WESCO
INTERNATIONAL
2018 ANNUAL REPORT
YEAR IN REVIEW
NET SALES
(in millions)
7
7
1
,
8
$
0
9
8
,
7
$
9
7
6
,
7
$
8
1
5
,
7
$
6
3
3
,
7
$
INCOME FROM
OPERATIONS (EBIT) 1
(in millions)
5
6
4
$
3
7
3
$
3
5
3
$
1
3
3
$
9
1
3
$
DILUTED EPS 2
(in millions)
FREE CASH FLOW 2
(in millions)
8
1
.
5
$
2
8
.
4
$
8
1
.
4
$
3
9
.
3
$
0
8
.
3
$
2
8
2
$
1
6
2
$
1
6
2
$
0
3
2
$
8
2
1
$
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
FINANCIAL HIGHLIGHTS
(Dollars in millions except for diluted EPS, financial leverage ratio, and percentages)
Year Ended December 31,
Net sales
Income from operations (EBIT) 1
Adjusted net income attributable to WESCO International, Inc. 2
Adjusted diluted EPS 2
Diluted share count
Free cash flow 2
Free cash flow as a % of net income 2
Total debt, including debt discount and debt issuance costs
Financial leverage ratio 3
Adjusted stockholders equity 2
Return on Invested Capital (ROIC)
2014
2015
2016
2017
2018
$7,890
$7,518
$7,336
$7,679
$8,177
373
211
4.18
50.4
261
125%
1,665
3.8
331
184
3.80
48.3
282
154%
1,403
3.5
465
276
5.18
53.3
230
84%
1,586
3.0
1,882
10.0%
319
190
3.93
48.4
128
67%
353
227
4.82
47.2
261
116%
1,363
1,233
3.5
3.0
2,238
7.9%
1,728
2,046
2,224
7.8%
7.5%
6.8%
1 Effective January 1, 2018, WESCO adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The adoption of this ASU resulted in the reclassification of $1.8 million, $1.5 million, $1.2 million
and $0.9 million from selling, general and administrative expenses to net interest and other in the Consolidated Statements of Income and Comprehensive Income (Loss)
for the years ended December 31, 2017, 2016, 2015 and 2014, respectively.
2 Non-GAAP financial measures are defined and reconciled on pages 90 and 91.
3 Financial leverage ratio is calculated by dividing total debt, excluding debt discount and debt issuance costs, by earnings before interest, taxes, depreciation and
amortization (EBITDA).
Corporate Profile: WESCO International, Inc. (NYSE: WCC), a publicly traded Fortune 500 holding company headquartered in Pittsburgh, Pennsylvania, is a
leading provider of electrical, industrial, and communications maintenance, repair and operating (MRO) and original equipment manufacturer (OEM) products,
construction materials, and advanced supply chain management and logistic services. 2018 annual sales were approximately $8.2 billion. The company employs
approximately 9,100 people, maintains relationships with approximately 30,000 suppliers, and serves approximately 70,000 active customers worldwide.
Customers include commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. WESCO
operates 10 fully automated distribution centers and approximately 500 branches in North America and international markets, providing a local presence for
customers and a global network to serve multi-location businesses and multi-national corporations.
2018 Annual Report 1
WESCO creates solutions for customers
by utilizing a broad product and services
portfolio, global reach, and technical
expertise. These solutions reduce
operational costs, increase energy
efficiency, eliminate waste, shorten
construction time, and make it easier to
do business. With a dedicated “extra effort”
team of 9,100 associates, WESCO has
cultivated long-term relationships with
customers who regard WESCO as a critical
supply chain partner and with suppliers
who depend on WESCO as one of their
largest customers. The future is bright for
WESCO, with extensive opportunities to
grow, become more profitable, and create
more value in the years ahead.
8%
11%
11%
14%
16%
40%
PRODUCT CATEGORIES
General Supplies
Communications and Security
Wire, Cable and Conduit
Electrical Distribution and Controls
Lighting and Sustainability
Automation, Controls and Motors
GEOGRAPHIES
United States
Canada
Rest of World
5%5%
20%
75%
To Our Shareholders,
Employees, and
Business Partners
OUR RESULTS
SUPPLY CHAIN SOLUTIONS COMPANY
Building on the positive momentum generated in our business in
the second half of 2017, our top priorities for 2018 were to expand
margins, deliver strong profitable growth, and increase cash
generation. We delivered on these priorities last year, despite an
economic backdrop that was more challenging than expected.
We achieved record sales of $8.2 billion, with growth in all end
markets and geographies. We expanded operating margin driven
by strong pull-through, effective operating cost leverage, and
sequentially improving gross margins in the second half of the
year. Compared to 2017, we posted double-digit percentage
increases in operating profit, net income, and earnings per share
in 2018. In 2019, we expect our profitable growth to continue as
operating leverage increases in our business, a hallmark of WESCO
in periods of growth.
WESCO is recognized for our ability to generate strong free cash
flow across all phases of the economic cycle. Last year, free cash
flow generation exceeded our net income and increased over
100% versus 2017. Over the last five years, we have generated
approximately $1.2 billion in free cash flow, more than 105% of net
income. In 2018, we used our free cash flow to continue to make
organic investments in the business, return $125 million to
shareholders via share repurchases, and repay $130 million of
debt. We ended the year with financial leverage within our target
band and at its lowest point since early 2015.
Over the past several years, we have described our continued
focus on expanding from a pure-play electrical distributor to
a service-focused, efficient, and capable supply chain solutions
company. We have leveraged our competitive differentiators,
including our broad product and service offerings, geographic
footprint, and technical expertise. These differentiators, combined
with our commercial and operational excellence initiatives, allow
us to continue to attract and retain loyal customers and supplier
partners, and they separate us from both traditional distributors
and online competitors.
During our 2019 Investor Day in June, we will share with you our
strategic initiatives to further enhance our leading market position.
We expect these initiatives to enable us to meet the current and
future needs of our customers, take share in the market, and drive
value for our shareholders. These initiatives include:
•
•
•
•
Advanced Digital Capabilities – Digitizing our business models
and processes while expanding our e-commerce solutions.
Commercial Excellence – Leveraging data to improve execution
in all phases of the customer experience.
Operational Excellence – Optimizing our operations and overall
supply chain through our distribution center network and
branch structure, enhanced pricing capabilities, and supplier
rationalization efforts.
Organization, Talent and Culture – Investing in our employees
and communities through increased training and development,
sustainability endeavors, and social initiatives.
MILESTONES
20YEARS
as a publicly-traded company
25YEARS
as a standalone company
since spin out from Westinghouse
2018 Annual Report 3
OUR BUSINESS
We are a leading supply chain solutions company in North
America, distributing over one million electrical and industrial
products to 70,000 customers, including a majority of Fortune 500
companies.
Our focus is to build scale and profitability through organic
growth, acquisitions, and the expansion of supply chain solutions
and service offerings we deliver to our customers. We operate in
highly fragmented markets, providing us with opportunities to
increase share and consolidate the industry. Increased scale
brings stronger customer and supplier relationships and enables
greater profitability and the ability to invest for future growth.
Across the value chain, our customers are seeking productivity,
while suppliers are looking for more capable channel partners to
generate demand for their products. This results in stronger, larger
relationships on both ends of our value chain, and WESCO is well
positioned to benefit from these trends.
OUR VALUES AND OUR CULTURE
WESCO’s 9,100 employees are the key to our results and our
“extra-effort” culture. The team is the strongest it has been in
my tenure. In 2018, we strengthened our talent base through
internal moves, promotions and new additions, including a
new Chief Human Resources Officer and a Vice President and
General Manager for our U.S. business.
We continue to invest in developing our workforce through a
mentorship program, military veteran recruiting, and WESCO
University training. In 2018, we conducted our bi-annual
Employee Engagement Survey, receiving improved scores across
nearly all dimensions studied. Based upon the survey’s results,
we are leveraging opportunities to make WESCO an even better
place to work.
Social and environmental responsibility is another WESCO focus.
We emphasize safety in everything that we do. We established
safety goals for our operational leaders and increased
comprehensive annual safety training requirements for all
employees. In 2018, we launched a new Inclusion & Diversity
campaign within the company that included focused training for
our senior leaders. Later this year, we will publish an update to our
WESCO Sustainability Report, detailing our initiatives to protect
the environment, contribute to our communities, and ensure
sound corporate governance practices. We also help our
customers accelerate their sustainability efforts by providing
products that improve energy efficiency, energy management,
renewable energy, water and waste mitigation, and green
procurement. Consistent with our lean culture, we are measuring
our progress, seeking improvement opportunities, and reporting
on our performance.
OUR PAST AND OUR FUTURE
In February, we celebrated 25 years as a standalone company and
in May we will mark 20 years as a publicly-traded company. Over
the past decades, through organic growth and acquisitions, we
have transformed WESCO from a break-even, captive distribution
arm of Westinghouse to a profitable, industry-leading provider of
supply chain solutions.
We enter 2019 with positive momentum and expect continued
end market growth. Skilled labor shortages, high capacity
utilization in the U.S. and Canada, and customer productivity
initiatives continue to drive demand for supply chain services
that we are well positioned to provide. We also expect to benefit
from positive market trends in renewable energy, LED lighting
renovation and retrofit, broadband communications build-out,
energy grid modernization, and Internet of Things (IoT)
applications. With roughly half of our business driven by capital
projects, increased customer capital spending provides significant
opportunities for future growth.
30YEARS
Hazmasters, Inc.
A WESCO subsidiary
100YEARS
EECOL Electric Corp.
A WESCO subsidiary
100YEARS
EESCO
A WESCO division
4 WESCO International, Inc.
We remain focused on what we can control — our strategy, our
investments, our team, and our execution. Our competitive
advantage is a broad portfolio of the industry’s leading brands
and an extensive array of service offerings to support our
customers.
OUR COMMITMENTS
To our employees, thank you for your dedication, engagement,
and “extra effort” in providing outstanding service and value to
our customers.
IN APPRECIATION
Sandra Beach Lin will retire from the WESCO Board of Directors
following our annual meeting in May. We thank Sandy for her
17 years of dedicated service to our Board of Directors, including
her 10 years as Chair of the Nominating & Governance Committee.
We appreciate her leadership and commitment to excellence, and
we are grateful for her many contributions to WESCO’s success.
To our customers, thank you for your business. We are committed
to creating value in your operations to enable you to perform at
the highest level. We will exceed your expectations in 2019.
To our suppliers, thank you for your support and ongoing
partnership. We look forward to excelling together in 2019.
To our shareholders, thank you for your continued investment and
confidence. We are committed to continually strengthening our
business and increasing shareholder value.
John J. Engel
Chairman, President, and Chief Executive Officer
GLOBAL REACH
WESCO provides an in-country
and regional support structure
that meets customers’ needs for
rapid deployment, scalability,
global sourcing, multi-currency
transactions, and local inventory
in the Americas, EMEA, and
Asia-Pacific.
WESCO PRESENCE
SERVICE AREA
Canada
U.S.A.
Mexico
Ecuador
Peru
Chile
Scotland
Ireland
Netherlands
Poland
England
Spain
Czech Republic
China
UAE
Thailand
Singapore
Angola
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 001-14989
WESCO International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
225 West Station Square Drive
Suite 700
Pittsburgh, Pennsylvania
(Address of principal executive offices)
25-1723342
(I.R.S. Employer
Identification No.)
15219
(Zip Code)
(412) 454-2200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class
Common Stock, par value $.01 per share
Name of Exchange on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for at least the past 90 days. Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such file). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Ex-change Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The registrant estimates that the aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $2.7
billion as of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on
the New York Stock Exchange for such stock.
As of February 26, 2019, 45,195,593 shares of Common Stock, par value $.01 per share, of the registrant were outstanding.
Part III of this Form 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Page
1
8
12
12
12
12
13
15
16
30
31
71
71
71
72
72
72
72
72
73
78
79
Item 1. Business.
PART I
In this Annual Report on Form 10-K, “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.
The Company
WESCO International, Inc. (“WESCO International”), incorporated in 1993 and effectively formed in February 1994 upon
acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American-based distributor of products
and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility, and
commercial, institutional and government (“CIG”) markets. We are a leading provider of electrical, industrial, and communications
maintenance, repair and operating ("MRO") and original equipment manufacturer ("OEM") products, construction materials, and
advanced supply chain management and logistics services. Our primary product categories include general supplies, wire, cable
and conduit, communications and security, electrical distribution and controls, lighting and sustainability, and automation, controls
and motors.
We serve approximately 70,000 active customers globally through approximately 500 branches primarily located in North
America, with operations in 15 additional countries and 10 distribution centers located in the United States and Canada. The
Company employs approximately 9,100 employees worldwide. We distribute over 1,000,000 products, grouped into six categories,
from approximately 30,000 suppliers, utilizing a highly automated, proprietary electronic procurement and inventory replenishment
system.
In addition, we offer a comprehensive portfolio of value-added capabilities, which includes supply chain management, logistics
and transportation, procurement, warehousing and inventory management, as well as kitting, limited assembly of products and
system installation. Our value-added capabilities, extensive geographic reach, experienced workforce and broad product and supply
chain solutions have enabled us to grow our business and establish a leading position in North America.
Industry Overview
We operate in highly fragmented markets that include thousands of small regional and locally based, privately owned
competitors. The total potential in North America for purchases of MRO and OEM supplies and services across all industrial
distribution market segments and channels is estimated to be approximately $880 billion per a combination of industry sources.
According to one industry publication, the five largest full-line electrical distributors in North America, including WESCO, account
for approximately one-third of an estimated $100 billion-plus of electrical sales in North America. Our global account, integrated
supply and OEM programs provide customers with regional, national, North American and global supply chain consolidation
opportunities. The demand for these programs is driven primarily by the desire of companies to reduce operating expenses by
outsourcing operational and administrative functions associated with the procurement, management and utilization of MRO
supplies and OEM components. We believe that opportunities exist for expansion of these programs.
According to various industry sources, electrical distribution industry sales have grown mid-single-digits on average over the
past three years. Growth has been influenced by trends in the wider economy, including MRO and OEM purchasing, investments
in infrastructure and construction activity. It is estimated that approximately 75% of electrical products sold in the United States
are delivered to the end user through the distribution channel.
1
Markets and Customers
We have a large base of approximately 70,000 active customers across a diverse set of end markets. Our top ten customers
accounted for approximately 18% of our sales in 2018. No one customer accounted for more than 4% of our sales in 2018.
The following table outlines our sales breakdown by end market:
(percentages based on total sales)
Industrial
Construction
Utility
Commercial, Institutional and Government
Year Ended December 31,
2017
37%
33%
16%
14%
2016
36%
34%
16%
14%
2018
36%
33%
16%
15%
Industrial. Sales to industrial customers of MRO, OEM, and construction products and services accounted for approximately
36% of our sales in 2018, compared to 37% in 2017. Industrial sales product categories include a broad range of electrical equipment
and supplies as well as lubricants, pipe, valves, fittings, fasteners, cutting tools, power transmission, and safety products. In addition,
OEM customers require a reliable supply of assemblies and components to incorporate into their own products as well as value-
added services such as supplier consolidation, design and technical support, just-in-time supply and electronic commerce, and
supply chain management.
Construction. Sales of electrical and communications products to construction customers accounted for approximately 33%
of our sales in 2018 and 2017. Customers include a wide array of contractors and engineering, procurement and construction firms
for industrial, infrastructure, commercial and data and broadband communications projects. Specific applications include projects
for refineries, railways, wastewater treatment facilities, data centers, security installations, offices, and modular and mobile homes.
In addition to a wide array of electrical products, we offer contractors communications products for projects related to IT/network
modernization, physical security upgrades, broadband deployments, network security, and disaster recovery.
Utility. Sales to utilities and utility contractors accounted for approximately 16% of our sales in 2018 and 2017. Customers
include large investor-owned utilities, rural electric cooperatives, municipal power authorities and contractors that serve these
customers. We provide our utility customers with products and services to support the construction and maintenance of their
generation, transmission and distribution systems along with an extensive range of products that meet their power plant MRO and
capital projects needs. Materials management and procurement outsourcing arrangements are also important in this market, as
cost pressures and deregulation have caused utility customers to seek improvements in the efficiency and effectiveness of their
supply chains.
Commercial, Institutional and Government. Sales to CIG customers accounted for approximately 15% of our sales in 2018,
compared to 14% in 2017. Customers include schools, hospitals, property management firms, retailers and federal, state and local
government agencies of all types, including federal contractors.
Business Strategy
Our goal is to grow organically at a rate greater than that of our industry while making accretive acquisitions. Our organic
growth strategy focuses on enhancing our sales, technical expertise and customer service capabilities to acquire new customers
and increase our sales to current customers, broaden our product and service offerings and expand our geographic footprint. We
utilize LEAN continuous improvement initiatives on a company-wide basis to deliver operational excellence and improve
productivity. We also extend our LEAN initiatives to customers to improve the efficiency and effectiveness of their operations
and supply chains. In addition, we seek to develop a distinct competitive advantage through talent management and employee
development processes and programs.
We have identified certain growth engines that we believe provide substantial opportunities for above-market growth, and have
developed strategies to address each of these areas of opportunity. These growth engines are a combination of business models,
selected end markets and product categories, as discussed below.
Grow Our Global Account Customer Relationships and Base. Our typical global account customer is a large, multi-location
industrial or commercial company, a large utility, a major contractor, or a government or institutional customer. Our global account
program is designed to provide customers with supply chain management services and cost reductions by coordinating and
standardizing activity for MRO materials and OEM direct materials across their multiple locations, utilizing our broad geographic
footprint and our largely integrated information technology platform. Comprehensive account plans are developed and managed
at the local, national and international levels to prioritize activities, identify key performance measures, and track progress against
2
objectives. We involve our preferred suppliers early in the implementation process to contribute expertise and product knowledge
to accelerate program implementation and deliver cost savings and process improvements.
Through our growth initiatives, we plan to continue to expand the suite of products and services we offer to current customer
sites, while increasing our reach to serve additional customer locations. We plan on expanding our customer base by capitalizing
on our industry expertise and supply chain optimization capabilities.
Extend Our Position in Integrated Supply Programs. Our integrated supply programs focus on optimizing the supply chain
and replacing the traditional multi-vendor, resource-intensive procurement process with a single, outsourced, automated process.
Each integrated supply program employs our product and distribution expertise to reduce the number of suppliers, total procurement
costs, and administrative expenses, while meeting the customers’ service needs and improving their operating controls. We believe
that large customers will seek to utilize such services to consolidate and simplify their MRO and OEM supply chains.
We are expanding our position in North America as an integrated supply service provider by building upon established
relationships within our large customer base and premier supplier network, and extending our services to additional customers
and locations around the world. Our services are offered across all four of our end markets.
Expand Our Relationships with Construction Contractors. We support new construction, renovation and retrofit projects
across a wide variety of vertical markets, including manufacturing, healthcare, education, enterprise data communications,
telecommunications, energy and government infrastructure. We believe that significant cross selling opportunities exist for our
electrical and communications products and expertise, and we are utilizing our global account and integrated supply programs,
LEAN initiatives and project management expertise to capitalize on new non-residential construction opportunities.
Expand Products and Services for Utilities. Our investor-owned, public power and utility contractor customers continue to
focus on improving grid reliability and operating efficiency, while reducing costs. As a result, we anticipate opportunities from
distribution grid improvement, storm hardening, renewable generation installation and transmission expansion projects as well as
the continued adoption of integrated supply programs. Accordingly, we are focused on expanding our logistical and project services
and supply chain management programs to increase our scope of supply on the distribution grid, generation and other energy
projects, including alternative energy projects.
Grow Industrial MRO and Safety Sales. Our sales of industrial MRO materials include a broad range of electrical and non-
electrical products used in the ongoing maintenance and repair of equipment used in production processes. These products are
also used for facility upkeep in manufacturing, commercial, institutional, and other operations. In addition, we have safety products,
personal protection safety equipment, first aid supplies, and OSHA compliance categories to complement the industrial MRO
product lines.
Expand International Operations. We seek to capitalize on existing and emerging international market opportunities through
the expansion of our global product and service platforms. We follow large existing global customers into international markets,
extending our procurement outsourcing, integrated supply programs and supplier relationships. Once established, we also seek to
develop new business opportunities in these markets. We believe this strategy of working with well-developed customer and
supplier relationships significantly reduces risk and provides the opportunity to establish profitable business. Our priorities are
focused on global vertical markets including energy, mining and metals, manufacturing, and infrastructure, as well as key product
categories such as communications and security.
Grow Our Communications Products Position. Over the last several years, there has been a convergence of electrical and
data communications contractors. Our ability to provide both electrical and communications products and services as well as
automation, electromechanical, non-electrical MRO, physical security and utility products has presented cross selling opportunities
across WESCO. Communications products are in continual demand due to network upgrades, low voltage security investments,
data center upgrades and increasing broadband and telecommunications usage.
Grow Lighting System and Sustainability Sales. Lighting applications are undergoing significant innovation, driven by energy
efficiency and sustainability trends. We have expanded our sales team and marketing initiatives and increased our presence and
customer base with recent acquisitions. We have also developed capabilities to provide complete turn-key solutions for the
installation of LED equipment and controls. We expect to continue to add product and service offerings to provide lighting and
energy-saving solutions.
Pursue Strategic Acquisitions. Since 2010, we have made fourteen acquisitions that have helped us broaden and strengthen
our product and services portfolio, increase our customer base, and provide an important source of talent.
We believe that the highly fragmented nature of the electrical and industrial distribution industry will continue to provide
acquisition opportunities.
Drive Operational Excellence. LEAN continuous improvement is a set of company-wide strategic initiatives to increase
efficiency and effectiveness across the entire business enterprise, including sales, operations and administrative processes. The
basic principles behind LEAN are to systematically identify and implement improvements through simplification, elimination of
3
waste and reduction in errors. We apply LEAN in our distribution environment, and develop and deploy numerous initiatives
through the Kaizen approach targeting improvements in sales, margin, warehouse operations, transportation, purchasing, working
capital management and administrative processes. Our objective is to continue to implement LEAN initiatives across our business
enterprise and to extend LEAN services to our customers and suppliers.
Manage Our Talent. We seek to develop a distinct competitive advantage through talent management, and employee
engagement and development. We believe our ability to attract, develop and retain diverse human capital is imperative to ongoing
business success. We improve workforce capability through various programs and processes that identify, recruit, develop and
promote our talent base. Significant enhancements in these programs have been made over the last several years, and we expect
to continue to refine and enhance these programs in the future.
Products and Services
Products
Our network of branches and distribution centers stock approximately 220,000 unique product stock keeping units and we
provide customers with access to more than 1,000,000 different products. Each branch tailors its inventory to meet the needs of
its local customers.
Representative product categories and associated product lines that we offer include:
• General Supplies. Wiring devices, fuses, terminals, connectors, boxes, enclosures, fittings, lugs, terminations, wrap,
splicing and marking equipment, tools and testers, safety, personal protection, sealants, cutting tools, adhesives,
consumables, fasteners, janitorial and other MRO supplies;
• Wire, Cable and Conduit. Wire, cable, raceway, metallic and non-metallic conduit;
• Communications and Security. Structured cabling systems, broadband products, low voltage specialty systems, specialty
wire and cable products, equipment racks and cabinets, access control, alarms, cameras, paging and voice solutions;
• Electrical Distribution and Controls. Circuit breakers, transformers, switchboards, panel boards, metering products
and busway products;
•
Lighting and Sustainability. Lamps, fixtures, ballasts and lighting control products, and
• Automation, Controls and Motors. Motor control devices, drives, surge and power protection, relays, timers,
pushbuttons, operator interfaces, switches, sensors, and interconnects.
The following table sets forth sales information by product category:
(percentages based on total sales)
General Supplies
Wire, Cable and Conduit
Communications and Security
Electrical Distribution and Controls
Lighting and Sustainability
Automation, Controls and Motors
Year Ended December 31,
2017
40%
15%
15%
10%
12%
8%
2016
40%
14%
15%
11%
12%
8%
2018
40%
14%
16%
11%
11%
8%
We purchase products from a diverse group of approximately 30,000 suppliers. In 2018, our ten largest suppliers accounted
for approximately 32% of our purchases. Our largest supplier in 2018 was Eaton Corporation, accounting for approximately 11%
of our purchases. No other supplier accounted for more than 4% of our total purchases.
Our supplier relationships are important to us, providing access to a wide range of products, services, technical training, and
sales and marketing support. We have approximately 300 commercial agreements with more than 200 preferred suppliers and
purchase nearly 60% of our products pursuant to these arrangements. Consistent with industry practice, most of our agreements
with suppliers, including both distribution agreements and commercial agreements, are terminable by either party on 60 days
notice or less.
4
Services
As part of our overall offering, we provide customers a comprehensive portfolio of value-added solutions within a wide range
of service categories including construction, e-commerce, energy and sustainability, engineering services, production support,
safety and security, supply chain optimization, training, and working capital. These solutions are designed to address our customers'
business needs through:
• Technical advisory strategies, including product lifecycle management and migration planning;
•
Supply chain and inventory optimization programs, including just-in-time delivery and vendor managed inventory;
• Consultation on production and operational efficiencies from cross-functional, cost saving teams;
• Transactional process improvements utilizing a suite of e-commerce solutions;
• Energy-saving solutions, including lighting renovation and retrofit;
• Operational safety and product training for customer's employees, and
• Dedicated on-site support personnel.
Competitive Strengths
As a leading electrical distributor in a highly fragmented North American market, we compete directly with global, national,
regional, and local distributors of electrical and other industrial supplies, along with buying groups formed by smaller distributors.
Competition is generally based on product line breadth, product availability, service capabilities and price. We believe that our
market leadership, broad product offering, value-added services, technical expertise, extensive distribution network and low-cost
operator status provide distinct competitive advantages.
Market Leadership. Our ability to manage complex global supply chains, and multi-site facility maintenance programs and
construction projects, which require special sourcing, technical advice, logistical support and locally based service, has enabled
us to establish a strong presence in the competitive and fragmented North American electrical distribution market.
Broad Product Offering and Value-added Services. We provide a wide range of products, services, and procurement solutions,
which draw on our product knowledge, supply and logistics expertise, system capabilities and supplier relationships to enable our
customers to maximize productivity, minimize waste, improve efficiencies, reduce costs and enhance safety. Our broad product
offering and stable source of supply enables us to consistently meet customers’ wide-ranging capital project, MRO and OEM
requirements.
Extensive Distribution Network. We operate approximately 500 geographically dispersed branch locations and ten distribution
centers (six in the United States and four in Canada). Our distribution centers add value for our customers, suppliers, and branches
through the combination of a broad and deep selection of inventory, online ordering and next-day shipment capabilities, and central
order handling and fulfillment. Our distribution center network reduces the lead time and cost of supply chain activities through
its automated replenishment and warehouse management system, and provides economies of scale in purchasing, inventory
management, administration and transportation. This extensive network, which would be difficult and expensive to replicate,
allows us to:
• Enhance local customer service, technical support and sales coverage;
• Tailor individual branch products and services to local customer needs, and
• Offer multi-site distribution capabilities to large customers and global accounts.
Low-Cost Operator. Our competitiveness has been enhanced by our consistent favorable operating cost position, which is
based on the use of LEAN, strategically-located distribution centers, and purchasing economies of scale. As a result of these and
other factors, we believe our operating costs as a percentage of sales has historically been one of the lowest in our industry. Our
selling, general and administrative expenses as a percentage of revenues for 2018 were 14.1%.
5
Geography
Our network of branches and distribution centers are located primarily in North America. To serve our customers in the United
States, we operate a network of approximately 340 branches supported by six distribution centers located in Arkansas, Mississippi,
Nevada, Pennsylvania, Texas and Wisconsin. To serve our Canadian customers, we operate a network of approximately 130
branches in nine provinces. Branch operations are supported by four distribution centers located in Alberta, British Columbia,
Ontario and Quebec. We have seven branch locations in Mexico that provide various supply chain services to a broad range of
end markets.
We also sell to global customers through export sales offices located in Calgary, Houston, Miami, Montreal and Pittsburgh
within North America and sales offices and branch operations in various international locations. Our branches in Aberdeen,
Scotland; Dublin, Ireland; and, Manchester, England support sales efforts in Europe and the Middle East. We have branches in
Singapore and Thailand to support our sales in Asia and a branch near Shanghai to serve customers in China. Furthermore, we
support sales in South America through our branches in Chile, Ecuador and Peru, and we have operations in six additional countries.
