PITTSBURGH — WESCO International, Inc., a leading provider of business-to-business distribution, logistics services, and supply chain solutions, announces its results for the third quarter of 2021.
“We had another exceptional quarter and again delivered outstanding results across the board. Early in the second year of our transformational combination of WESCO and Anixter, the substantial value creation of the new WESCO is building,” said John Engel, Chairman, President and CEO. “Our sales growth accelerated versus 2019 pre-pandemic levels, and our margin performance and backlog achieved new records for the company. We are outperforming the market across our three business units by utilizing our increased scale, expanded portfolio and industry-leading positions. And, we are continuing to de-lever our balance sheet at a rapid rate while investing in our digital transformation. The impressive progress we’re making in the integration is a direct result of the dedication, commitment and relentless execution of the entire WESCO team. I want to thank all our associates for their strong teamwork on our transformation, supplier engagement and customer focus in providing the products, services and resilient supply chain solutions our customers need.”
Engel continued, “We are seeing sales and margin momentum in each of our three strategic business units. Based on our strong third quarter results, we are raising our full year 2021 outlook for sales, margin and profitability for the third time this year. We now expect sales to increase 11% to 13%, adjusted EBITDA margin to expand to between 6.4% and 6.5%, and adjusted EPS to grow to a range of $9.20 to $9.40. As a result of our expected sales growth and increasing inventories to support our customers, we are also adjusting our full year 2021 outlook for free cash flow to approximately 80% of net income.”
Engel added, “We are transforming into a growth company as a result of our digital investments, cross-selling our expanded portfolio of products and services, and providing resilient and sustainable supply chain solutions for our customers around the world. Continued execution of our aggressive integration plan, and capitalizing on the secular growth trends, will only accelerate this shift. The value creation potential of the new WESCO is building, and we are only in the early days.”
The following are results for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
- Net sales were $4.7 billion for the third quarter of 2021 compared to $4.1 billion for the third quarter of 2020, an increase of 14.2%. Organic sales for the third quarter of 2021 grew by 13.6% as foreign exchange rates positively impacted reported net sales by 1.4% and divestitures negatively impacted reported net sales by 0.8%. Sequentially, net sales grew 2.9% and organic sales increased 3.4%. All segments increased sales versus the prior year period. Backlog at the end of the third quarter of 2021 increased by over 60% compared to the prior year quarter and the end of 2020. Sequentially, backlog grew approximately 15%. WESCO’s book-to-bill ratio was above 1.0 for the quarter ended September 30, 2021, indicating strong demand.
- Cost of goods sold for the third quarter of 2021 was $3.7 billion compared to $3.4 billion for the third quarter of 2020, and gross profit was $1.0 billion and $785.5 million, respectively. As a percentage of net sales, gross profit was 21.3% and 19.0% for the third quarter of 2021 and 2020, respectively. Gross profit as a percentage of net sales for the third quarter of 2021 reflects the favorable impact of margin improvement initiatives, partially offset by a write-down to the carrying value of certain personal protective equipment products, which had a negative impact of 10 basis points. Gross profit as a percentage of net sales for the third quarter of 2020 was 19.6% excluding the effect of merger-related fair value adjustments of $28.0 million. Sequentially, gross profit as a percentage of net sales increased 30 basis points from 21.0% for the second quarter of 2021.
- Selling, general and administrative expenses were $721.8 million, or 15.3% of net sales, for the third quarter of 2021, compared to $562.0 million, or 13.6% of net sales, for the third quarter of 2020. SG&A expenses for the third quarter of 2021 include merger-related costs of $35.8 million. Adjusted for this amount, SG&A expenses were $686.0 million, or 14.5% of net sales, for the third quarter of 2021. SG&A expenses for the third quarter of 2021 reflect higher salaries, variable compensation expense and benefit costs, as well as volume-related costs driven by significant sales growth, partially offset by the realization of integration cost synergies. SG&A expenses for the third quarter of 2020 include $14.2 million of merger-related costs, as well as a gain on the sale of an operating branch in the U.S. of $19.8 million. Adjusted for these amounts, SG&A expenses were $567.6 million, or 13.7% of net sales, for the third quarter of 2020, reflecting cost reduction actions taken in response to the COVID-19 pandemic that lowered SG&A expenses as a percentage of net sales by approximately 70 basis points.
