WESCO INTERNATIONAL INC [WCC] Filings

10-Q 1 wcc-20210930.htm 10-Q wcc-20210930

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 September 30, 2021


☐						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 1/1,00th 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 November 4, 2021, 50,409,946 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

Item 1. Financial Statements.			2

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.			25

Item 3. Quantitative and Qualitative Disclosures About Market Risk.			46

Item 4. Controls and Procedures.			46

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.			47

Item 1A. Risk Factors.			47

Item 6. Exhibits.			48

Signatures			49

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

Condensed Consolidated Balance Sheets (unaudited)			3
Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)			4
Condensed Consolidated Statements of Cash Flows (unaudited)			5
Condensed Consolidated Statements of Stockholders' Equity (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			8

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)


	As of
Assets	September 30, 2021		December 31, 2020
Current assets:
Cash and cash equivalents	$	251,799	$	449,135
Trade accounts receivable, net of allowance for expected credit losses of $38,550 and $23,909 in 2021 and 2020, respectively	2,955,632		2,466,903
Other accounts receivable	323,597		239,199
Inventories	2,569,798		2,163,831
Prepaid expenses and other current assets	114,670		187,910
Total current assets	6,215,496		5,506,978
Property, buildings and equipment, net of accumulated depreciation of $352,586 and $312,106 in 2021 and 2020, respectively	369,815		399,157
Operating lease assets	540,173		534,705
Intangible assets, net	1,977,841		2,065,495
Goodwill	3,201,688		3,187,169
Other assets	176,005		131,637
Assets held for sale	—		55,073
Total assets	$	12,481,018	$	11,880,214
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,246,454	$	1,707,329
Accrued payroll and benefit costs	285,362		198,535
Short-term debt and current portion of long-term debt, net of debt issuance costs of $1,039 in 2020	19,292		528,830
Other current liabilities	586,991		552,301
Total current liabilities	3,138,099		2,986,995
Long-term debt, net of debt discount and debt issuance costs of $74,222 and $87,142 in 2021 and 2020, respectively	4,565,772		4,369,953
Operating lease liabilities	421,831		414,889
Deferred income taxes	485,548		488,261
Other noncurrent liabilities	287,951		278,010
Liabilities held for sale	—		5,717
Total liabilities	$	8,899,201	$	8,543,825
Commitments and contingencies (Note 11)
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 2021 and 2020	—		—
Common stock, $.01 par value; 210,000,000 shares authorized, 68,049,518 and 67,596,515 shares issued, and 50,408,102 and 50,064,985 shares outstanding in 2021 and 2020, respectively	681		676
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued and no shares outstanding in 2021 and 2020, respectively	43		43
Additional capital	1,961,369		1,942,810
Retained earnings	2,851,747		2,601,662
Treasury stock, at cost; 21,980,847 and 21,870,961 shares in 2021 and 2020, respectively	(950,004)		(938,335)
Accumulated other comprehensive loss	(275,351)		(263,134)
Total WESCO International, Inc. stockholders' equity	3,588,485		3,343,722
Noncontrolling interests	(6,668)		(7,333)
Total stockholders’ equity	3,581,817		3,336,389
Total liabilities and stockholders’ equity	$	12,481,018	$	11,880,214

The accompanying notes are an integral part of the condensed consolidated financial statements.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2021		2020		2021		2020
Net sales	$	4,728,325	$	4,141,801	$	13,365,592	$	8,197,154
Cost of goods sold (excluding depreciation and amortization)	3,720,332		3,356,259		10,581,406		6,641,438
Selling, general and administrative expenses	721,795		561,971		2,057,952		1,221,114
Depreciation and amortization	56,732		45,476		144,645		80,324
Income from operations	229,466		178,095		581,589		254,278
Interest expense, net	69,720		74,540		207,683		152,281
Other income, net	(5,320)		(777)		(8,929)		(1,463)
Income before income taxes	165,066		104,332		382,835		103,460
Provision for income taxes	44,870		24,294		84,201		23,707
Net income	120,196		80,038		298,634		79,753
Less: Net income (loss) attributable to noncontrolling interests	600		(640)		665		(825)
Net income attributable to WESCO International, Inc.	119,596		80,678		297,969		80,578
Less: Preferred stock dividends	14,352		14,511		43,056		15,787
Net income attributable to common stockholders	$	105,244	$	66,167	$	254,913	$	64,791
Other comprehensive income:
Foreign currency translation adjustments and other	(50,277)		41,428		(12,217)		(9,689)
Comprehensive income attributable to common stockholders	$	54,967	$	107,595	$	242,696	$	55,102

