WESCO International(WCC) - 2022 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents Wesco International, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2022 Item 1. Financial Statements. This section presents Wesco International, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flow statements, and statements of stockholders' equity, along with detailed notes explaining accounting policies, revenue, goodwill, debt, and other financial aspects for the first quarter of 2022 and 2021 Condensed Consolidated Balance Sheets (unaudited) The Condensed Consolidated Balance Sheets provide a snapshot of the company's financial position, showing an increase in total assets and liabilities as of March 31, 2022, compared to December 31, 2021 Condensed Consolidated Balance Sheets (unaudited) | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total assets | $13,185.0 | $12,617.7 | | Total liabilities | $9,217.6 | $8,841.5 | | Total stockholders' equity | $3,967.5 | $3,776.2 | Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) The Condensed Consolidated Statements of Income and Comprehensive Income reflect significant year-over-year growth in net sales, income from operations, and net income attributable to common stockholders for the three months ended March 31, 2022 Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net sales | $4,932.2 | $4,041.5 | | Income from operations | $284.0 | $133.3 | | Net income attributable to WESCO International, Inc. | $181.2 | $59.2 | | Net income attributable to common stockholders | $166.9 | $44.8 | | Basic EPS | $3.30 | $0.89 | | Diluted EPS | $3.19 | $0.87 | Condensed Consolidated Statements of Cash Flows (unaudited) The Condensed Consolidated Statements of Cash Flows show a shift from positive to negative operating cash flow in Q1 2022, primarily due to increased investments in receivables and inventories, while financing activities provided net cash Condensed Consolidated Statements of Cash Flows (unaudited) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash (used in) provided by operating activities | $(171.9) | $120.5 | | Net cash (used in) provided by investing activities | $(15.1) | $44.5 | | Net cash provided by (used in) financing activities | $167.1 | $(312.2) | | Net change in cash and cash equivalents | $(11.1) | $(145.2) | | Cash and cash equivalents at end of period | $201.5 | $303.9 | Condensed Consolidated Statements of Stockholders' Equity (unaudited) The Condensed Consolidated Statements of Stockholders' Equity detail changes in equity components, reflecting net income, stock-based compensation, and preferred stock dividends for the three months ended March 31, 2022 and 2021 Condensed Consolidated Statements of Stockholders' Equity (unaudited) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net income attributable to WESCO International, Inc. | $181.2 | $59.2 | | Preferred stock dividends | $14.4 | $14.4 | | Foreign currency translation adjustments and other | $31.6 | $16.8 | | Total WESCO International, Inc. stockholders' equity (end of period) | $3,973.4 | $2,645.9 (Note: 2021 value is for Retained Earnings, not total equity) | Notes to Condensed Consolidated Financial Statements (unaudited) These notes provide essential context and detailed disclosures for the condensed consolidated financial statements, covering the company's organization, accounting policies, revenue recognition, goodwill and intangible assets, stock-based compensation, earnings per share, debt, employee benefit plans, fair value measurements, commitments, contingencies, income taxes, and business segment performance 1. ORGANIZATION WESCO International, Inc. is a leading global provider of business-to-business distribution, logistics, and supply chain solutions, operating through three strategic business units: Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS) - Wesco is a leading provider of business-to-business distribution, logistics services, and supply chain solutions[23] - The company operates through three strategic business units: Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS)[23] 2. ACCOUNTING POLICIES This section outlines the basis of presentation for the unaudited financial statements, notes reclassifications, and discusses the adoption of ASU 2020-04 for reference rate reform (LIBOR to SOFR) with no material impact, and the ongoing evaluation of ASU 2021-08 for business combinations - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with Rule 10-01 of Regulation S-X[24] - The company adopted ASU 2020-04 (Reference Rate Reform) in Q1 2022, transitioning from LIBOR to SOFR, which did not have a material impact on financial