# WESCO INTERNATIONAL INC (WCC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WESCO INTERNATIONAL INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/929008/000092900823000006/wcc-20221231.htm
Accession: 0000929008-23-000006
Filing date: 2023-02-21
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/WCC/
All MD&A years: /company/WCC/mda/
Previous year: /company/WCC/mda/fy2021/ (FY 2021)
Next year: /company/WCC/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in Item 8 of this 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 Item 1A of this Annual Report on Form 10-K. In this Item 7, “Wesco” refers to WESCO International, Inc., and its subsidiaries and its predecessors unless the context otherwise requires. References to “we,” “us,” “our” and the “Company” refer to Wesco and its subsidiaries.

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), our discussion and analysis of financial condition and results of operations includes certain non-GAAP financial measures, which are defined further below. These financial measures include organic sales growth, earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, adjusted EBITDA margin, financial leverage, adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense (income), adjusted provision for income taxes, adjusted income before income taxes, adjusted net income, adjusted net income attributable to WESCO International, Inc., adjusted net income attributable to common stockholders, and adjusted earnings per diluted share. We believe that these non-GAAP measures are helpful to users of our financial statements as they provide a better understanding of our financial condition and results of operations on a comparable basis. Additionally, certain non-GAAP measures either focus on or exclude items impacting comparability of results, allowing users to more easily compare our financial performance from period to period. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.

Company Overview

Wesco, headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.

We employ approximately 20,000 people, maintain relationships with more than 50,000 suppliers, and serve approximately 150,000 customers worldwide. With millions of products, end-to-end supply chain services, and leading digital capabilities, we provide innovative solutions to meet customer needs across commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. Our innovative value-added solutions include supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting and labeling, limited assembly of products and installation enhancement. We operate approximately 800 branches, warehouses and sales offices in more than 50 countries, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations.

In 2021, we established a new corporate brand strategy to adopt a single, master brand architecture. This initiative reflects our corporate integration strategy and simplifies engagement for our customers and suppliers. In 2022, we launched the master brand identity in North America and began migrating certain legacy sub-brands to the master brand architecture, a process that will continue for the next several years. Due to the strength of its recognition with customers and suppliers, we will continue to use the Anixter brand name globally for the foreseeable future.

We have operating segments comprising three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”). These operating segments are equivalent to our reportable segments. See Item 1, “Business” in this Annual Report on Form 10-K for a description of each of our reportable segments and their business activities.

Overall Financial Performance

Our financial results for 2022 compared to 2021 reflect double-digit sales growth driven by the benefits of price inflation and higher volumes, increased scale, secular demand trends and execution of our cross-sell program, as well as margin expansion and the realization of integration synergies, partially offset by higher selling, general and administrative (“SG&A”) payroll and payroll-related expenses, volume-related costs, along with expenses associated with our digital transformation initiatives.

Net sales for 2022 increased $3.2 billion, or 17.6%, over the prior year. The increase reflects price inflation and volume growth, secular demand trends, and execution of our cross-sell program, as well as the acquisition of Rahi Systems Holdings, Inc. (“Rahi Systems”) in the fourth quarter of 2022, partially offset by the negative impacts of fluctuations in foreign exchange rates and the divestiture of Wesco's legacy utility and data communications businesses in Canada in the first quarter of 2021. Cost of goods sold as a percentage of net sales was 78.2% and 79.2% for 2022 and 2021, respectively. The improvement of 100 basis points reflects our focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program and higher supplier volume rebates as a percentage of net sales. Cost of

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goods sold for 2021 included a write-down to the carrying value of certain personal protective equipment inventories, which increased cost of goods sold as a percentage of net sales by approximately 14 basis points.

Income from operations was $1.4 billion for 2022, compared to $0.8 billion for 2021. Income from operations as a percentage of net sales was 6.7% for the current year, compared to 4.4% for the prior year. Income from operations for 2022 includes merger-related and integration costs of $67.4 million. Additionally, in connection with an integration initiative to review our brand strategy, certain legacy trademarks are migrating to a master brand architecture, which resulted in $9.8 million of accelerated amortization expense in 2022. Adjusted for these items, income from operations was 7.1% of net sales in 2022. For 2021, income from operations adjusted for merger-related and integration costs of $158.5 million, accelerated trademark amortization expense of $32.0 million, and a net gain of $8.9 million resulting from the divestiture of our legacy utility and data communications businesses in Canada was 5.4% of net sales. For 2022, income from operations compared to the prior year improved across all segments and reflects sales growth and lower cost of goods sold as a percentage of net sales, as well as the realization of integration cost synergies and a reduction to incentive compensation expense. Income from operations for 2022 was negatively impacted by higher salaries due to wage inflation and increased headcount, as well as an increase in commissions and volume-related costs driven by significant sales growth. In addition, digital transformation initiatives contributed to higher expenses in 2022, including those related to professional and consulting fees.

Earnings per diluted share for 2022 was $15.33, based on 52.4 million diluted shares, compared to $7.84 for 2021, based on 52.0 million diluted shares. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for 2022 was $16.42. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on divestitures, a $36.6 million curtailment gain resulting from the remeasurement of our pension obligations in the U.S. and Canada due to amending certain terms of such defined benefit plans, and the related income tax effects, earnings per diluted share for 2021 was $9.98. Adjusted earnings per diluted share increased 64.5% year-over-year.

Our industry and the broader economy are experiencing supply chain challenges, including product delays and backlogged orders, shortages in raw materials and components, labor shortages, transportation challenges, and higher costs. During 2022, we continued to experience strong demand from many of our customers, along with uncertainty in the amount of time it takes to receive products from our suppliers. We are aggressively managing supply chain issues and have begun to experience some improvements, although we anticipate that supply chain constraints and inflationary pressures may extend into 2023. We intend to continue to actively manage the impact of inflation on our results of operations. We cannot reasonably estimate possible future impacts from these disruptions at this time.

There continues to be ongoing uncertainties associated with the COVID-19 pandemic, including with respect to economic conditions and the possible resurgence of COVID-19 whether through the emergence of new variants of the virus or otherwise. As the duration and severity of the COVID-19 pandemic cannot be predicted, there is significant uncertainty as to the ultimate impact that COVID-19 will have on our business, results of operations and financial condition.

Cash Flow

Operating cash flow for 2022 was $11.0 million. Net cash provided by operating activities included net income of $862.1 million and non-cash adjustments to net income totaling $243.1 million, which were primarily comprised of depreciation and amortization of $179.0 million, stock-based compensation expense of $46.4 million, amortization of debt discount and debt issuance costs of $15.2 million, and deferred income taxes of $1.2 million. Operating cash flow also included changes in assets and liabilities of $1.1 billion, which were primarily comprised of an increase in inventories of $817.0 million resulting from supply chain challenges and to support growth in our sales backlog, including project-based business, as well as an increase in trade accounts receivable of $690.6 million due to significant sales growth. These cash outflows were partially offset by an increase in accounts payable of $552.9 million due to the aforementioned higher purchases of inventory.

Investing activities primarily included $255.4 million of cash paid to acquire Rahi Systems, less cash acquired of $68.6 million, and $99.4 million of capital expenditures mostly consisting of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of branches, warehouses and sales offices.

Financing activities were primarily comprised of net borrowings of $433.0 million related to our revolving credit facility (the “Revolving Credit Facility”) and net borrowings of $265.0 million related to our accounts receivable securitization facility (the “Receivables Facility”). Financing activities for 2022 also included $57.4 million of dividends paid to holders of our Series A Preferred Stock, $25.8 million of payments for taxes related to the exercise and vesting of stock-based awards, borrowings and repayments of $19.5 million and $19.5 million, respectively, related to our various international lines of credit, and $11.1 million of common stock repurchases.

