Wesco International Inc 10-Q for FY2021 Q2
Wesco International Inc (WCC)
10-Q
2021-08-06
For: 2021-06-30
View Original
Added on
April 04, 2026
About this 10-Q
Wesco International Inc filed this 10-Q on August 6, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.6B
- up 120.2% from $2.09B a year earlier
- Net income
- $119.2M
- compared with a net loss of $34.51M a year earlier
- Diluted EPS
- $2.02
- compared with -$0.84 a year earlier
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 June 30, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period from to
Commission File Number: 001-14989
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
Suite 700 | |||||||||||
| (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 | ||||||||||||
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.
| ☑ | 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 August 5, 2021, 50,374,291 shares of common stock, $0.01 par value, of the registrant were outstanding.
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| Page | |||||
| PART I—FINANCIAL INFORMATION | |||||
| PART II—OTHER INFORMATION | |||||
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial information required by this item is set forth in the unaudited Condensed Consolidated Financial Statements and Notes thereto in this Quarterly Report on Form 10-Q, as follows:
| Page | |||||
2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
| As of | |||||||||||
| Assets | June 30, 2021 | December 31, 2020 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts receivable, net of allowance for expected credit losses of $ | |||||||||||
| Other accounts receivable | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property, buildings and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Assets held for sale | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and benefit costs | |||||||||||
Short-term debt and current portion of long-term debt, net of debt issuance costs of $ | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
Long-term debt, net of debt discount and debt issuance costs of $ | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Liabilities held for sale | |||||||||||
| Total liabilities | $ | $ | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Preferred stock, Series A, $ | |||||||||||
Common stock, $ | |||||||||||
Class B nonvoting convertible common stock, $ | |||||||||||
| Additional capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total WESCO International, Inc. stockholders' equity | |||||||||||
| Noncontrolling interests | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold (excluding depreciation and amortization) | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Provision for income taxes | ( | ( | |||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interests | ( | ||||||||||||||||||||||
| Net income (loss) attributable to WESCO International, Inc. | ( | ( | |||||||||||||||||||||
| Less: Preferred stock dividends | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to common stockholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Earnings (loss) per share attributable to common stockholders | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
| Six Months Ended | |||||||||||
| June 30 | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of debt discount and debt issuance costs | |||||||||||
| Gain on divestitures, net (Note 4) | ( | ||||||||||
| Other operating activities, net | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Trade accounts receivable, net | ( | ||||||||||
| Other accounts receivable | ( | ||||||||||
| Inventories | ( | ||||||||||
| Other current and noncurrent assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued payroll and benefit costs | |||||||||||
| Other current and noncurrent liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisition payments (Note 4) | ( | ||||||||||
| Proceeds from divestitures (Note 4) | |||||||||||
| Other investing activities, net | ( | ||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing activities: | |||||||||||
| Repayments of short-term debt, net | ( | ( | |||||||||
| Repayment of 5.375% Senior Notes due 2021 (Note 8) | ( | ||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Payments for taxes related to net-share settlement of equity awards | ( | ( | |||||||||
| Payment of dividends | ( | ||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Other financing activities, net | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at the beginning of period | |||||||||||
| Cash and cash equivalents at the end of period | $ | $ | |||||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except shares)
(unaudited)
| Accumulated Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B | Series A | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Preferred Stock | Additional | Earnings | Treasury Stock | Noncontrolling | Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Capital | (Deficit) | Amount | Shares | Interests | (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to WESCO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to WESCO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except shares)
(unaudited)
| Accumulated Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B | Series A | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Preferred Stock | Additional | Earnings | Treasury Stock | Noncontrolling | Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Capital | (Deficit) | Amount | Shares | Interests | (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to WESCO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units and retirement of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital stock issuance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to WESCO | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (1,276) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Translation adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | $ | $ | ( | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
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 June 30, 2021, the unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), the unaudited Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2021 and 2020, and the unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 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.
Prior to the completion of its merger with Anixter International Inc. ("Anixter") on June 22, 2020, as described in Note 4, "Acquisitions and Disposals", WESCO had four operating segments that had been aggregated as one reportable segment. Effective on the date of acquisition, the Company added Anixter as a separate reportable segment for the quarterly period ended June 30, 2020. At the beginning of the third quarter of 2020, the Company identified new operating segments organized around three strategic business units consisting of EES, CSS and UBS. These operating segments are equivalent to the Company's reportable segments. The operating segments in the respective periods were determined in accordance with the manner in which WESCO's chief operating decision maker ("CODM") reviewed financial information during those periods. The financial information used by the CODM to evaluate the performance of the Company's operating segments is disclosed in Note 13, "Business Segments". The applicable comparative financial information reported in the Company's previously issued interim financial statements for the three and six months ended June 30, 2020 has been recast in this Quarterly Report on Form 10-Q to conform to the basis of the new segments.
Reclassifications
For the three and six months ended June 30, 2020, $0.7 million and $0.8 million, respectively, of other non-operating income has been reclassified from "net interest and other" to "other income, net" in the unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss. For the six months ended June 30, 2020, stock-based compensation of $9.5 million and amortization of debt discount and debt issuance costs of $2.1 million have been reclassified from other operating activities in the unaudited Condensed Consolidated Statement of Cash Flows. These reclassifications have been made to conform to the current period presentation.
8
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
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.
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 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 | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| EES | $ | $ | $ | $ | |||||||||||||||||||
| CSS | |||||||||||||||||||||||
| UBS | |||||||||||||||||||||||
| Total by segment | $ | $ | $ | $ | |||||||||||||||||||
9
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
Other International(1) | |||||||||||||||||||||||
Total by geography(2) | $ | $ | $ | $ | |||||||||||||||||||
(1) No individual other international country's net sales are material.
(2) WESCO attributes revenues from external customers to individual countries on the basis of point of sale.
In accordance with certain contractual arrangements, WESCO receives payment from 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 June 30, 2021 and December 31, 2020, $43.0 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’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 June 30, 2021 and 2020 by approximately $112.4 million and $31.7 million , respectively, and by approximately $217.8 million and $54.9 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company's estimated product return obligation was $39.6 million and $38.9 million, respectively.
4. ACQUISITIONS AND DISPOSALS
Anixter International Inc.
On June 22, 2020, WESCO completed its acquisition of 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 %.
10
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 | $ | ||||
| Cash portion attributable to options and restricted stock units outstanding | |||||
| Fair value of cash consideration | |||||
| Common stock consideration | |||||
| Series A preferred stock consideration | |||||
| Fair value of equity consideration | |||||
| Extinguishment of Anixter obligations, including accrued and unpaid interest | |||||
| Total purchase consideration | $ | ||||
| Supplemental cash flow disclosure related to acquisitions: | |||||
| Cash paid for acquisition | $ | ||||
| Less: Cash acquired | ( | ||||
| Cash paid for acquisition, net of cash acquired | $ | ||||
The Merger was accounted for as a business combination with WESCO acquiring Anixter in accordance with Accounting Standards Codification (“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.
11
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 | $ | $ | — | $ | |||||||||||||
| Trade accounts receivable | ( | ||||||||||||||||
| Other accounts receivable | — | ||||||||||||||||
| Inventories | ( | ||||||||||||||||
| Prepaid expenses and other current assets | |||||||||||||||||
| Property, buildings and equipment | ( | ||||||||||||||||
| Operating lease assets | |||||||||||||||||
| Intangible assets | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Other assets | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Liabilities | |||||||||||||||||
| Accounts payable | $ | $ | ( | $ | |||||||||||||
| Accrued payroll and benefit costs | — | ||||||||||||||||
| Short-term debt and current portion of long-term debt | — | ||||||||||||||||
| Other current liabilities | |||||||||||||||||
| Long-term debt | ( | ||||||||||||||||
| Operating lease liabilities | |||||||||||||||||
| Deferred income taxes | ( | ||||||||||||||||
| Other noncurrent liabilities | |||||||||||||||||
| Total liabilities | $ | $ | $ | ||||||||||||||
| Fair value of net assets acquired, including goodwill and intangible assets | $ | $ | — | $ | |||||||||||||
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 | $ | |||||||||||||
| Trademarks | Indefinite | |||||||||||||
| Non-compete agreements | ||||||||||||||
| Total identifiable intangible assets | $ | |||||||||||||
(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.
12
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 six months ended June 30, 2021, the condensed consolidated statements of income include $2.5 billion and $4.6 billion of net sales, respectively, and $166.2 million and $271.6 million of income from operations, respectively, for Anixter. For the three and six months ended June 30, 2020, the condensed consolidated statements of loss include $221.9 18.4 37.7 million and $73.3 million, respectively, which primarily consist of advisory, legal, integration, separation and other costs. For the six months ended June 30, 2021 and 2020, such costs were $84.0 million and $78.0 million, respectively. These costs are included in selling, general and administrative expenses for all periods presented.
Pro Forma Financial Information
| Three Months Ended | Six Months Ended | ||||||||||
| (In thousands) | June 30, 2020 | June 30, 2020 | |||||||||
Pro forma net sales(1) | $ | $ | |||||||||
Pro forma net income attributable to common stockholders(1) | |||||||||||
(1) The Company reported pro forma net sales and pro forma net income attributable to common stockholders for the three and six months ended June 30, 2020 in the Notes to Condensed Consolidated Financial Statements of its Quarterly Report on Form 10-Q for the period ended June 30, 2020 of $3,678.5 million and $7,691.3 million, respectively, and $29.4 million and $47.4 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 $54.3 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 six months ended June 30, 2021. These sales fulfilled the Company’s divestiture commitments under the Consent Agreement and the net cash proceeds were used to repay debt.
13
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:
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2021 | |||||||||||||||||||||||
EES | CSS | UBS | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
Beginning balance January 1(1) | $ | $ | $ | $ | |||||||||||||||||||
Adjustments to goodwill for acquisitions (Note 4)(2) | |||||||||||||||||||||||
| Foreign currency exchange rate changes | |||||||||||||||||||||||
Ending balance June 30 | $ | $ | $ | $ | |||||||||||||||||||
(1) The beginning balance excludes $26.1 million of goodwill that was classified as held for sale on 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:
| June 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 | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||||
Customer relationships(2) | ( | ( | ||||||||||||||||||||||||||||||||||||
Distribution agreements(2) | ( | ( | ||||||||||||||||||||||||||||||||||||
Trademarks(2) | Less than 1 - | ( | ( | |||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
(1) Excludes the original cost and related accumulated amortization of fully-amortized intangible assets.
(2) The net carrying amount as of December 31, 2020 excluded $1.0 million of trademarks, $3.3 million of customer relationships and $1.4 million of distribution agreements that were classified as held for sale and disposed in the first quarter of 2021 as part of the divestitures disclosed in Note 4, "Acquisitions and Disposals".
Amortization expense related to intangible assets totaled $27.1 million and $10.1 million for the three months ended June 30, 2021 and 2020, respectively, and $48.7 million and $18.6 million for the six months ended June 30, 2021 and 2020, respectively. For the three and six months ended June 30, 2021, amortization expense includes $5.0 million resulting from the changes in estimated useful lives of certain legacy WESCO trademarks that are migrating to the Company's master brand architecture, as described in Note 2, "Accounting Policies".
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth the remaining estimated amortization expense for intangible assets for the next five years and thereafter:
| For year ending December 31, | (In thousands) | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
6. STOCK-BASED COMPENSATION
WESCO sponsors a stock-based compensation plan. On May 27, 2021, the Company's stockholders approved the WESCO International, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”). The 2021 Plan is administered by the Compensation Committee of the Company's Board of Directors.
The 2021 Plan was designed to be the successor plan to all prior stock-based compensation plans. Accordingly, no new awards may be granted under the Company’s 1999 Long-Term Incentive Plan, as amended and restated (the “1999 Plan”) or any other prior plan. Awards outstanding under any such prior plans will remain in full force and effect under such plans according to their respective terms. To the extent that any such award is forfeited, terminates, expires or lapses without being exercised, or is settled for cash, the shares subject to such award not delivered will again be available for awards under the 2021 Plan.