statements[27] - Management is evaluating the impact of ASU 2021-08 (Business Combinations: Accounting for Contract Assets and Liabilities), effective for fiscal years beginning after December 15, 2022[28] 3. REVENUE Wesco's net sales are disaggregated by segment and geography, with revenue recognition policies detailed for deferred revenue, contract assets, and variable consideration, which includes customer rebates and shipping/handling costs Net Sales by Segment | Segment | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Electrical & Electronic Solutions | $2,089.9 | $1,720.8 | | Communications & Security Solutions | $1,434.2 | $1,250.6 | | Utility & Broadband Solutions | $1,408.0 | $1,070.0 | | Total by segment | $4,932.2 | $4,041.5 | Net Sales by Geography | Geography | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | United States | $3,654.3 | $2,930.4 | | Canada | $715.0 | $607.8 | | Other International | $562.8 | $503.3 | | Total by geography | $4,932.2 | $4,041.5 | - Variable consideration (rebates, returns, discounts) reduced revenue by approximately $115.2 million in Q1 2022 and $105.4 million in Q1 2021[33] - Shipping and handling costs, recognized as SG&A expenses, totaled $67.6 million in Q1 2022 and $53.3 million in Q1 2021[34] 4. GOODWILL AND INTANGIBLE ASSETS This note details the changes in goodwill, which increased due to foreign currency exchange rates, and outlines the components of intangible assets, including amortization expense and estimated future amortization schedules Goodwill and Intangible Assets | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Goodwill | $3,222.5 | $3,208.3 | | Net Intangible assets | $1,922.3 | $1,944.1 | - Goodwill increased by $14.2 million in Q1 2022 due to foreign currency exchange rate changes[35] - Amortization expense for intangible assets totaled $25.7 million for the three months ended March 31, 2022[36] Estimated Future Amortization Expense | Year Ending December 31, | Estimated Amortization Expense (in millions) | | :----------------------- | :------------------------------------------ | | 2022 (remainder) | $66.7 | | 2023 | $83.6 | | 2024 | $81.1 | | 2025 | $78.0 | | 2026 | $72.5 | | Thereafter | $744.8 | 5. STOCK-BASED COMPENSATION This note details Wesco's stock-based compensation plans, including stock options, stock-settled stock appreciation rights, restricted stock units, and performance-based awards, outlining their vesting conditions, fair value assumptions, and the $8.9 million compensation expense recognized in Q1 2022 - Wesco recognized $8.9 million of non-cash stock-based compensation expense for the three months ended March 31, 2022, included in selling, general and administrative expenses[48] - As of March 31, 2022, total unrecognized compensation expense related to non-vested stock-based awards was $78.2 million, with approximately $30.6 million expected to be recognized over the remainder of 2022[48] Stock-Based Awards Granted | Award Type | Granted (3 months ended March 31, 2022) | Weighted-Average Fair Value ($) | | :-------------------------------- | :-------------------------------------- | :-------------------------- | | Stock options | 89,550 | $57.26 | | Restricted stock units | 224,946 | $122.11 | | Performance-based awards | 83,991 | $122.09 | 6. EARNINGS PER SHARE This note provides the computation of basic and diluted earnings per share, showing a significant increase in both metrics for Q1 2022, driven by higher net income attributable to common stockholders Earnings Per Share Calculation | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to common stockholders (in millions) | $166.9 | $44.8 | | Weighted-average common shares outstanding (basic, in thousands) | 50,597 | 50,124 | | Weighted-average common shares outstanding (diluted, in thousands) | 52,237 | 51,708 | | Basic EPS | $3.30 | $0.89 | | Diluted EPS | $3.19 | $0.87 | 7. DEBT Wesco's outstanding indebtedness is detailed, highlighting amendments to the Accounts Receivable Securitization Facility and Revolving Credit Facility in March 2022, which increased borrowing capacities, extended maturity dates, and transitioned from LIBOR to SOFR interest rates Outstanding Indebtedness | Debt Instrument | As of March 31, 2022 (in millions) | As of December 31, 2021 (in millions) | | :------------------------------------------ | :------------------------------------ | :------------------------------------- | | International lines of credit | $8.6 | $7.4 | | Accounts Receivable Securitization Facility | $1,300.0 | $1,270.0 | | Revolving Credit Facility | $758.0 | $597.0 | | 5.50% Anixter Senior Notes due 2023 | $58.6 | $58.6 | | 6.00% Anixter