- Operating profit was $229.5 million for the third quarter of 2021, compared to $178.1 million for the third quarter of 2020, an increase of $51.4 million, or 28.8%. Operating profit as a percentage of net sales was 4.9% for the current quarter, compared to 4.3% for the third quarter of the prior year. Operating profit for the third quarter of 2021 includes the aforementioned merger-related costs. Additionally, in connection with an integration initiative to review the Company’s brand strategy, certain legacy WESCO trademarks are migrating to a master brand architecture, which resulted in $15.1 million of accelerated amortization expense for the third quarter of 2021. Adjusted for these amounts, operating profit was $280.4 million, or 5.9% of net sales. In the third quarter of 2020, operating profit was $200.5 million, or 4.8% of net sales, adjusted for merger-related costs and fair value adjustments totaling $42.2 million and the gain on sale of a U.S. operating branch of $19.8 million. Adjusted operating margin was up 110 basis points compared to the prior year.
- Net interest expense for the third quarter of 2021 was $69.7 million, compared to $74.5 million for the third quarter of 2020. The decrease reflects a reduction of debt, including the repayment of higher fixed rate debt with lower variable rate debt.
- The effective tax rate for the third quarter of 2021 was 27.2%, compared to 23.3% for the third quarter of 2020. The higher effective tax rate in the current quarter reflects the impact on the estimated annual effective tax rate of a decrease in expected foreign tax credit utilization.
- Net income attributable to common stockholders was $105.2 million for the third quarter of 2021, compared to $66.2 million for the third quarter of 2020. Adjusted for merger-related costs and fair value adjustments, accelerated amortization expense associated with migrating to the Company’s master brand architecture, gain on sale of a U.S. operating branch, and the related income tax effects, net income attributable to common stockholders was $142.6 million and $83.6 million for the third quarter of 2021 and 2020, respectively, an increase of 70.6%.
- Earnings per diluted share for the third quarter of 2021 was $2.02, based on 52.1 million diluted shares, compared to $1.31 for the third quarter of 2020, based on 50.5 million diluted shares. Adjusted for merger-related costs and fair value adjustments, accelerated amortization expense associated with migrating to the Company’s master brand architecture, gain on sale of a U.S. operating branch, and the related income tax effects, earnings per diluted share for the third quarter of 2021 and 2020 was $2.74 and $1.66, respectively, an increase of 65.1%.
- Operating cash flow for the third quarter of 2021 was $69.9 million, compared to $286.3 million for the third quarter of 2020. Free cash flow for the third quarter of 2021 was $85.0 million, or 54% of adjusted net income, compared to $307.4 million, or 315% of adjusted net income, for the third quarter of 2020. Free 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.
The following are results for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The Company completed the merger with Anixter on June 22, 2020, thereby impacting comparisons to the prior year.
- Net sales were $13.4 billion for the first nine months of 2021 compared to $8.2 billion for the first nine months of 2020, an increase of 63.1% primarily due to the merger with Anixter.
- Cost of goods sold for the first nine months of 2021 was $10.6 billion compared to $6.6 billion for the first nine months of 2020, and gross profit was $2.8 billion and $1.6 billion, respectively. As a percentage of net sales, gross profit was 20.8% and 19.0% for the first nine months of 2021 and 2020, respectively. Gross profit as a percentage of net sales for the first nine months of 2021 reflects the favorable impact of margin improvement initiatives, partially offset by the write-down to the carrying value of certain personal protective equipment products, which had a negative impact of 20 basis points. Gross profit as a percentage of net sales for the first nine months of 2020 was 19.3% excluding the effect of merger-related fair value adjustments of $28.0 million.
- Selling, general and administrative expenses were $2.1 billion, or 15.4% of net sales, for the first nine months of 2021, compared to $1.2 billion, or 14.9% of net sales, for the first nine months of 2020. SG&A expenses for the first nine months of 2021 include merger-related costs of $119.8 million, as well as a net gain of $8.9 million resulting from the sale of WESCO’s legacy utility and data communications businesses in Canada during the first quarter of 2021, which were divested in connection with the merger. Adjusted for these amounts, SG&A expenses were 14.6% of net sales for the first nine months of 2021. SG&A expenses for the first nine months of 2020 include merger-related costs of $92.1 million, as well as a gain on the sale of an operating branch in the U.S. of $19.8 million. Adjusted for these amounts, SG&A expenses were $1.1 billion, or 14.0% of net sales, for the first nine months of 2020, reflecting cost reduction actions taken in response to the COVID-19 pandemic that lowered SG&A expenses as a percentage of net sales by approximately 60 basis points.
