May 15, 2023

Wesco International has recently announced its results for the first quarter of 2023.

“After delivering an exceptional performance in 2022, we’re off to a strong start this year and once again set new first quarter company records for sales, backlog, margin and profitability. The power of our increased scale, industry-leading positions, and expanded portfolio of products, services and solutions is clearly evident in our continued strong performance,” said John Engel, Chairman, President and CEO of Wesco.

Mr. Engel continued, “Strong secular demand trends and continued execution of our enterprise-wide cross selling and margin improvement programs are driving our sustained growth and market outperformance. Our dedicated team of colleagues continues to provide resilient and critical supply chain solutions for our customers around the world, capturing the benefits of our exposure to these sustainable secular trends. As our three-year integration program comes to a close this year, our digital transformation is accelerating which will result in an even higher level of performance, operating efficiency, supplier partnership and customer loyalty.”

Mr. Engel concluded, “We are reaffirming our 2023 outlook and remain confident in our ability to drive mid- to high-single digit sales growth this year, along with continued EBITDA margin expansion. We are also reaffirming that we expect to generate approximately $600 to $800 million in free cash flow in support of our growth initiatives and capital allocation priorities. In the near-term, we are focusing our cash generation on debt reduction and expect to reduce our leverage below the midpoint of our target range of 2.0 to 3.5x by year-end. We look forward with greater confidence than ever to a future of market outperformance and value creation.”

The following are results for the three months ended March 31, 2023 compared to the three months ended March 31, 2022:

Net sales were $5.5 billion for the first quarter of 2023 compared to $4.9 billion for the first quarter of 2022, an increase of 12.0%, reflecting price inflation and volume growth, secular demand trends, execution of our cross-sell program, and an improving supply chain. Organic sales for the first quarter of 2023 grew 10.8% as the acquisition of Rahi Systems, which closed in November of 2022, positively impacted reported net sales by 2.8%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 1.6%. Backlog at the end of the first quarter of 2023 increased 21% compared to the end of the first quarter of 2022. Sequentially, backlog remained flat.
Cost of goods sold for the first quarter of 2023 was $4.3 billion compared to $3.9 billion for the first quarter of 2022, and gross profit was $1.2 billion and $1.0 billion, respectively. As a percentage of net sales, gross profit was 21.9% and 21.3% for the first quarter of 2023 and 2022, respectively. Gross profit as a percentage of net sales for the first quarter of 2023 reflects our continued focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our margin improvement program.
Selling, general and administrative (“SG&A”) expenses were $817.7 million, or 14.8% of net sales, for the first quarter of 2023, compared to $718.1 million, or 14.6% of net sales, for the first quarter of 2022. SG&A expenses for the first quarter of 2023 and 2022 include merger-related and integration costs of $19.5 million and $25.6 million, respectively. Adjusted for these amounts, SG&A expenses were $798.2 million, or 14.5% of net sales, for the first quarter of 2023 and $692.5 million, or 14.0% of net sales, for the first quarter of 2022. Adjusted SG&A expenses for the first 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 also contributed to higher SG&A expenses. In addition, digital transformation initiatives contributed to higher expenses in the first quarter of 2023, including those related to professional 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 first quarter of 2023 was $44.4 million compared to $47.0 million for the first quarter of 2022, a decrease of $2.6 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 $5.3 million of accelerated amortization expense for the first quarter of 2022.
Operating profit was $346.4 million for the first quarter of 2023 compared to $284.0 million for the first quarter of 2022, an increase of $62.4 million, or 22.0%. Operating profit as a percentage of net sales was 6.3% for the current quarter compared to 5.8% for the first quarter of the prior year. Adjusted for the merger-related and integration costs described above, operating profit was $365.9 million, or 6.6% of net sales, for the first quarter of 2023. Adjusted for merger-related and integration costs, and accelerated trademark amortization, operating profit was $314.9 million, or 6.4% of net sales, for the first quarter of 2022.
Net interest expense for the first quarter of 2023 was $95.0 million compared to $63.6 million for the first quarter of 2022. The increase reflects higher borrowings and an increase in variable interest rates.
Other non-operating expense for the first quarter of 2023 was $10.1 million compared to $1.1 million for the first quarter of 2022. Net benefits of $0.3 million and $3.6 million associated with the non-service cost components of net periodic pension (benefit) cost were recognized for the three months ended March 31, 2023 and 2022, respectively. Due to fluctuations in the U.S. dollar against certain foreign currencies, a net foreign currency exchange loss of $9.5 million was recognized for the first quarter of 2023 compared to a net loss of $3.6 million for the first quarter of 2022.
The effective tax rate for the first quarter of 2023 was 18.3% compared to 17.2% for the first 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. The first quarter 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 $182.7 million for the first quarter of 2023 compared to $166.8 million for the first quarter of 2022. Adjusted for merger-related and integration costs and the related income tax effect, net income attributable to common stockholders was $196.9 million for the first 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 $189.7 million for the first quarter of 2022. Adjusted net income attributable to common stockholders increased 3.8% year-over-year.
Earnings per diluted share for the first quarter of 2023 was $3.48, based on 52.5 million diluted shares, compared to $3.19 for the first quarter of 2022, based on 52.2 million diluted shares. Adjusted for merger-related and integration costs and the related income tax effect, earnings per diluted share for the first quarter of 2023 was $3.75. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first quarter of 2022 was $3.63. Adjusted earnings per diluted share increased 3.3% year-over-year.
Operating cash flow for the first quarter of 2023 was an outflow of $255.4 million compared to an outflow of $172.0 million for the first quarter of 2022. The net cash outflow in the first quarter of 2023 was primarily driven by changes in working capital, including an increase in inventories of $223.8 million as shipments from suppliers have accelerated due to an improving supply chain. An increase in trade accounts receivable of $133.5 million and a decrease in accounts payable of $86.5 million due to the timing of receipts from customers and payments to suppliers, respectively, also contributed to the net cash outflow.

