WESCO International(WCC) - 2019 Q4 - Annual Report

PART I Item 1. Business. WESCO is a leading distributor of MRO and OEM products, pursuing a significant merger with Anixter International - WESCO is a leading North American distributor of electrical, industrial, and communications MRO and OEM products, and advanced supply chain management and logistics services[11] - The company serves approximately 70,000 active customers globally through approximately 500 branches and 11 distribution centers, distributing over 1,000,000 products from 30,000 suppliers[12] - WESCO entered into a definitive merger agreement to acquire Anixter International Inc for approximately $4.5 billion, with an implied value of $100.00 per Anixter share; WESCO stockholders are anticipated to own 84% of the combined company[14] Sales by End Market (2017-2019) | End Market | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Industrial | 36% | 36% | 37% | | Construction | 33% | 33% | 33% | | Utility | 16% | 16% | 16% | | Commercial, Institutional and Government | 15% | 15% | 14% | Sales by Product Category (2017-2019) | Product Category | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | General Supplies | 41% | 40% | 40% | | Wire, Cable and Conduit | 14% | 14% | 15% | | Communications and Security | 16% | 16% | 15% | | Electrical Distribution and Controls | 10% | 11% | 10% | | Lighting and Sustainability | 11% | 11% | 12% | | Automation, Controls and Motors | 8% | 8% | 8% | Item 1A. Risk Factors. The company faces operational, financial, and merger-related risks, including economic conditions, competition, and integration challenges - Adverse global economic conditions, including market volatility and lack of liquidity, could negatively impact WESCO's operations, cash flows, and financial position by affecting customer activity and project financing[54] - WESCO operates in a highly competitive industry, facing risks from price reductions by competitors, new market entrants, and potential loss of market share if customer preferences are not met[57][58] - The pending acquisition of Anixter is subject to significant risks, including failure to obtain regulatory approvals, potential business disruptions due to uncertainty, substantial transaction and integration costs, and increased indebtedness for the combined company[80][86][91][95] Item 1B. Unresolved Staff Comments. There are no unresolved staff comments to report - No unresolved staff comments were reported[101] Item 2. Properties. WESCO operates a global network of approximately 500 branches and 11 distribution centers, mostly leased - WESCO operates approximately 500 branches globally, with 340 in the United States, 130 in Canada, and 7 in Mexico, plus others in Africa, Asia, Europe, and South America[102] - Approximately 13% of the company's branches are owned facilities, with the remainder being leased[102] Distribution Centers (as of December 31, 2019) | Location | Square Feet | Leased/Owned | | :--- | :--- | :--- | | Little Rock, AR | 100,000 | Leased | | Carol Stream, IL | 147,000 | Leased | | Byhalia, MS | 148,000 | Owned | | Sparks, NV | 199,000 | Leased | | Warrendale, PA | 194,000 | Owned | | Dallas, TX | 112,000 | Leased | | Madison, WI | 136,000 | Leased | | Edmonton, AB | 101,000 | Leased | | Burnaby, BC | 65,000 | Leased | | Mississauga, ON | 246,000 | Leased | | Montreal, QC | 126,000 | Leased | Item 3. Legal Proceedings. The company is involved in various legal proceedings not expected to materially impact its financial condition - WESCO is involved in legal proceedings, audits, or investigations concerning commercial, product, and employment matters[103] - Management believes the ultimate outcome of any pending legal matters is unlikely to have a material adverse effect on the company's financial condition or liquidity[103] Item 4. Mine Safety Disclosures. This item is not applicable to WESCO International, Inc - Item 4 Mine Safety Disclosures is not applicable[105] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities WESCO's common stock (NYSE: WCC) has an active share repurchase program, with dividends currently suspended - WESCO's common stock is listed on the New York Stock Exchange under the symbol "WCC"[108] - As of February 21, 2020, there were 41,873,053 shares of common stock outstanding[3][108] - WESCO does not currently plan to pay dividends on its common stock, but evaluates the possibility from time to time, with current earnings expected to support growth initiatives and debt reduction[108] - As of December 31, 2019, WESCO repurchased 5,459,030 shares for $275.0 million under a $400 million share repurchase authorization approved through December 31, 2020[108] Item 6. Selected Financial Data. This section presents a five-year summary of key income statement, cash flow, and balance sheet data Selected Income Statement Data (2015-2019) | Metric (In millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $8,358.9 | $8,176.6 | $7,679.0 | $7,336.0 | $7,518.5 | | Income from operations | $346.2 | $352.5 | $319.1 | $330.5 | $372.5 | | Net income attributable to WESCO International | $223.3 | $227.4 | $163.5 | $101.6 | $210.7 | | Diluted EPS | $5.14 | $4.82 | $3.38 | $2.10 | $4.18 | Selected Cash Flow Data (2015-2019) | Metric (In millions) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $224.4 | $296.7 | $149.1 | $300.2 | $283.1 | | Net cash used in investing activities | $(60.8) | $(34.1) | $(5.3) | $(70.5) | $(170.2) | | Net cash used in financing activities | $(109.8) | $(275.1) | $(141.2) | $(276.3) | $(67.8) | | Capital expenditures | $44.1 | $36.2 | $21.5 | $18.0 | $21.7 | Selected Balance Sheet Data (2015-2019) | Metric (In millions) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $5,017.6 | $4,605.0 | $4,735.5 | $4,431.8 | $4,569.7 | | Total debt | $1,283.8 | $1,223.5 | $1,348.6 | $1,385.3 | $1,483.4 | | Stockholders' equity | $2,258.7 | $2,129.7 | $2,116.1 | $1,963.6 | $1,727.5 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2019 financial results, highlighting sales growth, cash flow, liquidity, and the pending Anixter merger - WESCO's 2019 financial results reflect record sales with growth in end markets and geographies, a challenging pricing environment, and effective capital deployment[116] - The company generated $224.4 million in operating cash flow in 2019 and maintained $823.2 million in total liquidity as of December 31, 2019, including available borrowing capacity and cash[119][167] - Post-Anixter merger, WESCO expects to prioritize debt reduction and integration costs, while maintaining ample liquidity and credit availability[172] Item 7A. Quantitative and Qualitative Disclosures About Market Risks WESCO is exposed to foreign currency and interest rate risks, with mitigation from fixed-rate debt - Approximately 25% of WESCO's 2019 sales were from foreign subsidiaries and denominated in foreign currencies, exposing the company to fluctuations in foreign exchange rates[210] - As of December 31, 2019, 66% of WESCO's debt portfolio was fixed-rate debt, mitigating interest rate fluctuations for these instruments[211] - Floating rate borrowings are subject to interest rate changes, but a 100 basis point increase or decrease is not expected to significantly impact future earnings[212] - The company's defined benefit pension plan is sensitive to discount rate changes; a one percent increase would decrease projected benefit obligations by $26.0 million, while a one percent decrease would increase them by $35.3 million[213] Item 8. Financial Statements and Supplementary Data This section presents WESCO's audited consolidated financial statements and supplementary data for the past three fiscal years - The consolidated financial statements include the balance sheets as of December 31, 2019 and 2018, and statements of income, comprehensive income, stockholders' equity, and cash flows for the three years ended December 31, 2019[215] - PricewaterhouseCoopers LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[219][220] - Key financial statement notes cover critical accounting policies, details on revenue recognition, goodwill and intangible assets, debt structure, income taxes, and employee benefit plans[244] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in or disagreements with accountants on accounting and financial disclosure were reported[435] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2019 - WESCO's management concluded that disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2019[436][438] - The adoption of ASU 2016-02, Leases, effective January 1, 2019, resulted in modifications to processes and implementation of internal controls related to leases[437] - No other material changes in internal control over financial reporting occurred during the last fiscal quarter of 2019[440] Item 9B. Other Information There is no other information to report under this item - No other information was reported under this item[441] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, officers, and governance is incorporated by reference from the 2020 Proxy Statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[443][447] - WESCO has adopted a Code of Business Ethics and Conduct for Directors, officers, and employees, and a Senior Financial Executive Code of Principles for senior executives, both accessible on the company's website[444][445] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the company's 2020 Proxy Statement - Executive compensation details are incorporated by reference from the 'Compensation Discussion and Analysis' and 'Director Compensation' sections of the 2020 Proxy Statement[448] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement and equity plan data is provided - Security ownership information is incorporated by reference from the 'Security Ownership' caption in the 2020 Proxy Statement[449] Equity Compensation Plan Information (as of December 31, 2019) | 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 | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,896,083 | $48.19 | 2,556,535 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 2,896,083 | $48.19 | 2,556,535 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 'Transactions with Related Persons' and 'Corporate Governance' sections of the 2020 Proxy Statement[450] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 'Independent Registered Public Accounting Firm Fees and Services' section of the 2020 Proxy Statement[451] PART IV Item 15. Exhibits and Financial Statement Schedule. This section lists the financial statements, schedules, and exhibits filed as part of the annual report - The annual report includes financial statements as set forth in Item 8, and Schedule II – Valuation and Qualifying Accounts[454] - Exhibits include the Agreement and Plan of Merger with Anixter, corporate organizational documents (Restated Certificate of Incorporation, Amended and Restated By-laws), debt indentures for Senior Notes, and various equity compensation plan agreements[454][455][456][457] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are also filed[457] Item 16. Form 10-K Summary. This item is not applicable to WESCO International, Inc - Item 16 Form 10-K Summary is not applicable[462] Signatures The report is duly signed by the company's principal officers and directors as of February 24, 2020 - The report is signed by John J. Engel, Chairman, President and Chief Executive Officer, and David S. Schulz, Senior Vice President and Chief Financial Officer, on February 24, 2020[465] - The report is also signed by the company's Directors, including Matthew J. Espe, Bobby J. Griffin, John K. Morgan, Steven A. Raymund, James L. Singleton, Easwaran Sundaram, and Laura K. Thompson[468]