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Financing Availability

During 2022 we amended our Receivables Facility and Revolving Credit Facility to, among other things, increase their borrowing capacities, extend their maturity dates, and replace the London Inter-Bank Offered Rate-based (“LIBOR”) interest rate options with Secured Overnight Financing Rate-based (“SOFR”) interest rate options.

See Note 9, “Debt” of our Notes to Consolidated Financial Statements for additional disclosure regarding the amendments to these facilities.

As of December 31, 2022, we had $664.9 million in total available borrowing capacity under our Revolving Credit Facility. Available borrowing capacity under our Receivables Facility was $50.0 million. The Revolving Credit Facility and the Receivables Facility mature in March 2027 and March 2025, respectively. As of December 31, 2022, we also had $10.1 million of borrowing capacity available under our international lines of credit that did not directly reduce availability under the Revolving Credit Facility.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations, including those related to goodwill and indefinite-lived intangible assets, defined benefit pension plans, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. If actual market conditions are less favorable than those projected by management, additional adjustments to reserve items may be required. We believe the following accounting estimates are the most critical to the understanding of our consolidated financial statements as they require subjective or complex judgments by management.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually as of October 1, or more frequently if triggering events occur, indicating that their carrying values may not be recoverable. We test for goodwill impairment on a reporting unit level. We first assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant events such as changes in key personnel, changes in the composition or carrying amount of the net assets of a reporting unit, and changes in share price, to determine whether it is more likely than not that the fair value of our reporting units are less than their carrying values. If the qualitative assessment indicates that the fair values of our reporting units may not exceed their respective carrying values, then we perform a quantitative test for impairment by comparing the fair value of each reporting unit to its carrying value. We determine the fair values of our reporting units using a discounted cash flow analysis and consideration of market multiples. The discounted cash flow analysis uses certain assumptions, including expected operating margins supported by a combination of historical results, current forecasts, market data and recent economic events, which are categorized within Level 3 of the fair value hierarchy. We use a discount rate that reflects market participants' cost of capital. We evaluate the recoverability of indefinite-lived intangible assets using the relief-from-royalty method based on projected financial information. Significant inputs used in the relief-from-royalty method include projected revenues, discount rates, royalty rates, and applicable income tax rates.

We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter of 2022 by assessing qualitative factors to determine whether it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets were less than their respective carrying amounts. As a result of this assessment, we determined that it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets continued to exceed their respective carrying amounts and, therefore, a quantitative impairment test was not necessary.

The determination of fair value involves significant management judgment, particularly as it relates to the underlying assumptions and factors around future expected operating margins and discount rate. Management applies its best judgment when assessing the reasonableness of financial projections. Fair values are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment tests will prove to be an accurate prediction of future results.

See Note 5, “Goodwill and Intangible Assets” of our Notes to Consolidated Financial Statements for additional disclosure regarding goodwill and indefinite-lived intangible assets.

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Defined Benefit Pension Plans

Liabilities and expenses for defined benefit pension plans are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated cash flows, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, retirement age, and mortality).

Liabilities for defined benefit pension plans are particularly sensitive to changes in the discount rate. At the end of each fiscal year, we determine the discount rate to measure our defined benefit pension plan liabilities at their present value. The discount rate reflects the current rate at which the defined benefit pension plan liabilities could be effectively settled at the end of the year. This rate is estimated using a yield curve based on corporate bond data, which we believe is consistent with observable market conditions and industry standards for developing spot rate curves. The consolidated weighted-average discount rate used to measure the projected benefit obligation of all plans was 4.6% and 2.6% at December 31, 2022 and 2021, respectively. As a sensitivity measure, the effect of a 50-basis-point decline in the assumed discount rate would result in an increase in the expense for 2023 of approximately $1.0 million, and an increase in our projected benefit obligations at December 31, 2022 of $41.0 million. The impact of a 50-basis-point increase in the assumed discount rate would result in a decrease in the expense for 2023 of approximately $3.0 million, and a decrease in our projected benefit obligations at December 31, 2022 of $37.0 million. Changes in the expected long-term rate of return on plan assets and assumptions relating to the employee workforce are less likely to have a material impact on the measurement of defined benefit pension plan liabilities.

See Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements for additional disclosure regarding defined benefit pension plans.

Income Taxes

We recognize deferred tax assets consistent with amounts expected to be realized. To make such determination, management evaluates all positive and negative evidence, including but not limited to, prior, current and future taxable income, tax planning strategies and future reversals of existing taxable temporary differences. A valuation allowance is recognized if it is “more-likely-than-not” that some or all of a deferred tax asset will not be realized. We regularly assess the realizability of deferred tax assets.

We account for uncertainty in income taxes using a “more-likely-than-not” recognition threshold. Due to the subjectivity inherent in the evaluation of uncertain tax positions, the tax benefit ultimately recognized may materially differ from the estimate recognized in the consolidated financial statements. We recognize interest and penalties related to uncertain tax benefits as part of interest expense and income tax expense, respectively.

See Note 11, “Income Taxes” of our Notes to Consolidated Financial Statements for additional disclosure regarding income taxes.

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Results of Operations

The following table sets forth the percentage relationship to net sales of the financial statement line items in our Consolidated Statements of Income and Comprehensive Income for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net sales","100.0","%","","100.0","%","","100.0","%"],["Cost of goods sold (excluding depreciation and amortization)","78.2","","","79.2","","","81.1"],["Selling, general and administrative expenses","14.2","","","15.3","","","15.1"],["Depreciation and amortization","0.8","","","1.1","","","1.0"],["Income from operations","6.8","","","4.4","","","2.8"],["Interest expense, net","1.5","","","1.5","","","1.8"],["Other expense (income), net","\u2014","","","(0.3)","","","\u2014"],["Income before income taxes","5.3","","","3.2","","","1.0"],["Provision for income taxes","1.3","","","0.6","","","0.2"],["Net income","4.0","","","2.6","","","0.8"],["Net income (loss) attributable to noncontrolling interests","\u2014","","","\u2014","","","\u2014"],["Net income attributable to WESCO International, Inc.","4.0","","","2.6","","","0.8"],["Preferred stock dividends","0.3","","","0.4","","","0.2"],["Net income attributable to common stockholders","3.7","%","","2.2","%","","0.6","%"]]
[[/GREPCENT_TABLE]]

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2022 Compared to 2021

Net Sales

The following table sets forth net sales and organic sales growth by segment for the periods presented:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended","","Growth/(Decline)"],["(In thousands)","December 31, 2022","","December 31, 2021","","Reported","","Acquisition/Divestiture Impact","","Foreign Exchange Impact","","Workday Impact","","Organic Growth"],["EES","$","8,823,331","","","$","7,621,263","","","15.8%","","(0.1)","%","","(1.8)","%","","0.4","%","","17.3","%"],["CSS","6,401,468","","","5,715,238","","","12.0%","","2.0","%","","(1.9)","%","","0.4","%","","11.5","%"],["UBS","6,195,317","","","4,881,011","","","26.9%","","(0.1)","%","","(0.6)","%","","0.4","%","","27.2","%"],["Total net sales","$","21,420,116","","","$","18,217,512","","","17.6%","","0.5","%","","(1.5)","%","","0.4","%","","18.2","%"]]
[[/GREPCENT_TABLE]]

Note: Organic sales growth is a non-GAAP financial measure of sales performance. Organic sales growth is calculated by deducting the percentage impact from acquisitions and divestitures for one year following the respective transaction, fluctuations in foreign exchange rates and number of workdays from the reported percentage change in consolidated net sales.

Net sales were $21.4 billion for 2022 compared with $18.2 billion for 2021, an increase of 17.6%. The increase primarily reflects price inflation and volume growth, secular demand trends, and execution of our cross-sell program. Organic sales for 2022 grew 18.2% as the acquisition of Rahi Systems in the fourth quarter of 2022, partially offset by the divestiture of Wesco's legacy utility and data communications businesses in Canada in the first quarter of 2021, positively impacted reported net sales by 0.5%. Additionally, the number of workdays positively impacted reported net sales by 0.4%, while fluctuations in foreign exchange rates negatively impacted reported net sales by 1.5%. All segments reported double-digit sales growth versus the prior year, as discussed below. For the year ended December 31, 2022, pricing related to inflation favorably impacted our net sales by approximately 8%.

