WESCO INTERNATIONAL INC (WCC)

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. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in Item 1A of this Annual Report on Form 10-K. In this Item 7, “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.

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), our discussion and analysis of financial condition and results of operations includes certain non-GAAP financial measures, which are defined further below. These financial measures include organic sales growth, earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, adjusted EBITDA margin, financial leverage, adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense (income), adjusted provision for income taxes, adjusted income before income taxes, adjusted net income, adjusted net income attributable to WESCO International, Inc., adjusted net income attributable to common stockholders, and adjusted earnings per diluted share. We believe that these non-GAAP measures are helpful to users of our financial statements as they provide a better understanding of our financial condition and results of operations on a comparable basis. Additionally, certain non-GAAP measures either focus on or exclude items impacting comparability of results, allowing users to more easily compare our financial performance from period to period. Management uses certain non-GAAP financial measures in its evaluation of the performance of the Company’s operating segments and in the determination of incentive compensation. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.

Company Overview

Wesco, headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.

We employ approximately 20,000 people, maintain relationships with more than 35,000 suppliers, and serve nearly 140,000 customers worldwide. With millions of products, end-to-end supply chain services, and leading digital capabilities, we provide innovative solutions to meet customer needs across commercial and industrial businesses, contractors, government agencies, educational institutions, telecommunications providers, utilities, and technology companies. Our innovative value-added solutions include supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting and labeling, limited assembly of products and installation enhancement. We operate more than 700 sites, including distribution centers, fulfillment centers, and sales offices, in approximately 50 countries, providing a local presence for customers and a global network to serve multi-location businesses and global corporations.

We have operating segments comprising three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”). These operating segments are equivalent to our reportable segments. See Item 1, “Business” in this Annual Report on Form 10-K for a description of each of our reportable segments and their business activities.

Overall Financial Performance

Our financial results for 2024 compared to 2023 reflect a single-digit decline in sales driven by a decrease in volume partially offset by the benefits of price inflation in certain segments. Additionally, financial results were impacted by higher facilities costs, a loss on abandonment of assets, and higher IT costs, partially offset by the gain recognized on the divestiture of our WIS business, as well as lower professional services and consulting fees.

Net sales for 2024 decreased $566.4 million, or 2.5%, over the prior year. The decrease reflects estimated volume decline of approximately 2% driven primarily by a decrease in volume for the UBS segment, with a less significant decrease in the EES segment, partially offset by an increase in the CSS segment. The reduction also includes the effect of the divestiture of the Wesco Integrated Supply (“WIS”) business of 2.6% and the negative impact of fluctuations in foreign exchange rates of 0.2%. These negative factors were partially offset by the estimated impact of changes in price of approximately 1%, the favorable impact from the number of workdays of 0.8%, and the increase from the acquisition of Ascent, LLC (“Ascent”) of 0.1%. Cost of goods sold as a percentage of net sales was 78.4% for the current and prior year.

Income from operations was $1.2 billion for 2024, compared to $1.4 billion for 2023, a decrease of 13.0%. Income from operations as a percentage of net sales was 5.6% for the current year, compared to 6.3% for the prior year. Income from operations for 2024 includes digital transformation costs of $24.9 million, a loss on abandonment of assets of $17.8 million as a result of the write-off of certain capitalized cloud computing arrangement implementation costs relating to a third-party developed operations management software product that will no longer be utilized, restructuring costs of $12.1 million, and excise taxes on excess pension plan assets of $4.9 million. Adjusted for these amounts, income from operations was 5.9% of net

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sales in 2024. For 2023, income from operations was 6.6% of net sales, as adjusted for digital transformation costs of $36.1 million, merger-related and integration costs of $19.3 million, restructuring costs of $16.7 million, and accelerated trademark amortization of $1.6 million. For the year ended December 31, 2024, income from operations declined compared to the prior year due to a decline in sales, an increase in costs to operate our facilities and an increase in IT costs. These factors were partially offset by a decrease in professional services and consulting fees.

Cash Flow

Operating cash flow for 2024 was $1,101.2 million. Net cash provided by operating activities included net income of $719.4 million and non-cash adjustments to net income totaling $105.6 million, which primarily comprised depreciation and amortization, stock-based compensation expense, a loss on abandonment of assets, amortization of debt discount and debt issuance costs, and cloud computing arrangement amortization, partially offset by a gain resulting from the divestiture of our WIS business, as described in Note 5, “Acquisitions and Divestitures” and deferred income taxes. Operating cash flow was positively impacted by an increase in accounts payable of $329.5 million, primarily due to the timing of inventory purchases and payments to suppliers, an increase in other current and noncurrent liabilities of $93.3 million, primarily due to increases in federal income taxes payable, accrued interest payable, and operating lease liabilities, and an increase of $62.7 million in accrued payroll and benefits costs, driven by an increase in accrued salaries and wages and the reversion of excess pension plan assets from the settlement of the U.S. pension plan, partially offset by contributions to other pension plans. Operating cash flow was negatively impacted by an increase in other current and noncurrent assets of $142.6 million primarily due to increases in capitalized costs associated with developing cloud computing arrangements, supplier prepayments, and contract assets, and an increase in trade accounts receivable of $50.7 million due to the timing of receipts from customers.

Investing activities primarily included $354.9 million in proceeds from the divestiture of the WIS business, net of cash transferred, partially offset by $221.3 million paid in the aggregate to acquire Ascent, the entroCIM business (“entroCIM”), and Independent Electric Supply Inc. (“IES”), net of cash acquired, and $94.7 million of capital expenditures mostly consisting of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of locations.

Financing activities primarily comprised the redemption of our $1,500.0 million aggregate principal amount of 7.125% Senior Notes due 2025 (the “2025 Notes”), and proceeds of $900.0 million and $850.0 million related to the issuance of our 6.375% Senior Notes due 2029 (the “2029 Notes”) and our 6.625% Senior Notes due 2032 (the “2032 Notes” and, together with the 2029 Notes, the “2029 and 2032 Notes”), respectively. Additionally, financing activities comprised net repayments of $428.0 million related to our revolving credit facility (the “Revolving Credit Facility”), net repayments of $100.0 million related to our accounts receivable securitization facility (the “Receivables Facility”), and payment of total debt issuance costs of $26.6 million related to the issuance of the 2029 and 2032 Notes and amendments to the Revolving Credit Facility and Receivables Facility. Financing activities for 2024 also included $425.0 million of common stock repurchases, $81.5 million and $57.4 million of dividends paid to holders of our common stock and Series A Preferred Stock, respectively, and $30.9 million of payments for taxes related to the exercise and vesting of stock-based awards.

Financing Availability

As of December 31, 2024, we had $1.2 billion in total available borrowing capacity under our Revolving Credit Facility and $100.0 million of available borrowing capacity under our Receivables Facility. The Revolving Credit Facility and the Receivables Facility both mature in March 2027.

Critical Accounting 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 U.S. 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 that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations, including those related to goodwill and indefinite-lived intangible assets, defined benefit pension plans, and income taxes. 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 accounting estimates are the most critical to the understanding of our consolidated financial statements as they require subjective or complex judgments by management.

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Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually as of October 1, or more frequently if triggering events occur, indicating that their carrying values may not be recoverable. We test for goodwill impairment on a reporting unit level. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value as a basis for determining whether it is necessary to perform quantitative impairment tests. When performing a qualitative assessment we consider several factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant events such as changes in key personnel, changes in the composition or carrying amount of the net assets of a reporting unit, and changes in share price.

We will perform a quantitative impairment test if we bypass the qualitative assessment, or if based on the qualitative assessment, it is more likely than not that the fair value of each reporting unit or indefinite-lived intangible asset is less than the carrying amount. For the year ended December 31, 2024, we elected to bypass the qualitative assessments and performed annual quantitative impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter of 2024 by comparing the fair values of our reporting units and indefinite-lived intangible assets to their carrying values. As a result of these assessments, we determined that the fair values of our reporting units and indefinite-lived intangible assets continue to exceed their respective carrying amounts.

The determination of fair value involves significant management judgment, particularly as it relates to the underlying assumptions and factors around future expected revenues, operating margins and discount rate. We performed sensitivity analyses around certain of these assumptions in order to assess the reasonableness of the assumptions and resulting estimated fair values. Management applies its best judgment when assessing the reasonableness of financial projections. Fair values are sensitive to changes in underlying assumptions and factors, and as a result there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible assets impairment tests will prove to be an accurate prediction of future results.

See Note 2, “Accounting Policies” and Note 6, “Goodwill and Intangible Assets” of our Notes to Consolidated Financial Statements for additional disclosure regarding goodwill and indefinite-lived intangible assets.

Defined Benefit Pension Plans

Liabilities and expenses for defined benefit pension plans 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).