The maximum number of shares of the Company’s common stock that may be granted pursuant to awards under the 2021 Plan is 2,150,000, less any shares issued under the 1999 Plan after March 31, 2021 and until the annual stockholders meeting in May 2021. If any award granted under the 2021 Plan is forfeited, terminates, expires or lapses instead of being exercised, or is settled for cash, the shares subject to such award will again be available for grant under the 2021 Plan. Shares delivered by participants or withheld by the Company to pay all or a portion of the exercise price or withholding taxes with respect to stock option or stock appreciation right awards will not again be available for issuance. Shares delivered by participants or withheld by the Company to satisfy applicable tax withholding obligations with respect to a full-value award (i.e., restricted shares or restricted stock units) will again be available for grant under the 2021 Plan.
WESCO’s stock-based employee compensation awards outstanding under the 1999 Plan are comprised of stock-settled stock appreciation rights, restricted stock units and performance-based awards. Compensation cost for all stock-based awards is measured at fair value on the date of grant and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair value of stock-settled stock appreciation rights is determined using the Black-Scholes model. The fair value of restricted stock units and performance-based awards with performance conditions is determined by the grant-date closing price of WESCO’s common stock. The forfeiture assumption is based on WESCO’s historical employee behavior that is reviewed on an annual basis. No dividends are assumed. For stock-settled stock appreciation rights that are exercised and for restricted stock units and performance-based awards that vest, shares are issued out of WESCO's outstanding common stock.
Stock-settled stock appreciation rights vest ratably over a three-year period and terminate on the tenth anniversary of the grant date unless terminated sooner under certain conditions. Restricted stock unit awards granted in February 2020 and prior vest based on a minimum time period of three years. The special award described below vests in tranches. Restricted stock units awarded in 2021 vest ratably over a three-year period on each of the first, second and third anniversaries of the grant date. Vesting of performance-based awards is based on a three-year performance period, and the number of shares earned, if any, depends on the attainment of certain performance levels. Outstanding awards would vest upon the consummation of a change in control transaction and performance-based awards would vest at the target level.
On July 2, 2020, a special award of restricted stock units was granted to certain officers of the Company. These awards vest in tranches of 30% on each of the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, subject, in each case, to continued employment through the applicable anniversary date.
15
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Performance-based awards granted in 2021, 2020 and 2019 were based on two equally-weighted performance measures: the three-year average growth rate of WESCO's net income and the three-year cumulative return on net assets.
During the three and six months ended June 30, 2021 and 2020, WESCO granted the following stock-settled stock appreciation rights, restricted stock units and performance-based awards at the following weighted-average fair values:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||
| Stock-settled stock appreciation rights granted | |||||||||||||||||||||||
| Weighted-average fair value | $ | $ | $ | $ | |||||||||||||||||||
| Restricted stock units granted | |||||||||||||||||||||||
| Weighted-average fair value | $ | $ | $ | $ | |||||||||||||||||||
| Performance-based awards granted | |||||||||||||||||||||||
| Weighted-average fair value | $ | $ | $ | $ | |||||||||||||||||||
The fair value of stock-settled stock appreciation rights was estimated using the following weighted-average assumptions:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||
| Risk free interest rate | % | n/a | % | % | |||||||||||||||||||
| Expected life (in years) | n/a | ||||||||||||||||||||||
| Expected volatility | % | n/a | % | % | |||||||||||||||||||
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve as of the grant date. The expected life is based on historical exercise experience and the expected volatility is based on the volatility of the Company's daily stock price over the expected life preceding the grant date of the award.
The following table sets forth a summary of stock-settled stock appreciation rights and related information for the six months ended June 30, 2021:
| Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In years) | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
Outstanding at June 30, 2021 | $ | ||||||||||||||||||||||
Exercisable at June 30, 2021 | $ | $ | |||||||||||||||||||||
For the six months ended June 30, 2021, the aggregate intrinsic value of stock-settled stock appreciation rights exercised during such period was $24.9 million.
16
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth a summary of time-based restricted stock units and related information for the six months ended June 30, 2021:
| Awards | Weighted- Average Fair Value | ||||||||||
Unvested at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
Unvested at June 30, 2021 | $ | ||||||||||
The following table sets forth a summary of performance-based awards for the six months ended June 30, 2021:
| Awards | Weighted- Average Fair Value | ||||||||||
Unvested at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
Unvested at June 30, 2021 | $ | ||||||||||
Vesting of the 377,908 shares of performance-based awards in the table above is dependent upon the achievement of certain performance targets, including half that are dependent upon the three-year average growth rate of WESCO's net income and the other half that are based upon the three-year cumulative return on net assets. These awards are accounted for as awards with performance conditions; compensation cost is recognized over the performance period based upon WESCO's determination of whether it is probable that the performance targets will be achieved.
WESCO recognized $7.2 million and $4.9 million of non-cash stock-based compensation expense, which is included in selling, general and administrative expenses, for the three months ended June 30, 2021 and 2020, respectively. WESCO recognized $13.2 million and $9.5 55.3 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements for all awards previously made of which approximately $14.8 million is expected to be recognized over the remainder of 2021, $23.9 million in 2022, $15.2 million in 2023 and $1.4 million in 2024.
7. EARNINGS PER SHARE
17
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following table sets forth the details of basic and diluted earnings (loss) per share:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income (loss) attributable to WESCO International, Inc. | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Less: Preferred stock dividends | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Weighted-average common shares outstanding used in computing basic earnings per share | |||||||||||||||||||||||
Common shares issuable upon exercise of dilutive equity awards | |||||||||||||||||||||||
| Weighted-average common shares outstanding and common share equivalents, diluted | |||||||||||||||||||||||
| Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings (loss) per share | |||||||||||||||||||||||
| Earnings (loss) per share attributable to common stockholders | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
For the three and six months ended June 30, 2021, the computation of diluted earnings per share attributable to common stockholders excluded stock-based awards of approximately 0.1 3.0 million and 2.8 million, respectively. These amounts were excluded because their effect would have been antidilutive.
8. DEBT
The following table sets forth WESCO's outstanding indebtedness:
| As of | |||||||||||
| June 30, 2021 | December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| International lines of credit | $ | $ | |||||||||
| Accounts Receivable Securitization Facility | |||||||||||
| Revolving Credit Facility | |||||||||||
| 5.375% Senior Notes due 2021 | |||||||||||
| 5.50% Anixter Senior Notes due 2023 | |||||||||||
| 5.375% Senior Notes due 2024 | |||||||||||
| 6.00% Anixter Senior Notes due 2025 | |||||||||||
| 7.125% Senior Notes due 2025 | |||||||||||
7.250% Senior Notes due 2028, less debt discount of $ | |||||||||||
| Finance lease obligations | |||||||||||
| Total debt | |||||||||||
| Plus: Fair value adjustment to the Anixter Senior Notes | |||||||||||
| Less: Unamortized debt issuance costs | ( | ( | |||||||||
| Less: Short-term debt and current portion of long-term debt | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
18
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Accounts Receivable Securitization Facility
On June 1, 2021, WESCO Distribution amended its accounts receivable securitization facility (the “Receivables Facility”) pursuant to the terms and conditions of a Third Amendment to the Fifth Amended and Restated Receivables Purchase Agreement (the “Receivables Amendment”), by and among WESCO Receivables Corp. (“WESCO Receivables”), WESCO Distribution, the various purchaser groups from time to time party thereto and PNC Bank, National Association, as Administrator. The Receivables Amendment amends the amended and restated receivables purchase agreement entered into on June 22, 2020 (the “Receivables Purchase Agreement”). The Receivables Amendment, among other things, increased the purchase limit under the Receivables Purchase Agreement from $1,200 million to $1,300 million, extended the maturity date from June 22, 2023 to June 21, 2024, decreased the LIBOR floor from 0.50 % to 0.00 % and decreased the interest rate spread from 1.20 % to 1.15 %. The commitment fee of the Receivables Facility remained unchanged.
Under the Receivables Facility, WESCO sells, on a continuous basis, an undivided interest in all domestic accounts receivable to WESCO Receivables, a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables, in the form of overcollateralization. Since WESCO maintains control of the transferred receivables, the transfers do not qualify for “sale” treatment. As a result, the transferred receivables remain on the balance sheet, and WESCO recognizes the related secured borrowing. WESCO has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at market rates; accordingly, no servicing asset or liability has been recorded.
5.375% Senior Notes due 2021
In November 2013, WESCO Distribution issued $500 million aggregate principal amount of 5.375 % Senior Notes due 2021 (the "2021 Notes") through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 2021 Notes were issued at 100% of par and were governed by an indenture (the “2021 Indenture”) entered into on November 26, 2013 between WESCO International and U.S. Bank National Association, as trustee. The 2021 Notes were unsecured senior obligations of WESCO Distribution and were guaranteed on a senior unsecured basis by WESCO International. The 2021 Notes had a stated interest rate of 5.375 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The 2021 Notes had a maturity date of December 15, 2021 and were redeemable in whole or in part at any time. The net proceeds of the 2021 Notes were used to prepay a portion of the U.S. sub-facility of the then outstanding term loan due 2019.
Under the terms of a registration rights agreement dated as of November 26, 2013 among WESCO Distribution, WESCO International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the representative of the initial purchasers of the 2021 Notes, WESCO Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in all material respects to the 2021 Notes (the “2021 Exchange Notes”) and to make an offer to exchange the 2021 Exchange Notes for the 2021 Notes. WESCO Distribution launched the exchange offer on June 12, 2014 and the exchange offer expired on July 17, 2014.
On December 15, 2020, WESCO Distribution exercised its right to redeem the entire $500 million aggregate principal amount of the 2021 Notes, and U.S. Bank, National Association, as trustee under the 2021 Indenture, issued a notice of redemption to registered holders of the 2021 Notes.
On January 14, 2021, WESCO Distribution redeemed the $500 million aggregate principal amount of the 2021 Notes at a redemption price equal to 100 % of the principal amount plus accrued interest to, but not including, January 14, 2021. The redemption of the 2021 Notes was funded with available cash, as well as borrowings under the Company's accounts receivable securitization and revolving credit facilities. The Company recognized a loss of $1.0 million from the redemption of the 2021 Notes resulting from the the write-off of unamortized debt issuance costs, which is recorded as a component of interest expense, net in the Condensed Consolidated Statement of Income and Comprehensive Income for the six months ended June 30, 2021.
5.375% Senior Notes due 2024
In June 2016, WESCO Distribution issued $350 million aggregate principal amount of 5.375% Senior Notes due 2024 (the "2024 Notes") through a private offering exempt from the registration requirements of the Securities Act. The 2024 Notes were issued at 100% of par and are governed by an indenture (the “2024 Indenture”) entered into on June 15, 2016 among WESCO Distribution, as issuer, WESCO International, as parent guarantor, and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International. The 2024 Notes bear interest at a stated rate of 5.375% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The 2024 Notes mature on June 15, 2024. The Company used the net proceeds to redeem its 6.0% Convertible Senior Debentures due 2029.
19
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Under the terms of a registration rights agreement dated as of June 15, 2016 among WESCO Distribution, as the issuer, WESCO International, as parent guarantor, and Goldman, Sachs & Co., as representative of the initial purchasers of the 2024 Notes, WESCO Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in all material respects to the 2024 Notes (the “2024 Exchange Notes”) and to make an offer to exchange the 2024 Exchange Notes for the 2024 Notes. WESCO Distribution launched the exchange offer on December 28, 2016 and the exchange offer expired on January 31, 2017.
On June 2, 2021, WESCO Distribution exercised its right to redeem the entire $350 million aggregate principal amount of the 2024 Notes, and U.S. Bank, National Association, as trustee under the 2024 Indenture, issued a notice of redemption to registered holders of the 2024 Notes. The date fixed for the redemption of the 2024 Notes is July 2, 2021. Accordingly, the 2024 Notes are classified as a component of short-term debt and current portion of long-term debt in the Condensed Consolidated Balance Sheet as of June 30, 2021. The 2024 Notes will be redeemed at a redemption price equal to 101.344 % of the principal amount of the 2024 Notes plus accrued interest on the 2024 Notes to, but not including, July 2, 2021.
9. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
WESCO Distribution sponsors a defined contribution retirement savings plan for the majority of its U.S. employees. The Company matches contributions made by employees at an amount equal to 50 % of participants' total monthly contributions up to 6 % of eligible compensation. Contributions are made in cash and employees have the option to transfer balances allocated to their accounts into any of the available investment options. The Company may also make, subject to the Board of Directors' approval, a discretionary contribution to the defined contribution retirement savings plan covering U.S. participants if certain predetermined profit levels are attained.
WESCO Distribution Canada LP, a wholly-owned subsidiary of the Company, sponsors a defined contribution plan for certain Canadian employees. The Company makes contributions in amounts ranging from 3 % to 5 % of participants' eligible compensation based on years of continuous service.
Anixter Inc. sponsors a defined contribution plan covering all of its non-union U.S. employees (the "Anixter Employee Savings Plan"). The employer match for the Anixter Employee Savings Plan is equal to 50 % of a participant's contribution up to 5 % of the participant's compensation. Anixter Inc. will also make an annual contribution to the Anixter Employee Savings Plan on behalf of each active participant who is hired or rehired on or after July 1, 2015, or is not participating in the Anixter Inc. Pension Plan. The amount of the employer annual contribution is equal to either 2 % or 2.5 % of the participant’s compensation, as determined by the participant’s years of service. This contribution is in lieu of being eligible for the Anixter Inc. Pension Plan. Certain of Anixter Inc.'s foreign subsidiaries also have defined contribution plans. Contributions to these plans are based upon various levels of employee participation and legal requirements.
WESCO incurred charges of $16.1 million and $3.4 million for the three months ended June 30, 2021 and 2020, respectively, and $32.7 million and $9.1 million for the six months ended June 30, 2021 and 2020, respectively, for all defined contribution plans.
Deferred Compensation Plans
WESCO Distribution sponsors a non-qualified deferred compensation plan (the "WESCO Deferred Compensation Plan") that permits select employees to make pre-tax deferrals of salary and bonus. Employees have the option to transfer balances allocated to their accounts in the WESCO Deferred Compensation Plan into any of the available investment options. The WESCO Deferred Compensation Plan is an unfunded plan. As of June 30, 2021, the Company's obligation under the WESCO Deferred Compensation Plan was $19.3 million, which was included in other noncurrent liabilities in the Condensed Consolidated Balance Sheet. As of December 31, 2020, the Company's obligation under the WESCO Deferred Compensation Plan was $27.4 million, of which $10.1 million was included in other current liabilities and $17.3 million was in other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
Anixter Inc. sponsored a non-qualified deferred compensation plan (the "Anixter Deferred Compensation Plan") that permitted select employees to make pre-tax deferrals of salary and bonus. Interest was accrued monthly on the deferred compensation balances based on the average ten-year Treasury note rate for the previous three months times a factor of 1.4, and the rate was further adjusted if certain financial goals were achieved. In the fourth quarter of 2020, the Company terminated the Anixter Deferred Compensation Plan. Accordingly, the deferred compensation liability of $45.1 million was classified in other current liabilities in the Condensed Consolidated Balance Sheet at December 31, 2020. In the second quarter of 2021, the Company settled the liability for the Anixter Deferred Compensation Plan by making lump sum payments of $42.8 million directly to participants.
The Company held assets in a Rabbi Trust arrangement to provide for the liability associated with the Anixter Deferred Compensation Plan. The assets were invested in marketable securities. As of December 31, 2020, the assets held in this arrangement were $39.6 million and were recorded in other current assets in the Condensed Consolidated Balance Sheets. In the second quarter of 2021, the Company liquidated this investment arrangement for approximately $39.7 million and used the proceeds to fund the settlement of the Anixter Deferred Compensation Plan described above.
Defined Benefit Plans
WESCO sponsors a contributory defined benefit plan (the "EECOL Plan") covering substantially all Canadian employees of EECOL Electric Corp. and a Supplemental Executive Retirement Plan for certain executives of EECOL Electric Corp. (the "EECOL SERP").
Anixter Inc. sponsors defined benefit pension plans in the U.S., which consist of the Anixter Inc. Pension Plan, the Executive Benefit Plan and the Supplemental Executive Retirement Plan (the "Anixter SERP") (together, the "Domestic Plans") and various defined benefit pension plans covering employees of foreign subsidiaries in Canada and Europe (together with the "EECOL Plan" and "EECOL SERP", the "Foreign Plans"). The Anixter Inc. Pension Plan was frozen to entrants first hired or rehired on or after July 1, 2015. The majority of the Anixter defined benefit pension plans are non-contributory, and with the exception of U.S. and Canada, cover substantially all full-time employees in their respective countries. Retirement benefits are provided based on compensation as defined in each of the pension plans.
In the fourth quarter of 2020, the Company terminated both the Anixter Inc. Executive Benefit Plan and the Anixter SERP. Accordingly, pension liabilities totaling $18.1 million associated with the Anixter Inc. Executive Benefit Plan and the Anixter SERP were classified as current in the Condensed Consolidated Balance Sheet at December 31, 2020. In the second quarter of 2021, the Company settled its liability for the Anixter Inc. Executive Benefit Plan by making lump sum payments of $10.4 million directly to participants. The Company expects to make lump sum payments directly to participants of the Anixter SERP during the second half of 2021.
The Domestic Plans are funded as required by the Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Service and the Foreign Plans are funded as required by applicable foreign laws. The EECOL SERP and the Anixter SERP are unfunded plans.
The Company made aggregate cash contributions to its Foreign Plans of $3.1 million and $0.8 million during the three months ended June 30, 2021 and 2020, respectively, and $5.7 million and $1.8 million during the six months ended June 30, 2021 and 2020, respectively.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The following tables set forth the components of net periodic pension (benefit) cost for the Company's defined benefit plans:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (In thousands) | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
Domestic Plans(1) | Foreign Plans(1) | Total | |||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
Recognized actuarial gain(2) | |||||||||||||||||||||||||||||||||||
| Settlement | ( | ( | |||||||||||||||||||||||||||||||||
| Net periodic pension (benefit) cost | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| (In thousands) | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
Domestic Plans(1) | Foreign Plans(1) | Total | |||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
Recognized actuarial gain(2) | |||||||||||||||||||||||||||||||||||
| Settlement | ( | ( | |||||||||||||||||||||||||||||||||
| Net periodic pension (benefit) cost | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
(1) The Company assumed the Domestic Plans and certain foreign plans, as described above, in connection with the acquisition of Anixter on June 22, 2020. The Company began recognizing the net periodic pension (benefit) cost associated with these plans as of the acquisition date.
(2) For the three and six months ended June 30, 2021 and 2020, no amounts were reclassified from accumulated other comprehensive income into net income, respectively.
The service cost of $4.1 million and $1.7 million for the three months ended June 30, 2021 and 2020, respectively, and $8.1 million and $3.0 million for the six months ended June 30, 2021 and 2020, respectively, is reported as a component of selling, general and administrative expenses. The other components of net periodic pension (benefit) cost totaling net benefits of $4.2 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively, and net benefits of $8.2 million and $1.2 million for the six months ended June 30, 2021 and 2020, respectively, are presented as a component of other non-operating income ("other income, net").
Other Benefits
As permitted by the Merger Agreement, Anixter granted restricted stock units prior to June 22, 2020 in the ordinary course of business to its employees and directors. These awards, which did not accelerate solely as a result of the Merger, were converted into cash-only settled WESCO phantom stock units, which vest ratably over a 3 -year period. As of June 30, 2021 and December 31, 2020, the estimated fair value of these awards was $18.2 million and $22.8 million, respectively. The Company recognized compensation expense associated with these awards of $0.6 million and $0.9 million for the three months ended June 30, 2021 and 2020, respectively, and $6.3 million and $0.9 million for the six months ended June 30, 2021 and 2020, respectively, which is reported as a component of selling, general and administrative expenses.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, bank overdrafts, outstanding indebtedness, foreign currency forward contracts, and benefit plan assets. Except for benefit plan assets, outstanding indebtedness and foreign currency forward contracts, the carrying value of the Company’s remaining financial instruments approximates fair value.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
The assets of the Company's various defined benefit plans are primarily comprised of common/collective/pool funds (i.e., mutual funds). These funds are valued at the net asset value (NAV) of shares held in the underlying funds. Investments for which fair value is measured using the NAV per share practical expedient are not classified in the fair value hierarchy.
The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy.
The carrying value of WESCO's debt instruments with fixed interest rates was $3,230.4 million and $3,730.1 million as of June 30, 2021 and December 31, 2020, respectively. The estimated fair value of this debt was $3,520.2 million and $4,084.7 million as of June 30, 2021 and December 31, 2020, respectively. The reported carrying values of WESCO's other debt instruments, including those with variable interest rates, approximated their fair values as of June 30, 2021 and December 31, 2020.
The Company purchases foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts on its earnings. The foreign currency forward contracts are not designated as hedges for accounting purposes. The Company's strategy is to negotiate terms for its derivatives and other financial instruments to be highly effective, such that the change in the value of the derivative offsets the impact of the underlying hedge. Its counterparties to foreign currency forward contracts have investment-grade credit ratings. The Company regularly monitors the creditworthiness of its counterparties to ensure no issues exist that could affect the value of its derivatives.
The Company does not hedge 100% of its foreign currency-denominated accounts. In addition, the results of hedging can vary significantly based on various factors, such as the timing of executing foreign currency forward contracts versus the movement of currencies as well as the fluctuations in the account balances throughout each reporting period. The fair value of foreign currency forward contracts is based on the difference between the contract rate and the current exchange rate. The fair value of foreign currency forward contracts is measured using observable market information. These inputs would be considered Level 2 in the fair value hierarchy. At June 30, 2021, foreign currency forward contracts were revalued at then-current foreign exchange rates with the changes in valuation reflected directly in other non-operating expenses ("other income, net") in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) offsetting the transaction gain (loss) recorded on foreign currency-denominated accounts. At June 30, 2021 and December 31, 2020, the gross and net notional amounts of foreign currency forward contracts outstanding were approximately $215.2 million and $111.9 million, respectively. While all of the Company's foreign currency forward contracts are subject to master netting arrangements with its counterparties, assets and liabilities related to these contracts are presented on a gross basis within the Condensed Consolidated Balance Sheets. The gross fair value of assets and liabilities related to foreign currency forward contracts were immaterial.
11. COMMITMENTS AND CONTINGENCIES
12. INCOME TAXES
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(unaudited)
13. BUSINESS SEGMENTS
The Company has operating segments that are organized around three strategic business units consisting of EES, CSS and UBS. These operating segments are equivalent to the Company's reportable segments. The Company's CODM evaluates the performance of its operating segments based primarily on net sales, income from operations, and total assets.
Corporate expenses are incurred to obtain and coordinate financing, tax, information technology, legal and other related services. The Company also has various corporate assets which are reported in corporate. Segment assets may not include jointly used assets, but segment results include depreciation expense or other allocations related to those assets. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis. Corporate expenses are shown in the tables below to reconcile the reportable segments to the consolidated financial statements.
The following tables set forth financial information by reportable segment for the periods presented:
| (In thousands) | Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Income from operations | ( | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Income from operations | ( | ||||||||||||||||||||||||||||
| (In thousands) | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Income from operations | ( | ||||||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Income from operations | ( | ||||||||||||||||||||||||||||
There were no material changes to the amounts of total assets by reportable segment from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
14. SUBSEQUENT EVENTS
On July 2, 2021 (the “Redemption Date”), WESCO Distribution, Inc. redeemed the $350 million aggregate principal amount of its 2024 Notes at a redemption price equal to 101.344 % of the principal amount plus accrued interest to, but not including, the Redemption Date. The redemption of the 2024 Notes was funded with borrowings under the Company's accounts receivable securitization and revolving credit facilities.
