15.1 million of accelerated amortization expense for the third quarter of 2022 and 2021, respectively.
- Operating profit was $401.6 million for the third quarter of 2022 compared to $229.5 million for the third quarter of 2021, an increase of $172.1 million, or 75.0%. Operating profit as a percentage of net sales was 7.4% for the current quarter compared to 4.9% for the third quarter of the prior year. Adjusted for the merger-related and integration costs, and accelerated trademark amortization described above, operating profit was $415.2 million, or 7.6% of net sales, for the third quarter of 2022 and $280.4 million, or 5.9% of net sales, for the third quarter of 2021. Adjusted operating margin was up 170 basis points compared to the prior year.
- Net interest expense for the third quarter of 2022 was $75.1 million compared to $69.7 million for the third quarter of 2021. The increase reflects higher borrowings and an increase in variable interest rates.
- The effective tax rate for the third quarter of 2022 was 26.3% compared to 27.2% for the third quarter of 2021. The effective tax rate for the quarter ended September 30, 2022 was lower than the comparable prior year period due to the favorable net impact of discrete income tax items.
- Net income attributable to common stockholders was $225.3 million for the third quarter of 2022 compared to $105.2 million for the third quarter of 2021. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders was $235.2 million for the third quarter of 2022 compared to $142.6 million for the third quarter of 2021. Adjusted net income attributable to common stockholders increased 64.9% year-over-year.
- Earnings per diluted share for the third quarter of 2022 was $4.30, based on 52.4 million diluted shares, compared to $2.02 for the third quarter of 2021, based on 52.1 million diluted shares. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the third quarter of 2022 was $4.49 compared to $2.74 for the third quarter of 2021. Adjusted earnings per diluted share increased 63.9% year-over-year.
- Operating cash flow for the third quarter of 2022 was an outflow of $106.1 million compared to an inflow of $69.9 million for the third quarter of 2021. The net cash outflow in the third quarter of 2022 was primarily driven by changes in working capital, including an increase in inventories of $355.6 million resulting from investments to address supply chain challenges and to support increases in our sales backlog, including project-based business. An increase in trade accounts receivable of $20.9 million resulting from higher sales and a decrease in accounts payable of $54.6 million also contributed to the net cash outflow.
The following are results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021:
- Net sales were $15.9 billion for the first nine months of 2022 compared to $13.4 billion for the first nine months of 2021, an increase of 18.7%, reflecting price inflation, continued strong demand, secular growth trends, and execution of our cross-sell program. Organic sales for the first nine months of 2022 grew 19.5% as the number of workdays positively impacted reported net sales by 0.5%, while fluctuations in foreign exchange rates and the divestiture of Wesco’s legacy utility and data communications businesses in Canada in the first quarter of 2021 negatively impacted reported net sales by 1.2% and 0.1%, respectively.
- Cost of goods sold for the first nine months of 2022 was $12.4 billion compared to $10.6 billion for the first nine months of 2021, and gross profit was $3.4 billion and $2.8 billion, respectively. As a percentage of net sales, gross profit was 21.7% and 20.8% for the first nine months of 2022 and 2021, respectively. Gross profit as a percentage of net sales for the first nine months of 2022 reflects our focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program. The first nine months of 2021 included a write-down to the carrying value of certain personal protective equipment inventories that unfavorably impacted gross profit as a percentage of net sales by approximately 20 basis points.
- SG&A expenses were $2.3 billion, or 14.2% of net sales, for the first nine months of 2022, compared to $2.1 billion, or 15.4% of net sales, for the first nine months of 2021. SG&A expenses for the first nine months of 2022 include merger-related and integration costs of $52.2 million. Adjusted for this amount, SG&A expenses were 13.9% of net sales for the first nine months of 2022. SG&A expenses for the first nine months of 2022 reflect higher salaries and variable compensation expenses, as well as higher volume-related costs driven by significant sales growth. In addition, digital transformation initiatives contributed to higher expenses in the first nine months of 2022. These increases were partially offset by the realization of integration cost synergies, as well as lower professional and consulting fees associated with integration activities. SG&A expenses for the first nine months of 2021 include merger-related and integration costs of $119.8 million, as well as a net gain of $8.9 million resulting from the Canadian divestitures described above. Adjusted for these amounts, SG&A expenses were 14.6% of net sales for the first nine months of 2021.
- Depreciation and amortization for the first nine months of 2022 was $135.6 million compared to $144.6 million for the first nine months of 2021, a decrease of $9.0 million. In connection with an integration initiative to review the Company’s brand strategy, certain legacy trademarks are migrating to a master brand architecture, which resulted in $9.4 million and $20.2 million of accelerated amortization expense for the first nine months of 2022 and 2021, respectively.
