WESCO INTERNATIONAL INC - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended March 31, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to
Commission File Number: 001-14989
WESCO International, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 25-1723342 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 225 West Station Square Drive Suite 700 | 15219 | ||||||||||
| Pittsburgh, | Pennsylvania | (Zip Code) | |||||||||
| (Address of principal executive offices) | |||||||||||
(412) 454-2200
(Registrant's telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of Class | Trading Symbol(s) | Name of Exchange on which registered | ||||||||||||
| Common Stock, par value $.01 per share | WCC | New York Stock Exchange | ||||||||||||
| Depositary Shares, each representing a 1/1,000th interest in a share of Series A Fixed-Rate Reset Cumulative Perpetual Preferred Stock | WCC PR A | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | ||||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 5, 2022, 50,715,675 shares of common stock, $0.01 par value, of the registrant were outstanding.
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| Page | |||||
| PART I—FINANCIAL INFORMATION | |||||
| PART II—OTHER INFORMATION | |||||
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial information required by this item is set forth in the unaudited Condensed Consolidated Financial Statements and Notes thereto in this Quarterly Report on Form 10-Q, as follows:
| Page | |||||
2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
| As of | |||||||||||
| Assets | March 31, 2022 | December 31, 2021 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 201,474 | $ | 212,583 | |||||||
Trade accounts receivable, net of allowance for expected credit losses of $42,870 and $41,723 in 2022 and 2021, respectively | 3,283,522 | 2,957,613 | |||||||||
| Other accounts receivable | 358,181 | 375,885 | |||||||||
| Inventories | 2,881,256 | 2,666,219 | |||||||||
| Prepaid expenses and other current assets | 154,536 | 137,811 | |||||||||
| Total current assets | 6,878,969 | 6,350,111 | |||||||||
Property, buildings and equipment, net of accumulated depreciation of $382,507 and $365,345 in 2022 and 2021, respectively | 376,593 | 379,012 | |||||||||
| Operating lease assets | 564,738 | 530,863 | |||||||||
| Intangible assets, net | 1,922,265 | 1,944,141 | |||||||||
| Goodwill | 3,222,538 | 3,208,333 | |||||||||
| Other assets | 219,930 | 205,239 | |||||||||
| Total assets | $ | 13,185,033 | $ | 12,617,699 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 2,341,137 | $ | 2,140,251 | |||||||
| Accrued payroll and benefit costs | 184,307 | 314,962 | |||||||||
| Short-term debt and current portion of long-term debt | 70,263 | 9,528 | |||||||||
| Other current liabilities | 666,426 | 585,067 | |||||||||
| Total current liabilities | 3,262,133 | 3,049,808 | |||||||||
Long-term debt, net of debt discount and debt issuance costs of $67,715 and $70,572 in 2022 and 2021, respectively | 4,836,658 | 4,701,542 | |||||||||
| Operating lease liabilities | 445,867 | 414,248 | |||||||||
| Deferred income taxes | 434,651 | 437,444 | |||||||||
| Other noncurrent liabilities | 238,246 | 238,446 | |||||||||
| Total liabilities | $ | 9,217,555 | $ | 8,841,488 | |||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or outstanding | — | — | |||||||||
Preferred stock, Series A, $.01 par value; 25,000 shares authorized, 21,612 shares issued and outstanding in 2022 and 2021 | — | — | |||||||||
Common stock, $.01 par value; 210,000,000 shares authorized, 68,398,261 and 68,162,297 shares issued, and 50,709,912 and 50,474,806 shares outstanding in 2022 and 2021, respectively | 684 | 682 | |||||||||
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2022 and 2021, respectively | 43 | 43 | |||||||||
| Additional capital | 1,970,401 | 1,969,332 | |||||||||
| Retained earnings | 3,163,445 | 3,004,690 | |||||||||
Treasury stock, at cost; 22,027,780 and 22,026,922 shares in 2022 and 2021, respectively | (956,775) | (956,188) | |||||||||
| Accumulated other comprehensive loss | (204,395) | (236,035) | |||||||||
| Total WESCO International, Inc. stockholders' equity | 3,973,403 | 3,782,524 | |||||||||
| Noncontrolling interests | (5,925) | (6,313) | |||||||||
| Total stockholders’ equity | 3,967,478 | 3,776,211 | |||||||||
| Total liabilities and stockholders’ equity | $ | 13,185,033 | $ | 12,617,699 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Net sales | $ | 4,932,181 | $ | 4,041,477 | |||||||
| Cost of goods sold (excluding depreciation and amortization) | 3,883,074 | 3,230,441 | |||||||||
| Selling, general and administrative expenses | 718,098 | 636,576 | |||||||||
| Depreciation and amortization | 46,980 | 41,209 | |||||||||
| Income from operations | 284,029 | 133,251 | |||||||||
| Interest expense, net | 63,620 | 70,373 | |||||||||
| Other expense (income), net | 1,124 | (2,807) | |||||||||
| Income before income taxes | 219,285 | 65,685 | |||||||||
| Provision for income taxes | 37,654 | 6,531 | |||||||||
| Net income | 181,631 | 59,154 | |||||||||
| Less: Net income (loss) attributable to noncontrolling interests | 388 | (24) | |||||||||
| Net income attributable to WESCO International, Inc. | 181,243 | 59,178 | |||||||||
| Less: Preferred stock dividends | 14,352 | 14,352 | |||||||||
| Net income attributable to common stockholders | $ | 166,891 | $ | 44,826 | |||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation adjustments and other | 31,640 | 16,841 | |||||||||
| Comprehensive income attributable to common stockholders | $ | 198,531 | $ | 61,667 | |||||||
| Earnings per share attributable to common stockholders | |||||||||||
| Basic | $ | 3.30 | $ | 0.89 | |||||||
| Diluted | $ | 3.19 | $ | 0.87 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 181,631 | $ | 59,154 | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | 46,980 | 41,209 | |||||||||
| Stock-based compensation expense | 8,911 | 5,954 | |||||||||
| Amortization of debt discount and debt issuance costs | 4,608 | 5,119 | |||||||||
| Gain on divestitures, net | — | (8,927) | |||||||||
| Other operating activities, net | 1,482 | 820 | |||||||||
| Deferred income taxes | (4,471) | (13,074) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Trade accounts receivable, net | (324,558) | (117,412) | |||||||||
| Other accounts receivable | 17,814 | 7,563 | |||||||||
| Inventories | (214,203) | (124,772) | |||||||||
| Other current and noncurrent assets | (34,181) | 17,140 | |||||||||
| Accounts payable | 199,983 | 250,987 | |||||||||
| Accrued payroll and benefit costs | (135,910) | (43,824) | |||||||||
| Other current and noncurrent liabilities | 80,003 | 40,553 | |||||||||
| Net cash (used in) provided by operating activities | (171,911) | 120,490 | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | (15,247) | (10,211) | |||||||||
| Proceeds from divestitures | — | 54,142 | |||||||||
| Other investing activities, net | 111 | 611 | |||||||||
| Net cash (used in) provided by investing activities | (15,136) | 44,542 | |||||||||
| Financing activities: | |||||||||||
| Proceeds (repayments) of short-term debt, net | 1,499 | (8,499) | |||||||||
| Repayment of 5.375% Senior Notes due 2021 | — | (500,000) | |||||||||
| Proceeds from issuance of long-term debt | 982,253 | 956,595 | |||||||||
| Repayments of long-term debt | (792,525) | (736,595) | |||||||||
| Payments for taxes related to net-share settlement of equity awards | (16,793) | (4,342) | |||||||||
| Payment of dividends | (14,352) | (14,352) | |||||||||
| Other financing activities, net | 7,051 | (4,980) | |||||||||
| Net cash provided by (used in) financing activities | 167,133 | (312,173) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 8,805 | 1,893 | |||||||||
| Net change in cash and cash equivalents | (11,109) | (145,248) | |||||||||
| Cash and cash equivalents at the beginning of period | 212,583 | 449,135 | |||||||||
| Cash and cash equivalents at the end of period | $ | 201,474 | $ | 303,887 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for interest | $ | 8,892 | $ | 10,733 | |||||||
| Cash paid for income taxes | $ | 27,840 | $ | 6,086 | |||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 79,113 | $ | 19,960 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except shares)
(unaudited)
| Class B | Series A | Retained | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Preferred Stock | Additional | Earnings | Treasury Stock | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Capital | (Deficit) | Amount | Shares | Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 682 | 68,162,297 | $ | 43 | 4,339,431 | $ | — | 21,612 | $ | 1,969,332 | $ | 3,004,690 | $ | (956,188) | (22,026,922) | $ | (6,313) | $ | (236,035) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | 4 | 365,833 | (10) | (587) | (858) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 8,911 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | (2) | (129,869) | (7,832) | (8,136) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | 388 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to WESCO International, Inc. | 181,243 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (14,352) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments and other | 31,640 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 684 | 68,398,261 | $ | 43 | 4,339,431 | $ | — | 21,612 | $ | 1,970,401 | $ | 3,163,445 | $ | (956,775) | (22,027,780) | $ | (5,925) | $ | (204,395) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B | Series A | Retained | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Preferred Stock | Additional | Earnings | Treasury Stock | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Capital | (Deficit) | Amount | Shares | Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 676 | 67,596,515 | $ | 43 | 4,339,431 | $ | — | 21,612 | $ | 1,942,810 | $ | 2,601,662 | $ | (938,335) | (21,870,961) | $ | (7,333) | $ | (263,134) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | 2 | 165,641 | (38) | (1,421) | (15,330) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 5,954 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | — | (35,289) | (2,209) | (617) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | (24) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to WESCO International, Inc. | 59,178 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (14,352) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments and other | 16,841 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | 678 | 67,726,867 | $ | 43 | 4,339,431 | $ | — | 21,612 | $ | 1,946,517 | $ | 2,645,871 | $ | (939,756) | (21,886,291) | $ | (7,357) | $ | (246,293) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. ("Wesco International") and its subsidiaries (collectively, “Wesco” or the "Company"), headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.
The Company has operating segments that are comprised of three strategic business units consisting of Electrical & Electronic Solutions ("EES"), Communications & Security Solutions ("CSS") and Utility & Broadband Solutions ("UBS").
2. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Wesco have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial information should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Wesco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 25, 2022. The Condensed Consolidated Balance Sheet at December 31, 2021 was derived from the audited Consolidated Financial Statements as of that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America.
The unaudited Condensed Consolidated Balance Sheet as of March 31, 2022, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income, the unaudited Condensed Consolidated Statements of Cash Flows, and the unaudited Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2022 and 2021, respectively, in the opinion of management, have been prepared on the same basis as the audited Consolidated Financial Statements and include all adjustments necessary for the fair statement of the results of the interim periods presented herein. All adjustments reflected in the unaudited condensed consolidated financial information are of a normal recurring nature unless indicated. The results for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
Reclassifications
For the three months ended March 31, 2021, amortization of debt discount and debt issuance costs of $5.1 million has been reclassified from other operating activities, net in the unaudited Condensed Consolidated Statement of Cash Flows to conform to the current period presentation.