The redemption of the 2024 Notes will result in a loss on debt extinguishment totaling $6.9 million, which includes $4.7 million for the premium paid to redeem the 2024 Notes and $2.2 million for the write-off of unamortized debt issuance costs. The loss will be recorded as a component of interest expense, net in the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International, Inc.’s audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2020 Annual Report on Form 10-K. 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 WESCO International, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as WESCO International, Inc.’s other reports filed with the Securities and Exchange Commission (the "SEC").
Company Overview
WESCO International, Inc. ("WESCO International") and its subsidiaries (collectively, “WESCO” or the "Company"), headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.
On June 22, 2020, we completed our acquisition of Anixter International Inc. ("Anixter"), a Delaware corporation. Pursuant to the terms of the Agreement and Plan of Merger, dated January 10, 2020, 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.
We employ nearly 18,000 people, maintain relationships with approximately 30,000 suppliers, and serve more than 125,000 customers worldwide. With nearly 1,500,000 products, end-to-end supply chain services, and extensive digital capabilities, we provide innovative solutions to meet current customer needs across commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. Our innovative value-add 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.
During the second quarter of 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 will begin migrating certain legacy WESCO sub-brands to the master brand architecture over the course of the next year.
Prior to the completion of the Merger, we had four operating segments that had been aggregated as one reportable segment. Effective on the date of acquisition, we added Anixter as a separate reportable segment for the quarterly period ended June 30, 2020. At the beginning of the third quarter of 2020, we identified new operating segments organized around three strategic business units consisting of Electrical & Electronic Solutions ("EES"), Communications & Security Solutions ("CSS") and Utility and Broadband Solutions ("UBS"). The applicable comparative financial information reported in our previously issued interim financial statements for the three and six months ended June 30, 2020 has been recast in this Quarterly Report on Form 10-Q to conform to the basis of the new segments.
The following is a description of each of our reportable segments and their business activities.
Electrical & Electronic Solutions
The EES segment supplies a broad range of products and supply chain solutions primarily to the Construction, Industrial and Original Equipment Manufacturer ("OEM") markets. Product categories include a broad range of electrical equipment and supplies, wire and cable, lubricants, pipe, valves, fittings, fasteners, cutting tools, power transmission, and safety products. In addition, OEM customers require a reliable supply of assemblies and components to incorporate into their own products as well as value-add services such as supplier consolidation, design and technical support, just-in-time supply and electronic commerce, and supply chain management. EES includes the “Electrical and Electronic Solutions” business acquired from Anixter and the majority of WESCO's legacy industrial and construction businesses.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Communications & Security Solutions
The CSS segment supplies products and customized supply chain solutions to customers in a diverse range of industries including technology, finance, telecommunications service providers, transportation, education, government, healthcare and retail. CSS sells these products directly to end users or through various channels including data communications contractors, security, network, professional audio/visual and systems integrators. CSS has a broad product portfolio that includes copper and fiber optic cable and connectivity, access control, video surveillance, intrusion and fire/life safety, cabinets, power, cable management, wireless, professional audio/video, voice and networking switches and other ancillary products. CSS includes the “Network and Security Solutions” business acquired from Anixter and WESCO's legacy data communications and safety businesses.
Utility & Broadband Solutions
The UBS segment supplies electrical transmission and distribution products, power plant maintenance, repair and operations supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation, power transmission and electricity distribution industries. The UBS segment combines the “Utility Power Solutions” business acquired from Anixter, and WESCO's legacy utility, broadband and integrated supply businesses.
Overall Financial Performance
Our financial results for the first six months of 2021 reflect the merger with Anixter, broad-based sales growth due to strong demand and improved economic conditions, the favorable impacts of margin improvement initiatives and lower operating expenses due to cost reduction actions and integration synergies, partially offset by higher salaries, variable compensation expense and benefit costs.
Net sales for the first six months of 2021 increased $4.6 billion, or 113.0%, over the corresponding year-to-date period. In addition to the impact from the Merger, the increase reflects improved economic conditions and strong demand. Cost of goods sold as a percentage of net sales and gross margin was 79.4% and 20.6%, respectively, for the first six months of 2021, compared to 81.0% and 19.0%, respectively, for the first six months of 2020. The increase in gross margin of 160 basis points reflects the favorable impact of margin improvement initiatives, partially offset by write-downs to the carrying value of certain personal protective equipment products during the first and second quarters of 2021, which had a negative impact of 20 basis points for the six months ended June 30, 2021.
Operating profit was $352.1 million for the first six months of 2021, compared to $76.2 million for the first six months of 2020. Operating profit as a percentage of net sales was 4.1% for the current six-month period, compared to 1.9% for the first six months of the prior year. Operating profit for the first six months of 2021 includes merger-related costs of $84.0 million and a net gain of $8.9 million resulting from the sale of WESCO's legacy utility and data communications businesses in Canada during the first quarter of 2021, which were divested in connection with the Merger. Additionally, we recognized $5.0 million of amortization expense for the six months ended June 30, 2021 resulting from changes in the estimated useful lives of certain legacy WESCO trademarks that are migrating to our master brand architecture, as described in Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements. Adjusted for these items, operating profit was $432.3 million, or 5.0% of net sales. For the first six months of 2020, operating profit adjusted for merger-related costs of $78.0 million was $154.1 million, or 3.8% of net sales.
Earnings per diluted share for the first six months of 2021 was $2.89, based on 51.9 million diluted shares, compared to a loss per diluted share of $0.03 for the first six months of 2020, based on 42.3 million diluted shares. Adjusted for merger-related costs and interest, the net gain on the Canadian divestitures, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for the first six months of 2021 and 2020 was $4.06 and $2.25, respectively, an increase of 80.4%.
Beginning in 2020, and continuing through the second quarter of 2021, the COVID-19 pandemic had a significant impact on our business, and there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the economic conditions and possible resurgence of COVID, including new variants of the virus in various geographies, and the availability and effectiveness of treatments and vaccines. As the duration and severity of the COVID-19 pandemic remain uncertain and cannot be predicted, there is significant uncertainty as to the ultimate impact it will have on our business and our results of operations and financial condition. Events and factors relating to the COVID-19 pandemic include limitations on the ability of our suppliers to manufacture or procure the products we sell or to meet delivery requirements and commitments; disruptions to our global supply chains; limitations on the ability of our employees to perform their work due to travel or other restrictions; limitations on the ability of carriers to deliver our products to our customers; limitations on the ability of our customers to conduct their business and purchase our products and services, or pay us on a timely basis; and disruptions to our customers’ purchasing patterns. In response to the COVID-19 pandemic, we have taken actions focused on protecting the health and safety of our employees, which is our top priority.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
The products and services that we provide are integral to the daily operations of our customers and accordingly, we have taken actions to maintain the continuity of our operations in response to the pandemic. We have experienced, and may continue to experience, fluctuations in customer demand for certain of our products and services, including changes in project plans or timing due to circumstances affecting our customers, suppliers and other third parties. The full extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward remains highly uncertain and will depend on many factors outside of our control, including the duration and scope of the crisis, the emergence and effects of variants, the availability of effective treatments and vaccines, imposition of protective public safety measures, and the overall impact of the COVID-19 pandemic on the global economy and capital markets.
Cash Flow
We generated $102.8 million of operating cash flow for the first six months of 2021. Cash provided by operating activities included net income of $178.4 million and adjustments to net income totaling $101.8 million, which were primarily comprised of depreciation and amortization of $87.9 million, stock-based compensation expense of $13.2 million, amortization of debt discount and debt issuance costs of $9.2 million, a net gain of $8.9 million resulting from the divestiture of WESCO's legacy utility and data communications businesses in Canada, as described in Note 4, "Acquisitions and Disposals" of our Notes to the unaudited Condensed Consolidated Financial Statements, and deferred income taxes of $3.0 million. Operating cash flow also included changes in assets and liabilities of $177.5 million, which were primarily comprised of an increase in trade accounts receivable of $372.3 million resulting from higher sales in the latter part of the quarter and an increase in inventories of $268.3 million to support increased customer demand, partially offset by an increase in accounts payable of $474.9 million due to higher purchases of inventory.
Investing activities included $54.3 million of net proceeds from the Canadian divestitures and $20.2 million of capital expenditures.
Financing activities were primarily comprised of the redemption of our $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the "2021 Notes"), borrowings and repayments of $914.8 million and $869.8 million, respectively, related to our revolving credit facility (the "Revolving Credit Facility"), and borrowings and repayments of $643.0 million and $413.0 million, respectively, related to our accounts receivable securitization facility (the "Receivables Facility"). Financing activities for the first six months of 2021 also included $28.7 million of dividends paid to holders of our Series A Preferred Stock, net repayments related to our various international lines of credit of approximately $10.8 million, and $12.4 million of payments for taxes related to the exercise and vesting of stock-based awards.
Financing Availability
On June 1, 2021, we amended our Receivables Facility to increase its borrowing capacity from $1,200 million to $1,300 million, extend its maturity date from June 22, 2023 to June 21, 2024, decrease its LIBOR floor from 0.50% to 0.00% and decrease its interest rate spread from 1.20% to 1.15%. Borrowings under the amended accounts receivable securitization facility will be used to redeem our $350 million aggregate principal amount of 5.375% Senior Notes due 2024 (the "2024 Notes"), as described in Note 14, "Subsequent Events" of our Notes to the unaudited Condensed Consolidated Financial Statements.
As of June 30, 2021, we had $873.1 million in total available borrowing capacity under our Revolving Credit Facility, which was comprised of $581.7 million of availability under the U.S. sub-facility and $291.4 million of availability under the Canadian sub-facility. Available borrowing capacity under our Receivables Facility was $120.0 million. The Revolving Credit Facility and the Receivables Facility mature in June 2025 and June 2024, respectively.
Critical Accounting Policies and Estimates
We adopted Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, in the first quarter of 2021. The adoption of this ASU did not have a material impact on our consolidated financial statements and notes thereto.
During the second quarter of 2021, we made changes to the estimated useful lives of certain legacy WESCO trademarks that are migrating to our master brand architecture, as disclosed in Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements.
See Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements for more information regarding our significant accounting policies.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
Second Quarter of 2021 versus Second Quarter of 2020
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the periods presented:
| Three Months Ended | |||||||||||
| June 30, 2021 | June 30, 2020 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of goods sold (excluding depreciation and amortization) | 79.0 | 81.1 | |||||||||
| Selling, general and administrative expenses | 15.2 | 17.2 | |||||||||
| Depreciation and amortization | 1.0 | 1.0 | |||||||||
| Income from operations | 4.8 | 0.7 | |||||||||
| Interest expense, net | 1.4 | 2.8 | |||||||||
| Other income, net | 0.1 | 0.1 | |||||||||
| Income (loss) before income taxes | 3.3 | (2.2) | |||||||||
| Provision for income taxes | 0.7 | (0.5) | |||||||||
| Net income (loss) attributable to WESCO International, Inc. | 2.6 | (1.7) | |||||||||
| Preferred stock dividends | 0.3 | — | |||||||||
| Net income (loss) attributable to common stockholders | 2.3 | % | (1.7) | % | |||||||
Net Sales
The following table sets forth net sales by segment for the periods presented:
| Three Months Ended | ||||||||||||||||||||
| (In thousands) | June 30, 2021 | June 30, 2020 | Growth | |||||||||||||||||
| EES | $ | 1,923,011 | $ | 1,043,294 | 84.3 | % | ||||||||||||||
| CSS | 1,461,120 | 341,470 | 327.9 | % | ||||||||||||||||
| UBS | 1,211,659 | 701,942 | 72.6 | % | ||||||||||||||||
| Total net sales | $ | 4,595,790 | $ | 2,086,706 | 120.2 | % | ||||||||||||||
Net sales were $4.6 billion for the second quarter of 2021, compared to $2.1 billion for the second quarter of 2020, an increase of 120.2%. The increase primarily reflects the merger with Anixter that was completed on June 22, 2020, along with growth across all segments, as described below.
EES reported net sales $1.9 billion for the second quarter of 2021, compared to $1.0 billion for the second quarter of 2020, an increase of 84.3%. In addition to the impact of the Merger, the increase reflects double-digit growth in our construction, original equipment manufacturer and industrial businesses due to continued strong demand and accelerating economic recovery in certain regions.