Many of our international locations have been established to serve our growing list of customers with global operations.
Intellectual Property
We currently have trademarks, patents and service marks registered with the U.S. Patent and Trademark Office and Canadian
Intellectual Property Office. The trademarks and service marks registered in the U.S. include: “WESCO®”, our corporate logo
and the running man logo. The Company's "EECOL" trademark is registered in Canada. In addition, trademarks, patents, and
service mark applications have been filed in various foreign jurisdictions, including Argentina, Australia, Brazil, Chile, Colombia,
Costa Rica, Canada, Chile, China, the European Community, Egypt, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Mexico,
New Zealand, Norway, Panama, Peru, Philippines, Russia, Singapore, South Africa, Switzerland, Taiwan, Thailand, United Arab
Emirates, United Kingdom, Venezuela, and Vietnam.
Environmental Matters
Our facilities and operations are subject to federal, state and local laws and regulations relating to environmental protection
and human health and safety. Some of these laws and regulations may impose strict, joint and several liabilities on certain persons
for the cost of investigation or remediation of contaminated properties. These persons may include former, current or future owners
or operators of properties and persons who arranged for the disposal of hazardous substances. Our owned and leased real property
may give rise to such investigation, remediation and monitoring liabilities under environmental laws. In addition, anyone disposing
of certain products we distribute, such as ballasts, fluorescent lighting and batteries, must comply with environmental laws that
regulate certain materials in these products.
We believe that we are in compliance, in all material respects, with applicable environmental laws. As a result, we do not
anticipate making significant capital expenditures for environmental control matters either in the current year or in the near future.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are affected by a
reduced level of activity. Sales during the second, third and fourth quarters are generally 6% to 8% higher than the first quarter.
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 seasonal pattern.
Website Access
Our Internet address is www.wesco.com. Information contained on our website is not part of, and should not be construed as
being incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge under the “Investors”
heading on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as well as our Proxy Statements, as soon as reasonably practicable after such documents are
electronically filed or furnished, as applicable, with the Securities and Exchange Commission (the “SEC”).
In addition, our charters for our Executive Committee, Nominating and Governance Committee, Audit Committee and
Compensation Committee, as well as our Corporate Governance Guidelines, Code of Principles for Senior Executives,
Independence Policy, Global Anti-Corruption Policy, and Code of Business Ethics and Conduct for our Directors, officers and
employees, are all available on our website in the “Corporate Governance” link under the “Investors” heading.
6
Forward-Looking Information
This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve certain unknown risks and uncertainties, including, among others, those
contained in Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” When used in this Annual Report on Form 10-K, the words “anticipates,” “plans,” “believes,”
“estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although
not all forward-looking statements contain such words. Such statements, including, but not limited to, our statements regarding
business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product
and service introductions and liquidity and capital resources, are based on management’s beliefs, as well as on assumptions made
by and information currently available to management, and involve various risks and uncertainties, some of which are beyond our
control. Our actual results could differ materially from those expressed in any forward-looking statement made by us or on our
behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove
to be accurate. We have undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Executive Officers
Our executive officers and their respective ages and positions as of February 27, 2019, are set forth below.
Name
John J. Engel
Diane E. Lazzaris
Robert Minicozzi
David S. Schulz
Christine A. Wolf
Age
57
52
57
53
58
Position
Chairman, President and Chief Executive Officer
Senior Vice President and General Counsel
Vice President and Chief Information Officer
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Human Resources Officer
Set forth below is biographical information for our executive officers listed above.
John J. Engel was elected as Chairman of the Board at the 2011 Annual Meeting and has served as President and Chief
Executive Officer since 2009. Previously, Mr. Engel served as our Senior Vice President and Chief Operating Officer from 2004
to 2009. Before joining WESCO in 2004, Mr. Engel served as Senior Vice President and General Manager of Gateway, Inc.,
Executive Vice President and Senior Vice President of Perkin Elmer, Inc., Vice President and General Manager of Allied Signal,
Inc., and also held various engineering, manufacturing and general management positions at General Electric Company.
Diane E. Lazzaris has served as our Senior Vice President and General Counsel since January 2014, and from 2010 to December
2013 she served as our Vice President, Legal Affairs. From 2008 to 2010, Ms. Lazzaris served as Senior Vice President - Legal,
General Counsel and Corporate Secretary of Dick’s Sporting Goods, Inc. From 1994 to 2008, she held various corporate counsel
positions at Alcoa Inc., including Group Counsel to a group of global businesses.
Robert Minicozzi has served as our Vice President and Chief Information Officer since January 2016. From 2012 to December
2015, Mr. Minicozzi served as Vice President and Global Divisional Chief Information Officer of Arrow Electronics, Inc. and
previously held various information systems leadership positions with Arrow Electronics, Inc.
David S. Schulz has served as our Senior Vice President and Chief Financial Officer since October 2016. From April 2016 to
October 2016, he served as Senior Vice President and Chief Operating Officer of Armstrong Flooring, Inc. From 2013 to March
2016, he served as Senior Vice President and Chief Financial Officer of Armstrong World Industries, Inc., and as Vice President,
Finance of the Armstrong Building Products division from 2011 to 2013. Prior to joining Armstrong World Industries in 2011, he
held various financial leadership roles with Procter & Gamble and The J.M. Smucker Company. Mr. Schulz began his career as
an officer in the United States Marine Corps.
Christine A. Wolf has served as our Senior Vice President and Chief Human Resources Officer since June 2018. From 2011
to June 2018, Ms. Wolf served as the Chief Human Resources Officer of Orbital ATK, Inc. until its acquisition by Northrop
Grumman. From 2008 to 2011, she served as the Chief Human Resources Officer of Fannie Mae and from 2004 to 2008 she served
as Chief Human Resources Officer of E*Trade Financial Corporation. Prior to that, she held various positions in human resources
with companies in a variety of industries.
7
Item 1A. Risk Factors.
The following factors, among others, could cause our actual results to differ materially from the forward-looking statements
we make. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified by the following
factors. This information should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations, Item 7A, Quantitative and Qualitative Disclosures about Market Risks and the consolidated financial
statements and related notes included in this Form 10-K.
Operational Risk Factors
Adverse conditions in the global economy and disruptions of financial markets could negatively impact our results of
operations, cash flows or financial position.
Our results of operations are affected by the level of business activity of our customers, which in turn is affected by global
economic conditions and market factors impacting the industries and markets that they serve. Certain global economies and markets
continue to experience significant uncertainty and volatility, particularly commodity-driven end markets such as oil and gas and
metals and mining. Adverse economic conditions or lack of liquidity in these markets, particularly in North America, may adversely
affect our revenues and operating results. Economic and financial market conditions may also affect the availability of financing
for projects and for our customers' capital or other expenditures, which can result in project delays or cancellations and thus affect
demand for our products. There can be no assurance that any governmental responses to economic conditions or disruptions in
the financial markets ultimately will stabilize the markets or increase our customers' liquidity or the availability of credit to our
customers. Should one or more of our larger customers declare bankruptcy, it could adversely affect the collectability of our
accounts receivable, along with bad debt reserves and net income. In addition, our ability to access the capital markets may be
restricted at a time when we would like, or need, to do so. The economic, political and financial environment may also affect our
business and financial condition in ways that we currently cannot predict, and there can be no assurance that economic and political
instability, both domestically and internationally (for example, resulting from changes to trade policies, tariffs or participation in
trade agreements or economic and political unions) will not adversely affect our results of operations, cash flows or financial
position in the future.
An increase in competition could decrease sales, profit margins, and earnings.
We operate in a highly competitive industry and compete directly with global, national, regional and local providers of like
products and services. Some of our existing competitors have, and new market entrants may have, greater resources than us.
Competition is generally based on product line breadth, product availability, service capabilities and price. Other sources of
competition are buying groups formed by smaller distributors to increase purchasing power and provide some cooperative marketing
capability, as well as e-commerce companies. There may be new market entrants with non-traditional business and customer
service models, resulting in increased competition and changing industry dynamics.
Existing or future competitors may seek to gain or retain market share by reducing prices, and we may be required to lower
our prices or may lose business, which could adversely affect our financial results. We may be subject to supplier price increases
while not being able to increase prices to customers. Also, to the extent that we do not meet changing customer preferences or
demands, or to the extent that one or more of our competitors becomes more successful with private label products, on-line offerings
or otherwise, our ability to attract and retain customers could be materially adversely affected. Existing or future competitors also
may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of
suitable acquisitions. These factors, in addition to competitive pressures resulting from the fragmented nature of our industry,
could affect our sales, profit margins and earnings.
Expansion into new business activities, industries, product lines or geographic areas could subject the company to increased
costs and risks and may not achieve the intended results.
We have invested significantly in expanding our e-commerce capabilities and online customer experience. If our efforts to
expand our capabilities in this area are not successful, we may not realize the return on our investments as anticipated, or our
operating results could be adversely affected by slower than expected sales growth or additional costs. Furthermore, engaging in
or significantly expanding business activities in product sourcing, sales and services could subject the company to unexpected
costs and risks. Such activities could subject us to increased operating costs, product liability, regulatory requirements and
reputational risks. Our expansion into new and existing markets, including manufacturing related or regulated businesses, may
present competitive distribution and regulatory challenges that differ from current ones. We may be less familiar with the target
customers and may face different or additional risks, as well as increased or unexpected costs, compared to existing operations.
Growth into new markets may also bring us into direct competition with companies with whom we have little or no past experience
as competitors. To the extent we are reliant upon expansion into new geographic, industry and product markets for growth and do
8
not meet the new challenges posed by such expansion, our future sales growth could be negatively impacted, our operating costs
could increase, and our business operations and financial results could be negatively affected.
Certain events or conditions, including a failure or breach of our information security systems, could lead to interruptions
in our operations, which may materially adversely affect our business operations, financial condition, and results of
operations.
We operate a number of facilities and we coordinate company activities, including information technology systems and
administrative services and the like, through our headquarters operations. Our operations depend on our ability to maintain existing
systems and implement new technology, which includes allocating sufficient resources to periodically upgrade our information
technology systems, and to protect our equipment and the information stored in our databases against both manmade and natural
disasters, as well as power losses, computer and telecommunications failures, technological breakdowns, unauthorized intrusions,
cyber-attacks, and other events. Conversions to new information technology systems may result in cost overruns, delays or business
interruptions. If our information technology systems are disrupted, become obsolete or do not adequately support our strategic,
operational or compliance needs, it could result in a competitive disadvantage or adversely affect our business operations and
financial condition, including our ability to process orders, receive and ship products, maintain inventories, collect accounts
receivable and pay expenses, therefore impacting our results of operations.
Because we rely heavily on information technology both in serving our customers and in our enterprise infrastructure in order
to achieve our objectives, we may be vulnerable to damage or intrusion from a variety of cyber-attacks, including computer viruses,
worms or other malicious software programs that access our systems. Despite the precautions we take to mitigate the risks of such
events, an attack on our enterprise information technology system could result in theft or disclosure of our proprietary or confidential
information or a breach of confidential customer, supplier or employee information. Such events could have an adverse impact
on revenue and harm our reputation. Additionally, such an event could cause us to incur legal liabilities and costs, which could be
significant, in order to address and remediate the effects of an attack and related security concerns.
We also depend on accessible office facilities, distribution centers and information technology data centers for our operations
to function properly. An interruption of operations at any of our distribution centers or data centers could have a material adverse
effect on the operations of branches served by the affected distribution or data center. Such disaster related risks and effects are
not predictable with certainty and, although they typically can be mitigated, they cannot be eliminated. We seek to mitigate our
exposures to disaster events in a number of ways. For example, where feasible, we design the configuration of our facilities to
reduce the consequences of disasters. We also maintain insurance for our facilities against casualties, and we evaluate our risks
and develop contingency plans for dealing with them. Although we have reviewed and analyzed a broad range of risks applicable
to our business, the ones that actually affect us may not be those that we have concluded are most likely to occur. Furthermore,
although our reviews have led to more systematic contingency planning, our plans are in varying stages of development and
execution, such that they may not be adequate at the time of occurrence for the magnitude of any particular disaster event that we
may encounter.
Loss of key suppliers, product cost fluctuations, lack of product availability, or inefficient supply chain operations could
decrease sales, profit margins, and earnings.
Most of our agreements with suppliers are terminable by either party on 60 days' notice or less. Our 10 largest suppliers in
2018 accounted for approximately 32% of our purchases for the period. Our largest supplier in 2018 was Eaton Corporation,
accounting for approximately 11% of our purchases. The loss of, or a substantial decrease in the availability of, products from any
of these suppliers, a supplier's change in sales strategy to rely less on distribution channels, the loss of key preferred supplier
agreements, or disruptions in a key supplier's operations could have a material adverse effect on our business. Supply interruptions
could arise from shortages of raw materials, effects of economic, political or financial market conditions on a supplier's operations,
labor disputes or weather conditions affecting products or shipments, transportation disruptions, information system disruptions
or other reasons beyond our control.
In addition, certain of our products, such as wire and conduit, are commodity price based products and may be subject to
significant price fluctuations which are beyond our control. While increases in the cost of energy or products could have adverse
effects, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which
could cause our gross profit margin to deteriorate. Fluctuations in energy or raw materials costs can also adversely affect our
customers. Declines in oil and natural gas prices can negatively impact our customers operating in those industries and, consequently,
our sales to those customers. Furthermore, we cannot be certain that particular products or product lines will be available to us,
or available in quantities sufficient to meet customer demand. Such limited product access could cause us to be at a competitive
disadvantage. The profitability of our business is also dependent upon the efficiency of our supply chain. An inefficient or ineffective
supply chain strategy or operations could increase operational costs, decrease sales, profit margins and earnings, which could
adversely affect our business.
9
We must attract, retain and motivate key employees, and the failure to do so may adversely affect our business.
Our success depends on hiring, retaining and motivating key employees, including executive, managerial, sales, technical,
marketing and support personnel. We may have difficulty locating and hiring qualified personnel. In addition, we may have
difficulty retaining such personnel once hired, and key people may leave and compete against us. The loss of key personnel or
our failure to attract and retain other qualified and experienced personnel could disrupt or adversely affect our business, its sales
and operating results. In addition, our operating results could be adversely affected by increased costs due to increased competition
for employees, higher employee turnover, which may also result in loss of significant customer business, or increased employee
benefit costs.
Acquisitions that we may undertake would involve a number of inherent risks, any of which could cause us not to
realize the benefits anticipated to result.
We have expanded our operations through organic growth and selected acquisitions of businesses and assets, and may seek to
do so in the future. Acquisitions involve various inherent risks, including: problems that could arise from the integration of the
acquired business; uncertainties in assessing the value, strengths, weaknesses, contingent and other liabilities and potential
profitability of acquisition candidates; the potential loss of key employees of an acquired business; the ability to achieve identified
operating and financial synergies anticipated to result from an acquisition or other transaction; unanticipated changes in business,
industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale; and
expansion into new countries or geographic markets where we may be less familiar with operating requirements, target customers
and regulatory compliance. Any one or more of these factors could increase our costs or cause us not to realize the benefits
anticipated to result from the acquisition of a business or assets.
While there are risks associated with acquisitions generally, including integration risks, there are additional risks more
specifically associated with owning and operating businesses internationally, including those arising from import and export
controls, foreign currency exchange rate changes, developments in political, regulatory or economic conditions impacting those
operations and various environmental and climatic conditions in particular areas of the world.
Financial Risk Factors
Changes in tax laws or challenges to the Company's tax positions by taxing authorities could adversely impact the
Company's results of operations and financial condition.
We are subject to taxes in jurisdictions in which we do business, including but not limited to taxes imposed on our income,
receipts, stockholders' equity, property, sales, purchases and payroll. As a result, the tax expense we incur can be adversely affected
by changes in tax law. We frequently cannot anticipate these changes in tax law, which can cause unexpected volatility in our
results of operations. While not limited to the United States (U.S.) and Canada, changes in the tax law at the federal and state/
provincial levels in the U.S. and Canada can have a material adverse effect on our results of operations.
Additionally, the tax laws to which the Company is subject are inherently complex and ambiguous. Therefore, we must interpret
the applicable laws and make subjective judgments about the expected outcome upon challenge by the applicable taxing authorities.
As a result, the impact on our results from operations of the application of enacted tax laws to our facts and circumstances is
frequently uncertain. If a tax authority successfully challenges our interpretation and application of the tax law to our facts and
circumstances, there can be no assurance that we can accurately predict the outcome and the taxes ultimately owed upon effective
settlement, which may differ from the tax expense recognized in our consolidated statements of income and comprehensive income
(loss) and accrued in our consolidated balance sheets. Additionally, if we cannot meet liquidity requirements in the U.S., we may
have to repatriate funds from overseas, which would result in additional income taxes being incurred on the amount repatriated.
Uncertainties in the interpretation and application of the Tax Cuts and Jobs Act of 2017 could materially affect our tax
obligations and effective tax rate.
The Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted on December 22, 2017, and it significantly affected U.S. tax
law by, among other things, changing how the U.S. taxes the income of multinational corporations. The U.S. Department of
Treasury (the "Treasury Department") has broad authority to issue regulations and interpretative guidance that may significantly
impact how the TCJA is applied. While the Treasury Department issued many proposed regulations and other guidance in 2018
to clarify certain aspects of the TCJA, these regulations and other guidance are subject to change when issued in their final form.
Additionally, the Treasury Department is expected to issue more proposed regulations in 2019 to address other aspects of the
TCJA. Furthermore, guidance is expected to be forthcoming with respect to the treatment of the TCJA by the various states. We
will continue to monitor the guidance issued by the Treasury Department and the various states and will record any material impact
related to it in the period of enactment.
10
Fluctuations in foreign currency have an effect on our results from operations.
The results of our foreign operations are reported in the local currency and then translated into U.S. dollars at the applicable
exchange rates for inclusion in our consolidated financial statements. The exchange rates between some of these currencies and
the U.S. dollar have fluctuated significantly in recent years, and may continue to do so in the future. We may incur losses related
to foreign currency fluctuations, and foreign exchange controls may prevent us from repatriating cash in countries outside the U.S.
In addition, because our financial statements are stated in U.S. dollars, such fluctuations may also affect the comparability of our
results between financial periods.
Our outstanding indebtedness requires debt service commitments that could adversely affect our ability to fulfill our
obligations and could limit our growth and impose restrictions on our business.
As of December 31, 2018, excluding debt discount and debt issuance costs, we had $1.2 billion of consolidated indebtedness.
We and our subsidiaries may undertake additional borrowings in the future, subject to certain limitations contained in the debt
instruments governing our indebtedness. Over the next three years, we will be required to repay or refinance approximately $883.3
million of our currently outstanding indebtedness.
Our debt service obligations impact our ability to operate and grow our business. Our payments of principal and interest on
our indebtedness reduce the amount of funds available to us to invest in operations, future business opportunities, acquisitions,
and other potentially beneficial activities. Our debt service obligations also increase our vulnerability to adverse economic, financial
market and industry conditions. Our ability to service and refinance our indebtedness, make scheduled payments on our operating
leases and fund capital expenditures, acquisitions or other business opportunities, will depend in large part on both our future
performance and the availability of additional financing in the future. There can be no assurance that our business will continue
to generate sufficient cash flows from operations in the future to service our debt, make necessary capital expenditures, or meet
other cash needs. If unable to do so, we may be required to refinance all or a portion of our existing debt, sell assets, or obtain
additional financing.
Our debt agreements contain restrictions that may limit our ability to operate our business.
Our credit facilities require us to maintain specific earnings to fixed expense ratios and to meet minimum net worth requirements
in certain circumstances. In addition, our credit facilities and our other debt agreements contain, and any of our future debt
agreements may contain, additional covenant restrictions that limit our ability to operate our business, or are dependent upon our
future financial performance.
As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional
financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise
be beneficial to us. See the liquidity section in "Item 7. Management's Discussion and Analysis" for further details.
There is a risk that the market value of our common stock may decline.
Stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies in our
industry have been volatile. For some issuers, the markets have exerted downward pressure on stock prices and credit capacity. It
is impossible to predict whether the price of our common stock will rise or fall. Trading prices of our common stock will be
influenced by our operating results and prospects and by economic, political, financial, and other factors.
Regulatory and Legal Risk Factor
We are subject to costs and risks associated with global laws and regulations affecting our business, as well as litigation
for product liability or other matters affecting our business.
The global legal and regulatory environment is complex and exposes us to compliance costs and risks, as well as litigation and
other legal proceedings, which could materially affect our operations and financial results. These laws and regulations may change,
sometimes significantly, as a result of political or economic events, and some changes are anticipated to occur in the coming year.
They include tax laws and regulations, import and export laws and regulations, labor and employment laws and regulations, product
safety, occupational safety and health laws and regulations, securities and exchange laws and regulations, data privacy laws and
regulations (and other laws applicable to publicly-traded companies such as the Foreign Corrupt Practices Act), and environmental
laws and regulations. Furthermore, as a government contractor selling to federal, state and local government entities, we are also
subject to a wide variety of additional laws and regulations. Proposed laws and regulations in these and other areas could affect
the cost of our business operations.
From time to time we are involved in legal proceedings, audits or investigations which may relate to, for example, product
liability, labor and employment (including wage and hour), tax, escheat, import and export compliance, government contracts,
worker health and safety, and general commercial and securities matters. While we believe the outcome of any pending matter is
11
unlikely to have a material adverse effect on our financial condition or liquidity, additional legal proceedings may arise in the
future and the outcome of these as well as other contingencies could require us to take actions, which could adversely affect our
operations or could require us to pay substantial amounts of money.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We have approximately 500 branches, of which approximately 340 are located in the United States, approximately 130 are
located in Canada, seven are located in Mexico and the remainder are in other countries located in Africa, Asia, Europe and South
America. Approximately 14% of our branches are owned facilities, and the remainder are leased.
The following table summarizes our distribution centers:
Location
Little Rock, AR
Byhalia, MS (1)
Sparks, NV
Warrendale, PA (1)
Dallas, TX
Madison, WI
Edmonton, AB
Burnaby, BC
Mississauga, ON
Montreal, QC
Square Feet
Leased/Owned
100,000
148,000
199,000
194,000
112,000
136,000
101,000
65,000
246,000
126,000
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
(1) Property pledged as collateral under our Term Loan Facility.
We also lease our 109,000 square-foot headquarters in Pittsburgh, Pennsylvania. We do not regard the real property associated
with any single branch location as material to our operations. We believe our facilities are in good operating condition and are
adequate for their respective uses.
Item 3. Legal Proceedings.
From time to time, a number of lawsuits and claims have been or may be asserted against us relating to the conduct of our
business, including litigation relating to commercial, product and employment matters. The outcome of any litigation cannot be
predicted with certainty, and some lawsuits may be determined adversely to us. However, management does not believe that the
ultimate outcome of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity,
although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on our results of
operations for that period.
Information relating to legal proceedings is disclosed in Note 16, "Commitments and Contingencies," of the Notes to
Consolidated Financial Statements and is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
12
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market, Stockholder and Dividend Information. Our common stock is listed on the New York Stock Exchange under the
symbol “WCC.” As of February 26, 2019, there were 45,195,593 shares of common stock outstanding held by approximately 19
holders of record. We have not paid dividends on common stock and do not currently plan to pay dividends. We do, however,
evaluate the possibility from time to time. It is currently expected that earnings will be reinvested to support growth initiatives,
acquisitions, debt reduction, and share repurchases. In addition, our Revolving Credit Facility, Term Loan Facility, 2021 Notes
and 2024 Notes limit our ability to pay dividends and repurchase our common stock. See Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
Issuer Purchases of Equity Securities. On December 13, 2017, WESCO announced that its Board of Directors approved, on
December 7, 2017, the repurchase of up to $300 million of the Company's common stock through December 31, 2020. On October
31, 2018, the Company's Board of Directors approved an increase to the authorization from $300 million to $400 million. As
disclosed in Note 12 of the Notes to Consolidated Financial Statements, as of December 31, 2018, 2,003,446 shares had been
repurchased for $125.0 million under this repurchase authorization.
The following table sets forth all issuer purchases of common stock during the three months ended December 31, 2018, including
those made pursuant to publicly announced plans or programs:
Period
October 1 – October 31, 2018
November 1 – November 30, 2018
December 1 – December 31, 2018
Total
Total Number
of Shares
Purchased(1)
Average Price
Paid Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares That
May Yet be Purchased
Under the Plans or
Programs(2)
(In Millions)
64,148
1,588,868
$
$
— $
$
1,653,016
59.14
53.53
—
53.75
63,730
1,587,895
$
$
— $
1,651,625
375.0
275.0
275.0
(1)
(2)
There were 1,391 shares purchased in the period that were not part of the publicly announced share repurchase
program. These shares were surrendered by stock-based compensation plan participants to satisfy tax withholding
obligations arising from the exercise of stock-settled stock appreciation rights and vesting of restricted stock units.
This amount represents the remaining authorization under the Company's share repurchase program that is available to
repurchase shares of the Company's common stock. Due to the nature of accelerated share repurchases, the Company
receives a certain percentage of shares immediately upon an up-front payment of cash. The remaining shares are
delivered by the respective counterparty at the end of the valuation period. The amount authorized under the
Company’s share repurchase program was reduced at the time of the up-front cash payment.
13
Company Performance. The following stock price performance graph illustrates the cumulative total return on an investment
Company Performance. The following stock price performance graph illustrates the cumulative total return on an investment
in WESCO International, a 2018 Performance Peer Group, and the Russell 2000 Index. The graph covers the period from December
in WESCO International, a 2018 Performance Peer Group, and the Russell 2000 Index. The graph covers the period from December
31, 2013 to December 31, 2018, and assumes that the value for each investment was $100 on December 31, 2018, and that all
31, 2013 to December 31, 2018, and assumes that the value for each investment was $100 on December 31, 2018, and that all
dividends were reinvested.
dividends were reinvested.
2018 Performance Peer Group:
2018 Performance Peer Group:
Anixter International, Inc.
Anixter International, Inc.
Essendant, Inc.
Essendant, Inc.
MSC Industrial Direct Co., Inc.
MSC Industrial Direct Co., Inc.
Applied Industrial Technologies, Inc.
Applied Industrial Technologies, Inc.
Fastenal Company
Fastenal Company
Rexel SA
Rexel SA
Arrow Electronics, Inc.
Arrow Electronics, Inc.
Avnet, Inc.
Avnet, Inc.
Barnes Group
Barnes Group
Eaton Corporation Plc
Eaton Corporation Plc
Genuine Parts Company
Genuine Parts Company
HD Supply Holdings, Inc.
HD Supply Holdings, Inc.
Hubbell, Inc.
Hubbell, Inc.
MRC Global, Inc.
MRC Global, Inc.
Rockwell Automation, Inc.
Rockwell Automation, Inc.
Tech Data Corporation
Tech Data Corporation
W.W. Grainger, Inc.
W.W. Grainger, Inc.
14
14
Item 6. Selected Financial Data.
The following selected financial data for the last five fiscal years has been derived from the Company's Consolidated Financial
Statements for those years. As described below, certain prior periods have been impacted by the retrospective application of an
accounting standard. This financial data should be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in Item 8, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7.