- Operating profit was $1.1 billion for the first nine months of 2022 compared to $0.6 billion for the first nine months of 2021, an increase of $474.7 million, or 81.6%. Operating profit as a percentage of net sales was 6.7% for the current nine-month period compared to 4.4% for the first nine months of the prior year. Operating profit for the first nine months of 2022 includes the merger-related and integration costs, and accelerated trademark amortization expense described above. Adjusted for these amounts, operating profit was 7.0% of net sales. For the first nine months of 2021, operating profit was 5.3% of net sales as adjusted for merger-related and integration costs of $119.8 million, accelerated trademark amortization expense of $20.2 million, and the net gain on the Canadian divestitures of $8.9 million. Adjusted operating margin was up 170 basis points compared to the prior year.
- The effective tax rate for the first nine months of 2022 was 24.0% compared to 22.0% for the first nine months of 2021. The effective tax rates for the current nine-month period and the comparable prior year period reflect discrete income tax benefits of $13.4 million and $8.3 million, respectively, resulting from reductions to the valuation allowance recorded against foreign tax credit carryforwards, as well as the exercise and vesting of stock-based awards of $9.4 million and $7.8 million, respectively. These discrete income tax benefits were partially offset by discrete income tax expense of $0.8 million and $4.2 million, respectively, resulting from return-to-provision adjustments. The net impact of discrete income tax items was a reduction to the estimated annual effective tax rates in such periods of approximately 2.6 and 3.1 percentage points, respectively.
- Net income attributable to common stockholders was $598.5 million for the first nine months of 2022 compared to $254.9 million for the first nine months of 2021. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders was $643.7 million for the first nine months of 2022. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on Canadian divestitures, and the related income tax effects, net income attributable to common stockholders for the first nine months of 2021 was $353.0 million. Adjusted net income attributable to common stockholders increased 82.4% year-over-year.
- Earnings per diluted share for the first nine months of 2022 was $11.42, based on 52.4 million diluted shares, compared to $4.91 for the first nine months of 2021, based on 51.9 million diluted shares. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first nine months of 2022 was $12.29. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on Canadian divestitures, and the related income tax effects, earnings per diluted share for the first nine months of 2021 was $6.80. Adjusted earnings per diluted share increased 80.7% year-over-year.
- Operating cash flow for the first nine months of 2022 was an outflow of $410.6 million compared to an inflow of $172.7 million for the first nine months of 2021. Operating cash flow for the current year period was lower than the comparable prior year period primarily due to changes in working capital to support double-digit sales growth.
Segment Results
The Company has operating segments comprising three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”).
The Company incurs corporate costs primarily related to treasury, tax, information technology, legal and other centralized functions. Segment results include depreciation expense or other allocations related to various corporate assets. Interest expense and other non-operating items are either not allocated to the segments or reviewed on a segment basis. Corporate expenses not directly identifiable with our reportable segments are reported in the tables below to reconcile the reportable segments to the consolidated financial statements.
The following are results by segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021:
- EES reported net sales of $2.2 billion for the third quarter of 2022 compared to $2.0 billion for the third quarter of 2021, an increase of 12.7%. Organic sales for the third quarter of 2022 grew 14.9% as fluctuations in foreign exchange rates negatively impacted reported net sales by 2.2%. Sequentially, reported net sales declined 4.1%. Adjusting for the negative effect of fluctuations in foreign exchange rates, organic sales decreased 3.2%. The increase compared to the prior year quarter reflects price inflation and strong end market demand, partially offset by the effect of supply chain constraints and commodity prices. Operating profit was $213.2 million for the third quarter of 2022 compared to $155.2 million for the third quarter of 2021, an increase of $58.0 million, or 37.4%. The increase primarily reflects the factors impacting the overall business, as described above. EBITDA, adjusted for other non-operating income and non-cash stock-based compensation expense, was $225.8 million for the third quarter of 2022, or 10.1% of net sales, compared to $173.9 million for the third quarter of 2021, or 8.8% of net sales. Adjusted EBITDA increased $51.9 million, or 29.8% year-over-year.
- CSS reported net sales of $1.6 billion for the third quarter of 2022 compared to $1.5 billion for the third quarter of 2021, an increase of 7.6%. Organic sales for the third quarter of 2022 grew 9.6% as fluctuations in foreign exchange rates negatively impacted reported net sales by 2.0%. Sequentially, reported net sales were flat and organic sales increased 0.8%. The increase compared to the prior year quarter reflects price inflation, growth in our security solutions and network infrastructure businesses, as well as the benefits of cross selling, partially offset by the effect of supply chain constraints. Operating profit was $139.0 million for the third quarter of 2022 compared to $108.2 million for the third quarter of 2021, an increase of $30.8 million, or 28.4%. The increase primarily reflects the factors impacting the overall business, as described above. Operating profit for the third quarter of 2021 was negatively impacted by approximately 20 basis points from the inventory write-down described above. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation expense, was $156.4 million for the third quarter of 2022, or 9.8% of net sales, compared to $133.7 million for the third quarter of 2021, or 9.0% of net sales. Adjusted EBITDA increased $22.7 million, or 17.0% year-over-year.