EES reported net sales of $8.8 billion for 2022 compared to $7.6 billion for 2021, an increase of 15.8%. Organic sales for 2022 grew 17.3% as the number of workdays positively impacted reported net sales by 0.4%, while fluctuations in foreign exchange rates and the Canadian divestitures described in our overall results above negatively impacted reported net sales by 1.8% and 0.1%, respectively. The year-over-year increase in organic sales reflects price inflation, growth in our industrial, construction, and original equipment manufacturer businesses, as well as the benefits of cross selling and secular growth trends. Additionally, supply chain constraints have had a negative impact on sales in both 2022 and 2021; however, these pressures have begun to moderate.

CSS reported net sales of $6.4 billion for 2022 compared to $5.7 billion for 2021, an increase of 12.0%. Organic sales for 2022 grew 11.5% as the acquisition of Rahi Systems in the fourth quarter of 2022 and the number of workdays positively impacted reported net sales by 2.0% and 0.4%, respectively, while fluctuations in foreign exchange rates negatively impacted reported net sales by 1.9%. The year-over-year increase in organic sales reflects strong growth in our security solutions and network infrastructure businesses, as well as the benefits of cross selling and some improvements in supply chain constraints.

UBS reported net sales of $6.2 billion for 2022 compared to $4.9 billion for 2021, an increase of 26.9%. Organic sales for 2022 grew 27.2% as the number of workdays positively impacted reported net sales by 0.4%, while fluctuations in foreign exchange rates and the Canadian divestitures described in our overall results above negatively impacted reported net sales by 0.6% and 0.1%, respectively. The year-over-year increase in organic sales reflects price inflation, broad-based growth driven by investments in electrification, green energy, utility grid modernization and hardening, and rural broadband development, as well as expansion in our integrated supply business.

Cost of Goods Sold

Cost of goods sold for 2022 was $16.8 billion compared to $14.4 billion for 2021, an increase of $2.4 billion. Cost of goods sold as a percentage of net sales was 78.2% and 79.2% for 2022 and 2021, respectively. The favorable reduction of 100 basis points reflects our focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program and higher supplier volume rebates as a percentage of net sales. Cost of goods sold for 2021 included a write-down to the carrying value of certain personal protective equipment inventories, which increased cost of goods sold as a percentage of net sales by approximately 14 basis points.

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Selling, General and Administrative Expenses

SG&A expenses primarily include payroll and payroll-related costs, shipping and handling, travel and entertainment, facilities, utilities, information technology expenses, professional and consulting fees, credit losses, gains (losses) on the sale of property and equipment, as well as real estate and personal property taxes. SG&A expenses for 2022 totaled $3.0 billion versus $2.8 billion for 2021, an increase of $252.6 million, or 9.0%. As a percentage of net sales, SG&A expenses were 14.2% and 15.3% for 2022 and 2021, respectively. SG&A expenses for 2022 include merger-related and integration costs of $67.4 million. Adjusted for this amount, SG&A expenses for 2022 were 13.9% of net sales. SG&A expenses for 2021 include merger-related and integration costs of $158.5 million, as well as a net gain of $8.9 million resulting from the Canadian divestitures. Adjusted for these amounts, SG&A expenses were 14.5% of net sales for 2021.

SG&A payroll and payroll-related expenses for 2022 of $1.9 billion increased by $128.7 million compared to 2021 primarily as a result of higher salaries due to wage inflation and increased headcount, as well as an increase in commissions driven by significant sales growth, partially offset by a reduction to incentive compensation expense.

SG&A expenses not related to payroll and payroll-related costs for 2022 were $1.1 billion, an increase of $123.9 million compared to 2021. The increase primarily reflects higher volume-related costs driven by significant sales growth and digital transformation initiatives that contributed to higher expenses in 2022, including those related to professional and consulting fees, as well as the absence of the net gain recognized in the first quarter of 2021 on the Canadian divestitures. These increases were partially offset by the realization of integration cost synergies and lower costs associated with integration activities.

Depreciation and Amortization

Depreciation and amortization decreased $19.6 million to $179.0 million for 2022, compared to $198.6 million for 2021. Depreciation and amortization for 2022 and 2021 includes $9.8 million and $32.0 million, respectively, of accelerated amortization expense resulting from changes in the estimated useful lives of certain legacy trademarks that are migrating to our master brand architecture, as described in our overall results above.

Income from Operations

The following tables set forth income from operations by segment for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Income from operations","","$","799,419","","","$","525,693","","","$","650,470","","","$","(537,497)","","","$","1,438,085"],["","","Year Ended December 31, 2021"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Income from operations","","$","542,059","","","$","395,343","","","$","412,740","","","$","(548,269)","","","$","801,873"]]
[[/GREPCENT_TABLE]]

Income from operations was $1.4 billion for 2022 compared to $0.8 billion for 2021. The increase of $636.2 million, or 79.3%, reflects sales growth and lower cost of goods sold as a percentage of net sales, along with the realization of integration synergies and a reduction to incentive compensation expense, partially offset by higher salaries and commissions, volume-related costs, as well as expenses associated with our digital transformation initiatives.

EES reported income from operations of $799.4 million for 2022 compared to $542.1 million for 2021. The increase of $257.3 million primarily reflects the factors impacting the overall business, as described above.

CSS reported income from operations of $525.7 million for 2022 compared to $395.3 million for 2021. The increase of $130.4 million primarily reflects the factors impacting the overall business, as described above. Additionally, income from operations for 2021 was negatively impacted by approximately $21.1 million from the inventory write-down described under Cost of Goods Sold above.

UBS reported income from operations of $650.5 million for 2022 compared to $412.7 million for 2021. The increase of $237.8 million primarily reflects the factors impacting the overall business, as described above, offset by the benefit in the first quarter of 2021 from the net gain on the Canadian divestitures.

Corporate, which primarily incurs costs related to treasury, tax, information technology, legal and other centralized functions, recognized net expenses of $537.5 million for 2022, compared to $548.3 million for 2021. The decrease of $10.8 million primarily reflects lower professional and consulting fees associated with integration activities, partially offset by an increase in information technology expenses related to our digital transformation initiatives as well as higher salaries due to wage inflation and increased headcount.

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Interest Expense, net

Net interest expense totaled $294.4 million for 2022 compared to $268.1 million for 2021. The increase of $26.3 million, or 9.8%, reflects higher borrowings and an increase in variable interest rates.

Other Expense (Income), net

Other non-operating expense totaled $7.0 million for 2022 compared to other non-operating income of $48.1 million for 2021. As disclosed in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, we recognized net benefits of $14.8 million and $53.2 million associated with the non-service cost components of net periodic pension (benefit) cost for 2022 and 2021, respectively. The non-service cost components of net periodic pension (benefit) cost for 2021 includes a $36.6 million curtailment gain. Due to fluctuations in the U.S. dollar against certain foreign currencies, for example the Canadian dollar, we recorded foreign currency exchange losses of $19.9 million and $2.8 million in 2022 and 2021, respectively.

Income Taxes

The provision for income taxes was $274.5 million for 2022 compared to $115.5 million for 2021, resulting in effective tax rates of 24.2% and 19.9%, respectively. The effective tax rates for both the current year and the prior year were favorably impacted by the tax benefits related to intercompany financing and reductions in the valuation allowance recorded against certain foreign tax credit carryforwards. The higher effective tax rate in the current year is primarily due to lower tax benefits from intercompany financing arrangements resulting from changes in Canadian tax law and certain foreign derived intangible income.