Income Statement Data:
(In millions, except per share data)
Net sales
Cost of goods sold (excluding depreciation and amortization)
Selling, general and administrative expenses(1)
Depreciation and amortization
Income from operations
Net interest and other(1)
Loss on debt extinguishment(2)
Income before income taxes
Provision for income taxes
Net income
Net loss attributable to noncontrolling interests
2018
$ 8,176.6
6,609.2
1,151.9
63.0
352.5
71.4
—
281.1
55.7
225.4
2.0
Year Ended December 31,
2015
2016
2017
$ 7,518.5
$ 7,336.0
$ 7,679.0
6,024.8
5,887.8
6,194.4
1,056.2
1,050.8
1,101.5
65.0
66.9
64.0
372.5
330.5
319.1
68.6
75.1
66.6
—
123.9
—
303.9
131.5
252.5
95.5
30.4
89.3
208.4
101.1
163.2
2.3
0.5
0.3
2014
$ 7,889.6
6,278.6
1,077.7
68.0
465.3
81.2
—
384.1
108.7
275.4
0.5
Net income attributable to WESCO International
Earnings per common share attributable to WESCO
International
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
Other Financial Data:
Capital expenditures
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Balance Sheet Data:
$
227.4
$
163.5
$
101.6
$
210.7
$
275.9
$
$
$
4.87
4.82
$
$
3.42
3.38
$
$
2.30
2.10
$
$
4.85
4.18
$
$
46.7
47.2
47.8
48.4
44.1
48.3
43.4
50.4
6.21
5.18
44.4
53.3
$
$
36.2
296.7
(34.1)
(275.1)
21.5
149.1
(5.3)
(141.2)
$
18.0
300.2
(70.5)
(276.3)
$
21.7
283.1
(170.2)
(67.8)
20.5
251.2
(144.2)
(95.5)
Total assets
Total debt (including current and short-term debt)(3)
Stockholders’ equity
$ 4,605.0
$ 4,735.5
$ 4,431.8
$ 4,569.7
$ 4,754.4
1,223.5
2,129.7
1,348.6
2,116.1
1,385.3
1,963.6
1,483.4
1,727.5
1,415.6
1,881.8
(1) Effective January 1, 2018, WESCO adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The adoption of this ASU resulted
in the reclassification of $1.8 million, $1.5 million, $1.2 million and $0.9 million from selling, general and administrative expenses to net
interest and other in the Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended December 31, 2017,
2016, 2015 and 2014, respectively.
(2) Represents the loss recognized in 2016 related to the redemption of the then outstanding 6.0% Convertible Senior Debentures due 2029 (the
"2029 Debentures").
(3) Includes the discount related to the 2029 Debentures and Term Loan Facility. For 2018, 2017, 2016 and 2015, also includes debt issuance
costs. See Note 9 of the Notes to Consolidated Financial Statements.
15
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.
Company Overview
Our 2018 financial results reflect record sales with growth in all end markets and geographies, operating margin expansion,
strong cash flow generation, and effective capital deployment. Sales increased $497.6 million, or 6.5%, over the prior year. Foreign
exchange rates positively impacted net sales by 0.3%, resulting in organic sales growth of 6.2%. Cost of goods sold as a percentage
of net sales was 80.8% and 80.7% in 2018 and 2017, respectively. Operating income was $352.4 million for 2018, compared to
$319.0 million for 2017. Operating income increased primarily due to higher sales volume and operating leverage. Net income
attributable to WESCO International of $227.3 million increased by 39.1% compared to 2017 net income of $163.5 million, which
included $26.4 million of discrete income tax expense resulting from the application of the TCJA. Earnings per diluted share
attributable to WESCO International was $4.82 in 2018, based on 47.2 million diluted shares, compared with earnings per diluted
share of $3.38 in 2017, based on 48.4 million diluted shares. Excluding the impact of the TCJA of $0.55, adjusted earnings per
diluted share for 2017 was $3.93.
We provide a full-line of electrical, industrial and communications MRO and OEM products, construction materials, and
advanced supply chain management and logistics services to customers globally. Approximately 75% of our sales in 2018 were
from customers in the United States and 25% were from international customers, primarily in Canada. Our end markets consist
of industrial firms, electrical and data communications contractors, utilities, and commercial organizations, institutions and
government entities. Our transaction types to these markets can be categorized as stock, direct ship and special order. Stock orders
are filled directly from existing inventory and represent approximately 52% of total sales. Approximately 38% of our total sales
are direct ship sales. Direct ship sales are typically custom-built products, large orders or products that are too bulky to easily
handle and, as a result, are shipped directly to the customer from the supplier. Special orders are for products that are not ordinarily
stocked in inventory and are ordered based on a customer’s specific request. Special orders represent the remaining 10% of total
sales.
We have historically financed our working capital requirements, capital expenditures, acquisitions, share repurchases and new
branch openings through internally-generated cash flow, debt issuances, borrowings under our Revolving Credit Facility and
funding through our Receivables Facility.
Cash Flow
We generated $296.7 million in operating cash flow during 2018. Cash provided by operating activities included net income
of $225.4 million, adjustments to net income totaling $84.9 million, which were offset by changes in assets and liabilities of $13.6
million. Investing activities primarily included capital expenditures of $36.2 million. Financing activities consisted of borrowings
and repayments of $473.1 million and $433.5 million, respectively, related to our Revolving Credit Facility, borrowings and
repayments of $720.0 million and $825.0 million, respectively, related to our Receivables Facility, repayments of $60.0 million
applied to our Term Loan Facility as well as borrowings and repayments on our various international lines of credit of $142.3
million and $143.7 million, respectively. Financing activities also included the repurchase of $127.2 million of the Company's
common stock, of which $125.0 million was pursuant to the share repurchase plan announced on December 13, 2017 and amended
on October 31, 2018.
Free cash flow for the years ended December 31, 2018 and 2017 was $260.5 million and $127.6 million, respectively.
16
The following table sets forth the components of free cash flow:
(In millions)
Cash flow provided by operations
Less: Capital expenditures
Free cash flow
Twelve Months Ended
December 31,
2018
2017
$
$
296.7
(36.2)
260.5
$
$
149.1
(21.5)
127.6
Note: The table above reconciles cash flow provided by operations to free cash flow. Free cash flow is a non-GAAP financial measure of
liquidity. Capital expenditures are deducted from operating cash flow to determine free cash flow. Free cash flow is available to fund
investing and financing activities.
Financing Availability
As of December 31, 2018, we had $515.9 million in total available borrowing capacity under our Revolving Credit Facility,
which was comprised of $398.1 million of availability under the U.S. sub-facility and $117.8 million of availability under the
Canadian sub-facility. Available borrowing capacity under our Receivables Facility was $275.0 million. The Receivables Facility
and Revolving Credit Facility both mature in September 2020.
Critical Accounting Policies and 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 accounting principles generally accepted in the United States of America
(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, including those related to supplier programs, bad debts, inventories, insurance costs, goodwill, income
taxes, contingencies and litigation. 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 critical accounting policies affect our judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Our revenue arrangements generally consist of single performance obligations to transfer a promised good or service, or a
combination of goods and services. Revenue is recognized when control has transferred to the customer, which is generally when
the product has shipped from one of our facilities or directly from a supplier. For products that ship directly from suppliers to
customers, we act as the principal in the transaction and recognize revenue on a gross basis. Revenue for integrated supply services
is recognized over time based on hours incurred as the transfer of control occurs as the services are being performed. We generally
satisfy our performance obligations within a year or less.
We generally do not have significant financing terms associated with our contracts; payments are normally received within 60
days. There are generally no significant costs associated with obtaining customer contracts. We generally pass through warranties
offered by manufacturers or suppliers to our customers. Sales taxes (and value added taxes in foreign jurisdictions) collected from
customers and remitted to governmental authorities are excluded from net sales.
Supplier Volume Rebates
We receive rebates from certain suppliers based on contractual arrangements with such suppliers. Since there is a lag between
actual purchases and the rebates received from suppliers, we estimate and accrue the approximate amount of rebates available at
a specific date based on forecasted purchases and the rebate provisions of the various supplier contracts. We record the amounts
as other accounts receivable in the Consolidated Balance Sheets and the corresponding rebate income is recorded as a reduction
of cost of goods sold.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. We have a systematic procedure using historical data and reasonable assumptions of collectability made at the
local branch level and on a consolidated corporate basis to estimate allowances for doubtful accounts.
17
Excess and Obsolete Inventory
We write down our inventories to the lower of cost and net realizable value based on internal factors derived from historical
analysis of actual losses. We use past data to identify items in excess of 36 months supply relative to demand or movement. We
then analyze the ultimate disposition of identified excess inventories as they are sold, returned to supplier, or scrapped. This
historical item-by-item analysis allows us to develop an estimate of the likelihood that an item identified as being in excess supply
ultimately becomes obsolete. We apply the estimate to inventories currently in excess of 36 months supply, and reduce the carrying
value of inventories by the derived amount. We revisit and test our assumptions on a periodic basis. Historically, we have not had
material changes to our assumptions, nor do we anticipate any material changes in the future.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the fourth quarter using information
available at the end of September, or more frequently if triggering events occur, indicating that their carrying value may not be
recoverable. We test for goodwill impairment on a reporting unit level and the evaluation involves comparing the fair value of
each reporting unit to its carrying value. The fair values of the reporting units are determined using a combination of a discounted
cash flow analysis and market multiples. Assumptions used for these fair value techniques are based on a combination of historical
results, current forecasts, market data and recent economic events. We evaluate the recoverability of indefinite-lived intangible
assets using the relief-from-royalty method based on projected financial information.
The determination of fair value involves significant management judgment and we apply our 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.
We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter. A
possible indicator of goodwill impairment is the relationship of a company’s market capitalization to its book value. As of
December 31, 2018, our market capitalization exceeded our book value and the fair values of our reporting units exceeded their
carrying values. Accordingly, there were no impairment losses identified as a result of our annual test.
Intangible Assets
We account for certain economic benefits purchased as a result of our acquisitions, including customer relations, distribution
agreements, technology and trademarks, as intangible assets. Most trademarks have an indefinite life. We amortize all other
intangible assets over a useful life determined by the expected cash flows produced by such intangibles and their respective tax
benefits. Useful lives vary between 2 and 20 years, depending on the specific intangible asset.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred income taxes for
events that have future tax consequences. Under this method, deferred income taxes are recognized (using enacted tax laws and
rates) based on the future income tax effects of differences in the carrying amounts of assets and liabilities for financial reporting
and tax purposes. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period of
change.
We recognize deferred tax assets at amounts that are 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 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. We recognize interest and penalties related to uncertain tax benefits as part of interest expense and income tax expense,
respectively.
The TCJA imposed a one-time tax on the deemed repatriation of undistributed foreign earnings (the "transition tax"). Except
for a portion of the previously taxed foreign earnings that have been repatriated, we continue to assert that the remaining
undistributed earnings of our foreign subsidiaries, the majority of which were subject to the transition tax, are indefinitely reinvested.
We believe we are able to maintain a sufficient level of liquidity for our domestic operations and commitments without repatriating
cash held by these foreign subsidiaries. Upon any future repatriation, additional income taxes may be incurred; however, it is not
practicable to determine the amount at this time.
The provisions of the TCJA also introduced U.S. taxation on certain global intangible low-taxed income ("GILTI"). We have
elected to account for GILTI tax as a component of income tax expense.
18
Future adjustments (if any) resulting from additional regulatory guidance regarding the accounting for the income tax effects
of TCJA will be recognized as discrete income tax expense or benefit in the period in which guidance is issued.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items in our Consolidated Statements of
Income and Comprehensive Income for the periods presented:
Net sales
Cost of goods sold (excluding depreciation and amortization)
Selling, general and administrative expenses
Depreciation and amortization
Income from operations
Net interest and other
Loss on debt redemption
Income before income taxes
Provision for income taxes
Year Ended December 31,
2017
2016
2018
100.0%
100.0%
100.0%
80.8
14.1
0.8
4.3
0.9
—
3.4
0.6
80.7
14.3
0.8
4.2
0.9
—
3.3
1.2
80.3
14.3
0.9
4.5
1.0
1.7
1.8
0.4
Net income attributable to WESCO International
2.8%
2.1%
1.4%
2018 Compared to 2017
Net Sales. Net sales in 2018 increased 6.5% to $8.2 billion, compared with $7.7 billion in 2017. Foreign exchange rates positively
impacted net sales by 0.3%, resulting in organic sales growth of 6.2%.
The following table sets forth organic sales growth:
Organic Sales Growth:
Change in net sales
Less: Impact from acquisitions
Less: Impact from foreign exchange rates
Less: Impact from number of workdays
Organic sales growth
Twelve Months Ended
December 31,
2018
6.5%
—%
0.3%
—%
6.2%
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 in the first year of ownership, foreign exchange rates and number of workdays from the overall percentage
change in consolidated net sales.
Cost of Goods Sold. Cost of goods sold increased 6.7% in 2018 to $6.6 billion, compared with $6.2 billion in 2017. Cost of
goods sold as a percentage of net sales was 80.8% and 80.7% in 2018 and 2017, respectively. Cost of goods sold as a percentage
of net sales was positively impacted by our ability to effectively pass through supplier price increases to customers and margin
improvement initiatives. These benefits were offset by a reclassification of certain labor costs from selling, general and
administrative expenses to cost of goods sold.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses include costs associated with personnel, shipping
and handling, travel, advertising, facilities, utilities and bad debts. SG&A expenses increased by $50.3 million, or 4.6%, to $1.2
billion in 2018. SG&A expenses increased primarily as a result of higher payroll expenses and higher operating costs, which were
required to support sales volume growth. SG&A expenses as a percentage of net sales improved to 14.1% in 2018 from 14.3% in
2017.
19
SG&A payroll expenses for 2018 of $804.2 million increased by $27.9 million compared to 2017. The increase in SG&A
payroll expenses was primarily due to increases in salaries, variable compensation and healthcare benefits, which were partially
offset by a reclassification of certain labor costs from selling, general and administrative expenses to cost of goods sold.
The remaining SG&A expenses for 2018 of $347.8 million increased by $22.5 million compared to 2017. The increase in the
remaining SG&A expenses was primarily due to higher costs driven by sales volume growth and a bad debt charge related to a
Canadian customer that ceased operations. These increases were partially offset by gains from the sale of certain long-lived assets.
Depreciation and Amortization. Depreciation and amortization decreased $1.0 million to $63.0 million in 2018, compared with
$64.0 million in 2017.
Income from Operations. Income from operations increased by $33.4 million to $352.4 million in 2018, compared to $319.0
million in 2017. Income from operations as a percentage of net sales was 4.3% and 4.2% in 2018 and 2017, respectively. Income
from operations as a percentage of net sales increased primarily as a result of higher sales volume, as well as operational efficiencies
and cost discipline.
Net Interest and Other. Net interest and other totaled $71.4 million in 2018, compared with $66.6 million in 2017, an increase
of 7.2%. The increase was primarily due to a foreign exchange loss of approximately $3.0 million from the remeasurement of a
financial instrument, as well as accelerated amortization of debt discount and debt issuance costs due to early repayments on our
term loan facility.
Income Taxes. Our effective tax rate was 19.8% in 2018 compared to 35.4% in 2017. The lower effective tax rate for 2018 was
primarily due to the permanent reduction of the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018,
as well as the completion of the accounting for the income tax effects of the TCJA. In 2017, the effective tax rate was negatively
impacted by the discrete income tax expense of $26.4 million related to the application of the TCJA.
Net Income. Net income increased by $62.2 million, or 38.1%, to $225.4 million in 2018, compared to $163.1 million in 2017.
The increase in net income was primarily due higher sales volume and lower income taxes.
Net Loss Attributable to Noncontrolling Interests. Net loss attributable to noncontrolling interests in 2018 and 2017 was $2.0
million and $0.3 million, respectively. The change in net loss attributable to noncontrolling interests was primarily due to the effect
of foreign currency.
Net Income Attributable to WESCO International. Net income and earnings per diluted share attributable to WESCO
International were $227.3 million and $4.82 per share, respectively, in 2018, compared with $163.5 million and $3.38 per share,
respectively, in 2017.
2017 Compared to 2016
Net Sales. Net sales in 2017 increased 4.7% to $7.7 billion, compared with $7.3 billion in 2016. Foreign exchange rates and
acquisitions positively impacted net sales by 0.4% and 0.2%, respectively, and were partially offset by a 0.4% impact from the
number of workdays, resulting in organic sales growth of 4.5%.
The following table sets forth organic sales growth:
Organic Sales Growth:
Change in net sales
Less: Impact from acquisitions
Less: Impact from foreign exchange rates
Less: Impact from number of workdays
Organic sales growth
Twelve Months Ended
December 31,
2017
4.7 %
0.2 %
0.4 %
(0.4)%
4.5 %
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 in the first year of ownership, foreign exchange rates and number of workdays from the overall percentage
change in consolidated net sales.
20
Cost of Goods Sold. Cost of goods sold increased 5.2% in 2017 to $6.2 billion, compared with $5.9 billion in 2016. Cost of
goods sold as a percentage of net sales was 80.7% and 80.3% in 2017 and 2016, respectively. The increase in cost of goods sold
as a percentage of net sales was primarily due to geographic mix and competition.
SG&A Expenses. SG&A expenses include costs associated with personnel, shipping and handling, travel, advertising, facilities,
utilities and bad debts. SG&A expenses increased by $50.8 million, or 4.8%, to $1.1 billion in 2017. As a percentage of net sales,
SG&A expenses were consistent at 14.3% in 2017 and 2016. SG&A expenses increased primarily as a result of higher variable
compensation expense.
SG&A payroll expenses for 2017 of $776.3 million increased by $40.0 million compared to 2016. The increase in SG&A
payroll expenses was primarily due to an increase in commissions, incentive compensation, healthcare benefits, and temporary
labor costs.
The remaining SG&A expenses for 2017 of $325.3 million increased by $10.8 million compared to 2016. The increase in the
remaining SG&A expenses was primarily due to an increase in operating costs required to support higher sales volumes.
Depreciation and Amortization. Depreciation and amortization decreased $2.8 million to $64.0 million in 2017, compared with
$66.9 million in 2016.
Income from Operations. Income from operations decreased by $11.5 million to $319.0 million in 2017, compared to $330.6
million in 2016. Income from operations as a percentage of net sales was 4.2% and 4.5% in 2017 and 2016, respectively. Income
from operations as a percentage of net sales decreased primarily as a result of lower gross margin.
Net Interest and Other. Net interest and other totaled $66.6 million in 2017, compared with $75.1 million in 2016, a decrease
of 11.3%. The decrease was primarily due to a reduction in higher-priced debt. Non-cash interest expense, which includes the
amortization of debt discounts and debt issuance costs, the non-service cost components of net periodic benefit cost, and interest
related to uncertain tax positions, was $2.2 million and $6.4 million for 2017 and 2016, respectively.
The following table sets forth the components of interest expense:
(In millions)
Amortization of debt discounts
Amortization of debt issuance costs
Non-service cost components of net periodic benefit cost
Interest related to uncertain tax positions, net
Non-cash interest expense
Change in accrued interest
Cash interest expense
Total interest expense
Twelve Months Ended
December 31,
2017
2016
$
0.3
$
3.7
(1.9)
0.1
2.2
0.6
63.8
66.6
$
$
3.1
3.6
(1.5)
1.2
6.4
(5.6)
74.3
75.1
Income Taxes. Our effective tax rate was 35.4% in 2017 compared to 23.1% in 2016. Our effective tax rate was impacted by
the relative amounts of income earned in the U.S. and foreign jurisdictions, primarily Canada, the tax rates in these jurisdictions,
and changes in foreign currency exchange rates. Additionally, as a result of the enactment of the TCJA, we recorded provisional
discrete tax expense of $26.4 million, which increased the annual effective tax rate by 10.5%. Without the impact of the TCJA,
our 2017 effective tax rate would have been 24.9%.
Net Income. Net income increased by $62.0 million, or 61.3%, to $163.1 million in 2017, compared to $101.1 million in 2016.
The increase in net income was primarily due to the loss on debt redemption recognized in 2016 as a result of the early redemption
of the 2029 Debentures and an increase in net sales, partially offset by higher cost of goods sold, SG&A and income tax expenses.
Adjusted net income for the years ended December 31, 2017 and 2016 was $189.6 million and $183.8 million, respectively.
Net Loss Attributable to Noncontrolling Interests. Net loss attributable to noncontrolling interests in 2017 and 2016 was $0.3
million and $0.5 million, respectively.
21
Net Income Attributable to WESCO International. Net income and earnings per diluted share attributable to WESCO
International were $163.5 million and $3.38 per share, respectively, in 2017, compared with $101.6 million and $2.10 per share,
respectively, in 2016. Adjusted net income and adjusted earnings per diluted share attributable to WESCO International were
$189.9 million and $3.93 per share, and $184.3 million and $3.80 per share, for the years ended December 31, 2017 and 2016,
respectively.
The following table sets forth the reconciliation of adjusted net income, adjusted income taxes, and adjusted earnings per
diluted share:
Twelve Months Ended
December 31,
2017
2016
Adjusted Income Before Income Taxes:
Income before income taxes
Loss on debt redemption
Adjusted income before income taxes
Adjusted Tax Provision:
Provision for income taxes
Income tax expense for TCJA(1)
Income tax benefit from loss on debt redemption(2)
Adjusted provision for income taxes
Adjusted Net Income Attributable to WESCO International:
Adjusted income before income taxes
Adjusted provision for income taxes
Adjusted net income
$
$
$
$
$
Net loss attributable to noncontrolling interests
Adjusted net income attributable to WESCO International, Inc.
$
$
$
$
252.5
—
252.5
89.3
(26.4)
—
62.9
$
252.5
$
62.9
189.6
(0.3)
189.9
$
Adjusted Earnings per Diluted Share:
Twelve Months Ended
December 31,
2017
2016
Earnings per diluted common share
Impact of TCJA(1)
Loss on debt redemption(3)
Tax effect of loss on debt redemption(3)
Adjusted earnings per diluted common share
$
$
$
3.38
0.55
—
—
3.93
$
131.5
123.9
255.4
30.4
—
41.2
71.6
255.4
71.6
183.8
(0.5)
184.3
2.10
—
2.54
(0.84)
3.80
(1) The application of the TCJA resulted in a provisional discrete income tax expense of $26.4 million, which is comprised of $82.8 million of
expense associated with the deemed repatriation of undistributed earnings of foreign subsidiares partially offset by a $56.4 million benefit
from the remeasurement of U.S. deferred income tax balances.
(2) Represents the third quarter of 2016 income tax benefit related to the loss on debt redemption.
(3) The loss on debt redemption and related income tax benefit are based on the third quarter of 2016 diluted shares of 48.7 million.
Note: Adjusted net income attributable to WESCO International, Inc. for the year ended December 31, 2017, does not include provisional
discrete income tax expense of $26.4 million associated with the application of the TCJA. For 2016, adjusted net income attributable to
WESCO International, Inc. is defined as income before income taxes plus the 2016 third quarter loss on debt redemption, less the provision
for income taxes excluding the third quarter benefit of such loss.
For the year ended December 31, 2017, adjusted earnings per diluted share is computed by dividing adjusted net income by the weighted-
average common shares outstanding and common share equivalents. For the year ended 2016, adjusted earnings per diluted share is computed
22
by adding the loss per diluted share on debt redemption and deducting the related income tax benefit per diluted share recognized in the third
quarter of 2016 divided by the weighted-average common shares outstanding and common share equivalents.
The Company believes that these non-GAAP financial measures provide an overall understanding of the Company's current financial
performance and a consistent measure for assessing the current and historical financial results.
Liquidity and Capital Resources
Total assets were $4.6 billion and $4.7 billion at December 31, 2018 and 2017, respectively. Total liabilities at December 31,
2018 and 2017 were $2.5 billion and $2.6 billion, respectively. Total stockholders’ equity was $2.1 billion at December 31, 2018
and 2017.
The following table sets forth our outstanding indebtedness:
International lines of credit
Term Loan Facility, less debt discount of $0.2 and $0.5 in 2018 and 2017, respectively
Accounts Receivable Securitization Facility
Revolving Credit Facility
5.375% Senior Notes due 2021
5.375% Senior Notes due 2024
Capital leases
Total debt
Less unamortized debt issuance costs
Less short-term debt and current portion of long-term debt
Total long-term debt
As of December 31,
2018
2017
(In millions)
$
30.8
24.6
275.0
51.6
500.0
350.0
1.1
1,233.1
(9.6)
(56.2)
1,167.3
$
34.1
84.2
380.0
12.0
500.0
350.0
2.0
1,362.3
(13.7)
(35.3)
1,313.3
$
$
The required annual principal repayments for all indebtedness for the next five years and thereafter, as of December 31,
2018, is set forth in the following table:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total payments on debt
Debt discount
Total debt
$
$
56.7
326.6
500.0
—
—
350.0
1,233.3
(0.2)
1,233.1
Our liquidity needs generally arise from fluctuations in our working capital requirements, capital expenditures, acquisitions
and debt service obligations. As of December 31, 2018, we had $515.9 million in available borrowing capacity under our Revolving
Credit Facility and $275.0 million in available borrowing capacity under our Receivables Facility, which combined with available
cash of $33.1 million, provided liquidity of $824.0 million. Cash included in our determination of liquidity represents cash in
deposit and interest bearing investment accounts. We believe cash provided by operations and financing activities will be adequate
to cover our current operational and business needs.
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 also communicate on a regular basis with our lenders regarding
our financial and working capital performance, liquidity position and financial leverage. Our financial leverage ratio was 3.0 and
23
3.6 as of December 31, 2018 and 2017, respectively. In addition, we are in compliance with all covenants and restrictions contained
in our debt agreements as of December 31, 2018.
The following table sets forth the Company's financial leverage ratio as of December 31, 2018 and 2017:
(In millions, except ratios)
Net income
Provision for income taxes
Net interest and other(1)
Depreciation and amortization
EBITDA
Short-term borrowings and current debt
Long-term debt
Debt discount and debt issuance costs(2)
Total debt
Financial leverage ratio based on total debt
Twelve months ended December 31,
2018
2017
225.4
$
55.7
71.4
63.0
415.5
$
163.1
89.3
66.6
64.0
383.0
December 31, 2018
December 31, 2017
56.2
$
1,167.3
9.6
1,233.1
$
3.0
35.3
1,313.3
14.2
1,362.8
3.6
$
$
$
$
(1) Due to the adoption of ASU 2017-07 on a retrospective basis in the first quarter of 2018, the Company classified the non-service cost
components of net periodic benefit cost as part of net interest and other for the years ended December 31, 2018 and December 31, 2017.
These components aggregated to a benefit of $1.9 million for both years.
(2) Long-term debt is presented in the Consolidated Balance Sheets net of debt discount and debt issuance costs.
Note: Financial leverage is a non-GAAP financial measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, including
debt discount and debt issuance costs, by EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation
and amortization.
At December 31, 2018, we had cash and cash equivalents totaling $96.3 million, of which $67.7 million was held by foreign
subsidiaries. As a result of the TCJA, we reevaluated our intent and ability to repatriate foreign earnings based upon the liquidity
of our domestic operations and the cash flow needs of our foreign subsidiaries. Consequently, during the year ended December 31,
2018, we repatriated a portion of the previously taxed earnings attributable to our Canadian operations. We continue to assert that
the remaining undistributed earnings of our foreign subsidiaries, the majority of which were subject to the one-time tax imposed
by the TCJA, are indefinitely reinvested. We believe that we are able to maintain a sufficient level of liquidity for our domestic
operations and commitments without repatriating cash held by these foreign subsidiaries. Upon any future repatriation, additional
income taxes may be incurred; however, it is not practicable to determine the amount at this time.
Over the next several quarters, we plan to closely manage working capital, and it is expected that excess cash will be directed
primarily at growth initiatives, acquisitions, debt reduction, and share repurchases. We remain focused on maintaining ample
liquidity and credit availability. We anticipate capital expenditures in 2019 to be similar to 2018. We believe our balance sheet and
ability to generate ample cash flow provides us with a durable business model and should allow us to fund expansion needs and
growth initiatives.
We finance our operating and investing needs as follows:
International Lines of Credit
Certain foreign subsidiaries of WESCO have entered into uncommitted lines of credit, which serve as overdraft facilities, to
support local operations. The maximum borrowing limit varies by facility and ranges between $2.0 million and $21.0 million. The
applicable interest rate for borrowings under these lines of credit varies by country and is governed by the applicable loan agreement.
The international lines of credit are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed
by WESCO Distribution. Accordingly, borrowings under these lines directly reduce availability under the Revolving Credit Facility.
The average interest rate for these facilities was 8.78% and 5.42% at December 31, 2018 and 2017, respectively.
24
Term Loan Facility
On December 12, 2012, WESCO Distribution, as U.S. borrower, WDCC Enterprises Inc. ("WDCC" and together with WESCO
Distribution, the “Borrowers”), as Canadian borrower, and WESCO International entered into a Term Loan Agreement (the “Term
Loan Agreement”) among WESCO Distribution, WDCC, the Company, the lenders party thereto and Credit Suisse AG Cayman
Islands Branch, as administrative agent and as collateral agent.