- Operating profit was $581.6 million for the first nine months of 2021, compared to $254.3 million for the first nine months of 2020. Operating profit as a percentage of net sales was 4.4% for the current nine month period, compared to 3.1% for the first nine months of the prior year. Operating profit for the first nine months of 2021 includes merger-related costs and the net gain on the Canadian divestitures, as well as $20.2 million of accelerated amortization expense associated with migrating to the Company’s master brand architecture. Adjusted for these amounts, operating profit was $712.7 million, or 5.3% of net sales. Adjusted for merger-related costs and fair value adjustments totaling $120.1 million, and gain on sale of a U.S. operating branch of $19.8 million, operating profit was $354.6 million for the first nine months of 2020, or 4.3% of net sales. Adjusted operating margin was up 100 basis points compared to the prior year.
- Net interest expense for the first nine months of 2021 was $207.7 million, compared to $152.3 million for the first nine months of 2020. The increase in interest expense was driven by financing activity related to the Anixter merger.
- The effective tax rate for the first nine months of 2021 was 22.0%, compared to 22.9% for the first nine months of 2020. The effective tax rate for the current year-to-date period reflects discrete income tax benefits resulting from a decrease in the valuation allowance recorded against foreign tax credit carryforwards of $8.3 million and deductible stock-based compensation of $7.8 million, which were partially offset by discrete income tax expense of $4.2 million associated with return-to-provision adjustments. These discrete items reduced the estimated annual effective tax rate by approximately 3.1 percentage points.
- Net income attributable to common stockholders was $254.9 million for the first nine months of 2021, compared to $64.8 million for the first nine months of 2020. Adjusted for merger-related costs and fair value adjustments, net gains on the Canadian divestitures and sale of a U.S. operating branch, accelerated amortization expense associated with migrating to the Company’s master brand architecture, and the related income tax effects, net income attributable to common stockholders was $353.0 million and $143.0 million for the first nine months of 2021 and 2020, respectively, an increase of 146.8%.
- Earnings per diluted share for the first nine months of 2021 was $4.91, based on 51.9 million diluted shares, compared to $1.44 for the first nine months of 2020, based on 45.1 million diluted shares. Adjusted for merger-related costs and fair value adjustments, net gains on the Canadian divestitures and sale of a U.S. operating branch, accelerated amortization expense associated with migrating to the Company’s master brand architecture, and the related income tax effects, earnings per diluted share for the first nine months of 2021 and 2020 was $6.80 and $3.17, respectively, an increase of 114.5%.
- Operating cash flow for the first nine months of 2021 was $172.7 million, compared to $418.9 million for the first nine months of 2020. Free cash flow for the first nine months of 2021 was $209.2 million, or 53% of adjusted net income, compared to $462.1 million, or 292% of adjusted net income, for the first nine months of 2020. Free 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 that are organized around three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”).
Corporate expenses are incurred to obtain and coordinate financing, tax, information technology, legal and other related services. Segment results include depreciation expense or other allocations related to various corporate assets. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis. Corporate expenses are not directly identifiable with our reportable segments and 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, 2021 compared to the three months ended September 30, 2020. For the third quarter of 2021, operating profit and adjusted EBITDA margin improved for all segments (EES, CSS and UBS), reflecting sales growth, gross margin expansion due to strong execution of margin improvement initiatives and the realization of integration cost synergies, partially offset by higher salaries, variable compensation expense and benefit costs, as well as volume-related costs.
- EES reported net sales of $2.0 billion for the third quarter of 2021, compared to $1.7 billion for the third quarter of 2020, an increase of 19.9%. Organic sales for the third quarter of 2021 grew by 19.0% as foreign exchange rates positively impacted reported net sales by 2.0% and the Canadian divestitures negatively impacted reported net sales by 1.1%. The increase reflects double-digit sales growth in our construction, original equipment manufacturer and industrial businesses due to business expansion, price inflation, and the benefits of cross selling. Operating profit was $155.2 million for the third quarter of 2021, compared to $105.5 million for the third quarter of 2020, an increase of $49.7 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the third quarter of 2021 was negatively impacted by the inventory write-down described above, as well as accelerated amortization expense of $6.3 million associated with migrating to the Company’s master brand architecture. EBITDA, adjusted for other non-operating income and non-cash stock-based compensation, was $173.9 million for the third quarter of 2021, or 8.8% of net sales, compared to $108.9 million for the third quarter of 2020, or 6.6% of net sales.