Net Income and Earnings per Share

Net income for 2022 was $862.1 million compared to $466.4 million for 2021, an increase of $395.7 million, or 84.8%.

Preferred stock dividends expense, which relates to the fixed-rate reset cumulative perpetual preferred stock, Series A, that was issued in connection with the merger with Anixter, was $57.4 million for 2022 and 2021.

Net income and earnings per diluted share attributable to common stockholders were $803.1 million and $15.33, respectively, for 2022 compared to $408.0 million and $7.84, respectively, for 2021. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $860.1 million and $16.42, respectively, for the year ended December 31, 2022. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on Canadian divestitures, gain on curtailment of defined benefit pension plans, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $519.3 million and $9.98, respectively, for the year ended December 31, 2021.

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The following tables reconcile selling, general and administrative expenses, income from operations, other non-operating expense (income), provision for income taxes and earnings per diluted share to adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense (income), adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted SG&A Expenses:","2022","","2021"],["","(In thousands)"],["Selling, general and administrative expenses","$","3,044,223","","","$","2,791,641"],["Merger-related and integration costs","(67,446)","","","(158,484)"],["Net gain on divestitures","\u2014","","","8,927"],["Adjusted selling, general and administrative expenses","$","2,976,777","","","$","2,642,084"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Income from Operations:","2022","","2021"],["","(In thousands)"],["Income from operations","$","1,438,085","","","$","801,873"],["Merger-related and integration costs","67,446","","","158,484"],["Accelerated trademark amortization","9,774","","","32,021"],["Net gain on divestitures","\u2014","","","(8,927)"],["Adjusted income from operations","$","1,515,305","","","$","983,451"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Other Expense (Income), net:","2022","","2021"],["","(In thousands)"],["Other expense (income), net","$","7,014","","","$","(48,112)"],["Curtailment gain","\u2014","","","36,580"],["Adjusted other expense (income), net","$","7,014","","","$","(11,532)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Provision for Income Taxes:","2022","","2021"],["","(In thousands)"],["Provision for income taxes","$","274,529","","","$","115,510"],["Income tax effect of adjustments to income from operations and other income, net(1)","20,165","","","33,672"],["Adjusted provision for income taxes","$","294,694","","","$","149,182"]]
[[/GREPCENT_TABLE]]

(1)    The adjustments to income from operations for the years ended December 31, 2022 and 2021 have been tax effected at rates of 26.1% and 23.5%, respectively. The adjustment to other-non operating income for the year ended December 31, 2021 has been tax effected at a rate of 24.6% as the majority of the curtailment gain relates to our Canadian defined benefit pension plans.

31

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Earnings Per Diluted Share:","2022","","2021"],["(In thousands, except per share data)"],["Adjusted income from operations","$","1,515,305","","","$","983,451"],["Interest expense, net","294,420","","","268,073"],["Adjusted other expense (income), net","7,014","","","(11,532)"],["Adjusted income before income taxes","1,213,871","","","726,910"],["Adjusted provision for income taxes","294,694","","","149,182"],["Adjusted net income","919,177","","","577,728"],["Net income attributable to noncontrolling interests","1,651","","","1,020"],["Adjusted net income attributable to WESCO International, Inc.","917,526","","","576,708"],["Preferred stock dividends","57,408","","","57,408"],["Adjusted net income attributable to common stockholders","$","860,118","","","$","519,300"],["Diluted shares","52,395","","","52,030"],["Adjusted earnings per diluted share","$","16.42","","","$","9.98"]]
[[/GREPCENT_TABLE]]

Note: For the year ended December 31, 2022, SG&A expenses, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, accelerated trademark amortization expense associated with migrating to our master brand architecture, and the related income tax effects. For the year ended December 31, 2021, SG&A expenses, income from operations, other non-operating income, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, a net gain on the divestiture of our legacy utility and data communications businesses in Canada, accelerated trademark amortization expense associated with migrating to our master brand architecture, a curtailment gain, 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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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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Net income attributable to common stockholders","","$","801,283","","$","526,985","","$","648,478","","$","(1,173,683)","","$","803,063"],["Net income attributable to noncontrolling interests","","158","","\u2014","","\u2014","","1,493","","1,651"],["Preferred stock dividends","","\u2014","","\u2014","","\u2014","","57,408","","57,408"],["Provision for income taxes","","\u2014","","\u2014","","\u2014","","274,529","","274,529"],["Interest expense, net","","\u2014","","\u2014","","\u2014","","294,420","","294,420"],["Depreciation and amortization","","42,621","","68,448","","23,251","","44,694","","179,014"],["EBITDA","","$","844,062","","$","595,433","","$","671,729","","$","(501,139)","","$","1,610,085"],["Other (income) expense, net","","(2,022)","","(1,292)","","1,992","","8,336","","7,014"],["Stock-based compensation expense(1)","","9,226","","4,859","","3,534","","23,418","","41,037"],["Merger-related and integration costs","","\u2014","","\u2014","","\u2014","","67,446","","67,446"],["Adjusted EBITDA","","$","851,266","","$","599,000","","$","677,255","","$","(401,939)","","$","1,725,582"],["Adjusted EBITDA margin %","","9.6","%","","9.4","%","","10.9","%","","","","8.1","%"],["(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the year ended December 31, 2022 excludes $5.4 million as such amount is included in merger-related and integration costs."],["","","Year Ended December 31, 2021"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Net income attributable to common stockholders","","$","543,633","","$","394,031","","$","412,698","","$","(942,388)","","$","407,974"],["Net income attributable to noncontrolling interests","","298","","\u2014","","\u2014","","722","","1,020"],["Preferred stock dividends","","\u2014","","\u2014","","\u2014","","57,408","","57,408"],["Provision for income taxes","","\u2014","","\u2014","","\u2014","","115,510","","115,510"],["Interest expense, net","","\u2014","","\u2014","","\u2014","","268,073","","268,073"],["Depreciation and amortization","","55,998","","82,870","","22,447","","37,239","","198,554"],["EBITDA","","$","599,929","","$","476,901","","$","435,145","","$","(463,436)","","$","1,048,539"],["Other (income) expense, net(1)","","(1,872)","","1,312","","42","","(47,594)","","(48,112)"],["Stock-based compensation expense(2)","","6,404","","2,607","","2,107","","14,581","","25,699"],["Merger-related and integration costs","","\u2014","","\u2014","","\u2014","","158,484","","158,484"],["Net gain on divestitures","","\u2014","","\u2014","","(8,927)","","\u2014","","(8,927)"],["Adjusted EBITDA","","$","604,461","","$","480,820","","$","428,367","","$","(337,965)","","$","1,175,683"],["Adjusted EBITDA margin %","","7.9","%","","8.4","%","","8.8","%","","","","6.5","%"],["(1) Corporate other non-operating income in the calculation of adjusted EBITDA for the year ended December 31, 2021 includes a $36.6 million curtailment gain."],["(2) Stock-based compensation expense in the calculation of adjusted EBITDA for the year ended December 31, 2021 excludes $5.1 million as such amount is included in merger-related and integration costs."]]
[[/GREPCENT_TABLE]]

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 other non-operating expense (income), non-cash stock-based compensation expense, merger-related and integration costs, and net gain on the divestiture of our legacy utility and data communications businesses in Canada. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.

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2021 Compared to 2020

The comparability of our financial performance for 2021 relative to 2020 is impacted by the fact that 2020 includes the results of operations of Anixter for only the second half of the year.

Net Sales

The following table sets forth net sales by segment for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In thousands)","","2021","","2020"],["EES","","$","7,621,263","","","$","5,479,760"],["CSS","","5,715,238","","","3,323,264"],["UBS","","4,881,011","","","3,522,971"],["Total net sales","","$","18,217,512","","","$","12,325,995"]]
[[/GREPCENT_TABLE]]

Net sales were $18.2 billion for 2021 compared with $12.3 billion for 2020, an increase of 47.8%. The increase primarily reflects the merger with Anixter, along with double-digit growth across all segments, as described below. For the year ended December 31, 2021, pricing related to inflation favorably impacted our net sales by approximately 3%.