The Term Loan Agreement provided a seven-year term loan facility (the “Term Loan Facility”), which consisted of two separate
sub-facilities: (i) a Canadian sub-facility in an aggregate principal amount of CAD150 million, issued at a 2.0% discount, and (ii)
a U.S. sub-facility in an aggregate principal amount of $700 million, issued at a 1.0% discount. The proceeds of the Term Loan
Facility were used to finance the acquisition of EECOL, and to pay fees and expenses incurred in connection with the acquisition
and certain other transactions. Subject to the terms of the Term Loan Agreement, the Borrowers may request incremental term
loans from time to time in an aggregate principal amount not to exceed at any time $300 million, with an equivalent principal
amount in U.S. dollars being calculated for any incremental term loan denominated in Canadian dollars.
On November 19, 2013, the Borrowers and WESCO International entered into an amendment (the “Term Loan Amendment”)
to the Term Loan Agreement. The Term Loan Amendment, among other things, reduced the applicable margin on U.S. term loans
by 0.50% and the LIBOR floor applicable to the U.S. sub-facility from 1.00% to 0.75%. The modified pricing terms were effective
December 13, 2013.
On November 26, 2013, WESCO Distribution sold $500 million aggregate principal amount of 5.375% Senior Notes due 2021
(the “2021 Notes”), and used the net proceeds plus excess cash to prepay $500 million under the Company's U.S. sub-facility of
the Term Loan Facility (see discussion below under “5.375% Senior Notes due 2021” for additional information). The prepayment
satisfied all remaining quarterly repayment obligations under the U.S. sub-facility. As of December 31, 2018, the amount
outstanding under the U.S. sub-facility was $24.8 million. The Canadian sub-facility was fully repaid in 2015 using cash provided
by Canadian operations.
Borrowings under the Term Loan Facility bear interest at base rates plus applicable margins. At December 31, 2018, the interest
rate on borrowings under the U.S. sub-facility was 7.5%. To the extent not previously paid, the outstanding U.S. sub-facility will
become due and payable on December 12, 2019, with any unpaid incremental term loans becoming due and payable on the
respective maturity dates applicable to those incremental term loans. At any time or from time to time, the Borrowers may prepay
borrowings under the Term Loan Facility in whole or in part without premium or penalty. The Borrowers' obligations under the
Term Loan Facility are secured by substantially all of the assets of the Borrowers, the Company and certain of the Company's
other subsidiaries; provided that, with respect to borrowings under the U.S. sub-facility, the collateral does not include assets of
certain foreign subsidiaries or more than 65% of the issued and outstanding equity interests in certain foreign subsidiaries.
The Term Loan Facility contains customary affirmative and negative covenants for credit facilities of this type. The Term Loan
Facility also provides for customary events of default.
Accounts Receivable Securitization Facility
On November 8, 2017, WESCO Distribution amended its accounts receivable securitization facility (the "Receivables Facility")
pursuant to the terms and conditions of a Fifth Amendment to Fourth Amended and Restated Receivables Purchase Agreement,
by and among WESCO Receivables Corp. (“WESCO Receivables”), WESCO Distribution, the various purchasers from time to
time party thereto and PNC Bank, National Association, as Administrator (the "Amendment"). The Amendment extended the term
of the Receivables Facility to September 24, 2020 and added and amended certain other defined terms. Substantially all other
terms and conditions of the Receivables Facility were unchanged.
The Receivables Facility has a purchase limit of $550 million with the opportunity to exercise an accordion feature that permits
increases in the purchase limit of up to $100 million. The interest rate spread and commitment fee of the Receivables Facility is
0.95% and 0.45%, respectively.
Under the Receivables Facility, WESCO sells, on a continuous basis, an undivided interest in all domestic accounts receivable
to WESCO Receivables, a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided
interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables,
in the form of overcollateralization. Since WESCO maintains control of the transferred receivables, the transfers do not qualify
for “sale” treatment. As a result, the transferred receivables remain on the balance sheet, and WESCO recognizes the related secured
borrowing. WESCO has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at
market rates; accordingly, no servicing asset or liability has been recorded. The expenses associated with the Receivables Facility
are reported as a component of net interest and other in the Consolidated Statements of Income and Comprehensive Income.
25
As of December 31, 2018 and 2017, accounts receivable eligible for securitization totaled $758.3 million and $751.2 million,
respectively. The Consolidated Balance Sheets as of December 31, 2018 and 2017 include $275.0 million and $380.0 million,
respectively, of account receivable balances legally sold to third parties, as well as borrowings for equal amounts. At December 31,
2018, the interest rate for this facility was approximately 2.0%.
Revolving Credit Facility
On September 24, 2015, WESCO International, WESCO Distribution and certain other subsidiaries of the Company entered
into a $600 million revolving credit facility (the “Revolving Credit Facility”), which contains a letter of credit sub-facility of up
to $125 million, pursuant to the terms and conditions of a Second Amended and Restated Credit Agreement (the "Credit
Agreement"). The Revolving Credit Facility contains an accordion feature allowing WESCO Distribution to request increases to
the borrowing commitments of up to $200 million in the aggregate, subject to customary conditions.
The Revolving Credit Facility matures in September 2020 and consists of two separate sub-facilities: (i) a Canadian sub-facility
with a borrowing limit of up to $400 million, which is collateralized by substantially all assets of WESCO Canada and the other
Canadian Borrowers, other than, among other things, real property, in each case, subject to customary exceptions and limitations,
and (ii) a U.S sub-facility with a borrowing limit of up to $600 million less the amount of outstanding borrowings under the
Canadian sub-facility. The U.S. sub-facility is collateralized by substantially all assets of WESCO Distribution and its domestic
subsidiaries which are party to the Credit Agreement, other than, among other things, real property and accounts receivable sold
or intended to be sold pursuant to the Receivables Purchase Agreement. The applicable interest rate for borrowings under the
Revolving Credit Facility includes interest rate spreads based on available borrowing capacity that range between 1.25% and
1.75% for LIBOR-based borrowings and 0.25% and 0.75% for prime rate-based borrowings. At December 31, 2018, the interest
rate for this facility was approximately 3.5%.
The Credit Agreement requires ongoing compliance with certain customary affirmative and negative covenants. The Credit
Agreement also contains customary events of default.
During 2018, WESCO borrowed $473.1 million under the Revolving Credit Facility and made repayments in the aggregate
amount of $433.5 million. During 2017, aggregate borrowings and repayments were $834.4 million and $826.4 million, respectively.
WESCO had $515.9 million available under the Revolving Credit facility at December 31, 2018, after giving effect to $27.2 million
of outstanding letters of credit, $19.5 million of surety bonds, and $5.3 million of other reserves, as compared to $562.9 million
available under the Revolving Credit facility at December 31, 2017, after giving effect to $18.0 million of outstanding letters of
credit, $19.1 million of surety bonds, and $7.1 million of other reserves.
5.375% Senior Notes due 2021
In November 2013, WESCO Distribution issued $500 million aggregate principal amount of 2021 Notes through a private
offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 2021
Notes were issued at 100% of par and are governed by an indenture (the “2021 Indenture”) entered into on November 26, 2013
between WESCO International and U.S. Bank National Association, as trustee. The 2021 Notes are unsecured senior obligations
of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International. The 2021 Notes bear interest
at a stated rate of 5.375%, payable semi-annually in arrears on June 15 and December 15 of each year. In addition, WESCO incurred
costs related to the issuance of the 2021 Notes totaling $8.4 million, which were recorded as a reduction to the carrying value of
the debt and are being amortized over the life of the notes. The 2021 Notes mature on December 15, 2021. The net proceeds of
the 2021 Notes were used to prepay a portion of the U.S. sub-facility of the term loans due 2019.
Under the terms of a registration rights agreement dated as of November 26, 2013 among WESCO Distribution, WESCO
International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the representative of the initial purchasers of the 2021
Notes, WESCO Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in
all material respects to the 2021 Notes (the “2021 Exchange Notes”) and to make an offer to exchange the 2021 Exchange Notes
for the 2021 Notes. WESCO Distribution launched the exchange offer on June 12, 2014 and the exchange offer expired on July
17, 2014.
At any time WESCO Distribution may redeem all or a part of the 2021 Notes. Between December 15, 2018 and December 14,
2019, WESCO Distribution may redeem all or a part of the 2021 Notes at a redemption price equal to 101.344% of the principal
amount. On and after December 15, 2019, WESCO Distribution may redeem all or a part of the 2021 Notes at a redemption price
equal to 100% of the principal amount.
The 2021 Indenture contains customary covenants and customary events of default. In addition, upon a change of control, the
holders of 2021 Notes have the right to require WESCO Distribution to repurchase all or any part of the 2021 Notes at a redemption
price equal to 101% of the principal amount, plus accrued and unpaid interest.
26
5.375% Senior Notes due 2024
In June 2016, WESCO Distribution issued $350 million aggregate principal amount of 5.375% Senior Notes due 2024 (the
"2024 Notes") through a private offering exempt from the registration requirements of the Securities Act. The 2024 Notes were
issued at 100% of par and are governed by an indenture (the “2024 Indenture”) entered into on June 15, 2016 among WESCO
Distribution, as issuer, WESCO International, as parent guarantor, and U.S. Bank National Association, as trustee. The 2024 Notes
are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International.
The 2024 Notes bear interest at a rate of 5.375% per annum, payable semi-annually in arrears on June 15 and December 15 of
each year. WESCO incurred costs totaling $6.0 million to issue the 2024 Notes, which were recorded as a reduction to the carrying
value of the debt and are being amortized over the life of the note. The notes mature on June 15, 2024. The Company used the net
proceeds to redeem its 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") on September 15, 2016.
Under the terms of a registration rights agreement dated as of June 15, 2016 among WESCO Distribution, as the issuer, WESCO
International, as parent guarantor, and Goldman, Sachs & Co., as representative of the initial purchasers of the 2024 Notes, WESCO
Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in all material
respects to the 2024 Notes (the “2024 Exchange Notes”) and to make an offer to exchange the 2024 Exchange Notes for the 2024
Notes. WESCO Distribution launched the exchange offer on December 28, 2016 and the exchange offer expired on January 31,
2017.
At any time on or after June 15, 2019, WESCO Distribution may redeem all or a part of the 2024 Notes. Between June 15,
2019 and June 14, 2020, WESCO Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 104.031%
of the principal amount. Between June 15, 2020 and June 14, 2021, WESCO Distribution may redeem all or a part of the 2024
Notes at a redemption price equal to 102.688% of the principal amount. Between June 15, 2021 and June 14, 2022, WESCO
Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 101.344% of the principal amount. On and
after June 15, 2022, WESCO Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 100% of the
principal amount.
The 2024 Indenture contains customary covenants and events of default. Upon a change of control, the holders of the 2024
Notes have the right to require WESCO Distribution to repurchase all or any part of the 2024 Notes at a redemption price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest.
6.0% Convertible Senior Debentures due 2029
On August 27, 2009, WESCO International completed an exchange offer pursuant to which it issued $345 million in aggregate
principal amount of the 2029 Debentures. On September 15, 2016, the Company redeemed the 2029 Debentures. Holders of the
2029 Debentures received cash totaling $344.8 million, which was equal to the principal amount of the then-outstanding debentures,
in addition to accrued and unpaid interest. Holders who surrendered the 2029 Debentures for conversion received 18 shares of
WESCO stock for each $1,000 principal amount of 2029 Debentures converted. In total, 6,267,688 shares were issued on the
redemption date. The redemption resulted in a non-cash loss of $123.9 million, which included the write off of unamortized debt
issuance costs.
WESCO separately accounted for the liability and equity components of its 2029 Debentures in a manner that reflected its non-
convertible debt borrowing rate. WESCO utilized an interest rate of 13.875% to reflect the non-convertible debt borrowing rate
of its offering upon issuance, which was determined based on discussions with its financial institutions and a review of relevant
market data, and resulted in a $181.2 million discount to the 2029 Debenture balance and a net increase in additional capital of
$106.5 million. In addition, the financing costs incurred to issue the 2029 Debentures were allocated between the instrument's debt
and equity components. The debt discount was amortized to interest expense, using the effective interest method, over the implicit
life of the debentures. WESCO amortized the financing costs on a straight-line basis over the term of the instrument. For the year
ended December 31, 2016, non-cash interest expense for the amortization of the debt discount and debt issuance costs was $3.1
million.
Covenant Compliance
We were in compliance with all relevant covenants contained in our debt agreements as of December 31, 2018.
27
Cash Flow
An analysis of cash flows for 2018 and 2017 follows:
Operating Activities. Cash provided by operating activities for 2018 totaled $296.7 million, compared with $149.1 million of
cash generated in 2017. Cash provided by operating activities included net income of $225.4 million and adjustments to net income
totaling $84.9 million. Sources of cash in 2018 were generated from an increase in accrued payroll and benefit costs related to
incentive compensation of $18.8 million, and an increase in accounts payable of $9.2 million. Primary uses of cash in 2018 included
a $22.9 million and a $8.7 million increase in trade receivables and inventories, respectively, as a result of sales growth, an increase
in other current and noncurrent assets of $4.3 million, and a decrease in other current and noncurrent liabilities of $5.7 million.
Cash provided by operating activities for 2017 totaled $149.1 million, compared with $300.3 million of cash generated in 2016.
Cash provided by operating activities included net income of $163.1 million and adjustments to net income totaling $28.5 million.
Sources of cash in 2017 were generated from an increase in accounts payable of $102.9 million, as a result of the increase in sales,
an increase in noncurrent liabilities of $64.8 million, due to an accrued tax liability related to the taxation of undistributed earnings
of foreign subsidiares under the TCJA, and an increase in accrued payroll and benefit costs of $24.7 million related to incentive
compensation. Primary uses of cash in 2017 included a $119.0 million and a $113.0 million increase in inventory and trade
receivables, respectively, as a result of an increase in customer backlog as well as an increase in sales, and a $2.9 million increase
in other current and noncurrent assets.
Investing Activities. Net cash used in investing activities in 2018 was $34.1 million, compared with $5.3 million of net cash
used in 2017. Capital expenditures in 2018 of $36.2 million increased from $21.5 million in 2017 to support the growth of our
business. Proceeds from the sale of assets were $12.5 million and $6.8 million in 2018 and 2017, respectively. Other investing
activities in 2018 included $10.4 million of cash outflows, the majority of which was for the purchase of a foreign investment.
Net cash used in investing activities in 2017 was $5.3 million, compared with $70.5 million of net cash used in 2016, which
included a payment of $50.9 million primarily related to the acquisition of Atlanta Electrical Distributors, LLC. Capital expenditures
were $21.5 million and $18.0 million in 2017 and 2016, respectively. Proceeds from the sale of assets were $6.8 million and $8.4
million in 2017 and 2016, respectively. Other investing activities in 2017 included $9.4 million of cash inflows from the maturity
of a foreign investment.
Financing Activities. Net cash used in financing activities in 2018 was $275.1 million, compared with $141.2 million in 2017.
During 2018, financing activities consisted of borrowings and repayments of $473.1 million and $433.5 million, respectively,
related to our Revolving Credit Facility, borrowings and repayments of $720.0 million and $825.0 million, respectively, related
to our Receivables Facility, repayments of $60.0 million related to our Term Loan Facility, as well as borrowings and repayments
of $142.3 million and $143.7 million, respectively, related to our international lines of credit. Financing activities in 2018 also
included the repurchase of $127.2 million of the Company's common stock, of which $125.0 million was pursuant to the share
repurchase plan announced on December 13, 2017 and amended on October 31, 2018.
Net cash used in financing activities in 2017 was $141.2 million, compared with $276.3 million in 2016. During 2017, financing
activities consisted of borrowings and repayments of $834.4 million and $826.4 million, respectively, related to our Revolving
Credit Facility, borrowings and repayments of $670.2 million, related to our Receivables Facility, repayments of $60.0 million
related to our Term Loan Facility, as well as borrowings and repayments of $175.8 million and $164.0 million, respectively, related
to our international lines of credit. Financing activities in 2017 also included the repurchase of $106.8 million of the Company's
common stock, of which $100.0 million was pursuant to the share repurchase plan announced on December 17, 2014.
28
Contractual Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual obligations at December 31, 2018, including interest, and the effect such
obligations are expected to have on liquidity and cash flow in future periods.
2019
2020 to 2021
2022 to 2023
2024 - After
Total
(In millions)
Contractual cash obligations (including interest):
Debt, excluding debt discount and debt issuance costs $
Interest on indebtedness(1)
Non-cancelable operating leases
Taxes due on deemed repatriation of foreign
earnings(2)
56.7
57.3
71.6
2.6
$
826.6
$
— $
350.0
$
1,233.3
95.6
106.9
5.2
37.6
59.0
5.2
9.4
40.3
30.2
199.9
277.8
43.2
Total contractual cash obligations
$
188.2
$
1,034.2
$
101.8
$
430.0
$
1,754.3
(1) Interest on the variable rate debt was calculated using the rates and balances outstanding at December 31, 2018.
(2) Includes the U.S. federal income taxes due under the deemed repatriation provisions of the TCJA, net of available foreign tax credits, that
will be paid over 8 years.
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. Also, we do not consider liabilities for uncertain tax benefits to be contractual
obligations requiring disclosure due to the uncertainty surrounding the ultimate settlement and timing of these liabilities. As such,
we have not included liabilities for uncertain tax benefits of $2.1 million in the table above.
Inflation
The rate of inflation, as measured by changes in the producer price index, affects different commodities, the cost of products
purchased and ultimately the pricing of our different products and product classes to our customers. For year ended December 31,
2018, pricing related to inflation impacted our sales by less than 2%.
Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are affected by a reduced
level of activity. Sales during the second, third and fourth quarters are generally 6% to 8% higher than the first quarter. 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.
Impact of Recently Issued Accounting Standards
See Note 2 of the Notes to Consolidated Financial Statements for information regarding the effect of new accounting
pronouncements.
29
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
Foreign Currency Risks
Approximately 25% of our sales in 2018 were from our foreign subsidiaries located in North America, South America, Europe,
Africa, and Asia and are denominated in foreign currencies. We may establish additional foreign subsidiaries in the future.
Accordingly, we may derive a larger portion of our sales from international operations, and a portion of these sales may be
denominated in foreign currencies. As a result, our future operating results could become subject to fluctuations in foreign exchange
rates relative to the U.S. dollar. Furthermore, to the extent that we engage in international sales denominated in U.S. dollars, an
increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international
markets. We have monitored and will continue to monitor our exposure to currency fluctuations.
Interest Rate Risk
Fixed Rate Borrowings: As of December 31, 2018, approximately 69% of our debt portfolio is comprised of fixed rate debt.
At various times, we have refinanced our debt to mitigate the impact of interest rate fluctuations. As the 2021 Notes and 2024
Notes were issued at fixed rates, interest expense would not be impacted by interest rate fluctuations, although market value would
be. For the 2021 Notes and 2024 Notes, fair value approximated carrying value (see Note 4 to the Consolidated Financial
Statements).
Floating Rate Borrowings: The Company's variable rate borrowings at December 31, 2018 were comprised of the amounts
outstanding under the Term Loan Facility, Receivables Facility, Revolving Credit Facility, and the international lines of credit.
The fair value of these debt instruments at December 31, 2018 approximated carrying value. We entered into the Term Loan
Facility on December 12, 2012 and the proceeds were primarily used to finance the acquisition of EECOL. Borrowings under the
U.S. sub-facility of the Term Loan Facility bear interest at 0.75% or, if greater, the applicable LIBOR (London Interbank Offered
Rate) or base rates plus applicable margins and therefore are subject to fluctuations in interest rates. We borrow under our Revolving
Credit Facility and Receivables Facility for general corporate purposes, including working capital requirements and capital
expenditures. Borrowings under our Revolving Credit Facility bear interest at the applicable LIBOR / CDOR (Canadian Dealer
Offered Rate) or base rates plus applicable margins, whereas borrowings under the Receivables Facility bear interest at the 30 day
LIBOR plus applicable margins. A 100 basis point increase or decrease in interest rates would not have a significant impact on
future earnings under our current capital structure.
Defined Benefit Pension Plan: The interest rate used to discount future estimated cash flows is determined using the Canadian
Institute of Actuaries ("CIA") methodology, which references yield curve information provided by Fiera Capital. The discount
rate used to determine the projected benefit obligations for the Canadian pensions was 4.0% at December 31, 2018. An increase
in the discount rate of one percent would decrease the projected benefit obligations by $18.6 million, and a decrease in the discount
rate of one percent would increase the projected benefit obligations by $24.8 million. The impact of a change in the discount rate
of one percent would be either a charge of $1.5 million or a credit of $1.1 million to earnings in the following year.
30
Item 8. Financial Statements and Supplementary Data.
The information required by this item is set forth in our Consolidated Financial Statements contained in this Annual Report
on Form 10-K. Specific financial statements can be found at the pages listed below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
PAGE
32
34
35
36
37
38
31
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of WESCO International, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of WESCO International, Inc. and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of income and comprehensive income, of stockholders’
equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule
of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 listed in the index appearing
under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
32
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 27, 2019
We have served as the Company’s auditor since 1994.
33
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2018
2017
(In thousands,
except share data)
Current assets:
Assets
Cash and cash equivalents
Trade accounts receivable, net of allowance for doubtful accounts of $24,468 and $21,313
$
96,343
$
117,953
in 2018 and 2017, respectively
Other accounts receivable
Inventories
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Property, buildings and equipment, net (Note 8)
Intangible assets, net (Note 5)
Goodwill (Note 5)
Deferred income taxes (Note 11)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued payroll and benefit costs (Note 13)
Short-term debt (Note 9)
Current portion of long-term debt, net of debt discount and debt issuance costs
of $488 in 2018 (Note 9)
Bank overdrafts
Other current liabilities (Note 2)
Total current liabilities
Long-term debt, net of debt discount and debt issuance costs of $9,243 and $14,224
in 2018 and 2017, respectively (Note 9)
Deferred income taxes (Notes 2 and 11)
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ Equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or
outstanding (Note 10)
Common stock, $.01 par value; 210,000,000 shares authorized, 59,157,696 and 59,045,762
shares issued and 45,106,085 and 47,009,540 shares outstanding in 2018 and 2017,
respectively (Note 10)
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized,
4,339,431 issued and no shares outstanding in 2018 and 2017, respectively
Additional capital (Note 2)
Retained earnings
Treasury stock, at cost; 18,391,042 and 16,375,653 shares in 2018 and 2017, respectively
Accumulated other comprehensive loss
Total WESCO International, Inc. stockholders' equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
1,166,607
96,984
948,726
24,873
52,107
2,385,640
160,878
316,016
1,722,603
16,374
3,525
4,605,036
794,348
88,105
30,785
25,429
17,818
105,461
1,061,946
1,167,311
143,967
102,086
2,475,310
—
592
43
993,666
2,307,462
(758,018)
(408,435)
2,135,310
(5,584)
2,129,726
4,605,036
$
$
$
$
1,170,080
101,229
956,148
23,250
40,189
2,408,849
156,445
367,104
1,771,877
24,203
6,990
4,735,468
799,520
72,686
34,075
1,224
37,644
95,820
1,040,969
1,313,261
136,858
128,237
2,619,325
—
591
43
999,156
2,079,697
(647,158)
(312,590)
2,119,739
(3,596)
2,116,143
4,735,468
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
34
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Net sales
Cost of goods sold (excluding depreciation and amortization)
Selling, general and administrative expenses (Note 13)
Depreciation and amortization
Income from operations
Net interest and other (Notes 13 and 15)
Loss on debt redemption (Note 9)
Income before income taxes
Provision for income taxes (Note 11)
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to WESCO International, Inc.
Other comprehensive income (loss):
Foreign currency translation adjustments
Post retirement benefit plan adjustments, net of tax (Note 13)
Comprehensive income attributable to WESCO International, Inc.
Earnings per share attributable to WESCO International, Inc. (Note 12)
Basic
Diluted
Year Ended December 31,
2018
2017
2016
(In thousands, except per share data)
$
8,176,601
$
7,679,021
$
7,336,017
6,609,220
1,151,944
6,194,366
1,101,598
5,887,814
1,050,799
62,997
352,440
71,415
—
281,025
55,670
225,355
(1,988)
227,343
$
(99,643)
3,798
131,498
$
64,017
319,040
66,600
—
252,440
89,307
163,133
(327)
163,460
85,762
(6,381)
242,841
4.87
4.82
$
$
3.42
3.38
$
$
$
$
66,858
330,546
75,062
123,933
131,551
30,431
101,120
(468)
101,588
38,275
(2,485)
137,378
2.30
2.10
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
35
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3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation expense
Amortization of debt discount and debt issuance costs
Loss on debt redemption (Note 9)
Other operating activities (Note 2)
Deferred income taxes (Note 11)
Changes in assets and liabilities:
Trade receivables, net
Inventories
Other current and noncurrent assets
Accounts payable
Accrued payroll and benefit costs
Other current and noncurrent liabilities
Net cash provided by operating activities
Investing Activities:
Capital expenditures
Acquisition payments, net of cash acquired
Proceeds from sale of assets
Other investing activities
Net cash used in investing activities
Financing Activities:
Proceeds from issuance of short-term debt
Repayments of short-term debt
Proceeds from issuance of long-term debt
Repayments of long-term debt
Debt issuance costs
Repurchases of common stock (Note 12)
Increase (decrease) in bank overdrafts
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at the end of period
Supplemental disclosures:
Cash paid for interest
Cash paid for taxes
Non-cash investing and financing activities:
2018
Year Ended December 31,
2017
(In thousands)
2016
$
225,355
$
163,133
$
101,120
62,997
16,445
4,482
—
(8,134)
9,137
(22,934)
(8,702)
(4,239)
9,193
18,777
(5,656)
296,721
(36,210)
—
12,461
(10,393)
(34,142)
64,017
14,809
3,984
—
(3,959)
(50,396)
(112,977)
(119,002)
(2,829)
102,870
24,679
64,793
149,122
(21,507)
—
6,766
9,446
(5,295)
66,858
12,493
6,684
123,933
(5,538)
(45,174)
56,767
(1,612)
11,579
(40,607)
(1,922)
15,654
300,235
(17,957)
(50,890)
8,361
(10,000)
(70,486)
142,293
(143,747)
1,193,067
(1,318,470)
—
(127,169)
(19,857)
(1,211)
(275,094)
(9,095)
(21,610)
117,953
96,343
64,702
61,983
$
$
175,819
(164,030)
1,504,636
(1,556,636)
(915)
(106,792)
8,199
(1,477)
(141,196)
5,191
7,822
110,131
117,953
63,795
65,117
$
$
111,458
(131,501)
2,082,738
(2,323,568)
(6,002)
(4,818)
(4,907)
337
(276,263)
(3,634)
(50,148)
160,279
110,131
74,391
76,293
$
$
Property, buildings and equipment acquired through capital leases
437
552
1,143
The accompanying notes are an integral part of the consolidated financial statements.
37
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WESCO International, Inc. ("WESCO International") and its subsidiaries (collectively, “WESCO” or the "Company"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of electrical, industrial and communications maintenance,
repair and operating ("MRO") and original equipment manufacturer ("OEM") products, construction materials, and advanced
supply chain management and logistics services used primarily in the industrial, construction, utility and commercial, institutional
and government markets. WESCO serves approximately 70,000 active customers globally, through approximately 500 branches
and 10 distribution centers located primarily in the United States, Canada and Mexico, with operations in 15 additional countries.
2. ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of WESCO International and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Correction of Prior Period
Management determined that the deferred tax asset related to stock-based compensation was overstated by $5.7 million due
to equity awards that had expired subsequent to the requisite service period in years 2016 and prior. In accordance with Staff
Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, management concluded that this misstatement is not material
to the Company's previously issued annual and interim financial statements, and the correction of this item in the year ended
December 31, 2018 is not material to the 2018 consolidated financial statements presented herein. The Company recorded an
adjustment to decrease deferred income taxes and additional capital in the Consolidated Balance Sheet at December 31, 2018.
Reclassifications
Effective January 1, 2018, WESCO adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The adoption
of this ASU, as described below and in Note 13, resulted in the reclassification of amounts reported in the Consolidated Statements
of Income and Comprehensive Income for the years ended December 31, 2017 and 2016.