Recently Adopted and Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted this ASU during the first quarter of 2022 in connection with amending Wesco's credit facilities, as disclosed in Note 7, "Debt". The replacement of London Interbank Offered Rate (LIBOR) and the related adoption of the optional guidance under this accounting standard did not have a material impact on the Company's consolidated financial statements and notes thereto.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Management is currently evaluating the impact that the adoption of this accounting standard will have on its consolidated financial statements and notes thereto.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to Wesco’s financial position, results of operations or cash flows.
7
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
3. REVENUE
Wesco distributes products and provides services to customers globally in various end markets within its business segments. The segments, which consist of EES, CSS and UBS, operate in the United States, Canada and various other international countries.
The following tables disaggregate Wesco’s net sales by segment and geography for the periods presented:
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Electrical & Electronic Solutions | $ | 2,089,959 | $ | 1,720,813 | |||||||
| Communications & Security Solutions | 1,434,175 | 1,250,615 | |||||||||
| Utility & Broadband Solutions | 1,408,047 | 1,070,049 | |||||||||
| Total by segment | $ | 4,932,181 | $ | 4,041,477 | |||||||
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| United States | $ | 3,654,312 | $ | 2,930,435 | |||||||
| Canada | 715,033 | 607,753 | |||||||||
Other International(1) | 562,836 | 503,289 | |||||||||
Total by geography(2) | $ | 4,932,181 | $ | 4,041,477 | |||||||
(1) No individual country's net sales are greater than 10% of total net sales.
(2) Wesco attributes revenues from external customers to individual countries on the basis of point of sale.
Due to the terms of certain contractual arrangements, Wesco bills or receives payment from its customers in advance of satisfying the respective performance obligation. Such advance billings or payments are recorded as deferred revenue and recognized as revenue when the performance obligation has been satisfied and control has transferred to the customer, which is generally upon shipment. Deferred revenue is usually recognized within a year or less from the date of the advance billing or payment. At March 31, 2022 and December 31, 2021, $30.2 million and $35.5 million, respectively, of deferred revenue was recorded as a component of other current liabilities in the Condensed Consolidated Balance Sheets.
The Company also has certain long-term contractual arrangements where revenue is recognized over time based on the cost-to-cost input method. As of March 31, 2022 and December 31, 2021, the Company had contract assets of $36.7 million and $33.4 million, respectively, resulting from arrangements where the amount of revenue recognized exceeded the amount billed to the customer. Contract assets are recorded in the Condensed Consolidated Balance Sheets as a component of prepaid expenses and other current assets.
Wesco’s revenues are adjusted for variable consideration, which includes customer volume rebates, returns and discounts. Wesco measures variable consideration by estimating expected outcomes using analysis and inputs based upon historical data, as well as current and forecasted information. Variable consideration is reviewed by management on a monthly basis and revenue is adjusted accordingly. Variable consideration reduced revenue for the three months ended March 31, 2022 and 2021 by approximately $115.2 million and $105.4 million, respectively. As of March 31, 2022 and December 31, 2021, the Company's estimated product return obligation was $39.1 million and $38.8 million, respectively.
Billings to customers for shipping and handling are recognized in net sales. Wesco has elected to recognize shipping and handling costs as a fulfillment cost. Shipping and handling costs recorded as a component of selling, general and administrative expenses totaled $67.6 million and $53.3 million for the three months ended March 31, 2022 and 2021, respectively.
8
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table sets forth the changes in the carrying value of goodwill:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
EES | CSS | UBS | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Beginning balance, January 1 | $ | 860,958 | $ | 1,121,712 | $ | 1,225,663 | $ | 3,208,333 | |||||||||||||||
| Foreign currency exchange rate changes | 5,896 | 3,150 | 5,159 | 14,205 | |||||||||||||||||||
Ending balance, March 31 | $ | 866,854 | $ | 1,124,862 | $ | 1,230,822 | $ | 3,222,538 | |||||||||||||||
Intangible Assets
The components of intangible assets are as follows:
| As of | ||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Life (in years) | Gross Carrying Amount (1) | Accumulated Amortization (1) | Net Carrying Amount | Gross Carrying Amount (1) | Accumulated Amortization (1) | Net Carrying Amount | ||||||||||||||||||||||||||||||||
| Intangible assets: | (In thousands) | |||||||||||||||||||||||||||||||||||||
| Trademarks | Indefinite | $ | 795,549 | $ | — | $ | 795,549 | $ | 795,065 | $ | — | $ | 795,065 | |||||||||||||||||||||||||
| Customer relationships | 10 - 20 | 1,437,174 | (330,208) | 1,106,966 | 1,431,251 | (308,180) | 1,123,071 | |||||||||||||||||||||||||||||||
| Distribution agreements | 15 - 19 | 29,212 | (23,140) | 6,072 | 29,212 | (22,714) | 6,498 | |||||||||||||||||||||||||||||||
| Trademarks | 1 - 12 | 38,827 | (25,649) | 13,178 | 38,758 | (20,058) | 18,700 | |||||||||||||||||||||||||||||||
| Non-compete agreements | 2 | 3,478 | (2,978) | 500 | 4,300 | (3,493) | 807 | |||||||||||||||||||||||||||||||
| $ | 2,304,240 | $ | (381,975) | $ | 1,922,265 | $ | 2,298,586 | $ | (354,445) | $ | 1,944,141 | |||||||||||||||||||||||||||
(1) Excludes the original cost and related accumulated amortization of fully-amortized intangible assets.
Amortization expense related to intangible assets totaled $25.7 million and $21.6 million for the three months ended March 31, 2022 and 2021, respectively.
The following table sets forth the remaining estimated amortization expense for intangible assets for the next five years and thereafter:
| For the year ending December 31, | (In thousands) | ||||
| 2022 | $ | 66,736 | |||
| 2023 | 83,584 | ||||
| 2024 | 81,113 | ||||
| 2025 | 77,985 | ||||
| 2026 | 72,492 | ||||
| Thereafter | 744,806 | ||||
5. STOCK-BASED COMPENSATION
Wesco’s stock-based employee compensation awards are comprised of stock options, stock-settled stock appreciation rights, restricted stock units and performance-based awards. Compensation cost for all stock-based awards is measured at fair value on the date of grant and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair value of stock options and stock-settled stock appreciation rights is determined using the Black-Scholes model. The fair value of restricted stock units and performance-based awards with performance conditions is determined by the grant-
9
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
date closing price of Wesco’s common stock. The forfeiture assumption is based on Wesco’s historical employee behavior that is reviewed on an annual basis. No dividends are assumed. For stock options and stock-settled stock appreciation rights that are exercised, and for restricted stock units and performance-based awards that vest, shares are issued out of Wesco's outstanding common stock.
Stock options and stock-settled stock appreciation rights vest ratably over a three-year period and terminate on the tenth anniversary of the grant date unless terminated sooner under certain conditions. Restricted stock unit awards granted in February 2020 and prior vest based on a minimum time period of three years. The special award described below vests in tranches. Restricted stock units awarded in 2022 and 2021 vest ratably over a three-year period on each of the first, second and third anniversaries of the grant date. Vesting of performance-based awards is based on a three-year performance period, and the number of shares earned, if any, depends on the attainment of certain performance levels. Outstanding awards would vest upon the consummation of a change in control transaction and performance-based awards would vest at the target level.
On July 2, 2020, a special award of restricted stock units was granted to certain officers of the Company. These awards vest in tranches of 30% on each of the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, subject, in each case, to continued employment through the applicable anniversary date.
Performance-based awards granted in 2022, 2021 and 2020 are based on two equally-weighted performance measures: the three-year average growth rate of Wesco's net income attributable to common stockholders and the three-year cumulative return on net assets.
During the three months ended March 31, 2022 and 2021, Wesco granted the following stock options, stock-settled stock appreciation rights, restricted stock units and performance-based awards at the following weighted-average fair values:
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Stock options granted | 89,550 | — | |||||||||
| Weighted-average fair value | $ | 57.26 | $ | — | |||||||
| Stock-settled stock appreciation rights granted | — | 136,194 | |||||||||
| Weighted-average fair value | $ | — | $ | 33.05 | |||||||
| Restricted stock units granted | 224,946 | 300,722 | |||||||||
| Weighted-average fair value | $ | 122.11 | $ | 76.89 | |||||||
| Performance-based awards granted | 83,991 | 119,792 | |||||||||
| Weighted-average fair value | $ | 122.09 | $ | 76.50 | |||||||
The fair value of stock options and stock-settled stock appreciation rights, as disclosed in the table above, was estimated using the following weighted-average assumptions in the respective periods:
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Risk free interest rate | 1.9 | % | 0.8 | % | |||||||
| Expected life (in years) | 7 | 7 | |||||||||
| Expected volatility | 43 | % | 41 | % | |||||||
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve as of the grant date. The expected life is based on historical exercise experience and the expected volatility is based on the volatility of the Company's daily stock price over the expected life preceding the grant date of the award.
10
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth a summary of stock options for the three months ended March 31, 2022:
| Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In years) | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||
Outstanding at December 31, 2021 | — | $ | — | ||||||||||||||||||||
| Granted | 89,550 | 122.09 | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Forfeited | — | — | |||||||||||||||||||||
Outstanding at March 31, 2022 | 89,550 | $ | 122.09 | 9.9 | $ | 731,176 | |||||||||||||||||
Exercisable at March 31, 2022 | — | $ | — | 0 | $ | — | |||||||||||||||||
The following table sets forth a summary of stock-settled stock appreciation rights for the three months ended March 31, 2022:
| Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In years) | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||
Outstanding at December 31, 2021 | 1,370,388 | $ | 62.09 | ||||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | (37,411) | 66.32 | |||||||||||||||||||||
| Forfeited | (1,386) | 76.80 | |||||||||||||||||||||
Outstanding at March 31, 2022 | 1,331,591 | $ | 61.95 | 6.0 | $ | 90,797 | |||||||||||||||||
Exercisable at March 31, 2022 | 1,155,912 | $ | 61.73 | 5.6 | $ | 79,079 | |||||||||||||||||
For the three months ended March 31, 2022, the aggregate intrinsic value of stock-settled stock appreciation rights exercised during such period was $2.4 million.
The following table sets forth a summary of time-based restricted stock units for the three months ended March 31, 2022:
| Awards | Weighted- Average Fair Value | ||||||||||
Unvested at December 31, 2021 | 974,162 | $ | 53.48 | ||||||||
| Granted | 224,946 | 122.11 | |||||||||
| Vested | (232,276) | 64.01 | |||||||||
| Forfeited | (1,092) | 106.05 | |||||||||
Unvested at March 31, 2022 | 965,740 | $ | 66.87 | ||||||||
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth a summary of performance-based awards for the three months ended March 31, 2022:
| Awards | Weighted- Average Fair Value | ||||||||||
Unvested at December 31, 2021 | 380,819 | $ | 59.23 | ||||||||
| Granted | 83,991 | 122.09 | |||||||||
| Vested | (115,394) | 54.64 | |||||||||
| Forfeited | (1,790) | 76.80 | |||||||||
Unvested at March 31, 2022 | 347,626 | $ | 73.16 | ||||||||
Vesting of the 347,626 shares of performance-based awards in the table above is dependent upon the achievement of certain performance targets, including half that are dependent upon the three-year average growth rate of Wesco's net income attributable to common stockholders and the other half that are based upon the three-year cumulative return on net assets. These awards are accounted for as awards with performance conditions; compensation cost is recognized over the performance period based upon Wesco's determination of whether it is probable that the performance targets will be achieved.