EES reported net sales of $7.6 billion for 2021, compared to $5.5 billion for 2020, an increase of 39.1%. In addition to the impact from the merger with Anixter, the increase reflects improved economic conditions and strong demand.

CSS reported net sales of $5.7 billion for 2021, compared to $3.3 billion for 2020, an increase of 72.0%. The increase reflects the impact of the merger with Anixter and broad-based growth in our security solutions and network infrastructure businesses.

UBS reported net sales of $4.9 billion for 2021, compared to $3.5 billion for 2020, an increase of 38.5%. Along with the impact of the merger with Anixter, the increase reflects broad-based growth in our utility business and continued strong demand in our broadband business.

Cost of Goods Sold

Cost of goods sold for 2021 was $14.4 billion compared to $10.0 billion for 2020, an increase of $4.4 billion, reflecting the merger with Anixter. Cost of goods sold as a percentage of net sales was 79.2% and 81.1% for 2021 and 2020, respectively. The decrease of 190 basis points reflects strong execution on supplier price increases and cost initiatives to offset inflation, along with higher supplier volume rebate income, partially offset by higher expense related to excess and obsolete inventories, including write-downs totaling $26.2 million to the carrying value of certain personal protective equipment products. These write-downs of inventory impacted cost of goods sold as a percentage of net sales for 2021 by 14 basis points. Cost of goods sold as a percentage of net sales for 2020 was 80.6% excluding the effect of merger-related fair value adjustments of $43.7 million and an out-of-period adjustment related to inventory cost absorption accounting of $18.9 million.

Selling, General and Administrative Expenses

SG&A expenses primarily include payroll and payroll-related costs, shipping and handling, travel and entertainment, facilities, utilities, information technology expenses, professional and consulting fees, credit losses, gains (losses) on the sale of property and equipment, as well as real estate and personal property taxes. SG&A expenses for 2021 totaled $2.8 billion versus $1.9 billion for 2020. As a percentage of net sales, SG&A expenses were 15.3% and 15.1%, respectively. The increase in SG&A expenses of $932.6 million, or 50.2%, primarily reflects the impact of the merger with Anixter. SG&A expenses for 2021 were favorably impacted by the realization of integration synergies and structural cost takeout actions. SG&A expenses for 2021 include merger-related and integration costs of $158.5 million, as well as a net gain of $8.9 million resulting from the divestiture of our legacy utility and data communications businesses in Canada in the first quarter of 2021 in connection with the merger with Anixter. Adjusted for these amounts, SG&A expenses were 14.5% of net sales for 2021. SG&A expenses for 2020 include $132.2 million of merger-related and integration costs, as well as a gain on the sale of an operating branch in the U.S. of $19.8 million. Adjusted for these amounts, SG&A expenses were 14.2% of net sales for 2020, reflecting lower sales and the merger with Anixter, partially offset by cost reduction actions taken in response to the COVID-19 pandemic that lowered SG&A expenses as a percentage of net sales by approximately 40 basis points.

SG&A payroll and payroll-related expenses for 2021 of $1.8 billion increased by $589.5 million compared to 2020 primarily due to the merger with Anixter. Excluding the impact of the merger with Anixter, SG&A payroll and payroll-related expenses in 2021 were negatively impacted by higher salaries, variable compensation expense and benefit costs, including the impact of reinstating salaries and certain benefits for legacy Wesco employees that had been reduced or suspended in 2020 in response to the COVID-19 pandemic.

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SG&A expenses not related to payroll and payroll-related costs for 2021 were $991.1 million, an increase of $343.1 million compared to 2020 primarily due to the merger with Anixter. Excluding the impact of the merger with Anixter, these SG&A expenses for 2021 were negatively impacted by higher professional and consulting fees, and information technology expenses resulting from integration activities and digital transformation initiatives. Shipping and handling costs also increased in 2021 due to sales volume growth. The gain on the sale of an operating branch in the U.S., as described above, positively impacted SG&A expenses in 2020.

Depreciation and Amortization

Depreciation and amortization increased $77.0 million to $198.6 million for 2021, compared to $121.6 million for 2020. Depreciation and amortization for 2021 includes $63.3 million attributable to the amortization of identifiable intangible assets acquired in the merger with Anixter, as well as $32.0 million resulting from changes in the estimated useful lives of certain legacy trademarks that are migrating to our master brand architecture, as described above.

Income from Operations

The following tables set forth income from operations by segment for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Income from operations","","$","542,059","","","$","395,343","","","$","412,740","","","$","(548,269)","","","$","801,873"],["","","Year Ended December 31, 2020"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Income from operations","","$","260,207","","","$","217,163","","","$","231,702","","","$","(362,034)","","","$","347,038"]]
[[/GREPCENT_TABLE]]

Income from operations was $801.9 million for 2021, compared to $347.0 million for 2020. The increase of $454.9 million, or 131.1%, primarily reflects the merger with Anixter. For 2021, income from operations improved compared to 2020 across all segments and reflects sales growth and lower cost of goods sold as a percentage of net sales, as well as the realization of integration cost synergies and structural cost takeout actions. Income from operations for 2021 was negatively impacted by higher volume-related costs, and SG&A payroll and payroll-related expenses, as described above. Income from operations for 2021 was not materially effected by higher pricing related to inflation given the offsetting effect of higher costs for certain products.

EES reported income from operations of $542.1 million for 2021, compared to $260.2 million for 2020. The increase of $281.9 million primarily reflects the factors impacting the overall business, as described above. Additionally, income from operations for 2021 was negatively impacted by $4.4 million from the inventory write-down described under Cost of Goods Sold above, as well as accelerated trademark amortization expense of $13.3 million associated with migrating to our master brand architecture.

CSS reported income from operations of $395.3 million for 2021, compared to $217.2 million for 2020. The increase of $178.1 million primarily reflects the factors impacting the overall business, as described above. Additionally, income from operations for 2021 was negatively impacted by $21.1 million from the inventory write-down described under Cost of Goods Sold above, as well as accelerated trademark amortization expense of $17.4 million associated with migrating to our master brand architecture.

UBS reported income from operations of $412.7 million for 2021, compared to $231.7 million for 2020. The increase of $181.0 million primarily reflects the factors impacting the overall business, as described above, combined with the benefit from the net gain on the Canadian divestitures.

Corporate, which primarily incurs costs related to treasury, tax, information technology, legal and other centralized functions, recognized net expenses of $548.3 million for 2021, compared to $362.0 million for 2020. The increase of $186.3 million primarily reflects the merger with Anixter, as well as merger-related and integration costs, higher SG&A payroll and payroll-related expenses, professional and consulting fees, and information technology expenses, as described above.

Interest Expense, net

Net interest expense totaled $268.1 million for 2021, compared to $226.6 million for 2020. The increase of $41.5 million, or 18.3%, was driven by financing activity related to the merger with Anixter.

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Other Expense (Income), net

Other non-operating income totaled $48.1 million for 2021, compared to $2.4 million for 2020, an increase of $45.7 million. As disclosed in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, we recognized net benefits of $53.2 million and $8.2 million associated with the non-service cost components of net periodic pension (benefit) cost for 2021 and 2020, respectively. The non-service cost components of net periodic pension (benefit) cost for 2021 includes a $36.6 million curtailment gain. Due to fluctuations in the U.S. dollar against certain foreign currencies, we recognized net foreign currency exchange losses of $2.8 million and $4.9 million in 2021 and 2020, respectively.

