PITTSBURGH — Wesco International today announced its results for the second quarter of 2023.
“The power of our portfolio and mix-shift into higher-growth markets is clear in our record second quarter sales. Continued strong growth and record sales in our CSS and UBS businesses more than offset a quarterly drop in our EES business that was largely the result of unprecedented supply chain rebalancing in the electrical industry and select weakness in certain sectors including commercial construction and manufactured structures. Our long-term secular growth drivers remain intact and are reflected in the continued sales growth in utility, data centers, security, and industrial sectors. On the strength of our industry leading customer value proposition, strong cross-sell execution continued in the quarter, we’re raising our sales synergy target from $1.8 billion to $2.0 billion,” said John Engel, Chairman, President and CEO.
Mr. Engel continued, “Lead times for most product categories have returned to 2019 levels. The extraordinary supply chain disruptions and customer purchase patterns driven by the pandemic over the last few years are now correcting with the rapid reduction in supplier lead times. Against these supply chain rebalancing conditions, our gross margins remain healthy and stable. While economic conditions remain positive, we did see pockets of underperformance in certain end markets served by our EES business.”
Mr. Engel added, “Even with increased overall sales in the second quarter, our free cash flow generation of $293 millionwas strong and brought us into positive territory for the half of fiscal 2023 – back in line with our expectations. During the second quarter we reduced inventories and paid down debt. Our financial leverage now stands at 2.8x, near the mid-point of our target range and at the lowest level since the Anixter acquisition in June 2020. Given our anticipated free cash flow generation in the second half of fiscal 2023, we stand in a good position to use that cash flow to increase value to our shareholders.”
Mr. Engel concluded, “We remain confident in and focused on the transformational steps we are taking to improve our digital capabilities, capture market share, and create value for all our stakeholders. We continue to invest in our digital transformation plan, and we are working to deliver digital capabilities to benefit our customers and supplier partners that will be game-changing. We have already taken steps to address the supply chain re-balancing in our EES business through a $25 million annualized cost reduction set of actions, taken in June that will begin to benefit our second half. Given EES results in the second quarter, we are revising our full year outlook, that still delivers record sales, EBITDA and free cash flow at the midpoint. The power of Wesco’s scale, industry-leading positions, and expanded portfolio of products, services and solutions positions us to capture the benefits of enduring secular growth trends as well anticipated increased infrastructure investments in North America. We are committed to and remain confident in our ability to deliver the financial objectives presented at our Investor Day including long-term margin expansion, profit growth and cash generation targets.”
2023 Outlook Update:
Wesco is now expecting reported net sales growth of 5%-7% versus 6%-9% prior largely driven by market weakness in certain sectors of the Electrical and Electronic Solutions business unit. EBITDA margins are forecast to be 7.8%-8.0% versus 8.1%-8.4% prior primarily due to the lower sales range. At the mid-point of the guidance range, adjusted EBITDA is approximately $1.8 billion versus $1.9 billion prior. Earnings per share is now forecast to be $15.00–$16.00. The company’s free cash flow outlook is $500–$700 million.
The following are results for the three months ended June 30, 2023 compared to the three months ended June 30, 2022:
- Net sales were $5.7 billion for the second quarter of 2023 compared to $5.5 billion for the second quarter of 2022, an increase of 4.8%, reflecting price inflation, volume growth (driven in part by secular demand trends and the execution of our cross-sell program), and an improving supply chain. Organic sales for the second quarter of 2023 grew by 2.8% as the acquisition of Rahi Systems, which closed in November of 2022, positively impacted reported net sales by 2.7%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 0.7%. Backlog at the end of the second quarter of 2023 increased 6% compared to the end of the second quarter of 2022. Sequentially, backlog declined slightly by approximately 2%.
- Cost of goods sold for the second quarter of 2023 was $4.5 billion compared to $4.3 billion for the second quarter of 2022, and gross profit was $1.2 billion for both periods. As a percentage of net sales, gross profit was 21.6% and 21.7% for the second quarter of 2023 and 2022, respectively. The slight decline in gross profit as a percentage of net sales for the second quarter of 2023 primarily reflects a shift in sales mix. The negative impact of the shift in sales mix was partially offset by our continued focus on a strategy of pricing products and services to realize the value that we provide to our customers as a result of our broad portfolio of product and service offerings, global footprint and capabilities (“value-driven pricing”).
