WESCO International, Inc. Reports Second Quarter 2021 Results

August 5, 2021

WESCO International, Inc. announces its results for the second quarter of 2021.

Highlights:

• Net sales of $4.6 billion, up more than double due to the Anixter merger
• Up 24% YOY on a pro forma basis
• Up 14% sequentially on a reported basis
• Record backlog as of June 30, 2021
• Operating profit of $218.9 million; operating margin of 4.8%
• Gross margin of 21.0%, up 210 basis points YOY and up 90 basis points sequentially
• Adjusted operating profit of $261.6 million; adjusted operating margin of 5.7%, up 150 basis points YOY
• Adjusted EBITDA of $309.2 million; adjusted EBITDA margin of 6.7%, up 130 basis points YOY
• Net income attributable to common stockholders of $104.8 million
• Adjusted net income attributable to common stockholders of $137.2 million, up 145% YOY
• Earnings per diluted share of $2.02
• Adjusted earnings per diluted share of $2.64, up 98% YOY
• Leverage of 4.5x; improvement of 0.4x sequentially and 1.2x one year post-close of the Anixter merger
• Trailing twelve months pro forma adjusted EBITDA of $989.1 million
• Raising 2021 outlook for adjusted earnings per diluted share to a range of $8.40 to $8.80
• Raising three-year integration cost synergy target from $250 million to $300 million

John Engel, Chairman, President and CEO, said, “We had an exceptional quarter and delivered outstanding results across the board. Just one year after closing the transformational combination of WESCO and Anixter, the substantial value creation of the new WESCO is clear and powerful. Our second quarter results speak for themselves. We’re capitalizing on our scale and leading industry positions, while generating significant integration synergies at a pace exceeding our initial expectations. Our margin performance and backlog are records for the company. And we are de-levering our balance sheet at a rapid rate. We are still in the early stages of unlocking the power and performance of this new WESCO. From our distribution center associates to the branch level staff and across our three business units and corporate functions, our team has done a terrific job partnering with our suppliers to provide resilient supply chain solutions to our customers. I want to thank every one of them for their outstanding work and continuing commitment to make WESCO the leader in serving our global customer community.”

Mr. Engel continued, “We are seeing accelerating sales and margin momentum in each of our strategic business units driven by three factors: the continuing economic recovery, our significantly increased scale, and our mix-shift into higher growth markets. At the same time, we are executing our extensive and comprehensive integration program at a pace and scale that is exceeding our initial expectations. Based on our strong second quarter results, we are raising our full year 2021 outlook for sales, margin and profitability for the second time this year. We now expect sales to increase 10% to 13%, adjusted EBITDA margin to expand to between 6.1% and 6.4%, and adjusted EPS to grow to a range of $8.40 to $8.80. In addition, we are raising both our expected cost synergy benefit, from $250 million to $300 million by the end of 2023, and more importantly the assumed sales benefit from cross selling, from 1% to 3% cumulatively, also by the end of 2023. Finally, we are accelerating the timeline to return to our target leverage ratio range of 2.0x to 3.5x to the second half of 2022, six months to one year earlier than our original guidance.”

Mr. Engel added, “We are on a journey with a new mission statement to build, connect, power and protect the world. One year into this journey, we are confident that the results we are seeing are just the beginning of the value creation opportunity that the new WESCO represents. Our dramatically increased scale and expanded portfolio position us well to capitalize on the secular growth trends that will sustain the current economic recovery and be foundational for the global economy in the years ahead. The value creation potential of WESCO plus Anixter has started to emerge, but we have only just begun.”

The following are results for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The Company completed the merger with Anixter on June 22, 2020, thereby impacting comparisons to the prior year quarter.

• Net sales were $4.6 billion for the second quarter of 2021 compared to $2.1 billion for the second quarter of 2020, an increase of more than double due to the merger with Anixter. On a pro forma basis, net sales for the second quarter of 2021 increased 24.0%, and as adjusted for one and one-half more workdays in the current quarter compared to the prior quarter, pro forma net sales were up 21.6%. Sequentially, net sales grew 13.7%. The increases in both periods reflect growth across all segments. Backlog at the end of the second quarter of 2021 increased by double-digits compared to the prior year quarter, the end of 2020 and sequentially compared to the first quarter of 2021. WESCO’s book-to-bill ratio was above 1.0 at the end of the second quarter of 2021.