Liabilities for defined benefit pension plans are particularly sensitive to changes in the discount rate. At the end of each fiscal year, we determine the discount rate to measure our defined benefit pension plan liabilities at their present value. The discount rate reflects the current rate at which the defined benefit pension plan liabilities could be effectively settled at the end of the year. This rate is estimated using a yield curve based on corporate bond data, which we believe is consistent with observable market conditions and industry standards for developing spot rate curves. The consolidated weighted-average discount rate used to measure the projected benefit obligation of all plans was 4.8% and 4.4% at December 31, 2024 and 2023, respectively. As a sensitivity measure, the effect of a 50-basis-point decline in the assumed discount rate would result in no change in the expense for 2025, and an increase in our projected benefit obligations at December 31, 2024 of $21.0 million. The impact of a 50-basis-point increase in the assumed discount rate would result in a decrease in the expense for 2025 of approximately $2.0 million, and a decrease in our projected benefit obligations at December 31, 2024 of $19.0 million. Changes in the expected long-term rate of return on plan assets and assumptions relating to the employee workforce are less likely to have a material impact on the measurement of defined benefit pension plan liabilities.

See Note 2, “Accounting Policies” and Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements for additional disclosure regarding defined benefit pension plans.

Income Taxes

We recognize deferred tax assets consistent with amounts 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 taxable 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.

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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 recognized in the consolidated financial statements. We recognize interest and penalties related to uncertain tax benefits as part of interest expense and income tax expense, respectively.

See Note 2, “Accounting Policies” and Note 11, “Income Taxes” of our Notes to Consolidated Financial Statements for additional disclosure regarding income taxes.

Results of Operations

2024 Compared to 2023

Net Sales

The following table sets forth net sales and organic sales growth for the periods presented:

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 and divestitures for one year following the respective transaction, fluctuations in foreign exchange rates and number of workdays from the reported percentage change in consolidated net sales. Workday impact represents the change in the number of operating days period-over-period after adjusting for weekends and public holidays in the United States; 2024 had two more workdays compared to 2023.

Net sales were $21.8 billion for 2024 compared to $22.4 billion for 2023, a decrease of 2.5%. Adjusting for the decrease from the divestiture of the WIS business of 2.6%, the unfavorable impact from fluctuations in foreign exchange rates of 0.2%, the favorable impact from the number of workdays of 0.8%, and the increase from the acquisition of Ascent of 0.1%, organic sales for 2024 declined by 0.6%, reflecting an approximately 2% decline in volume, driven by declines in the UBS and EES segments, partially offset by a volume increase in the CSS segment, and the impact of changes in price, which favorably impacted organic sales by approximately 1%.

Cost of Goods Sold

Cost of goods sold for 2024 was $17.1 billion compared to $17.5 billion for 2023, a decrease of $0.4 billion. Cost of goods sold as a percentage of net sales was 78.4% for the current and prior year.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses primarily include payroll and payroll-related costs, shipping and handling, travel and entertainment, facilities, utilities, information technology expenses, professional and consulting fees, credit losses, gains (losses) on the sale, disposal, or abandonment of property and equipment, as well as real estate and personal property taxes. SG&A expenses for 2024 totaled $3,306.2 million versus $3,256.0 million for 2023, an increase of 1.5%. As a percentage of net sales, SG&A expenses were 15.2% and 14.5% for 2024 and 2023, respectively. SG&A expenses for 2024 include $24.9 million of digital transformation costs, a $17.8 million loss on abandonment of assets, $12.1 million of restructuring costs, and $4.9 million of excise taxes on excess pension plan assets. SG&A expenses for 2023 include digital transformation costs of $36.1 million, merger-related and integration costs of $19.3 million, and restructuring costs of $16.7 million. Adjusted for digital transformation costs, the loss on abandonment of assets, restructuring costs, and excise taxes on excess pension plan assets, SG&A expenses for 2024 were 14.9% of net sales for 2024. Adjusted for digital transformation costs, merger-related and integration costs, and restructuring costs, SG&A expenses for 2023 were 14.2% of net sales.

SG&A payroll and payroll-related expenses for 2024 of $2,049.5 million decreased by $2.9 million compared to 2023.

SG&A expenses not related to payroll and payroll-related costs for 2024 were $1,256.7 million, an increase of $53.1 million compared to 2023, which primarily reflects higher costs to operate our facilities of $28.0 million, an increase of $20.5 million in other income and deductions, driven by the loss on abandonment of assets, an increase of $12.7 million in IT costs, and an increase of $10.6 million in taxes, partially due to the $4.9 million of excise taxes on excess pension plan assets as discussed above. These increases were partially offset by a $14.1 million decrease in professional service and consulting fees, including decreases in merger-related and integration costs and costs related to digital transformation initiatives.

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Income from Operations

Income from operations was $1.2 billion for 2024 compared to $1.4 billion for 2023. The decrease of 13.0%, reflects a decrease in sales due to volume declines, and higher SG&A expenses, as described above.

Interest Expense, net

Net interest expense totaled $364.9 million for 2024 compared to $389.3 million for 2023. The decrease of $24.4 million, or 6.3%, primarily reflects lower borrowings, the redemption of the 2025 Notes in the second quarter of 2024, and a decrease in variable interest rates.

Other (Income) Expense, net

Other non-operating income totaled $92.7 million for 2024 compared to expense of $25.1 million for 2023. In 2024, we completed the divestiture of our WIS business and recognized a gain from the sale of $122.2 million. Due to fluctuations in the U.S. dollar against certain foreign currencies, we recognized a net foreign currency exchange loss of $25.5 million for 2024 compared to a net loss of $22.9 million for 2023. Adjusted for the gain on the divestiture of our WIS business, a $3.6 million loss on termination of a business arrangement, and $2.5 million of pension settlement cost related to the final settlement of the Anixter Inc. Pension Plan, other non-operating expense was $23.4 million for 2024. Other non-operating expense for 2023 includes net pension settlement cost of $2.8 million primarily related to the partial settlement of the Anixter Inc. Pension Plan, partially offset by pension settlement gains related to other plans. Adjusted for this amount, other non-operating expense was $22.3 million for 2023.

Income Taxes

The provision for income taxes was $231.6 million for 2024 compared to $225.9 million for 2023, resulting in effective tax rates of 24.4% and 22.8%, respectively. The higher effective tax rate is primarily due to a valuation allowance being recorded against certain deferred tax assets in the current year.

Net Income and Earnings per Share

Net income and earnings per diluted share attributable to common stockholders were $660.2 million and $13.05, respectively, for 2024 compared to $708.1 million and $13.54, respectively, for 2023. Adjusted for digital transformation costs, the loss on abandonment of assets, restructuring costs, excise taxes on excess pension plan assets, the gain recognized on the divestiture of the WIS business, the loss on termination of a business arrangement, pension settlement cost, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $618.6 million and $12.23, respectively, for the year ended December 31, 2024. Adjusted for digital transformation costs, merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, net pension settlement cost, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $763.6 million and $14.60, respectively, for the year ended December 31, 2023.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, was $1.5 billion for 2024 compared to $1.7 billion for 2023. Adjusted EBITDA decreased 11.5% year-over-year. The decrease primarily reflects the $566.4 million decrease in net sales, and a $50.2 million increase in SG&A expenses, as described above, partially offset by a corresponding decrease in cost of goods sold of $435.3 million.

Segment Results

The following is a discussion of the financial results of our operating segments comprising three strategic business units consisting of EES, CSS and UBS for the year ended December 31, 2024. As further described below and in Note 16, “Business Segments” of our Notes to Consolidated Financial Statements, the performance of our operating segments is based on net sales, adjusted EBITDA, and adjusted EBITDA margin percentage. Adjusted EBITDA and adjusted EBITDA margin percentage are non-GAAP financial measures.

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Electrical & Electronic Solutions

EES reported net sales of $8.5 billion for 2024 compared to $8.6 billion for 2023, a decrease of 0.7%. Adjusting for the unfavorable impact from fluctuations in foreign exchange rates of 0.5% and the favorable impact from the number of workdays of 0.8%, EES organic sales for 2024 declined 1.0%, reflecting volume declines of approximately 2%, primarily as a result of a decline in the original equipment manufacturer business. The decline in volume was partially offset by the impact of changes in price, which favorably impacted organic sales by approximately 1%.

EES reported adjusted EBITDA of $717.5 million for 2024, or 8.4% of net sales, compared to $727.4 million for 2023, or 8.4% of net sales. Adjusted EBITDA decreased $9.9 million, or 1.4% year-over-year. The decrease primarily reflects the $63.5 million decline in net sales, as described above, partially offset by a corresponding decrease in cost of goods sold of $58.4 million.

Communications & Security Solutions

CSS reported net sales of $7.5 billion for 2024 compared to $7.2 billion for 2023, an increase of 5.4%. Adjusting for the favorable impact from the acquisition of Ascent of 0.5%, the unfavorable impact from fluctuations in foreign exchange rates of 0.2%, and the favorable impact from the number of workdays of 0.8%, CSS organic sales for 2024 grew by 4.3%, primarily as a result of growth in the data center solutions business, partially offset by volume decline in the enterprise network infrastructure and security solutions businesses. Changes in price did not have a material impact on the year-over-year increase in CSS organic sales.

CSS reported adjusted EBITDA of $621.1 million for 2024, or 8.2% of net sales, compared to $683.8 million for 2023, or 9.6% of net sales. Adjusted EBITDA decreased $62.7 million, or 9.2% year-over-year. The decrease reflects an increase in net sales of $384.8 million, which was more than offset by an increase in cost of goods sold of $393.8 million, which is inclusive of an increase in inventory adjustments of $13.1 million and lower supplier volume rebates of approximately $4.1 million, and an increase in SG&A expenses of $55.1 million. The increase in SG&A expenses is primarily attributed to increased commissions and incentives of $13.5 million, higher salaries of $11.5 million, higher costs to operate our facilities of $5.5 million, which includes an increase in rents and the opening of a new facility, higher benefits expense of $5.4 million, and higher professional and consulting fees of $5.3 million.