- Selling, general and administrative (“SG&A”) expenses were $831.7 million, or 14.5% of net sales, for the second quarter of 2023, compared to $772.9 million, or 14.1% of net sales, for the second quarter of 2022. SG&A expenses for the second quarter of 2023 and 2022 include merger-related and integration costs of $10.9 million and $13.4 million, respectively. SG&A expenses for the second quarter of 2023 also include $9.8 million of restructuring costs. Adjusted for merger-related and integration costs and restructuring costs, SG&A expenses were $811.0 million, or 14.1% of net sales, for the second quarter of 2023 and $759.5 million, or 13.9% of net sales, for the second quarter of 2022. Adjusted SG&A expenses for the second quarter of 2023 reflect higher salaries and benefits due to wage inflation and increased headcount, including the impact of the Rahi Systems acquisition, as well as an increase in volume-related costs such as commissions and transportation. Increased costs to operate our facilities and higher employee expenses due to increased headcount also contributed to higher SG&A expenses. In addition, digital transformation initiatives contributed to higher expenses in the second quarter of 2023, including those related to professional services and consulting fees. These increases were partially offset by the realization of integration cost synergies and a reduction to incentive compensation expense.
- Depreciation and amortization for the second quarter of 2023 was $46.9 million compared to $45.8 million for the second quarter of 2022, an increase of $1.1 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 $0.8 million and $3.7 million of accelerated amortization expense for the second quarter of 2023 and 2022, respectively.
- Operating profit was $363.8 million for the second quarter of 2023 compared to $370.7 million for the second quarter of 2022, a decrease of $6.9 million, or 1.9%. Operating profit as a percentage of net sales was 6.3% for the current quarter compared to 6.8% for the second quarter of the prior year. Adjusted for the merger-related and integration costs, restructuring costs, and accelerated trademark amortization described above, operating profit was $385.3 million, or 6.7% of net sales, for the second quarter of 2023. Adjusted for merger-related and integration costs, and accelerated trademark amortization, operating profit was $387.8 million, or 7.1% of net sales, for the second quarter of 2022.
- Net interest expense for the second quarter of 2023 was $98.8 million compared to $68.5 million for the second quarter of 2022. The increase reflects higher borrowings and an increase in variable interest rates.
- Other non-operating expense for the second quarter of 2023 was $0.8 million compared to $1.2 million for the second quarter of 2022.
- The effective tax rate for the second quarter of 2023 was 27.2% compared to 26.5% for the second quarter of 2022. The current quarter and the comparable prior year period both reflect discrete income tax benefits resulting from the exercise and vesting of stock-based awards.
- Net income attributable to common stockholders was $178.7 million for the second quarter of 2023 compared to $206.3 million for the second quarter of 2022. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders was $194.3 million for the second quarter of 2023. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders was $218.9 million for the second quarter of 2022. Adjusted net income attributable to common stockholders decreased 11.2% year-over-year.
- Earnings per diluted share for the second quarter of 2023 was $3.41, based on 52.4 million diluted shares, compared to $3.95 for the second quarter of 2022, based on 52.2 million diluted shares. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the second quarter of 2023 was $3.71. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the second quarter of 2022 was $4.19. Adjusted earnings per diluted share decreased 11.5% year-over-year.
- Operating cash flow for the second quarter of 2023 was an inflow of $317.6 million compared to an outflow of $132.6 million for the second quarter of 2022. Free cash flow for the second quarter of 2023 was $293.2 million, or 141% of adjusted net income. The net cash inflow in the second quarter of 2023 was primarily driven by changes in working capital, including a decrease in inventories of $149.9 million, partially offset by an increase in trade accounts receivable of $29.4 million, due to the sequential increase in net sales compared to the prior quarter.
- Financial leverage ratio was 2.8 as of June 30, 2023, an improvement of 2.9 and at the lowest level since the Anixter merger in June of 2020.
The following are results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:
- Net sales were $11.3 billion for the first six months of 2023 compared to $10.4 billion for the first six months of 2022, an increase of 8.2%, reflecting price inflation, volume growth (driven in part by secular demand trends and the execution of our cross-sell program), and an improving supply chain. Organic sales for the first six months of 2023 grew by 6.6% as the acquisition of Rahi Systems positively impacted reported net sales by 2.7%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 1.1%.
- Cost of goods sold for the first six months of 2023 was $8.8 billion compared to $8.2 billion for the first six months of 2022, and gross profit was $2.5 billion and $2.2 billion, respectively. As a percentage of net sales, gross profit was 21.8% and 21.5% for the first six months of 2023 and 2022, respectively. Gross profit as a percentage of net sales for the first six months of 2023 reflects our continued focus on value-driven pricing. Additionally, pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program, contributed to the increase in gross profit as a percentage of net sales.