CSS reported net sales of $1.5 billion for the second quarter of 2021, compared to $341.5 million for the second quarter of 2020, an increase of 327.9%. In addition to the impact of the Merger, the increase reflects strong sales growth in both our security solutions and network infrastructure businesses driven by the rebound in the global economy, a rise in project activity, and new wins from our expanding business.
UBS reported net sales of $1.2 billion for the second quarter of 2021, compared to $701.9 million for the second quarter of 2020, an increase of 72.6%. Along with the impact of the Merger, the increase reflects broad-based growth in our utility business with strength in both the investor-owned utility and public power markets. UBS sales growth also reflects continued strong demand in our broadband business, as well as growth in our integrated supply business due to improving economic conditions.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Cost of Goods Sold
Cost of goods sold for the second quarter of 2021 was $3.6 billion compared to $1.7 billion for the second quarter of 2020, an increase of $1.9 billion, reflecting the merger with Anixter. Cost of goods sold as a percentage of net sales was 79.0% for the second quarter of 2021, compared to 81.1% for the second quarter of 2020. The decrease of 210 basis points primarily reflects the favorable impact of margin improvement initiatives, partially offset by a write-down of $8.0 million to the carrying value of certain personal protective equipment products that were considered to either be in excess of supply relative to demand or for which current net realizable value has declined below cost. This write-down of inventory impacted cost of goods sold as a percentage of net sales for the second quarter of 2021 by 20 basis points.
Selling, General and Administrative Expenses
SG&A expenses for the second quarter of 2021 totaled $699.6 million versus $359.8 million for the second quarter of 2020. As a percentage of net sales, SG&A expenses were 15.2% and 17.2%, respectively. The increase in SG&A expenses of $339.8 million, or 94.5%, primarily reflects the impact of the merger with Anixter. In addition, SG&A expenses in the current quarter reflect higher volume-related costs and SG&A payroll expenses, as described below. The realization of integration synergies and structural cost takeout actions favorably impacted SG&A expenses for the second quarter of 2021. SG&A expenses for the second quarter of 2021 include merger-related costs of $37.7 million. Adjusted for these costs, SG&A expenses were $661.9 million, or 14.4% of net sales, for the second quarter of 2021. SG&A expenses for the second quarter of 2020 include $73.3 million of merger-related costs. Adjusted for these costs, SG&A expenses were $286.4 million, or 13.7% of net sales, for the second quarter of 2020.
SG&A payroll expenses for the second quarter of 2021 of $458.4 million increased by $231.6 million compared to the same period in 2020 primarily due to the merger with Anixter. Excluding the impact of the Merger, SG&A payroll expenses were up $43.9 million in the current quarter due to higher variable compensation expense and benefit costs, as well as the impact of reinstating salaries and retirement savings plan employer matching contributions for legacy WESCO employees that had been suspended in the prior year in response to the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization increased $27.9 million to $46.7 million for the second quarter of 2021, compared to $18.8 million for the second quarter of 2020. The second quarter of 2021 includes $15.8 million attributable to the amortization of identifiable intangible assets acquired in the merger with Anixter, as well as $5.0 million resulting from changes in the estimated useful lives of certain legacy WESCO trademarks that are migrating to our master brand architecture, as described in Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements. As of June 30, 2021, there is $42.8 million of estimated amortization expense remaining for trademarks migrating to our master brand architecture, of which approximately $15.4 million and $12.1 million are expected to be recognized in the third and fourth quarters of 2021, respectively.
Income from Operations
The following tables set forth income from operations by segment for the periods presented:
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 153,740 | $ | 111,257 | $ | 94,693 | $ | (140,818) | $ | 218,872 | ||||||||||||||||||||||
| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 45,809 | $ | 27,922 | $ | 51,774 | $ | (110,235) | $ | 15,270 | ||||||||||||||||||||||
Operating profit was $218.9 million for the second quarter of 2021 compared to $15.3 million for the second quarter of 2020, an increase of $203.6 million. The increase primarily reflects the merger with Anixter. For the second quarter of 2021, operating profit also reflects the favorable impact of margin improvement initiatives, the realization of integration synergies and structural cost takeout actions. Operating profit for the second quarter of 2021 was negatively impacted by higher salaries, variable compensation expense and benefit costs compared to the prior year, including the impact of reinstating the salaries and certain benefits of legacy WESCO employees that had been suspended in the prior year in response to the COVID-19 pandemic.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
EES reported operating profit of $153.7 million for the second quarter of 2021, compared to $45.8 million for the second quarter of 2020, an increase of $107.9 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the second quarter of 2021 was negatively impacted by the inventory write-down described above and accelerated amortization expense of $2.1 million associated with migrating to our master brand architecture.
CSS reported operating profit of $111.3 million for the second quarter of 2021, compared to $27.9 million for the second quarter of 2020, an increase of $83.4 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the second quarter of 2021 was negatively impacted by $5.4 million from the inventory write-down described above, as well as accelerated amortization expense of $2.7 million associated with migrating to our master brand architecture.
UBS reported operating profit of $94.7 million for the second quarter of 2021, compared to $51.8 million for the second quarter of 2020, an increase of $42.9 million. The increase primarily reflects the factors impacting the overall business, as described above.
Interest Expense, net
Net interest expense totaled $67.6 million for the second quarter of 2021, compared to $61.3 million for the second quarter of 2020. The increase in interest expense was driven by financing activity related to the Anixter merger. Net interest expense for the second quarter of 2020 includes $44.7 million of merger-related financing and interest costs, of which $33.5 million was non-recurring.
Other Income, net
Other non-operating income ("other income, net") totaled $0.8 million for the second quarter of 2021, compared to $0.7 million for the second quarter of 2020.
Income Taxes
The provision for income taxes was an expense of $32.8 million for the second quarter of 2021, compared to a benefit of $10.9 million in last year's comparable period, and the effective tax rate was 21.6% and 24.0%, respectively. The lower effective tax rate in the current quarter as compared to the corresponding quarter of the prior year was primarily due to a discrete income tax benefit of $3.4 million associated with the exercise and vesting of stock-based awards. In addition, the effective tax rate for the corresponding quarter of the prior year was higher due to costs incurred to complete the merger with Anixter. Excluding the impact of the Merger, the effective tax rate for the prior quarter would have been approximately 22%.
Net Income (Loss) and Earnings (Loss) per Share
Net income for the second quarter of 2021 was $119.3 million, compared to a net loss of $34.5 million for the second quarter of 2020.
Net income attributable to noncontrolling interests was less than $0.1 million for the second quarter of 2021 and 2020.
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, was $14.4 million for the second quarter of 2021 compared to $1.3 million for the second quarter of 2020.
Net income and earnings per diluted share attributable to common stockholders were $104.8 million and $2.02 per diluted share, respectively, for the second quarter of 2021, compared with a net loss and loss per diluted share attributable to common stockholders of $35.8 million and $0.84 per diluted share, respectively, for the second quarter of 2020. Adjusted for merger-related costs, accelerated amortization expense associated with migrating to our master brand architecture, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders for the three months ended June 30, 2021 were $137.2 million and $2.64, respectively. Adjusted for merger-related costs and interest, the related income tax effects, and the weighted-average impact of 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter, net income and earnings per diluted share attributable to common stockholders were $55.9 million and $1.33, respectively, for the three months ended June 30, 2020.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
The following tables reconcile income from operations, net interest expense, provision for income taxes and earnings per diluted share to adjusted income from operations, adjusted net interest expense, 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 Income from Operations: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Income from operations | $ | 218,872 | $ | 15,270 | |||||||
| Merger-related costs | 37,720 | 73,345 | |||||||||
| Accelerated trademark amortization | 5,049 | — | |||||||||
| Adjusted income from operations | $ | 261,641 | $ | 88,615 | |||||||
| Three Months Ended | |||||||||||
| Adjusted Interest Expense, Net: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Interest expense, net | $ | 67,590 | $ | 61,270 | |||||||
Merger-related interest expense(1) | — | (44,738) | |||||||||
| Adjusted interest expense, net | $ | 67,590 | $ | 16,532 | |||||||
(1) The adjustment for the three months ended June 30, 2020 represents financing and interest costs associated with the debt financing used to fund a portion of the merger with Anixter, of which $33.5 million was non-recurring.
| Three Months Ended | |||||||||||
| Adjusted Provision for Income Taxes: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Provision for income taxes | $ | 32,800 | $ | (10,854) | |||||||
Income tax effect of adjustments to income from operations and net interest(1) | 10,381 | 26,363 | |||||||||
| Adjusted provision for income taxes | $ | 43,181 | $ | 15,509 | |||||||
(1) The adjustments to income from operations and net interest have been tax effected at rates of 24.3% and 22.3% for the three months ended June 30, 2021 and 2020, respectively.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
| Three Months Ended | |||||||||||
| Adjusted Earnings per Diluted Share: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands, except per share data) | |||||||||||
| Adjusted income from operations | $ | 261,641 | $ | 88,615 | |||||||
| Adjusted interest expense, net | 67,590 | 16,532 | |||||||||
| Other income, net | (802) | (687) | |||||||||
| Adjusted income before income taxes | 194,853 | 72,770 | |||||||||
| Adjusted provision for income taxes | 43,181 | 15,509 | |||||||||
| Adjusted net income | 151,672 | 57,261 | |||||||||
| Net income attributable to noncontrolling interests | 89 | 47 | |||||||||
| Adjusted net income attributable to WESCO International, Inc. | 151,583 | 57,214 | |||||||||
| Preferred stock dividends | 14,352 | 1,276 | |||||||||
| Adjusted net income attributable to common stockholders | $ | 137,231 | $ | 55,938 | |||||||
| Diluted shares | 51,994 | 42,775 | |||||||||
Adjusted diluted shares(1) | 51,994 | 41,969 | |||||||||
Adjusted earnings per diluted share(2) | $ | 2.64 | $ | 1.33 | |||||||
(1) Adjusted diluted shares for the three months ended June 30, 2020 exclude the weighted-average impact of 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter.
(2) Adjusted earnings per diluted share for the three months ended June 30, 2020, as previously reported in our Quarterly Report on Form 10-Q for the period ended June 30, 2020, excluded preferred stock dividends of $1.3 million. Adjusted earnings per diluted share excluding the preferred stock dividends was $1.36 for the three months ended June 30, 2020.
Note: For the three months ended June 30, 2021, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related costs, accelerated amortization expense associated with migrating to our master brand architecture, and the related income tax effects. For the three months ended June 30, 2020, income from operations, net interest expense, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related costs and interest, and the related income tax effects. These non-GAAP financial measures provide a better understanding of our financial results on a comparable basis.
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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 June 30, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 153,976 | $ | 111,046 | $ | 94,688 | $ | (254,867) | $ | 104,843 | ||||||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (76) | — | — | 165 | 89 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 14,352 | 14,352 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 32,800 | 32,800 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 67,590 | 67,590 | |||||||||||||||||||||||||||
| Depreciation and amortization | 12,781 | 19,241 | 5,466 | 9,216 | 46,704 | |||||||||||||||||||||||||||
| EBITDA | $ | 166,681 | $ | 130,287 | $ | 100,154 | $ | (130,744) | $ | 266,378 | ||||||||||||||||||||||
| Other income, net | (160) | 211 | 5 | (858) | (802) | |||||||||||||||||||||||||||
Stock-based compensation expense(1) | 1,434 | 641 | 543 | 3,331 | 5,949 | |||||||||||||||||||||||||||
| Merger-related costs | — | — | — | 37,720 | 37,720 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 167,955 | $ | 131,139 | $ | 100,702 | $ | (90,551) | $ | 309,245 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 8.7% | 9.0% | 8.3% | 6.7% | ||||||||||||||||||||||||||||
(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the three months ended June 30, 2021 excludes $1.3 million as such amount is included in merger-related costs. | ||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 45,915 | $ | 27,764 | $ | 51,774 | $ | (161,235) | $ | (35,782) | ||||||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (162) | — | — | 209 | 47 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 1,276 | 1,276 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | (10,854) | (10,854) | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 61,270 | 61,270 | |||||||||||||||||||||||||||
| Depreciation and amortization | 7,351 | 4,016 | 4,082 | 3,306 | 18,755 | |||||||||||||||||||||||||||
| EBITDA | $ | 53,104 | $ | 31,780 | $ | 55,856 | $ | (106,028) | $ | 34,712 | ||||||||||||||||||||||
| Other income, net | 56 | 158 | — | (901) | (687) | |||||||||||||||||||||||||||
| Stock-based compensation expense | 1,118 | 263 | 306 | 3,214 | 4,901 | |||||||||||||||||||||||||||
| Merger-related costs | — | — | — | 73,345 | 73,345 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 54,278 | $ | 32,201 | $ | 56,162 | $ | (30,370) | $ | 112,271 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 5.2 | % | 9.4 | % | 8.0 | % | 5.4 | % | ||||||||||||||||||||||||
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 and merger-related costs. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.