Earnings per share attributable to common stockholders
Basic	$	2.09	$	1.32	$	5.07	$	1.44
Diluted	$	2.02	$	1.31	$	4.91	$	1.44

The accompanying notes are an integral part of the condensed consolidated financial statements.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended
	September 30
	2021		2020
Operating activities:
Net income	$	298,634	$	79,753
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	144,645		80,324
Stock-based compensation expense	22,784		15,529
Amortization of debt discount and debt issuance costs	15,290		6,301
Gain on sale of assets and divestitures, net	(8,927)		(19,816)
Other operating activities, net	8,604		(3,777)
Deferred income taxes	(5,340)		(8,261)
Changes in assets and liabilities:
Trade accounts receivable, net	(521,491)		3,584
Other accounts receivable	(84,326)		(14,702)
Inventories	(428,405)		77,681
Other current and noncurrent assets	19,299		(26,655)
Accounts payable	550,858		80,489
Accrued payroll and benefit costs	65,136		25,872
Other current and noncurrent liabilities	95,909		122,616
Net cash provided by operating activities	172,670		418,938
Investing activities:
Capital expenditures	(25,170)		(42,562)
Acquisition payments (Note 4)	—		(3,707,575)
Proceeds from divestitures (Note 4)	56,010		—
Other investing activities, net	5,766		26,240
Net cash provided by (used in) investing activities	36,606		(3,723,897)
Financing activities:
Repayments of short-term debt, net	(10,288)		(9,824)
Repayment of 5.375% Senior Notes due 2021 (Note 8)	(500,000)		—
Repayment of 5.375% Senior Notes due 2024 (Note 8)	(354,704)		—
Proceeds from issuance of long-term debt	2,470,306		4,661,830
Repayments of long-term debt	(1,935,655)		(1,045,667)
Payments for taxes related to net-share settlement of equity awards	(20,784)		(2,032)
Payment of dividends	(43,056)		(15,787)
Debt issuance costs	(1,849)		(79,945)
Other financing activities, net	(14,174)		(1,255)
Net cash (used in) provided by financing activities	(410,204)		3,507,320

Effect of exchange rate changes on cash and cash equivalents	3,592		(1,014)
Net change in cash and cash equivalents	(197,336)		201,347
Cash and cash equivalents at the beginning of period	449,135		150,902
Cash and cash equivalents at the end of period	$	251,799	$	352,249
Supplemental disclosures:
Cash paid for interest	$	141,594	$	36,035
Cash paid for income taxes	$	53,759	$	44,994
Right-of-use assets obtained in exchange for new operating lease liabilities	$	120,384	$	80,626

The accompanying notes are an integral part of the condensed consolidated financial statements.