• Cost of goods sold for the second quarter of 2021 was $3.6 billion compared to $1.7 billion for the second quarter of 2020, and gross profit was $965.2 million and $393.8 million, respectively. As a percentage of net sales, gross profit was 21.0% for the second quarter of 2021, an increase of 210 basis points compared to 18.9% for the second quarter of 2020. Gross profit as a percentage of net sales for the second 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 20 basis points. Sequentially, gross profit as a percentage of net sales increased 90 basis points from 20.1% for the first quarter of 2021.

• Selling, general and administrative expenses were $699.6 million, or 15.2% of net sales, for the second quarter of 2021, compared to $359.8 million, or 17.2% of net sales, for the second quarter of 2020. SG&A expenses for the second quarter of 2021 include merger-related costs of $37.7 million. Adjusted for these amounts, SG&A expenses were $661.9 million, or 14.4% of net sales, for the second quarter of 2021. In addition to the impact from the merger, SG&A expenses for the second quarter of 2021 reflect higher volume-related costs, variable compensation expense and benefit costs. SG&A expenses for the second quarter of 2020 include $73.3 million of merger-related costs. Adjusted for these costs, SG&A expenses were $286.4 million, or 13.7% of net sales, for the second quarter of 2020 reflecting cost reductions the Company took in response to the COVID-19 pandemic.

• Operating profit was $218.9 million for the second quarter of 2021, compared to $15.3 million for the second quarter of 2020. Operating profit as a percentage of net sales was 4.8% for the current quarter, compared to 0.7% for the second quarter of the prior year. Operating profit for the second 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 $5.0 million of accelerated amortization expense for the second quarter of 2021. Adjusted for these amounts, operating profit was $261.6 million, or 5.7% of net sales. Adjusted for merger-related costs of $73.3 million, operating profit was $88.6 million for the second quarter of 2020, or 4.2% of net sales. Adjusted operating margin was up 150 basis points compared to the prior year.

• Net interest expense for the second quarter of 2021 was $67.6 million, compared to $61.3 million for the second quarter of 2020. The increase in interest expense was driven by financing activity related to the Anixter merger. Net interest expense for the second quarter of 2020 includes $44.7 million of merger-related financing and interest costs, of which $33.5 million was non-recurring.

• The effective tax rate for the second quarter of 2021 was 21.6%, compared to 24.0% for the second quarter of 2020. The lower effective tax rate in the current quarter was primarily due to the favorable discrete income tax benefit of $3.4 million associated with the exercise and vesting of stock-based awards, which reduced the effective tax rate by approximately 2.2 percentage points. In addition, the effective tax rate in last year’s comparable period was higher due to costs incurred to complete the merger with Anixter.

• Net income attributable to common stockholders was $104.8 million for the second quarter of 2021, compared to a net loss of $35.8 million for the second quarter of 2020. Adjusted for merger-related costs and interest, 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 $137.2 million and $55.9 million for the second quarter of 2021 and 2020, respectively, an increase of 145.3%.

• Earnings per diluted share for the second quarter of 2021 was $2.02, based on 52.0 million diluted shares, compared to a loss per diluted share of $0.84 for the second quarter of 2020, based on 42.7 million diluted shares. Adjusted for merger-related costs and interest, accelerated amortization expense associated with migrating to the Company’s master brand architecture, the related income tax effects, and the weighted-average impact of approximately 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter, earnings per diluted share for the second quarter of 2021 and 2020 was $2.64 and $1.33, respectively, an increase of 98.5%.

• Operating cash flow for the second quarter of 2021 was an outflow of $17.7 million, compared to an inflow of $101.2 million for the second quarter of 2020. Free cash flow for the second quarter of 2020 was $141.9 million, or 248% of adjusted net income. The net cash outflow in the second quarter of 2021 was primarily driven by changes in working capital to support double-digit sales growth.

The following are results for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The Company completed the merger with Anixter on June 22, 2020, thereby impacting comparisons to the prior year.

• Net sales were $8.6 billion for the first six months of 2021 compared to $4.1 billion for the first six months of 2020, an increase of more than double due to the merger with Anixter.