The Consolidated Balance Sheet as of December 31, 2017 and the Consolidated Statements of Cash Flows for the years
ended December 31, 2017 and 2016 include certain reclassifications to previously reported amounts to conform to the current
period's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Although these estimates are based on management’s best knowledge of current events and
actions WESCO may undertake in the future, actual results may ultimately differ from the estimates.
Revenue Recognition
WESCO’s revenue arrangements generally consist of single performance obligations to transfer a promised good or service,
or a combination of goods and services. Revenue is recognized when control has transferred to the customer, which is generally
when the product has shipped from a WESCO facility or directly from a supplier. For products that ship directly from suppliers
to customers, WESCO acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue for integrated
supply services is recognized over time based on hours incurred as the transfer of control occurs as the services are being performed.
WESCO generally satisfies its performance obligations within a year or less.
WESCO generally does not have significant financing terms associated with its contracts; payments are normally received
within 60 days. There are generally no significant costs associated with obtaining customer contracts. WESCO generally passes
through warranties offered by manufacturers or suppliers to its customers. Sales taxes (and value added taxes in foreign jurisdictions)
collected from customers and remitted to governmental authorities are excluded from net sales.
38
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Supplier Volume Rebates
WESCO receives volume rebates from certain suppliers based on contractual arrangements with such suppliers. Volume rebates
are included within other accounts receivable in the Consolidated Balance Sheets, and represent the estimated amounts due to
WESCO based on forecasted purchases and the rebate provisions of the various supplier contracts. The corresponding rebate
income is recorded as a reduction to cost of goods sold. Receivables under the supplier rebate program were $73.5 million at
December 31, 2018 and $72.7 million at December 31, 2017. In 2018, 2017 and 2016, the supplier volume rebate as a percentage
of net sales was 1.3%.
Cash Equivalents
Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less when purchased.
Allowance for Doubtful Accounts
WESCO maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. WESCO has a systematic procedure using historical data and reasonable assumptions of collectability made
at the local branch level and on a consolidated corporate basis to estimate allowances for doubtful accounts. If the financial condition
of WESCO’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. The allowance for doubtful accounts was $24.5 million at December 31, 2018 and $21.3 million at December
31, 2017. The total amount recorded as selling, general and administrative expense related to bad debts was $10.9 million, $8.5
million and $5.9 million for 2018, 2017 and 2016, respectively.
Inventories
Inventories primarily consist of merchandise purchased for resale and are stated at the lower of cost and net realizable value.
Cost is determined principally under the average cost method. WESCO makes provisions for obsolete or slow-moving inventories
as necessary to reflect reductions in value. WESCO writes down its inventories to net realizable value based on internal factors
derived from historical analysis of actual losses. WESCO uses past data to identify items in excess of 36 months supply relative
to demand or movement. WESCO then analyzes the ultimate disposition of identified excess inventories as they are sold, returned
to supplier, or scrapped. This historical item-by-item analysis allows WESCO to develop an estimate of the likelihood that an item
identified as being in excess supply ultimately becomes obsolete. WESCO applies the estimate to inventories currently in excess
of 36 months supply, and reduces the carrying value of its inventories by the derived amount. Reserves for excess and obsolete
inventories were $27.6 million and $28.6 million at December 31, 2018 and 2017, respectively. The total expense related to excess
and obsolete inventories, included in cost of goods sold, was $9.7 million, $8.8 million and $7.3 million for 2018, 2017 and 2016,
respectively. WESCO absorbs into the cost of inventories certain overhead expenses such as purchasing, receiving and storage
and at December 31, 2018 and 2017, $69.2 million and $70.7 million, respectively, of these costs were included in ending inventories.
Property, Buildings and Equipment
Property, buildings and equipment are recorded at cost. Depreciation expense is determined using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are amortized over either their respective lease terms or
their estimated lives, whichever is shorter. Estimated useful lives range from five to forty years for buildings and leasehold
improvements and three to ten years for furniture, fixtures and equipment.
Capitalized computer software costs are amortized using the straight-line method over the estimated useful life, typically three
to five years, and are reported at the lower of unamortized cost or net realizable value.
Expenditures for new facilities and improvements that extend the useful life of an asset are capitalized. Ordinary repairs and
maintenance are expensed as incurred. When property is retired or otherwise disposed of, the cost and the related accumulated
depreciation are removed from the accounts and any resulting gains or losses are recorded and reported as selling, general and
administrative expenses.
Of WESCO’s $160.9 million net book value of property, buildings and equipment as of December 31, 2018, $88.3 million
consists of land, buildings and leasehold improvements that are geographically dispersed among WESCO’s 500 branches and 10
distribution centers, mitigating the risk of impairment. WESCO assesses its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of any such assets may not be fully recoverable. Changes in
circumstances include technological advances, changes in the business model, capital structure, economic conditions or operating
performance. The evaluation is based upon, among other things, utilization, serviceability and assumptions about the estimated
future undiscounted cash flows that these assets are expected to generate. When the sum of the undiscounted cash flows is less
than the carrying value of the asset or asset group, an impairment loss is recognized to the extent that carrying value exceeds fair
value. Management applies its best judgment when performing these evaluations.
39
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the fourth quarter using information
available at the end of September, or more frequently if triggering events occur, indicating that their carrying value may not be
recoverable. WESCO tests for goodwill impairment on a reporting unit level and the evaluation involves comparing the fair value
of each reporting unit to its carrying value. The fair values of the reporting units are determined using a combination of a discounted
cash flow analysis and market multiples. Assumptions used for these fair value techniques are based on a combination of historical
results, current forecasts, market data and recent economic events. WESCO evaluates the recoverability of indefinite-lived
intangible assets using the relief-from-royalty method based on projected financial information. At December 31, 2018 and 2017,
respectively, goodwill and indefinite-lived trademarks totaled $1.8 billion and $1.9 billion.
We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter. A
possible indicator of goodwill impairment is the relationship of a company’s market capitalization to its book value. As of
December 31, 2018, our market capitalization exceeded our book value and the fair values of our reporting units exceeded their
carrying values. Accordingly, there were no impairment losses identified as a result of our annual test.
The determination of fair value involves significant management judgment and 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.
Definite Lived Intangible Assets
Definite lived intangible assets are amortized over 2 to 20 years. A portion of definite lived intangible assets related to certain
customer relationships are amortized using an accelerated method whereas all other definite lived intangible assets subject to
amortization use a straight-line method. In either case, the amortization method reflects the pattern in which the economic benefits
of the respective assets are consumed or otherwise used. Definite lived intangible assets are tested for impairment if events or
circumstances occur indicating that the respective asset might be impaired.
Insurance Programs
WESCO uses commercial insurance for auto, workers’ compensation, casualty and health claims, and information technology
as a risk-reduction strategy to minimize catastrophic losses. The Company’s strategy involves large deductible policies where
WESCO must pay all costs up to the deductible amount. WESCO estimates the reserve for these programs based on historical
incident rates and costs. The assumptions included in developing this accrual include the period of time between the incurrence
and payment of a claim. The total liability related to the insurance programs was $13.1 million and $13.9 million at December 31,
2018 and 2017, respectively.
Income Taxes
WESCO accounts for income taxes under the asset and liability method, which requires the recognition of deferred income
taxes for events that have future tax consequences. Under this method, deferred income taxes are recognized (using enacted tax
laws and rates) based on the future income tax effects of differences in the carrying amounts of assets and liabilities for financial
reporting and tax purposes. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the
period of change.
WESCO recognizes deferred tax assets at amounts that are 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 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. WESCO regularly assesses the realizability of deferred tax assets.
WESCO accounts 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. WESCO recognizes interest and penalties related to uncertain tax benefits as part of interest expense and income tax
expense, respectively.
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) imposed a one-time tax on the deemed repatriation of undistributed foreign
earnings (the "transition tax"). Except for a portion of the previously taxed foreign earnings that have been repatriated, WESCO
continues to assert that the remaining undistributed earnings of its foreign subsidiaries, the majority of which were subject to the
transition tax, are indefinitely reinvested. WESCO believes it is able to maintain a sufficient level of liquidity for its domestic
operations and commitments without repatriating cash held by these foreign subsidiaries. Upon any future repatriation, additional
income taxes may be incurred; however, it is not practicable to determine the amount at this time.
40
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The provisions of the TCJA also introduced U.S. taxation on certain global intangible low-taxed income ("GILTI"). WESCO
has elected to account for GILTI tax as a component of income tax expense.
Future adjustments (if any) resulting from additional regulatory guidance regarding the accounting for the income tax effects
of TCJA will be recognized as discrete income tax expense or benefit in the period in which guidance is issued.
Foreign Currency
The local currency is the functional currency for the majority of WESCO’s operations outside the United States. Assets and
liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end of each period. Income statement
accounts are translated at an exchange rate that approximates the average for the period. Translation adjustments arising from the
use of differing exchange rates from period to period are included as a component of other comprehensive income (loss) within
stockholders’ equity. Gains and losses from foreign currency transactions are included in net income for the period.
Defined Benefit Pension Plan
Liabilities and expenses for pension benefits 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).
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities according to a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted
prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; Level 2 inputs
include inputs other than Level 1 that are observable, either directly or indirectly, and Level 3 inputs are unobservable inputs in
which little or no market data exists, therefore requiring an entity to develop its own assumptions. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
measurements involving significant unobservable inputs (Level 3).
Recently Adopted Accounting Pronouncements
Effective January 1, 2018, WESCO adopted ASU 2014-09, Revenue from Contracts with Customers, and all the related
amendments (“Topic 606”) using the modified retrospective approach to all open contracts (see Note 3 below). There was no
impact to WESCO’s previously reported consolidated financial statements and WESCO does not expect the adoption of Topic 606
to have a material impact on its revenue and results of operations on an ongoing basis.
In August 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU provided
guidance on eight specific cash flow issues where there was diversity in practice. The Company adopted this ASU in the first
quarter of 2018. The adoption of this guidance did not have an impact on the consolidated financial statements and notes presented
herein.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which eliminates Step 2 of the goodwill impairment test. Under the amendments in this ASU, an entity should perform
its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. An entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should
apply the amendments in this ASU on a prospective basis. This guidance is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Management adopted this ASU in the
fourth quarter of 2018 when the Company performed its annual impairment tests. The adoption of this accounting standard did
not have an impact on the consolidated financial statements and notes presented herein.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer disaggregate the
service cost from the other components of net benefit cost. The Company adopted this guidance on a retrospective basis in the
first quarter of 2018. See Note 13 for a description of the impact of this accounting standard on the Consolidated Statements of
Income and Comprehensive Income presented herein. The adoption of this guidance did not have an impact on the Company's
Consolidated Balance Sheets and the Consolidated Statements of Cash Flows presented herein.
41
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a
modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the
classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted
this ASU in the first quarter of 2018. The adoption of this guidance did not have an impact on the consolidated financial statements
presented and notes herein.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, a comprehensive new standard that amends various aspects of
existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability in the balance sheet
and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. During 2018, the FASB issued additional ASUs that address
implementation issues and correct or improve certain aspects of the new accounting guidance for leases, including ASU 2018-10,
Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. These ASUs do
not change the core principles in the leasing standard outlined above. The amendments in ASU 2018-11 provide an optional
transition method that allows entities to initially apply the new lease standard at the adoption date. Consequently, an entity’s
reporting for the comparative periods will continue to be in accordance with current lease accounting guidance. During 2018,
management established a cross-functional team to evaluate and implement the new standard. The team selected a third-party
software solution to facilitate the accounting and financial reporting requirements of the new lease standard. Lease data elements
have been gathered and migrated to the software solution. The new standard will be adopted in the first quarter of 2019. The
Company expects to use the optional transition method and elect the package of practical expedients permitted under the transition
guidance. The Company also expects to elect the practical expedient related to lease and nonlease components. The Company
anticipates recording right-of-use assets and lease liabilities of $200 million to $250 million in the Consolidated Balance Sheet as
of January 1, 2019, most of which will relate to real estate. The Company does not expect the adoption to have a material impact
on the Consolidated Statement of Income and Comprehensive Income (Loss) or Consolidated Statement of Cash Flow. The
Company is currently updating business processes and internal controls to meet the standard’s new accounting, reporting and
disclosure requirements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which introduces new guidance for the accounting for credit losses on certain financial instruments.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. Early adoption is permitted. Management does not expect the adoption of this accounting standard to have a
material impact on its consolidated financial statements and notes thereto.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for recurring and nonrecurring
fair value measurements by removing, modifying and adding certain disclosures. The amendments in this ASU are effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
Management does not expect the adoption of this accounting standard to have a material impact on its consolidated financial
statements and notes thereto.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General
(Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends
the disclosure requirements for all employers that sponsor defined benefit pension and other post retirement plans by removing
and adding certain disclosures. The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Early
adoption is permitted. Management does not expect the adoption of this accounting standard to have a material impact on its
consolidated financial statements and notes thereto.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are
either not applicable or are not expected to be significant to WESCO’s financial position, results of operations or cash flows.
42
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
3. REVENUE
WESCO distributes products and provides services to customers globally within the following end markets: (1) industrial, (2)
construction, (3) utility, and (4) commercial, institutional and government. Revenue is measured as the amount of consideration
WESCO expects to receive in exchange for transferring goods or providing services.
The following tables disaggregate WESCO’s net sales by end market and geography:
(In thousands)
Industrial
Construction
Utility
Commercial, Institutional and Government
Total by end market
(In thousands)
United States
Other (1)
Total by geography
Year Ended December 31,
2018
2017
2016
2,983,062
$
2,852,357
$
2,684,844
1,303,697
1,204,998
2,546,261
1,181,704
1,098,699
8,176,601
$
7,679,021
$
2,644,442
2,482,624
1,158,651
1,050,300
7,336,017
Year Ended December 31,
2018
2017
2016
6,089,130
2,087,471
8,176,601
$
$
5,775,988
1,903,033
7,679,021
$
$
5,635,803
1,700,214
7,336,017
$
$
$
$
(1) Other primarily includes net sales originating in Canada.
The amount of revenue recognized for integrated supply services totaled $23.3 million, $26.2 million, and $27.1 million in
2018, 2017 and 2016, respectively.
In accordance with certain contractual arrangements, WESCO receives payment from its customers in advance and recognizes
such payment as deferred revenue. Revenue for advance payment is recognized when the performance obligation has been satisfied
and control has transferred to the customer, which is generally upon shipment. Deferred revenue is usually recognized within a
year or less from the date of the customer’s advance payment. At December 31, 2018 and 2017, $11.8 million and $15.5 million,
respectively, of deferred revenue was recorded as a component of other current liabilities in the Consolidated Balance Sheets.
WESCO’s revenues are adjusted for variable consideration, which includes customer volume rebates, returns, and discounts.
WESCO measures variable consideration by estimating expected outcomes using analysis and inputs based upon historical data,
as well as current and forecasted information. Variable consideration is reviewed by management on a monthly basis and revenue
is adjusted accordingly. Variable consideration reduced revenue for the years ended December 31, 2018, 2017 and 2016 by
approximately $107.4 million, $91.1 million and $79.9 million, respectively.
Shipping and handling costs are recognized in net sales when they are billed to the customer. These costs are recognized as a
component of selling, general and administrative expenses when WESCO does not bill the customer. WESCO has elected to
recognize shipping and handling costs as a fulfillment cost. Shipping and handling costs recorded as a component of selling, general
and administrative expenses totaled $74.1 million, $61.8 million and $57.9 million for the years ended December 31, 2018, 2017
and 2016, respectively.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank
overdrafts, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments,
utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving
similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level
2 within the fair value hierarchy. The reported carrying amounts of WESCO's financial instruments approximated their fair values
as of December 31, 2018 and 2017.
43
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table sets forth the changes in the carrying value of goodwill:
Beginning balance January 1
Foreign currency exchange rate changes
Ending balance December 31
Intangible Assets
The components of intangible assets are as follows:
Year Ended December 31,
2018
2017
(In thousands)
$
$
1,771,877
(49,274)
1,722,603
$
$
1,730,950
40,927
1,771,877
Intangible assets:
Trademarks
Trademarks
Non-compete agreements
Customer relationships
Distribution agreements
Patents
December 31, 2018
December 31, 2017
Life
Gross
Carrying
Amount (1)
Accumulated
Amortization (1)
Net
Carrying
Amount
Gross
Carrying
Amount (1)
(In thousands)
Accumulated
Amortization (1)
Net
Carrying
Amount
Indefinite
$
96,260
$
— $
96,260
$ 100,249
$
— $ 100,249
4-15
2-7
2-20
10-19
10
25,185
196
358,620
36,984
48,310
$ 565,555
(7,585)
(141)
(180,395)
(22,562)
(38,856)
17,600
25,118
55
196
178,225
377,270
14,422
39,515
48,310
$ 590,658
9,454
$ (249,539) $ 316,016
14,285
$ (223,554) $ 367,104
(5,516)
(102)
(161,711)
(22,200)
(34,025)
19,602
94
215,559
17,315
(1) Excludes the original cost and related accumulated amortization of fully-amortized intangible assets.
Amortization expense related to intangible assets totaled $35.9 million, $37.8 million and $39.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table sets forth the estimated amortization expense for intangible assets for the next five years and thereafter:
For the year ending December 31,
2019
2020
2021
2022
2023
Thereafter
(In thousands)
35,269
$
33,417
25,809
23,431
22,877
78,953
6. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT SUPPLIERS
WESCO distributes its products and services and extends credit to a large number of customers in the industrial, construction,
utility, and commercial, institutional and government markets. Based upon WESCO’s broad customer base, the Company has
concluded that it has no material credit risk as a result of customer concentration. WESCO is subject to supplier concentration risk
as Eaton Corporation, the Company's largest supplier, accounted for approximately 11% of its purchases in 2018, 2017 and 2016.
44
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
7. ACQUISITIONS
The following table sets forth the consideration paid for acquisitions:
Fair value of assets acquired
Fair value of liabilities assumed
Cash paid for acquisitions
Supplemental cash flow disclosure related to acquisitions:
Cash paid for acquisitions
Less: cash acquired
Cash paid for acquisitions, net of cash acquired
Year Ended
December 31,
2016
(In thousands)
$
$
$
$
76,980
25,058
51,922
51,922
(1,032)
50,890
Atlanta Electrical Distributors, LLC
On March 14, 2016, WESCO Distribution, Inc. ("WESCO Distribution") completed the acquisition of Atlanta Electrical
Distributors, LLC, an Atlanta-based electrical distributor focused on the construction and MRO markets from five locations in
Georgia with approximately $85 million in annual sales. WESCO Distribution funded the purchase price paid at closing with
borrowings under its revolving credit facility. The purchase price was allocated to the respective assets and liabilities based upon
their estimated fair values as of the acquisition date. In addition to the cash paid at closing, the purchase price included a contingent
payment that may be earned upon the achievement of certain financial performance targets over three consecutive one year periods.
The fair value of the contingent consideration was determined using a probability-weighted outcome analysis and Level 3 inputs
such as internal forecasts. This amount was initially accrued at the maximum potential payout under the terms of the purchase
agreement and was reduced in 2017 to reflect a payout that aligns with current financial performance. The fair value of intangibles
was estimated by management and the allocation resulted in intangible assets of $21.8 million and goodwill of $30.0 million. The
intangible assets include customer relationships of $15.8 million amortized over 13 and 14 years, a trademark of $6.0 million
amortized over 13 years, and non-compete agreements of less than $0.1 million amortized over 5 years. No residual value was
estimated for the intangible assets being amortized. The majority of goodwill is deductible for tax purposes.
8. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth the components of property, buildings and equipment:
As of December 31,
2018
2017
(In thousands)
Buildings and leasehold improvements
$
111,510
$
Furniture, fixtures and equipment
Software costs
Accumulated depreciation and amortization
Land
Construction in progress
186,523
115,631
413,664
(291,811)
121,853
23,996
15,029
117,894
183,801
103,842
405,537
(278,455)
127,082
25,814
3,549
$
160,878
$
156,445
Depreciation expense was $17.3 million, $16.3 million and $17.1 million, and capitalized software amortization was $9.8
million, $9.9 million and $10.6 million, in 2018, 2017 and 2016, respectively. The unamortized software cost was $24.2 million
and $22.4 million as of December 31, 2018 and 2017, respectively. Furniture, fixtures and equipment include capitalized leases
of $9.3 million and $10.6 million and related accumulated amortization of $8.4 million and $9.0 million as of December 31, 2018
and 2017, respectively.
45
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
9. DEBT
The following table sets forth WESCO’s outstanding indebtedness:
As of December 31,
2018
2017
(In thousands)
International lines of credit
$
30,785
$
Term Loan Facility, less debt discount of $156 and $513 in 2018 and 2017, respectively
Accounts Receivable Securitization Facility
Revolving Credit Facility
5.375% Senior Notes due 2021
5.375% Senior Notes due 2024
Capital leases
Total debt
Less unamortized debt issuance costs
Less short-term debt and current portion of long-term debt
Total long-term debt
International Lines of Credit
24,594
275,000
51,598
500,000
350,000
1,123
34,075
84,237
380,000
12,000
500,000
350,000
1,959
1,233,100
(9,575)
(56,214)
1,167,311
$
1,362,271
(13,711)
(35,299)
1,313,261
$
Certain foreign subsidiaries of WESCO have entered into uncommitted lines of credit, which serve as overdraft facilities, to
support local operations. The maximum borrowing limit varies by facility and ranges between $2.0 million and $21.0 million. The
applicable interest rate for borrowings under these lines of credit varies by country and is governed by the applicable loan agreement.
The international lines of credit are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed
by WESCO Distribution. Accordingly, borrowings under these lines directly reduce availability under the Revolving Credit Facility.
The average interest rate for these facilities was 8.78% and 5.42% at December 31, 2018 and 2017, respectively.
Term Loan Facility
On December 12, 2012, WESCO Distribution, as U.S. borrower, WDCC Enterprises Inc. ("WDCC" and together with WESCO
Distribution, the “Borrowers”), as Canadian borrower, and WESCO International entered into a Term Loan Agreement (the “Term
Loan Agreement”) among WESCO Distribution, WDCC, the Company, the lenders party thereto and Credit Suisse AG Cayman
Islands Branch, as administrative agent and as collateral agent.
The Term Loan Agreement provided a seven-year term loan facility (the “Term Loan Facility”), which consisted of two separate
sub-facilities: (i) a Canadian sub-facility in an aggregate principal amount of CAD150 million, issued at a 2.0% discount, and (ii)
a U.S. sub-facility in an aggregate principal amount of $700 million, issued at a 1.0% discount. The proceeds of the Term Loan
Facility were used to finance the acquisition of EECOL, and to pay fees and expenses incurred in connection with the acquisition
and certain other transactions. Subject to the terms of the Term Loan Agreement, the Borrowers may request incremental term
loans from time to time in an aggregate principal amount not to exceed at any time $300 million, with an equivalent principal
amount in U.S. dollars being calculated for any incremental term loan denominated in Canadian dollars.
On November 19, 2013, the Borrowers and WESCO International entered into an amendment (the “Term Loan Amendment”)
to the Term Loan Agreement. The Term Loan Amendment, among other things, reduced the applicable margin on U.S. term loans
by 0.50% and the LIBOR floor applicable to the U.S. sub-facility from 1.00% to 0.75%. The modified pricing terms were effective
December 13, 2013.
On November 26, 2013, WESCO Distribution sold $500 million aggregate principal amount of 5.375% Senior Notes due 2021
(the “2021 Notes”), and used the net proceeds plus excess cash to prepay $500 million under the Company's U.S. sub-facility of
the Term Loan Facility (see discussion below under “5.375% Senior Notes due 2021” for additional information). The prepayment
satisfied all remaining quarterly repayment obligations under the U.S. sub-facility. As of December 31, 2018, the amount
outstanding under the U.S. sub-facility was $24.8 million. The Canadian sub-facility was fully repaid in 2015 using cash provided
by Canadian operations.
Borrowings under the Term Loan Facility bear interest at base rates plus applicable margins. At December 31, 2018, the interest
rate on borrowings under the U.S. sub-facility was 7.5%. To the extent not previously paid, the outstanding U.S. sub-facility will
become due and payable on December 12, 2019, with any unpaid incremental term loans becoming due and payable on the
46
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
respective maturity dates applicable to those incremental term loans. At any time or from time to time, the Borrowers may prepay
borrowings under the Term Loan Facility in whole or in part without premium or penalty. The Borrowers' obligations under the
Term Loan Facility are secured by substantially all of the assets of the Borrowers, the Company and certain of the Company's
other subsidiaries; provided that, with respect to borrowings under the U.S. sub-facility, the collateral does not include assets of
certain foreign subsidiaries or more than 65% of the issued and outstanding equity interests in certain foreign subsidiaries.
The Term Loan Facility contains customary affirmative and negative covenants for credit facilities of this type. The Term Loan
Facility also provides for customary events of default.
Accounts Receivable Securitization Facility
On November 8, 2017, WESCO Distribution amended its accounts receivable securitization facility (the "Receivables Facility")
pursuant to the terms and conditions of a Fifth Amendment to Fourth Amended and Restated Receivables Purchase Agreement,
by and among WESCO Receivables Corp. (“WESCO Receivables”), WESCO Distribution, the various purchasers from time to
time party thereto and PNC Bank, National Association, as Administrator (the "Amendment"). The Amendment extended the term
of the Receivables Facility to September 24, 2020 and added and amended certain other defined terms. Substantially all other
terms and conditions of the Receivables Facility were unchanged.
The Receivables Facility has a purchase limit of $550 million with the opportunity to exercise an accordion feature that permits
increases in the purchase limit of up to $100 million. The interest rate spread and commitment fee of the Receivables Facility is
0.95% and 0.45%, respectively.
Under the Receivables Facility, WESCO sells, on a continuous basis, an undivided interest in all domestic accounts receivable
to WESCO Receivables, a wholly owned special purpose entity (the “SPE”). The SPE sells, without recourse, a senior undivided
interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables,
in the form of overcollateralization. Since WESCO maintains control of the transferred receivables, the transfers do not qualify
for “sale” treatment. As a result, the transferred receivables remain on the balance sheet, and WESCO recognizes the related secured
borrowing. WESCO has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at
market rates; accordingly, no servicing asset or liability has been recorded. The expenses associated with the Receivables Facility
are reported as a component of net interest and other in the Consolidated Statements of Income and Comprehensive Income.
As of December 31, 2018 and 2017, accounts receivable eligible for securitization totaled $758.3 million and $751.2 million,
respectively. The Consolidated Balance Sheets as of December 31, 2018 and 2017 include $275.0 million and $380.0 million,
respectively, of account receivable balances legally sold to third parties, as well as borrowings for equal amounts. At December 31,
2018, the interest rate for this facility was approximately 2.0%.
Revolving Credit Facility
On September 24, 2015, WESCO International, WESCO Distribution and certain other subsidiaries of the Company entered
into a $600 million revolving credit facility (the “Revolving Credit Facility”), which contains a letter of credit sub-facility of up
to $125 million, pursuant to the terms and conditions of a Second Amended and Restated Credit Agreement (the "Credit
Agreement"). The Revolving Credit Facility contains an accordion feature allowing WESCO Distribution to request increases to
the borrowing commitments of up to $200 million in the aggregate, subject to customary conditions.
The Revolving Credit Facility matures in September 2020 and consists of two separate sub-facilities: (i) a Canadian sub-facility
with a borrowing limit of up to $400 million, which is collateralized by substantially all assets of WESCO Canada and the other
Canadian Borrowers, other than, among other things, real property, in each case, subject to customary exceptions and limitations,
and (ii) a U.S sub-facility with a borrowing limit of up to $600 million less the amount of outstanding borrowings under the
Canadian sub-facility. The U.S. sub-facility is collateralized by substantially all assets of WESCO Distribution and its domestic
subsidiaries which are party to the Credit Agreement, other than, among other things, real property and accounts receivable sold
or intended to be sold pursuant to the Receivables Purchase Agreement. The applicable interest rate for borrowings under the
Revolving Credit Facility includes interest rate spreads based on available borrowing capacity that range between 1.25% and
1.75% for LIBOR-based borrowings and 0.25% and 0.75% for prime rate-based borrowings. At December 31, 2018, the interest
rate for this facility was approximately 3.5%.