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, 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												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)
Exercise of stock-based awards	2		194,615							(1)				(7,942)		(74,698)
Stock-based compensation expense										7,225
Tax withholding related to vesting of restricted stock units and retirement of common stock	—		(1,520)							(88)		(49)
Noncontrolling interests																	89
Net income attributable to WESCO												119,195
Preferred stock dividends												(14,352)
Translation adjustments and other																			21,219
Balance, June 30, 2021	$	680	67,919,962	$	43	4,339,431	$	—	21,612	$	1,953,653	$	2,750,665	$	(947,698)	(21,960,989)	$	(7,268)	$	(225,074)
Exercise of stock-based awards	2		187,770							(2)				(2,306)		(19,858)
Stock-based compensation expense										9,605
Tax withholding related to vesting of restricted stock units and retirement of common stock	(1)		(58,214)							(1,887)		(4,162)
Noncontrolling interests																	600
Net income attributable to WESCO												119,596
Preferred stock dividends												(14,352)
Translation adjustments and other																			(50,277)
Balance, September 30, 2021	$	681	68,049,518	$	43	4,339,431	$	—	21,612	$	1,961,369	$	2,851,747	$	(950,004)	(21,980,847)	$	(6,668)	$	(275,351)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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, 2019	$	593	59,308,018	$	43	4,339,431	$	—	—	$	1,039,347	$	2,530,429	$	(937,157)	(21,850,356)	$	(6,812)	$	(367,772)
Exercise of stock-based awards	1		105,620							(39)				79		2,020
Stock-based compensation expense										4,626
Tax withholding related to vesting of restricted stock units and retirement of common stock	—		(31,680)							(2,297)		761
Noncontrolling interests																	(232)
Net income attributable to WESCO												34,407
Translation adjustments and other																			(93,851)
Balance, March 31, 2020	$	594	59,381,958	$	43	4,339,431	$	—	—	$	1,041,637	$	2,565,597	$	(937,078)	(21,848,336)	$	(7,044)	$	(461,623)
Exercise of stock-based awards	—		30,665							—				(437)		(10,858)
Stock-based compensation expense										4,901
Tax withholding related to vesting of restricted stock units and retirement of common stock	—		(652)							(37)		27
Capital stock issuance	82		8,150,228				—		21,612	886,740
Noncontrolling interests																	47
Net loss attributable to WESCO												(34,506)
Preferred stock dividends												(1,276)
Translation adjustments and other																			42,734
Balance, June 30, 2020	$	676	67,562,199	$	43	4,339,431	$	—	21,612	$	1,933,241	$	2,529,842	$	(937,515)	(21,859,194)	$	(6,997)	$	(418,889)
Exercise of stock-based awards	—		479							—				(5)		(107)
Stock-based compensation expense										6,002
Tax withholding related to vesting of restricted stock units and retirement of common stock	—		(57)							(3)		13
Capital stock issuance										(139)
Noncontrolling interests																	(640)
Net income attributable to WESCO												80,678
Preferred stock dividends												(14,511)
Translation adjustments and other																			41,428
Balance, September 30, 2020	$	676	67,562,621	$	43	4,339,431	$	—	21,612	$	1,939,101	$	2,596,022	$	(937,520)	(21,859,301)	$	(7,637)	$	(377,461)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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 organized around 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 2020 Annual Report on Form 10-K as filed with the SEC on March 1, 2021. The Condensed Consolidated Balance Sheet at December 31, 2020 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 September 30, 2021, the unaudited Condensed Consolidated Statements of Income and Comprehensive Income, the unaudited Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2021 and 2020, and the unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, 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 nine months ended September 30, 2020, a gain on sale of assets of $19.8 million, stock-based compensation of $15.5 million, and amortization of debt discount and debt issuance costs of $6.3 million have been reclassified from other operating activities, net in the unaudited Condensed Consolidated Statement of Cash Flows. These reclassifications have been made to conform to the current period presentation.

Change in Estimates

During the second quarter of 2021, the Company established a new corporate brand strategy that will result in migrating certain legacy WESCO sub-brands to a master brand architecture. The Company accounts for the trademarks associated with these sub-brands as intangible assets. As of December 31, 2020, $39.1 million of the trademarks impacted by the master brand strategy had indefinite lives and $9.5 million had remaining estimated useful lives ranging from 3 to 8 years. The Company continually evaluates whether events or circumstances have occurred that would require a change to the estimated useful lives of indefinite-lived and definite lived intangible assets. When such a change is warranted, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. Accordingly, during the second quarter of 2021, the Company changed the estimated useful lives of the trademarks affected by the new corporate brand strategy to coincide with the expected period of time to migrate such sub-brands to the master brand architecture. The Company assigned remaining estimated useful lives to these trademarks, including those that previously had indefinite lives, ranging from less than one year to 5 years. The Company assessed these intangible assets for impairment prior to amortizing them over their revised estimated remaining useful lives. No impairment losses were identified as a result of these tests.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of Accounting Standards Codification ("ASC") Topic 740, Income Taxes, and simplifies other aspects of accounting for income taxes. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company adopted this ASU in the first quarter of 2021. The adoption of this guidance did not have a material impact on the consolidated financial statements and notes thereto presented herein.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued 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. Management is currently evaluating the impact related to the replacement of London Interbank Offered Rate ("LIBOR") and whether the Company will elect the adoption of the optional guidance.