Wesco recognized $8.9 million and $6.0 million of non-cash stock-based compensation expense for the three months ended March 31, 2022 and 2021, respectively, which is included in selling, general and administrative expenses. As of March 31, 2022, there was $78.2 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements for all awards previously made of which approximately $30.6 million is expected to be recognized over the remainder of 2022, $30.5 million in 2023, $15.3 million in 2024 and $1.8 million in 2025.
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average common shares and common share equivalents outstanding during the periods. The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury stock method, which includes consideration of equity awards.
The following table sets forth the details of basic and diluted earnings per share:
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| (In thousands, except per share data) | 2022 | 2021 | |||||||||
| Net income attributable to WESCO International, Inc. | $ | 181,243 | $ | 59,178 | |||||||
| Less: Preferred stock dividends | 14,352 | 14,352 | |||||||||
| Net income attributable to common stockholders | $ | 166,891 | $ | 44,826 | |||||||
Weighted-average common shares outstanding used in computing basic earnings per share | 50,597 | 50,124 | |||||||||
Common shares issuable upon exercise of dilutive equity awards | 1,640 | 1,584 | |||||||||
| Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share | 52,237 | 51,708 | |||||||||
| Earnings per share attributable to common stockholders | |||||||||||
| Basic | $ | 3.30 | $ | 0.89 | |||||||
| Diluted | $ | 3.19 | $ | 0.87 | |||||||
The computation of diluted earnings per share attributable to common stockholders excludes stock-based awards that would have an antidilutive effect on earnings per share. For the three months ended March 31, 2022 and 2021, there were approximately 0.1 million and 0.3 million antidilutive awards, respectively.
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
7. DEBT
The following table sets forth Wesco's outstanding indebtedness:
| As of | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| International lines of credit | $ | 8,551 | $ | 7,354 | |||||||
| Accounts Receivable Securitization Facility | 1,300,000 | 1,270,000 | |||||||||
| Revolving Credit Facility | 757,962 | 596,959 | |||||||||
| 5.50% Anixter Senior Notes due 2023 | 58,636 | 58,636 | |||||||||
| 6.00% Anixter Senior Notes due 2025 | 4,173 | 4,173 | |||||||||
| 7.125% Senior Notes due 2025 | 1,500,000 | 1,500,000 | |||||||||
7.250% Senior Notes due 2028, less debt discount of $7,777 and $8,088 in 2022 and 2021, respectively | 1,317,223 | 1,316,912 | |||||||||
| Finance lease obligations | 19,528 | 18,563 | |||||||||
| Total debt | 4,966,073 | 4,772,597 | |||||||||
| Plus: Fair value adjustment to the Anixter Senior Notes | 786 | 957 | |||||||||
| Less: Unamortized debt issuance costs | (59,938) | (62,484) | |||||||||
Less: Short-term debt and current portion of long-term debt(1) | (70,263) | (9,528) | |||||||||
| Total long-term debt | $ | 4,836,658 | $ | 4,701,542 | |||||||
(1) As of March 31, 2022, short-term debt and current portion of long-term debt includes the $58.6 million aggregate principal amount of the Company's 5.50% Anixter Senior Notes due 2023, which mature on March 1, 2023.
Accounts Receivable Securitization Facility
On March 1, 2022, WESCO Distribution, Inc. (“Wesco Distribution”) amended its accounts receivable securitization facility (the “Receivables Facility”) pursuant to the terms and conditions of a Fourth Amendment to Fifth Amended and Restated Receivables Purchase Agreement (the “Receivables Amendment”), by and among WESCO Receivables Corp., Wesco Distribution, the various purchaser groups from time to time party thereto and PNC Bank, National Association, as administrator. The Receivables Amendment amended the receivables purchase agreement entered into on June 22, 2020. The Receivables Amendment, among other things, (i) increased the purchase limit under the Receivables Facility from $1,300 million to $1,400 million, (ii) increased the aggregate commitment from $1,500 million to $1,750 million under an accordion feature that permits requests to increase the purchase limit, and (iii) extended the maturity date from June 1, 2024 to March 1, 2025. Additionally, the Receivables Amendment replaced the London Inter-Bank Offered Rate-based (“LIBOR”) interest rate option with Secured Overnight Financing Rate-based (“SOFR”) interest rate options, including term SOFR and daily simple SOFR, and decreased the interest rate spread from 1.15% to 1.10%. The commitment fee of the Receivables Facility remained unchanged.
Under the Receivables Facility, Wesco Distribution sells, on a continuous basis, an undivided interest in all domestic accounts receivable to Wesco Receivables, a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables, in the form of overcollateralization. Since Wesco Distribution maintains control of the transferred receivables, the transfers do not qualify for “sale” treatment. As a result, the transferred receivables remain on the balance sheet, and Wesco recognizes the related secured borrowing. Wesco Distribution has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at market rates; accordingly, no servicing asset or liability has been recorded.
Revolving Credit Facility
On March 1, 2022, Wesco Distribution amended its revolving credit facility (the “Revolving Credit Facility”) pursuant to the terms and conditions of a Second Amendment to Fourth Amended and Restated Credit Agreement (the “Revolver Amendment”), by and among Wesco Distribution, as the borrower representative, the other U.S. borrowers party thereto, WESCO Distribution Canada LP, the other Canadian borrowers party thereto, WESCO International, the lenders party thereto
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
and Barclays Bank PLC, as the administrative agent. The Revolver Amendment amended the revolving credit facility entered into on June 22, 2020. The Revolver Amendment, among other things, (i) increased the revolving commitments under the Revolving Credit Facility from $1,200 million to $1,350 million, (ii) increased the sub-facility for loans denominated in Canadian dollars from $500 million to $550 million, (iii) increased the capacity to request increases in the aggregate revolving commitments from $400 million to $650 million, (iv) modified certain negative covenants to provide for additional flexibility, and (v) extended the maturity date from June 22, 2025 to March 1, 2027. Additionally, the Revolver Amendment replaced the LIBOR-based interest rate option with SOFR-based interest rate options, including term SOFR and daily simple SOFR. The applicable interest rate for borrowings under the Revolving Credit Facility, as amended, includes interest rate spreads based on available borrowing capacity that range from 1.00% to 1.50% for SOFR-based borrowings and from 0.00% to 0.50% for prime rate-based borrowings.
8. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
Wesco Distribution sponsors a defined contribution retirement savings plan for the majority of its U.S. employees (the "WESCO Distribution, Inc. Retirement Savings Plan"). Effective January 1, 2022, the defined contribution plan covering all of Anixter Inc.'s non-union U.S. employees (the "Anixter Inc. Employee Savings Plan") was merged with and into the WESCO Distribution, Inc. Retirement Savings Plan (the "U.S. Defined Contribution Plan Merger"). On December 31, 2021, participant account balances were transferred from the Anixter Inc. Employee Savings Plan to the WESCO Distribution, Inc. Retirement Savings Plan. In connection with the U.S. Defined Contribution Plan Merger, the WESCO Distribution, Inc. Retirement Savings Plan was amended to change the employer matching contribution at an amount equal to 100% of a participant's eligible elective deferrals up to 3% of the participant's eligible compensation and 50% of the next 4% of eligible compensation, and to eliminate discretionary employer contributions.
WESCO Distribution Canada LP, a wholly-owned subsidiary of the Company, sponsors a defined contribution plan covering the current full-time employees of WESCO Distribution Canada LP and part-time employees meeting certain requirements for continuous service, earnings and minimum hours of employment (the "Wesco Canadian Defined Contribution Plan"). Effective January 1, 2022, the defined contribution plan for certain employees of Anixter Canada Inc. and Anixter Power Solutions Canada Inc. (the "Anixter Canadian Defined Contribution Plan") was merged with and into an amended Wesco Canadian Defined Contribution Plan. During the three months ended March 31, 2022, participant account balances were transferred from the Anixter Canadian Defined Contribution Plan to the amended Wesco Canadian Defined Contribution Plan. The amended Wesco Canadian Defined Contribution Plan provides a core employer contribution of 3% of a participant's eligible compensation, plus a matching contribution equal to 50% of a participant's elective contributions up to 4% of eligible compensation (for a maximum total employer contribution equal to 5%). The amended Wesco Canadian Defined Contribution Plan also requires employees of EECOL Electric Corp. hired on or after January 1, 2022 to join this Canadian defined contribution plan, and permits enrollment for those not participating in the defined benefit plan described below.
Wesco incurred charges of $18.1 million and $16.6 million for the three months ended March 31, 2022 and 2021, respectively, for all defined contribution plans.
Deferred Compensation Plans
Wesco Distribution sponsors a non-qualified deferred compensation plan (the "Wesco Deferred Compensation Plan") that permits select employees to make pre-tax deferrals of salary and bonus. Employees have the option to transfer balances allocated to their accounts in the Wesco Deferred Compensation Plan into any of the available investment options. The Wesco Deferred Compensation Plan is an unfunded plan. As of March 31, 2022 and December 31, 2021, the Company's obligation under the Wesco Deferred Compensation Plan was $20.9 million, which was included in other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
Defined Benefit Plans
Wesco sponsors a contributory defined benefit plan covering substantially all Canadian employees of EECOL Electric Corp., a wholly-owned subsidiary of the Company (the "EECOL Plan") and a Supplemental Executive Retirement Plan for certain executives of EECOL Electric Corp. (the "EECOL SERP").
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Anixter Inc. sponsors the Anixter Inc. Pension Plan, which was closed to entrants first hired or rehired on or after July 1, 2015, and various defined benefit pension plans covering employees of foreign subsidiaries in Canada and Europe (together with the "EECOL Plan" and "EECOL SERP", the "Foreign Plans"). The majority of the Anixter defined benefit pension plans are non-contributory, and with the exception of the U.S. and Canada, cover substantially all full-time employees in their respective countries. Retirement benefits are provided based on compensation as defined in each of the plan agreements. The Anixter Inc. Pension Plan is funded as required by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Service. With the exception of the EECOL SERP, which is an unfunded plan, the Foreign Plans are funded as required by applicable foreign laws.
During the fourth quarter of 2021, the Company adopted certain plan amendments to: (i) freeze the benefits provided under the Anixter Inc. Pension Plan effective December 31, 2021, (ii) close participation in the EECOL Plan effective December 31, 2021, and (iii) freeze the benefit accruals under the Pension Plan for Employees of Anixter Canada Inc., the EECOL Plan and the EECOL SERP effective December 31, 2023.
The Company expects to contribute approximately $10.8 million to its Foreign Plans in 2022, of which approximately $3.2 million was contributed during the three months ended March 31, 2022. The Company does not expect to make a contribution to its domestic qualified pension plan in 2022 due to its overfunded status.