Income Taxes

The provision for income taxes was $115.5 million for 2021, compared to $22.8 million for 2020, resulting in effective tax rates of 19.9% and 18.6%, respectively. The effective tax rate for 2021 was favorably impacted by a change in the mix of domestic and foreign earnings, tax benefits related to certain foreign derived intangible income, and a reduction in the valuation allowance recorded against certain foreign tax credit carryforwards. The effective tax rate for 2020 was impacted by one-time items associated with the Anixter merger.

Net Income and Earnings per Share

Net income for 2021 was $466.4 million, compared to $100.0 million for 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 with Anixter, was $57.4 million for 2021 compared to $30.1 million for 2020.

Net income and earnings per diluted share attributable to common stockholders were $408.0 million and $7.84, respectively, for 2021, compared with $70.4 million and $1.51, respectively, for 2020. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on Canadian divestitures, gain on curtailment of defined benefit pension plans, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $519.3 million and $9.98, respectively, for the year ended December 31, 2021. Adjusted for merger-related and integration costs, merger-related fair value adjustments, an out-of-period adjustment related to inventory cost absorption accounting, gain on sale of a U.S. operating branch, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $203.6 million and $4.37, respectively, for the year ended December 31, 2020.

The following tables reconcile selling, general and administrative expenses, income from operations, other non-operating income, provision for income taxes and earnings per diluted share to adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating income, adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted SG&A Expenses:","2021","","2020"],["","(In thousands)"],["Selling, general and administrative expenses","$","2,791,641","","","$","1,859,028"],["Merger-related and integration costs","(158,484)","","","(132,236)"],["Net gain on sale of assets and divestitures","8,927","","","19,816"],["Adjusted selling, general and administrative expenses","$","2,642,084","","","$","1,746,608"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Income from Operations:","2021","","2020"],["","(In thousands)"],["Income from operations","$","801,873","","","$","347,038"],["Merger-related and integration costs","158,484","","","132,236"],["Accelerated trademark amortization","32,021","","","\u2014"],["Merger-related fair value adjustments","\u2014","","","43,693"],["Out-of-period adjustment","\u2014","","","18,852"],["Net gain on sale of assets and divestitures","(8,927)","","","(19,816)"],["Adjusted income from operations","$","983,451","","","$","522,003"]]
[[/GREPCENT_TABLE]]

36

Table of Contents

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Other Income, net:","2021","","2020"],["","(In thousands)"],["Other income, net","$","(48,112)","","","$","(2,395)"],["Curtailment gain","36,580","","","\u2014"],["Adjusted other income, net","$","(11,532)","","","$","(2,395)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Provision for Income Taxes:","2021","","2020"],["","(In thousands)"],["Provision for income taxes","$","115,510","","","$","22,803"],["Income tax effect of adjustments to income from operations and other income, net(1)","33,672","","","41,817"],["Adjusted provision for income taxes","$","149,182","","","$","64,620"]]
[[/GREPCENT_TABLE]]

(1)    The adjustments to income from operations have been tax effected at rates of 23.5% and 23.9% for the years ended December 31, 2021 and 2020, respectively. The adjustment to other non-operating income for the year ended December 31, 2021 has been tax effected at a rate of 24.6% as the majority of the curtailment gain relates to our Canadian defined benefit pension plans.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Adjusted Earnings Per Diluted Share:","2021","","2020"],["(In thousands, except per share data)"],["Adjusted income from operations","$","983,451","","","$","522,003"],["Interest expense, net","268,073","","","226,591"],["Adjusted other income, net","(11,532)","","","(2,395)"],["Adjusted income before income taxes","726,910","","","297,807"],["Adjusted provision for income taxes","149,182","","","64,620"],["Adjusted net income","577,728","","","233,187"],["Net income (loss) attributable to noncontrolling interests","1,020","","","(521)"],["Adjusted net income attributable to WESCO International, Inc.","576,708","","","233,708"],["Preferred stock dividends","57,408","","","30,139"],["Adjusted net income attributable to common stockholders","$","519,300","","","$","203,569"],["Diluted shares","52,030","","","46,625"],["Adjusted earnings per diluted share","$","9.98","","","$","4.37"]]
[[/GREPCENT_TABLE]]

Note: For the year ended December 31, 2021, SG&A expenses, income from operations, other non-operating income, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, a net gain on the divestiture of our legacy utility and data communications businesses in Canada, accelerated trademark amortization expense associated with migrating to our master brand architecture, a curtailment gain, and the related income tax effects. For the year ended December 31, 2020, SG&A expenses, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, merger-related fair value adjustments, an out-of-period adjustment related to inventory cost absorption accounting, a gain on sale of an operating branch in the U.S., 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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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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Net income attributable to common stockholders","","$","543,633","","$","394,031","","$","412,698","","$","(942,388)","","$","407,974"],["Net income attributable to noncontrolling interests","","298","","\u2014","","\u2014","","722","","1,020"],["Preferred stock dividends","","\u2014","","\u2014","","\u2014","","57,408","","57,408"],["Provision for income taxes","","\u2014","","\u2014","","\u2014","","115,510","","115,510"],["Interest expense, net","","\u2014","","\u2014","","\u2014","","268,073","","268,073"],["Depreciation and amortization","","55,998","","82,870","","22,447","","37,239","","198,554"],["EBITDA","","$","599,929","","$","476,901","","$","435,145","","$","(463,436)","","$","1,048,539"],["Other (income) expense, net(1)","","(1,872)","","1,312","","42","","(47,594)","","(48,112)"],["Stock-based compensation expense(2)","","6,404","","2,607","","2,107","","14,581","","25,699"],["Merger-related and integration costs","","\u2014","","\u2014","","\u2014","","158,484","","158,484"],["Net gain on divestitures","","\u2014","","\u2014","","(8,927)","","\u2014","","(8,927)"],["Adjusted EBITDA","","$","604,461","","$","480,820","","$","428,367","","$","(337,965)","","$","1,175,683"],["Adjusted EBITDA margin %","","7.9","%","","8.4","%","","8.8","%","","","","6.5","%"],["(1) Corporate other non-operating income in the calculation of adjusted EBITDA for the year ended December 31, 2021 includes a $36.6 million curtailment gain."],["(2) Stock-based compensation expense in the calculation of adjusted EBITDA for the year ended December 31, 2021 excludes $5.1 million as such amount is included in merger-related and integration costs."],["","","Year Ended December 31, 2020"],["(In thousands)","","EES","","CSS","","UBS","","Corporate","","Total"],["Net income attributable to common stockholders","","$","262,829","","$","217,211","","$","231,678","","$","(641,297)","","$","70,421"],["Net loss attributable to noncontrolling interests","","(842)","","\u2014","","\u2014","","321","","(521)"],["Preferred stock dividends","","\u2014","","\u2014","","\u2014","","30,139","","30,139"],["Provision for income taxes","","\u2014","","\u2014","","\u2014","","22,803","","22,803"],["Interest expense, net","","\u2014","","\u2014","","\u2014","","226,591","","226,591"],["Depreciation and amortization","","35,811","","37,765","","22,380","","25,644","","121,600"],["EBITDA","","$","297,798","","$","254,976","","$","254,058","","$","(335,799)","","$","471,033"],["Other (income) expense, net","","(1,780)","","(48)","","24","","(591)","","(2,395)"],["Stock-based compensation expense(1)","","4,080","","1,403","","1,336","","9,895","","16,714"],["Merger-related and integration costs","","\u2014","","\u2014","","\u2014","","132,236","","132,236"],["Merger-related fair value adjustments","","15,411","","22,000","","6,282","","\u2014","","43,693"],["Out-of-period adjustment","","12,634","","2,325","","3,893","","\u2014","","18,852"],["Gain on sale of asset","","(19,816)","","\u2014","","\u2014","","\u2014","","(19,816)"],["Adjusted EBITDA","","$","308,327","","$","280,656","","$","265,593","","$","(194,259)","","$","660,317"],["Adjusted EBITDA margin %","","5.6","%","","8.4","%","","7.5","%","","","","5.4","%"],["(1) Stock-based compensation expense in the calculation of adjusted EBITDA for the year ended December 31, 2020 excludes $2.6 million as such amount is included in merger-related and integration costs."]]
[[/GREPCENT_TABLE]]

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 other non-operating expense (income), non-cash stock-based compensation expense, merger-related and integration costs, merger-related fair value adjustments, an out-of-period adjustment related to inventory cost absorption accounting, and net gains on the divestiture of our legacy utility and data communications businesses in Canada and sale of an operating branch in the U.S. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.