Senior Notes due 2025 | $4.2 | $4.2 | | 7.125% Senior Notes due 2025 | $1,500.0 | $1,500.0 | | 7.250% Senior Notes due 2028 | $1,317.2 | $1,316.9 | | Finance lease obligations | $19.5 | $18.6 | | Total debt | $4,966.1 | $4,772.6 | | Total long-term debt | $4,836.7 | $4,701.5 | - The Accounts Receivable Securitization Facility's purchase limit increased to $1,400 million, maturity extended to March 1, 2025, and interest rate spread decreased from 1.15% to 1.10% (LIBOR to SOFR transition)[52] - The Revolving Credit Facility's commitments increased to $1,350 million, maturity extended to March 1, 2027, and transitioned to SOFR-based interest rate options[55] 8. EMPLOYEE BENEFIT PLANS This note describes Wesco's defined contribution, deferred compensation, and defined benefit plans, including the merger of Anixter's U.S. and Canadian defined contribution plans into Wesco's, and the freezing of benefits and accruals for certain defined benefit plans - Anixter's U.S. and Canadian defined contribution plans were merged into Wesco's respective plans, effective January 1, 2022[56][57] - Wesco incurred $18.1 million in charges for all defined contribution plans for the three months ended March 31, 2022[58] - The company adopted plan amendments to freeze benefits under the Anixter Inc. Pension Plan and EECOL Plan effective December 31, 2021, and freeze benefit accruals for certain plans effective December 31, 2023[62] Net Periodic Pension (Benefit) Cost | Component of Net Periodic Pension (Benefit) Cost | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------ | :--------------------------------------------- | | Service cost | $2.2 | | Interest cost | $4.4 | | Expected return on plan assets | $(7.8) | | Recognized actuarial gain | $(0.2) | | Net periodic pension (benefit) cost | $(1.4) | 9. FAIR VALUE OF FINANCIAL INSTRUMENTS This note discusses the fair value of Wesco's financial instruments, including debt and foreign currency forward contracts, which are primarily valued using observable market information and classified as Level 2 within the fair value hierarchy Fair Value of Fixed Interest Rate Debt | Metric | As of March 31, 2022 (in millions) | As of December 31, 2021 (in millions) | | :-------------------------------- | :--------------------------------- | :---------------------------------- | | Carrying value of fixed interest rate debt | $2,880.8 | $2,880.7 | | Estimated fair value of fixed interest rate debt | $3,034.0 | $3,118.0 | - The company uses foreign currency forward contracts with gross notional amounts of approximately $175.9 million (March 31, 2022) to minimize the effect of fluctuating foreign currency-denominated accounts[73] - The inputs used to measure the fair value of the company's debt instruments and foreign currency forward contracts are classified as Level 2 within the fair value hierarchy[70][73] 10. COMMITMENTS AND CONTINGENCIES Wesco is subject to various lawsuits and claims in the ordinary course of business, but management believes the ultimate outcome of these matters is unlikely to have a material adverse effect on the company's financial condition or liquidity - The company faces lawsuits and claims related to commercial, product, and employment matters[74] - Management does not believe the ultimate outcome of these pending matters will have a material adverse effect on Wesco's financial condition or liquidity[74] 11. INCOME TAXES The effective tax rate for Q1 2022 was 17.2%, influenced by discrete income tax benefits from reductions to the valuation allowance against foreign tax credit carryforwards and deductible stock-based compensation Income Taxes | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | 17.2% | 9.9% | - Discrete income tax benefits of $13.4 million (valuation allowance) and $5.8 million (stock-based compensation) reduced the effective tax rate by approximately 8.7 percentage points in Q1 2022[76] 12. BUSINESS SEGMENTS This note provides financial information for Wesco's three reportable segments (EES, CSS, UBS), detailing net sales, Adjusted EBITDA, and total assets, which are key metrics used by management to evaluate segment performance Segment Performance (Q1 2022) | Segment | Net Sales (Q1 2022, in millions) | Adjusted EBITDA (Q1 2022, in millions) | Adjusted EBITDA Margin % (Q1 2022) | | :-------------------------------- | :-------------------------------- | :------------------------------------ | :--------------------------------- | | Electrical & Electronic Solutions | $2,089.9 | $192.4 | 9.2% | | Communications & Security Solutions | $1,434.2 | $123.0 | 8.6% | | Utility & Broadband Solutions | $1,408.0 | $136.4 | 9.7% | | Total | $4,932.2 | $364.1 | 7.4% | Segment Total Assets | Segment | Total Assets (March 31, 2022, in millions) | Total Assets (December 31, 2021, in millions) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------- | | Electrical & Electronic Solutions | $4,336.9 | $4,098.3 | | Communications & Security Solutions | $4,650.8 | $4,601.1 | | Utility & Broadband Solutions | $3,513.6 | $3,266.2 | | Corporate | $683.6 | $652.0 | | Total | $13,185.0 | $12,617.