ACQUISITIONS

3 Months Ended

Jun. 30, 2020

Anixter International Inc.

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

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

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

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

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


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

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

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

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


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

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

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

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


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

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

The results of operations of Anixter are included in the unaudited condensed consolidated financial statements beginning on June 22, 2020, the acquisition date. For the three and six months ended June 30, 2021, the condensed consolidated statements of income include $2.5 billion and $4.6 billion of net sales, respectively, and $166.2 million and $271.6 million of income from operations, respectively, for Anixter. For the three and six months ended June 30, 2020, the condensed consolidated statements of loss include $221.9 million of net sales and $18.4 million of income from operations for Anixter. For the three months ended June 30, 2021 and 2020, the Company incurred costs related to the merger of $37.7 million and $73.3 million, respectively, which primarily consist of advisory, legal, integration, separation and other costs. For the six months ended June 30, 2021 and 2020, such costs were $84.0 million and $78.0 million, respectively. These costs are included in selling, general and administrative expenses for all periods presented.

Pro Forma Financial Information

The following unaudited pro forma financial information presents combined results of operations for the periods presented, as if the Company had completed the Merger on January 1, 2019. The unaudited pro forma financial information includes adjustments to amortization and depreciation for intangible assets and property, buildings and equipment, adjustments to interest expense for the additional indebtedness incurred to complete the acquisition (including the amortization of debt discount and issuance costs), transaction costs, change in control and severance costs, dividends accrued on the Series A preferred stock, compensation expense associated with the WESCO phantom stock unit awards described in Note 9, "Employee Benefit Plans", as well as the respective income tax effects of such adjustments. For the three and six months ended June 30, 2020, adjustments totaling $61.5 million and $11.3 million, respectively increased the unaudited pro forma net income attributable to common stockholders. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that WESCO may achieve as a result of its acquisition of Anixter, the costs to integrate the operations of WESCO and Anixter or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. The unaudited pro forma financial information presented below is not necessarily indicative of consolidated results of operations of the combined business had the acquisition occurred at the beginning of the respective periods, nor is it necessarily indicative of future results of operations of the combined company.


	Three Months Ended		Six Months Ended
(In thousands)	June 30, 2020		June 30, 2020
Pro forma net sales(1)	$	3,705,913	$	7,746,260
Pro forma net income attributable to common stockholders(1)	32,493		52,373

(1) The Company reported pro forma net sales and pro forma net income attributable to common stockholders for the three and six months ended June 30, 2020 in the Notes to Condensed Consolidated Financial Statements of its Quarterly Report on Form 10-Q for the period ended June 30, 2020 of $3,678.5 million and $7,691.3 million, respectively, and $29.4 million and $47.4 million, respectively. These amounts excluded the financial results of WESCO's legacy utility and data communications businesses in Canada, which were divested in the first quarter of 2021 under a Consent Agreement with the Competition Bureau of Canada, as described below.

Canadian Divestitures

On August 6, 2020, the Company entered into a Consent Agreement with the Competition Bureau of Canada regarding the merger with Anixter. Under the Consent Agreement, the Company was required to divest certain legacy WESCO utility and data communications businesses in Canada. In February 2021, the Company completed such divestitures for cash consideration totaling $54.3 million. The Company recognized a net gain from the sale of these businesses of $8.9 million, which is reported as a component of selling, general and administrative expenses for the six months ended June 30, 2021. These sales fulfilled the Company’s divestiture commitments under the Consent Agreement and the net cash proceeds were used to repay debt.