The following table sets forth the components of net periodic pension (benefit) cost for the Company's defined benefit plans:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (In thousands) | March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||||||||||||
| Domestic Plans | Foreign Plans | Total | |||||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | 764 | $ | 2,155 | $ | 3,224 | $ | 2,155 | $ | 3,988 | |||||||||||||||||||||||
| Interest cost | 2,083 | 2,137 | 2,311 | 2,446 | 4,394 | 4,583 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (3,497) | (4,501) | (4,277) | (4,256) | (7,774) | (8,757) | |||||||||||||||||||||||||||||
Recognized actuarial gain(1) | — | — | (185) | 102 | (185) | 102 | |||||||||||||||||||||||||||||
| Net periodic pension (benefit) cost | $ | (1,414) | $ | (1,600) | $ | 4 | $ | 1,516 | $ | (1,410) | $ | (84) | |||||||||||||||||||||||
(1) For the three months ended March 31, 2022 and 2021, no material amounts were reclassified from accumulated other comprehensive income into net income.
The service cost of $2.2 million and $4.0 million for the three months ended March 31, 2022 and 2021, respectively, is reported as a component of selling, general and administrative expenses. The other components of net periodic pension (benefit) cost totaling net benefits of $3.6 million and $4.1 million for the three months ended March 31, 2022 and 2021, respectively, are presented as components of other non-operating income ("other expense (income), net").
Other Benefits
Prior to its acquisition by Wesco on June 22, 2020, Anixter granted restricted stock units in the ordinary course of business to its employees and directors. These awards, for which vesting did not accelerate solely as a result of the Company's merger with Anixter, were converted into cash-only settled Wesco phantom stock units, which vest ratably over a 3-year period. As of March 31, 2022 and December 31, 2021, the estimated fair value of these awards was $11.3 million and $22.7 million, respectively.
As of March 31, 2022, the Company's liability for these awards was $7.9 million, of which $5.5 million was included in accrued payroll and benefit costs and $2.4 million was a component of other noncurrent liabilities in the Condensed Consolidated Balance Sheet. As of December 31, 2021, the Company's liability for these awards was $17.3 million, of which $10.9 million was included in accrued payroll and benefit costs and $6.4 million was a component of other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
The Company recognized compensation expense associated with these awards of $0.2 million and $5.7 million for the three months ended March 31, 2022 and 2021, respectively, which is reported as a component of selling, general and administrative expenses.
15
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, bank overdrafts, outstanding indebtedness, foreign currency forward contracts, and benefit plan assets. Except for benefit plan assets, outstanding indebtedness and foreign currency forward contracts, the carrying value of the Company’s remaining financial instruments approximates fair value.
The assets of the Company's various defined benefit plans are primarily comprised of common/collective/pool funds (i.e., mutual funds). These funds are valued at the net asset value (NAV) of shares held in the underlying funds. Investments for which fair value is measured using the NAV per share practical expedient are not classified in the fair value hierarchy.
The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy.
The carrying value of Wesco's debt instruments with fixed interest rates was $2,880.8 million and $2,880.7 million as of March 31, 2022 and December 31, 2021, respectively. The estimated fair value of this debt was $3,034.0 million and $3,118.0 million as of March 31, 2022 and December 31, 2021, respectively. The reported carrying values of Wesco's other debt instruments, including those with variable interest rates, approximated their fair values as of March 31, 2022 and December 31, 2021.
The Company purchases foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts on its earnings. The foreign currency forward contracts are not designated as hedges for accounting purposes. The Company's strategy is to negotiate terms for its derivatives and other financial instruments to be highly effective, such that the change in the value of the derivative offsets the impact of the underlying hedge. Its counterparties to foreign currency forward contracts have investment-grade credit ratings. The Company regularly monitors the creditworthiness of its counterparties to ensure no issues exist that could affect the value of its derivatives.
The Company does not hedge 100% of its foreign currency-denominated accounts. In addition, the results of hedging can vary significantly based on various factors, such as the timing of executing foreign currency forward contracts versus the movement of currencies, as well as fluctuations in the account balances throughout each reporting period. The fair value of foreign currency forward contracts is based on the difference between the contract rate and the current price of a forward contract with an equivalent remaining term. The fair value of foreign currency forward contracts is measured using observable market information. These inputs are considered Level 2 in the fair value hierarchy. At March 31, 2022 and December 31, 2021, foreign currency forward contracts were revalued at then-current foreign exchange rates with the changes in valuation reflected directly in other non-operating income (expense) in the Condensed Consolidated Statements of Income and Comprehensive Income offsetting the transaction gain (loss) recorded on foreign currency-denominated accounts. At March 31, 2022 and December 31, 2021, the gross and net notional amounts of foreign currency forward contracts outstanding were approximately $175.9 million and $188.6 million, respectively. While all of the Company's foreign currency forward contracts are subject to master netting arrangements with its counterparties, assets and liabilities related to these contracts are presented on a gross basis within the Condensed Consolidated Balance Sheets. The gross fair value of assets and liabilities related to foreign currency forward contracts were immaterial.
10. COMMITMENTS AND CONTINGENCIES
From time to time, a number of lawsuits and claims have been or may be asserted against the Company relating to the conduct of its business, including litigation relating to commercial, product and employment matters (including wage and hour). The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to Wesco. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on Wesco's financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on Wesco's results of operations for that period.
16
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
11. INCOME TAXES
The effective tax rate for the three months ended March 31, 2022 and 2021 was 17.2% and 9.9%, respectively. Wesco’s effective tax rate typically differs from the federal statutory income tax rate due to the tax effect of intercompany financing, foreign tax rate differences, the U.S. taxes imposed on foreign income, nondeductible expenses and state income taxes. For the three months ended March 31, 2022 and 2021, the effective tax rate reflects discrete income tax benefits of $13.4 million and $8.3 million, respectively, resulting from reductions to the valuation allowance recorded against foreign tax credit carryforwards, as well as deductible stock-based compensation of $5.8 million and $1.1 million, respectively. These discrete income tax benefits reduced the estimated annual effective tax rate by approximately 8.7 and 14.4 percentage points, respectively.
There have been no material adjustments to liabilities for uncertain tax positions since the last annual disclosure for the year ended December 31, 2021.
12. BUSINESS SEGMENTS
The Company has operating segments that are comprised of three strategic business units consisting of EES, CSS and UBS. These operating segments are equivalent to the Company's reportable segments. The Company's chief operating decision maker evaluates the performance of its operating segments based primarily on net sales, adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), and adjusted EBITDA margin percentage.
Corporate primarily incurs costs related to treasury, tax, information technology, legal and other centralized functions. The Company also has various corporate assets which are reported in corporate. Segment assets may not include jointly used assets, but segment results include depreciation expense or other allocations related to those assets. Interest expense and other non-operating items are either not allocated to the segments or reviewed on a segment basis. Corporate expenses and assets not directly identifiable with a reportable segment are reported in the tables below to reconcile the reportable segments to the consolidated financial statements.
The following tables set forth financial information by reportable segment for the periods presented:
| (In thousands) | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||
| EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||
| Net sales | $ | 2,089,959 | $ | 1,434,175 | $ | 1,408,047 | $ | — | $ | 4,932,181 | |||||||||||||||||||
| Adjusted EBITDA | 192,417 | 123,040 | 136,360 | (87,695) | 364,122 | ||||||||||||||||||||||||
| Adjusted EBITDA Margin % | 9.2 | % | 8.6 | % | 9.7 | % | 7.4 | % | |||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | ||||||||||||||||||||||||
| Net sales | $ | 1,720,813 | $ | 1,250,615 | $ | 1,070,049 | $ | — | $ | 4,041,477 | |||||||||||||||||||
| Adjusted EBITDA | 112,025 | 90,682 | 83,653 | (69,812) | 216,548 | ||||||||||||||||||||||||
| Adjusted EBITDA Margin % | 6.5 | % | 7.3 | % | 7.8 | % | 5.4 | % | |||||||||||||||||||||
The following table sets forth total assets by reportable segment for the periods presented:
| As of | |||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate(1) | Total | ||||||||||||||||||||||||
| Total assets | $ | 4,336,938 | $ | 4,650,849 | $ | 3,513,628 | $ | 683,618 | $ | 13,185,033 | |||||||||||||||||||
| As of | |||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate(1) | Total | ||||||||||||||||||||||||
| Total assets | $ | 4,098,335 | $ | 4,601,132 | $ | 3,266,231 | $ | 652,001 | $ | 12,617,699 | |||||||||||||||||||
(1) Total assets for Corporate primarily consist of cash and cash equivalents, deferred income taxes, fixed assets and right-of-use assets associated with operating leases.
17
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following tables reconcile net income attributable to common stockholders to adjusted EBITDA and adjusted EBITDA margin % by segment, which are non-GAAP financial measures, for the periods presented:
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 178,735 | $ | 103,687 | $ | 129,981 | $ | (245,512) | $ | 166,891 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 210 | — | — | 178 | 388 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 14,352 | 14,352 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 37,654 | 37,654 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 63,620 | 63,620 | |||||||||||||||||||||||||||
| Depreciation and amortization | 12,024 | 18,132 | 5,786 | 11,038 | 46,980 | |||||||||||||||||||||||||||
| Other (income) expense, net | (174) | 344 | (33) | 987 | 1,124 | |||||||||||||||||||||||||||
Stock-based compensation expense(1) | 1,622 | 877 | 626 | 4,425 | 7,550 | |||||||||||||||||||||||||||
| Merger-related and integration costs | — | — | — | 25,563 | 25,563 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 192,417 | $ | 123,040 | $ | 136,360 | $ | (87,695) | $ | 364,122 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 9.2 | % | 8.6 | % | 9.7 | % | 7.4 | % | ||||||||||||||||||||||||
(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the three months ended March 31, 2022 excludes $1.4 million as such amount is included in merger-related and integration costs. | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 100,629 | $ | 73,594 | $ | 87,013 | $ | (216,410) | $ | 44,826 | ||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (75) | — | — | 51 | (24) | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 14,352 | 14,352 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 6,531 | 6,531 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 70,373 | 70,373 | |||||||||||||||||||||||||||
| Depreciation and amortization | 10,563 | 16,293 | 5,210 | 9,143 | 41,209 | |||||||||||||||||||||||||||
| Other (income) expense, net | (443) | 370 | 17 | (2,751) | (2,807) | |||||||||||||||||||||||||||
Stock-based compensation expense(2) | 1,351 | 425 | 340 | 2,577 | 4,693 | |||||||||||||||||||||||||||
| Merger-related and integration costs | — | — | — | 46,322 | 46,322 | |||||||||||||||||||||||||||
| Net gain on divestitures | — | — | (8,927) | — | (8,927) | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 112,025 | $ | 90,682 | $ | 83,653 | $ | (69,812) | $ | 216,548 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 6.5 | % | 7.3 | % | 7.8 | % | 5.4 | % | ||||||||||||||||||||||||
(2) Stock-based compensation expense in the calculation of adjusted EBITDA for the three months ended March 31, 2021 excludes $1.3 million as such amount is included in merger-related and integration costs. | ||||||||||||||||||||||||||||||||
Note: Adjusted EBITDA and Adjusted EBITDA margin % are non-GAAP financial measures that provide indicators of the Company's performance and its ability to meet debt service requirements. Adjusted EBITDA is defined as EBITDA before foreign exchange and other non-operating expenses (income), non-cash stock-based compensation expense, merger-related and integration costs, and net gain on the divestiture of Wesco's legacy utility and data communications businesses in Canada. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.