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides a comprehensive analysis of Wesco's financial condition and operational results for the first quarter of 2022, highlighting strong sales growth, margin expansion, and synergy realization, while also addressing ongoing supply chain challenges and inflationary pressures Company Overview Wesco International is a global leader in business-to-business distribution, logistics, and supply chain solutions, serving diverse markets with a broad product portfolio and value-added services across its EES, CSS, and UBS segments - Wesco employs approximately 18,000 people, maintains relationships with 45,000 suppliers, and serves 140,000 customers worldwide across over 50 countries[87] - The company provides innovative value-added solutions including supply chain management, logistics, procurement, warehousing, and digital solutions[87] - Wesco is migrating to a single, master brand architecture, while retaining the Anixter brand name due to its strong recognition[88] - Operating segments include Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS)[89] Overall Financial Performance Wesco achieved double-digit sales growth and margin expansion in Q1 2022, driven by strong demand, price inflation, and integration cost synergies, partially offset by higher SG&A expenses, and anticipates continued supply chain challenges and inflationary pressures Overall Financial Performance Summary | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Net sales | $4,932.2 million | $4,041.5 million | +22.0% | | Income from operations | $284.0 million | $133.3 million | +113.2% | | Income from operations as % of net sales | 5.8% | 3.3% | +2.5 pp | | Diluted EPS | $3.19 | $0.87 | +266.7% | | Adjusted diluted EPS | $3.63 | $1.43 | +153.8% | - Cost of goods sold as a percentage of net sales decreased by 120 basis points to 78.7% in Q1 2022, reflecting value-driven pricing and profit margin improvement[96] - Supply chain issues unfavorably impacted net sales by approximately 1% to 2% in Q1 2022, and these challenges, along with inflationary pressures, are expected to continue into 2023[99][101] Cash Flow Operating cash flow for Q1 2022 was an outflow of $171.9 million, primarily driven by increased investments in receivables and inventories to support sales growth and address supply chain issues, and payments of management incentive compensation Cash Flow Activities | Cash Flow Activity | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash (used in) provided by operating activities | $(171.9) | $120.5 | | Net cash (used in) provided by investing activities | $(15.1) | $44.5 | | Net cash provided by (used in) financing activities | $167.1 | $(312.2) | - Operating cash outflow was primarily due to a $324.6 million increase in trade accounts receivable and a $214.2 million increase in inventories[103][156] - Capital expenditures totaled $15.2 million, mainly for internal-use computer software and IT hardware[104] Financing Availability Wesco amended its Accounts Receivable Securitization Facility and Revolving Credit Facility in March 2022, increasing borrowing capacities, extending maturity dates, and transitioning to SOFR-based interest rates, resulting in $715.4 million in total available liquidity as of March 31, 2022 - The Accounts Receivable Securitization Facility's purchase limit increased from $1,300 million to $1,400 million, and its maturity date was extended to March 1, 2025[106][154] - The Revolving Credit Facility's commitments increased from $1,200 million to $1,350 million, and its maturity date was extended to March 1, 2027[106][155] - As of March 31, 2022, total available liquidity was $715.4 million, comprising $554.2 million from the Revolving Credit Facility, $100.0 million from the Receivables Facility, and $61.2 million in cash[107][143] Results of Operations This section provides a detailed comparative analysis of Wesco's income statement items for Q1 2022 versus Q1 2021, showing significant improvements in net sales, gross profit margin, and income from operations across all segments, while also noting increases in SG&A expenses and depreciation/amortization Net Sales Net sales increased 