• Cost of goods sold for the first six months of 2021 was $6.9 billion compared to $3.3 billion for the first six months of 2020, and gross profit was $1.8 billion and $770.2 million, respectively. As a percentage of net sales, gross profit was 20.6% for the first six months of 2021, an increase of 160 basis points compared to 19.0% for the first six months of 2020. Gross profit as a percentage of net sales for the first six months 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 20 basis points.

• Selling, general and administrative expenses were $1.3 billion, or 15.5% of net sales, for the first six months of 2021, compared to $659.1 million, or 16.3% of net sales, for the first six months of 2020. SG&A expenses for the first six months of 2021 include merger-related costs of $84.0 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 six months of 2021. SG&A expenses for the first six months of 2020 include $78.0 million of merger-related costs. Adjusted for these costs, SG&A expenses were $581.1 million, or 14.3% of net sales, for the first six months of 2020.

• Operating profit was $352.1 million for the first six months of 2021, compared to $76.2 million for the first six months of 2020. Operating profit as a percentage of net sales was 4.1% for the current six month period, compared to 1.9% for the first six months of the prior year. Operating profit for the first six months of 2021 includes merger-related costs and the net gain on the Canadian divestitures, as well as $5.0 million of accelerated amortization expense associated with migrating to the Company’s master brand architecture. Adjusted for these amounts, operating profit was $432.3 million, or 5.0% of net sales. Adjusted for merger-related costs of $78.0 million, operating profit was $154.1 million for the first six months of 2020, or 3.8% of net sales. Adjusted operating margin was up 120 basis points compared to the prior year.

• Net interest expense for the first six months of 2021 was $138.0 million, compared to $77.9 million for the first six months of 2020. The increase in interest expense was driven by financing activity related to the Anixter merger. Net interest expense for the first six months of 2020 includes $45.3 million of merger-related financing and interest costs, of which $33.5 million was non-recurring.

• The effective tax rate for the first six months of 2021 was 18.1%, compared to 67.3% for the first six months of 2020. The effective tax rate in last year’s comparable period was higher due to costs incurred to complete the merger with Anixter. Excluding the impact of the merger, the effective tax rate for the first six months of 2020 would have been approximately 22%. For the current period, the effective tax rate reflects the favorable discrete income tax benefits of $8.3 million and $4.5 million associated with a change in a valuation allowance recorded against foreign tax credit carryforwards and the exercise and vesting of stock-based awards, respectively, which together reduced the effective tax rate by approximately 5.9 percentage points.

• Net income attributable to common stockholders was $149.7 million for the first six months of 2021, compared to a net loss of $1.4 million for the first six months of 2020. Adjusted for merger-related costs and interest, the net gain on the Canadian divestitures, 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 $210.5 million and $94.3 million for the first six months of 2021 and 2020, respectively, an increase of 123.1%.

• Earnings per diluted share for the first six months of 2021 was $2.89, based on 51.9 million diluted shares, compared to a loss per diluted share of $0.03 for the first six months of 2020, based on 42.3 million diluted shares. Adjusted for merger-related costs and interest, the net gain on the Canadian divestitures, accelerated amortization expense associated with migrating to the Company’s master brand architecture, the related income tax effects, and the weighted-average impact of approximately 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter, earnings per diluted share for the first six months of 2021 and 2020 was $4.06 and $2.25, respectively, an increase of 80.4%.

• Operating cash flow for the first six months of 2021 was $102.8 million, compared to $132.7 million for the first six months of 2020. Free cash flow for the first six months of 2021 was $124.2 million, or 52% of adjusted net income, compared to $161.7 million, or 169% of adjusted net income, for the first six 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 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 June 30, 2021 compared to the three months ended June 30, 2020, which primarily reflect the impact of the merger with Anixter. For the second quarter of 2021, segment results also reflect the favorable impacts of margin improvement initiatives and lower operating expenses due to cost reduction actions, synergy capture and integration initiatives, partially offset by higher salaries, variable compensation expense and benefit costs.