18
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and WESCO International, Inc.’s audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for 2021. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in Item 1A of WESCO International, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as WESCO International, Inc.’s other reports filed with the Securities and Exchange Commission (the "SEC").
In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), our discussion and analysis of financial condition and results of operations includes certain non-GAAP financial measures, which are defined further below. These financial measures include organic sales growth, earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted EBITDA margin, financial leverage, adjusted income from operations, adjusted provision for income taxes, adjusted income before income taxes, adjusted net income, adjusted net income attributable to WESCO International, Inc., adjusted net income attributable to common stockholders, and adjusted earnings per diluted share. We believe that these non-GAAP measures are useful to investors as they provide a better understanding of financial performance, and the use of debt and liquidity on a comparable basis. Additionally, certain non-GAAP measures either focus on or exclude items impacting comparability of results, allowing investors to more easily compare our financial performance from period to period. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.
Company Overview
WESCO International, Inc. ("Wesco International") and its subsidiaries (collectively, “Wesco” or the "Company"), headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.
We employ approximately 18,000 people, maintain relationships with approximately 45,000 suppliers, and serve approximately 140,000 customers worldwide. With nearly 1,500,000 products, end-to-end supply chain services, and extensive digital capabilities, we provide innovative solutions to meet customer needs across commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. Our innovative value-added solutions include supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting and labeling, limited assembly of products and installation enhancement. We have approximately 800 branches, warehouses and sales offices with operations in more than 50 countries, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations.
In 2021, we established a new corporate brand strategy to adopt a single, master brand architecture. This initiative reflects our corporate integration strategy and simplifies engagement for our customers and suppliers. As a result, we have begun migrating certain legacy sub-brands to the master brand architecture, a process that will continue through the next twelve months. Due to the strength of its recognition with customers and suppliers, we will continue to use the Anixter brand name as part of the master brand strategy for the foreseeable future.
We have operating segments that are comprised of three strategic business units consisting of Electrical & Electronic Solutions ("EES"), Communications & Security Solutions ("CSS") and Utility & Broadband Solutions ("UBS"). These operating segments are equivalent to our reportable segments. The following is a description of each of our reportable segments and their business activities.
Electrical & Electronic Solutions
The EES segment, with over 6,400 employees supporting customers in over 50 countries, supplies a broad range of products and solutions primarily to the construction, industrial, and original equipment manufacturer ("OEM") markets. The product portfolio in this business includes a broad range of electrical equipment and supplies, automation and connected devices (the "Internet of Things" or "IoT"), security, lighting, wire and cable, safety, and maintenance, repair and operating ("MRO") products from industry-leading manufacturing partners. The EES service portfolio includes contractor solutions to improve project execution, direct and indirect manufacturing supply chain optimization programs, lighting and renewables advisory services, and digital and automation solutions to improve safety and productivity.
19
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Communications & Security Solutions
The CSS segment, with over 3,300 employees supporting customers in over 50 countries, is a global leader in the network infrastructure and security markets. CSS sells products directly to end-users or through various channels including data communications contractors, security, network, professional audio/visual and systems integrators. In addition to the core network infrastructure and security portfolio, CSS has a broad offering of safety and energy management solutions. CSS products are often combined with supply chain services to increase efficiency and productivity, including installation enhancement, project deployment, advisory, and IoT and digital services.
Utility & Broadband Solutions
The UBS segment, with over 2,400 employees supporting customers primarily in the U.S. and Canada, provides products and services to investor-owned utilities, public power companies, including municipalities, as well as global service providers, wireless providers, broadband operators and the contractors that service these customers. The UBS segment also includes Wesco's integrated supply business, which provides products and services to large industrial and commercial end-users to support their MRO spend. The products sold into the utility and broadband markets include wire and cable, transformers, transmission and distribution hardware, switches, protective devices, connectors, lighting, conduit, fiber and copper cable, connectivity products, pole line hardware, racks, cabinets, safety and MRO products, and point-to-point wireless devices. The UBS segment also offers a complete set of service solutions to improve customer supply chain efficiencies.
Overall Financial Performance
Our financial results for the first three months of 2022 compared to the first three months of 2021 reflect double-digit sales growth, margin expansion, and the realization of integration cost synergies, partially offset by higher selling, general and administrative ("SG&A") payroll and payroll-related expenses consisting of salaries and variable compensation, volume-related costs, as well as information technology expenses associated with our digital transformation initiatives.
Net sales for the first three months of 2022 increased $0.9 billion, or 22.0%, over the corresponding prior year period. The increase reflects continued strong demand, price inflation, and expanded product and service offerings afforded by the combination of Wesco and Anixter, as well as secular growth trends in electrification, automation, communications and security. Cost of goods sold as a percentage of net sales was 78.7% and 79.9% for the first three months of 2022 and 2021, respectively. The decrease of 120 basis points reflects our focus on value-driven pricing and continued momentum of our profit margin improvement program, along with higher supplier volume rebate income. Cost of goods sold for the first quarter of 2021 included a write-down to the carrying value of certain personal protective equipment inventories that increased cost of goods sold as a percentage of net sales by 20 basis points.
Income from operations was $284.0 million for the first three months of 2022 compared to $133.3 million for the first three months of 2021, an increase of $150.8 million, or 113.2%. Income from operations as a percentage of net sales was 5.8% for the current three-month period, compared to 3.3% for the first three months of the prior year. Income from operations for the first three months of 2022 includes merger-related and integration costs of $25.6 million. Additionally, 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 three months ended March 31, 2022. Adjusted for these items, income from operations was $314.9 million, or 6.4% of net sales. For the first three months of 2021, income from operations adjusted for merger-related and integration costs of $46.3 million, and a net gain of $8.9 million resulting from the divestiture of Wesco's legacy utility and data communications businesses in Canada was $170.6 million, or 4.2% of net sales. For the three months ended March 31, 2022, income from operations compared to the prior year improved across all segments and reflects sales growth and lower cost of goods sold as a percentage of net sales, as well as the realization of integration cost synergies. Income from operations for the first three months of 2022 was negatively impacted by higher SG&A payroll and payroll-related expenses consisting of salaries and variable compensation, volume-related costs, as well as information technology expenses associated with our digital transformation initiatives.
Earnings per diluted share for the first three months of 2022 was $3.19, based on 52.2 million diluted shares, compared to $0.87 for the first three months of 2021, based on 51.7 million diluted shares. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first three months of 2022 was $3.63. Adjusted for merger-related and integration costs, net gain on Canadian divestitures, and the related income tax effects, earnings per diluted share for the first three months of 2021 was $1.43. Adjusted earnings per diluted share increased 153.8% year-over-year.
During the first three months of 2022, we continued to experience strong demand from many of our customers. We also continued to experience some delays in receiving products from our suppliers. We believe that these supply chain issues unfavorably impacted our net sales by approximately 1% to 2% in the first quarter of 2022. We are aggressively managing supply chain issues, which includes increasing inventory levels to service our customers. Our industry and the broader economy
20
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
are experiencing supply chain challenges, including product delays and backlogged orders, shortages in raw materials and components, labor shortages, transportation challenges, and higher costs. We anticipate that these supply chain challenges, as well as inflationary pressures, will continue for the remainder of 2022 and may extend into 2023. We intend to continue to actively manage the impact of inflation on our results of operations. We cannot reasonably estimate possible future impacts at this time.
There continues to be ongoing uncertainties associated with the COVID-19 pandemic, including with respect to the economic conditions and possible resurgence of COVID-19, including new variants of the virus. As the duration and severity of the COVID-19 pandemic cannot be predicted, there is significant uncertainty as to the ultimate impact that COVID-19 will have on our business and our results of operations and financial condition.
Cash Flow
Operating cash flow for the first three months of 2022 was an outflow of $171.9 million. Net cash used in operating activities included net income of $181.6 million and non-cash adjustments to net income totaling $57.5 million, which were primarily comprised of depreciation and amortization of $47.0 million, stock-based compensation expense of $8.9 million, amortization of debt discount and debt issuance costs of $4.6 million, and deferred income taxes of $4.5 million. Operating cash flow also included changes in assets and liabilities of $411.2 million, which were primarily comprised of an increase in trade accounts receivable of $324.6 million resulting from higher sales in the latter part of the quarter, an increase in inventories of $214.2 million due to investments during the quarter to both address supply chain challenges and support our strong sales growth opportunities, a decrease in accrued payroll and benefit costs of $135.9 million resulting primarily from the payment of management incentive compensation earned in 2021, partially offset by an increase in accounts payable of $200.0 million due to the aforementioned higher purchases of inventory.
Investing activities primarily included $15.2 million of capital expenditures mostly consisting of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support the Company's global network of branches, warehouses and sales offices.
Financing activities were primarily comprised of borrowings and repayments of $852.3 million and $692.2 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), and borrowings and repayments of $130.0 million and $100.0 million, respectively, related to our accounts receivable securitization facility (the "Receivables Facility"). Financing activities for the first three months of 2022 also included $14.4 million of dividends paid to holders of our Series A Preferred Stock, net proceeds from our various international lines of credit of approximately $1.2 million, and $16.8 million of payments for taxes related to the exercise and vesting of stock-based awards.
Financing Availability
On March 1, 2022, we amended our accounts receivable securitization and revolving credit facilities to, among other things, increase their borrowing capacities, extend their maturity dates, and replace London Inter-Bank Offered Rate-based (“LIBOR”) interest rate options with Secured Overnight Financing Rate-based (“SOFR”) interest rate options.
See Note 7, "Debt" of our Notes to the unaudited Condensed Consolidated Financial Statements for additional disclosure regarding the amendments to these facilities.
As of March 31, 2022, we had $554.2 million in total available borrowing capacity under our Revolving Credit Facility, and $100.0 million of available borrowing capacity under our Receivables Facility. The Revolving Credit Facility and the Receivables Facility mature in March 2027 and March 2025, respectively.