The Credit Agreement requires ongoing compliance with certain customary affirmative and negative covenants. The Credit
Agreement also contains customary events of default.
During 2018, WESCO borrowed $473.1 million under the Revolving Credit Facility and made repayments in the aggregate
amount of $433.5 million. During 2017, aggregate borrowings and repayments were $834.4 million and $826.4 million, respectively.
WESCO had $515.9 million available under the Revolving Credit facility at December 31, 2018, after giving effect to $27.2 million
of outstanding letters of credit, $19.5 million of surety bonds, and $5.3 million of other reserves, as compared to $562.9 million
47
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
available under the Revolving Credit facility at December 31, 2017, after giving effect to $18.0 million of outstanding letters of
credit, $19.1 million of surety bonds, and $7.1 million of other reserves.
5.375% Senior Notes due 2021
In November 2013, WESCO Distribution issued $500 million aggregate principal amount of 2021 Notes through a private
offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 2021
Notes were issued at 100% of par and are governed by an indenture (the “2021 Indenture”) entered into on November 26, 2013
between WESCO International and U.S. Bank National Association, as trustee. The 2021 Notes are unsecured senior obligations
of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International. The 2021 Notes bear interest
at a stated rate of 5.375%, payable semi-annually in arrears on June 15 and December 15 of each year. In addition, WESCO incurred
costs related to the issuance of the 2021 Notes totaling $8.4 million, which were recorded as a reduction to the carrying value of
the debt and are being amortized over the life of the notes. The 2021 Notes mature on December 15, 2021. The net proceeds of
the 2021 Notes were used to prepay a portion of the U.S. sub-facility of the term loans due 2019.
Under the terms of a registration rights agreement dated as of November 26, 2013 among WESCO Distribution, WESCO
International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the representative of the initial purchasers of the 2021
Notes, WESCO Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in
all material respects to the 2021 Notes (the “2021 Exchange Notes”) and to make an offer to exchange the 2021 Exchange Notes
for the 2021 Notes. WESCO Distribution launched the exchange offer on June 12, 2014 and the exchange offer expired on July
17, 2014.
At any time WESCO Distribution may redeem all or a part of the 2021 Notes. Between December 15, 2018 and December 14,
2019, WESCO Distribution may redeem all or a part of the 2021 Notes at a redemption price equal to 101.344% of the principal
amount. On and after December 15, 2019, WESCO Distribution may redeem all or a part of the 2021 Notes at a redemption price
equal to 100% of the principal amount.
The 2021 Indenture contains customary covenants and customary events of default. In addition, upon a change of control, the
holders of 2021 Notes have the right to require WESCO Distribution to repurchase all or any part of the 2021 Notes at a redemption
price equal to 101% of the principal amount, plus accrued and unpaid interest.
5.375% Senior Notes due 2024
In June 2016, WESCO Distribution issued $350 million aggregate principal amount of 5.375% Senior Notes due 2024 (the
"2024 Notes") through a private offering exempt from the registration requirements of the Securities Act. The 2024 Notes were
issued at 100% of par and are governed by an indenture (the “2024 Indenture”) entered into on June 15, 2016 among WESCO
Distribution, as issuer, WESCO International, as parent guarantor, and U.S. Bank National Association, as trustee. The 2024 Notes
are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis by WESCO International.
The 2024 Notes bear interest at a rate of 5.375% per annum, payable semi-annually in arrears on June 15 and December 15 of
each year. WESCO incurred costs totaling $6.0 million to issue the 2024 Notes, which were recorded as a reduction to the carrying
value of the debt and are being amortized over the life of the note. The notes mature on June 15, 2024. The Company used the net
proceeds to redeem its 6.0% Convertible Senior Debentures due 2029 (the "2029 Debentures") on September 15, 2016.
Under the terms of a registration rights agreement dated as of June 15, 2016 among WESCO Distribution, as the issuer, WESCO
International, as parent guarantor, and Goldman, Sachs & Co., as representative of the initial purchasers of the 2024 Notes, WESCO
Distribution and WESCO International agreed to register under the Securities Act notes having terms identical in all material
respects to the 2024 Notes (the “2024 Exchange Notes”) and to make an offer to exchange the 2024 Exchange Notes for the 2024
Notes. WESCO Distribution launched the exchange offer on December 28, 2016 and the exchange offer expired on January 31,
2017.
At any time on or after June 15, 2019, WESCO Distribution may redeem all or a part of the 2024 Notes. Between June 15,
2019 and June 14, 2020, WESCO Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 104.031%
of the principal amount. Between June 15, 2020 and June 14, 2021, WESCO Distribution may redeem all or a part of the 2024
Notes at a redemption price equal to 102.688% of the principal amount. Between June 15, 2021 and June 14, 2022, WESCO
Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 101.344% of the principal amount. On and
after June 15, 2022, WESCO Distribution may redeem all or a part of the 2024 Notes at a redemption price equal to 100% of the
principal amount.
The 2024 Indenture contains customary covenants and events of default. Upon a change of control, the holders of the 2024
Notes have the right to require WESCO Distribution to repurchase all or any part of the 2024 Notes at a redemption price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest.
48
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
6.0% Convertible Senior Debentures due 2029
On August 27, 2009, WESCO International completed an exchange offer pursuant to which it issued $345 million in aggregate
principal amount of the 2029 Debentures. On September 15, 2016, the Company redeemed the 2029 Debentures. Holders of the
2029 Debentures received cash totaling $344.8 million, which was equal to the principal amount of the then-outstanding debentures,
in addition to accrued and unpaid interest. Holders who surrendered the 2029 Debentures for conversion received 18 shares of
WESCO stock for each $1,000 principal amount of 2029 Debentures converted. In total, 6,267,688 shares were issued on the
redemption date. The redemption resulted in a non-cash loss of $123.9 million, which included the write off of unamortized debt
issuance costs.
WESCO separately accounted for the liability and equity components of its 2029 Debentures in a manner that reflected its non-
convertible debt borrowing rate. WESCO utilized an interest rate of 13.875% to reflect the non-convertible debt borrowing rate
of its offering upon issuance, which was determined based on discussions with its financial institutions and a review of relevant
market data, and resulted in a $181.2 million discount to the 2029 Debenture balance and a net increase in additional capital of
$106.5 million. In addition, the financing costs incurred to issue the 2029 Debentures were allocated between the instrument's debt
and equity components. The debt discount was amortized to interest expense, using the effective interest method, over the implicit
life of the debentures. WESCO amortized the financing costs on a straight-line basis over the term of the instrument. For the year
ended December 31, 2016, non-cash interest expense for the amortization of the debt discount and debt issuance costs was $3.1
million.
Debt Issuance Costs
WESCO capitalizes costs associated with the issuance of debt and such costs are amortized over the term of the respective
debt instrument on a straight-line basis. Debt issuance costs are presented in the Consolidated Balance Sheets as a direct reduction
from the carrying amount of the related debt liability. Upon prepayment of debt, the Company accelerates the recognition of an
appropriate amount of the costs as refinancing or extinguishment of debt. As of December 31, 2018 and 2017, unamortized debt
issuance costs of $9.6 million and $13.7 million were recorded in the Consolidated Balance Sheets, respectively.
Covenant Compliance
WESCO was in compliance with all relevant covenants contained in its debt agreements as of December 31, 2018.
The following table sets forth the aggregate principal repayment requirements for all indebtedness for the next five years and
thereafter, as of December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
Total payments on debt
Debt discount
Total debt
(In thousands)
$
$
56,702
326,554
500,000
—
—
350,000
1,233,256
(156)
1,233,100
WESCO’s credit agreements contain various restrictive covenants that, among other things, impose limitations on: (i) dividend
payments or certain other restricted payments or investments; (ii) the incurrence of additional indebtedness and guarantees;
(iii) creation of liens; (iv) mergers, consolidation or sales of substantially all of WESCO’s assets; (v) certain transactions among
affiliates; (vi) payments by certain subsidiaries to WESCO, and (vii) capital expenditures. In addition, the Revolving Credit Facility
and the Receivables Facility require WESCO to meet certain fixed charge coverage tests depending on availability or liquidity,
respectively.
49
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
10. CAPITAL STOCK
Preferred Stock
There are 20 million shares of preferred stock authorized at a par value of $0.01 per share; there are no shares issued or
outstanding. The Board of Directors has the authority, without further action by the stockholders, to issue all authorized preferred
shares in one or more series and to fix the number of shares, designations, voting powers, preferences, optional and other special
rights and the restrictions or qualifications thereof. The rights, preferences, privileges and powers of each series of preferred stock
may differ with respect to dividend rates, liquidation values, voting rights, conversion rights, redemption provisions and other
matters.
Common Stock
There are 210 million shares of common stock and 20 million shares of Class B common stock authorized at a par value of
$0.01 per share. The Class B common stock is identical to the common stock, except for voting and conversion rights. The holders
of Class B common stock have no voting rights. With certain exceptions, Class B common stock may be converted, at the option
of the holder, into the same number of shares of common stock.
The terms of the Revolving Credit Facility and the Term Loan Facility, as well as the indentures governing the 2021 Notes
and 2024 Notes, place certain limits on the Company's ability to declare or pay dividends and repurchase common stock. The share
repurchases in 2018 and 2017, as described in Note 12, were made within the limits of our various credit agreements. At
December 31, 2018 and 2017, no dividends had been declared and, therefore, no retained earnings were reserved for dividend
payments.
Treasury Stock
Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is
reduced by the cost of such stock, with cost determined on a weighted-average basis.
11. INCOME TAXES
The Tax Cuts and Jobs Act of 2017 (the "TCJA”), enacted on December 22, 2017, provided a broad range of change to U.S.
corporate tax law, including changes to the U.S. corporate income tax rate, new business-related exclusions, deductions and credits,
as well as international tax provisions. Most notably, the TCJA permanently reduced the U.S. corporate income tax rate from 35%
to 21%, effective January 1, 2018, and imposed a one-time tax on the deemed repatriation of undistributed foreign earnings (the
"transition tax"). The TCJA also introduced anti-base erosion provisions, including the global intangible low-taxed income
("GILTI") tax.
As a result of the reduction in the U.S. corporate income tax rate, the Company remeasured its U.S. deferred income tax balances
and recorded a provisional deferred income tax benefit of $56.4 million for the year ended December 31, 2017. The Company
also recognized provisional current income tax expense for the transition tax under the TCJA of $82.8 million for the year ended
December 31, 2017. After the utilization of foreign tax credit carryforwards of $17.8 million, a provisional liability of $65.0 million
was accrued for the transition tax as of December 31, 2017, which is payable over a period of eight years.
During the year ended December 31, 2018, the Company completed its accounting for the income tax effects of the TCJA,
which resulted in an additional deferred income tax benefit of $0.9 million and a discrete benefit of $3.4 million. As of December 31,
2018, a liability of $43.2 million was in the Consolidated Balance Sheet for the transition tax.
The accounting for the income tax effects of the TCJA was completed based on regulatory guidance issued to date. Additional
guidance could be issued, which could affect the amounts described above. Future adjustments (if any) will be recognized as
discrete income tax expense or benefit in the period in which guidance is issued.
The following table sets forth the components of income before income taxes by jurisdiction:
United States
Foreign
Income before income taxes
Year Ended December 31,
2017
2016
2018
(In thousands)
$
$
198,556
82,469
281,025
$
$
180,957
71,483
252,440
$
$
80,881
50,670
131,551
50
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The following table sets forth the components of the provision (benefit) for income taxes:
Current income taxes:
Federal(1)
State
Foreign
Total current income taxes
Deferred income taxes:
Federal
State
Foreign
Total deferred income taxes
Provision for income taxes
Year Ended December 31,
2017
2016
2018
(In thousands)
$
28,464
$
122,170
$
65,614
7,458
10,611
46,533
5,253
1,967
1,917
9,137
$
55,670
$
2,259
15,274
139,703
(48,060)
4,508
(6,844)
(50,396)
89,307
$
6,489
3,502
75,605
(42,835)
(2,938)
599
(45,174)
30,431
(1) Income tax expense related to stock-based awards and other equity instruments recorded directly to additional paid in capital totaled $0.1
million in 2016. Due to the adoption of ASU 2016-09 in the first quarter of 2017, there was no income tax expense or benefit recorded to
additional paid in capital for stock-based awards in 2018 and 2017.
The following table sets forth the reconciliation between the federal statutory income tax rate and the effective tax rate:
Federal statutory rate
State income taxes, net of federal income tax benefit
Deemed repatriation of undistributed foreign earnings
Deferred income tax remeasurement
Tax effect of intercompany financing
Other(1)
Effective tax rate
Year Ended December 31,
2017
2016
2018
21.0%
2.8
(1.2)
(0.3)
(5.6)
3.1
19.8%
35.0%
1.4
32.8
(22.4)
(10.5)
(0.9)
35.4%
35.0%
1.0
—
—
(19.9)
7.0
23.1%
(1) Certain components of the effective tax rate for 2017 and 2016 have been reclassified to conform to the current period presentation.
As a result of the TCJA, WESCO reevaluated its intent and ability to repatriate foreign earnings based upon the liquidity of
the Company's domestic operations and cash flow needs of its foreign subsidiaries. Consequently, during the year ended
December 31, 2018, WESCO repatriated a portion of the previously taxed earnings attributable to the Company's Canadian
operations to repay outstanding indebtedness in the U.S. WESCO continues to assert that the remaining undistributed earnings of
its foreign subsidiaries, the majority of which were subject to the transition tax described above, are indefinitely reinvested. WESCO
believes that it is able to maintain a sufficient level of liquidity for its domestic operations and commitments without repatriating
cash held by these foreign subsidiaries. Upon any future repatriation, additional income taxes may be incurred; however, it is not
practicable to determine the amount at this time.
51
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The following table sets forth deferred tax assets and liabilities:
As of December 31,
2018
2017
(In thousands)
Assets
Liabilities
Assets
Liabilities
Accounts receivable
Inventories
Depreciation of property, buildings and equipment
Amortization of intangible assets
Employee benefits
Stock-based compensation(1)
Advance payments
Tax loss carryforwards
Other
Deferred income taxes before valuation allowance
Valuation allowance
Total deferred income taxes
$
$
3,657
$
— $
3,496
$
—
—
—
20,107
12,840
—
15,557
7,927
60,088
(4,072)
56,016
3,315
17,384
158,795
—
—
—
—
4,115
183,609
—
183,609
$
$
—
—
—
14,835
16,341
8,456
19,128
11,850
74,106
(2,518)
71,588
—
3,181
13,283
159,107
—
—
—
—
8,672
184,243
—
184,243
$
(1) The Company does not expect the executive compensation deduction rules in Section 162(m) of the Internal Revenue Code as amended by
the TCJA to have a material impact on the realizability of the deferred tax asset related to stock-based compensation.
As of December 31, 2018 and 2017, WESCO had deferred tax assets of $6.4 million and $10.4 million, respectively, related
to Canadian net operating loss carryforwards. The Canadian net operating loss carryforwards expire beginning in 2036 through
2037. Additionally, WESCO had deferred tax assets of $7.2 million and $7.0 million as of December 31, 2018 and 2017, respectively,
related to non-Canadian foreign net operating loss carryforwards. These net operating loss carryforwards expire beginning in 2019
through 2028, while some may be carried forward indefinitely. As of December 31, 2018 and 2017, WESCO had deferred tax
assets of $3.2 million and $3.1 million, respectively, related to state net operating loss carryforwards. These carryforwards expire
beginning in 2022 through 2037. The Company has determined, based upon an evaluation of all available evidence, that it "more-
likely-than-not" will utilize all of its net operating loss carryforwards before expiration, other than those incurred in certain non-
Canadian foreign jurisdictions. Accordingly, the Company recorded a full valuation allowance against deferred tax assets related
to certain non-Canadian foreign net operating loss carryforwards of $4.1 million and $2.5 million at December 31, 2018 and 2017,
respectively.
The Company is under examination by tax authorities in the U.S. and Canada and remains subject to examination until the
applicable statutes of limitation expire. The statutes of limitation for the material jurisdictions in which the Company files income
tax returns remain open principally due to certain transfer pricing matters and are as follows:
United States — Federal
United States — Material States
Canada
2004 and forward
2004 and forward
2004 and forward
The following table sets forth the reconciliation of gross unrecognized tax benefits:
Beginning balance January 1
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapse in statute of limitations
Foreign currency exchange rate changes
Ending balance December 31
2018
As of December 31,
2017
(In thousands)
2016
$
4,348
$
6,181
$
—
—
(2,646)
(287)
(122)
1,293
—
(155)
(1,025)
(755)
102
$
4,348
$
$
52
5,436
3,298
(21)
(1,921)
(728)
117
6,181
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The total amount of unrecognized tax benefits were $1.3 million, $4.3 million, and $6.2 million as of December 31, 2018, 2017
and 2016, respectively. The amount of unrecognized tax benefits that would affect the effective tax rate if recognized in the
consolidated financial statements was $1.3 million, $1.7 million, and $7.5 million, respectively.
It is reasonably possible that the amount of unrecognized tax benefits will decrease by approximately $0.1 million within the
next twelve months due to the settlement of uncertain tax positions related to state audits or the expiration of statutes of limitation.
This amount could affect the effective tax rate if recognized in the consolidated financial statements.
The Company classifies interest related to unrecognized tax benefits as a component of net interest and other in the Consolidated
Statement of Income and Comprehensive Income. Interest expense on unrecognized tax benefits was $0.2 million, $0.1 million,
and $1.2 million for 2018, 2017 and 2016, respectively. As of December 31, 2018 and 2017, WESCO had a liability of $0.8 million
and $1.8 million, respectively, for interest expense related to unrecognized tax benefits. The Company classifies penalties related
to unrecognized tax benefits as part of income tax expense. Penalties recorded in income tax expense were immaterial in 2018,
2017, and 2016.
12. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to WESCO International by the weighted-average
number of common shares outstanding during the periods. Diluted earnings per share is computed by dividing net income attributable
to WESCO International by the weighted-average common shares and common share equivalents outstanding during the periods.
The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury
stock method, which includes consideration of equity awards and contingently convertible debt.
The following tables set forth the details of basic and diluted earnings per share:
Year Ended December 31,
2017
2016
2018
(In thousands, except per share data)
Net income attributable to WESCO International
$
227,343
$
163,460
$
101,588
Weighted-average common shares outstanding used in computing basic
earnings per share
Common shares issuable upon exercise of dilutive equity awards
Common shares issuable from contingently convertible debentures (see
below for basis of calculation)
Weighted-average common shares outstanding and common share
equivalents used in computing diluted earnings per share
Earnings per share attributable to WESCO International
Basic
Diluted
46,722
477
—
47,849
512
—
44,116
543
3,674
47,199
48,361
48,333
$
$
4.87
4.82
$
$
3.42
3.38
$
$
2.30
2.10
The computation of diluted earnings per share attributable to WESCO International excluded equity awards of approximately
1.6 million, 1.3 million and 1.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. These shares were
excluded because their effect would have been antidilutive.
Because of WESCO’s previous obligation to settle the par value of the 2029 Debentures in cash upon conversion, WESCO
was required to include shares underlying the 2029 Debentures in its diluted weighted-average shares outstanding when the average
stock price per share for the period exceeded the conversion price of the debentures. Only the number of shares that would have
been issuable under the treasury stock method of accounting for share dilution were included, which was based upon the amount
by which the average stock price exceeded the conversion price. The conversion price of the 2029 Debentures was $28.87 and the
maximum amount of share dilution was limited to 11,951,932 shares. Since the 2029 Debentures were redeemed on September 15,
2016, there was no dilution from contingently convertible debentures for the years ended December 31, 2018 and 2017. For the
year ended December 31, 2016, the effect of the 2029 Debentures on diluted earnings per share attributable to WESCO International
was a decrease of $0.17.
In December 2014, the Company's Board of Directors (the "Board") authorized the repurchase of up to $300 million of the
Company's common stock through December 31, 2017 (the "2014 Repurchase Authorization"). During the year ended
December 31, 2017, the Company repurchased 1,778,537 shares for $100.0 million. As of December 31, 2017, WESCO had
repurchased 4,247,113 shares of common stock for $250.0 million under the 2014 Repurchase Authorization.
53
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
In December 2017, the Board authorized the repurchase of up to $300 million of the Company's common stock through
December 31, 2020 (the "2017 Repurchase Authorization"). In October 2018, the Board approved an increase to the 2017
Repurchase Authorization from $300 million to $400 million. On September 6, 2018 and November 6, 2018, the Company entered
into accelerated stock repurchase agreements with a financial institution to repurchase additional shares of its common stock
pursuant to its 2017 Repurchase Authorization. In exchange for up-front cash payments totaling $125.0 million, the Company
received 2,003,446 shares. As of December 31, 2018, the accelerated stock repurchase agreement entered into on November 6,
2018 had not yet settled between the counterparties. Upon settlement, the Company expects to receive additional shares.
The total number of shares ultimately delivered under the accelerated stock repurchases described above are determined by
the average of the volume-weighted-average prices of the Company's common stock for each exchange business day during the
respective settlement valuation periods. WESCO funded the repurchases with available cash, and borrowings under its accounts
receivable securitization and revolving credit facilities. For purposes of computing earnings per share, share repurchases have
been reflected as a reduction to common shares outstanding on the respective delivery dates.
13. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
A majority of WESCO’s employees are covered by defined contribution retirement savings plans for their services rendered
subsequent to WESCO’s formation. WESCO also offers a deferred compensation plan for select individuals. For U.S. participants,
WESCO matches contributions made by employees at an amount equal to 50% of participants' total monthly contributions up to
a maximum of 6% of eligible compensation. For Canadian participants, WESCO makes contributions in amounts ranging from
3% to 5% of participants' eligible compensation based on years of continuous service. WESCO may also make, subject to the
Board's approval, a discretionary contribution to the defined contribution retirement savings plan covering U.S. participants if
certain predetermined profit levels are attained. Discretionary employer contribution charges of $20.6 million and $10.0 million
were incurred in 2018 and 2017, respectively. In 2016, there was no charge for discretionary employer contributions. For the years
ended December 31, 2018, 2017 and 2016, WESCO incurred charges of $42.0 million, $31.3 million, and $18.5 million,
respectively, for all such plans. Contributions are made in cash to employee retirement savings plan accounts. The deferred
compensation plan is an unfunded plan. As of December 31, 2018 and 2017, the Company's obligation under the deferred
compensation plan was $21.9 million and $24.3 million, respectively. Employees have the option to transfer balances allocated
to their accounts in the defined contribution retirement savings plan and the deferred compensation plan into any of the available
investment options.
Defined Benefit Plans
The Company sponsors a contributory defined benefit plan (the "Plan") covering substantially all Canadian employees of
EECOL. The Plan provides retirement benefits based on earnings and credited service, and participants contribute 2% of their
earnings to the Plan. Participants become 100% vested after two years of continuous service or, if earlier, at the participant's normal
retirement age.
The Company also sponsors a Supplemental Executive Retirement Plan (the "SERP"), which provides additional pension
benefits to certain executives of EECOL based on earnings, and credited service. Effective January 1, 2013, the SERP was closed
to new participants and existing participants became 100% vested. SERP participants continue to contribute 4% of their earnings
to the Plan.
54
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The following tables present the changes in benefit obligations, plan assets and funded status for the pension plans and the
components of net periodic pension cost.
(In thousands)
Accumulated Benefit Obligation (ABO) at December 31
Change in Projected Benefit Obligation (PBO)
PBO at beginning of year
Service cost
Interest cost
Participant contributions
Actuarial (gain) loss, including assumption changes
Benefits paid
Foreign currency exchange rate changes
PBO at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Participant contributions
Employer contributions
Benefits paid
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Funded Status
Amounts Recognized in the Consolidated Balance Sheets
Current liabilities
Noncurrent liabilities
Net amount recognized
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
Net actuarial (gain) loss
Total amount recognized, before tax effect
Year Ended December 31,
2018
2017
78,746
$
92,375
120,319
$
96,160
5,242
4,137
745
(11,644)
(3,892)
(9,392)
105,515
97,182
(425)
745
372
(3,892)
(7,426)
86,556
$
$
$
4,328
3,912
735
10,906
(3,005)
7,283
120,319
84,753
7,875
735
368
(3,005)
6,456
97,182
(18,959) $
(23,137)
(364) $
(18,595)
(18,959) $
(395)
(22,742)
(23,137)
(2,696) $
(2,696) $
2,508
2,508
$
$
$
$
$
$
$
$
$
$
55
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Year Ended December 31,
2017
2016
2018
Components of Net Periodic Pension Cost
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial gain
Net periodic pension cost
Other Changes in Plan Assets and PBO Recognized in Accumulated
Other Comprehensive Income (Loss)
Net actuarial (gain) loss
Amortization of unrecognized net actuarial gain
Total amount recognized, before tax effect
Tax effect
Total amount recognized, after tax effect
Total recognized in net periodic pension cost and accumulated other
comprehensive income (loss)
(In thousands)
$
5,242
$
4,328
$
3,845
4,137
(5,969)
(46)
3,364
$
3,912
(5,562)
(149)
2,529
$
3,856
(5,328)
(31)
2,342
(5,250) $
46
(5,204)
1,406
(3,798) $
8,593
$
2,756
149
8,742
(2,361)
6,381
$
31
2,787
(302)
2,485
(434) $
8,910
$
4,827
$
$
$
$
In accordance with ASU 2017-07, as described in Note 2, the service cost of $5.2 million, $4.3 million and $3.8 million for
the years ended December 31, 2018, 2017 and 2016, respectively, was reported as a component of selling, general and administrative
expenses. The other components of net periodic benefit cost totaling a net benefit of $1.9 million for the year ended December 31,
2018 was presented as a component of net interest and other, as described in Note 15 below. For the years ended December 31,
2017 and 2016, the Company reclassified a net benefit of $1.8 million and $1.5 million, respectively, from selling, general and
administrative expenses to net interest and other. The Company used the amounts disclosed in Note 11 of the Notes to Consolidated
Financial Statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as the estimation basis for
applying the retrospective presentation requirements.
The interest rate used to discount future estimated cash flows is determined using the Canadian Institute of Actuaries ("CIA")
methodology, which references yield curve information provided by Fiera Capital and matches expected benefit payments. The
expected long-term rate of return on plan assets is applied to the fair market-related value of plan assets.
The following weighted-average actuarial assumptions were used to determine benefit obligations at December 31:
Discount rate
Rate of compensation increase
2018
2017
Pension Plan
SERP
Pension Plan
SERP
4.0%
3.8%
4.0%
3.8%
3.5%
3.8%
3.5%
3.8%
The following weighted-average actuarial assumptions were used to determine net periodic pension costs at January 1:
Year Ended December 31,
2018
2017
2016
Pension
Plan
SERP
Pension
Plan
SERP
Pension
Plan
SERP
Discount rate
Expected long-term return on
assets
Rate of compensation increase
3.5%
6.4%
3.8%
3.9%
6.4%
3.8%
3.9%
n/a
3.8%
4.2%
6.4%
4.0%
4.2%
n/a
4.0%
3.5%
n/a
3.8%
56
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The following benefit payments, which reflect expected future service, are expected to be paid:
Years ending December 31
(In thousands)
2019
2020
2021
2022
2023
2024 to 2028
$
2,870
2,946
3,098
3,196
3,448
21,721
The Company expects to contribute approximately $2.9 million and $0.4 million to the Plan and SERP, respectively, in
2019.
The Plan's weighted asset allocations by asset category are as follows:
Asset Category
Pooled Funds:
Canadian equities
U.S. equities
Non-North American equities
Fixed income investments
Other
Total
December 31
2018
2017
12.4%
5.0%
22.5%
44.7%
15.4%
11.5%
4.6%
20.8%
41.4%
21.7%
100.0%
100.0%
The Plan's long-term overall objective is to maintain benefits at their current level without affecting the cost of maintaining
the Plan, assuming that the demographic make-up of the group of members remains the same.