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Utility & Broadband Solutions

UBS reported net sales of $5.7 billion for 2024 compared to $6.6 billion for 2023, a decrease of 13.4%. Adjusting for the decrease from the divestiture of the WIS business of 8.9%, the unfavorable impact of fluctuations in foreign exchange rates of 0.1%, and the favorable impact from the number of workdays of 0.8%, UBS organic sales for 2024 declined 5.2%, reflecting volume declines of approximately 7%, primarily as a result of declines in the utility and broadband businesses. The decline in volume was partially offset by the impact of changes in price, which favorably impacted organic sales by approximately 2%.

UBS reported adjusted EBITDA of $643.4 million for 2024, or 11.2% of net sales, compared to $739.3 million for 2023, or 11.2% of net sales. Adjusted EBITDA decreased $95.9 million, or 13.0% year-over-year. The decrease primarily reflects the $887.7 million decrease in net sales, as described above, partially offset by a corresponding decrease in cost of goods sold of $770.7 million, which is inclusive of lower supplier volume rebates of $20.6 million. SG&A expenses decreased $21.1 million as compared to the prior year, which was primarily attributed to a decrease in commissions and incentives of $17.0 million, driven by lower sales volume and the impact of the WIS divestiture.

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The following tables reconcile net income attributable to common stockholders to adjusted EBITDA and adjusted EBITDA margin % by segment, which are non-GAAP financial measures, for the periods presented:

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Note: Adjusted EBITDA and Adjusted EBITDA margin % are non-GAAP financial measures that provide indicators of the Company’s performance and its ability to meet debt service requirements. For the year ended December 31, 2024, Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization before other non-operating expenses (income), non-cash stock-based compensation expense, digital transformation costs, loss on abandonment of assets, cloud computing arrangement amortization, restructuring costs and excise taxes on excess pension plan assets related to the final settlement of the Anixter Inc. Pension Plan. For the year ended December 31, 2023, Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization before other non-operating expenses (income), non-cash stock-based compensation expense, digital transformation costs, merger-related and integration costs, and restructuring costs. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.

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The following tables reconcile selling, general and administrative expenses, income from operations, other non-operating (income) expense, provision for income taxes and earnings per diluted share to adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating (income) expense, adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:

(1)    Digital transformation costs include costs associated with certain digital transformation initiatives.

(2)    Loss on abandonment of assets represents the write-off of certain capitalized cloud computing arrangement implementation costs relating to a third-party developed operations management software product in favor of an application with functionality that better suits the Company’s operations.

(3)    Restructuring costs include severance costs incurred pursuant to an ongoing restructuring plan.

(4)    Excise taxes on excess pension plan assets represent the excise taxes applicable to the excess pension plan assets following the final settlement of the Company’s U.S. pension plan.

(5)    Merger-related and integration costs include integration and professional fees associated with the integration of Wesco and Anixter, as well as advisory, legal, and separation costs associated with the merger between the two companies.

(6)    Accelerated trademark amortization represents additional amortization expense resulting from changes in the estimated useful lives of certain legacy trademarks that have migrated to our master brand architecture.

(7)    Loss on termination of business arrangement represents the loss recognized as a result of management’s decision to terminate a business arrangement with a third party.

(8)    For the year ended December 31, 2024, pension settlement cost represents expense related to the settlement of the Company’s U.S. pension plan. For the year ended December 31, 2023, pension settlement cost represents expense related to the partial settlement of the Company’s U.S. pension plan, partially offset by pension settlement gains related to other plans.

(9)    The adjustments to income from operations and other (income) expense, net for the years ended December 31, 2024 and 2023 have been tax effected at rates of 26.2% and 27.5%, respectively.

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Note: For the year ended December 31, 2024, SG&A expenses, income from operations, other non-operating (income) expense, the provision for income taxes and earnings per diluted share have been adjusted to exclude digital transformation costs, the loss on abandonment of assets, restructuring costs, excise taxes on excess pension plan assets, the gain recognized on the divestiture of the WIS business, the loss on termination of business arrangement, pension settlement cost, and the related income tax effects. For the year ended December 31, 2023, SG&A expenses, income from operations, other non-operating expense, the provision for income taxes and earnings per diluted share have been adjusted to exclude digital transformation costs, merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, pension settlement cost, and the related income tax effects. These non-GAAP financial measures provide a better understanding of our financial results on a comparable basis.

Liquidity and Capital Resources

Our liquidity needs generally arise from fluctuations in our working capital requirements, information technology investments, capital expenditures, acquisitions, the payment of dividends, and debt service obligations. As of December 31, 2024, we had approximately $1.2 billion in available borrowing capacity under our Revolving Credit Facility, after giving effect to outstanding letters of credit and certain borrowings under our international lines of credit, and $100.0 million of available borrowing capacity under our Receivables Facility, which combined with available cash of $383.0 million, provided liquidity of approximately $1.7 billion. Cash included in our determination of liquidity represents cash in certain deposit and interest-bearing investment accounts held in the United States and Canada. 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.

As described in Note 9, “Debt” of our Notes to Consolidated Financial Statements, on March 7, 2024, Wesco Distribution issued $900 million aggregate principal amount of 2029 Notes and $850 million aggregate principal amount of 2032 Notes. We used the net proceeds from the issuance of the 2029 and 2032 Notes to redeem the $1,500 million aggregate principal amount of 2025 Notes on June 17, 2024 and for other corporate purposes.

We regularly review our mix of fixed versus variable rate debt, and we may, from time to time, issue or retire borrowings and/or refinance existing debt in an effort to mitigate the impact of interest rate and foreign exchange rate fluctuations, and to maintain a cost-effective capital structure consistent with our anticipated capital requirements. Economic conditions contributed to increases in interest rates during 2023; however, interest rates have remained stable in 2024, and the Federal Reserve reduced its benchmark interest rate by a total of 100 basis points in the second half of 2024. Future interest rate changes would raise or lower the rates we pay on our variable rate debt and would contribute to fluctuations in interest expense versus prior periods.

At December 31, 2024, approximately 60% of our debt portfolio consisted of fixed rate debt. We believe our capital structure has an appropriate mix of fixed versus variable rate debt and secured versus unsecured instruments.

Over the next several quarters, we expect that our excess liquidity will be directed primarily at returning capital to shareholders through our existing share repurchase authorization, the payment of dividends, debt reduction, digital transformation initiatives, potential acquisitions and related integration activities, and/or the redemption of Series A Preferred Stock. We expect to maintain sufficient liquidity through our credit facilities and cash balances. We believe cash provided by operations and financing activities will be adequate to cover our operational and business needs for at least the next twelve months.

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We communicate on a regular basis with our lenders regarding our financial and working capital performance, and liquidity position. We were in compliance with all financial covenants and restrictions contained in our debt agreements as of December 31, 2024.

We also measure our ability to meet our debt obligations based on our financial leverage ratio, which was 2.9x as of December 31, 2024 and 2.8x as of December 31, 2023.

The following table sets forth our financial leverage ratio, which is a non-GAAP financial measure, for the periods presented:

(1)    Merger-related and integration costs include integration and professional fees associated with the integration of Wesco and Anixter, as well as advisory, legal, and separation costs associated with the merger between the two companies.

(2)    Restructuring costs include severance costs incurred pursuant to an ongoing restructuring plan.

(3)    Digital transformation costs include costs associated with certain digital transformation initiatives, which have historically been included in merger-related and integration costs in prior years.

(4)    Excise taxes on excess pension plan assets represent the excise taxes applicable to the excess pension plan assets following the final settlement of the Company’s U.S. pension plan.

(5)    Loss on abandonment of assets represents the write-off of certain capitalized cloud computing arrangement implementation costs relating to a third-party developed operations management software product in favor of an application with functionality that better suits the Company’s operations.

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(6)    Cloud computing arrangement amortization consists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing arrangements to support our digital transformation initiatives.

(7)    Debt is presented in the Consolidated Balance Sheets net of debt discount and debt issuance costs, and includes adjustments to record the long-term debt assumed in the merger with Anixter at its acquisition date fair value.

Note: Financial leverage ratio is a non-GAAP measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, excluding debt discount, debt issuance costs and fair value adjustments, net of cash, by adjusted EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as the trailing twelve months EBITDA before other non-operating expense (income), non-cash stock-based compensation expense, merger-related and integration costs, restructuring costs, digital transformation costs, excise taxes on excess pension plan assets related to the final settlement of the Anixter Inc. Pension Plan, loss on abandonment of assets, and cloud computing arrangement amortization.

