WESCO International(WCC) - 2020 Q4 - Annual Report

PART I Item 1. Business WESCO is a global B2B distribution and supply chain solutions provider, expanded by the 2020 Anixter acquisition, operating through EES, CSS, and UBS segments - WESCO completed the acquisition of Anixter International Inc. on June 22, 2020, significantly expanding its operations[15] - The company's business segments are Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS)[17] - WESCO's business strategy is built on six planks, with the Anixter acquisition being a key element in 2020[24][26] - No single customer accounted for more than 2% of sales in 2020, and the top ten customers accounted for approximately 12% of sales[27] - The company offers a comprehensive portfolio of value-added solutions including supply chain programs, project deployment, and eBusiness services[30] - As of December 31, 2020, WESCO had nearly 18,000 full-time employees worldwide, with over 12,000 in the U.S. and approximately 5,800 internationally[39] Business Overview | Metric | Value | | :----- | :---- | | Employees | ~18,000 | | Suppliers | ~30,000 | | Customers | >125,000 | | Products | ~1,500,000 | | Branches/Warehouses/Sales Offices | ~800 | | Countries of Operation | >50 | Item 1A. Risk Factors WESCO faces risks from merger integration, global operations, COVID-19, cyber-attacks, supplier dependency, and substantial indebtedness - The company may not fully realize the anticipated benefits and cost savings from the Anixter merger due to integration difficulties and higher-than-expected costs[71][72][73] - Global operations in over 50 countries expose WESCO to political, economic, legal, and currency risks, with approximately 26% of revenues from outside the U.S[78] - The COVID-19 pandemic has adversely affected business, causing disruptions to supply chains, reduced customer demand, and potential project delays[82][83][84] - Significant disruption or failure of information systems, including cyber-attacks, could lead to operational interruptions and data breaches[90][93][94] - Loss of key suppliers (top 10 account for ~30% of purchases), product cost fluctuations, and a decline in large project volumes could decrease sales and profit margins[96][98][99] - The company's outstanding indebtedness of $5.0 billion as of December 31, 2020, requires substantial debt service commitments, which could limit growth and impose restrictive covenants[109][114] Item 1B. Unresolved Staff Comments No unresolved staff comments from the SEC - No unresolved staff comments[120] Item 2. Properties WESCO operates nearly 700 branches and 100 sales offices globally, with 8% owned and the rest leased - WESCO operates nearly 700 branches and warehouse locations and over 100 sales offices in more than 50 countries[121] - Approximately 8% of the company's facilities are owned, with the rest being leased[121] Item 3. Legal Proceedings WESCO is involved in various lawsuits, but management does not expect a material adverse effect on financial condition or liquidity - WESCO is involved in various lawsuits and claims, but management does not expect a material adverse effect on financial condition or liquidity[123] Item 4. Mine Safety Disclosures This item is not applicable to WESCO International, Inc - Not applicable[125] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities WESCO's common stock trades on NYSE, with 50.16 million shares outstanding, no dividends, and limited repurchases due to debt - WESCO's common stock trades on the NYSE under the symbol 'WCC'[128] - The company has not paid common stock dividends and current debt agreements limit future dividend payments and share repurchases[128] - Under a repurchase authorization, WESCO repurchased 5,459,030 shares for $275.0 million through December 31, 2020[128] Market for Registrant's Common Equity | Metric | Value (as of Feb 25, 2021) | | :----- | :------------------------- | | Shares