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.

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				Nine Months Ended
	September 30				September 30
(In thousands)	2021		2020		2021		2020
EES	$	1,982,485	$	1,653,726	$	5,626,309	$	3,811,498
CSS	1,488,689		1,388,791		4,200,424		1,953,967
UBS	1,257,151		1,099,284		3,538,859		2,431,689
Total by segment	$	4,728,325	$	4,141,801	$	13,365,592	$	8,197,154


	Three Months Ended				Nine Months Ended
	September 30				September 30
(In thousands)	2021		2020		2021		2020
United States	$	3,407,437	$	3,033,101	$	9,656,183	$	6,100,877
Canada	709,507		582,700		2,020,395		1,311,724
Other International(1)	611,381		526,000		1,689,014		784,553
Total by geography	$	4,728,325	$	4,141,801	$	13,365,592	$	8,197,154

(1) No individual country's net sales are greater than 10% of total net sales.

In accordance with certain contractual arrangements, WESCO receives payment from certain of its customers in advance and recognizes such payment as deferred revenue. Revenue for advance payment is recognized 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 customer’s advance payment. At September 30, 2021 and December 31, 2020, $44.5 million and $24.3 million, respectively, of deferred revenue was recorded as a component of other current liabilities in the Condensed Consolidated Balance Sheets.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

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 September 30, 2021 and 2020 by approximately $95.5 million and $75.4 million, respectively, and by approximately $274.7 million and $129.0 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company's estimated product return obligation was $37.8 million and $38.9 million, respectively.

Shipping and handling activities are recognized in net sales when they are billed to the customer. 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 $63.5 million and $55.5 million for the three months ended September 30, 2021 and 2020, respectively, and $179.5 million and $94.4 million for the nine months ended September 30, 2021 and 2020, respectively.

4. ACQUISITIONS AND DISPOSALS

Anixter International Inc.

On June 22, 2020, WESCO completed its acquisition of Anixter International Inc. ("Anixter"), a Delaware corporation. Pursuant to the terms of the Agreement and Plan of Merger, dated January 10, 2020 (the “Merger Agreement”), by and among Anixter, WESCO and Warrior Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of WESCO (“Merger Sub”), Merger Sub was merged with and into Anixter (the “Merger”), with Anixter surviving the Merger and continuing as a wholly owned subsidiary of WESCO. On June 23, 2020, Anixter merged with and into Anixter Inc., with Anixter Inc. surviving to become a wholly owned subsidiary of WESCO.

The Company used the net proceeds from the issuance of senior unsecured notes, borrowings under its revolving credit and accounts receivable securitization facilities, as well as cash on hand, to finance the acquisition of Anixter and related transaction costs.

At the effective time of the Merger, each outstanding share of common stock of Anixter (subject to limited exceptions) was converted into the right to receive (i) $72.82 in cash, (ii) 0.2397 shares of common stock of WESCO, par value $0.01 per share (the “WESCO Common Stock”) and (iii) 0.6356 depositary shares, each representing a 1/1,000th interest in a share of newly issued fixed-rate reset cumulative perpetual preferred stock of WESCO, Series A, with a $25,000 stated amount per whole preferred share and an initial dividend rate equal to 10.625%.

Anixter was a leading distributor of network and security solutions, electrical and electronic solutions, and utility power solutions with locations in over 300 cities across approximately 50 countries, and 2019 annual sales of more than $8 billion. The Merger brought together two companies with highly compatible capabilities and characteristics. The combination of WESCO and Anixter created an enterprise with scale and has afforded the Company the opportunity to digitize its business and expand its services portfolio and supply chain offerings.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

The total fair value of consideration transferred for the Merger consisted of the following:


	(In thousands)
Cash portion attributable to common stock outstanding	$	2,476,010
Cash portion attributable to options and restricted stock units outstanding	87,375
Fair value of cash consideration	2,563,385
Common stock consideration	313,512
Series A preferred stock consideration	573,786
Fair value of equity consideration	887,298
Extinguishment of Anixter obligations, including accrued and unpaid interest	1,247,653
Total purchase consideration	$	4,698,336
Supplemental cash flow disclosure related to acquisitions:
Cash paid for acquisition	$	3,811,038
Less: Cash acquired	(103,463)
Cash paid for acquisition, net of cash acquired	$	3,707,575