- CSS reported net sales of $1.5 billion for the third quarter of 2021, compared to $1.4 billion for the third quarter of 2020, an increase of 7.2%. Organic sales for the third quarter of 2021 grew by 6.2% as foreign exchange rates positively impacted reported net sales by 1.0%. The increase reflects sales growth in our network infrastructure and security solutions businesses driven by business expansion and the enhanced scale and capabilities afforded by the combination of WESCO and Anixter. Operating profit was $108.2 million for the third quarter of 2021, compared to $89.6 million for the third quarter of 2020, an increase of $18.7 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the third quarter of 2021 was negatively impacted by 20 basis points from the inventory write-down described above, as well as accelerated amortization expense of $8.3 million associated with migrating to the Company’s master brand architecture. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation, was $133.7 million for the third quarter of 2021, or 9.0% of net sales, compared to $121.2 million for the third quarter of 2020, or 8.7% of net sales.
- UBS reported net sales of $1.3 billion for the third quarter of 2021, compared to $1.1 billion for the third quarter of 2020, an increase of 14.4%. Organic sales for the third quarter of 2021 grew by 14.8% as foreign exchange rates positively impacted reported net sales by 0.9% and the Canadian divestitures negatively impacted reported net sales by 1.3%. The increase reflects broad-based growth in our utility business, as well as continued strong demand in our broadband and integrated supply businesses. Operating profit was $108.2 million for the third quarter of 2021, compared to $74.1 million for the third quarter of 2020, an increase of $34.1 million. 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 accelerated amortization expense of $0.5 million associated with migrating to the Company’s master brand architecture. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation, was $114.7 million for the third quarter of 2021, or 9.1% of net sales, compared to $86.1 million for the third quarter of 2020, or 7.8% of net sales.
The following are results by segment for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, which primarily reflect the impact of the merger with Anixter. For the nine months ended September 30, 2021, operating profit and adjusted EBITDA margin improved for all segments and reflects sales growth and gross margin expansion, as well as the realization of integration cost synergies and structural cost takeout actions. Operating profit for the first nine months of 2021 was negatively impacted by higher volume-related costs, and SG&A payroll and payroll-related expenses consisting of salaries, variable compensation expense and benefit costs, including the impact of reinstating salaries and certain benefits of legacy WESCO employees that had been reduced or suspended in the prior year in response to the COVID-19 pandemic.
- EES reported net sales of $5.6 billion for the first nine months of 2021, compared to $3.8 billion for the first nine months of 2020, an increase of 47.6%. In addition to the impact from the merger, the increase reflects improved economic conditions and strong demand. Operating profit was $409.1 million for the first nine months of 2021, compared to $194.6 million for the first nine months of 2020, an increase of $214.4 million. 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 10 basis points from the inventory write-down described above, as well as accelerated amortization expense of $8.4 million associated with migrating to the Company’s master brand architecture. EBITDA, adjusted for other non-operating income and non-cash stock-based compensation, was $453.9 million for the first nine months of 2021, or 8.1% of net sales, compared to $214.5 million for the first nine months of 2020, or 5.6% of net sales.
- CSS reported net sales of $4.2 billion for the nine months ended September 30, 2021, compared to $2.0 billion for the nine months ended September 30, 2020, an increase of 115.0%. The increase reflects the impact from the merger and broad-based growth in our security solutions and network infrastructure businesses. Operating profit was $293.4 million for the first nine months of 2021, compared to $127.5 million for the first nine months of 2020, an increase of $165.9 million. 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 40 basis points from the inventory write-down described above, as well as accelerated amortization expense of $11.1 million associated with migrating to the Company’s master brand architecture. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation, was $355.5 million for the first nine months of 2021, or 8.5% of net sales, compared to $165.4 million for the first nine months of 2020, or 8.5% of net sales.
- UBS reported net sales of $3.5 billion for the nine months ended September 30, 2021, compared to $2.4 billion for the nine months ended September 30, 2020, an increase of 45.5%. Along with the impact of the merger, the increase reflects broad-based growth in our utility business and continued strong demand in our broadband business. Operating profit was $289.9 million for the first nine months of 2021, compared to $167.7 million for the first nine months of 2020, an increase of $122.2 million. Operating profit for the first nine months of 2021 The increase primarily reflects the factors impacting the overall business, as described above, combined with the benefit from the net gain on the Canadian divestitures. Accelerated amortization expense of $0.7 million associated with migrating to the Company’s master brand architecture negatively impacted operating profit in the current year. EBITDA, adjusted for other non-operating expenses, non-cash stock-based compensation and net gain on the Canadian divestitures, was $299.0 million for the first nine months of 2021, or 8.4% of net sales, compared to $187.8 million for the first nine months of 2020, or 7.7% of net sales.