Outstanding | 50,161,831 | | Holders of Record | ~800 | Item 6. Selected Financial Data Selected financial data shows significant 2020 growth in sales and assets due to the Anixter merger, but decreased net income from financing costs - Year-over-year changes from 2020 to 2019 are primarily due to the merger with Anixter and related financing costs[132] Selected Income Statement Data (2016-2020) | Metric (in millions, except per share) | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------- | :--- | :--- | :--- | :--- | :--- | | Net sales | $12,326.0 | $8,358.9 | $8,176.6 | $7,679.0 | $7,336.0 | | Income from operations | $347.1 | $346.2 | $352.5 | $319.1 | $330.5 | | Net income attributable to common stockholders | $70.5 | $223.4 | $227.4 | $163.5 | $101.6 | | Diluted EPS | $1.51 | $5.14 | $4.82 | $3.38 | $2.10 | Selected Cash Flow Data (2016-2020) | Metric (in millions) | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------- | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $543.9 | $224.4 | $296.7 | $149.1 | $300.2 | | Net cash used in investing activities | $(3,735.1) | $(60.8) | $(34.1) | $(5.3) | $(70.5) | | Net cash provided by (used in) financing activities | $3,480.7 | $(109.8) | $(275.1) | $(141.2) | $(276.3) | Selected Balance Sheet Data (2016-2020) | Metric (in millions) | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------- | :--- | :--- | :--- | :--- | :--- | | Total assets | $11,880.2 | $5,017.6 | $4,605.0 | $4,735.5 | $4,431.8 | | Total debt | $4,898.8 | $1,283.8 | $1,223.5 | $1,348.6 | $1,385.3 | | Stockholders' equity | $3,336.4 | $2,258.7 | $2,129.7 | $2,116.1 | $1,963.6 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A reviews WESCO's 2020-2018 financial performance, highlighting the Anixter merger's impact on sales, assets, debt, and net income Company Overview - WESCO completed the acquisition of Anixter on June 22, 2020, which significantly expanded its employee base, supplier relationships, customer count, and product offerings[136][137] - Following the merger, WESCO reorganized its operating segments into three strategic business units: Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility and Broadband Solutions (UBS)[138] Overall Financial Performance - The 2020 financial results reflect the half-year impact of the Anixter merger, partially offset by unfavorable business conditions caused by the COVID-19 pandemic[143] - The company performed interim goodwill impairment tests as of March 31, 2020, and in Q3 2020, with no impairment losses identified, though the EES reporting unit remains susceptible to impairment risk[148][150][152] Financial Performance Overview (2020 vs 2019) | Metric | 2020 (Actual) | 2019 (Actual) | Change (%) | | :----- | :------------ | :------------ | :--------- | | Net Sales | $12.3 billion | $8.4 billion | +47.5% | | Gross Profit Margin | 18.9% | 18.9% | 0.0 pp | | Adjusted Gross Profit Margin | 19.4% | 18.9% | +0.5 pp | | SG&A as % of Net Sales | 15.1% | 14.0% | +1.1 pp | | Adjusted SG&A as % of Net Sales | 14.2% | 14.0% | +0.2 pp | | Operating Income | $347.0 million | $346.2 million | +0.2% | | Adjusted Operating Profit | $522.0 million | $349.3 million | +49.4% | | Net Income Attributable to Common Stockholders | $70.4 million | $223.4 million | -68.5% | | Adjusted Net Income Attributable to Common Stockholders | $203.6 million | $225.9 million | -9.8% | | Diluted EPS | $1.51 | $5.14 | -70.6% | | Adjusted Diluted EPS | $4.37 | $5.20 | -15.9% | Cash Flow - Investing activities in 2020 included $3,707.6 million to fund a portion of the Anixter merger[153] - Financing activities in 2020 included $2,815.0 million net proceeds from senior unsecured notes for the Anixter merger, and significant borrowings/repayments related to revolving credit and accounts receivable securitization facilities[153] Cash Flow Summary (2020 vs 2019) | Metric (in millions) | 