The undistributed earnings of our foreign subsidiaries amounted to approximately $2,107.7 million at December 31, 2024. Most of these earnings have been taxed in the U.S. under either the one-time tax on the deemed repatriation of undistributed foreign earnings (the “transition tax”), or the global intangible low-taxed income (“GILTI”) tax regime imposed by the Tax Cuts and Jobs Act of 2017. We have elected to pay the transition tax in installments over an eight year period, which ends in 2026. As of December 31, 2024, our remaining liability for the transition tax was $37.7 million. We continue to assert that the remaining undistributed earnings of our foreign subsidiaries are indefinitely reinvested. The distribution of earnings by our foreign subsidiaries in the form of dividends, or otherwise, may be subject to additional taxation. We estimate that additional taxes of approximately $69.4 million would be payable upon the remittance of all previously undistributed foreign earnings as of December 31, 2024, based upon the laws in effect on that date. We believe that we are able to maintain sufficient liquidity for our domestic operations and commitments without repatriating cash from our foreign subsidiaries.

We finance our operating and investing needs primarily with borrowings under our Revolving Credit Facility and Receivables Facility, as well as uncommitted lines of credit entered into by certain of our foreign subsidiaries to support local operations, some of which are overdraft facilities. The Revolving Credit Facility has a borrowing limit of $1,725 million and the purchase limit under the Receivables Facility is $1,550 million. As of December 31, 2024, we had $525.0 million outstanding on the Revolving Credit Facility and $1,450.0 million outstanding under the Receivables Facility. The maximum borrowing limits of our international lines of credit vary by facility and range between $0.6 million and $9.5 million. Our international lines of credit generally are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed by Wesco Distribution. Accordingly, certain borrowings under these lines directly reduce availability under our Revolving Credit Facility. As of December 31, 2024, we had $0.6 million outstanding under our international lines of credit.

For information regarding amendments to the Receivables Facility and Revolving Credit Facility as well as disclosure of our debt instruments, including our outstanding indebtedness as of December 31, 2024, see Note 9, “Debt” of our Notes to Consolidated Financial Statements.

An analysis of cash flows for 2024 and 2023 follows:

Operating Activities

Net cash provided by operating activities for 2024 totaled $1,101.2 million, compared to $493.2 million of cash generated in 2023. Net cash provided by operating activities for 2024 included net income of $719.4 million and non-cash adjustments to net income totaling $105.6 million, which primarily comprised depreciation and amortization, stock-based compensation expense, a loss on abandonment of assets, amortization of debt discount and debt issuance costs, and cloud computing arrangement amortization, partially offset by a gain resulting from the divestiture of our WIS business, as described in Note 5, “Acquisitions and Divestitures” and deferred income taxes.

Other sources of cash in 2024 included an increase in accounts payable of $329.5 million primarily due to the timing of inventory purchases and payment to suppliers, an increase in other current and noncurrent liabilities of $93.3 million, primarily due to increases in federal income taxes payable, accrued interest payable, and operating lease liabilities, and an increase of $62.7 million in accrued payroll and benefits costs, driven by an increase in accrued salaries and wages and the reversion of excess pension plan assets from the settlement of the U.S. pension plan, partially offset by contributions to other pension plans. Primary uses of cash in 2024 included an increase in other current and noncurrent assets of $142.6 million primarily due to increases in capitalized costs associated with developing cloud computing arrangements, supplier prepayments, and contract assets, an increase in trade accounts receivable of $50.7 million due to the timing of receipts from customers, and an increase in inventories of $18.0 million.

Net cash provided by operating activities for 2023 totaled $493.2 million. Net cash provided by operating activities for 2023 included net income of $766.1 million and non-cash adjustments to net income totaling $235.8 million, which primarily comprised depreciation and amortization, stock-based compensation expense, and amortization of debt discount and debt issuance costs, partially offset by deferred income taxes.

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Other sources of cash in 2023 included a decrease in trade accounts receivable of $52.2 million due to the timing of receipts from customers and a decrease in net sales in the fourth quarter of 2023 compared to the fourth quarter of the prior year. Primary uses of cash in 2023 included a decrease in accounts payable of $319.7 million primarily due to a reduction in inventory purchases in the fourth quarter, a decrease in accrued payroll and benefit costs of $92.3 million resulting primarily from the payment of management incentive compensation earned in 2022, partially offset by the accrual of management incentive compensation earned in 2023. Net operating cash flow was also negatively impacted by $68.4 million from an increase in inventories. Inventories grew at a slower rate than sales, as supply chain lead times normalized. Uses of cash in 2023 also included an increase in other current and noncurrent assets of $60.6 million primarily due to an increase in capitalized costs associated with developing cloud computing arrangements to support our digital transformation initiatives, as well as a decrease in other current and noncurrent liabilities of $23.5 million.

Investing Activities

Net cash provided by investing activities in 2024 was $40.4 million compared to $89.6 million used in investing activities in 2023. Included in 2024 were $354.9 million in proceeds from the divestiture of the WIS business, net of cash transferred, partially offset by $221.3 million paid to acquire Ascent, entroCIM, IES, net of cash acquired, as well as capital expenditures of $94.7 million compared to $92.3 million in 2023. Capital expenditures in 2024 and 2023 primarily comprised internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of distribution centers, fulfillment centers, and sales offices.

Financing Activities

Net cash used in financing activities in 2024 was $928.3 million, compared to $403.9 million in 2023. During 2024, financing activities primarily comprised the redemption of our $1,500 million aggregate principal amount of 2025 Notes, proceeds of $900.0 million and $850.0 million related to the issuance of the 2029 Notes and 2032 Notes, respectively, net repayments of $428.0 million related to our Revolving Credit Facility, net repayments of $100.0 million related to our Receivables Facility, and payment of total debt issuance costs of $26.6 million related to the issuance of the 2029 and 2032 Notes and amendments to the Revolving Credit Facility and Receivables Facility. Financing activities for 2024 also included $425.0 million of common stock repurchases, $81.5 million and $57.4 million of dividends paid to holders of our common stock and Series A Preferred Stock, respectively, and $30.9 million of payments for taxes related to the exercise and vesting of stock-based awards.

During 2023, financing activities primarily comprised net repayments of $70.3 million related to our Revolving Credit Facility and the repayment of our $58.6 million aggregate principal amount of 5.50% Anixter Senior Notes due 2023, partially offset by net borrowings of $15.0 million related to our Receivables Facility. Financing activities for 2023 also included $76.6 million and $57.4 million of dividends paid to holders of our common stock and Series A Preferred Stock, respectively, $75.0 million of common stock repurchases, $68.3 million of payments for taxes related to the exercise and vesting of stock-based awards, and net repayments on our various international lines of credit of approximately $6.0 million.

The following table summarizes our material cash requirements from known contractual and other obligations at December 31, 2024, including interest, and the expected effect on our liquidity and cash flow in future periods:

(1)    Interest on variable rate debt was calculated using the rates and balances outstanding at December 31, 2024.

(2)    As disclosed in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, the majority of our various defined benefit pension plans are non-contributory and, with the exception of Canada, cover substantially all full-time employees in their respective countries. Retirement benefits are provided based on compensation as defined in the plans. Our policy is to fund these plans as required by local statutory law. We currently estimate that we will contribute $7.1 million to our foreign pension plans in 2025. Due to the future impact of various market conditions, rates of return and changes in plan participants, we cannot provide a meaningful estimate of our future contributions beyond 2025.

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In addition to the cash requirements disclosed in the table above, we expect future uses of cash to include working capital requirements, capital expenditures, investments in our digital capabilities, dividend payments to holders of our common stock and Series A Preferred Stock, benefit payments to participants in our deferred compensation plan, and other organic opportunities. Future uses of cash could also include acquisitions of businesses and the repurchase of common or preferred stock. We expect to spend approximately $120 million in 2025 on capital expenditures for information technology investments and to support our global network of distribution centers, fulfillment centers, and sales offices.

We expect to fund future uses of cash with a combination of existing cash balances, cash generated from operating activities, borrowings under our revolving credit and accounts receivable securitization facilities, or new issuances of debt.

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.

Liabilities related to unrecognized tax benefits, including interest and penalties, of $141.0 million were excluded from the table above as we cannot reasonably estimate the timing of these potential cash settlements with taxing authorities. See Note 11, “Income Taxes” of our Notes to Consolidated Financial Statements for further information related to unrecognized tax benefits.

Seasonality

Our operating results are not significantly affected by seasonal factors. Sales during the first and fourth quarters have historically been affected by a reduced level of activity primarily due to the impact of weather on projects. 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.

Recent Accounting Standards

See Note 2, “Accounting Policies” of our Notes to Consolidated Financial Statements for a description of recently adopted and recently issued accounting standards.

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. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in Item 1A of this Annual Report on Form 10-K. In this Item 7, “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.

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), our discussion and analysis of financial condition and results of operations includes certain non-GAAP financial measures, which are defined further below. These financial measures include organic sales growth, earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, adjusted EBITDA margin, financial leverage, adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense (income), adjusted provision for income taxes, adjusted income before income taxes, adjusted net income, adjusted net income attributable to WESCO International, Inc., adjusted net income attributable to common stockholders, and adjusted earnings per diluted share. We believe that these non-GAAP measures are helpful to users of our financial statements as they provide a better understanding of our financial condition and results of operations on a comparable basis. Additionally, certain non-GAAP measures either focus on or exclude items impacting comparability of results, allowing users to more easily compare our financial performance from period to period. Management uses certain non-GAAP financial measures in its evaluation of the performance of the Company's operating segments and in the determination of incentive compensation. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.