Adjusted EBITDA for EES was $168.0 million for the second quarter of 2021, or 8.7% of net sales, compared to $54.3 million for the second quarter of 2020, or 5.2% of net sales.
Adjusted EBITDA for CSS was $131.1 million for the second quarter of 2021, or 9.0% of net sales, compared to $32.2 million for the second quarter of 2020, or 9.4% of net sales.
Adjusted EBITDA for UBS was $100.7 million for the second quarter of 2021, or 8.3% of net sales, compared to $56.2 million for the second quarter of 2020, or 8.0% of net sales.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Six Months Ended June 30, 2021 versus Six Months Ended June 30, 2020
The following table sets forth the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the periods presented:
| Six Months Ended | |||||||||||
| June 30, 2021 | June 30, 2020 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of goods sold (excluding depreciation and amortization) | 79.4 | 81.0 | |||||||||
| Selling, general and administrative expenses | 15.5 | 16.3 | |||||||||
| Depreciation and amortization | 1.0 | 0.8 | |||||||||
| Income from operations | 4.1 | 1.9 | |||||||||
| Interest expense, net | 1.6 | 1.9 | |||||||||
| Other income, net | — | — | |||||||||
| Income (loss) before income taxes | 2.5 | — | |||||||||
| Provision for income taxes | 0.4 | — | |||||||||
| Net income (loss) attributable to WESCO International, Inc. | 2.1 | — | |||||||||
| Preferred stock dividends | 0.4 | — | |||||||||
| Net income (loss) attributable to common stockholders | 1.7 | % | — | % | |||||||
Net Sales
The following table sets forth net sales by segment for the periods presented:
| Six Months Ended | ||||||||||||||||||||
| (In thousands) | June 30, 2021 | June 30, 2020 | Growth | |||||||||||||||||
| EES | $ | 3,643,824 | $ | 2,157,766 | 68.9 | % | ||||||||||||||
| CSS | 2,711,735 | 565,185 | 379.8 | % | ||||||||||||||||
| UBS | 2,281,708 | 1,332,402 | 71.2 | % | ||||||||||||||||
| Total net sales | $ | 8,637,267 | $ | 4,055,353 | 113.0 | % | ||||||||||||||
Net sales were $8.6 billion for the first six months of 2021, compared to $4.1 billion for the first six months of 2020, an increase of 113.0%. The increase primarily reflects the merger with Anixter, along with growth across all segments, as described below.
EES reported net sales $3.6 billion for the first six months of 2021, compared to $2.2 billion for the first six months of 2020, an increase of 68.9%. In addition to the impact of the Merger, the increase reflects growth in our construction and original equipment manufacturer businesses due to continued strong demand and improving economic conditions.
CSS reported net sales of $2.7 billion for the first six months of 2021, compared to $565.2 million for the first six months of 2020, an increase of 379.8%. The increase reflects the impact from the Merger and broad-based growth in our security solutions and network infrastructure businesses.
UBS reported net sales of $2.3 billion for the first six months of 2021, compared to $1.3 billion for the first six months of 2020, an increase of 71.2%. Along with the impact of the Merger, the increase reflects broad-based growth in our utility business, continued strong demand in our broadband business, and growth from integrated supply programs.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Cost of Goods Sold
Cost of goods sold for the first six months of 2021 was $6.9 billion compared to $3.3 billion for the first six months of 2020, an increase of $3.6 billion, reflecting the merger with Anixter. Cost of goods sold as a percentage of net sales was 79.4% for the first six months of 2021, compared to 81.0% for the first six months of 2020. The decrease of 160 basis points primarily reflects the favorable impact of margin improvement initiatives, partially offset by a write-down of $16.9 million to the carrying value of certain personal protective equipment products that were considered to either be in excess of supply relative to demand or for which current net realizable value has declined below cost. This write-down of inventory impacted cost of goods sold as a percentage of net sales for the first six months of 2021 by 20 basis points.
Selling, General and Administrative Expenses
SG&A expenses for the first six months of 2021 totaled $1.3 billion versus $659.1 million for the first six months of 2020. As a percentage of net sales, SG&A expenses were 15.5% and 16.3%, respectively. The increase in SG&A expenses of $677.0 million, or 102.7%, primarily reflects the impact of the merger with Anixter. In addition, SG&A expenses in the current year reflect higher volume-related costs and SG&A payroll expenses, as described below. SG&A expenses for the first six months of 2021 were favorably impacted by the realization of integration synergies and structural cost takeout actions, as well as lower travel, entertainment and similar expenses due to restrictions imposed on non-essential business travel in response to the COVID-19 pandemic. SG&A expenses for the first six months of 2021 include merger-related costs of $84.0 million, as well as a net gain of $8.9 million resulting from the sale of WESCO's legacy utility and data communications businesses in Canada, which were divested during the first quarter of 2021 in connection with the Merger. Adjusted for these amounts, SG&A expenses were 14.6% of net sales for the first six months of 2021. SG&A expenses for the first six months of 2020 include $78.0 million of merger-related costs. Adjusted for these costs, SG&A expenses were $581.2 million, or 14.3% of net sales, for the first six months of 2020.
SG&A payroll expenses for the first six months of 2021 of $882.1 million increased by $451.7 million compared to the same period in 2020 primarily due to the merger with Anixter. Excluding the impact of the Merger, SG&A payroll expenses were up $48.8 million in the current year due to higher variable compensation expense and benefit costs, as well as the impact of reinstating salaries and retirement savings plan employer matching contributions for legacy WESCO employees that had been suspended in the prior year in response to the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization increased $53.1 million to $87.9 million for the first six months of 2021, compared to $34.8 million for the first six months of 2020. The six months ended June 30, 2021 includes $31.4 million attributable to the amortization of identifiable intangible assets acquired in the merger with Anixter, as well as $5.0 million resulting from changes in the estimated useful lives of certain legacy WESCO trademarks that are migrating to our master brand architecture, as described in Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements. As of June 30, 2021, there is $42.8 million of estimated amortization expense remaining for trademarks migrating to our master brand architecture, of which approximately $27.5 million is expected to be recognized over the remainder of 2021, $10.0 million in 2022 and $5.3 million thereafter.
Income from Operations
The following tables set forth income from operations by segment for the periods presented:
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 253,852 | $ | 185,220 | $ | 181,723 | $ | (268,672) | $ | 352,123 | ||||||||||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Income from operations | $ | 89,135 | $ | 37,868 | $ | 93,559 | $ | (144,379) | $ | 76,183 | ||||||||||||||||||||||
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Operating profit was $352.1 million for the first six months of 2021 compared to $76.2 million for the first six months of 2020, an increase of 362.2%. The increase primarily reflects the merger with Anixter. For the first six months of 2021, operating profit also reflects the favorable impact of margin improvement initiatives, the realization of integration synergies and structural cost takeout actions. Additionally, income from operations reflects the benefit of lower travel, entertainment and similar expenses due to restrictions imposed on non-essential business travel in response to the COVID-19 pandemic. Operating profit for the first six months of 2021 was negatively impacted by higher salaries, variable compensation expense and benefit costs, as well as the impact of reinstating salaries and certain benefits of legacy WESCO employees that had been suspended in the prior year in response to the COVID-19 pandemic.
EES reported operating profit of $253.9 million for the first six months of 2021, compared to $89.1 million for the first six months of 2020, an increase of $164.7 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the first six months of 2021 was negatively impacted by the inventory write-down described above and accelerated amortization expense of $2.1 million associated with migrating to our master brand architecture.
CSS reported operating profit of $185.2 million for the first six months of 2021, compared to $37.9 million for the first six months of 2020, an increase of $147.4 million. The increase primarily reflects the factors impacting the overall business, as described above. Additionally, operating profit for the first six months of 2021 was negatively impacted by $12.9 million from the inventory write-down described above, as well as accelerated amortization expense of $2.7 million associated with migrating to our master brand architecture.
UBS reported operating profit of $181.7 million for the first six months of 2021, compared to $93.6 million for the first six months of 2020, an increase of $88.2 million. The increase primarily reflects the factors impacting the overall business, as described above, combined with the benefit from the gain on the Canadian divestitures.
Interest Expense, net
Net interest expense totaled $138.0 million for the first six months of 2021, compared to $77.9 million for the first six months of 2020. The increase in interest expense was driven by financing activity related to the Anixter merger. Net interest expense for the first six months of 2020 includes $45.3 million of merger-related financing and interest costs, of which $33.5 million was non-recurring.
Other Income, net
Other non-operating income ("other income, net") totaled $3.6 million for the first six months of 2021, compared to $0.8 million for the first six months of 2020.
Income Taxes
The provision for income taxes was an expense of $39.3 million for the first six months of 2021, compared to a benefit of $0.6 million in last year's comparable period, and the effective tax rate was 18.1% and 67.3%, respectively. The lower effective tax rate in the current period was primarily due to the discrete income tax benefits of $8.3 million and $4.5 million associated with a change in the valuation allowance recorded against foreign tax credit carryforwards and the exercise and vesting of stock-based awards, respectively, which together reduced the effective tax rate by approximately 5.9 percentage points. In addition, the effective tax rate in the corresponding preceding year-to-date period was higher due to costs incurred to complete the merger with Anixter. Excluding the impact of the Merger, the effective tax rate for the first six months of 2020 would have been approximately 22%.
Net Income (Loss) and Earnings (Loss) per Share
Net income for the first six months of 2021 was $178.4 million, compared to a net loss of $0.3 million for the first six months of 2020.
Net income attributable to noncontrolling interests was less than $0.1 million for the first six months of 2021, compared to a net loss of $0.2 million for the first six months of 2020.
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, was $28.7 million for the first six months of 2021 compared to $1.3 million for the first six months of 2020.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Net income and earnings per diluted share attributable to common stockholders were $149.7 million and $2.89 per diluted share, respectively, for the first six months of 2021, compared with a net loss and loss per diluted share attributable to common stockholders of $1.4 million and $0.03 per diluted share, respectively, for the first six months of 2020. Adjusted for merger-related costs, the net gain on the sale of WESCO's legacy utility and data communications businesses in Canada, accelerated amortization expense associated with migrating to our master brand architecture, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders for the six months ended June 30, 2021 were $210.5 million and $4.06, respectively. Adjusted for merger-related costs and interest, the related income tax effects, and the weighted-average impact of 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter, net income and earnings per diluted share attributable to common stockholders were $94.3 million and $2.25, respectively, for the six months ended June 30, 2020.
