WESCO INTERNATIONAL, INC. 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 2019 financial results reflect record sales with growth in our end markets and geographies, a challenging pricing environment, and effective capital deployment. Sales increased$182.3 million , or 2.2%, over the prior year. Foreign exchange rates and the number of workdays negatively impacted net sales by 0.8% and 0.4%, respectively, and were partially offset by the positive 0.8% impact from acquisitions, resulting in organic sales growth of 2.6%. Cost of goods sold as a percentage of net sales was 81.1% and 80.8% in 2019 and 2018, respectively. Operating income was$346.2 million for 2019, compared to$352.4 million for 2018. Adjusted for$3.1 million of transaction costs related to our merger with Anixter, announced onJanuary 10, 2020 , operating income was$349.3 million for 2019. Net income attributable toWESCO International for 2019 and 2018 was$223.4 million and$227.3 million , respectively. Earnings per diluted share attributable toWESCO International was$5.14 in 2019, based on 43.5 million diluted shares, compared with earnings per diluted share of$4.82 in 2018, based on 47.2 million diluted shares. Excluding the impact of the merger-related transaction costs of$0.06 , adjusted earnings per diluted share for 2019 was a record$5.20 . 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 2019 were from customers inthe United States and 25% were from international customers, primarily inCanada . 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 37% 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 11% 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. We expect to finance the Anixter merger utilizing new debt issuances, borrowings under our existing Receivables Facility and a new asset based revolving credit facility. We also expect to offer additional shares of WESCO common stock and / or other equity or equity-linked securities to fund a portion of the consideration for the merger. Cash Flow We generated$224.4 million in operating cash flow during 2019. Cash provided by operating activities included net income of$222.2 million , adjustments to net income totaling$83.2 million , which were offset by changes in assets and liabilities of$81.0 million . Investing activities primarily included$44.1 million of capital expenditures,$27.6 million to acquireSylvania Lighting Services Corp. ("SLS") and$16.8 million of proceeds from the sale of assets. Financing activities consisted of borrowings and repayments of$715.4 million and$767.4 million , respectively, related to our Revolving Credit Facility, borrowings and repayments of$590.0 million and$450.0 million , respectively, related to our Receivables Facility,$24.8 million applied to fully repaying our Term Loan Facility, as well as net repayments on our various international lines of credit of$5.0 million . Additionally, financing activities for 2019 included the repurchase of$150.0 million of the Company's common stock pursuant to the share repurchase plan announced onDecember 13, 2017 and amended onOctober 31, 2018 . Free cash flow for the years endedDecember 31, 2019 and 2018 was$180.3 million and$260.5 million , respectively. The following table sets forth the components of free cash flow: Twelve Months Ended December 31, 2019 2018 (In millions) Cash flow provided by operations$ 224.4 $ 296.7 Less: Capital expenditures (44.1 ) (36.2 ) Free cash flow$ 180.3 $ 260.5 18
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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 ofDecember 31, 2019 , we had$563.8 million in total available borrowing capacity under our Revolving Credit Facility, which was comprised of$381.4 million of availability under theU.S. sub-facility and$182.4 million of availability under the Canadian sub-facility. Available borrowing capacity under our Receivables Facility was$185.0 million . These debt facilities were amended and restated inSeptember 2019 . The Revolving Credit Facility and the Receivables Facility mature inSeptember 2024 andSeptember 2022 , respectively. See Note 10 of the Notes to Consolidated Financial Statements for further information regarding these facilities. 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 inthe 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 to 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. 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. 19
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Goodwill and Indefinite-Lived Intangible AssetsGoodwill 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, including expected operating margin and discount rate, 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 ofDecember 31, 2019 , 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 5 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 tax expense or benefit may be incurred; however, we do not believe such amount would be material. The provisions of the TCJA also introducedU.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. 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. 20