In the first quarter of the fiscal year ended December 31, 2023, we changed our presentation in tables from thousands to millions. Certain amounts as of and for the year ended December 31, 2022 in Management’s Discussion and Analysis of Financial Condition and Results of Operations may not foot or recalculate due to rounding.

Company Overview

Wesco, headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.

We employ approximately 20,000 people, maintain relationships with more than 50,000 suppliers, and serve nearly 150,000 customers worldwide. With millions of products, end-to-end supply chain services, and leading digital capabilities, we provide innovative solutions to meet customer needs across commercial and industrial businesses, contractors, government agencies, educational institutions, telecommunications providers, and utilities. Our innovative value-added solutions include supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting and labeling, limited assembly of products and installation enhancement. We operate nearly 800 branches, warehouses and sales offices in approximately 50 countries, providing a local presence for customers and a global network to serve multi-location businesses and global corporations.

In 2021, we established a new corporate brand strategy to adopt a single, master brand architecture. This initiative reflects our corporate integration strategy and simplifies engagement for our customers and suppliers. In 2022, we launched the master brand identity in North America and began migrating certain legacy sub-brands to the master brand architecture, a process that will continue for the next several years. In 2023, we launched the Wesco Anixter go-to-market brand in all markets outside of the U.S. and Canada, as part of our master brand deployment strategy. Due to the strength of its recognition with customers and suppliers, we will continue to use the Anixter brand name globally for the foreseeable future.

We have operating segments comprising three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”). These operating segments are equivalent to our reportable segments. See Item 1, “Business” in this Annual Report on Form 10-K for a description of each of our reportable segments and their business activities.

Overall Financial Performance

Our financial results for 2023 compared to 2022 reflect single-digit sales growth driven by the benefits of price inflation, increased scale, and secular demand trends. These impacts were partially offset by volume declines in certain businesses, as well as slight margin contraction, and higher payroll and payroll-related expenses, costs to operate our facilities, along with expenses associated with our digital transformation initiatives.

Net sales for 2023 increased $965.1 million, or 4.5%, over the prior year. The increase reflects the estimated impact of changes in price of approximately 3% and the favorable impact of 2.1% from the acquisition of Rahi Systems Holdings, Inc. (“Rahi Systems”), which closed in November of 2022. These positive factors were partially offset by the negative impacts of

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fluctuations in foreign exchange rates of 0.4% and the number of workdays of 0.4%. Volume growth did not have a material impact on the year-over-year increase in organic sales. Cost of goods sold as a percentage of net sales was 78.4% and 78.2% for 2023 and 2022, respectively. The unfavorable increase of 20 basis points reflects lower supplier volume rebates and a shift in sales mix, partially offset by our continued focus on a strategy of pricing products and services to realize the value that we provide to our customers as a result of our broad portfolio of product and service offerings, global footprint and capabilities (“value-driven pricing”).

Income from operations was $1,406.4 million for 2023, compared to $1,438.1 million for 2022, a decrease of $31.7 million, or 2.2%. Income from operations as a percentage of net sales was 6.3% for the current year, compared to 6.7% for the prior year. Income from operations for 2023 includes merger-related and integration costs of $55.4 million, restructuring costs of $16.7 million, and accelerated trademark amortization expense of $1.6 million. Adjusted for these items, income from operations was 6.6% of net sales in 2023. For 2022, income from operations was 7.1% of net sales, as adjusted for merger-related and integration costs of $67.4 million and accelerated trademark amortization expense of $9.8 million. For 2023, income from operations declined compared to the prior year due to higher cost of goods sold as a percentage of net sales, higher salaries and benefits due to wage inflation and increased headcount, including the impact of the Rahi Systems acquisition, as well as an increase in volume-related costs such as commissions and marketing costs. The costs to operate our facilities also unfavorably affected income from operations. In addition, digital transformation initiatives contributed to higher expenses in 2023. These negative factors were partially offset by sales growth as well as the realization of integration synergies and a reduction to incentive compensation expense.

Earnings per diluted share for 2023 was $13.54, based on 52.3 million diluted shares, compared to $15.33 for 2022, based on 52.4 million diluted shares, a decrease of 11.7%. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, net pension settlement cost, and the related income tax effects, earnings per diluted share for 2023 was $14.60. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for 2022 was $16.42. Adjusted earnings per diluted share decreased 11.1% year-over-year.

Our industry and the broader economy have experienced supply chain challenges, including product delays and backlogged orders, shortages in raw materials and components, labor shortages, transportation challenges, and higher costs. We have aggressively responded to these supply chain issues which have largely improved and progressively become manageable throughout 2023.

Cash Flow

Operating cash flow for 2023 was $493.2 million. Net cash provided by operating activities included net income of $766.1 million and non-cash adjustments to net income totaling $235.8 million, which primarily consisted of depreciation and amortization of $181.3 million, stock-based compensation expense of $48.1 million, amortization of debt discount and debt issuance costs of $14.8 million, and deferred income taxes of $7.9 million. Operating cash flow was negatively impacted by net changes in assets and liabilities of $508.7 million, which primarily consisted of a decrease in accounts payable of $319.7 million, mainly due to a reduction in inventory purchases in the fourth quarter, and an increase in inventories of $68.4 million. Inventories grew at a slower rate than sales, as supply chain lead times have normalized. These cash usage factors were partially offset by cash inflow from a decrease in trade accounts receivable of $52.2 million. Additionally, the payment of management incentive compensation earned in 2022 resulted in a cash outflow of approximately $153.9 million in 2023, which was partially offset by the accrual of management incentive compensation earned in the current year.

Investing activities primarily included $92.3 million of capital expenditures mostly consisting of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of branches, warehouses and sales offices.

Financing activities primarily consisted of net repayments of $70.3 million related to our revolving credit facility (the “Revolving Credit Facility”) and the repayment of our $58.6 million aggregate principal amount of 5.50% Anixter Senior Notes due 2023, which matured on March 1, 2023, partially offset by net borrowings of $15.0 million related to our accounts receivable securitization facility (the “Receivables Facility”). Financing activities for 2023 also included $76.6 million and $57.4 million of dividends paid to holders of our common stock and Series A Preferred Stock, respectively, $75.0 million of common stock repurchases, and $68.3 million of payments for taxes related to the exercise and vesting of stock-based awards.

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Financing Availability

As of December 31, 2023, we had $736.0 million in total available borrowing capacity under our Revolving Credit Facility and $75.0 million of available borrowing capacity under our Receivables Facility. The Revolving Credit Facility and the Receivables Facility mature in March 2027 and March 2025, respectively. As of December 31, 2023, we also had $8.2 million of borrowing capacity available under our international lines of credit that did not directly reduce availability under the Revolving Credit Facility.

Critical Accounting 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 U.S. 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 that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations, including those related to goodwill and indefinite-lived intangible assets, defined benefit pension plans, and income taxes. 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 accounting estimates are the most critical to the understanding of our consolidated financial statements as they require subjective or complex judgments by management.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually as of October 1, or more frequently if triggering events occur, indicating that their carrying values may not be recoverable. We test for goodwill impairment on a reporting unit level. We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter of 2023 by assessing qualitative factors to determine whether it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets were less than their respective carrying amounts. As a result of this assessment, we determined that it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets continued to exceed their respective carrying amounts and, therefore, a quantitative impairment test was not necessary.

The determination of fair value involves significant management judgment, particularly as it relates to the underlying assumptions and factors around future expected operating margins and discount rate. 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.

See Note 2, “Accounting Policies” and Note 5, “Goodwill and Intangible Assets” of our Notes to Consolidated Financial Statements for additional disclosure regarding goodwill and indefinite-lived intangible assets.

Defined Benefit Pension Plans

Liabilities and expenses for defined benefit pension plans 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).

Liabilities for defined benefit pension plans are particularly sensitive to changes in the discount rate. At the end of each fiscal year, we determine the discount rate to measure our defined benefit pension plan liabilities at their present value. The discount rate reflects the current rate at which the defined benefit pension plan liabilities could be effectively settled at the end of the year. This rate is estimated using a yield curve based on corporate bond data, which we believe is consistent with observable market conditions and industry standards for developing spot rate curves. The consolidated weighted-average discount rate used to measure the projected benefit obligation of all plans was 4.4% and 4.6% at December 31, 2023 and 2022, respectively. As a sensitivity measure, the effect of a 50-basis-point decline in the assumed discount rate would result in no change in the expense for 2024, and an increase in our projected benefit obligations at December 31, 2023 of $31.0 million. The impact of a 50-basis-point increase in the assumed discount rate would result in a decrease in the expense for 2024 of approximately $1.0 million, and a decrease in our projected benefit obligations at December 31, 2023 of $29.0 million. Changes in the expected long-term rate of return on plan assets and assumptions relating to the employee workforce are less likely to have a material impact on the measurement of defined benefit pension plan liabilities.

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See Note 2, “Accounting Policies” and Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements for additional disclosure regarding defined benefit pension plans.

Income Taxes

We recognize deferred tax assets consistent with amounts 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 taxable 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 recognized in the consolidated financial statements. We recognize interest and penalties related to uncertain tax benefits as part of interest expense and income tax expense, respectively.