The Merger was accounted for as a business combination with WESCO acquiring Anixter in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the purchase consideration was allocated to the identified assets acquired and liabilities assumed based on their respective acquisition date fair value, with any excess allocated to goodwill. The fair value estimates were based on income, market and cost valuation methods using primarily unobservable inputs developed by management, which are categorized as Level 3 in the fair value hierarchy. Specifically, the fair values of the identified trademark and customer relationship intangible assets were estimated using the relief-from-royalty and multi-period excess earnings methods, respectively. Significant inputs used to value these identifiable intangible assets included projected revenues and expected operating margins, customer attrition rates, discount rates, royalty rates, and applicable income tax rates. The excess purchase consideration recorded to goodwill is not deductible for income tax purposes, and has been assigned to the Company's reportable segments based on their relative fair values, as disclosed in Note 5, "Goodwill and Intangible Assets". The resulting goodwill is primarily attributable to Anixter's workforce, significant cross-selling opportunities in additional geographies, enhanced scale, and other operational efficiencies.

During the second quarter of 2021, the Company finalized its allocation of the purchase consideration to the respective fair values of assets acquired and liabilities assumed in the acquisition of Anixter. As the Company obtained additional information during the measurement period (one year from the acquisition date), it recorded adjustments to its preliminary estimates of fair value, which are presented in the table below. The net impact of these adjustments was an increase to goodwill of $13.4 million in the second quarter of 2021 and $16.4 million since the Company's initial estimate.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

The following table sets forth the allocation of the purchase consideration to the respective fair value of assets acquired and liabilities assumed for the acquisition of Anixter:


	Preliminary Fair Value Estimates		Measurement Period Adjustments		Final Purchase Price Allocation
Assets	(In thousands)
Cash and cash equivalents	$	103,463	$	—	$	103,463
Trade accounts receivable	1,309,894		(8,928)		1,300,966
Other accounts receivable	116,386		—		116,386
Inventories	1,424,768		(14,906)		1,409,862
Prepaid expenses and other current assets	53,462		14,202		67,664
Property, buildings and equipment	215,513		(3,792)		211,721
Operating lease assets	262,238		18,047		280,285
Intangible assets	1,832,700		5,365		1,838,065
Goodwill	1,367,981		16,356		1,384,337
Other assets	114,258		25,589		139,847
Total assets	$	6,800,663	$	51,933	$	6,852,596

Liabilities
Accounts payable	$	920,163	$	(1,239)	$	918,924
Accrued payroll and benefit costs	69,480		—		69,480
Short-term debt and current portion of long-term debt	13,225		—		13,225
Other current liabilities	221,574		12,745		234,319
Long-term debt	77,822		(205)		77,617
Operating lease liabilities	200,286		17,017		217,303
Deferred income taxes	392,165		(15,111)		377,054
Other noncurrent liabilities	207,612		38,726		246,338
Total liabilities	$	2,102,327	$	51,933	$	2,154,260

Fair value of net assets acquired, including goodwill and intangible assets	$	4,698,336	$	—	$	4,698,336

The following table sets forth the identifiable intangible assets and their estimated weighted-average useful lives:


Identifiable Intangible Assets	Estimated Fair Value		Weighted-Average Estimated Useful Life in Years(1)
	(In thousands)
Customer relationships	$	1,098,900	19
Trademarks	735,000		Indefinite
Non-compete agreements	4,165		2
Total identifiable intangible assets	$	1,838,065

(1) During the three months ended December 31, 2020, the Company recorded measurement period adjustments to the estimated useful lives initially assigned to customer relationships, which resulted in income of $6.4 million.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

The results of operations of Anixter are included in the unaudited condensed consolidated financial statements beginning on June 22, 2020, the acquisition date. For the three and nine months ended September 30, 2021, the condensed consolidated statements of income include $2.5 billion and $7.0 billion of net sales, respectively, and $165.8 million and $437.3 million of income from operations, respectively, for Anixter. For the three and nine months ended September 30, 2020, the condensed consolidated statements of income include $2.2 billion and $2.4 billion of net sales, respectively, $80.0 million and $98.4 million of income from operations for Anixter. For the three months ended September 30, 2021 and 2020, the Company incurred costs related to the Merger of $35.8 million and $14.2 million, respectively, which primarily consist of advisory, legal, integration, separation and other costs. For the nine months ended September 30, 2021 and 2020, such costs were $119.8 million and $92.1 million, respectively. These costs are included in selling, general and administrative expenses for all periods presented.