38

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Liquidity and Capital Resources

Our liquidity needs generally arise from fluctuations in our working capital requirements, information technology investments, capital expenditures, acquisitions and debt service obligations. As of December 31, 2022, we had $664.9 million in available borrowing capacity under our Revolving Credit Facility, after giving effect to outstanding letters of credit and certain borrowings under our international lines of credit, and $50.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of $294.5 million, provided liquidity of $1.0 billion. Cash included in our determination of liquidity represents cash in certain deposit and interest-bearing investment accounts. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions.

We regularly review our mix of fixed versus variable rate debt, and we may, from time to time, issue or retire borrowings and/or refinance existing debt in an effort to mitigate the impact of interest rate and foreign exchange rate fluctuations, and to maintain a cost-effective capital structure consistent with our anticipated capital requirements. Economic conditions have contributed to increases in interest rates during 2022. Further increases will raise the rates we pay on our variable rate debt and will contribute to higher interest expense versus prior periods.

At December 31, 2022, approximately 53% of our debt portfolio was comprised of fixed rate debt. We believe our capital structure has an appropriate mix of fixed versus variable rate debt and secured versus unsecured instruments.

Over the next several quarters, it is expected that excess liquidity will be directed primarily at debt reduction, integration activities and potential acquisitions, or returning capital to shareholders through the payment of dividends and our existing share repurchase authorization. We expect to maintain sufficient liquidity through our credit facilities and cash balances. We believe cash provided by operations and financing activities will be adequate to cover our operational and business needs for at least the next twelve months.

We communicate on a regular basis with our lenders regarding our financial and working capital performance, and liquidity position. We were in compliance with all financial covenants and restrictions contained in our debt agreements as of December 31, 2022.

We also measure our ability to meet our debt obligations based on our financial leverage ratio, which was 2.9 as of December 31, 2022 and 3.9 as of December 31, 2021.

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The following table sets forth our financial leverage ratio, which is a non-GAAP financial measure, for the periods presented:

[[GREPCENT_TABLE]]
[["","Twelve months ended"],["","December 31, 2022","","December 31, 2021"],["(In millions of dollars, except ratios)"],["Net income attributable to common stockholders","$","803.1","","","$","408.0"],["Net income attributable to noncontrolling interests","1.7","","","1.0"],["Preferred stock dividends","57.4","","","57.4"],["Provision for income taxes","274.5","","","115.5"],["Interest expense, net","294.4","","","268.1"],["Depreciation and amortization","179.0","","","198.5"],["EBITDA","$","1,610.1","","","$","1,048.5"],["Other expense (income), net(1)","7.0","","","(48.1)"],["Stock-based compensation expense","41.0","","","25.7"],["Merger-related and integration costs","67.4","","","158.5"],["Net gain on divestitures","\u2014","","","(8.9)"],["Adjusted EBITDA","$","1,725.5","","","$","1,175.7"],["","As of"],["","December 31, 2022","","December 31, 2021"],["Short-term debt and current portion of long-term debt, net","$","70.5","","","$","9.5"],["Long-term debt, net","5,346.0","","","4,701.5"],["Debt discount and debt issuance costs(2)","57.9","","","70.6"],["Fair value adjustments to Anixter Senior Notes due 2023 and 2025(2)","(0.3)","","","(0.9)"],["Total debt","5,474.1","","","4,780.7"],["Less: Cash and cash equivalents","527.3","","","212.6"],["Total debt, net of cash","$","4,946.8","","","$","4,568.1"],["Financial leverage ratio","2.9","","3.9"]]
[[/GREPCENT_TABLE]]

(1)    Other non-operating income for the year ended December 31, 2021 includes a $36.6 million curtailment gain.

(2)    Debt is presented in the 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 is a non-GAAP measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, excluding debt discount, debt issuance costs and fair value adjustments, net of cash, by adjusted EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as the trailing twelve months EBITDA before other non-operating expense (income), non-cash stock-based compensation expense, merger-related and integration costs, and net gain on the divestiture of our legacy utility and data communications businesses in Canada.

The undistributed earnings of our foreign subsidiaries amounted to approximately $1,865.4 million at December 31, 2022. Most of these earnings have been taxed in the U.S. under either the one-time tax on the deemed repatriation of undistributed foreign earnings (the “transition tax”), or the GILTI tax regime imposed by the Tax Cuts and Jobs Act of 2017. Future distributions of previously taxed earnings by our foreign subsidiaries should, therefore, result in minimal U.S. taxation. We have elected to pay the transition tax in installments over an eight year period, which ends in 2026. As of December 31, 2022, our remaining liability for the transition tax was $58.8 million. We continue to assert that the remaining undistributed earnings of our foreign subsidiaries are indefinitely reinvested. The distribution of earnings by our foreign subsidiaries in the form of dividends, or otherwise, may be subject to additional taxation. We estimate that additional taxes of approximately $91.4 million would be payable upon the remittance of all previously undistributed foreign earnings as of December 31, 2022, based upon the laws in effect on that date. We believe that we are able to maintain sufficient liquidity for our domestic operations and commitments without repatriating cash from our foreign subsidiaries.

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We finance our operating and investing needs primarily with borrowings under our Revolving Credit Facility, Receivables Facility, as well as uncommitted lines of credit entered into by certain of our foreign subsidiaries to support local operations, some of which are overdraft facilities. The Revolving Credit Facility has a borrowing limit of $1,725 million and the purchase limit under the Receivables Facility is $1,625 million. As of December 31, 2022, we had $1,023.6 million and $1,535.0 million outstanding under the Revolving Credit Facility and Receivables Facility, respectively. The maximum borrowing limits of our international lines of credit vary by facility and range between $0.6 million and $31.0 million. Our international lines of credit generally are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed by Wesco Distribution. Accordingly, certain borrowings under these lines directly reduce availability under our Revolving Credit Facility. As of December 31, 2022, there was $10.1 million of borrowing capacity available under the international lines of credit that did not directly reduce availability under the Revolving Credit facility. As of December 31, 2022, we had $7.1 million outstanding under our international lines of credit.

During 2022, we amended our Receivables Facility several times to increase its borrowing capacity from $1,300 million to $1,625 million, extend its maturity date from June 21, 2024 to March 1, 2025, and decrease the interest rate spread from 1.15% to 1.05%.

We also amended our Revolving Credit Facility several times in 2022 to increase its borrowing capacity from $1,200 million to $1,725 million, extend its maturity date from June 22, 2025 to March 1, 2027, and to increase the sub-facility for loans denominated in Canadian dollars from $500 million to $625 million.

The amendments to the Receivables Facility and the Revolving Credit Facility in 2022 also replaced the respective LIBOR-based interest rate options with SOFR-based interest rate options, including term SOFR and daily simple SOFR.

The Anixter 5.50% Senior Notes due 2023 will mature on March 1, 2023 and we expect to use borrowings under our Revolving Credit Facility to redeem the $58.6 million aggregate principal amount of this instrument.

For additional information regarding the amendments to the Receivables Facility and Revolving Credit Facility as well as disclosure of our debt instruments, including our outstanding indebtedness as of December 31, 2022, see Note 9, “Debt” of our Notes to Consolidated Financial Statements.