22.0% to $4.9 billion in Q1 2022, driven by strong demand, approximately 8% price inflation, expanded product and service offerings, and secular growth trends, with all segments reporting double-digit organic sales growth Net Sales by Segment and Growth | Segment | Net Sales (Q1 2022, in millions) | Net Sales (Q1 2021, in millions) | Reported Growth | Organic Sales Growth | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------- | :------------------- | | Electrical & Electronic Solutions | $2,089.9 | $1,720.8 | 21.5% | 20.8% | | Communications & Security Solutions | $1,434.2 | $1,250.6 | 14.7% | 13.9% | | Utility & Broadband Solutions | $1,408.0 | $1,070.0 | 31.6% | 30.4% | | Total net sales | $4,932.2 | $4,041.5 | 22.0% | 21.2% | - Pricing related to inflation favorably impacted net sales by approximately 8% for the three months ended March 31, 2022[112] - Organic sales growth was positively impacted by 1.6% due to the number of workdays, and negatively impacted by 0.5% from foreign exchange rates and 0.3% from divestitures[112] Cost of Goods Sold Cost of goods sold increased by $0.7 billion in Q1 2022, but decreased as a percentage of net sales by 120 basis points to 78.7%, reflecting improved pricing strategies and profit margin programs, along with higher supplier volume rebate income Cost of Goods Sold | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Cost of goods sold | $3,883.1 | $3,230.4 | | Cost of goods sold as % of net sales | 78.7% | 79.9% | - The 120 basis point decrease in cost of goods sold as a percentage of net sales reflects a focus on value-driven pricing, profit margin improvement, and higher supplier volume rebate income[117] Selling, General and Administrative Expenses SG&A expenses increased by $81.5 million to $718.1 million in Q1 2022, primarily due to higher payroll, variable compensation, and IT expenses for digital transformation, though as a percentage of net sales, they decreased to 14.6% Selling, General and Administrative Expenses | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Selling, general and administrative expenses | $718.1 | $636.6 | | SG&A expenses as % of net sales | 14.6% | 15.8% | | Adjusted selling, general and administrative expenses | $692.5 | $599.2 | - The increase in SG&A was driven by $37.2 million higher payroll and payroll-related expenses (variable and stock-based compensation, salaries) and $44.3 million higher non-payroll costs (shipping, IT expenses for digital transformation)[119][120] Depreciation and Amortization Depreciation and amortization increased by $5.8 million to $47.0 million in Q1 2022, including $5.3 million from accelerated amortization due to changes in the estimated useful lives of certain legacy trademarks as the company migrates to a master brand architecture Depreciation and Amortization | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Depreciation and amortization | $47.0 | $41.2 | - Q1 2022 includes $5.3 million in accelerated amortization expense due to changes in estimated useful lives of legacy trademarks migrating to a master brand architecture[121] Income from Operations Income from operations significantly increased by 113.2% to $284.0 million in Q1 2022, driven by sales growth, lower cost of goods sold as a percentage of net sales, and integration cost synergies, despite higher SG&A and IT expenses, with all segments showing improved performance Income from Operations | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Income from operations | $284.0 | $133.3 | | Adjusted income from operations | $314.9 | $170.6 | Income from Operations by Segment | Segment | Income from Operations (Q1 2022, in millions) | Income from Operations (Q1 2021, in millions) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Electrical & Electronic Solutions | $178.8 | $100.1 | | Communications & Security Solutions | $104.0 | $74.0 | | Utility & Broadband Solutions | $129.9 | $87.0 | | Corporate | $(128.7) | $(127.9) | - Income from operations for Q1 2022 was not materially affected by higher pricing related to inflation due to offsetting higher product costs[124] Interest Expense, net Net interest expense decreased by $6.8 million to $63.6 million in Q1 2022, primarily due to the repayment of fixed-rate debt with variable-rate debt that has lower borrowing rates Interest Expense, Net | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | | Interest expense, net | $63.6 | $70.4 | - The decrease in interest expense reflects the repayment of fixed-rate debt with variable debt that has lower borrowing rates[129] Other Expense (Income), net Wesco reported other non-operating expense of $1.1 million in Q1 