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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:
Year Ended December 31,
2019 2018 2017
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold (excluding depreciation and
amortization) 81.1 80.8 80.7
Selling, general and administrative expenses 14.0 14.1 14.3 Depreciation and amortization 0.8 0.8 0.8 Income from operations 4.1 4.3 4.2 Net interest and other 0.7 0.9 0.9 Income before income taxes 3.4 3.4 3.3 Provision for income taxes 0.7 0.6 1.2 Net income attributable to WESCO International 2.7 % 2.8 %
2.1 %
2019 Compared to 2018Net Sales . Net sales in 2019 increased 2.2% to$8.4 billion , compared with$8.2 billion in 2018. Organic sales for 2019 grew by 2.6% as foreign exchange rates and the number of workdays negatively impacted net sales by 0.8% and 0.4%, respectively, and were partially offset by the positive 0.8% impact from acquisitions. The following table sets forth organic sales growth: Twelve Months EndedDecember 31 , Organic Sales Growth: 2019 Change in net sales 2.2 % Less: Impact from acquisitions 0.8 % Less: Impact from foreign exchange rates (0.8 )% Less: Impact from number of workdays (0.4 )% Organic sales growth 2.6 % 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 for 2019 was$6.8 billion , compared to$6.6 billion for 2018. Cost of goods sold as a percentage of net sales was 81.1% and 80.8% in 2019 and 2018, respectively. Cost of goods sold as a percentage of net sales was negatively impacted by a challenging pricing environment, as well as business mix. 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 for 2019 were$1.2 billion , an increase of$21.2 million , or 1.8%, from 2018. SG&A expenses as a percentage of net sales improved to 14.0% in 2019 from 14.1% in 2018. The increase in SG&A expenses reflects the impact of the SLS acquisition and transactions costs related to our merger with Anixter, partially offset by lower variable payroll expenses and the absence of a bad debt charge that was recorded in the prior year. SG&A payroll expenses for 2019 of$812.9 million increased by$8.7 million compared to 2018. The increase in SG&A payroll expenses was primarily due to wage inflation and the impact of the SLS acquisition, which were partially offset by lower variable compensation expense and benefit costs. The remaining SG&A expenses for 2019 of$360.2 million increased by$12.4 million compared to 2018. The increase in the remaining SG&A expenses was primarily due to the impact of the SLS acquisition. 21
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Depreciation and Amortization. Depreciation and amortization decreased$0.9 million to$62.1 million in 2019, compared with$63.0 million in 2018. Income from Operations. Income from operations decreased by$6.2 million to$346.2 million in 2019, compared to$352.4 million in 2018. Income from operations as a percentage of net sales was 4.1% and 4.3% in 2019 and 2018, respectively. Adjusted for merger-related transaction costs of$3.1 million , income from operations was$349.3 million for 2019, or 4.2% of net sales. Net Interest and Other. Net interest and other totaled$64.2 million in 2019, compared with$71.4 million in 2018, a decrease of 10.2%. The resolution of transfer pricing matters associated with the Canadian taxing authority resulted in non-cash interest income of$3.7 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , net interest and other includes a foreign exchange loss of$3.0 million from the remeasurement of a financial instrument, as well as accelerated amortization of debt discount and debt issuance costs totaling$0.8 million due to early repayments of our then outstanding term loan facility. Income Taxes. Our effective tax rate was 21.2% in 2019 compared to 19.8% in 2018. The higher effective tax rate in the current year is primarily due to the full application of the international provisions ofU.S. tax reform. Net Income. Net income decreased by$3.2 million , or 1.4%, to$222.2 million in 2019, compared to$225.4 million in 2018. Net Loss Attributable to Noncontrolling Interests. Net loss attributable to noncontrolling interests in 2019 and 2018 was$1.2 million and$2.0 million , respectively. Net Income Attributable toWESCO International . Net income and earnings per diluted share attributable toWESCO International were$223.4 million and$5.14 per share, respectively, in 2019, compared with$227.3 million and$4.82 per share, respectively, in 2018. Adjusted net income and earnings per diluted share attributable toWESCO International were$225.9 million and$5.20 per share, respectively, for the year endedDecember 31, 2019 . The following table sets forth adjusted net income attributable toWESCO International and adjusted earnings per diluted share: Twelve Months Ended December 31, December 31, Adjusted Income from Operations: 2019 2018 Income from operations$ 346.2 $ 352.4 Merger-related transaction costs 3.1 -