2020 | 2019 | | :------------------- | :--- | :--- | | Operating Cash Flow | $543.9 | $224.4 | | Investing Activities | $(3,735.1) | $(60.8) | | Financing Activities | $3,480.7 | $(109.8) | Free Cash Flow (2020 vs 2019) | Metric (in millions) | 2020 | 2019 | | :------------------- | :--- | :--- | | Cash flow provided by operations | $543.9 | $224.4 | | Less: Capital expenditures | $(56.7) | $(44.1) | | Add: Merger-related expenditures | $98.9 | $0.0 | | Free Cash Flow | $586.1 | $180.3 | Financing Availability - WESCO entered into a new $1,100 million Revolving Credit Facility and amended its Accounts Receivable Securitization Facility in June 2020, further increasing borrowing capacities to $1,200 million each in December 2020[157] - The Revolving Credit Facility matures in June 2025, and the Receivables Facility matures in June 2023[158] Available Borrowing Capacity (as of Dec 31, 2020) | Facility | Available Capacity (in millions) | | :------- | :----------------------------- | | Revolving Credit Facility | $801.5 | | Receivables Facility | $75.0 | | Total Liquidity (incl. cash) | $1,136.0 | Critical Accounting Policies and Estimates - Key accounting policies and estimates include revenue recognition, supplier volume rebates, allowance for expected credit losses, inventories, goodwill and indefinite-lived intangible assets, definite-lived intangible assets, insurance programs, and income taxes[159][160][162][163][164][165][167][168][170][171][172][173] - The determination of fair value for reporting units and intangible assets involves significant management judgment, making estimates sensitive to changes in underlying assumptions[166] Results of Operations 2020 Compared to 2019 - Total net sales increased by 47.5% due to the Anixter merger, partially offset by weakened demand from the COVID-19 pandemic[176] - Cost of goods sold as a percentage of net sales remained at 81.1% for both years, but adjusted, it was 80.6% in 2020[180] - SG&A expenses increased by 58.5% to $1.9 billion, primarily due to the Anixter merger, but adjusted, it was 14.2% of net sales in 2020[181] - Interest expense, net, increased by 244.8% to $226.6 million in 2020, driven by financing activities for the Anixter merger[189] Net Sales by Segment (2020 vs 2019) | Segment | 2020 (in thousands) | 2019 (in thousands) | Growth (Decline) | | :------ | :------------------ | :------------------ | :--------------- | | EES | $5,479,760 | $4,860,541 | 12.7% | | CSS | $3,323,264 | $909,496 | 265.4% | | UBS | $3,522,971 | $2,588,880 | 36.1% | | Total Net Sales | $12,325,995 | $8,358,917 | 47.5% | Income from Operations by Segment (2020 vs 2019) | Segment | 2020 (in thousands) | 2019 (in thousands) | | :------ | :------------------ | :------------------ | | EES | $260,207 | $261,788 | | CSS | $217,163 | $43,835 | | UBS | $231,702 | $184,931 | | Corporate | $(362,034) | $(144,337) | | Total | $347,038 | $346,217 | Net Income and EPS (2020 vs 2019) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Net income attributable to common stockholders | $70.4 million | $223.4 million | | Diluted EPS | $1.51 | $5.14 | | Adjusted Net income attributable to common stockholders | $203.6 million | $225.9 million | | Adjusted Diluted EPS | $4.37 | $5.20 | Adjusted EBITDA and Margin by Segment (2020 vs 2019) | Segment | 2020 Adjusted EBITDA (in thousands) | 2020 Margin (%) | 2019 Adjusted EBITDA (in thousands) | 2019 Margin (%) | | :------ | :---------------------------------- | :-------------- | :---------------------------------- | :-------------- | | EES | $294,929 | 5.4% | $291,473 | 6.0% | | CSS | $289,621 | 8.7% | $51,067 | 5.6% | | UBS | $264,555 | 7.5% | $198,745 | 7.7% | | Total Adjusted EBITDA | $660,317 | 5.4% | $430,516 | 5.2% | 2019 Compared to 2018 - Total net sales increased by 2.2% in 2019, driven by growth in CSS and UBS segments, while EES saw a moderate decline[198][199][200] - Cost