2022, a shift from income in the prior year, primarily due to a $3.6 million foreign currency exchange loss, partially offset by net benefits from pension costs Other Expense (Income), Net | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Other expense (income), net | $1.1 | $(2.8) | | Foreign currency exchange loss | $3.6 | $1.0 | | Net benefits from pension costs | $3.6 | $4.1 | Income Taxes The provision for income taxes increased to $37.7 million in Q1 2022, resulting in an effective tax rate of 17.2%, influenced by discrete income tax benefits from reductions to the valuation allowance against foreign tax credit carryforwards and deductible stock-based compensation Income Taxes | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Provision for income taxes | $37.7 | $6.5 | | Effective tax rate | 17.2% | 9.9% | | Adjusted provision for income taxes | $45.7 | $14.7 | - Discrete income tax benefits of $13.4 million (valuation allowance) and $5.8 million (stock-based compensation) reduced the estimated annual effective tax rate by approximately 8.7 percentage points in Q1 2022[76][131] Net Income and Earnings per Share Net income for Q1 2022 more than doubled to $181.6 million, and diluted EPS significantly increased to $3.19, with adjusted figures showing even stronger growth after excluding merger-related costs and accelerated trademark amortization Net Income and Earnings Per Share | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net income | $181.6 | $59.2 | | Net income attributable to common stockholders | $166.9 | $44.8 | | Diluted EPS | $3.19 | $0.87 | | Adjusted net income attributable to common stockholders | $189.8 | $74.1 | | Adjusted diluted EPS | $3.63 | $1.43 | - Preferred stock dividends remained consistent at $14.4 million for both periods[135] - Adjusted diluted EPS increased by 153.8% year-over-year[98] EBITDA, Adjusted EBITDA and Adjusted EBITDA margin % This section reconciles net income to EBITDA and Adjusted EBITDA, demonstrating significant increases in both metrics for Q1 2022, with Adjusted EBITDA margin improving to 7.4%, reflecting strong operational performance and synergy realization EBITDA and Adjusted EBITDA Reconciliation | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | EBITDA | $329.9 | $177.3 | | Adjusted EBITDA | $364.1 | $216.5 | | Adjusted EBITDA margin % | 7.4% | 5.4% | - Adjusted EBITDA is defined as EBITDA before foreign exchange and other non-operating expenses (income), non-cash stock-based compensation expense, merger-related and integration costs, and net gain on divestitures[142] Liquidity and Capital Resources Wesco manages its liquidity through working capital, IT investments, capital expenditures, acquisitions, and debt service, maintaining a mix of fixed and variable rate debt, and expects sufficient liquidity for the next 12 months, prioritizing debt reduction, integration, and potential acquisitions - As of March 31, 2022, Wesco had $715.4 million in total available liquidity, including credit facilities and cash[143] - Approximately 58% of the company's debt portfolio was comprised of fixed rate debt as of March 31, 2022[146] Financial Leverage Ratio | Metric | As of March 31, 2022 | As of December 31, 2021 | | :---------------------- | :------------------- | :-------------------- | | Financial leverage ratio | 3.6 | 3.9 | - The financial leverage ratio has been reduced by 2.1 since the merger with Anixter[148] - Excess liquidity is expected to be directed primarily at debt reduction, integration activities, and potential acquisitions[147] Seasonality Wesco's operating results are not significantly affected by seasonal factors, although sales typically experience a reduced level of activity in the first and fourth quarters due to weather, with increases generally observed from March through October - Operating results are not significantly affected by seasonal factors[163] - Sales are usually affected by reduced activity in the first and fourth quarters due to weather, and typically increase from March through October[163] Critical Accounting Estimates There have been no significant changes to the critical accounting estimates previously disclosed in Wesco's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - No significant changes to critical accounting estimates were reported[164] Recent Accounting Standards For a description of recently adopted and recently issued accounting standards, refer to Note 2, 'Accounting Policies' of the unaudited Condensed Consolidated Financial Statements - Refer to Note 2, 'Accounting Policies' for details on recently adopted and issued accounting standards[167] Forward-Looking Statements