Adjusted income from operations
Twelve Months Ended
December 31 , December 31 ,
Adjusted Provision for Income Taxes: 2019 2018
Provision for income taxes $ 59.9 $ 55.7
Income tax effect of merger-related transaction costs 0.6 -
Adjusted provision for income taxes $ 60.5 $ 55.7
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Twelve Months Ended
December 31 , December 31 ,
Adjusted Earnings Per Diluted Share: 2019 2018
Adjusted income from operations $ 349.3 $
352.4
Net interest and other 64.1
71.4
Adjusted income before income taxes 285.2
281.0
Adjusted provision for income taxes 60.5
55.7
Adjusted net income 224.7
225.3
Net loss attributable to noncontrolling interests (1.2 ) (2.0 ) Adjusted net income attributable to WESCO International, Inc. $ 225.9 $ 227.3 Diluted shares 43.5 47.2 Adjusted earnings per diluted share $ 5.20 $
4.82
Note: Income from operations, the provision for income taxes and earnings per diluted share for the year endedDecember 31, 2019 are adjusted to exclude$3.1 million of Anixter merger-related transaction costs and the related income tax effect. We believe that these non-GAAP financial measures provide a better understanding of our financial results on a comparable basis. 2018 Compared to 2017Net 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: Twelve Months EndedDecember 31 , Organic Sales Growth: 2018 Change in net sales 6.5 % Less: Impact from acquisitions - % Less: Impact from foreign exchange rates 0.3 % Less: Impact from number of workdays - % Organic sales growth 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. 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. 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. 23
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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 theU.S. federal statutory income tax rate from 35% to 21%, effectiveJanuary 1, 2018 , as well as 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 toWESCO International . Net income and earnings per diluted share attributable toWESCO 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. Liquidity and Capital Resources Total assets were$5.0 billion and$4.6 billion atDecember 31, 2019 and 2018, respectively. Total liabilities atDecember 31, 2019 and 2018 were$2.8 billion and$2.5 billion , respectively. Total stockholders' equity was$2.3 billion and$2.1 billion atDecember 31, 2019 and 2018, respectively. The following table sets forth our outstanding indebtedness: As of December 31, 2019 2018 (In millions) International lines of credit$ 26.3 $
30.8
Term Loan Facility, less debt discount of$0.2 in 2018 -
24.6
Accounts Receivable Securitization Facility 415.0 275.0 Revolving Credit Facility - 51.6 5.375% Senior Notes due 2021 500.0 500.0 5.375% Senior Notes due 2024 350.0 350.0 Capital leases 1.3 1.1 Total debt 1,292.6 1,233.1 Less unamortized debt issuance costs (8.8 ) (9.6 ) Less short-term debt and current portion of long-term debt (26.7 ) (56.2 ) Total long-term debt$ 1,257.1 $ 1,167.3 24
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The required annual principal repayments for all indebtedness for the next five years and thereafter, as ofDecember 31, 2019 , is set forth in the following table: (In millions) 2020$ 26.7 2021 500.9 2022 415.0 2023 - 2024 350.0 Thereafter -
Total payments on debt
Our liquidity needs generally arise from fluctuations in our working capital requirements, capital expenditures, acquisitions and debt service obligations. As ofDecember 31, 2019 , we had$563.8 million in available borrowing capacity under our Revolving Credit Facility and$185.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of$74.4 million , provided liquidity of$823.2 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 2.8 and 2.7 as ofDecember 31, 2019 and 2018, respectively. In addition, we are in compliance with all covenants and restrictions contained in our debt agreements as ofDecember 31, 2019 . The following table sets forth the Company's financial leverage ratio as ofDecember 31, 2019 and 2018: Twelve months ended December 31, 2019 December 31, 2018 (In millions, except ratios) Net income $ 222.2 $ 225.4 Provision for income taxes 59.9 55.7 Net interest and other 64.2 71.4 Depreciation and amortization 62.1 63.0 EBITDA $ 408.4 $ 415.5 December 31, 2019 December 31, 2018 Short-term borrowings and current debt $ 26.7 $
56.2
Long-term debt 1,257.1
1,167.3
Debt discount and debt issuance costs(1) 8.8
9.6
Total debt 1,292.6
1,233.1
Less: cash and cash equivalents 150.9 96.3 Total debt, net of cash $ 1,141.7 $ 1,136.8 Financial leverage ratio 2.8 2.7
(1) 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.