of goods sold as a percentage of net sales increased slightly to 81.1% in 2019 from 80.8% in 2018, negatively impacted by a challenging pricing environment[201] - SG&A expenses increased by 1.8% in 2019, but improved as a percentage of net sales to 14.0% from 14.1%, reflecting the impact of the SLS acquisition and merger-related costs[202] - Net income decreased by 1.4% to $222.2 million in 2019, while diluted EPS increased to $5.14 from $4.82, partly due to fewer diluted shares outstanding[211][212] Net Sales by Segment (2019 vs 2018) | Segment | 2019 (in thousands) | 2018 (in thousands) | Growth (Decline) | | :------ | :------------------ | :------------------ | :--------------- | | EES | $4,860,541 | $4,878,836 | (0.4)% | | CSS | $909,496 | $857,481 | 6.1% | | UBS | $2,588,880 | $2,440,284 | 6.1% | | Total Net Sales | $8,358,917 | $8,176,601 | 2.2% | Income from Operations by Segment (2019 vs 2018) | Segment | 2019 (in thousands) | 2018 (in thousands) | | :------ | :------------------ | :------------------ | | EES | $261,788 | $289,065 | | CSS | $43,835 | $34,592 | | UBS | $184,931 | $165,149 | | Corporate | $(144,337) | $(136,366) | | Total | $346,217 | $352,440 | Adjusted EBITDA and Margin by Segment (2019 vs 2018) | Segment | 2019 Adjusted EBITDA (in thousands) | 2019 Margin (%) | 2018 Adjusted EBITDA (in thousands) | 2018 Margin (%) | | :------ | :---------------------------------- | :-------------- | :---------------------------------- | :-------------- | | EES | $291,473 | 6.0% | $319,868 | 6.6% | | CSS | $51,067 | 5.6% | $42,121 | 4.9% | | UBS | $198,745 | 7.7% | $178,947 | 7.3% | | Total Adjusted EBITDA | $430,516 | 5.2% | $431,882 | 5.3% | Liquidity and Capital Resources - As of December 31, 2020, WESCO had $1.1 billion in total liquidity, comprising $801.5 million from the Revolving Credit Facility, $75.0 million from the Receivables Facility, and $259.5 million in cash[219] - The company's financial leverage ratio was 5.3 on a pro forma basis as of December 31, 2020, compared to 2.7 as reported at December 31, 2019[223][225] - Approximately 75% of WESCO's debt portfolio was fixed-rate debt at December 31, 2020[219] - Undistributed foreign earnings amounted to $1,835.0 million at December 31, 2020, with an estimated $75.0 million in additional taxes payable upon remittance[226][491] Total Assets, Liabilities, and Equity (2020 vs 2019) | Metric (in millions) | Dec 31, 2020 | Dec 31, 2019 | | :------------------- | :----------- | :----------- | | Total assets | $11,880.2 | $5,017.6 | | Total liabilities | $8,543.8 | $2,759.0 | | Total stockholders' equity | $3,336.4 | $2,258.7 | Outstanding Indebtedness (as of Dec 31, 2020) | Debt Type | Amount (in millions) | | :-------- | :------------------- | | International lines of credit | $29.6 | | Accounts Receivable Securitization Facility | $950.0 | | Revolving Credit Facility | $250.0 | | 5.375% Senior Notes due 2021 | $500.0 | | 5.50% Senior Notes due 2023 | $58.6 | | 5.375% Senior Notes due 2024 | $350.0 | | 6.00% Senior Notes due 2025 | $4.2 | | 7.125% Senior Notes due 2025 | $1,500.0 | | 7.250% Senior Notes due 2028 | $1,315.7 | | Finance lease obligations | $17.9 | | Total Debt | $4,976.0 | Required Annual Principal Repayments on Debt (as of Dec 31, 2020) | Year | Amount (in millions) | | :--- | :------------------- | | 2021 | $529.9 | | 2022 | $4.1 | | 2023 | $1,016.3 | | 2024 | $352.2 | | 2025 | $1,756.1 | | Thereafter | $1,326.7 | | Total Payments on Debt | $4,985.3 | Contractual Cash Obligations and Other Commercial Commitments - Liabilities for unrecognized tax benefits ($75.1 million) are excluded due to inability to reasonably estimate timing of cash settlements[272] Contractual Cash Obligations (as of Dec 31, 2020) | Obligation (in millions) | 2021 | 2022 to 2023 | 2024 to 2025 | 2026 - After | Total | | :----------------------- | :--- | :----------- | :----------- | :----------- | :---- | | Debt, excluding