Pro Forma Financial Information

The following unaudited pro forma financial information presents combined results of operations for the periods presented, as if the Company had completed the Merger on January 1, 2019. The unaudited pro forma financial information includes adjustments to amortization and depreciation for intangible assets and property, buildings and equipment, adjustments to interest expense for the additional indebtedness incurred to complete the acquisition (including the amortization of debt discount and issuance costs), transaction costs, change in control and severance costs, dividends accrued on the Series A preferred stock, compensation expense associated with the WESCO phantom stock unit awards described in Note 9, "Employee Benefit Plans", as well as the respective income tax effects of such adjustments. For the three and nine months ended September 30, 2020, adjustments totaling $1.3 million and $5.5 million, respectively increased the unaudited pro forma net income attributable to common stockholders. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that WESCO may achieve as a result of its acquisition of Anixter, the costs to integrate the operations of WESCO and Anixter or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. The unaudited pro forma financial information presented below is not necessarily indicative of consolidated results of operations of the combined business had the acquisition occurred at the beginning of the respective periods, nor is it necessarily indicative of future results of operations of the combined company.


	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2020		September 30, 2020
Pro forma net sales(1)	$	4,141,801	$	11,888,061
Pro forma net income attributable to common stockholders(1)	66,651		112,717

(1) The Company reported pro forma net sales and pro forma net income attributable to common stockholders for the three and nine months ended September 30, 2020 in the Notes to Condensed Consolidated Financial Statements of its Quarterly Report on Form 10-Q for the period ended September 30, 2020 of $4,111.7 million and $11,802.5 million, respectively, and $63.8 million and $106.9 million, respectively. These amounts excluded the financial results of WESCO's legacy utility and data communications businesses in Canada, which were divested in the first quarter of 2021 under a Consent Agreement with the Competition Bureau of Canada, as described below.

Canadian Divestitures

On August 6, 2020, the Company entered into a Consent Agreement with the Competition Bureau of Canada regarding the merger with Anixter. Under the Consent Agreement, the Company was required to divest certain legacy WESCO utility and data communications businesses in Canada. In February 2021, the Company completed such divestitures for cash consideration totaling $56.0 million. The Company recognized a net gain from the sale of these businesses of $8.9 million, which is reported as a component of selling, general and administrative expenses for the nine months ended September 30, 2021. These sales fulfilled the Company’s divestiture commitments under the Consent Agreement and the net cash proceeds were used to repay debt.

WESCO INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table sets forth the changes in the carrying value of goodwill:


	Nine Months Ended
	September 30, 2021
	EES		CSS		UBS		Total
	(In thousands)
Beginning balance January 1(1)	$	853,456	$	1,115,500	$	1,218,213	$	3,187,169
Adjustments to goodwill for acquisitions (Note 4)(2)	1,124		8,602		4,215		13,941
Foreign currency exchange rate changes	1,679		(2,188)		1,087		578
Ending balance September 30	$	856,259	$	1,121,914	$	1,223,515	$	3,201,688

(1) The beginning balance excludes $26.1 million of goodwill that was classified as held for sale in the UBS segment as of December 31, 2020 and disposed in the first quarter of 2021 as part of the divestitures disclosed in Note 4, "Acquisitions and Disposals".

(2) Includes the effect on goodwill of the adjustments to the assets acquired and liabilities assumed in the merger with Anixter since their initial measurement, as described in Note 4, "Acquisitions and Disposals".

Intangible Assets

The components of intangible assets are as follows:


		September 30, 2021						December 31, 2020
	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	$	794,915	$	—	$	794,915	$	833,793	$	—	$	833,793
Customer relationships(2)	10 - 20	1,431,265		(287,565)		1,143,700		1,434,554		(227,585)		1,206,969
Distribution agreements(2)	10 -

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