This section contains forward-looking statements that are subject to known and unknown risks and uncertainties, including those related to the Wesco-Anixter transaction, integration challenges, market conditions, supply chain disruptions, inflation, and geopolitical events such as the Russia-Ukraine conflict - Statements are forward-looking and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[168] - Key risks include unexpected costs from the transaction, integration problems, ability to retain customers and personnel, achieving synergies, leverage, natural disasters, health epidemics (COVID-19), supply chain disruptions, inflationary cost pressures, and the impact of Russia's invasion of Ukraine[169] Item 3. Quantitative and Qualitative Disclosures About Market Risk. For a discussion of changes to the market risks previously disclosed, refer to Part I, Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and Part II, Item 1A, 'Risk Factors' within this report - Refer to Item 2 ('Management's Discussion and Analysis') and Item 1A ('Risk Factors') for disclosures regarding changes to market risks[170] Item 4. Controls and Procedures. Management, including the principal executive and financial officers, concluded that Wesco's disclosure controls and procedures and internal control over financial reporting were effective as of March 31, 2022, with no material changes occurring during the quarterly period - Disclosure controls and procedures and internal control over financial reporting were effective as of March 31, 2022[171] - No material changes in internal control over financial reporting occurred during the quarterly period ended March 31, 2022[172] PART II—OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity security sales, and a list of exhibits for the report Item 1. Legal Proceedings. Wesco is involved in various lawsuits and claims related to its business operations, as detailed in Note 10, but management does not anticipate that the ultimate outcome of these matters will have a material adverse effect on the company's financial condition or liquidity - The company is subject to various lawsuits and claims, including commercial, product, and employment matters[175] - Management believes the ultimate outcome of these matters is unlikely to have a material adverse effect on financial condition or liquidity[175] Item 1A. Risk Factors. Previously disclosed risk factors, such as political instability, armed conflict, trade sanctions, cybersecurity, economic instability, supply chain challenges, commodity pricing, and inflationary pressures, have been heightened by Russia's invasion of Ukraine in Q1 2022 - Existing risk factors, including political instability, armed conflict, and supply chain disruptions, have been heightened by Russia's invasion of Ukraine[176] - While Wesco's business has not been materially adversely affected to date, the situation remains unstable and uncertain, making future impacts unpredictable[176] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This section details issuer purchases of common stock during Q1 2022, totaling 136,180 shares at an average price of $123.31, primarily to satisfy tax withholding obligations arising from stock-based compensation awards Issuer Purchases of Common Stock | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----------------------- | :----------------------------- | :--------------------------- | | January 1 – January 31, 2022 | 3,600 | $129.49 | | February 1 – February 28, 2022 | 129,944 | $123.02 | | March 1 – March 31, 2022 | 2,636 | $129.04 | | Total | 136,180 | $123.31 | - Shares were purchased to satisfy tax withholding obligations from the exercise of stock-settled stock appreciation rights and vesting of restricted stock units and performance-based awards[177] Item 6. Exhibits. This section lists all exhibits filed with the Form 10-Q, including material contracts, certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rules 13a-14(a)/15d-14(a) and Section 906 of Sarbanes-Oxley Act), and various XBRL taxonomy documents - Exhibits include material contracts, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[178][179][180][181][183][184] Signatures The Form 10-Q report was duly signed on May 6, 2022, by David S. Schulz, Executive Vice President and Chief Financial Officer, and Matthew S. Kulasa, Senior Vice President, Corporate Controller and Chief Accounting Officer - The report was signed on May 6, 2022[187] - Signatories include David S. Schulz (Executive Vice President and Chief Financial Officer) and Matthew S. Kulasa (Senior Vice President, Corporate Controller and Chief Accounting Officer)[187]