discount/issuance costs | $529.9 | $1,020.4 | $2,108.2 | $1,326.8 | $4,985.3 | | Interest on indebtedness | $246.4 | $479.9 | $368.3 | $240.2 | $1,334.7 | | Non-cancelable operating leases | $155.1 | $228.6 | $119.6 | $124.1 | $627.4 | | Transition tax installments | $2.6 | $8.7 | $38.3 | $13.7 | $63.3 | | Deferred compensation liability | $55.2 | $17.3 | $0.0 | $0.0 | $72.5 | | Pension plans | $29.5 | $0.0 | $0.0 | $0.0 | $29.5 | | Total | $1,018.6 | $1,754.9 | $2,634.4 | $1,704.8 | $7,112.7 | Inflation - Inflation, as measured by changes in the producer price index, did not have a material impact on sales for the year ended December 31, 2020[273] Seasonality - Operating results are not significantly affected by seasonal factors, though sales typically increase from March through October[274] Impact of Recently Issued Accounting Standards - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, which did not materially impact income or cash flows, and other ASUs adopted in 2020 also had no material impact and are not expected to have a material impact in the future[275][374][376][377][378][381][382][383] Guarantor Financial Statements - WESCO Distribution's 2021 and 2024 Senior Notes are fully and unconditionally guaranteed by WESCO International and Anixter Inc[277] - The Notes are effectively subordinated to secured obligations and structurally subordinated to liabilities of non-Guarantor Subsidiaries[277][278][279] Summarized Balance Sheets (Guarantors, in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :----- | :----------- | :----------- | | Total current assets | $2,537,705 | $1,047,087 | | Total assets | $5,905,952 | $1,531,639 | | Total current liabilities | $3,868,448 | $3,578,401 | | Total liabilities | $8,038,087 | $4,645,887 | Summarized Statement of Income (Loss) (Guarantors, in thousands) | Metric | Year ended Dec 31, 2020 | | :----- | :---------------------- | | Net sales | $4,888,110 | | Gross profit | $901,992 | | Net loss | $(132,331) | Item 7A. Quantitative and Qualitative Disclosures About Market Risks WESCO faces foreign currency and interest rate risks, with 25% of sales from foreign subsidiaries and 75% fixed-rate debt - Approximately 25% of WESCO's 2020 sales were from foreign subsidiaries, exposing the company to foreign currency fluctuations[288] - WESCO uses foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts, with approximately $111.9 million outstanding at December 31, 2020[290] - As of December 31, 2020, approximately 75% of WESCO's debt portfolio was comprised of fixed-rate debt[291] - A 100 basis point change in interest rates is not expected to significantly impact future earnings from floating-rate borrowings[292] - A 50-basis-point decline in the assumed discount rate for pension plans would increase 2021 expense by approximately $1.0 million and PBO by $80.0 million[293] Item 8. Financial Statements and Supplementary Data This section presents WESCO's audited consolidated financial statements for 2018-2020, including PwC's report and detailed notes - PricewaterhouseCoopers LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[299][300] - Anixter Inc. was excluded from management's assessment and PwC's audit of internal control over financial reporting, representing 30% of consolidated total assets and 37% of consolidated net sales for 2020[305] - Critical audit matters included interim goodwill impairment assessments and customer relationship intangible assets recognized in connection with the Anixter acquisition, both involving significant judgment[310][311][313][315] Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :----- | :----------- | :----------- | | Cash and cash equivalents | $449,135 | $150,902 | | Total current assets | $5,506,978 | $2,540,411 | | Property, buildings and equipment, net | $399,157 | $181,448 | | Operating lease assets | $534,705 | $235,834 | | Intangible