21
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
First Quarter of 2022 versus First Quarter of 2021
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income and Comprehensive Income for the periods presented:
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of goods sold (excluding depreciation and amortization) | 78.7 | 79.9 | |||||||||
| Selling, general and administrative expenses | 14.6 | 15.8 | |||||||||
| Depreciation and amortization | 0.9 | 1.0 | |||||||||
| Income from operations | 5.8 | 3.3 | |||||||||
| Interest expense, net | 1.3 | 1.7 | |||||||||
| Other expense, net | 0.1 | — | |||||||||
| Income before income taxes | 4.4 | 1.6 | |||||||||
| Provision for income taxes | 0.7 | 0.1 | |||||||||
| Net income attributable to WESCO International, Inc. | 3.7 | 1.5 | |||||||||
| Preferred stock dividends | 0.3 | 0.4 | |||||||||
| Net income attributable to common stockholders | 3.4 | % | 1.1 | % | |||||||
Net Sales
The following table sets forth net sales and organic sales growth by segment for the periods presented:
| Three Months Ended | Growth/(Decline) | ||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | Reported | Divestiture Impact | Foreign Exchange Impact | Workday Impact | Organic Sales Growth | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| EES | $ | 2,089,959 | $ | 1,720,813 | 21.5% | (0.5) | % | (0.4) | % | 1.6 | % | 20.8 | % | ||||||||||||||||||||||||||||
| CSS | 1,434,175 | 1,250,615 | 14.7% | — | % | (0.8) | % | 1.6 | % | 13.9 | % | ||||||||||||||||||||||||||||||
| UBS | 1,408,047 | 1,070,049 | 31.6% | (0.4) | % | — | % | 1.6 | % | 30.4 | % | ||||||||||||||||||||||||||||||
| Total net sales | $ | 4,932,181 | $ | 4,041,477 | 22.0% | (0.3) | % | (0.5) | % | 1.6 | % | 21.2 | % | ||||||||||||||||||||||||||||
Note: Organic sales growth is a non-GAAP financial measure of sales performance. Organic sales growth is calculated by deducting the percentage impact from acquisitions and divestitures for one year following the respective transaction, foreign exchange rates and number of workdays from the reported percentage change in consolidated net sales.
Net sales were $4.9 billion for the first quarter of 2022 compared to $4.0 billion for the first quarter of 2021, an increase of 22.0% reflecting continued strong demand, price inflation, and expanded product and service offerings afforded by the combination of Wesco and Anixter, as well as secular growth trends in electrification, automation, communications and security. Organic sales for the first quarter of 2022 grew by 21.2% as the number of workdays positively impacted reported net sales by 1.6%, and foreign exchange rates and divestitures negatively impacted reported net sales by 0.5% and 0.3%, respectively. All segments reported increased sales versus the prior year period, as described below. For the three months ended March 31, 2022, pricing related to inflation favorably impacted our net sales by approximately 8%.
EES reported net sales of $2.1 billion for the first quarter of 2022 compared to $1.7 billion for the first quarter of 2021, an increase of 21.5%. Organic sales for the first quarter of 2022 grew by 20.8% as the number of workdays positively impacted reported net sales by 1.6%, and foreign exchange rates and the Canadian divestitures described above negatively impacted reported net sales by 0.4% and 0.5%, respectively. The increase reflects double-digit sales growth in our construction, original equipment manufacturer, and industrial businesses, reflecting business expansion, price inflation, as well as the benefits of cross selling and secular growth trends in electrification and automation.
22
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CSS reported net sales of $1.4 billion for the first quarter of 2022 compared to $1.3 billion for the first quarter of 2021, an increase of 14.7%. Organic sales for the first quarter of 2022 grew by 13.9% as the number of workdays positively impacted reported net sales by 1.6% and foreign exchange rates negatively impacted reported net sales by 0.8%. The increase reflects double-digit growth in our network infrastructure business led by global hyper-scale data center customers and an increase in structured cabling driven by accelerating return-to-work activities, as well as growth in our security solutions business driven by IP-based surveillance and the adoption of cloud-based technologies.
UBS reported net sales of $1.4 billion for the first quarter of 2022 compared to $1.1 billion for the first quarter of 2021, an increase of 31.6%. Organic sales for the first quarter of 2022 grew by 30.4% as the number of workdays positively impacted reported net sales by 1.6% and the Canadian divestitures described above negatively impacted reported net sales by 0.4%. The increase reflects broad-based growth driven by investments in grid modernization, connectivity demand and rural broadband development, as well as expansion in our integrated supply business.
Cost of Goods Sold
Cost of goods sold for the first quarter of 2022 was $3.9 billion compared to $3.2 billion for the first quarter of 2021, an increase of $0.7 billion. Cost of goods sold as a percentage of net sales was 78.7% and 79.9% for the first quarter of 2022 and 2021, respectively. The decrease of 120 basis points reflects our focus on value-driven pricing and continued momentum of our profit margin improvement program, along with higher supplier volume rebate income. Cost of goods sold for the first quarter of 2021 included a write-down to the carrying value of certain personal protective equipment inventories, which increased cost of goods sold as a percentage of net sales by 20 basis points.
Selling, General and Administrative Expenses
SG&A expenses primarily include payroll and payroll-related costs, shipping and handling, travel and entertainment, facilities, utilities, information technology expenses, professional and consulting fees, credit losses, gains (losses) on the sale of property and equipment, as well as real estate and personal property taxes. SG&A expenses for the first quarter of 2022 totaled $718.1 million versus $636.6 million for the first quarter of 2021, an increase of $81.5 million, or 12.8%. As a percentage of net sales, SG&A expenses were 14.6% and 15.8%, respectively. SG&A expenses for the first quarter of 2022 include merger-related and integration costs of $25.6 million. Adjusted for these costs, SG&A expenses were $692.5 million, or 14.0% of net sales, for the first quarter of 2022. SG&A expenses for the first quarter of 2021 include $46.3 million of merger-related and integration costs, as well as a net gain on the Canadian divestitures of $8.9 million. Adjusted for these amounts, SG&A expenses were $599.2 million, or 14.8% of net sales, for the first quarter of 2021.
SG&A payroll and payroll-related expenses for the first quarter of 2022 of $460.9 million increased by $37.2 million compared to the same period in 2021 due to higher variable and stock-based compensation expense, as well as an increase in salaries and wages resulting from merit increases.
SG&A expenses not related to payroll and payroll-related costs for the first quarter of 2022 were $257.2 million compared to $212.9 million for the same period in 2021. The increase of $44.3 million primarily reflects higher shipping and handling costs due to sales volume growth, digital transformation initiatives contributing to higher information technology expenses, as well as the absence of the net gain recognized in the first quarter of 2021 on the Canadian divestitures.
Depreciation and Amortization
Depreciation and amortization increased $5.8 million to $47.0 million for the first quarter of 2022, compared to $41.2 million for the first quarter of 2021. The first quarter of 2022 includes $5.3 million resulting from changes in the estimated useful lives of certain legacy trademarks that are migrating to our master brand architecture, as described above. As of March 31, 2022, we expect to recognize approximately $4.6 million of amortization expense for trademarks migrating to our master brand architecture over the reminder of 2022 and $5.3 million thereafter.
23
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Income from Operations
The following tables set forth income from operations by segment for the periods presented:
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 178,771 | $ | 104,031 | $ | 129,948 | $ | (128,721) | $ | 284,029 | ||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 100,111 | $ | 73,964 | $ | 87,030 | $ | (127,854) | $ | 133,251 | ||||||||||||||||||||||
Income from operations was $284.0 million for the first quarter of 2022 compared to $133.3 million for the first quarter of 2021. The increase of $150.7 million, or 113.2%, reflects sales growth and lower cost of goods sold as a percentage of net sales, as well as the realization of integration cost synergies, partially offset by higher SG&A payroll and payroll-related expenses, volume-related costs, as well as information technology expenses associated with our digital transformation initiatives. Income from operations for the first quarter of 2022 was not materially affected by higher pricing related to inflation given the offsetting effect of higher costs for certain products.
EES reported income from operations of $178.8 million for the first quarter of 2022 compared to $100.1 million for the first quarter of 2021. The increase of $78.7 million primarily reflects the factors impacting the overall business, as described above. Additionally, income from operations for the first quarter of 2022 was negatively impacted by accelerated trademark amortization expense of $2.2 million.
CSS reported income from operations of $104.0 million for the first quarter of 2022 compared to $74.0 million for the first quarter of 2021. The increase of $30.0 million primarily reflects the factors impacting the overall business, as described above, as well as the prior year personal protective equipment inventory value write-down described in our overall results above. Additionally, income from operations for the first quarter of 2022 was negatively impacted by accelerated trademark amortization expense of $2.6 million.
UBS reported income from operations of $129.9 million for the first quarter of 2022 compared to $87.0 million for the first quarter of 2021. The increase of $42.9 million primarily reflects the factors impacting the overall business, as described above, offset by the benefit in the corresponding prior year quarter from the net gain on the Canadian divestitures.
Corporate, which primarily incurs costs related to treasury, tax, information technology, legal and other centralized functions, recognized net expenses of $128.7 million for the first quarter of 2022, compared to $127.9 million for the first quarter of 2021. The increase of $0.8 million primarily reflects higher payroll and payroll-related costs, and information technology expenses, as described above, partially offset by a decrease in professional and consulting fees associated with integration activities.
Interest Expense, net
Net interest expense totaled $63.6 million for the first quarter of 2022 compared to $70.4 million for the first quarter of 2021. The decrease of $6.8 million reflects the repayment of fixed rate debt with variable debt that has lower borrowing rates.
Other Expense (Income), net
Other non-operating expense totaled $1.1 million for the first quarter of 2022 compared to other non-operating income of $2.8 million for the first quarter of 2021. As disclosed in Note 8, "Employee Benefit Plans" of our Notes to the unaudited Condensed Consolidated Financial Statements, we recognized net benefits of $3.6 million and $4.1 million associated with the non-service cost components of net periodic pension (benefit) cost for the three months ended March 31, 2022 and 2021, respectively. Due to fluctuations in the U.S. dollar against certain foreign currencies, we recorded a foreign currency exchange loss of $3.6 million for the first quarter of 2022 compared to a loss of $1.0 million for the first quarter of 2021.
Income Taxes
The provision for income taxes was $37.7 million for the first quarter of 2022 compared to $6.5 million for the corresponding quarter of the prior year, resulting in an effective tax rate of 17.2% and 9.9%, respectively. The effective tax rate for the first quarter of 2022 and the corresponding quarter of the prior year reflect discrete income tax benefits of $13.4 million and $8.3 million, respectively, resulting from reductions to the valuation allowance recorded against foreign tax credit carryforwards, as well as deductible stock-based compensation of $5.8 million and $1.1 million, respectively. These discrete
24
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
income tax benefits reduced the estimated annual effective tax rate by approximately 8.7 and 14.4 percentage points, respectively.
Net Income and Earnings per Share
Net income for the first quarter of 2022 was $181.6 million compared to $59.2 million for the first quarter of 2021, an increase of $122.4 million, or over 200%.
Net income attributable to noncontrolling interests for the first quarter of 2022 was $0.4 million compared to a net loss of less than $0.1 million for the first quarter of 2021.
Preferred stock dividends expense, which relates to the fixed-rate reset cumulative perpetual preferred stock, Series A, that was issued in connection with the merger with Anixter, was $14.4 million for the first quarter of 2022 and 2021.
Net income and earnings per diluted share attributable to common stockholders were $166.9 million and $3.19, respectively, for the first quarter of 2022, compared with $44.8 million and $0.87, respectively, for the first quarter of 2021. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $189.8 million and $3.63, respectively, for the three months ended March 31, 2022. Adjusted for merger-related and integration costs, net gain on Canadian divestitures, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $74.1 million and $1.43, respectively, for the three months ended March 31, 2021.