The following tables reconcile income from operations, net interest expense, provision for income taxes and earnings per diluted share to adjusted income from operations, adjusted net interest expense, adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:
| Six Months Ended | |||||||||||
| Adjusted Income from Operations: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Income from operations | $ | 352,123 | $ | 76,183 | |||||||
| Merger-related costs | 84,042 | 77,953 | |||||||||
| Accelerated trademark amortization | 5,049 | — | |||||||||
| Net gain on Canadian divestitures | (8,927) | — | |||||||||
| Adjusted income from operations | $ | 432,287 | $ | 154,136 | |||||||
| Six Months Ended | |||||||||||
| Adjusted Interest Expense, Net: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Interest expense, net | $ | 137,963 | $ | 77,862 | |||||||
Merger-related interest expense(1) | — | (45,253) | |||||||||
| Adjusted interest expense, net | $ | 137,963 | $ | 32,609 | |||||||
(1) The adjustment for the six months ended June 30, 2020 represents financing and interest costs associated with the debt financing used to fund a portion of the merger with Anixter, of which $33.5 million was non-recurring.
| Six Months Ended | |||||||||||
| Adjusted Provision for Income Taxes: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands) | |||||||||||
| Provision for income taxes | $ | 39,331 | $ | (587) | |||||||
Income tax effect of adjustments to income from operations and net interest(1) | 19,348 | 27,492 | |||||||||
| Adjusted provision for income taxes | $ | 58,679 | $ | 26,905 | |||||||
(1) The adjustments to income from operations and net interest have been tax effected at rates of 24.1% and 22.3% for the six months ended June 30, 2021 and 2020, respectively.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
| Six Months Ended | |||||||||||
| Adjusted Earnings per Diluted Share: | June 30, 2021 | June 30, 2020 | |||||||||
| (In thousands, except per share data) | |||||||||||
| Adjusted income from operations | $ | 432,287 | $ | 154,136 | |||||||
| Adjusted interest expense, net | 137,963 | 32,609 | |||||||||
| Other income, net | (3,609) | (807) | |||||||||
| Adjusted income before income taxes | 297,933 | 122,334 | |||||||||
| Adjusted provision for income taxes | 58,679 | 26,905 | |||||||||
| Adjusted net income | 239,254 | 95,429 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 65 | (185) | |||||||||
| Adjusted net income attributable to WESCO International, Inc. | 239,189 | 95,614 | |||||||||
| Preferred stock dividends | 28,704 | 1,276 | |||||||||
| Adjusted net income attributable to common stockholders | $ | 210,485 | $ | 94,338 | |||||||
| Diluted shares | 51,875 | 42,412 | |||||||||
Adjusted diluted shares(1) | 51,875 | 42,009 | |||||||||
Adjusted earnings per diluted share(2) | $ | 4.06 | $ | 2.25 | |||||||
(1) Adjusted diluted shares for the six months ended June 30, 2020 exclude the weighted-average impact of 8.15 million shares of common stock issued as equity consideration to fund a portion of the merger with Anixter.
(2) Adjusted earnings per diluted share for the six months ended June 30, 2020, as previously reported in our Quarterly Report on Form 10-Q for the period ended June 30, 2020, excluded preferred stock dividends of $1.3 million. Adjusted earnings per diluted share excluding the preferred stock dividends was $2.28 for the six months ended June 30, 2020.
Note: For the six months ended June 30, 2021, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related costs, a net gain on the sale of WESCO's legacy utility and data communications businesses in Canada, accelerated amortization expense associated with migrating to our master brand architecture, and the related income tax effects. For the six months ended June 30, 2020, income from operations, net interest expense, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related costs and interest, and the related income tax effects. These non-GAAP financial measures provide a better understanding of our financial results on a comparable basis.
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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:
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 254,606 | $ | 184,639 | $ | 181,701 | $ | (471,277) | $ | 149,669 | ||||||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (151) | — | — | 216 | 65 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 28,704 | 28,704 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | 39,331 | 39,331 | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 137,963 | 137,963 | |||||||||||||||||||||||||||
| Depreciation and amortization | 23,344 | 35,534 | 10,676 | 18,359 | 87,913 | |||||||||||||||||||||||||||
| EBITDA | $ | 277,799 | $ | 220,173 | $ | 192,377 | $ | (246,704) | $ | 443,645 | ||||||||||||||||||||||
| Other income, net | (603) | 581 | 22 | (3,609) | (3,609) | |||||||||||||||||||||||||||
Stock-based compensation expense(1) | 2,785 | 1,066 | 883 | 5,908 | 10,642 | |||||||||||||||||||||||||||
| Merger-related costs | — | — | — | 84,042 | 84,042 | |||||||||||||||||||||||||||
| Net gain on Canadian divestitures | — | — | (8,927) | — | (8,927) | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 279,981 | $ | 221,820 | $ | 184,355 | $ | (160,363) | $ | 525,793 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 7.7 | % | 8.2 | % | 8.1 | % | 6.1 | % | ||||||||||||||||||||||||
(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the six months ended June 30, 2021 excludes $2.5 million as such amount is included in merger-related costs. | ||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| (In thousands) | EES | CSS | UBS | Corporate | Total | |||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 89,593 | $ | 37,710 | $ | 93,559 | $ | (222,238) | $ | (1,376) | ||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (394) | — | — | 209 | (185) | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | 1,276 | 1,276 | |||||||||||||||||||||||||||
| Provision for income taxes | — | — | — | (587) | (587) | |||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 77,862 | 77,862 | |||||||||||||||||||||||||||
| Depreciation and amortization | 14,227 | 5,857 | 7,603 | 7,161 | 34,848 | |||||||||||||||||||||||||||
| EBITDA | $ | 103,426 | $ | 43,567 | $ | 101,162 | $ | (136,317) | $ | 111,838 | ||||||||||||||||||||||
| Other income, net | (64) | 158 | — | (901) | (807) | |||||||||||||||||||||||||||
| Stock-based compensation expense | 2,197 | 419 | 599 | 6,312 | 9,527 | |||||||||||||||||||||||||||
| Merger-related costs | — | — | — | 77,953 | 77,953 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 105,559 | $ | 44,144 | $ | 101,761 | $ | (52,953) | $ | 198,511 | ||||||||||||||||||||||
| Adjusted EBITDA margin % | 4.9 | % | 7.8 | % | 7.6 | % | 4.9 | % | ||||||||||||||||||||||||
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, merger-related costs and net gain on the sale of WESCO's legacy utility and data communications businesses in Canada. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.
Adjusted EBITDA for EES was $280.0 million for the first six months of 2021, or 7.7% of net sales, compared to $105.6 million for the first six months of 2020, or 4.9% of net sales.
Adjusted EBITDA for CSS was $221.8 million for the first six months of 2021, or 8.2% of net sales, compared to $44.1 million for the first six months of 2020, or 7.8% of net sales.
Adjusted EBITDA for UBS was $184.4 million for the first six months of 2021, or 8.1% of net sales, compared to $101.8 million for the first six months of 2020, or 7.6% of net sales.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
Our liquidity needs generally arise from fluctuations in our working capital requirements, capital expenditures, acquisitions and debt service obligations. As of June 30, 2021, we had $873.1 million in available borrowing capacity under our Revolving Credit Facility and $120.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of $118.1 million, provided liquidity of $1.1 billion. Cash included in our determination of liquidity represents cash in certain deposit and interest bearing investment accounts. 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. In addition, 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. At June 30, 2021, approximately 68% of our debt portfolio was comprised of fixed rate debt.
As described in Note 8, "Debt" of our Notes to the unaudited Condensed Consolidated Financial Statements, on January 14, 2021, we redeemed the $500 million aggregate principal amount of our 2021 Notes at a redemption price equal to 100% of the principal amount plus accrued interest to, but not including, January 14, 2021. The redemption of the 2021 Notes was funded with available cash, as well as borrowings under our accounts receivable securitization and revolving credit facilities.
As also described in Note 8, "Debt" of our Notes to the unaudited Condensed Consolidated Financial Statements, on June 2, 2021, we exercised our right to redeem the $350 million aggregate principal amount of our 2024 Notes at a redemption price equal to 101.344% of the principal amount plus accrued interest to, but not including, July 2, 2021, the date fixed for the redemption. See Note 14, "Subsequent Events" of our Notes to the unaudited Condensed Consolidated Financial Statements for more information.
As a result of the redemption of the 2024 Notes and amendment to the Receivables Facility, as described above, total interest expense is expected to be reduced by approximately $2 million in 2021 and $18 million per year thereafter based on current interest rates.
Since the merger with Anixter, we have used cash and the net proceeds from the divestiture of WESCO's legacy utility and data communications businesses in Canada to reduce our debt, net of cash, by approximately $464 million. Over the next several quarters, it is expected that excess liquidity will be directed primarily at debt reduction and merger-related integration activities, and we expect to maintain sufficient liquidity through our credit facilities and cash balances. We expect to spend between $100 million to $120 million in 2021 on capital expenditures and cloud-based initiatives, much of which will be invested to align the systems of our legacy businesses and enhance our digital tools.
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 also communicate on a regular basis with our lenders regarding our financial and working capital performance, liquidity position and financial leverage. Our financial leverage ratio, on a pro forma basis, was 4.5 as of June 30, 2021 and 5.3 as of December 31, 2020. In addition, we are in compliance with all covenants and restrictions contained in our debt agreements as of June 30, 2021.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
The following table sets forth our financial leverage ratio, which is a non-GAAP financial measure, for the periods presented:
Pro Forma(1) | |||||||||||
| Twelve Months Ended | |||||||||||
| (In millions of dollars, except ratio) | June 30, 2021 | December 31, 2020 | |||||||||
| Net income attributable to common stockholders | $ | 221.5 | $ | 115.6 | |||||||
| Net loss attributable to noncontrolling interests | (0.3) | (0.5) | |||||||||
| Preferred stock dividends | 57.6 | 30.1 | |||||||||
| Provision for income taxes | 62.7 | 55.7 | |||||||||
| Interest expense, net | 286.8 | 255.8 | |||||||||
| Depreciation and amortization | 174.7 | 153.5 | |||||||||
| EBITDA | 803.0 | 610.2 | |||||||||
| Other, net | (5.3) | 4.6 | |||||||||
| Stock-based compensation | 19.4 | 34.7 | |||||||||
| Merger-related costs and fair value adjustments | 181.0 | 206.7 | |||||||||
| Out-of-period adjustment | 18.9 | 18.9 | |||||||||
| Net gain on sale of asset and Canadian divestitures | (27.7) | (19.8) | |||||||||
| Adjusted EBITDA | $ | 989.3 | $ | 855.3 | |||||||
| As of | |||||||||||
| June 30, 2021 | December 31, 2020 | ||||||||||
| Short-term debt and current portion of long-term debt, net | $ | 367.0 | $ | 528.8 | |||||||
| Long-term debt, net | 4,303.1 | 4,370.0 | |||||||||
Debt discount and debt issuance costs(2) | 80.5 | 88.2 | |||||||||
Fair value adjustments to Anixter Senior Notes due 2023 and 2025(2) | (1.3) | (1.7) | |||||||||
| Total debt | 4,749.3 | 4,985.3 | |||||||||
| Less: Cash and cash equivalents | 287.9 | 449.1 | |||||||||
| Total debt, net of cash | $ | 4,461.4 | $ | 4,536.2 | |||||||
| Financial leverage ratio | 4.5 | 5.3 | |||||||||
(1)Pro forma adjusted EBITDA includes 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.
(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 measures 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, costs and fair value adjustments associated with the merger with Anixter, an out-of-period adjustment related to inventory absorption accounting, and net gain on the sale of a U.S. operating branch and WESCO's legacy utility and data communications businesses in Canada. Pro forma financial leverage ratio is calculated by dividing total debt, excluding debt discount and debt issuance costs, net of cash, by pro forma adjusted EBITDA. Pro forma EBITDA and pro forma adjusted EBITDA gives effect to the combination of WESCO and Anixter as if it had occurred at the beginning of the respective trailing twelve month period.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Most of the undistributed earnings of our foreign subsidiaries have been taxed in the U.S. under either the one-time transition tax or the global intangible low-taxed income ("GILTI") tax regime imposed by the Tax Cuts and Jobs Act of 2017 ("TCJA"). Except for a portion of foreign earnings previously taxed in the U.S. that can effectively be distributed without further material U.S. or foreign taxation, we continue to assert that the undistributed earnings of our foreign subsidiaries are indefinitely reinvested. To the extent the earnings of our foreign subsidiaries are distributed in the form of dividends, such earnings may be subject to additional taxes. We believe that we are able to maintain a sufficient level of liquidity for our domestic operations and commitments without incurring any material tax cost to repatriate cash held by our foreign subsidiaries.