See Note 2, “Accounting Policies” and Note 11, “Income Taxes” of our Notes to Consolidated Financial Statements for additional disclosure regarding income taxes.

Results of Operations

2023 Compared to 2022

Net Sales

The following table sets forth net sales and organic sales growth for the periods presented:

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 and divestitures for one year following the respective transaction, fluctuations in foreign exchange rates and number of workdays from the reported percentage change in consolidated net sales. Workday impact represents the change in the number of operating days period-over-period after adjusting for weekends and public holidays in the United States; 2023 had one less workday compared to 2022.

Net sales were $22.4 billion for 2023 compared with $21.4 billion for 2022, an increase of 4.5%. Adjusting for the favorable impact from the acquisition of Rahi Systems of 2.1%, the unfavorable impacts from fluctuations in foreign exchange rates of 0.4% and the number of workdays of 0.4%, organic sales for 2023 grew by 3.2%. The increase was primarily due to the impact of changes in price, which favorably impacted organic sales by approximately 3%. Volume growth did not have a material impact on the year-over-year increase in organic sales, as increases in sales volume in the CSS and UBS operating segments were offset by a decrease in sales volume in the EES segment.

Cost of Goods Sold

Cost of goods sold for 2023 was $17.5 billion compared to $16.8 billion for 2022. Cost of goods sold as a percentage of net sales was 78.4% and 78.2% for 2023 and 2022, respectively. The unfavorable increase of 20 basis points reflects a shift in sales mix and lower supplier volume rebates, partially offset by our continued focus on a strategy of pricing products and services to realize the value that we provide to our customers as a result of our broad portfolio of product and service offerings, global footprint and capabilities (“value-driven pricing”).

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses primarily include payroll and payroll-related costs, shipping and handling, travel and entertainment, facilities, utilities, information technology expenses, professional and consulting fees, credit losses, gains (losses) on the sale of property and equipment, as well as real estate and personal property taxes. SG&A expenses for 2023 totaled $3.3 billion versus $3.0 billion for 2022, an increase of 7.0%. As a percentage of net sales, SG&A expenses were 14.5% and 14.2% for 2023 and 2022, respectively. SG&A expenses for 2023 and 2022 include merger-related and integration costs of $55.4 million and $67.4 million, respectively. SG&A expenses for 2023 also include $16.7 million of restructuring costs. Adjusted for merger-related and integration costs, and restructuring costs, SG&A expenses for 2023 were 14.2% of net sales for 2023 and 13.9% of net sales for 2022.

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SG&A payroll and payroll-related expenses for 2023 of $2.1 billion increased by $89.4 million compared to 2022 as a result of higher salaries and benefits due to wage inflation and increased headcount, including the impact of the Rahi Systems acquisition, partially offset by the impact of headcount reductions taken at the end of the second quarter of 2023. This increase in payroll and payroll-related expenses also includes an increase in sales commissions of $31.9 million and a reduction to incentive compensation expense of $98.3 million.

SG&A expenses not related to payroll and payroll-related costs for 2023 were $1.2 billion, an increase of $122.4 million compared to 2022, which primarily reflects higher costs to operate our facilities of $49.2 million, increased marketing costs of $11.5 million, as well as higher employee expenses of $6.6 million due to increased headcount. In addition, digital transformation initiatives contributed to higher expenses of $22.4 million in 2023, which includes higher professional and consulting expenses. These increases were partially offset by the realization of integration cost synergies.

Depreciation and Amortization

Depreciation and amortization increased $2.3 million to $181.3 million for 2023, compared to $179.0 million for 2022. Depreciation and amortization for 2023 and 2022 includes $1.6 million and $9.8 million, respectively, of accelerated amortization expense resulting from changes in the estimated useful lives of certain legacy trademarks that are migrating to our master brand architecture.

Income from Operations

Income from operations was $1,406.4 million for 2023 compared to $1,438.1 million for 2022. The decrease of $31.7 million, or 2.2%, reflects slightly higher cost of goods sold as a percentage of net sales and higher SG&A expenses, as described above, partially offset by sales growth and the realization of integration synergies.

Interest Expense, net

Net interest expense totaled $389.3 million for 2023 compared to $294.4 million for 2022. The increase of $94.9 million, or 32.2%, reflects higher borrowings and an increase in variable interest rates.

Other Expense, net

Other non-operating expense totaled $25.1 million for 2023 compared to $7.0 million for 2022. Due to fluctuations in the U.S. dollar against certain foreign currencies, particularly the Argentine Peso and the Egyptian Pound, a net foreign currency exchange loss of $22.9 million was recognized for 2023 compared to a net loss of $19.9 million for 2022. We recognized net costs of $0.2 million and net benefits of $14.8 million associated with the non-service cost components of net periodic pension cost (benefit) for 2023 and 2022, respectively. The year-over-year change was primarily due to a decrease in expected return on plan assets and an increase in interest cost. Other non-operating expense for 2023 includes net pension settlement cost of $2.8 million primarily related to the partial settlement of the Company's pension plan in the U.S., partially offset by pension settlement gains related to other plans. Adjusted for this amount, other non-operating expense was $22.3 million for 2023.

Income Taxes

The provision for income taxes was $225.9 million for 2023 compared to $274.5 million for 2022, resulting in effective tax rates of 22.8% and 24.2%, respectively. The effective tax rate for both the current year and the prior year were favorably impacted by the tax benefits related to the exercise and vesting of stock-based awards and reductions in the valuation allowance recorded against certain deferred tax assets. The lower effective tax rate in the current year is due primarily to higher tax benefits from stock-based compensation deductions and foreign tax credit utilization as compared to the prior year.

Net Income and Earnings per Share

Net income and earnings per diluted share attributable to common stockholders were $708.1 million and $13.54, respectively, for 2023 compared to $803.1 million and $15.33, respectively, for 2022. Adjusted for merger-related and integration costs, restructuring costs, accelerated trademark amortization expense, net pension settlement cost, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $763.6 million and $14.60, respectively, for the year ended December 31, 2023. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, net income and earnings per diluted share attributable to common stockholders were $860.1 million and $16.42, respectively, for the year ended December 31, 2022.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, was $1,705.3 million for 2023 compared to $1,725.6 million for 2022. Adjusted EBITDA decreased $20.3 million, or 1.2% year-over-year. The decrease primarily reflects the $211.8 million increase in SG&A expenses, as well as the increase in cost of goods sold of $782.7 million, partially offset by the $1.0 billion increase in net sales, as described above. Included in the increase in SG&A expenses was restructuring costs of $16.7 million, partially offset by a decrease in merger-related and integration costs of $12.0 million.

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Segment Results

The following is a discussion of the financial results of our operating segments comprising three strategic business units consisting of EES, CSS and UBS for the year ended December 31, 2023. As further described below and in Note 16, “Business Segments” of our Notes to the Consolidated Financial Statements, the performance of our operating segments is based on net sales, adjusted EBITDA, and adjusted EBITDA margin percentage. Adjusted EBITDA and adjusted EBITDA margin percentage are non-GAAP financial measures.

Electrical & Electronic Solutions

EES reported net sales of $8.6 billion for 2023 compared to $8.8 billion for 2022, a decrease of 2.4%. Adjusting for the unfavorable impact from fluctuations in foreign exchange rates of 0.6% and the number of workdays of 0.4%, EES organic sales for 2023 declined 1.4%, reflecting volume declines of approximately 2%, primarily as a result of declines in construction and original equipment manufacturers, partially offset by continued positive momentum in industrial and the benefits of selling the broader company portfolio (“cross selling”). In addition, a transfer of certain customer accounts to the CSS segment negatively impacted organic net sales for EES by approximately 2%. These negative factors were partially offset by the impact of changes in price, which favorably impacted organic sales by approximately 3%.

EES reported adjusted EBITDA of $727.4 million for 2023, or 8.4% of net sales, compared to $851.3 million for 2022, or 9.6% of net sales. Adjusted EBITDA decreased $123.9 million, or 14.6% year-over-year. The decrease primarily reflects the decline in net sales, as described above, and an increase in SG&A expenses as a percentage of net sales, partially offset by a decrease in cost of goods sold of $131.8 million, which is inclusive of higher inventory write-downs and lower supplier volume rebates totaling approximately $28.7 million and the negative impact of a shift in sales mix. SG&A expenses increased $41.6 million as compared to the prior year, which was primarily attributed to higher payroll and payroll-related expenses of $43.6 million as a result of higher salaries due to wage inflation and increased headcount. This increase in payroll and payroll-related expenses also includes a reduction to incentive compensation expense of $31.4 million.

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Communications & Security Solutions

CSS reported net sales of $7.2 billion for 2023 compared to $6.4 billion for 2022, an increase of 11.7%. Adjusting for the favorable impact from the acquisition of Rahi Systems of 7.1%, the unfavorable impacts from fluctuations in foreign exchange rates of 0.4% and the number of workdays of 0.4%, CSS organic sales for 2023 grew 5.4%, reflecting the impact of changes in price, which favorably impacted organic sales by approximately 1%. Volume growth, which includes growth in data center, security solutions and enterprise network infrastructure and the benefits of cross selling, favorably impacted organic sales by approximately 1%. The transfer of certain customer accounts from the EES segment also positively impacted organic net sales for CSS by approximately 3%.