The following tables reconcile selling, general and administrative expenses, income from operations, provision for income taxes and earnings per diluted share to adjusted selling, general and administrative expenses, adjusted income from operations, adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:
| Three Months Ended | |||||||||||
| Adjusted SG&A Expenses: | March 31, 2022 | March 31, 2021 | |||||||||
| (In thousands) | |||||||||||
| Selling, general and administrative expenses | $ | 718,098 | $ | 636,576 | |||||||
| Merger-related and integration costs | (25,563) | (46,322) | |||||||||
| Net gain on divestitures | — | 8,927 | |||||||||
| Adjusted selling, general and administrative expenses | $ | 692,535 | $ | 599,181 | |||||||
| Three Months Ended | |||||||||||
| Adjusted Income from Operations: | March 31, 2022 | March 31, 2021 | |||||||||
| (In thousands) | |||||||||||
| Income from operations | $ | 284,029 | $ | 133,251 | |||||||
| Merger-related and integration costs | 25,563 | 46,322 | |||||||||
| Accelerated trademark amortization | 5,323 | — | |||||||||
| Net gain on divestitures | — | (8,927) | |||||||||
| Adjusted income from operations | $ | 314,915 | $ | 170,646 | |||||||
25
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
| Three Months Ended | |||||||||||
| Adjusted Provision for Income Taxes: | March 31, 2022 | March 31, 2021 | |||||||||
| (In thousands) | |||||||||||
| Provision for income taxes | $ | 37,654 | $ | 6,531 | |||||||
Income tax effect of adjustments to income from operations(1) | 8,008 | 8,145 | |||||||||
| Adjusted provision for income taxes | $ | 45,662 | $ | 14,676 | |||||||
(1) The adjustments to income from operations have been tax effected at rates of approximately 26% and 22% for the three months ended March 31, 2022 and 2021, respectively.
| Three Months Ended | |||||||||||
| Adjusted Earnings per Diluted Share: | March 31, 2022 | March 31, 2021 | |||||||||
| (In thousands, except per share data) | |||||||||||
| Adjusted income from operations | $ | 314,915 | $ | 170,646 | |||||||
| Interest expense, net | 63,620 | 70,373 | |||||||||
| Other expense (income), net | 1,124 | (2,807) | |||||||||
| Adjusted income before income taxes | 250,171 | 103,080 | |||||||||
| Adjusted provision for income taxes | 45,662 | 14,676 | |||||||||
| Adjusted net income | 204,509 | 88,404 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 388 | (24) | |||||||||
| Adjusted net income attributable to WESCO International, Inc. | 204,121 | 88,428 | |||||||||
| Preferred stock dividends | 14,352 | 14,352 | |||||||||
| Adjusted net income attributable to common stockholders | $ | 189,769 | $ | 74,076 | |||||||
| Diluted shares | 52,237 | 51,708 | |||||||||
| Adjusted earnings per diluted share | $ | 3.63 | $ | 1.43 | |||||||
Note: For the three months ended March 31, 2022, selling, general and administrative expenses, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, accelerated amortization expense associated with migrating to our master brand architecture, and the related income tax effects. For the three months ended March 31, 2021, selling, general and administrative expenses, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, a net gain on the divestiture of Wesco's legacy utility and data communications businesses in Canada, and the related income tax effects. These non-GAAP financial measures provide a better understanding of our financial results on a comparable basis.
26
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin %
The following tables reconcile net income attributable to common stockholders to EBITDA, adjusted EBITDA and adjusted EBITDA margin % by segment, which are non-GAAP financial measures, for the periods presented:
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 178,735 | $ | 103,687 | $ | 129,981 | $ | (245,512) | $ | 166,891 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 210 | — | — | 178 | 388 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 14,352 | 14,352 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 37,654 | 37,654 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 63,620 | 63,620 | |||||||||||||||||||||||||||
| Depreciation and amortization | 12,024 | 18,132 | 5,786 | 11,038 | 46,980 | |||||||||||||||||||||||||||
| EBITDA | $ | 190,969 | $ | 121,819 | $ | 135,767 | $ | (118,670) | $ | 329,885 | ||||||||||||||||||||||
| Other (income) expense, net | (174) | 344 | (33) | 987 | 1,124 | |||||||||||||||||||||||||||
Stock-based compensation expense(1) | 1,622 | 877 | 626 | 4,425 | 7,550 | |||||||||||||||||||||||||||
| Merger-related and integration costs | — | — | — | 25,563 | 25,563 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 192,417 | $ | 123,040 | $ | 136,360 | $ | (87,695) | $ | 364,122 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 9.2% | 8.6% | 9.7% | 7.4% | ||||||||||||||||||||||||||||
(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the three months ended March 31, 2022 excludes $1.4 million as such amount is included in merger-related and integration costs. | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 100,629 | $ | 73,594 | $ | 87,013 | $ | (216,410) | $ | 44,826 | ||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (75) | — | — | 51 | (24) | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 14,352 | 14,352 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 6,531 | 6,531 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 70,373 | 70,373 | |||||||||||||||||||||||||||
| Depreciation and amortization | 10,563 | 16,293 | 5,210 | 9,143 | 41,209 | |||||||||||||||||||||||||||
| EBITDA | $ | 111,117 | $ | 89,887 | $ | 92,223 | $ | (115,960) | $ | 177,267 | ||||||||||||||||||||||
| Other (income) expense, net | (443) | 370 | 17 | (2,751) | (2,807) | |||||||||||||||||||||||||||
Stock-based compensation expense(2) | 1,351 | 425 | 340 | 2,577 | 4,693 | |||||||||||||||||||||||||||
| Merger-related and integration costs | — | — | — | 46,322 | 46,322 | |||||||||||||||||||||||||||
| Net gain on divestitures | — | — | (8,927) | — | (8,927) | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 112,025 | $ | 90,682 | $ | 83,653 | $ | (69,812) | $ | 216,548 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 6.5 | % | 7.3 | % | 7.8 | % | 5.4 | % | ||||||||||||||||||||||||
(2) Stock-based compensation expense in the calculation of adjusted EBITDA for the three months ended March 31, 2021 excludes $1.3 million as such amount is included in merger-related and integration costs. | ||||||||||||||||||||||||||||||||
Note: EBITDA, Adjusted EBITDA and Adjusted EBITDA margin % are non-GAAP financial measures that provide indicators of our performance and ability to meet debt service requirements. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before foreign exchange and other non-operating expenses (income), non-cash stock-based compensation expense, merger-related and integration costs and net gain on the divestiture of Wesco's legacy utility and data communications businesses in Canada. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.
Liquidity and Capital Resources
Our liquidity needs generally arise from fluctuations in our working capital requirements, information technology investments, capital expenditures, acquisitions and debt service obligations. As of March 31, 2022, we had $554.2 million in available borrowing capacity under our Revolving Credit Facility, after giving effect to outstanding letters of credit and certain borrowings under the Company's international lines of credit, and $100.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of $61.2 million, provided liquidity of $715.4 million. Cash included
27
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
in our determination of liquidity represents cash in certain deposit and interest-bearing investment accounts. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions.
We regularly review our mix of fixed versus variable rate debt, and we may, from time to time, issue or retire borrowings and/or refinance existing debt in an effort to mitigate the impact of interest rate and foreign exchange rate fluctuations, and to maintain a cost-effective capital structure consistent with our anticipated capital requirements. As of March 31, 2022, approximately 58% of our debt portfolio was comprised of fixed rate debt. We believe our capital structure has an appropriate mix of fixed versus variable rate debt and secured versus unsecured instruments.
Over the next several quarters, it is expected that excess liquidity will be directed primarily at debt reduction, integration activities and potential acquisitions, and we expect to maintain sufficient liquidity through our credit facilities and cash balances. We believe cash provided by operations and financing activities will be adequate to cover our operational and business needs for at least the next twelve months.
We communicate on a regular basis with our lenders regarding our financial and working capital performance, and liquidity position. We were in compliance with all financial covenants and restrictions contained in our debt agreements as of March 31, 2022.
We also measure our ability to meet our debt obligations based on our financial leverage ratio, which was 3.6 as of March 31, 2022 and 3.9 as of December 31, 2021. Since our merger with Anixter, we have reduced our financial leverage by 2.1.
The following table sets forth our financial leverage ratio, which is a non-GAAP financial measure, for the periods presented:
| Twelve Months Ended | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In millions of dollars, except ratio) | |||||||||||
| Net income attributable to common stockholders | $ | 530.0 | $ | 408.0 | |||||||
| Net income attributable to noncontrolling interests | 1.4 | 1.0 | |||||||||
| Preferred stock dividends | 57.4 | 57.4 | |||||||||
| Provision for income taxes | 146.6 | 115.5 | |||||||||
| Interest expense, net | 261.3 | 268.1 | |||||||||
| Depreciation and amortization | 204.3 | 198.5 | |||||||||
| EBITDA | 1,201.0 | 1,048.5 | |||||||||
Other income, net(1) | (44.2) | (48.1) | |||||||||
| Stock-based compensation expense | 28.6 | 25.7 | |||||||||
| Merger-related and integration costs | 137.7 | 158.5 | |||||||||
| Net gain on divestitures | — | (8.9) | |||||||||
| Adjusted EBITDA | $ | 1,323.1 | $ | 1,175.7 | |||||||
| As of | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Short-term debt and current portion of long-term debt, net | $ | 70.3 | $ | 9.5 | |||||||
| Long-term debt, net | 4,836.7 | 4,701.5 | |||||||||
Debt discount and debt issuance costs(2) | 67.7 | 70.6 | |||||||||
Fair value adjustments to Anixter Senior Notes due 2023 and 2025(2) | (0.8) | (0.9) | |||||||||
| Total debt | 4,973.9 | 4,780.7 | |||||||||
| Less: Cash and cash equivalents | 201.5 | 212.6 | |||||||||
| Total debt, net of cash | $ | 4,772.4 | $ | 4,568.1 | |||||||
| Financial leverage ratio | 3.6 | 3.9 | |||||||||
28
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
(1)Other non-operating income for the twelve months ended March 31, 2022 and December 31, 2021 includes a $36.6 million curtailment gain resulting from the remeasurement of our pension obligations in the U.S. and Canada due to amending certain terms of such defined benefit plans.
(2)Debt is presented in the condensed consolidated balance sheets net of debt discount and debt issuance costs, and includes adjustments to record the long-term debt assumed in the merger with Anixter at its acquisition date fair value.
Note: Financial leverage ratio is a non-GAAP measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, excluding debt discount, debt issuance costs and fair value adjustments, net of cash, by adjusted EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as the trailing twelve months EBITDA before foreign exchange and other non-operating expenses (income), non-cash stock-based compensation expense, merger-related and integration costs, and net gain on the divestiture of Wesco's legacy utility and data communications businesses in Canada.
