WESCO International(WCC) - 2022 Q4 - Annual Report

PART I Business WESCO International, Inc. is a global B2B distribution, logistics, and supply chain solutions provider operating through EES, CSS, and UBS segments - Wesco is a leading B2B distribution and supply chain solutions provider with approximately 20,000 employees, 50,000 suppliers, and 150,000 customers worldwide, operating from about 800 locations in over 50 countries[13][14] Business Segments Overview | Segment | Description | Key Markets | | :--- | :--- | :--- | | Electrical & Electronic Solutions (EES) | Supplies electrical equipment, automation, security, lighting, wire, and MRO products | Construction, Industrial, Original Equipment Manufacturer (OEM) | | Communications & Security Solutions (CSS) | Provides network infrastructure (cabling, connectivity) and security solutions (video surveillance, access control) | Technology, Finance, Telecom, Government, Healthcare | | Utility & Broadband Solutions (UBS) | Offers products and services to utilities, public power companies, and broadband operators | Investor-owned utilities, Public power, Global service providers | - The company's business strategy is built on three core elements: extending its scale and value proposition, developing its organization and culture of excellence, and digitalizing and transforming the business[23][24][25] - In 2022, the company's top ten customers accounted for approximately 10% of sales, with no single customer representing more than 2%. The ten largest suppliers accounted for about 28% of purchases, with no single supplier exceeding 5%[28][30] - Wesco has set specific environmental goals, including a 30% reduction in absolute direct and certain indirect GHG emissions by 2030 (from a 2019 baseline) and a 15% reduction in landfill waste intensity by 2030 (from a 2020 baseline)[64][68] Executive Officers The report lists nine executive officers as of February 21, 2023, led by John J. Engel, Chairman, President, and CEO Key Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | John J. Engel | 61 | Chairman, President and Chief Executive Officer | | David S. Schulz | 57 | Executive Vice President and Chief Financial Officer | | James F. Cameron | 57 | Executive Vice President and General Manager, Utility and Broadband Solutions | | William C. Geary, II | 52 | Executive Vice President and General Manager, Communications and Security Solutions | | Nelson J. Squires III | 61 | Executive Vice President and General Manager, Electrical and Electronic Solutions | Risk Factors Wesco faces material risks from macroeconomic factors, global operations, supply chain disruptions, IT failures, substantial debt, and regulatory compliance - The company's global operations, which generate approximately 26% of revenues from outside the U.S., expose it to political, economic, legal, and currency risks[99] - The successful integration of Anixter, acquired in June 2020, is critical, with failure to realize anticipated benefits potentially resulting from loss of key employees, higher costs, or business disruption[110] - The business is vulnerable to supply chain challenges, including product shortages, transportation constraints, and price inflation, which could decrease sales and profit margins[125][126][127] - Significant reliance on information technology exposes the company to risks of system failures and cyber-attacks, which could disrupt operations, lead to data theft, and result in significant costs[116][118] - As of December 31, 2022, the company had $5.5 billion of consolidated indebtedness, requiring substantial cash flow for debt service and including restrictive covenants that may limit operational flexibility[148][154] Properties Wesco operates approximately 800 global locations, mostly leased, including 49 regional distribution centers, with its Pittsburgh headquarters also leased - The company operates a network of approximately 800 locations, with about 650 being branches and warehouses and 150 being sales offices[159] - The majority of facilities are leased, with only about 7% being owned by the company[159] Legal Proceedings The company is involved in various lawsuits and claims, but management does not expect a material adverse effect on financial condition or liquidity - The company is subject to various lawsuits and claims from time to time but does not expect any pending matters to have a material adverse effect on its financial condition or liquidity[161] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Wesco's common stock trades on NYSE, initiating quarterly dividends in Q1 2023 and authorized a $1 billion share repurchase program - The company expects to begin paying a quarterly cash dividend on its common stock starting in the first quarter of 2023, a change from its historical policy of not paying dividends[166] - On May 31, 2022, the Board of Directors authorized a new share repurchase program for up to $1 billion of the company's common and Series A Preferred Stock[167] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased Under Program | Approx. Value Remaining Under Program (in millions) | | :--- | :--- | :--- | :--- | :--- | | Oct 2022 | 4,089 | $123.68 | — | $1,000.0 | | Nov 2022 | 88,661 | $126.50 | 87,502 | $988.9 | | Dec 2022 | 1,258 | $125.10 | — | $988.9 | | Total | 94,008 | $126.36 | 87,502 | $988.9 | Management's Discussion and Analysis of Financial Condition and Results of Operations Wesco's FY2022 net sales grew 17.6% to $21.4 billion, adjusted EPS rose 64.5%, but operating cash flow was significantly lower due to working capital investments Overall Financial Performance For FY2022, Wesco's net sales increased 17.6% to $21.4 billion, income from operations rose to $1.4 billion, and adjusted EPS grew 64.5% to $16.42 Key Financial Highlights (2022 vs. 2021) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $21.4 billion | $18.2 billion | +17.6% | | Income from Operations | $1.4 billion | $0.8 billion | +75.0% | | Earnings per Diluted Share | $15.33 | $7.84 | +95.5% | | Adjusted EPS | $16.42 | $9.98 | +64.5% | - Gross margin improved by 100 basis points year-over-year, with cost of goods sold as a percentage of net sales decreasing to 78.2% in 2022 from 79.2% in 2021, driven by value-based pricing, inflation pass-through, and higher supplier