- UBS reported net sales of $1.6 billion for the third quarter of 2022 compared to $1.3 billion for the third quarter of 2021, an increase of 28.0%. Organic sales for the third quarter of 2022 grew 28.6% as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.6%. Sequentially, reported net sales grew 3.7% and organic sales increased 4.0%. The increase compared to the prior year quarter reflects price inflation, broad-based growth driven by investments in electrification, green energy, grid modernization and hardening, and rural broadband development, as well as expansion in our integrated supply business. Operating profit was $179.3 million for the third quarter of 2022 compared to $108.2 million for the third quarter of 2021, an increase of $71.1 million, or 65.7%. The increase primarily reflects the factors impacting the overall business, as described above. EBITDA, adjusted for other non-operating expenses (income) and non-cash stock-based compensation expense, was $186.3 million for the third quarter of 2022, or 11.6% of net sales, compared to $114.7 million for the third quarter of 2021, or 9.1% of net sales. Adjusted EBITDA increased $71.6 million, or 62.4% year-over-year.
The following are results by segment for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
- EES reported net sales of $6.7 billion for the first nine months of 2022 compared to $5.6 billion for the first nine months of 2021, an increase of 18.3%. Organic sales for the first nine months of 2022 grew 19.4% as the number of workdays positively impacted reported net sales by 0.5%, while fluctuations in foreign exchange rates and the Canadian divestitures described above negatively impacted reported net sales by 1.4% and 0.2%, respectively. The increase reflects price inflation, expansion in our industrial, construction, and original equipment manufacturer businesses, as well as the benefits of cross selling and secular growth trends in electrification and automation, partially offset by the effect of supply chain constraints and commodity prices. Operating profit was $613.5 million for the first nine months of 2022 compared to $409.1 million for the first nine months of 2021, an increase of $204.4 million, or 50.0%. The increase primarily reflects the factors impacting the overall business, as described above. EBITDA, adjusted for other non-operating income and non-cash stock-based compensation expense, was $653.6 million for the first nine months of 2022, or 9.8% of net sales, compared to $453.9 million for the first nine months of 2021, or 8.1% of net sales. Adjusted EBITDA increased $199.7 million, or 44.0% year-over-year.
- CSS reported net sales of $4.6 billion for the first nine months of 2022 compared to $4.2 billion for the first nine months of 2021, an increase of 10.4%. Organic sales for the first nine months of 2022 grew 11.5% as the number of workdays positively impacted reported net sales by 0.5% and fluctuations in foreign exchange rates negatively impacted reported net sales by 1.6%. The increase reflects strong growth in our security solutions and network infrastructure businesses, as well as price inflation and the benefits of cross selling, partially offset by the effect of supply chain constraints. Operating profit was $373.8 million for the first nine months of 2022 compared to $293.4 million for the first nine months of 2021, an increase of $80.4 million, or 27.4%. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the first nine months of 2021 was negatively impacted by approximately 40 basis points from the inventory write-down described above. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation expense, was $429.5 million for the first nine months of 2022, or 9.3% of net sales, compared to $355.5 million for the first nine months of 2021, or 8.5% of net sales. Adjusted EBITDA increased $74.0 million, or 20.8% year-over-year.
- UBS reported net sales of $4.6 billion for the first nine months of 2022 compared to $3.5 billion for the first nine months of 2021, an increase of 29.1%. Organic sales for the first nine months of 2022 grew 29.1% as the number of workdays positively impacted reported net sales by 0.5%, while fluctuations in foreign exchange rates and the Canadian divestitures described above negatively impacted reported net sales by 0.4% and 0.1%, respectively. The increase reflects price inflation, broad-based growth in our utility and broadband businesses, as well as expansion in our integrated supply business. Operating profit was $471.7 million for the first nine months of 2022 compared to $289.9 million for the first nine months of 2021, an increase of $181.8 million, or 62.7%. The increase primarily reflects the factors impacting the overall business, as described above, offset by the benefit in the first quarter of 2021 from the net gain on the Canadian divestitures. EBITDA, adjusted for other non-operating expenses (income), non-cash stock-based compensation expense, and the net gain on the Canadian divestitures in the first quarter of 2021 was $491.7 million for the first nine months of 2022, or 10.8% of net sales, compared to $299.0 million for the first nine months of 2021, or 8.4% of net sales. Adjusted EBITDA increased $192.7 million, or 64.4% year-over-year.