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AtDecember 31, 2019 , we had cash and cash equivalents totaling$150.9 million , of which$111.0 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 years endedDecember 31, 2019 and 2018, we repatriated a portion of the previously taxed earnings attributable to our foreign 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 tax expense or benefit may be incurred; however, we do not believe such amount would be material. Over the next several quarters, we plan to closely manage working capital, and it is expected that excess cash and amounts available under our Receivables Facility will be used to fund our merger with Anixter. Between signing and closing of the Anixter merger, we expect to use excess cash to repay indebtedness. After closing, it is expected that excess liquidity will be directed primarily at debt reduction and costs related to the integration process. We remain focused on maintaining ample liquidity and credit availability. We anticipate capital expenditures in 2020 to be similar to 2019. We believe our balance sheet and ability to generate ample cash flow provide 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 of our foreign subsidiaries have entered into uncommitted lines of credit, some of which are 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 6.32% and 8.78% atDecember 31, 2019 and 2018, respectively. Term Loan Facility OnDecember 12, 2012 , WESCO Distribution, asU.S. borrower,WDCC Enterprises Inc. ("WDCC" and together with WESCO Distribution, the "Borrowers"), as Canadian borrower, andWESCO International entered into a Term Loan Agreement (the "Term Loan Agreement") among WESCO Distribution, WDCC, the Company, the lenders party thereto andCredit 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 ofCAD150 million , issued at a 2.0% discount, and (ii) aU.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 ofEECOL , 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 could 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 inU.S. dollars being calculated for any incremental term loan denominated in Canadian dollars. OnNovember 19, 2013 , theBorrowers andWESCO 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 onU.S. term loans by 0.50% and the LIBOR floor applicable to theU.S. sub-facility from 1.00% to 0.75%. The modified pricing terms were effectiveDecember 13, 2013 . OnNovember 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'sU.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 theU.S. sub-facility. The Canadian sub-facility was fully repaid in 2015 and the remaining amount outstanding under theU.S. sub-facility was fully repaid in the first quarter of 2019. Accounts Receivable Securitization Facility OnSeptember 26, 2019 , WESCO Distribution amended its accounts receivable securitization facility (the "Receivables Facility") pursuant to the terms and conditions of a Ninth Amendment to the Fourth Amended and Restated Receivables Purchase Agreement, dated as ofSeptember 26, 2019 (the "Receivables Amendment"), by and amongWESCO Receivables Corp. ("WESCO Receivables"), WESCO Distribution, the various purchaser groups from time to time party thereto andPNC Bank, National Association , as Administrator. The Receivables Amendment amended the amended and restated receivables purchase agreement entered into onSeptember 24, 2015 (the "Existing Receivables Purchase Agreement" and as amended by the Receivables Amendment, the "Receivables Purchase Agreement"). 26
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The Receivables Amendment increased the purchase limit under the Existing Receivables Purchase Agreement from$550 million to$600 million, with the opportunity to exercise an accordion feature that permits increases in the purchase limit of up to$200 million , extended the term of the Receivables Facility toSeptember 26, 2022 and added and amended certain defined terms. The interest rate spread and commitment fee of the Receivables Facility is 0.95% and 0.45%, respectively. Under the Receivables Facility, we sell, 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 we maintain control of the transferred receivables, the transfers do not qualify for "sale" treatment. As a result, the transferred receivables and related secured borrowings remain on the balance sheet. We have 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. As ofDecember 31, 2019 and 2018, accounts receivable eligible for securitization totaled$809.5 million and$758.3 million , respectively. The Consolidated Balance Sheets as ofDecember 31, 2019 and 2018 include$415.0 million and$275.0 million , respectively, of account receivable balances legally sold to third parties, as well as borrowings for equal amounts. AtDecember 31, 2019 , the interest rate for this facility was approximately 2.0%. Revolving Credit Facility OnSeptember 26, 2019 ,WESCO International , WESCO Distribution and certain other subsidiaries of the Company entered into a$600 million revolving credit facility (the "Revolving Credit Facility") as a replacement of its existing revolving credit facility entered into onSeptember 24, 2015 . The Revolving Credit Facility contains a letter of credit sub-facility of up to$125 million , pursuant to the terms and conditions of a Third Amended and Restated Credit Agreement, dated as ofSeptember 26, 2019 (the "Credit Agreement"). The Revolving Credit Facility contains an accordion feature allowing WESCO Distribution to request increases to the borrowing commitments under the Revolving Credit Facility of up to$200 million in the aggregate, subject to customary conditions. The Revolving Credit Facility matures inSeptember 2024 and is collateralized by (i) substantially all assets of WESCO Distribution and its 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 WESCO Distribution's Receivables Facility, and (ii) substantially all assets of WESCOCanada and the other Canadian Borrowers, other than, among other things, real property, in each case, subject to customary exceptions and limitations. The obligations of WESCO Distribution and the otherU.S. Borrowers under the Revolving Credit Facility have been guaranteed by the Company and certain of WESCO Distribution's subsidiaries. The obligations of WESCOCanada and the other Canadian Borrowers under the Revolving Credit Facility have been guaranteed by certain subsidiaries of WESCOCanada and the other Canadian Borrowers. 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 1.50% for LIBOR-based borrowings and 0.25% and 0.50% for prime rate-based borrowings. AtDecember 31, 2019 , the interest rate for this facility was approximately1.6%. The Credit Agreement requires compliance with conditions precedent that must be satisfied prior to any borrowing as well as ongoing compliance with certain customary affirmative and negative covenants. The Credit Agreement contains customary events of default. During 2019, WESCO borrowed$715.4 million under the Revolving Credit Facility and made repayments in the aggregate amount of$767.4 million . During 2018, aggregate borrowings and repayments were$473.1 million and$433.5 million , respectively. We had$563.8 million available under the Revolving Credit facility atDecember 31, 2019 , after giving effect to$28.4 million of outstanding letters of credit,$36.1 million of surety bonds, and$7.8 million of other reserves, as compared to$515.9 million available under the Revolving Credit facility atDecember 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. 5.375% Senior Notes due 2021 InNovember 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 onNovember 26, 2013 betweenWESCO International andU.S. Bank National Association , as trustee. The 2021 Notes are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis byWESCO International . The 2021 Notes bear interest at a stated rate of 5.375%, payable semi-annually in arrears onJune 15 andDecember 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 onDecember 15, 2021 . The net proceeds of the 2021 Notes were used to prepay a portion of theU.S. sub-facility of the term loan due 2019. 27
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Under the terms of a registration rights agreement dated as ofNovember 26, 2013 among WESCO Distribution,WESCO International andMerrill Lynch, Pierce, Fenner & Smith Incorporated , as the representative of the initial purchasers of the 2021 Notes,WESCO Distribution andWESCO 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 onJune 12, 2014 and the exchange offer expired onJuly 17, 2014 . At any time WESCO Distribution may redeem all or a part of the 2021 Notes. On and afterDecember 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 InJune 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 onJune 15, 2016 among WESCO Distribution, as issuer,WESCO International , as parent guarantor, andU.S. Bank National Association , as trustee. The 2024 Notes are unsecured senior obligations of WESCO Distribution and are guaranteed on a senior unsecured basis byWESCO International . The 2024 Notes bear interest at a rate of 5.375% per annum, payable semi-annually in arrears onJune 15 andDecember 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 onJune 15, 2024 . The Company used the net proceeds to redeem its 6.0% Convertible Senior Debentures due 2029 onSeptember 15, 2016 . Under the terms of a registration rights agreement dated as ofJune 15, 2016 among WESCO Distribution, as the issuer,WESCO International , as parent guarantor, andGoldman, Sachs & Co. , as representative of the initial purchasers of the 2024 Notes,WESCO Distribution andWESCO 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 onDecember 28, 2016 and the exchange offer expired onJanuary 31, 2017 . At any time on or afterJune 15, 2019 , WESCO Distribution may redeem all or a part of the 2024 Notes. BetweenJune 15, 2019 andJune 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. BetweenJune 15, 2020 andJune 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. BetweenJune 15, 2021 andJune 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 afterJune 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. Covenant Compliance We were in compliance with all relevant covenants and restrictions contained in our debt agreements as ofDecember 31, 2019 . Cash Flow An analysis of cash flows for 2019 and 2018 follows: Operating Activities. Cash provided by operating activities for 2019 totaled$224.4 million , compared with$296.7 million of cash generated in 2018. Cash provided by operating activities included net income of$222.2 million and adjustments to net income totaling$83.2 million . Sources of cash in 2019 were generated from an increase in accounts payable of$23.5 million and a decrease in trade accounts receivable of$11.5 million . Primary uses of cash in 2019 included: an increase in inventories of$47.3 million ; a decrease in accrued payroll and benefit costs of$39.1 million ; an increase in other current and noncurrent assets of$28.8 million ; and, a decrease in other current and noncurrent liabilities of$0.8 million . 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 28
