WESCO Third Quarter 2020 Results
Nov 6, 2020
Third quarter summary:
-Net sales of $4.1 billion, up 93% due to the Anixter merger
-Operating profit of $178.1 million; operating margin of 4.3%
-Adjusted operating profit of $200.5 million; adjusted operating margin of 4.8%
-Earnings per diluted share of $1.31
-Adjusted earnings per diluted share of $1.66
-Operating cash flow of $286.3 million
-Free cash flow of $307.4 million, or 315% of adjusted net income
-Leverage of 5.3x; improved 0.4x sequentially
-Net debt reduction of $280 million
Mr. John J. Engel, WESCO’s Chairman, President and CEO, commented, “We delivered very strong results in the third quarter and exceeded our sales, margin, profit and cash generation expectations. This was our first full quarter of results after completing the merger with Anixter and clearly highlights the value creation potential of this transformational combination. Business momentum improved through the quarter as we took market share and built an all-time record third quarter backlog. We aggressively managed our business and executed significant cost reduction, margin improvement and cash management actions, which enabled us to deliver profit growth in the third quarter. Free cash flow generation was exceptional at over 300% of net income and demonstrates our resilient business model and strength through the cycle. Notably, net debt was reduced by $280 million thereby reducing our financial leverage consistent with our capital allocation priorities. Again this quarter, I would like to recognize and thank all of our associates for their inspirational dedication, commitment and hard work in effectively managing in this COVID-19 driven environment.”
Mr. Engel continued, “We accelerated our integration planning, execution and synergy realization efforts, and made outstanding progress in the third quarter. The strong cultural alignment between WESCO and Anixter is proving to be a key driver of our initial success. We realized $15 million of cost synergies in the third quarter, and have already initiated actions to deliver 100% of our year one cost synergy target of $68 million after just four months since closing the acquisition. I could not be more pleased with the integration team’s execution of our plan. As a result, we are raising our year 1, 2 and 3 cost synergy targets to $100 million, $180 million, and $250 million, respectively. Our initial integration progress gives us confidence that we will revisit our synergy targets as we build success upon success. We are also realizing initial sales synergies through leveraging our expanded global footprint and cross-selling our broader product and services portfolio. We believe our sales synergy efforts will support incremental revenue growth in the years ahead. As a result, we are building on these early successes and are increasingly confident in our ability to achieve significant upside potential and exceed our three year cost savings, sales growth, margin expansion, and cash generation synergy targets.”
Mr. Engel added, “WESCO’s new era is off to an exceptional start. As the premier electrical, communications and utility distribution and supply chain solutions company in the world, we are very well positioned to capitalize on the accelerating secular trends of electrification, increased bandwidth demand driven by higher voice, data, video and mobile usage, and the digitization of our B2B value chain. Building on our positive momentum, we are looking forward to entering 2021 with accelerating results. As we look to the future, we are more bullish than ever in the substantial value creation that this transformational combination will create for our customers, supplier partners, employees, investors, and the communities in which we operate.”
The following are results for the three months ended September 30, 2020 compared to the three months ended September 30, 2019:
-Net sales were $4.1 billion for the third quarter of 2020 compared to $2.1 billion for the third quarter of 2019, an increase of 92.8% due to the merger with Anixter that was completed on June 22, 2020, partially offset by the weakened demand impact from the COVID-19 pandemic.
-Cost of goods sold for the third quarter of 2020 was $3.4 billion compared to $1.7 billion for the third quarter of 2019, and gross profit was $785.5 million and $400.2 million, respectively. As a percentage of net sales, gross profit was 19.0% and 18.6% for the third quarter of 2020 and 2019, respectively. 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.
-Selling, general and administrative expenses were $562.0 million, or 13.6% of net sales, for the third quarter of 2020, compared to $290.9 million, or 13.5% of net sales, for the third quarter of 2019. SG&A expenses for the third quarter of 2020 include merger-related costs of $14.2 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 $567.6 million, or 13.7% of net sales, for the third quarter of 2020, reflecting the favorable impact of cost reduction actions taken in response to the COVID-19 pandemic.
-Operating profit was $178.1 million for the third quarter of 2020, compared to $93.7 million for the third quarter of 2019. Operating profit as a percentage of net sales was 4.3% for the current quarter, compared to 4.4% for the third quarter of the prior year. As adjusted for the merger-related costs and gain on the sale of a U.S. operating branch, operating profit was $200.5 million for the third quarter of 2020, or 4.8% of net sales.
-Net interest expense for the third quarter of 2020 was $74.5 million, compared to $14.3 million for the third quarter of 2019. The increase in interest expense was driven by financing activity related to the Anixter merger.
-The effective tax rate for the third quarter of 2020 was 23.3%, compared to 19.8% for the third quarter of 2019. The higher effective tax rate in the current quarter is primarily due to costs incurred to complete the merger with Anixter.
-Net income attributable to common stockholders was $66.2 million for the third quarter of 2020, compared to $64.5 million for the third quarter of 2019. As adjusted, net income attributable to common stockholders was $83.6 million for the third quarter of 2020.
-Earnings per diluted share for the third quarter of 2020 was $1.31, based on 50.5 million diluted shares, compared to $1.52 for the third quarter of 2019, based on 42.4 million diluted shares. As adjusted, earnings per diluted share for the third quarter of 2020 was $1.66.