An analysis of cash flows for 2022 and 2021 follows:

Operating Activities

Net cash provided by operating activities for 2022 totaled $11.0 million, compared to $67.1 million of cash generated in 2021. Net cash provided by operating activities for 2022 included net income of $862.1 million and non-cash adjustments to net income totaling $243.1 million, which were primarily comprised of depreciation and amortization of $179.0 million, stock-based compensation expense of $46.4 million, amortization of debt discount and debt issuance costs of $15.2 million, and deferred income taxes of $1.2 million. Other sources of cash in 2022 included an increase in accounts payable of $552.9 million due to higher purchases of inventory and an increase in other current and noncurrent liabilities of $131.6 million, primarily due to increases in deferred revenue and accrued taxes. Primary uses of cash in 2022 included an increase in inventories of $817.0 million due to supply chain challenges and to support growth in our sales backlog, including project-based business, an increase in trade accounts receivable of $690.6 million resulting from significant sales growth, an increase in other current and noncurrent assets of $153.2 million primarily due to an increase in capitalized costs associated with developing cloud computing arrangements to support our digital transformation initiatives, an increase in other accounts receivable of $54.8 million associated with higher supplier volume rebate income accruals, and a decrease in accrued payroll and benefit costs of $63.1 million due to lower incentive compensation accruals.

Net cash provided by operating activities for 2021 totaled $67.1 million, compared to $543.9 million of cash generated in 2020. Net cash provided by operating activities for 2021 included net income of $466.4 million and non-cash adjustments to net income totaling $132.2 million, which were primarily comprised of depreciation and amortization of $198.6 million, deferred income taxes of $78.3 million, a gain on curtailment of defined benefit pension plans of $36.6 million, as described in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, stock-based compensation expense of $30.8 million, amortization of debt discount and debt issuance costs of $19.2 million, and a net gain of $8.9 million resulting from the divestiture of our legacy utility and data communications businesses in Canada, as described in Note 6, “Acquisitions and Disposals” of our Notes to Consolidated Financial Statements. Other sources of cash in 2021 included an increase in accounts payable of $449.6 million due to higher purchases of inventory, an increase in other current and noncurrent liabilities of $190.3 million, and an increase in accrued payroll and benefit costs of $84.2 million due to higher incentive compensation accruals. Primary uses of cash in 2021 included an increase in trade accounts receivable of $531.8 million resulting from significant sales growth, an increase in inventories of $530.7 million to support increased customer demand, an increase in other receivables of $136.7 million associated with higher supplier volume rebate income accruals and an increase in other current and noncurrent assets of $56.3 million.

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Investing Activities

Net cash used in investing activities in 2022 was $283.6 million, compared to $2.5 million of net cash provided by investing activities for 2021. Included in 2022 was $255.4 million of cash paid to acquire Rahi Systems, less cash acquired of $68.6 million, as described in Note 6, “Acquisitions and Disposals” of our Notes to Consolidated Financial Statements. Included in 2021 was $56.0 million of net proceeds from the Canadian divestitures. Capital expenditures were $99.4 million in 2022, compared to $54.7 million in 2021.

Net cash provided by investing activities in 2021 was $2.5 million, compared to $3,735.1 million of net cash used in 2020. Included in 2021 was $56.0 million of net proceeds from the Canadian divestitures, as described in Note 6, “Acquisitions and Disposals” of our Notes to Consolidated Financial Statements. Capital expenditures were $54.7 million in 2021, compared to $56.7 million in 2020.

Financing Activities

Net cash provided by financing activities in 2022 was $584.0 million, compared to $310.8 million of net cash used in financing activities in 2021. During 2022, financing activities were primarily comprised of net borrowings of $433.0 million related to our Revolving Credit Facility and net borrowings of $265.0 million related to our Receivables Facility. Financing activities for 2022 also included $57.4 million of dividends paid to holders of our Series A Preferred Stock, $25.8 million of payments for taxes related to the exercise and vesting of stock-based awards, borrowings and repayments of $19.5 million and $19.5 million, respectively, related to our various international lines of credit, and $11.1 million of common stock repurchases.

Net cash used in financing activities in 2021 was $310.8 million, compared to $3,480.7 million of net cash provided by financing activities for 2020. During 2021, financing activities were primarily comprised of the redemption of the $500.0 million and $354.7 million aggregate principal amounts of our 5.375% Senior Notes due 2021 and 5.375% Senior Notes due 2024, respectively, net borrowings of $347.0 million related to our Revolving Credit Facility, and net borrowings of $320.0 million related to our Receivables Facility. Financing activities for 2021 also included $57.4 million of dividends paid to holders of our Series A Preferred Stock, borrowings and repayments of $14.5 million and $34.8 million, respectively, related to our various international lines of credit, and $27.2 million of payments for taxes related to the exercise and vesting of stock-based awards.

The following table summarizes our material cash requirements from known contractual and other obligations at December 31, 2022, including interest, and the expected effect on our liquidity and cash flow in future periods:

[[GREPCENT_TABLE]]
[["","2023","","2024 to 2025","","2026 to 2027","","2028 - After","","Total"],["(In millions)"],["Debt, excluding debt discount and debt issuance costs","$","70.5","","","$","3,049.6","","","$","1,028.5","","","$","1,325.6","","","$","5,474.2"],["Interest on indebtedness(1)","339.0","","","563.1","","","256.5","","","48.0","","","1,206.6"],["Non-cancelable operating leases","158.6","","","244.3","","","156.3","","","170.9","","","730.1"],["Transition tax installments","5.0","","","40.2","","","13.6","","","\u2014","","","58.8"],["Defined benefit pension plans(2)","7.0","","","\u2014","","","\u2014","","","\u2014","","","7.0"],["Total","$","580.1","","","$","3,897.2","","","$","1,454.9","","","$","1,544.5","","","$","7,476.7"]]
[[/GREPCENT_TABLE]]

(1)    Interest on variable rate debt was calculated using the rates and balances outstanding at December 31, 2022.

(2)    As disclosed in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, the majority of our various defined benefit pension plans are non-contributory and, with the exception of the U.S. and Canada, cover substantially all full-time employees in their respective countries. Retirement benefits are provided based on compensation as defined in the plans. Our policy is to fund these plans as required by the Employee Retirement Income Security Act, the Internal Revenue Service and local statutory law. We currently estimate that we will contribute $7.0 million to our foreign pension plans in 2023. Due to the future impact of various market conditions, rates of return and changes in plan participants, we cannot provide a meaningful estimate of our future contributions beyond 2023.

In addition to the cash requirements disclosed in the table above, we expect future uses of cash to include working capital requirements, capital expenditures, investments in our digital capabilities, costs to integrate the operations of Wesco and Anixter and achieve the anticipated synergies of the merger with Anixter, dividend payments to holders of our common stock and Series A Preferred Stock, benefit payments to participants in our deferred compensation plan, and other organic opportunities. Future uses of cash could also include acquisitions of businesses and the repurchase of common or preferred stock. We expect to spend approximately $100 million in 2023 on capital expenditures for information technology investments and to support our global network of branches, warehouses and sales offices.

We expect to fund future uses of cash with a combination of existing cash balances, cash generated from operating activities, borrowings under our revolving credit and accounts receivable securitization facilities, or new issuances of debt.

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Purchase orders for inventory requirements and service contracts are not included in the table above. Generally, our purchase orders and contracts contain clauses allowing for cancellation. We do not have significant agreements to purchase material or goods that would specify minimum order quantities.

Liabilities related to unrecognized tax benefits, including interest and penalties, of $122.9 million were excluded from the table above as we cannot reasonably estimate the timing of these potential cash settlements with taxing authorities. See Note 11, “Income Taxes” in our Notes to Consolidated Financial Statements for further information related to unrecognized tax benefits.

Seasonality

Our operating results are not significantly affected by seasonal factors. Sales during the first and fourth quarters have historically been 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.

Recent Accounting Standards

See Note 2, “Accounting Policies” of our Notes to Consolidated Financial Statements for a description of recently adopted and recently issued accounting standards.