rebates[180][181] Results of Operations In 2022, net sales grew 17.6% to $21.4 billion with 18.2% organic growth across all segments, and income from operations increased 79.3% to $1.4 billion Net Sales and Organic Growth by Segment (2022 vs. 2021) | Segment | 2022 Net Sales (in billions) | Reported Growth | Organic Growth | | :--- | :--- | :--- | :--- | | EES | $8.8 | 15.8% | 17.3% | | CSS | $6.4 | 12.0% | 11.5% | | UBS | $6.2 | 26.9% | 27.2% | | Total | $21.4 | 17.6% | 18.2% | - In 2022, price inflation favorably impacted net sales by approximately 8%[208] - SG&A expenses as a percentage of net sales decreased from 15.3% in 2021 to 14.2% in 2022, reflecting operating leverage and synergy realization despite higher payroll and volume-related costs[214] Reconciliation of EPS to Adjusted EPS (2022 vs. 2021) | Per Share Data | 2022 | 2021 | | :--- | :--- | :--- | | Diluted EPS | $15.33 | $7.84 | | Adjusted EPS | $16.42 | $9.98 | Liquidity and Capital Resources As of December 31, 2022, Wesco had $1.0 billion in liquidity, improved its leverage ratio to 2.9, but operating cash flow significantly decreased to $11.0 million due to working capital investments - Total liquidity was $1.0 billion as of December 31, 2022, comprising cash and available borrowing capacity under its credit facilities[260] - The financial leverage ratio improved to 2.9 as of December 31, 2022, down from 3.9 as of December 31, 2021[264][266] - Operating cash flow was $11.0 million in 2022, significantly lower than 2021, primarily due to an $817.0 million increase in inventories and a $690.6 million increase in trade accounts receivable to support sales growth[273] Material Cash Requirements from Contractual Obligations (as of Dec 31, 2022) | Obligation (in millions) | 2023 | 2024-2025 | 2026-2027 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $70.5 | $3,049.6 | $1,028.5 | $1,325.6 | $5,474.2 | | Interest on Indebtedness | $339.0 | $563.1 | $256.5 | $48.0 | $1,206.6 | | Operating Leases | $158.6 | $244.3 | $156.3 | $170.9 | $730.1 | | Total | $580.1 | $3,897.2 | $1,454.9 | $1,544.5 | $7,476.7 | Quantitative and Qualitative Disclosures About Market Risk Wesco faces market risks from foreign currency fluctuations, mitigated by forward contracts, and interest rate changes on its variable-rate debt, with 53% of debt fixed-rate - Foreign currency risk exists as approximately 26% of 2022 sales were from foreign subsidiaries, and the company uses foreign currency forward contracts to mitigate this exposure[286] - As of December 31, 2022, approximately 53% of the company's debt portfolio was fixed-rate, and a hypothetical 100 basis point change in interest rates would impact annual interest expense on its variable-rate debt by $25.7 million[288][289] Financial Statements and Supplementary Data This section presents Wesco's audited consolidated financial statements for FY2022 and prior two years, including balance sheets, income statements, cash flows, and detailed notes Notes to Consolidated Financial Statements The notes provide detailed disclosures on Wesco's accounting policies, revenue recognition, acquisitions, debt structure, employee benefits, and segment reporting Net Sales by Geography (in millions) | Region | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | United States | $15,857.3 | $13,157.9 | $9,110.5 | | Canada | $3,021.4 | $2,747.2 | $1,892.3 | | Other International | $2,541.4 | $2,312.5 | $1,323.2 | | Total | $21,420.1 | $18,217.5 | $12,326.0 | - On November 1, 2022, Wesco acquired Rahi Systems for a total purchase consideration of $255.4 million, intended to strengthen its data center solution offerings[382][383] Outstanding Indebtedness (as of Dec 31, 2022, in millions) | Instrument | Amount | | :--- | :--- | | Accounts Receivable Securitization Facility | $1,535.0 | | Revolving Credit Facility | $1,023.6 | | 7.125% Senior Notes due 2025 | $1,500.0 | | 7.250% Senior Notes due 2028 | $1,318.2 | | Other | $89.5 | | Total Debt | $5,466.3 | - In Q4 2021, the company amended several pension plans, resulting in a curtailment gain of $36.6 million, and in Q4 2022, the Anixter Inc. Pension Plan was terminated[505][506] Controls and Procedures Management concluded that Wesco's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding the recently acquired Rahi Systems - Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2022[575][576] - The assessment of internal control over financial reporting excluded Rahi Systems, which was acquired on November 1, 2022[577] PART III Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, corporate governance, and audit committee from the 2023 Proxy Statement, and details adopted codes of conduct - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the 2023 Annual Meeting Proxy Statement[584][588] - The company has adopted a Code of Business Conduct and a Code of Principles for Senior Financial Executives, which are available on its website[585][586] Executive Compensation This section incorporates by reference executive and director compensation details from the 2023 Proxy Statement - Details on executive and director compensation are incorporated by reference from the 2023 Proxy Statement[589] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information from the 2023 Proxy Statement and details equity compensation plan authorizations Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 2,445,024 | $36.01 | 1,992,652 | | Not approved by security holders | — | — | — | | Total | 2,445,024 | $36.01 | 1,992,652 | Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information on related party transactions and director independence from the 2023 Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement[591] Principal Accountant Fees and Services This section incorporates by reference details on principal accountant fees and services from the 2023 Proxy Statement - Details on principal accountant fees and services are incorporated by reference from the 2023 Proxy Statement[592] PART IV Exhibits and Financial Statement Schedule This section lists all financial statements, schedules, and exhibits filed or incorporated by reference as part of the annual report, including key agreements - This section provides a comprehensive list of all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K[595]