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 andWESCO 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 ofWESCO International, Inc.'s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as well asWESCO International, Inc.'s other reports filed with theSecurities and Exchange Commission (the "SEC"). In addition to the results provided in accordance withU.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 toWESCO 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
(collectively, “Wesco” or the “Company”), headquartered in
Pennsylvania
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.
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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
TheUBS segment, with over 2,400 employees supporting customers primarily in theU.S. andCanada , 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. TheUBS segment also includesWesco'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. TheUBS 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
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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 OnMarch 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 ofMarch 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 inMarch 2027 andMarch 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)
Foreign Exchange Organic Sales
March 31, 2022 March 31, 2021 Reported Divestiture Impact Impact Workday Impact 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
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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
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 ofMarch 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 endedMarch 31, 2022 and 2021, respectively. Due to fluctuations in theU.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 endedMarch 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 endedMarch 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:
(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
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
(1) The adjustments to income from operations have been tax effected at rates of approximately 26% and 22% for the three months endedMarch 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
Diluted shares 52,237 51,708 Adjusted earnings per diluted share $
3.63 $ 1.43
Note: For the three months endedMarch 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 endedMarch 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 ofWesco's legacy utility and data communications businesses inCanada , 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
million
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
million
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 ofWesco's legacy utility and data communications businesses inCanada . 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 ofMarch 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 ofMarch 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 ofMarch 31, 2022 . We also measure our ability to meet our debt obligations based on our financial leverage ratio, which was 3.6 as ofMarch 31, 2022 and 3.9 as ofDecember 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, December 31,
2022 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, December 31,
2022 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
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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
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 endedMarch 31, 2021 . Included in the first three months of 2021 was$54.1 million of net proceeds from the divestiture ofWesco's legacy utility and data communications businesses inCanada .
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
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" ofWesco's Annual Report on Form 10-K for the fiscal year endedDecember 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 betweenWesco 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 ofWesco'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 ofWesco's andWesco'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 ofRussia's recent invasion ofUkraine , including the impact of sanctions or other actions taken by theU.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 inWesco's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 andWesco's other reports filed with theSEC .
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