CSS reported adjusted EBITDA of $683.8 million for 2023, or 9.6% of net sales, compared to $599.0 million for 2022, or 9.4% of net sales. Adjusted EBITDA increased $84.8 million, or 14.2% year-over-year. The increase primarily reflects the increase in net sales, as described above, partially offset by a corresponding increase in cost of goods sold of $580.2 million. SG&A expenses increased $90.5 million as compared to the prior year, which was primarily attributed to higher payroll and payroll-related expenses of $45.1 million as a result of higher salaries due to wage inflation and increased headcount, including the impact of the Rahi Systems acquisition. This increase in payroll and payroll-related expenses also includes an increase in sales commissions of $26.1 million and a reduction to incentive compensation expense of $29.9 million. Additionally, higher costs to operate our facilities of $15.9 million, higher marketing costs of $6.8 million due to increased sales volume, and higher employee expenses of $5.9 million due to increased headcount contributed to the year-over-year increase in SG&A expenses.

Utility & Broadband Solutions

UBS reported net sales of $6.6 billion for 2023 compared to $6.2 billion for 2022, an increase of 6.9%. Adjusting for the unfavorable impacts of fluctuations in foreign exchange rates of 0.2% and the number of workdays of 0.4%, UBS organic sales for 2023 grew 7.5%, reflecting the impact of changes in price, which favorably impacted organic sales by approximately 6%. Volume growth, which includes growth in utility and integrated supply, and the benefits of cross selling, partially offset by lower sales in broadband, particularly in Canada, favorably impacted organic sales by approximately 2%.

UBS reported adjusted EBITDA of $739.3 million for 2023, or 11.2% of net sales, compared to $677.3 million for 2022, or 10.9% of net sales. Adjusted EBITDA increased $62.0 million, or 9.2% year-over-year. The increase primarily reflects the $427.4 million increase in net sales, as described above, partially offset by a corresponding increase in cost of goods sold of $334.4 million. SG&A expenses increased $31.2 million as compared to the prior year, which was primarily attributed to higher payroll and payroll-related expenses of $13.2 million as a result of higher salaries due to wage inflation and increased headcount. This increase in payroll and payroll-related expenses includes a reduction to incentive compensation expense of $6.5 million and a decrease in sales commissions of $1.1 million. Additionally, higher costs to operate our facilities of $13.9 million and increased transportation costs of $4.1 million as a result of sales growth, contributed to the year-over-year increase in SG&A expenses.

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The following tables reconcile net income attributable to common stockholders to adjusted EBITDA and adjusted EBITDA margin % by segment, which are non-GAAP financial measures, for the periods presented:

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Note: Adjusted EBITDA and Adjusted EBITDA margin % are non-GAAP financial measures that provide indicators of our performance and ability to meet debt service requirements. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization before other non-operating expenses (income), non-cash stock-based compensation expense, merger-related and integration costs, and restructuring costs. Adjusted EBITDA margin % is calculated by dividing Adjusted EBITDA by net sales.

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The following tables reconcile selling, general and administrative expenses, income from operations, other non-operating expense, provision for income taxes and earnings per diluted share to adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense, adjusted provision for income taxes and adjusted earnings per diluted share, which are non-GAAP financial measures, for the periods presented:

(1)    Merger-related and integration costs include integration and professional fees associated with the integration of Wesco and Anixter, including digital transformation costs, as well as advisory, legal, and separation costs associated with the merger between the two companies.

(2)    Restructuring costs include severance costs incurred pursuant to an ongoing restructuring plan.

(3)    Accelerated trademark amortization represents additional amortization expense resulting from changes in the estimated useful lives of certain legacy trademarks that are migrating to our master brand architecture.

(4)    Pension settlement cost represents expense related to the partial settlement of the Company's pension plan in the U.S., partially offset by pension settlement gains related to other plans.

(5)    The adjustments to income from operations for the years ended December 31, 2023 and 2022 have been tax effected at rates of 27.5% and 26.1%, respectively.

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Note: For the year ended December 31, 2023, SG&A expenses, income from operations, other non-operating expense, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, restructuring costs, accelerated amortization expense associated with migrating to our master brand architecture, net pension settlement cost primarily related to the partial settlement of the Company's pension plan in the U.S., partially offset by pension settlement gains related to other plans, and the related income tax effects. For the year ended December 31, 2022, SG&A expenses, income from operations, the provision for income taxes and earnings per diluted share have been adjusted to exclude merger-related and integration costs, accelerated trademark amortization expense associated with migrating to our master brand architecture, and the related income tax effects. These non-GAAP financial measures provide a better understanding of our financial results on a comparable basis.

Liquidity and Capital Resources

Our liquidity needs generally arise from fluctuations in our working capital requirements, information technology investments, capital expenditures, acquisitions, the payment of dividends, and debt service obligations. As of December 31, 2023, we had $736.0 million in available borrowing capacity under our Revolving Credit Facility, after giving effect to outstanding letters of credit and certain borrowings under our international lines of credit, and $75.0 million in available borrowing capacity under our Receivables Facility, which combined with available cash of $250.1 million, provided liquidity of $1.1 billion. Cash included in our determination of liquidity represents cash in certain deposit and interest-bearing investment accounts. 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 regularly review our mix of fixed versus variable rate debt, and we may, from time to time, issue or retire borrowings and/or refinance existing debt in an effort to mitigate the impact of interest rate and foreign exchange rate fluctuations, and to maintain a cost-effective capital structure consistent with our anticipated capital requirements. Economic conditions contributed to increases in interest rates during 2023 and 2022. Further increases will raise the rates we pay on our variable rate debt and will contribute to higher interest expense versus prior periods.

At December 31, 2023, approximately 53% of our debt portfolio consisted of fixed rate debt. We believe our capital structure has an appropriate mix of fixed versus variable rate debt and secured versus unsecured instruments.

Over the next several quarters, we expect that our excess liquidity will be directed primarily at debt reduction, digital transformation initiatives, returning capital to shareholders through the payment of dividends and our existing share repurchase authorization, or potential acquisitions and related integration activities. We expect to maintain sufficient liquidity through our credit facilities and cash balances. We believe cash provided by operations and financing activities will be adequate to cover our operational and business needs for at least the next twelve months.

We communicate on a regular basis with our lenders regarding our financial and working capital performance, and liquidity position. We were in compliance with all financial covenants and restrictions contained in our debt agreements as of December 31, 2023.

We also measure our ability to meet our debt obligations based on our financial leverage ratio, which was 2.8x as of December 31, 2023 and 2.9x as of December 31, 2022.

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The following table sets forth our financial leverage ratio, which is a non-GAAP financial measure, for the periods presented:

(1)    Merger-related and integration costs include integration and professional fees associated with the integration of Wesco and Anixter, including digital transformation costs, as well as advisory, legal, and separation costs associated with the merger between the two companies.

(2)    Restructuring costs include severance costs incurred pursuant to an ongoing restructuring plan.

(3)    Debt is presented in the Consolidated Balance Sheets net of debt discount and debt issuance costs, and includes adjustments to record the long-term debt assumed in the merger with Anixter at its acquisition date fair value.

Note: Financial leverage ratio is a non-GAAP measure of the use of debt. Financial leverage ratio is calculated by dividing total debt, excluding debt discount, debt issuance costs and fair value adjustments, net of cash, by adjusted EBITDA. EBITDA is defined as the trailing twelve months earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as the trailing twelve months EBITDA before other non-operating expense (income), non-cash stock-based compensation expense, merger-related and integration costs, and restructuring costs.

The undistributed earnings of our foreign subsidiaries amounted to approximately $2,194.1 million at December 31, 2023. Most of these earnings have been taxed in the U.S. under either the one-time tax on the deemed repatriation of undistributed foreign earnings (the “transition tax”), or the global intangible low-taxed income (“GILTI”) tax regime imposed by the Tax Cuts and Jobs Act of 2017. We have elected to pay the transition tax in installments over an eight year period, which ends in 2026. As of December 31, 2023, our remaining liability for the transition tax was $53.8 million. We continue to assert that the remaining undistributed earnings of our foreign subsidiaries are indefinitely reinvested. The distribution of earnings by our foreign subsidiaries in the form of dividends, or otherwise, may be subject to additional taxation. We estimate that additional taxes of approximately $119.3 million would be payable upon the remittance of all previously undistributed foreign earnings as of December 31, 2023, based upon the laws in effect on that date. We believe that we are able to maintain sufficient liquidity for our domestic operations and commitments without repatriating cash from our foreign subsidiaries.

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We finance our operating and investing needs primarily with borrowings under our Revolving Credit Facility and Receivables Facility, as well as uncommitted lines of credit entered into by certain of our foreign subsidiaries to support local operations, some of which are overdraft facilities. The Revolving Credit Facility has a borrowing limit of $1,725 million and the purchase limit under the Receivables Facility is $1,625 million. As of December 31, 2023, we had $953.0 million and $1,550.0 million outstanding under the Revolving Credit Facility and Receivables Facility, respectively. The maximum borrowing limits of our international lines of credit vary by facility and range between $0.6 million and $10.0 million. Our international lines of credit generally are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed by Wesco Distribution. Accordingly, certain borrowings under these lines directly reduce availability under our Revolving Credit Facility. As of December 31, 2023, there was $8.2 million of borrowing capacity available under the international lines of credit that did not directly reduce availability under the Revolving Credit Facility. As of December 31, 2023, we had $1.0 million outstanding under our international lines of credit.