Cash Flow
Operating Activities. Net cash generated from operations for the first six months of 2021 totaled $102.8 million, compared to $132.7 million for the first six months of 2020. Operating activities included net income of $178.4 million and adjustments to net income totaling $101.7 million, which were primarily comprised of depreciation and amortization of $87.9 million, stock-based compensation expense of $13.2 million, amortization of debt discount and debt issuance costs of $9.2 million, a net gain of $8.9 million resulting from the Canadian divestitures, and deferred income taxes of $3.0 million. Other sources of cash in the first six months of 2021 included an increase in accounts payable of $474.9 million due to higher purchases of inventory, an increase in other current and noncurrent liabilities of $26.0 million, and an increase in accrued payroll and benefit costs of $1.9 million. Primary uses of cash in the first six months of 2021 included an increase in trade accounts receivable of $372.3 million resulting from higher sales in the latter part of the quarter, an increase in inventories of $268.3 million to support increased customer demand, an increase in other accounts receivable of $25.4 million due to higher supplier volume rebate accruals, and an increase in other current and noncurrent assets of $14.3 million.
Net cash provided by operating activities for the first six months of 2020 totaled $132.7 million, which included a net loss of $0.3 million and adjustments to net loss totaling $43.4 million, which were primarily comprised of depreciation and amortization of $34.8 million and stock-based compensation expense of $9.5 million. Other sources of cash in the first six months of 2020 included an increase in other current and noncurrent liabilities of $93.8 million, a decrease in inventories of $55.4 million, a decrease in trade accounts receivable of $29.3 million, a decrease in other accounts receivable of $20.5 million, and an increase in accrued payroll and benefit costs of $1.7 million. Primary uses of cash in the first six months of 2020 included a decrease in accounts payable of $83.1 million, and an increase in other current and noncurrent assets of $28.1 million.
Investing Activities. Net cash provided by investing activities for the first six months of 2021 was $32.4 million, compared to $3.7 billion of net cash used during the first six months of 2020. Included in the first six months of 2021 was $54.3 million of net proceeds from the divestiture of WESCO's legacy utility and data communications businesses in Canada, as described in Note 4, "Acquisitions and Disposals" of our Notes to the unaudited Condensed Consolidated Financial Statements. Included in the first six months of 2020 was $3.7 billion to fund a portion of the merger with Anixter, as described in Note 4, "Acquisitions and Disposals" of our Notes to the unaudited Condensed Consolidated Financial Statements. Capital expenditures were $20.2 million for the six month period ended June 30, 2021, compared to $27.2 million for the six month period ended June 30, 2020.
Financing Activities. Net cash used in financing activities for the first six months of 2021 was $289.7 million, compared to $3.7 billion of net cash provided by financing activities for the first six months of 2020. During the first six months of 2021, financing activities primarily consisted of the redemption of our $500.0 million aggregate principal amount of 2021 Notes, borrowings and repayments of $914.8 million and $869.8 million, respectively, related to our Revolving Credit Facility, and borrowings and repayments of $643.0 million and $413.0 million, respectively, related to our Receivables Facility. Financing activities for the first six months of 2021 also included $28.7 million of dividends paid to holders of our Series A Preferred Stock, net repayments related to our various international lines of credit of approximately $10.8 million, and $12.4 million of payments for taxes related to the exercise and vesting of stock-based awards.
During the first six months of 2020, financing activities consisted of $2,815.0 million of net proceeds from the issuance of senior unsecured notes to finance a portion of the merger with Anixter, borrowings and repayments of $875.3 million and $425.6 million, respectively, related to our prior revolving credit facility, as well as borrowings and repayments of $700.0 million and $155.0 million, respectively, related to our prior accounts receivable securitization facility. Financing activities for the first six months of 2020 also included net repayments related to our various international lines of credit of approximately $10.5 million. Additionally, we paid $79.5 million of debt issuance costs associated with financing the merger with Anixter.
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 2020 Annual Report on Form 10-K.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Inflation
The rate of inflation, as measured by changes in the producer price index, affects different commodities, the cost of products purchased and ultimately the pricing of our different products and product classes to our customers. For the six months ended June 30, 2021, pricing related to inflation did not have a material impact on our operating profit.
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.
Guarantor Financial Statements
WESCO Distribution (the “Issuer”) has outstanding $350 million in aggregate principal amount of 5.375% Senior Notes due 2024 (the “2024 Notes”).
The 2024 Notes are unsecured senior obligations of WESCO Distribution and are fully and unconditionally guaranteed on a senior unsecured basis by WESCO International and Anixter Inc. (the “Guarantors”), ranking pari passu in right of payment with all other existing and future senior obligations of the Issuer, including obligations under other unsubordinated indebtedness. The 2024 Notes are effectively subordinated to all existing and future obligations of the Issuer that are secured by liens on any property or assets of the Issuer, including the Issuer’s Revolving Credit Facility and the then outstanding term loan facility (the “Senior Secured Credit Facilities”), to the extent of the value of the collateral securing such obligations, and are structurally subordinated to all liabilities (including trade payables) of any of the Guarantors’s or the Issuer’s subsidiaries (the “non-Guarantor Subsidiaries”) and senior in right of payment to all existing and future obligations of the Issuer that are, by their terms, subordinated in right of payment to the 2024 Notes.
The 2024 Notes are guaranteed by the Guarantors and not by the non-Guarantor Subsidiaries. In the event of a bankruptcy, liquidation or reorganization of any of the non-Guarantor Subsidiaries, such non-Guarantor Subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute or contribute, as the case may be, any of their assets to the Issuer or the Guarantors. Therefore, the 2024 Notes and the guarantee of the Guarantors (the “Guarantee”) are effectively subordinated to the liabilities of the non-Guarantor Subsidiaries.
The Guarantee constitutes a senior obligation of the Guarantors, ranking pari passu in right of payment with all other senior obligations of the Guarantors, including obligations under other unsubordinated indebtedness. The Guarantee is effectively subordinated to all existing and future obligations incurred by the Guarantors that are secured by liens on any property or assets of the Guarantors, including the Senior Secured Credit Facilities, to the extent of the value of the collateral securing such obligations, structurally subordinated to all liabilities (including trade payables) of the non-Guarantor Subsidiaries and senior in right of payment to all existing and future obligations of the Guarantors that are, by their terms, subordinated in right of payment to the Guarantee.
The Guarantors guarantee to each holder of the 2024 Notes and to the respective trustees (i) the due and punctual payment of the principal of, premium, if any, and interest on each Note, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal of and interest on the 2024 Notes, to the extent lawful, and the due and punctual payment of all other obligations and due and punctual performance of all obligations of the Issuer to the holders or the respective trustee all in accordance with the terms of the 2024 Notes and the indentures governing the 2024 Notes and (ii) in the case of any extension of time of payment or renewal of any 2024 Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, at stated maturity, by acceleration or otherwise.
If the Issuer becomes a debtor in a case under the U.S. Bankruptcy Code or encounters other financial difficulty, under federal or state fraudulent transfer law, a court may void, subordinate or otherwise decline to enforce the 2024 Notes. A court might do so if it is found that when the Issuer issued the 2024 Notes, or in some states when payments became due under the 2024 Notes, the Issuer received less than reasonably equivalent value or fair consideration and either: (i) were insolvent or rendered insolvent by reason of such incurrence; (ii) were left with inadequate capital to conduct its business; or (iii) believed or reasonably should have believed that the Issuer would incur debts beyond its ability to pay.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
A court might also void an issuance of the 2024 Notes without regard to the above factors, if the court found that the Issuer issued the 2024 Notes with actual intent to hinder, delay or defraud its creditors. A court would likely find that the Issuer did not receive reasonably equivalent value or fair consideration for the 2024 Notes, if the Issuer did not substantially benefit directly or indirectly from the issuance of the 2024 Notes. If a court were to void the issuance of the 2024 Notes, holders would no longer have any claim against the Issuer. Sufficient funds to repay the 2024 Notes may not be available from other sources. In addition, the court might direct holders to repay any amounts that they already received from the Issuer.
The following tables present summarized financial information for WESCO International, WESCO Distribution and Anixter Inc. on a combined basis after elimination of (i) intercompany transactions and balances among such entities and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor. The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
| Summarized Balance Sheets | |||||||||||
| (In thousands) | |||||||||||
| (unaudited) | |||||||||||
| As of | |||||||||||
| June 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets | $ | 2,508,796 | $ | 2,259,748 | |||||||
| Due from non-guarantor subsidiaries | 337,478 | 277,957 | |||||||||
| Total current assets | 2,846,274 | 2,537,705 | |||||||||
| Noncurrent assets | 3,334,235 | 3,368,247 | |||||||||
| Total assets | $ | 6,180,509 | $ | 5,905,952 | |||||||
| Liabilities | |||||||||||
| Current liabilities | $ | 1,906,543 | $ | 1,821,835 | |||||||
| Due to non-guarantor subsidiaries | 2,529,212 | 2,046,613 | |||||||||
| Total current liabilities | 4,435,755 | 3,868,448 | |||||||||
| Noncurrent liabilities | 3,859,587 | 4,169,639 | |||||||||
| Total liabilities | $ | 8,295,342 | $ | 8,038,087 | |||||||
| Summarized Statement of Income (Loss) | |||||
| (In thousands) | |||||
| (unaudited) | |||||
| Six Months Ended | |||||
| June 30, 2021 | |||||
Net sales(1) | $ | 3,475,869 | |||
Gross profit(1) | 697,156 | ||||
| Net loss | $ | (39,568) | |||
(1) Includes $43.0 million of net sales and cost of goods sold to non-guarantor subsidiaries.
Impact of Recently Issued Accounting Standards
See Note 2, "Accounting Policies" of our Notes to the unaudited Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Forward-Looking Statements
All statements made herein that are not historical facts should be considered as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. These statements include, but are not limited to, statements regarding the expected benefits and costs of the transaction between WESCO and Anixter International Inc., including anticipated future financial and operating results, synergies, accretion and growth rates, and the combined company's plans, objectives, expectations and intentions, statements that address the combined company's expected future business and financial performance, and other statements identified by words such as "anticipate," "plan," "believe," "estimate," "intend," "expect," "project," "will" and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of WESCO's management, as well as assumptions made by, and information currently available to, WESCO's management, current market trends and market conditions and involve risks and uncertainties, many of which are outside of WESCO's and WESCO's management's control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements.
Those risks, uncertainties and assumptions include the risk of any unexpected costs or expenses resulting from the transaction, the risk of any litigation or post-closing regulatory action relating to 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 proposed 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, health epidemics and other outbreaks, especially the outbreak of COVID-19 since December 2019, which may have a material adverse effect on the combined company's business, results of operations and financial conditions, and other important factors that could cause actual results to differ materially from those projected. All such factors are difficult to predict and are beyond each company's control. Additional factors that could cause results to differ materially from those described above can be found in WESCO's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and WESCO's other reports filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
For a discussion of changes to the market risks that were previously disclosed in our 2020 Annual Report on Form 10-K, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by this report.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarterly period ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, a number of lawsuits and claims have been or may be asserted against us relating to the conduct of our business, including litigation relating to commercial, product and employment matters. The outcome of any litigation cannot be predicted with certainty, and some lawsuits may be determined adversely to us. However, management does not believe that the ultimate outcome of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on our results of operations for that period.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in Item 1A. to Part 1 of WESCO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Item 6. Exhibits.
(a)Exhibits
(10)Material Contracts
(1) Third Amendment to the Fifth Amended and Restated Receivables Purchase Agreement (filed herewith)
(31) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications
(1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WESCO International, Inc. | ||||||||
| (Registrant) | ||||||||
| August 6, 2021 | By: | /s/ David S. Schulz | ||||||
| (Date) | David S. Schulz | |||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| August 6, 2021 | By: | /s/ Matthew S. Kulasa | ||||||
| (Date) | Matthew S. Kulasa | |||||||
| Senior Vice President, Corporate Controller and Chief Accounting Officer | ||||||||
| (Principal Accounting Officer) | ||||||||
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