• EES reported net sales of $1.9 billion for the second quarter of 2021, compared to $1.0 billion for the second quarter of 2020, an increase of 84.3%. In addition to the impact from the merger, the increase reflects double-digit sales growth in our construction, original equipment manufacturer and industrial businesses. Operating profit was $153.7 million for the second quarter of 2021, compared to $45.8 million for the second quarter of 2020. Operating profit for the second quarter of 2021 was negatively impacted by the inventory write-down described above, as well as accelerated amortization expense of $2.1 million associated with migrating to the Company’s master brand architecture. Adjusted EBITDA was $168.0 million for the second quarter of 2021, or 8.7% of net sales, compared to $54.3 million for the second quarter of 2020, or 5.2% of net sales.

• CSS reported net sales of $1.5 billion for the second quarter of 2021, compared to $341.5 million for the second quarter of 2020, an increase of 327.9%. In addition to the impact from the merger, the increase reflects sales growth in our security solutions and network infrastructure businesses. Operating profit was $111.3 million for the second quarter of 2021, compared to $27.9 million for the second quarter of 2020. Operating profit for the second quarter of 2021 was negatively impacted by 40 basis points from the inventory write-down described above, as well as accelerated amortization expense of $2.7 million associated with migrating to the Company’s master brand architecture. Adjusted EBITDA was $131.1 million for the second quarter of 2021, or 9.0% of net sales, compared to $32.2 million for the second quarter of 2020, or 9.4% of net sales.

• UBS reported net sales of $1.2 billion for the second quarter of 2021, compared to $701.9 million for the second quarter of 2020, an increase of 72.6%. Along with the impact of the merger, the increase reflects sales growth in our utility, broadband and integrated supply businesses. Operating profit was $94.7 million for the second quarter of 2021, compared to $51.8 million for the second quarter of 2020. Adjusted EBITDA was $100.7 million for the second quarter of 2021, or 8.3% of net sales, compared to $56.2 million for the second quarter of 2020, or 8.0% of net sales.

The following are results by segment for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, which primarily reflect the impact of the merger with Anixter. For the six months ended June 30, 2021, adjusted EBITDA margin improved for all segments (EES, CSS and UBS) and reflects the favorable impacts of margin improvement initiatives and lower operating expenses due to cost reduction actions, synergy capture and integration initiatives, partially offset by higher salaries, variable compensation expense and benefit costs.

• EES reported net sales of $3.6 billion for the first six months of 2021, compared to $2.2 billion for the first six months of 2020, an increase of 68.9%. In addition to the impact from the merger, the increase reflects improved economic conditions and strong demand. Operating profit was $253.9 million for the first six months of 2021, compared to $89.1 million for the first six months of 2020. Operating profit for the first six months of 2021 was negatively impacted by the inventory write-down described above, as well as accelerated amortization expense of $2.1 million associated with migrating to the Company’s master brand architecture. Adjusted EBITDA was $280.0 million for the first six months of 2021, or 7.7% of net sales, compared to $105.6 million for the first six months of 2020, or 4.9% of net sales.

• CSS reported net sales of $2.7 billion for the six months ended June 30, 2021, compared to $565.2 million for the six months ended June 30, 2020, an increase of 379.8%. The increase reflects the impact from the merger, as well as broad-based growth in our security solutions and network infrastructure businesses. Operating profit was $185.2 million for the first six months of 2021, compared to $37.9 million for the first six months of 2020. Operating profit for the first six months of 2021 was negatively impacted by 50 basis points from the inventory write-down described above, as well as accelerated amortization expense of $2.7 million associated with migrating to the Company’s master brand architecture Adjusted EBITDA was $221.8 million for the first six months of 2021, or 8.2% of net sales, compared to $44.1 million for the first six months of 2020, or 7.8% of net sales.

• UBS reported net sales of $2.3 billion for the six months ended June 30, 2021, compared to $1.3 billion for the six months ended June 30, 2020, an increase of 71.2%. Along with the impact of the merger, the increase reflects broad-based growth in our utility business, continued strong demand in our broadband business, and growth from integrated supply programs. Operating profit was $181.7 million for the first six months of 2021, compared to $93.6 million for the first six months of 2020. Operating profit for the first six months of 2021 includes the benefit from the sale of WESCO’s legacy utility and data communications businesses in Canada in the first quarter of 2021. Adjusted EBITDA was $184.4 million for the first six months of 2021, or 8.1% of net sales, compared to $101.8 million for the first six months of 2020, or 7.6% of net sales.

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