The primary investment objective, in support of the overall objective, is to earn the highest rate of return possible for the Plan,
while keeping risk at acceptable levels. The long-term return objective of the Plan is to achieve a minimum annualized rate of
return in excess of the actuarial requirements. This translates into a required return of 3.0% above inflation, net of investment
management fees. The return objective is consistent with the overall investment risk level that the Plan assumes in order to meet
the pension obligations of the Plan. To achieve this long term investment objective, the Plan has adopted an asset mix that has a
combination of primarily equity and fixed income investments. Risk is controlled by investing in a well-diversified portfolio of
asset classes. A benchmark portfolio is established based on the expected returns for each asset class available. The investment of
the Plan's assets in accordance with the benchmark portfolio should enable the Plan to not only attain, but also exceed the minimum
overall objective.
The following table presents the target asset mix based on market value for each investment category within which the investment
managers must invest the Plan's assets. The asset mix is reviewed and rebalanced to target on an annual basis.
Asset Category
Canadian equities
Non-Canadian equities
Total equities
Fixed income investments
Other investments
Target %
12.5%
27.5%
40%
45%
15%
The Plan's assets are measured at fair value, which is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities
are classified in the fair value hierarchy based on the lowest level of any input that is significant to the measurement of fair value.
Investments for which fair value is measured using the net asset value (NAV) per share practical expedient are not classified in
the fair value hierarchy. The following describes the valuation methodologies used to measure the fair value of the Plan's assets.
57
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Pooled Equity Investments. These investments consist of the Plan's share of segregated funds that primarily invest in equity
securities. The funds are valued at the net asset value of shares held in the underlying funds.
Pooled Fixed Income Investments. These investments consist of the Plan's share of a segregated fund that primarily invests
in Canadian issued bonds and debentures and is valued at the net asset value of shares held in the underlying securities.
Other Investments. These investments consist of cash and cash equivalents, a money market fund and diversified growth
funds. The diversified growth funds invest in a broad range of asset classes, including equities, bonds, infrastructure, property,
commodities and absolute return strategies. These investments are valued at the net asset value of shares held in the underlying
funds.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values.
Additionally, while the Company believes the valuation methods are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a
different fair value measurement at the reporting date.
The following tables set forth the fair value of the Plan's assets by asset category:
(In thousands)
Pooled Funds:
Canadian equities
U.S. equities
Non-North American equities
Fixed income investments
Other
Total investments
(In thousands)
Pooled Funds:
Canadian equities
U.S. equities
Non-North American equities
Fixed income investments
Other
Total investments
$
$
$
Level 1
Level 2
December 31, 2018
Level 3
NAV (1)
Total
— $
— $
— $
10,693
$
—
—
—
203
203
—
—
—
—
—
—
—
—
4,356
19,492
38,668
13,144
$
— $
— $
86,353
$
10,693
4,356
19,492
38,668
13,347
86,556
Level 1
Level 2
December 31, 2017
Level 3
NAV (1)
Total
— $
— $
— $
11,211
$
—
—
—
3,996
—
—
—
—
—
—
—
—
4,436
20,207
40,193
17,139
$
3,996
$
— $
— $
93,186
$
11,211
4,436
20,207
40,193
21,135
97,182
(1) As described above, investments measured at fair value using the NAV per share practical expedient have not been classified in the fair value
hierarchy. The amounts presented in the tables are intended to reconcile the fair value hierarchy to the total fair value of plan assets.
14. STOCK-BASED COMPENSATION
WESCO sponsors a stock-based compensation plan. The 1999 Long-Term Incentive Plan, as amended and restated (“LTIP”)
was designed to be the successor plan to all prior plans. Any shares remaining reserved for future issuance under the prior plans
are available for issuance under the LTIP. The LTIP is administered by the Compensation Committee of the Board.
On May 31, 2017, the Company renewed and restated the LTIP, increasing the maximum number of shares of common stock
that may be issued under the plan by 1.7 million shares to 3.4 million. Under the LTIP, the total number of shares of common stock
authorized to be issued will be reduced by 1 share of common stock for every 1 share that is subject to a stock appreciation right
granted, and 1.83 shares of common stock for every 1 share that is subject to an award other than a stock appreciation right granted
on or after May 31, 2017. As of December 31, 2018, 3.1 million shares of common stock were reserved under the LTIP for future
equity award grants.
WESCO’s stock-based employee compensation plans are comprised of stock-settled stock appreciation rights, restricted stock
units and performance-based awards. Compensation cost for all stock-based awards is measured at fair value on the date of grant
58
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
and compensation cost is recognized, net of estimated forfeitures, over the service period for awards expected to vest. The fair
value of stock-settled stock appreciation rights and performance-based awards with market conditions is determined using the
Black-Scholes and Monte Carlo simulation models, respectively. The fair value of restricted stock units and performance-based
awards with performance conditions is determined by the grant-date closing price of WESCO’s common stock. The forfeiture
assumption is based on WESCO’s historical employee behavior that is reviewed on an annual basis. No dividends are assumed.
For stock appreciation rights that are exercised and for restricted stock units and performance-based award that vest, shares are
issued out of WESCO's outstanding common stock.
Except for the performance-based awards, awards granted vest and become exercisable once criteria based on time is achieved.
Performance-based awards vest based on market or performance conditions. In the event of a change in control, all awards vest
immediately. Each award terminates on the tenth anniversary of its grant date unless terminated sooner under certain conditions.
For awards granted in 2018, performance-based awards were based on two equally-weighted performance measures, which
include the three-year average growth rate of the Company’s fully diluted earnings per share and the three-year cumulative return
on net assets. From 2015 to 2017, the two equally-weighted performance-based award metrics were the three-year average growth
rate of WESCO's net income and WESCO's total stockholder return in relation to the total stockholder return of a select group of
peer companies over a three-year period.
WESCO recognized $16.4 million, $14.8 million and $12.5 million of non-cash stock-based compensation expense, which is
included in selling, general and administrative expenses, for the years ended December 31, 2018, 2017 and 2016, respectively. As
of December 31, 2018, there was $18.8 million of total unrecognized compensation expense related to non-vested stock-based
compensation arrangements for all awards previously made of which approximately $11.7 million is expected to be recognized
in 2019, $6.3 million in 2020 and $0.8 million in 2021.
The total intrinsic value of awards exercised during the years ended December 31, 2018, 2017, and 2016 was $8.2 million,
$17.2 million, and $13.0 million, respectively. The gross deferred tax benefit associated with the exercise of stock-based awards
totaled $2.0 million, $6.4 million, and $4.9 million in 2018, 2017, and 2016, respectively.
The following table sets forth a summary of stock-settled stock appreciation rights and related information for the years
presented:
Year Ended December 31,
2018
2017
2016
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(In
thousands)
Awards
Beginning of year
2,238,607
$
Granted
Exercised
Canceled
End of year
Exercisable at end
of year
509,046
(192,700)
(203,320)
2,351,633
57.75
62.68
40.74
68.69
59.26
6,514
6.1
4.6
$
$
Weighted-
Average
Exercise
Price
52.62
71.21
42.19
66.06
57.75
Awards
2,439,487
$
455,807
(495,181)
(161,506)
2,238,607
Weighted-
Average
Exercise
Price
54.47
42.63
41.54
63.71
52.62
Awards
2,567,021
$
709,999
(526,818)
(310,715)
2,439,487
1,453,932
$
57.93
5,623
1,331,580
$
56.96
1,549,350
$
53.35
The following table sets forth the weighted-average assumptions used to estimate the fair value of stock-settled stock
appreciation rights granted during the years presented:
Stock-settled stock appreciation rights granted
Risk free interest rate
Expected life (in years)
Expected volatility
Year Ended December 31,
2017
455,807
2016
709,999
2018
509,046
2.5%
5
28%
1.9%
5
29%
1.2%
5
32%
The risk-free interest rate is based on the U.S. Treasury Daily Yield Curve rate as of the grant date. The expected life is based
on historical exercise experience and the expected volatility is based on the volatility of the Company's daily stock prices over a
five-year period preceding the grant date.
59
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
The weighted-average fair value per stock-settled stock appreciation right granted was $18.38, $20.52 and $12.88 for the years
ended December 31, 2018, 2017 and 2016, respectively.
The following table sets forth a summary of time-based restricted stock units and related information for the years presented:
2018
Weighted-
Average
Fair
Value
Awards
Unvested at beginning of year
290,054
$
Granted
Vested
Forfeited
122,062
(64,166)
(20,152)
Unvested at end of year
327,798
$
58.11
62.40
67.91
58.15
57.87
Year Ended December 31,
2017
2016
Weighted-
Average
Fair
Value
57.47
71.33
84.57
57.52
58.11
Awards
257,096
$
100,993
(44,720)
(23,315)
290,054
$
Weighted-
Average
Fair
Value
74.52
44.45
72.41
59.15
57.47
Awards
175,411
$
162,256
(60,015)
(20,556)
257,096
$
The following table sets forth a summary of performance-based awards and related information for the years presented:
2018
Weighted-
Average
Fair
Value
Awards
Unvested at beginning of year
148,508
$
Granted
Vested
Forfeited
44,144
—
(53,756)
Unvested at end of year
138,896
$
60.23
62.80
—
64.67
59.33
Year Ended December 31,
2017
2016
Weighted-
Average
Fair
Value
60.36
76.63
—
76.77
60.23
Awards
149,320
$
39,978
—
(40,790)
148,508
$
Weighted-
Average
Fair
Value
76.48
47.00
—
71.25
60.36
Awards
114,520
$
91,768
—
(56,968)
149,320
$
The following table sets forth the assumptions used to estimate the fair value of performance shares granted during the years
presented:
Grant date share price
WESCO expected volatility
Peer group median volatility
Risk-free interest rate
Correlation of peer company returns
Year ended December 31,
2018
2017
2016
$
62.80
$
71.67
$
42.44
n/a
n/a
n/a
n/a
29%
24%
1.5%
114%
26%
24%
0.9%
122%
The unvested performance-based awards in the table above include 48,098 shares in which vesting of the ultimate number of
shares is dependent upon WESCO's total stockholder return in relation to the total stockholder return of a select group of peer
companies over a three-year period. These awards are accounted for as awards with market conditions; compensation cost is
recognized over the service period, regardless of whether the market conditions are achieved and the awards ultimately vest.
Vesting of the remaining 90,798 shares of performance-based awards in the table above is dependent upon the achievement of
certain performance targets, including 48,098 that are dependent upon the three-year average growth rate of WESCO's net income,
21,350 that are dependent upon the three-year average growth rate of the Company's fully diluted earnings per share, and 21,350
that are based upon the three-year cumulative return on net assets. These awards are accounted for as awards with performance
conditions; compensation cost is recognized over the performance period based upon WESCO's determination of whether it is
probable that the performance targets will be achieved.
60
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
15. NET INTEREST AND OTHER
Net interest and other includes interest expense, interest income, amortization of debt discount and debt issuance costs, the
non-service cost components of net periodic benefit cost, and foreign exchange gains and losses from the remeasurement of certain
financial instruments. For the year ended December 31, 2018, a foreign exchange loss of $2.8 million from the remeasurement of
certain financial instruments was reported as a component of net interest and other. Foreign exchange gains and losses were not
material for the years ended December 31, 2017 and 2016.
16. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases, primarily for real property that have noncancelable lease
terms in excess of one year as of December 31, 2018, are as follows:
Years ending December 31
2019
2020
2021
2022
2023
Thereafter
(In thousands)
$
71,640
59,594
47,264
34,490
24,493
40,302
Rental expense for the years ended December 31, 2018, 2017 and 2016 was $86.0 million, $82.0 million and $76.7 million,
respectively.
From time to time, a number of lawsuits and claims have been or may be asserted against the Company relating to the conduct
of its business, including litigation relating to commercial, product and employment matters. The outcome of any litigation cannot
be predicted with certainty, and some lawsuits may be determined adversely to WESCO. However, management does not believe
that the ultimate outcome of any such pending matters is likely to have a material adverse effect on WESCO's financial condition
or liquidity, although the resolution in any fiscal period of one or more of these matters may have a material adverse effect on
WESCO's results of operations for that period.
In an effort to expand the Company's footprint in the Middle East, WESCO has been doing business since 2009 with WESTEC
Supplies General Trading (“WESTEC”), an industrial equipment supplier headquartered in the United Arab Emirates. WESTEC
has a line of credit with a maximum borrowing capacity of approximately $6.7 million to support its working capital requirements
and joint sales efforts with WESCO. Due to the nature of WESCO’s arrangement with WESTEC, WESCO has provided a standby
letter of credit under its Revolving Credit Facility of up to $7.3 million as security for WESTEC’s line of credit. As of December 31,
2018, WESTEC had an outstanding loan balance of $6.4 million. Management currently believes the estimated fair value of the
noncontingent guarantee on the line of credit is nominal and therefore a liability has not been recorded as of December 31, 2018.
61
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
17. SEGMENTS AND RELATED INFORMATION
WESCO distributes products and provides services through its four operating segments, which have been aggregated as one
reportable segment. WESCO has approximately 220,000 unique product stock keeping units and markets more than 1,000,000
products for customers. There were no material amounts of sales or transfers among geographic areas and no material amounts of
export sales.
WESCO attributes revenues from external customers to individual countries on the basis of the point of sale. The following
table sets forth information about WESCO by geographic area:
Net Sales
Year Ended December 31,
2017
2018
2016
2018
Long-Lived Assets
December 31,
2017
2016
(In thousands)
United States
Other International(1)
$ 6,089,130
75% $ 5,775,988
75% $ 5,635,803
77% $
106,078
2,087,471
25%
1,903,033
25%
1,700,214
23%
54,800
Total
$ 8,176,601
$ 7,679,021
$ 7,336,017
$
160,878
$
$
95,851
60,594
156,445
$
$
123,465
65,182
188,647
(1) Other primarily includes Canada.
The following table sets forth information about WESCO’s sales by product category:
(percentages based on total sales)
General Supplies
Wire, Cable and Conduit
Communications and Security
Electrical Distribution and Controls
Lighting and Sustainability
Automation, Controls and Motors
Year Ended December 31,
2017
40%
15%
15%
10%
12%
8%
2016
40%
14%
15%
11%
12%
8%
2018
40%
14%
16%
11%
11%
8%
62
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
WESCO Distribution has outstanding $500 million in aggregate principal amount of 2021 Notes and $350 million in aggregate
principal amount of 2024 Notes. The 2021 Notes and 2024 Notes are unsecured senior obligations of WESCO Distribution and
are fully and unconditionally guaranteed on a senior unsecured basis by WESCO International.
Condensed consolidating financial information for WESCO International, WESCO Distribution and the non-guarantor
subsidiaries is presented in the following tables.
Condensed Consolidating Balance Sheet
December 31, 2018
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
$
— $
35,931
$
60,412
$
Cash and cash equivalents
Trade accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Intercompany receivables, net
Property, buildings and equipment, net
Intangible assets, net
Goodwill
Investments in affiliates
Other assets
Total assets
Accounts payable
Short-term debt
Other current liabilities
Total current liabilities
Intercompany payables, net
Long-term debt
Other noncurrent liabilities
— 1,166,607
440,422
57,586
508,304
124,523
533,939
1,859,846
— 2,403,704
63,506
2,131
97,372
313,885
— $
96,343
— 1,166,607
—
(9,268)
(9,268)
(2,403,704)
—
—
948,726
173,964
2,385,640
—
160,878
316,016
—
—
1,123
1,123
—
—
—
—
257,623
1,464,980
— 1,722,603
3,182,469
5,137,783
—
2,905
16,994
$ 3,183,592
$ 5,997,887
$ 6,156,781
(8,320,252)
—
19,899
$(10,733,224) $ 4,605,036
$
— $
404,373
$
389,975
$
— $
794,348
—
—
—
—
86,600
490,973
1,048,282
1,355,422
30,785
159,481
580,241
—
(9,268)
(9,268)
— (2,403,704)
30,785
236,813
1,061,946
—
—
—
842,093
126,930
325,218
119,123
— 1,167,311
246,053
—
(8,320,252)
—
2,135,310
(5,584)
$(10,733,224) $ 4,605,036
Total WESCO International stockholders’ equity
2,135,310
3,182,469
Noncontrolling interests
—
—
Total liabilities and stockholders’ equity
$ 3,183,592
$ 5,997,887
5,137,783
(5,584)
$ 6,156,781
63
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Balance Sheet
December 31, 2017
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
$
— $
50,602
$
67,351
$
Cash and cash equivalents
Trade accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Intercompany receivables, net
Property, buildings and equipment, net
Intangible assets, net
Goodwill
Investments in affiliates
Other assets
Total assets
Accounts payable
Short-term debt
Other current liabilities
Total current liabilities
Intercompany payables, net
Long-term debt
Other noncurrent liabilities
— 1,170,080
430,092
42,547
526,056
152,531
523,241
1,916,018
— 2,189,136
50,198
2,770
106,247
364,334
— $
117,953
— 1,170,080
—
(35,140)
(35,140)
(2,189,136)
—
—
956,148
164,668
2,408,849
—
156,445
367,104
—
—
4,730
4,730
—
—
—
—
257,623
1,514,254
— 1,771,877
3,058,613
5,023,826
—
2,778
— (8,082,439)
—
28,415
—
31,193
$(10,306,715) $ 4,735,468
$ 3,063,343
$ 5,860,436
$ 6,118,404
$
— $
417,690
$
381,830
$
— $
799,520
—
—
—
—
80,039
497,729
939,784
1,249,352
34,075
162,475
578,380
—
(35,140)
(35,140)
— (2,189,136)
34,075
207,374
1,040,969
—
—
3,820
934,033
120,709
379,228
140,566
— 1,313,261
265,095
—
(8,082,439)
—
2,119,739
(3,596)
$(10,306,715) $ 4,735,468
Total WESCO International stockholders’ equity
2,119,739
3,058,613
Noncontrolling interests
—
—
Total liabilities and stockholders’ equity
$ 3,063,343
$ 5,860,436
5,023,826
(3,596)
$ 6,118,404
64
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Statement of Income and Comprehensive
Income
Year ended December 31, 2018
(In thousands)
Net sales
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
$
— $ 3,572,406
$ 4,757,321
Cost of goods sold (excluding depreciation and
— 2,890,490
3,871,856
Consolidating
and
Eliminating
Entries
Consolidated
$ (153,126) $ 8,176,601
6,609,220
(153,126)
amortization)
Selling, general and administrative expenses
Depreciation and amortization
Results of affiliates’ operations
Net interest and other
Provision for income taxes
—
—
225,355
—
—
Net income
Less: Net loss attributable to noncontrolling interests
225,355
—
590,009
18,334
209,802
54,178
3,842
225,355
—
Net income attributable to WESCO International
$
225,355
$
225,355
$
561,935
44,663
—
17,237
51,828
209,802
(1,988)
211,790
— 1,151,944
—
(435,157)
—
—
(435,157)
—
$ (435,157) $
62,997
—
71,415
55,670
225,355
(1,988)
227,343
Other comprehensive income (loss):
Foreign currency translation adjustments
Post retirement benefit plan adjustments, net of tax
Comprehensive income attributable to WESCO
International
(99,643)
3,798
(99,643)
3,798
(99,643)
3,798
199,286
(7,596)
(99,643)
3,798
$
129,510
$
129,510
$
115,945
$ (243,467) $
131,498
Condensed Consolidating Statement of Income and Comprehensive
Income
Year ended December 31, 2017
(In thousands)
Net sales
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
$
— $ 3,370,088
$ 4,441,655
Cost of goods sold (excluding depreciation and
— 2,714,511
3,612,577
Consolidating
and
Eliminating
Entries
Consolidated
$ (132,722) $ 7,679,021
6,194,366
(132,722)
amortization)
Selling, general and administrative expenses
Depreciation and amortization
Results of affiliates’ operations
Net interest and other
Provision for income taxes
Net income
Less: Net loss attributable to noncontrolling interests
—
—
160,587
—
(2,546)
163,133
—
555,503
18,442
168,782
94,313
(4,486)
160,587
—
Net income attributable to WESCO International
$
163,133
$
160,587
$
546,095
45,575
—
(27,713)
96,339
168,782
(327)
169,109
— 1,101,598
—
(329,369)
—
—
(329,369)
—
$ (329,369) $
64,017
—
66,600
89,307
163,133
(327)
163,460
Other comprehensive income (loss):
Foreign currency translation adjustments
Post retirement benefit plan adjustments, net of tax
Comprehensive income attributable to WESCO
International
85,762
(6,381)
85,762
(6,381)
85,762
(6,381)
(171,524)
12,762
85,762
(6,381)
$
242,514
$
239,968
$
248,490
$ (488,131) $
242,841
65
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Statement of Income and Comprehensive
Income
Year ended December 31, 2016
$
$
$
Net sales
Cost of goods sold (excluding depreciation and
amortization)
Selling, general and administrative expenses
Depreciation and amortization
Results of affiliates’ operations
Net interest and other
Loss on debt redemption
Provision for income taxes
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to WESCO International
Other comprehensive income (loss):
Foreign currency translation adjustments
Post retirement benefit plan adjustments, net of tax
Comprehensive income attributable to WESCO
International
Reclassification
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
— $ 3,306,265
— 2,651,409
(In thousands)
Non-Guarantor
Subsidiaries
$ 4,134,508
3,341,161
Consolidating
and
Eliminating
Entries
Consolidated
$ (104,756) $ 7,336,017
5,887,814
(104,756)
61
—
240,571
17,555
123,933
(2,098)
101,120
—
101,120
$
$
477,437
20,226
155,814
87,824
—
8,263
216,920
—
216,920
$
$
573,301
46,632
—
(30,317)
—
24,266
179,465
(468)
179,933
— 1,050,799
—
(396,385)
—
—
—
$ (396,385) $
—
$ (396,385) $
66,858
—
75,062
123,933
30,431
101,120
(468)
101,588
38,275
(2,485)
38,275
(2,485)
38,275
(2,485)
(76,550)
4,970
38,275
(2,485)
$
136,910
$
252,710
$
215,723
$ (467,965) $
137,378
As described in Note 13, the Company reclassified a net benefit of $1.8 million and $1.5 million, respectively, from selling, general and
administrative expenses to net interest and other in the previously reported Condensed Consolidated Statement of Income and Comprehensive
Income of the non-guarantor subsidiaries for the years ended December 31, 2017 and 2016, respectively.
66
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2018
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Net cash provided by operating activities
$
18,672
$
153,467
$
124,582
$
— $
296,721
Investing activities:
Capital expenditures
Proceeds from sale of assets
Dividends received from subsidiaries
Advances to subsidiaries and other
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from issuance of debt
Repayments of debt
Equity activities
Dividends paid by subsidiaries
Other
Net cash used in financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of period
—
—
—
—
108,497
—
(127,169)
(17,573)
—
347,531
(406,028)
(76,070)
339,606
(410,606)
—
—
(18,672)
(21,068)
(92,068)
—
—
(14,671)
50,602
(18,637)
12,461
196,219
190,043
—
—
(347,531)
199,416
(148,115)
(36,210)
12,461
—
(10,393)
(34,142)
1,086,673
(1,051,611)
—
(347,531)
—
(312,469)
(9,095)
(6,939)
67,351
(199,416)
1,335,360
— (1,462,217)
—
(127,169)
347,531
—
—
(21,068)
148,115
(275,094)
—
—
—
(9,095)
(21,610)
117,953
Cash and cash equivalents at the end of period
$
— $
35,931
$
60,412
$
— $
96,343
67
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2017
(In thousands)
Net cash (used in) provided by operating activities
Investing activities:
Capital expenditures
Proceeds from sale of assets
Dividends received from subsidiaries
Advances to subsidiaries and other
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from issuance of debt
Repayments of debt
Equity activities
Dividends paid by subsidiaries
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of period
WESCO
International,
Inc.
(36,575) $
$
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
101,826
$
83,871
$
— $
149,122
—
—
—
—
—
143,367
—
(106,792)
—
—
36,575
—
—
—
(13,215)
—
307,784
(383,686)
(89,117)
775,926
(785,392)
—
—
5,807
(3,659)
—
9,050
41,552
(8,292)
6,766
—
26,912
25,386
1,144,848
(952,740)
—
(307,784)
—
(115,676)
5,191
(1,228)
68,579
—
(21,507)
—
(307,784)
366,220
58,436
(383,686)
17,466
—
307,784
—
(58,436)
6,766
—
9,446
(5,295)
1,680,455
(1,720,666)
(106,792)
—
5,807
(141,196)
—
—
—
5,191
7,822
110,131
Cash and cash equivalents at the end of period
$
— $
50,602
$
67,351
$
— $
117,953
68
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2016
(In thousands)
WESCO
International,
Inc.
WESCO
Distribution,
Inc.
Non-Guarantor
Subsidiaries
Consolidating
and
Eliminating
Entries
Consolidated
Net cash provided by (used in) operating activities
$
95,388
$ (243,476) $
448,323
$
— $
300,235
Investing activities:
Capital expenditures
Acquisition payments, net of cash acquired
Proceeds from sale of assets
Dividends received from subsidiaries
Advances to subsidiaries and other
Net cash used in investing activities
Financing activities:
Proceeds from issuance of debt
Repayments of debt
Equity activities
Dividends paid by subsidiaries
Other
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of period
—
—
—
—
—
—
(12,482)
(50,890)
—
82,912
(297,259)
(277,719)
252,246
(344,804)
(2,830)
—
—
(95,388)
1,566,864
(1,030,520)
—
—
(12,560)
523,784
—
—
—
—
2,589
38,963
(5,475)
—
8,361
—
(337,344)
(334,458)
672,345
(752,401)
—
(82,912)
—
(162,968)
(3,634)
(52,737)
121,316
—
—
—
(82,912)
624,603
541,691
(17,957)
(50,890)
8,361
—
(10,000)
(70,486)
(297,259)
(327,344)
—
82,912
—
(541,691)
2,194,196
(2,455,069)
(2,830)
—
(12,560)
(276,263)
—
—
—
(3,634)
(50,148)
160,279
Cash and cash equivalents at the end of period
$
— $
41,552
$
68,579
$
— $
110,131
69
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth selected quarterly financial data for the years ended December 31, 2018 and 2017:
2018
Net Sales
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
1,993,915
$
2,103,994
$
2,067,245
$
2,011,447
Cost of goods sold (excluding depreciation and amortization)
1,613,966
1,704,100
1,670,037
1,621,117
Income from operations
Income before income taxes
Net income
Net income attributable to WESCO International
73,241
53,458
42,971
44,421
91,183
73,442
57,673
57,940
97,517
80,467
66,645
66,849
90,499
73,658
58,066
58,133
Basic earnings per share attributable to WESCO
Diluted earnings per share attributable to WESCO
0.94
0.93
1.23
1.22
1.42
1.27
1.41
1.26
International(2)
International(3)
2017
Net Sales
$
1,772,591
$
1,909,624
$
2,000,159
$
1,996,647
Cost of goods sold (excluding depreciation and amortization)
1,422,573
1,543,510
1,614,814
1,613,469
Income from operations
Income before income taxes
Net income(1)
Net income attributable to WESCO International(1)
67,089
50,368
37,800
37,729
83,105
66,289
49,535
49,510
89,250
71,939
53,576
53,675
81,446
63,844
22,222
22,546
Basic earnings per share attributable to WESCO
Diluted earnings per share attributable to WESCO
0.77
0.76
1.03
1.02
1.13
0.48
1.12
0.47
International(1) (2)
International(1) (3)
(1) As described in Note 11, net income and net income attributable to WESCO International include provisional discrete income tax expense
of $26.4 million resulting from the application of the TCJA, which affected basic and diluted earnings per share attributable to WESCO
International in the fourth quarter of 2017.
(2) Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while
EPS for the full year is computed by using the weighted-average number of shares outstanding during the year. Thus, the sum of the four
quarters’ EPS may not equal the full-year EPS.
(3) Diluted EPS in each quarter is computed using the weighted-average number of shares outstanding and common share equivalents during
that quarter while diluted EPS for the full year is computed by using the weighted-average number of shares outstanding and common share
equivalents during the year. Thus, the sum of the four quarters’ diluted EPS may not equal the full-year diluted EPS.
20. SUBSEQUENT EVENTS
On January 16, 2019, WESCO issued a press release announcing that its WESCO Services, LLC subsidiary entered into a
definitive agreement to acquire certain assets of Sylvania Lighting Solutions from OSRAM Sylvania. The transaction is
expected to close in March 2019.