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 March 31, 2023 compared to the three months ended March 31, 2022:

EES reported net sales of $2,135.1 million for the first quarter of 2023 compared to $2,090.0 million for the first quarter of 2022, an increase of 2.2%. Organic sales for the first quarter of 2023 grew 3.9% as fluctuations in foreign exchange rates negatively impacted reported net sales by 1.7%. The increase in organic sales compared to the prior year quarter reflects continued momentum in our industrial business driven by strength in the automation, petrochemical, and metals and mining end markets, as well as growth in non-residential construction. These positive factors were partially offset by a transfer of certain customer accounts to the CSS segment, which negatively impacted reported net sales for EES by approximately 2%, as well as lower sales in certain original equipment manufacturer end markets. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation expense, was $183.0 million for the first quarter of 2023, or 8.6% of net sales, compared to $192.4 million for the first quarter of 2022, or 9.2% of net sales. Adjusted EBITDA decreased $9.4 million, or 4.9% year-over-year, as an increase in gross profit was more than offset by higher SG&A expenses.
CSS reported net sales of $1,732.0 million for the first quarter of 2023 compared to $1,434.2 million for the first quarter of 2022, an increase of 20.8%. Organic sales for the first quarter of 2023 grew 13.3% as the acquisition of Rahi Systems in the fourth quarter of 2022 positively impacted reported net sales by 9.5%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 2.0%. The increase in organic sales compared to the prior year quarter reflects growth in our security solutions and network infrastructure 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 2%. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation expense, was $155.5 million for the first quarter of 2023, or 9.0% of net sales, compared to $123.0 million for the first quarter of 2022, or 8.6% of net sales. Adjusted EBITDA increased $32.5 million, or 26.4% year-over-year. The increase primarily reflects the factors impacting the overall business, as described above.
UBS reported net sales of $1,654.8 million for the first quarter of 2023 compared to $1,408.0 million for the first quarter of 2022, an increase of 17.5%. Organic sales for the first quarter of 2023 grew 18.2% as fluctuations in foreign exchange rates negatively impacted reported net sales by 0.7%. 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, as well as expansion in our integrated supply business. These positive factors were partially offset by lower sales in our broadband business due to certain customers depleting existing inventories. EBITDA, adjusted for other non-operating expenses and non-cash stock-based compensation expense, was $187.7 million for the first quarter of 2023, or 11.3% of net sales, compared to $136.3 million for the first quarter of 2022, or 9.7% of net sales. Adjusted EBITDA increased $51.4 million, or 37.7% year-over-year. The increase primarily reflects the factors impacting the overall business, as described above.

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