assets, net | $2,065,495 | $287,275 | | Goodwill | $3,187,169 | $1,759,040 | | Total assets | $11,880,214 | $5,017,635 | | Accounts payable | $1,707,329 | $830,478 | | Total current liabilities | $2,986,995 | $1,084,059 | | Long-term debt, net | $4,369,953 | $1,257,067 | | Operating lease liabilities | $414,889 | $179,830 | | Total liabilities | $8,543,825 | $2,758,964 | | Total stockholders' equity | $3,336,389 | $2,258,671 | Consolidated Statements of Income and Comprehensive Income (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | | :----- | :--- | :--- | :--- | | Net sales | $12,325,995 | $8,358,917 | $8,176,601 | | Cost of goods sold | $9,998,329 | $6,777,456 | $6,609,220 | | SG&A expenses | $1,859,028 | $1,173,137 | $1,151,944 | | Income from operations | $347,038 | $346,217 | $352,440 | | Interest expense, net | $226,591 | $65,710 | $68,661 | | Net income attributable to WESCO International, Inc. | $100,560 | $223,426 | $227,343 | | Net income attributable to common stockholders | $70,421 | $223,426 | $227,343 | | Diluted EPS | $1.51 | $5.14 | $4.82 | Consolidated Statements of Cash Flows (in thousands) | Metric | 2020 | 2019 | 2018 | | :----- | :--- | :--- | :--- | | Net cash provided by operating activities | $543,931 | $224,367 | $296,721 | | Net cash used in investing activities | $(3,735,149) | $(60,800) | $(34,142) | | Net cash provided by (used in) financing activities | $3,480,741 | $(109,766) | $(275,094) | | Cash and cash equivalents at end of period | $449,135 | $150,902 | $96,343 | PART III Item 10. Directors, Executive Officers and Corporate Governance Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2021 Proxy Statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2021 Proxy Statement[589][593] - WESCO has adopted a Code of Business Ethics and Conduct and a Senior Financial Executive Code of Principles, both available on its website[590][591] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2021 Proxy Statement - Executive compensation details are incorporated by reference from the 2021 Proxy Statement[594] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2021 Proxy Statement, detailing equity compensation plan issuances - Security ownership information is incorporated by reference from the 2021 Proxy Statement[595] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :------------ | :--------------------------------------------------------------------------------------- | :----------------------------------------------------------------------- | :------------------------------------------------------------------------ | | Approved by security holders | 3,388,320 | $38.59 | 1,103,977 | | Not approved by security holders | 0 | $0.00 | 0 | | Total | 3,388,320 | $38.59 | 1,103,977 | Item 13. Certain Relationships and Related Transactions, and Director Independence Details on related party transactions and director independence are incorporated by reference from the 2021 Proxy Statement - Details on related party transactions and director independence are incorporated by reference from the 2021 Proxy Statement[596] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[597] PART IV Item 15. Exhibits and Financial Statement Schedule This section lists financial statements, Schedule II, and a comprehensive list of exhibits, including key legal and financial agreements - The financial statements required by Item 8 are incorporated by reference[600] - Schedule II – Valuation and Qualifying Accounts is included, detailing changes in allowance for expected credit losses and deferred tax assets[601][613] - A comprehensive list of exhibits is provided, including key legal and financial agreements such as the Anixter merger agreement, various debt indentures, and credit facilities[601][602][604][606][608][610] Item 16. Form 10-K Summary This item is not applicable to WESCO International, Inc.'s annual report - Not applicable[615]