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a$8.7 million increase in trade accounts receivable 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 . Investing Activities. Net cash used in investing activities in 2019 was$60.8 million , compared with$34.1 million in 2018. Capital expenditures in 2019 of$44.1 million increased from$36.2 million in 2018 to support the growth of our business. Included in 2019 were payments of$27.6 million for the acquisition of SLS. Proceeds from the sale of assets were$16.8 million and$12.5 million in 2019 and 2018, respectively. Other investing activities in 2019 included$5.9 million of cash outflows. Net cash used in investing activities in 2018 was$34.1 million , compared with$5.3 million 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. Financing Activities. Net cash used in financing activities in 2019 was$109.8 million , compared with$275.1 million in 2018. During 2019, financing activities consisted of borrowings and repayments of$715.4 million and$767.4 million , respectively, related to our Revolving Credit Facility, borrowings and repayments of$590.0 million and$450.0 million , respectively, related to our Receivables Facility,$24.8 million applied to fully repaying our Term Loan Facility, as well as net repayments of$5.0 million related to our various international lines of credit. Additionally, financing activities for 2019 included the repurchase of$150.0 million of the Company's common stock pursuant to the share repurchase plan announced onDecember 13, 2017 and amended onOctober 31, 2018 . 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 net repayments of$1.4 million related to our various 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 onDecember 13, 2017 and amended onOctober 31, 2018 . Contractual Cash Obligations and Other Commercial Commitments The following table summarizes our contractual obligations atDecember 31, 2019 , including interest, and the effect such obligations are expected to have on liquidity and cash flow in future periods. 2020 2021 to 2022 2023 to 2024 2025 - After Total (In millions) Contractual cash obligations (including interest):
Debt, excluding debt issuance
- $ 1,292.6 costs
Interest on indebtedness(1) 55.7 78.0 28.2 - 161.9 Non-cancelable operating leases 72.9 111.0 60.6 32.6 277.2 Taxes due on deemed repatriation 2.0 4.6 10.4 19.9 36.8 of foreign earnings(2) Total contractual cash$ 157.3 $ 1,109.6 $ 449.2 $ 52.5$ 1,768.6 obligations (1) Interest on the variable rate debt was calculated using the rates and balances outstanding atDecember 31, 2019 .
(2) Includes the
provisions of the TCJA, net of available foreign tax credits, that will be
paid in installments.
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 less than$0.1 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 the year endedDecember 31, 2019 , pricing related to inflation impacted our sales by 1% to 2%. 29
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Seasonality
Our operating results are not significantly affected by seasonal factors. Sales during the first quarter are usually affected by a reduced level of activity. Sales during the second, third and fourth quarters are generally 6% to 9% 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risks. Foreign Currency Risks Approximately 25% of our sales in 2019 were from our foreign subsidiaries located inNorth America ,South America ,Europe ,Africa , and theAsia Pacific region 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 theU.S. dollar. Furthermore, to the extent that we engage in international sales denominated inU.S. dollars, an increase in the value of theU.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 ofDecember 31, 2019 , approximately 66% 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 are comprised of the Revolving Credit Facility, Receivables Facility, and the international lines of credit. The fair value of these debt instruments atDecember 31, 2019 approximated carrying value. 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 theCanadian 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 3.2% atDecember 31, 2019 . An increase in the discount rate of one percent would decrease the projected benefit obligations by$26.0 million , and a decrease in the discount rate of one percent would increase the projected benefit obligations by$35.3 million . The impact of a change in the discount rate of one percent would be either a charge of$2.3 million or a credit of$1.6 million to earnings in the following year. 30
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