- SG&A expenses were $1,649.4 million, or 14.6% of net sales, for the first six months of 2023, compared to $1,491.0 million, or 14.3% of net sales, for the first six months of 2022. SG&A expenses for the first six months of 2023 and 2022 include merger-related and integration costs of $30.4 million and $39.0 million, respectively. SG&A expenses for first six months of 2023 also include $9.8 million of restructuring costs. Adjusted for merger-related and integration costs and restructuring costs, SG&A expenses were $1,609.2 million, or 14.3% of net sales, for the first six months of 2023 and $1,452.0 million, or 13.9% of net sales for the first six months of 2022. The increase in adjusted SG&A expenses for the first six months of 2023 compared to the first six months of 2022 reflects the same factors discussed above.
- Depreciation and amortization for the first six months of 2023 was $91.3 million compared to $92.8 million for the first six months of 2022, a decrease of $1.5 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 $0.8 million and $9.0 million of accelerated amortization expense for the first six months of 2023 and 2022, respectively.
- Operating profit was $710.2 million for the first six months of 2023 compared to $654.7 million for the first six months of 2022, an increase of $55.5 million, or 8.5%. Operating profit as a percentage of net sales was 6.3% for the first six months of 2023 and 2022. Adjusted for the merger-related and integration costs, restructuring costs, and accelerated trademark amortization described above, operating profit was $751.2 million, or 6.7% of net sales, for the first six months of 2023. Adjusted for merger-related and integration costs, and accelerated trademark amortization, operating profit was $702.7 million, or 6.7% of net sales, for the first six months of 2022.
- Net interest expense for the first six months of 2023 was $193.8 million compared to $132.1 million for the first six months of 2022. The increase reflects higher borrowings and an increase in variable interest rates.
- Other non-operating expense for the first six months of 2023 was $10.9 million compared to $2.3 million for the first six months of 2022. Net benefits of $0.7 million and $7.1 million associated with the non-service cost components of net periodic pension (benefit) cost were recognized for the six months ended June 30, 2023 and 2022, respectively. Due to fluctuations in the U.S. dollar against certain foreign currencies, a net foreign currency exchange loss of $13.2 million was recognized for the first six months of 2023 compared to a net loss of $7.1 millionfor the first six months of 2022.
- The effective tax rate for the first six months of 2023 was 22.9% compared to 22.6% for the first six months of 2022. The current six month period and the comparable prior year period both reflect discrete income tax benefits resulting from the exercise and vesting of stock-based awards. The first six months of 2022 also reflects a discrete income tax benefit resulting from a reduction to the valuation allowance recorded against foreign tax credit carryforwards.
- Net income attributable to common stockholders was $361.5 million for the first six months of 2023 compared to $373.2 million for the first six months of 2022. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders was $391.3 million for the first six months of 2023. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income attributable to common stockholders for the first six months of 2022 was $408.6 million. Adjusted net income attributable to common stockholders decreased 4.2% year-over-year.
- Earnings per diluted share for the first six months of 2023 was $6.90, based on 52.4 million diluted shares, compared to $7.15 for the first six months of 2022, based on 52.2 million diluted shares. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first six months of 2023 was $7.47. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first six months of 2022 was $7.82. Adjusted earnings per diluted share decreased 4.5% year-over-year.
- Operating cash flow for the first six months of 2023 was an inflow of $62.2 million compared to an outflow of $304.5 million for the first six months of 2022. Free cash flow for the first six months of 2023 was $27.3 million, or 7% of adjusted net income. The net cash inflow in the first six months of 2023 was primarily driven by net income of $389.6 million and non-cash adjustments to net income totaling $139.8 million, which were primarily comprised of depreciation and amortization, stock-based compensation expense, and deferred income taxes. Operating cash flow was negatively impacted by net changes in assets and liabilities of $467.2 million, which were primarily comprised of an increase in trade accounts receivable of $162.9 million and a decrease in accounts payable of $78.6 million due to the timing of receipts from customers and payments to suppliers, respectively. Net operating cash flow was also negatively impacted by $73.9 million from an increase in inventories. Additionally, the payment of management incentive compensation earned in 2022 resulted in a cash outflow in the first six months of 2023, which was partially offset by the accrual of management incentive compensation earned in the current year.
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 June 30, 2023 compared to the three months ended June 30, 2022:
- EES reported net sales of $2,200.3 million for the second quarter of 2023 compared to $2,330.1 million for the second quarter of 2022, a decrease of 5.6%. Organic sales for the second quarter of 2023 declined by 4.7% as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.9%. The decrease in organic sales compared to the prior year quarter reflects downturns in the construction and manufactured structures businesses, partially offset by price inflation and continued momentum in our industrial business. In addition, a transfer of certain customer accounts to the CSS segment negatively impacted reported net sales for EES by approximately two percentage points. Adjusted EBITDA was $189.0 million for the second quarter of 2023, or 8.6% of net sales, compared to $235.4 million for the second quarter of 2022, or 10.1% of net sales. Adjusted EBITDA decreased $46.4 million, or 19.7% year-over-year, primarily due to the decline in sales, a shift in sales mix to lower margin business, and an increase in SG&A expenses.