-Operating cash flow for the third quarter of 2020 was $286.3 million, compared to $125.4 million for the third quarter of 2019. Free cash flow for the third quarter of 2020 was $307.4 million, or 315% of adjusted net income, compared to $116.5 million, or 181% of net income, for the third quarter of 2019.
-The following are results for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
-Net sales were $8.2 billion for the first nine months of 2020 compared to $6.3 billion for the first nine months of 2019, an increase of 31.0% due to the merger with Anixter that was completed on June 22, 2020, partially offset by the weakened demand impact from the COVID-19 pandemic.
-Cost of goods sold for the first nine months of 2020 was $6.6 billion and gross profit was $1.6 billion, compared to $5.1 billion and $1.2 billion, respectively, for the first nine months of 2019. As a percentage of net sales, gross profit was 19.0% for the first nine months of 2020 and 2019. 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 $1.2 billion, or 14.9% of net sales, for the first nine months of 2020, compared to $883.2 million, or 14.1% of net sales, for the first nine months of 2019. 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 the favorable impact of cost reduction actions taken in response to the COVID-19 pandemic.
-Operating profit was $254.3 million for the first nine months of 2020, compared to $262.4 million for the first nine months of 2019. Operating profit as a percentage of net sales was 3.1% for the current nine month period, compared to 4.2% for the prior nine month period. As adjusted for the merger-related costs and gain on the sale of a U.S. operating branch, operating profit was $354.6 million for the first nine months of 2020, or 4.3% of net sales.
-Net interest expense for the first nine months of 2020 was $152.3 million, compared to $49.3 million for the first nine months of 2019. 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 2020 was 22.9%, compared to 21.0% for the first nine months of 2019. The higher effective tax rate in the current nine month period is primarily due to costs incurred to complete the merger with Anixter.
-Net income attributable to common stockholders was $64.8 million for the first nine months of 2020, compared to $170.3 million for the first nine months of 2019. As adjusted, net income attributable to common stockholders was $143.0 million for the nine months ended September 30, 2020.
-Earnings per diluted share for the first nine months of 2020 was $1.44, based on 45.1 million diluted shares, compared to $3.88 for the first nine months of 2019, based on 43.9 million diluted shares. As adjusted, earnings per diluted share for the current nine month period was $3.17.
-Operating cash flow for the first nine months of 2020 was $418.9 million, compared to $116.7 million for the first nine months of 2019. Free cash flow for the first nine months of 2020 was $462.1 million, or 292% of adjusted net income, compared to $86.3 million, or 51% of net income, for the first nine months of 2019.
Segment Results
In the third quarter of 2020, in connection with the acquisition of Anixter, the Company identified new segments, which have been 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, 2020 compared to the three months ended September 30, 2019:
-EES reported net sales of $1.7 billion for the third quarter of 2020, compared to $1.3 billion for the third quarter of 2019, an increase of 32.3%. Operating profit was $105.5 million for the third quarter of 2020, compared to $72.0 million for the third quarter of 2019. Adjusted EBITDA was $107.9 million for the third quarter of 2020, or 6.5% of net sales, compared to $78.7 million for the third quarter of 2019, or 6.3% of net sales.
-CSS reported net sales of $1.4 billion for the third quarter of 2020, compared to $235.9 million for the third quarter of 2019, an increase of 488.7%. Operating profit was $89.6 million for the third quarter of 2020, compared to $10.6 million for the third quarter of 2019. Adjusted EBITDA was $120.5 million for the third quarter of 2020, or 8.7% of net sales, compared to $12.4 million for the third quarter of 2019, or 5.2% of net sales.
-UBS reported net sales of $1.1 billion for the third quarter of 2020, compared to $662.1 million for the third quarter of 2019, an increase of 66.0%. Operating profit was $74.1 million for the third quarter of 2020, compared to $43.8 million for the third quarter of 2019. Adjusted EBITDA was $85.7 million for the third quarter of 2020, or 7.8% of net sales, compared to $47.3 million for the third quarter of 2019, or 7.1% of net sales.
The following are results by segment for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
-EES reported net sales of $3.8 billion for the first nine months of 2020, compared to $3.6 billion for the first nine months of 2019, an increase of 5.1%. Operating profit was $194.6 million for the first nine months of 2020, compared to $198.8 million for the first nine months of 2019. Adjusted EBITDA was $212.0 million for the first nine months of 2020, or 5.6% of net sales, compared to $219.6 million for the first nine months of 2019, or 6.1% of net sales.
-CSS reported net sales of $2.0 billion for the first nine months of 2020, compared to $681.1 million for the first nine months of 2019, an increase of 186.9%. Operating profit was $127.5 million for the first nine months of 2020, compared to $32.5 million for the first nine months of 2019. Adjusted EBITDA was $164.3 million for the first nine months of 2020, or 8.4% of net sales, compared to $38.0 million for the first nine months of 2019, or 5.6% of net sales.
-UBS reported net sales of $2.4 billion for the first nine months of 2020, compared to $2.0 billion for the first nine months of 2019, an increase of 24.6%. Operating profit was $167.7 million for the first nine months of 2020, compared to $134.4 million for the first nine months of 2019. Adjusted EBITDA was $187.0 million for the first nine months of 2020, or 7.7% of net sales, compared to $144.7 million for the first nine months of 2019, or 7.4% of net sales.