70
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Based
on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and
procedures and internal control over financial reporting were effective as of the end of the period covered by this report.
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments.
Although the adoption of this new revenue standard had no impact on our results of operations, financial position or cash flows,
we did expand our controls related to revenue recognition. However, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the updated framework in Internal Control — Integrated Framework (2013) (2013 Framework) issued
by the Committee of Sponsoring Organizations of the Treadway Commission on May 14, 2013. Based on our evaluation under
the 2013 Framework, our management concluded that our internal control over financial reporting was effective as of December 31,
2018.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
During the last fiscal quarter of 2018, there were no changes in the Company’s internal control over financial reporting identified
in connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
71
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information set forth under the captions “Board of Directors” and “Executive Officers” in our definitive Proxy Statement
for our 2019 Annual Meeting of Stockholders is incorporated herein by reference.
Codes of Business Ethics and Conduct
We have adopted a Code of Business Ethics and Conduct (“Code of Conduct”) that applies to our Directors, officers and
employees that is available on our website at www.wesco.com by selecting the “Investors” tab followed by the “Corporate
Governance” heading. Any amendment or waiver of the Code of Conduct for our officers or Directors will be disclosed promptly
at that location on our website.
We also have adopted a Senior Financial Executive Code of Principles for Senior Executives (“Senior Financial Executive
Code”) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or
persons performing these functions. The Senior Financial Executive Code is also available at that same location on our website.
We intend to timely disclose any amendment or waiver of the Senior Financial Executive Code on our website and will retain such
information on our website as required by applicable SEC rules.
A copy of the Code of Conduct and/or Senior Financial Executive Code may also be obtained upon request by any stockholder,
without charge, by writing to us at WESCO International, Inc., 225 West Station Square Drive, Suite 700, Pittsburgh, Pennsylvania
15219, Attention: Corporate Secretary.
The information required by Item 10 that relates to our Directors and executive officers, including the Audit Committee and
its financial expert, required by this item, is incorporated by reference from the information appearing under the captions “Corporate
Governance,” “Board and Committee Meetings” and “Security Ownership” in our definitive Proxy Statement for our 2019 Annual
Meeting of Stockholders that is to be filed with the SEC pursuant to the Exchange Act within 120 days of the end of our fiscal
year on December 31, 2018.
Item 11. Executive Compensation.
The information set forth under the captions “Compensation Discussion and Analysis” and “Director Compensation” in our
definitive Proxy Statement for our 2019 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information set forth under the caption “Security Ownership” in our definitive Proxy Statement for our 2019 Annual
Meeting of Stockholders is incorporated herein by reference.
The following table provides information as of December 31, 2018 with respect to the shares of our common stock that may
be issued under our existing equity compensation plans:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
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
2,818,327
—
2,818,327
$
$
49.49
—
49.49
3,121,358
—
3,121,358
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information set forth under the captions “Transactions with Related Persons” and “Corporate Governance” in our definitive
Proxy Statement for our 2019 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information set forth under the caption “Independent Registered Public Accounting Firm Fees and Services” in our
definitive Proxy Statement for our 2019 Annual Meeting of Stockholders is incorporated herein by reference.
72
PART IV
Item 15. Exhibits and Financial Statement Schedule.
The financial statements, financial statement schedule and exhibits listed below are filed as part of this annual report:
(a)
(1) Financial Statements
The list of financial statements required by this item is set forth in Item 8, “Financial Statements and Supplementary
Data,” and is incorporated herein by reference.
(2) Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
(b)
Exhibits
Exhibit No.
3.1
Description of Exhibit
Restated Certificate of Incorporation of WESCO
International, Inc.
Prior Filing or Sequential Page Number
Incorporated by reference to Exhibit 3.1 to WESCO’s
Registration Statement on Form S-4 (No. 333-70404)
3.2
3.3
4.1
Certificate of Amendment of Certificate of
Incorporation to Restated Certificate of Incorporation
of WESCO International, Inc.
Incorporated by reference to Exhibit 3.1 to WESCO’s
Current Report on Form 8-K, dated May 29, 2014
Amended and Restated By-laws of WESCO
International, Inc., effective as of May 29, 2014
Incorporated by reference to Exhibit 3.2 to WESCO’s
Current Report on Form 8-K, dated May 29, 2014
Indenture, dated November 26, 2013, among WESCO
Distribution, Inc. and U.S. Bank National Association,
as trustee
Incorporated by reference to Exhibit 4.1 to WESCO’s
Current Report on Form 8-K, dated November 27,
2013
4.2
Form of 5.375% Unrestricted Note due 2021
4.3
Indenture, dated June 15, 2016, among WESCO
Distribution, Inc. and U.S. Bank National Association,
as trustee
4.4
Form of 5.375% Unrestricted Note due 2024
10.1
1999 Deferred Compensation Plan for Non-Employee
Directors, as amended and restated September 20, 2007
Incorporated by reference to Exhibit A-2 to Exhibit 4.1
to WESCO’s Current Report on Form 8-K, dated
November 27, 2013
Incorporated by reference to Exhibit 4.1 to WESCO’s
Current Report on Form 8-K, dated June 15, 2016
Incorporated by reference to Exhibit A-2 to Exhibit 4.1
to WESCO’s Current Report on Form 8-K, dated June
15, 2016
Incorporated by reference to Exhibit 10.5 to WESCO's
Annual Report on Form 10-K for the year ended
December 31, 2011
73
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Exhibit No.
10.2
Description of Exhibit
Form of Stock Appreciation Rights Agreement for
Employees
Form of Stock Appreciation Rights Agreement for
Non-Employee Directors
Prior Filing or Sequential Page Number
Incorporated by reference to Exhibit 10.7 to WESCO's
Annual Report on Form 10-K for the year ended
December 31, 2011
Incorporated by reference to Exhibit 10.3 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010
Amended and Restated Employment Agreement, dated
as of September 1, 2009, between WESCO
International Inc. and John J. Engel
Incorporated by reference to Exhibit 10.2 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009
Term Sheet, dated January 15, 2010, memorializing
terms of employment of Diane Lazzaris by WESCO
International, Inc.
Incorporated by reference to Exhibit 10.28 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2009
Term Loan agreement, dated as of December 12, 2012
among WESCO Distribution, Inc., WDCC Enterprises
Inc., WESCO International, Inc., Credit Suisse AG,
Cayman Islands Branch, as Administrative Agent and
Collateral Agent and the other Lenders and Agents
party thereto
Incorporated by reference to Exhibit 10.1 to WESCO's
Current Report on Form 8-K, dated December 17,
2012
1999 Long-Term Incentive Plan, as restated effective
as of May 30, 2013
Incorporated by reference to Appendix A to the Proxy
Statement filed on Schedule 14A on April 16, 2013
First Amendment to Term Loan Agreement, dated as
of November 19, 2013 among WESCO Distribution,
Inc., WDCC Enterprises Inc., WESCO International,
Inc., Credit Suisse AG, Cayman Islands Branch, as
Administrative Agent and Collateral Agent and the
other Lenders and Agents party thereto
Form of Stock Appreciation Rights Agreement for
Employees
Second Amended and Restated Credit Agreement,
dated as of September 24, 2015 among WESCO
Distribution, Inc., the other U.S. Borrowers party
thereto, WESCO Distribution Canada LP, the other
Canadian Borrowers party thereto, WESCO
International, Inc., the Lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent,
and JPMorgan Chase Bank, N.A., Toronto Branch, as
Canadian Administrative Agent
Incorporated by reference to Exhibit 10.31 to
WESCO's Annual Report on Form 10-K for the year
ended December 31, 2013
Incorporated by reference to Exhibit 10.33 to
WESCO's Annual Report on Form 10-K for the year
ended December 31, 2014
Incorporated by reference to Exhibit 10.1 to WESCO’s
Current Report on Form 8-K, dated September 24,
2015
74
Exhibit No.
10.11
Description of Exhibit
Fourth Amended and Restated Receivables Purchase
Agreement, dated as of September 24, 2015, by and
among WESCO Receivables Corp., WESCO
Distribution, Inc., the various Purchaser Groups from
time to time party thereto and PNC Bank, National
Association, as Administrator
Prior Filing or Sequential Page Number
Incorporated by reference to Exhibit 10.2 to WESCO’s
Current Report on Form 8-K, dated September 24,
2015
10.12
Form of Non-Employee Director Restricted Stock Unit
Agreement
Incorporated by reference to Exhibit 10.1 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Form of Notice of Performance Share Award Under
the WESCO International, Inc. 1999 Long-Term
Incentive Plan, as amended May 30, 2013
Incorporated by reference to Exhibit 10.23 to
WESCO's Annual Report on Form 10-K for the year
ended December 31, 2015
Form of Director and Officer Indemnification
Agreement, entered among WESCO International, Inc.
and certain of its executive officers and directors listed
on a schedule attached thereto
Incorporated by reference to Exhibit 10.24 to
WESCO's Annual Report on Form 10-K for the year
ended December 31, 2015
First Amendment to Fourth Amended and Restated
Receivables Purchase Agreement, dated as of
December 18, 2015
Incorporated by reference to Exhibit 10.1 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016
Second Amendment to Fourth Amended and Restated
Receivables Purchase Agreement, dated as of April 19,
2016
Incorporated by reference to Exhibit 10.2 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016
Third Amendment to Fourth Amended and Restated
Receivables Purchase Agreement, dated as of May 10,
2016
Incorporated by reference to Exhibit 10.3 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016
Fourth Amendment to Fourth Amended and Restated
Receivables Purchase Agreement, dated as of May 27,
2016
Incorporated by reference to Exhibit 10.4 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016
Term Sheet, dated October 6, 2016, memorializing
terms of employment of David S. Schulz by WESCO
International, Inc.
Incorporated by reference to Exhibit 10.28 to
WESCO's Annual Report on Form 10-K for the year
ended December 31, 2016
Fifth Amendment to Fourth Amended and Restated
Receivables Purchase Agreement, dated as of
November 8, 2017
Incorporated by reference to Exhibit 10.1 to WESCO's
Current Report on Form 8-K, dated November 8, 2017
Sixth Amendment to Fourth Amended and Restated
Receivables Agreement, dated as of December 29,
2017
Incorporated by reference to Exhibit 10.22 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
10.22
Form of Non-Employee Director Restricted Stock Unit
Agreement
Incorporated by reference to Exhibit 10.23 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
10.23
Form of Restricted Stock Unit Agreement for
Employees
Incorporated by reference to Exhibit 10.24 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
75
Exhibit No.
10.24
Description of Exhibit
Form of Stock Appreciation Rights Agreement for
Employees
Prior Filing or Sequential Page Number
Incorporated by reference to Exhibit 10.25 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
10.25
Form of Notice of Performance Share Award Under
the WESCO International, Inc. 1999 Long-Term
Incentive Plan, as amended May 31, 2017
Incorporated by reference to Exhibit 10.26 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
10.26
1999 Long-Term Incentive Plan, as restated effective
as of May 31, 2017
Incorporated by reference to Appendix A to the Proxy
Statement filed on Schedule 14A on April 17, 2017
10.27
10.28
Term Sheet, dated December 4, 2015, memorializing
terms of employment of Robert Minicozzi by WESCO
International, Inc.
Incorporated by reference to Exhibit 10.28 to
WESCO’s Annual Report on Form 10-K for the year
ended December 31, 2017
Term Sheet, dated , memorializing terms of
employment of Christine Wolf by WESCO
International, Inc.
Incorporated by reference to Exhibit 10.1 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2018
10.29
Seventh Amendment to Fourth Amended and Restated
Receivables Agreement, dated as of April 23, 2018
Incorporated by reference to Exhibit 10.1 to WESCO’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2018
10.30
Eighth Amendment to Fourth Amended and Restated
Receivables Agreement, dated as of December 21,
2018
Filed herewith
21.1
23.1
31.1
31.2
32.1
32.2
Subsidiaries of WESCO International, Inc.
Consent of Independent Registered Public Accounting
Firm
Filed herewith
Filed herewith
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) promulgated under the Exchange Act
Filed herewith
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) promulgated under the Exchange Act
Filed herewith
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
101
Interactive Data File
Filed herewith
The registrant hereby agrees to furnish supplementally to the Commission, upon request, a copy of any omitted schedule to any
of the agreements contained herein.
Copies of exhibits may be retrieved electronically at the Securities and Exchange Commission’s home page at www.sec.gov.
Exhibits will also be furnished without charge by writing to David S. Schulz, Senior Vice President and Chief Financial Officer,
225 West Station Square Drive, Suite 700, Pittsburgh, Pennsylvania 15219. Requests may also be directed to (412) 454-2200.
76
Schedule II—Valuation and Qualifying Accounts
Allowance for doubtful accounts
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Balance at
Beginning
of Period
Charged to
Expense
Charged to
Other
Accounts(1)
(In thousands)
Balance at
Deductions(2)
End of Period
$
21,313
22,007
22,587
10,854
8,466
5,888
—
—
21
(7,699) $
(9,160)
(6,489)
24,468
21,313
22,007
_________________________
(1) Represents allowance for doubtful accounts in connection with certain acquisitions and divestitures.
(2) Includes a reduction in the allowance for doubtful accounts due to write-off of accounts receivable.
77
Item 16. Form 10-K Summary.
Not applicable.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
WESCO INTERNATIONAL, INC.
By: /s/ JOHN J. ENGEL
Name: John J. Engel
Title: Chairman, President and Chief Executive Officer
Date: February 27, 2019
WESCO INTERNATIONAL, INC.
By: /s/ DAVID S. SCHULZ
Name: David S. Schulz
Title: Senior Vice President and Chief Financial Officer
Date: February 27, 2019
79
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN J. ENGEL
John J. Engel
/s/ DAVID S. SCHULZ
David S. Schulz
Chairman, President and Chief Executive Officer
February 27, 2019
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
February 27, 2019
(Principal Financial and Accounting Officer)
/s/ SANDRA BEACH LIN
Director
Sandra Beach Lin
/s/ MATTHEW J. ESPE
Matthew J. Espe
/s/ BOBBY J. GRIFFIN
Bobby J. Griffin
/s/ JOHN K. MORGAN
John K. Morgan
Director
Director
Director
/s/ STEVEN A. RAYMUND
Director
Steven A. Raymund
/s/ JAMES L. SINGLETON
Director
James L. Singleton
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
/s/ EASWARAN SUNDARAM
Director
February 27, 2019
Easwaran Sundaram
/s/ LYNN M. UTTER
Lynn M. Utter
Director
February 27, 2019
80
Exhibit 21.1
SUBSIDIARIES OF WESCO INTERNATIONAL, INC.
1502218 Alberta Ltd., an Alberta corporation
Atlanta Electrical Distributors, LLC, a Delaware limited liability company
Calvert Wire & Cable Corporation, a Delaware corporation
Carlton-Bates Company, an Arkansas corporation
Carlton-Bates Company de Mexico S.A. de C.V., a Mexico variable capital company
Carlton-Bates Company of Texas GP, Inc., a Texas corporation
CBC LP Holdings, LLC, a Delaware limited liability company
CDW Holdco, LLC, a Delaware limited liability company
Communications Supply Corporation, a Connecticut corporation
Conney Investment Holdings, LLC, a Delaware limited liability company
Conney Safety Products, LLC, a Delaware limited liability company
Distribuidora Materiales Electricos E-Supply Limitada, a Chile limited liability company
EECOL Electric Bolivia Ltda., a Bolivia limited liability company
EECOL Electric Peru S.A.C., a Peru sociedad anonima cerrada
EECOL Electric Corp, an Alberta corporation
EECOL Industrial Electric Ecuador Limitada, an Ecuador limited liability company
EECOL Industrial Electric (SudAmerica) Limitada, a Chile limited liability company
EECOL Industrial Electric Limitada, a Chile limited liability company
EECOL Power S.A., a Chile closed stock corporation
EECOL Properties Corp., an Alberta corporation
Hazmasters, Inc., an Ontario corporation
Hi-Line Utility Supply Company, LLC, an Illinois limited liability company
Hill Country Electric Supply, L.P., a Texas limited partnership
Liberty Wire & Cable, Inc., a Delaware corporation
Needham Electric Supply, LLC, a Delaware limited liability company
Obras Y Servicios Sunpark S.A.C. (OS Sunpark), a Peru sociedad anonima cerrada
SASK Alta Holdings S.A., a Chile closely held stock corporation
Services Voice, Video and Data Distribution de Mexico, S. de R.L. de C.V., a Mexico limited liability company
Stone Eagle Electrical Supply GP Inc., an Alberta corporation
Stone Eagle Electrical Supply Limited Partnership, an Alberta limited partnership
TVC Communications, L.L.C., a Delaware limited liability company
TVC Espana Distribucion y Venta De Equipos, S.L., a Spain limited liability company
TVC International Holding, L.L.C., a Delaware limited liability company
TVC UK Holdings Limited, a United Kingdom limited company
Voice, Video and Data Distribution de Mexico, S. de R.L. de C.V., a Mexico limited liability company
WDC Holding Inc., a Delaware corporation
WDCH, LP, a Pennsylvania limited partnership
WDCH US LP, a Delaware limited partnership
WDI-Angola, LDA, an Angola company
WDI USVI, LLC, a Delaware company
WDINESCO B.V., a Netherlands private company with limited liability
WDINESCO C.V., a Netherlands limited partnership
WDINESCO II B.V., a Netherlands private company with limited liability
WDINESCO III B.V., a Netherlands private company with limited liability
WDINESCO II C.V., a Netherlands limited partnership
WDINESCO III C.V., a Netherlands limited partnership
WEAS Company, S. de R.L., a Mexico private limited company
WESCO (Suzhou) Trading Co., Ltd., a China limited liability company
WESCO Australia Pty Ltd, an Australian company
WESCO Canada I, LP, an Alberta limited partnership
WESCO Canada GP Inc., an Ontario corporation
WESCO Distribution Canada Co., a Nova Scotia unlimited liability company
WESCO Distribution Canada LP, an Ontario limited partnership
WESCO Distribution de Mexico, S. de R.L., a Mexico private limited company
WESCO Distribution HK Limited, a Hong Kong limited private company
WESCO Distribution II ULC, a Nova Scotia unlimited liability company
WESCO Distribution III ULC, a Nova Scotia unlimited liability company
WESCO Distribution-International Limited, a United Kingdom limited company
WESCO Distribution Ireland Limited, an Ireland limited company
WESCO Distribution, Inc., a Delaware corporation
WESCO Distribution IV Inc., an Ontario corporation
WESCO Distribution NL B.V., a Netherlands private company with limited liability
WESCO Distribution Pte. Ltd., a Singapore limited private company
WESCO Enterprises, Inc., a Delaware corporation
WESCO Equity Corporation, a Delaware corporation
WESCO Holdings, LLC, a Delaware limited liability company
WESCO Integrated Supply, Inc., a Delaware corporation
WESCO Integrated Supply Polska Spolka z o.o., a Poland limited company
WESCO Nevada, Ltd., a Nevada corporation
WESCO Netherlands B.V., a Netherlands private company with limited liability
WESCO Nigeria, Inc., a Delaware corporation
WESCO Procurement Canada ULC, an Alberta unlimited liability company
WESCO Real Estate I, LLC, a Delaware limited liability company
WESCO Real Estate II, LLC, a Delaware limited liability company
WESCO Real Estate III, LLC, a Delaware limited liability company
WESCO Real Estate IV, LLC, a Delaware limited liability company
WESCO Receivables Corp., a Delaware corporation
WESCO Services, LLC, a Delaware limited liability company
WESCO TLD Holdings Co., Ltd., a Thailand limited private company
WND Nigeria Limited, a Nigeria corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No's. 333-188979,
333-188978, 333-81845, 333-172531, 333-91187, 333-81841, 333-81847, 333-81857 and 333-218541) of WESCO
International, Inc. of our report dated February 27, 2019 relating to the financial statements, financial statement schedule and
the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 27, 2019
Exhibit 31.1
CERTIFICATION
I, John J. Engel, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, of WESCO International,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2019
By: /s/ John J. Engel
John J. Engel
Chairman, President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, David S. Schulz, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, of WESCO International,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2019
By: /s/ David S. Schulz
David S. Schulz
Senior Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of WESCO International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned,
in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
Date: February 27, 2019
By: /s/ John J. Engel
John J. Engel
Chairman, President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of WESCO International, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned,
in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
Date: February 27, 2019
By: /s/ David S. Schulz
David S. Schulz
Senior Vice President and Chief Financial Officer
THIS PAGE INTENTIONALLY LEFT BLANK
90 WESCO International, Inc.
NON-GAAP RECONCILIATIONS
(Dollars in millions, except for diluted EPS)
Adjusted net income attributable to
WESCO International, Inc.:
Net income attributable to WESCO International, Inc.
Loss on debt redemption, net of tax
Income tax expense for the Tax Cuts and Jobs Act of 2017 (TCJA)
Adjusted net income attributable
to WESCO International, Inc.
Adjusted diluted EPS:
Diluted share count
Adjusted diluted EPS 1
Adjusted stockholders’ equity:
Stockholders’ equity 2
Add: Loss on debt redemption, net of tax
Add: Income tax expense for TCJA
Adjusted stockholders’ equity
2014
2015
2016
2017
2018
276
–
–
276
53.3
5.18
1,882
–
–
1,882
211
–
–
211
50.4
4.18
1,728
–
–
1,728
102
82
–
184
48.3
3.80
1,964
82
–
2,046
164
–
26
190
48.4
3.93
2,116
82
26
2,224
227
–
–
227
47.2
4.82
2,130
82
26
2,238
1 2016 excludes the third quarter loss per diluted share on debt redemption of $1.70, net of tax, based on 48.7 million diluted shares. 2017 excludes the income tax expense related to
the application of the TCJA.
2 As described in Note 2 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017, the Consolidated Balance
Sheet at December 31, 2016 was revised to correct certain financial statement line items, including stockholders’ equity.
NON-GAAP RECONCILIATIONS
(Dollars in millions, except percentages)
Free cash flow:
Cash provided by operations
Less: capital expenditures
Add: non-recurring pension contribution
Free cash flow
Adjusted net income attributable
to WESCO International, Inc.
Free cash flow as a % of adjusted net income
Return on invested capital (ROIC):
Income from operations 1
Tax effect (year-end effective tax rate) 2
Tax effected income from operations
Par debt
December 31 of the prior year
March 31 of the current year
June 30 of the current year
September 30 of the current year
December 31 of the current year
Average par debt
Stockholders’ equity
December 31 of the prior year (adjusted) 3 4
Less: debt discount
Stockholders’ equity, net of debt discount
March 31 of the current year (adjusted) 3 4
Less: debt discount
Stockholders’ equity, net of debt discount
June 30 of the current year (adjusted) 3 4
Less: debt discount
Stockholders’ equity, net of debt discount
September 30 of the current year (adjusted) 3 4
Less: debt discount
Stockholders’ equity, net of debt discount
December 31 of the current year (adjusted) 3 4
Less: debt discount
Stockholders’ equity, net of debt discount
Average stockholders’ equity, net of debt discount
Average par debt and stockholders’ equity
ROIC
2018 Annual Report 91
2014
2015
2016
2017
2018
251
(21)
–
230
276
84%
465
132
334
1,662
1,676
1,741
1,689
1,586
1,671
1,765
175
1,590
1,774
174
1,600
1,890
173
1,717
1,909
172
1,737
1,882
170
1,711
1,671
3,342
10.0%
283
(22)
–
261
211
125%
373
117
256
1,586
1,557
1,653
1,667
1,665
1,626
1,882
170
1,711
1,837
169
1,669
1,866
167
1,699
1,760
166
1,594
1,728
164
1,563
1,647
3,273
7.8%
300
(18)
–
282
184
154%
331
76
254
1,665
1,621
1,589
1,474
1,403
1,550
1,728
164
1,563
1,893
163
1,730
1,943
162
1,781
1,993
–
1,993
2,046
–
2,046
1,823
3,373
7.5%
149
(21)
–
128
190
67%
319
79
240
1,403
1,355
1,375
1,424
1,363
1,384
2,046
–
2,046
2,093
–
2,093
2,131
–
2,131
2,143
–
2,143
2,224
–
2,224
2,128
3,511
6.8%
297
(36)
–
261
227
116%
353
70
283
1,363
1,348
1,310
1,272
1,233
1,305
2,224
–
2,224
2,241
–
2,241
2,274
–
2,274
2,340
–
2,340
2,238
–
2,238
2,263
3,568
7.9%
1 Effective January 1, 2018, WESCO adopted Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The adoption of this ASU resulted in the reclassification of $1.8 million, $1.5 million, $1.2 million and
$0.9 million from selling, general and administrative expenses to net interest and other in the Consolidated Statements of Income and Comprehensive Income (Loss) for the years
ended December 31, 2017, 2016, 2015 and 2014, respectively.
2 Adjusted for the income tax impact of applying the TCJA in 2017.
3 Adjusted for the impact of the loss on debt redemption in 2016 and income tax expense from the TCJA in 2017.
4 Adjusted for the revision to the Consolidated Balance Sheet at December 31, 2016, as described in Note 2 of the Notes to Consolidated Financial Statements in the Annual Report
on Form 10-K for the year ended December 31, 2017.
92 WESCO International, Inc.
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
TRANSFER AGENT AND REGISTRAR
WESCO International, Inc.
Suite 700
225 West Station Square Drive
Pittsburgh, PA 15219-1122
Phone: 412-454-2200
www.wesco.com
INVESTOR RELATIONS
For questions regarding WESCO, contact Investor Relations
at investorrelations@wesco.com. A copy of the Company’s
Annual Report on Form 10-K or other financial information may
be requested through our website (www.wesco.com) or
by contacting Investor Relations.
COMMON STOCK
WESCO International, Inc. is listed on the New York Stock Exchange
under the ticker symbol WCC.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on
May 30, 2019, at 2:00 p.m., E.D.T., at:
Hyatt Regency Pittsburgh International Airport
1111 Airport Boulevard
Pittsburgh, PA 15231
Computershare
P.O. Box 505000
Louisville, KY 40233
Toll free: 877-264-3927
TDD for Hearing Impaired: 800-231-5469
Foreign Shareholders: 201-680-6578
TDD Foreign Shareholders: 201-680-6610
Website address:
www.computershare.com/investor
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Pittsburgh, PA
CERTIFICATIONS TO THE NYSE AND THE SEC
On June 8, 2018, the Company submitted its CEO Certification
to the NYSE under NYSE Rule 303A.12(a). Also, any CEO/CFO
certifications required to be filed with the SEC, including the Section
302 certifications, are filed by the Company as exhibits to its Annual
Report on Form 10-K.
An online version of the Annual Report is available
at www.wesco.com
CORPORATE GOVERNANCE
BOARD OF DIRECTORS
(left to right)
Sandra Beach Lin
Former Chief Executive Officer
Calisolar, Inc.
Lynn M. Utter
Chief Talent Officer
Atlas Holdings
Steven A. Raymund
Former Chairman and
Chief Executive Officer
Tech Data Corporation
John J. Engel
Chairman, President, and
Chief Executive Officer
WESCO International, Inc.
John K. Morgan
Former Chairman, President,
and Chief Executive Officer
Zep, Inc.
Matthew J. Espe
Operating Partner
Advent International
Easwaran Sundaram
Executive Vice President
and Chief Digital &
Technology Officer
Jet Blue Airways Corporation
James L. Singleton
Chairman and
Chief Executive Officer
Cürex Group Holdings, LLC
Bobby J. Griffin
Former President
International Operations
Ryder System, Inc.
EXECUTIVE OFFICERS
(as of December 31, 2018)
John J. Engel
Chairman, President, and
Chief Executive Officer
Diane E. Lazzaris
Senior Vice President and
General Counsel
Robert Minicozzi
Vice President and
Chief Information Officer
David S. Schulz
Senior Vice President and
Chief Financial Officer
Christine A. Wolf
Senior Vice President and
Chief Human Resources Officer
WESCO International, Inc.
Suite 700
225 West Station Square Drive
Pittsburgh, Pennsylvania 15219-1122
Phone: 412-454-2200
www.wesco.com
© Copyright by WESCO 2018– 2019.
All rights reserved.
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appropriate, socially beneficial and economically viable management of the
world’s forests. This report is printed on paper made from mixed sources of
post-industrial recycled and virgin fiber.