- CSS reported net sales of $1,850.9 million for the second quarter of 2023 compared to $1,602.0 million for the second quarter of 2022, an increase of 15.5%. Organic sales for the second quarter of 2023 grew by 6.9% as the acquisition of Rahi Systems in the fourth quarter of 2022 positively impacted reported net sales by 9.4%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 0.8%. The increase in organic sales compared to the prior year quarter reflects strong growth in our network infrastructure and security solutions businesses, as well as improvements in the global supply chain. The transfer of certain customer accounts from the EES segment also positively impacted reported net sales for CSS by approximately 3%. Adjusted EBITDA was $179.5 million for the second quarter of 2023, or 9.7% of net sales, compared to $150.0 million for the second quarter of 2022, or 9.4% of net sales. Adjusted EBITDA increased $29.5 million, or 19.7% year-over-year. The increase is primarily driven by sales growth and operating cost leverage.
- UBS reported net sales of $1,694.3 million for the second quarter of 2023 compared to $1,551.4 million for the second quarter of 2022, an increase of 9.2%. Organic sales for the second quarter of 2023 grew by 9.6% as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.4%. The increase in organic sales compared to the prior year quarter reflects significant price inflation, secular trends in the utility business that are driving growth, and expansion in our integrated supply business, partially offset by lower sales in our broadband business due to certain customers depleting existing inventories and an overall downturn in the broadband business, particularly in Canada. Adjusted EBITDA was $188.6 million for the second quarter of 2023, or 11.1% of net sales, compared to $169.0 million for the second quarter of 2022, or 10.9% of net sales. Adjusted EBITDA increased $19.6 million, or 11.6% year-over-year. The increase is primarily driven by sales growth and gross margin improvement.
The following are results by segment for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:
- EES reported net sales of $4,335.4 million for the first six months of 2023 compared to $4,420.1 million for the first six months of 2022, a decrease of 1.9%. Organic sales for the first six months of 2023 declined by 0.6% as fluctuations in foreign exchange rates negatively impacted reported net sales by 1.3%. The decrease in organic sales reflects downturns in the construction and manufactured structures businesses, partially offset by price inflation and continued momentum in our industrial business. In addition, a transfer of certain customer accounts to the CSS segment negatively impacted reported net sales for EES by approximately two percentage points. Adjusted EBITDA was $372.0 million for the first six months of 2023, or 8.6% of net sales, compared to $427.9 million for the first six months of 2022, or 9.7% of net sales. Adjusted EBITDA decreased $55.9 million, or 13.1% year-over-year, primarily due to the decline in sales, a shift in sales mix to lower margin business, and an increase in SG&A expenses.
- CSS reported net sales of $3,582.9 million for the first six months of 2023 compared to $3,036.2 million for the first six months of 2022, an increase of 18.0%. Organic sales for the first six months of 2023 grew by 9.9% as the acquisition of Rahi Systems positively impacted reported net sales by 9.4%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 1.3%. The increase in organic sales reflects strong growth in our network infrastructure and security solutions businesses, as well as the benefits of cross selling and improvements in supply chain constraints. The transfer of certain customer accounts from the EES segment also positively impacted reported net sales for CSS by approximately 3%. Adjusted EBITDA was $335.0 million for the first six months of 2023, or 9.3% of net sales, compared to $273.1 million for the first six months of 2022, or 9.0% of net sales. Adjusted EBITDA increased $61.9 million, or 22.7% year-over-year. The increase primarily reflects the factors impacting the overall business, as described above.
- UBS reported net sales of $3,349.1 million for the first six months of 2023 compared to $2,959.4 million for the first six months of 2022, an increase of 13.2%. Organic sales for the first six months of 2023 grew by 13.7% as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.5%. The increase in organic sales reflects significant price inflation, secular trends in the utility business that are driving growth, and expansion in our integrated supply business, partially offset by lower sales in our broadband business due to certain customers depleting existing inventories and an overall downturn in the broadband business, particularly in Canada. Adjusted EBITDA was $376.3 million for the first six months of 2023, or 11.2% of net sales, compared to $305.4 million for the first six months of 2022, or 10.3% of net sales. Adjusted EBITDA increased $70.9 million, or 23.2% year-over-year. The increase is primarily driven by sales growth and gross margin improvement.