WESCO International, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. WESCO acquired Anixter on June 22, 2020; 2020 results include Anixter only from the acquisition date, limiting year-over-year comparability. The combined company operates through Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility & Broadband Solutions (UBS).
Financial results and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $12.326 billion | $8.359 billion |
| Gross margin | 18.9% reported; 19.4% excluding specified adjustments | 18.9% |
| SG&A as a percentage of sales | 15.1% reported; 14.2% adjusted | 14.0% |
| Operating income | $347.0 million reported; $522.0 million adjusted | $346.2 million reported; $349.3 million adjusted |
| Net income attributable to common stockholders | $70.4 million; diluted EPS $1.51 | $223.4 million; diluted EPS $5.14 |
| Operating cash flow | $543.9 million | $224.4 million |
| Capital expenditures | $56.7 million | $44.1 million |
Adjusted figures are non-GAAP measures. 2020 adjustments include merger costs, acquisition-related fair-value adjustments, an inventory accounting adjustment, a gain on asset sale, and related tax effects. Adjusted common-stockholder net income was $203.6 million and adjusted diluted EPS was $4.37, versus $225.9 million and $5.20 in 2019. The increase in reported sales primarily reflects the acquisition, while the pandemic weakened demand in some markets.
- Segments: EES sales were $5.480 billion (+12.7%), CSS $3.323 billion (+265.4%), and UBS $3.523 billion (+36.1%). Acquisition effects drove much of the segment growth. Adjusted EBITDA margins were 5.4% for EES, 8.7% for CSS, and 7.5% for UBS.
- Fourth quarter: Sales were $4.129 billion versus $2.099 billion in Q4 2019; operating income was $92.8 million versus $83.8 million. Net income attributable to common stockholders was $5.6 million, or diluted EPS of $0.11, versus $53.1 million and $1.26. Q4 results included an inventory-related adjustment; the filing’s annual and quarterly disclosures report different adjustment amounts.
- Cash flow: Management reported free cash flow of $586.1 million, a non-GAAP measure that adds back $98.9 million of merger-related expenditures to operating cash flow less capital expenditures. Investing cash outflow was $3.735 billion, largely reflecting the Anixter acquisition; financing cash inflow was $3.481 billion.
- Balance sheet and liquidity: At year-end, cash was $449.1 million, total assets $11.880 billion, and stockholders’ equity $3.336 billion. Debt was $4.976 billion, compared with $1.293 billion in 2019. The company reported $801.5 million available under its revolving facility and $75.0 million under its receivables facility, and stated total liquidity of about $1.1 billion using its liquidity measure. Pro forma net leverage was 5.3x adjusted EBITDA.
Material changes, outlook, and risks
- The Anixter transaction materially increased scale and debt. WESCO issued $2.825 billion of senior notes, including notes bearing 7.125% due 2025 and 7.250% due 2028, and issued Series A preferred stock with an initial 10.625% dividend rate. Preferred dividends were $30.1 million in 2020.
- Interest expense rose to $226.6 million from $65.7 million, principally due to merger financing. The company redeemed its $500 million 5.375% notes due 2021 on January 14, 2021, funded with revolving and receivables-facility borrowings. Approximately $1.6 billion of scheduled debt principal fell due over 2021–2023, based on the year-end schedule.
- Management expected COVID-19-related negative effects to continue through at least Q1 2021, potentially longer; it gave no specific sales or earnings guidance. It cited demand weakness, project delays or cancellations, supply-chain and transportation disruption, and customer payment risk. UBS was comparatively resilient because many utility customers remained operational.
- Management expected 2021 capital expenditures of $100–$120 million, particularly for systems integration and digital tools, and anticipated directing excess liquidity toward debt reduction and merger integration. It stated that cash from operations and financing should meet needs for at least 12 months.
- WESCO agreed to divest certain Canadian legacy businesses under a Competition Bureau consent agreement. They had approximately $120 million of 2019 sales; the company sold the businesses in February 2021 for about $52 million and expected to use proceeds to repay debt.
- A fourth-quarter inventory cost-absorption error led to a $60.3 million inventory reduction, partly offset by a $33.9 million goodwill increase and $12.0 million decrease in deferred tax liabilities. The annual income statement impact was an $18.9 million increase in cost of goods sold; the quarterly table separately cites a $23.3 million adjustment. Management said the error was not material to the current or prior periods.
- No goodwill impairment was recorded, but EES goodwill fair value exceeded carrying value by less than 10% in the interim assessment, leaving it more exposed to adverse conditions. Goodwill was $3.187 billion at year-end. The audit identified interim goodwill impairment testing and Anixter customer-relationship intangible valuation as critical audit matters.
- Other key risks include integration and synergy execution, high leverage and restrictive covenants, pandemic uncertainty, competition and pricing pressure, supplier concentration, project timing, foreign currency, cyber and systems risks, and legal, tax, and environmental contingencies. Management did not expect pending litigation to materially affect financial condition or liquidity, though a period’s results could be affected.
Important facts for investors to verify
- Reconcile reported and adjusted results, including the distinct annual and quarterly inventory-adjustment disclosures and the assumptions underlying non-GAAP measures.
- Track post-acquisition sales and margins on a comparable basis, integration costs, realized synergies, and EES goodwill headroom.
- Review debt maturities, refinancing and interest costs, covenant headroom, and progress toward reducing the 5.3x pro forma leverage ratio.
- Confirm the impact of the Canadian divestitures and whether proceeds were applied to debt as planned.
- Monitor pandemic effects on customer demand, projects, supply availability, collections, and cash generation; compare actual 2021 capital spending with the stated range.
- Note that management reported effective disclosure controls and internal control over financial reporting, but Anixter—representing 30% of consolidated assets and 37% of sales—was excluded from the 2020 internal-control assessment.