Most of the undistributed earnings of our foreign subsidiaries have been taxed in the U.S. under either the one-time tax on the deemed repatriation of undistributed foreign earnings, or the global intangible low-taxed income tax regime imposed by the Tax Cuts and Jobs Act of 2017. Future distributions of previously taxed earnings by our foreign subsidiaries should, therefore, result in minimal U.S. taxation. We continue to assert that the remaining undistributed earnings of our foreign subsidiaries are indefinitely reinvested. The distribution of earnings by our foreign subsidiaries in the form of dividends, or otherwise, may be subject to additional taxation. We believe that we are able to maintain sufficient liquidity for our domestic operations and commitments without repatriating cash from our foreign subsidiaries.
We finance our operating and investing needs primarily with borrowings under our Revolving Credit Facility, Receivables Facility, as well as uncommitted lines of credit entered into by certain of our foreign subsidiaries to support local operations, some of which are overdraft facilities. The Revolving Credit Facility has a borrowing limit of $1,350 million and the purchase limit under the Receivables Facility is $1,400 million. As of March 31, 2022, we had $758.0 million and $1,300 million outstanding under the Revolving Credit Facility and Receivables Facility, respectively. The maximum borrowing limits of our international lines of credit vary by facility and range between $0.6 million and $31.0 million. Our international lines of credit generally are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed by Wesco Distribution. Accordingly, certain borrowings under these lines directly reduce availability under our Revolving Credit Facility. As of March 31, 2022, we had $8.6 million outstanding under our international lines of credit.
On March 1, 2022, we amended our Receivables Facility to increase its borrowing capacity from $1,300 million to $1,400 million and extend its maturity date from June 21, 2024 to March 1, 2025. Additionally, the amendments to the Receivables Facility replaced the LIBOR-based interest rate option with SOFR-based interest rate options, including term SOFR and daily simple SOFR, and decreased the interest rate spread from 1.15% to 1.10%.
On March 1, 2022, we also amended our Revolving Credit Facility to, among other things, increase its borrowing capacity from $1,200 million to $1,350 million, extend its maturity date from June 22, 2025 to March 1, 2027, and replace its LIBOR-based interest rate option with SOFR-based interest rate options, including term SOFR and daily simple SOFR.
For additional disclosure regarding our debt instruments, including our outstanding indebtedness as of March 31, 2022, see Note 7, "Debt" of our Notes to the unaudited Condensed Consolidated Financial Statements.
An analysis of cash flow for the first three months of 2022 and 2021 follows:
Operating Activities
Net cash used in operations for the first three months of 2022 totaled $171.9 million, compared to $120.5 million of cash provided by operating activities for the first three months of 2021. Operating activities for the first three months of 2022 included net income of $181.6 million and non-cash adjustments to net income totaling $57.6 million, which were primarily comprised of depreciation and amortization of $47.0 million, stock-based compensation expense of $8.9 million, amortization of debt discount and debt issuance costs of $4.6 million, and deferred income taxes of $4.5 million. Other sources of cash in the first three months of 2022 included an increase in accounts payable of $200.0 million due to higher purchases of inventory, an increase in other current and noncurrent liabilities of $80.0 million primarily due to interest accrued on our 7.125% Senior Notes due 2025 and 7.250% Senior Notes due 2028, as well as an increase in accrued income taxes payable, and a decrease in other accounts receivable of $17.8 million due primarily to the collection of supplier volume rebates earned in 2021 in excess of income accrued during the current period. Primary uses of cash in the first three months of 2022 included an increase in trade accounts receivable of $324.6 million resulting from higher sales in the latter part of the quarter, an increase in inventories of $214.2 million due to investments during the quarter to both address supply chain challenges and support our strong sales growth opportunities, a decrease in accrued payroll and benefit costs of $135.9 million resulting primarily from the payment of management incentive compensation earned in 2021, and an increase in other current and noncurrent assets of $34.2 million primarily due to an increase in capitalized costs associated with implementing cloud computing arrangements to support our digital transformation initiatives.
29
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Net cash provided by operating activities for the first three months of 2021 totaled $120.5 million, which included net income of $59.2 million and non-cash adjustments to net income totaling $31.1 million, which were primarily comprised of depreciation and amortization of $41.2 million, deferred income taxes of $13.1 million, net gain on Canadian divestitures of $8.9 million, stock-based compensation expense of $6.0 million, and amortization of debt discount and debt issuance costs of $6.0 million. Other sources of cash for the first three months of 2021 included an increase in accounts payable of $251.0 million due to higher purchases of inventory, an increase in other current and noncurrent liabilities of $40.5 million, a decrease in other current and noncurrent assets of $17.1 million, and a decrease in other accounts receivable of $7.6 million. Primary uses of cash in the first three months of 2021 included an increase in inventories of $124.8 million to support increased customer demand, an increase in trade accounts receivable of $117.4 million resulting from higher sales in the latter part of the quarter, and a decrease in accrued payroll and benefit costs of $43.8 million resulting primarily from the payment of management incentive compensation earned in 2020.
Investing Activities
Net cash used in investing activities for the first three months of 2022 was $15.1 million, compared to $44.5 million of net cash provided by investing activities during the first three months of 2021. Included in the first three months of 2022 was capital expenditures of $15.2 million, compared to $10.2 million for the three month period ended March 31, 2021. Included in the first three months of 2021 was $54.1 million of net proceeds from the divestiture of Wesco's legacy utility and data communications businesses in Canada.
Financing Activities
Net cash provided by financing activities for the first three months of 2022 was $167.1 million, compared to $312.2 million of net cash used in financing activities for the first three months of 2021. During the first three months of 2022, financing activities were primarily comprised of borrowings and repayments of $852.3 million and $692.2 million, respectively, related to our Revolving Credit Facility, and borrowings and repayments of $130.0 million and $100.0 million, respectively, related to our Receivables Facility. The first three months of 2022 also included $14.4 million of dividends paid to holders of our Series A Preferred Stock, net proceeds from our various international lines of credit of approximately $1.2 million, and $16.8 million of payments for taxes related to the exercise and vesting of stock-based awards.
During the first three months of 2021, financing activities consisted of the redemption of our $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021, borrowings and repayments of $713.6 million and $488.6 million, respectively, related to our Revolving Credit Facility, as well as borrowings and repayments of $243.0 million and $248.0 million, respectively, related to our Receivables Facility. Financing activities for the first three months of 2021 also included net repayments related to our various international lines of credit of approximately $8.5 million, and $14.4 million of dividends paid to holders of our Series A Preferred Stock.
Contractual Cash Obligations and Other Commercial Commitments
There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first and fourth quarters are usually affected by a reduced level of activity due to the impact of weather on projects. Sales typically increase beginning in March, with slight fluctuations per month through October. During periods of economic expansion or contraction, our sales by quarter have varied significantly from this pattern.
Critical Accounting Estimates
There have been no significant changes to the critical accounting estimates disclosed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Wesco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
30
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Recent Accounting Standards
See Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements for a description of recently adopted and recently issued accounting standards.
Forward-Looking Statements
All statements made herein that are not historical facts should be considered as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. These statements include, but are not limited to, statements regarding the expected benefits and costs of the transaction between Wesco and Anixter, including anticipated future financial and operating results, synergies, accretion and growth rates, and the combined company's plans, objectives, expectations and intentions, statements that address the combined company's expected future business and financial performance, and other statements identified by words such as "anticipate," "plan," "believe," "estimate," "intend," "expect," "project," "will" and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of Wesco's management, as well as assumptions made by, and information currently available to, Wesco's management, current market trends and market conditions and involve risks and uncertainties, many of which are outside of Wesco's and Wesco's management's control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements.
Those risks, uncertainties and assumptions include the risk of any unexpected costs or expenses resulting from the transaction, the risk that the transaction could have an adverse effect on the ability of the combined company to retain customers and retain and hire key personnel and maintain relationships with its suppliers, customers and other business relationships and on its operating results and business generally, or the risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected, the risk that the combined company may be unable to achieve synergies or other anticipated benefits of the transaction or it may take longer than expected to achieve those synergies or benefits, the risk that the leverage of the company may be higher than anticipated, the impact of natural disasters (including as a result of climate change), health epidemics, pandemics and other outbreaks, such as the ongoing COVID-19 pandemic, supply chain disruptions, and the impact of Russia's recent invasion of Ukraine, including the impact of sanctions or other actions taken by the U.S. or other countries, the increased risk of cyber incidents and exacerbation of key materials shortages, inflationary cost pressures, material cost increases, demand volatility, and logistics and capacity constraints, which may have a material adverse effect on the combined company's business, results of operations and financial condition, and other important factors that could cause actual results to differ materially from those projected. All such factors are difficult to predict and are beyond each company's control. Additional factors that could cause results to differ materially from those described above can be found in Wesco's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and Wesco's other reports filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
For a discussion of changes to the market risks that were previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by this report.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarterly period ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
As set forth in Note 10, "Commitments and Contingencies" to the Notes to the unaudited Condensed Consolidated Financial Statements, from time to time, a number of lawsuits and claims have been or may be asserted against us relating to the conduct of our business, including litigation relating to commercial, product and employment matters (including wage and hour). The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to us. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on our results of operations for that period.
Item 1A. Risk Factors.
Various of the risk factors previously disclosed in Item 1A. to Part I of Wesco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 address matters such as political instability, armed conflict, trade sanctions, cybersecurity, economic and financial market instability, supply chain challenges, commodity pricing and inflationary pressures. Russia’s invasion of Ukraine in the first quarter of 2022 and the resulting international response have heightened such risks. While Wesco’s business and operations have not been materially adversely affected thus far, the situation remains unstable and uncertain, and we are unable to predict the possible effects on us should the conflict escalate or be prolonged.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth all issuer purchases of common stock during the three months ended March 31, 2022:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs | |||||||||||||||||||
| January 1 – January 31, 2022 | 3,600 | $ | 129.49 | — | $ | — | |||||||||||||||||
| February 1 – February 28, 2022 | 129,944 | $ | 123.02 | — | $ | — | |||||||||||||||||
| March 1 – March 31, 2022 | 2,636 | $ | 129.04 | — | $ | — | |||||||||||||||||
| Total | 136,180 | $ | 123.31 | — | |||||||||||||||||||
(1) These shares were surrendered by stock-based compensation plan participants to satisfy tax withholding obligations arising from the exercise of stock-settled stock appreciation rights, and vesting of restricted stock units and performance-based awards.
Item 6. Exhibits.
(a)Exhibits
(10) Material Contracts
(1) Agreement, dated May 28, 2020, memorializing terms of employment of William Geary by WESCO International, Inc.
(31) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications
(1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
33
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WESCO International, Inc. | ||||||||
| (Registrant) | ||||||||
| May 6, 2022 | By: | /s/ David S. Schulz | ||||||
| (Date) | David S. Schulz | |||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| May 6, 2022 | By: | /s/ Matthew S. Kulasa | ||||||
| (Date) | Matthew S. Kulasa | |||||||
| Senior Vice President, Corporate Controller and Chief Accounting Officer | ||||||||
| (Principal Accounting Officer) | ||||||||
34