On March 1, 2023, we repaid the $58.6 million aggregate principal amount of our 5.50% Anixter Senior Notes due 2023. The repayment was funded with borrowings under our Revolving Credit Facility and had no impact on our results of operations.

Our $1,500 million of 7.125% Senior Notes will mature on June 15, 2025 (“2025 Notes”). On and after June 15, 2024, all or part of the 2025 Notes may be redeemed at a redemption price equal to 100% of the principal amount. We expect to complete a transaction or transactions to refinance the 2025 Notes during 2024.

For information regarding amendments to the Receivables Facility and Revolving Credit Facility as well as disclosure of our debt instruments, including our outstanding indebtedness as of December 31, 2023, see Note 9, “Debt” of our Notes to Consolidated Financial Statements.

An analysis of cash flows for 2023 and 2022 follows:

Operating Activities

Net cash provided by operating activities for 2023 totaled $493.2 million, compared to $11.0 million of cash generated in 2022. Net cash provided by operating activities for 2023 included net income of $766.1 million and non-cash adjustments to net income totaling $235.8 million, which primarily consisted of depreciation and amortization of $181.3 million, stock-based compensation expense of $48.1 million, and amortization of debt discount and debt issuance costs of $14.8 million, partially offset by deferred income taxes of $7.9 million.

Other sources of cash in 2023 included a decrease in trade accounts receivable of $52.2 million due to the timing of receipts from customers and a decrease in net sales in the fourth quarter of 2023 compared to the fourth quarter of the prior year and a decrease in other accounts receivable of $3.6 million due primarily to the collection of supplier volume rebates earned in 2022 in excess of income accrued during the current period, partially offset by an increase in value-added tax receivables. Primary uses of cash in 2023 included a decrease in accounts payable of $319.7 million primarily due to a reduction in inventory purchases in the fourth quarter, a decrease in accrued payroll and benefit costs of $92.3 million resulting primarily from the payment of management incentive compensation earned in 2022, partially offset by the accrual of management incentive compensation earned in the current year. Net operating cash flow was also negatively impacted by $68.4 million from an increase in inventories. Inventories grew at a slower rate than sales, as supply chain lead times have normalized. Uses of cash in 2023 also included an increase in other current and noncurrent assets of $60.6 million primarily due to an increase in capitalized costs associated with developing cloud computing arrangements to support our digital transformation initiatives, as well as a decrease in other current and noncurrent liabilities of $23.5 million.

Net cash provided by operating activities for 2022 totaled $11.0 million. Net cash provided by operating activities for 2022 included net income of $862.1 million and non-cash adjustments to net income totaling $243.1 million, which primarily consisted of depreciation and amortization of $179.0 million, stock-based compensation expense of $46.4 million, and amortization of debt discount and debt issuance costs of $15.2 million, partially offset by deferred income taxes of $1.2 million.

Other sources of cash in 2022 included an increase in accounts payable of $552.9 million due to higher purchases of inventory and an increase in other current and noncurrent liabilities of $131.6 million, primarily due to increases in deferred revenue and accrued taxes. Primary uses of cash in 2022 included an increase in inventories of $817.0 million due to supply chain challenges and to support growth in our sales backlog, including project-based business, an increase in trade accounts receivable of $690.6 million resulting from significant sales growth, an increase in other current and noncurrent assets of $153.2 million, primarily due to an increase in capitalized costs associated with developing cloud computing arrangements to support our digital transformation initiatives, an increase in other receivables of $54.8 million associated with higher supplier volume rebate income accruals, and a decrease in accrued payroll and benefit costs of $63.1 million due to lower incentive compensation accruals.

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Investing Activities

Net cash used in investing activities in 2023 was $89.6 million, compared to $283.6 million in 2022. Included in 2023 were capital expenditures of $92.3 million which primarily consisted of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of branches, warehouses and sales offices.

Net cash used in investing activities in 2022 was $283.6 million. Included in 2022 was $255.4 million of cash paid to acquire Rahi Systems, less cash acquired of $68.6 million, as described in Note 6, “Acquisitions and Disposals” of our Notes to Consolidated Financial Statements. Capital expenditures were $99.4 million in 2022.

Financing Activities

Net cash used in financing activities in 2023 was $403.9 million, compared to $584.0 million of net cash provided by financing activities in 2022. During 2023, financing activities primarily consisted of net repayments of $70.3 million related to our Revolving Credit Facility and the repayment of our $58.6 million aggregate principal amount of 5.50% Anixter Senior Notes due 2023, partially offset by net borrowings of $15.0 million related to our Receivables Facility. Financing activities for 2023 also included $76.6 million and $57.4 million of dividends paid to holders of our common stock and Series A Preferred Stock, respectively, $75.0 million of common stock repurchases, $68.3 million of payments for taxes related to the exercise and vesting of stock-based awards, and net repayments on our various international lines of credit of approximately $6.0 million.

Net cash provided by financing activities in 2022 was $584.0 million. During 2022, financing activities primarily consisted of net borrowings of $433.0 million related to our Revolving Credit Facility and net borrowings of $265.0 million related to our Receivables Facility. Financing activities for 2022 also included $57.4 million of dividends paid to holders of our Series A Preferred Stock, $25.8 million of payments for taxes related to the exercise and vesting of stock-based awards, borrowings and repayments of $19.5 million and $19.5 million, respectively, related to our various international lines of credit, and $11.1 million of common stock repurchases.

The following table summarizes our material cash requirements from known contractual and other obligations at December 31, 2023, including interest, and the expected effect on our liquidity and cash flow in future periods:

(1)    Interest on variable rate debt was calculated using the rates and balances outstanding at December 31, 2023.

(2)    As disclosed in Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements, the majority of our various defined benefit pension plans are non-contributory and, with the exception of the U.S. and Canada, cover substantially all full-time employees in their respective countries. Retirement benefits are provided based on compensation as defined in the plans. Our policy is to fund these plans as required by the Employee Retirement Income Security Act, the Internal Revenue Service and local statutory law. We currently estimate that we will contribute $7.0 million to our foreign pension plans in 2024. Due to the future impact of various market conditions, rates of return and changes in plan participants, we cannot provide a meaningful estimate of our future contributions beyond 2024.

In addition to the cash requirements disclosed in the table above, we expect future uses of cash to include working capital requirements, capital expenditures, investments in our digital capabilities, dividend payments to holders of our common stock and Series A Preferred Stock, benefit payments to participants in our deferred compensation plan, and other organic opportunities. Future uses of cash could also include acquisitions of businesses and the repurchase of common or preferred stock. We expect to spend approximately $100 million in 2024 on capital expenditures for information technology investments and to support our global network of branches, warehouses and sales offices.

We expect to fund future uses of cash with a combination of existing cash balances, cash generated from operating activities, borrowings under our revolving credit and accounts receivable securitization facilities, or new issuances of debt.

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.

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Liabilities related to unrecognized tax benefits, including interest and penalties, of $133.7 million were excluded from the table above as we cannot reasonably estimate the timing of these potential cash settlements with taxing authorities. See Note 11, “Income Taxes” in our Notes to Consolidated Financial Statements for further information related to unrecognized tax benefits.

Seasonality

Our operating results are not significantly affected by seasonal factors. Sales during the first and fourth quarters have historically been affected by a reduced level of activity due to the impact of weather on projects. 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.

Recent Accounting Standards

See Note 2, “Accounting Policies” of our Notes to Consolidated Financial Statements for a description of recently adopted and recently issued accounting standards.

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. The matters discussed herein may contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Certain of these risks are set forth in Item 1A of this Annual Report on Form 10-K. In this Item 7, “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.

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), our discussion and analysis of financial condition and results of operations includes certain non-GAAP financial measures, which are defined further below. These financial measures include organic sales growth, earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, adjusted EBITDA margin, financial leverage, adjusted selling, general and administrative expenses, adjusted income from operations, adjusted other non-operating expense (income), adjusted provision for income taxes, adjusted income before income taxes, adjusted net income, adjusted net income attributable to WESCO International, Inc., adjusted net income attributable to common stockholders, and adjusted earnings per diluted share. We believe that these non-GAAP measures are helpful to users of our financial statements as they provide a better understanding of our financial condition and results of operations on a comparable basis. Additionally, certain non-GAAP measures either focus on or exclude items impacting comparability of results, allowing users to more easily compare our financial performance from period to period. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.

Company Overview

Wesco, headquartered in Pittsburgh, Pennsylvania, is a leading provider of business-to-business distribution, logistics services and supply chain solutions.

We employ approximately 20,000 people, maintain relationships with more than 50,000 suppliers, and serve approximately 150,000 customers worldwide. With millions of products, end-to-end supply chain services, and leading digital capabilities, we provide innovative solutions to meet customer needs across commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. Our innovative value-added solutions include supply chain management, logistics and transportation, procurement, warehousing and inventory management, as well as kitting and labeling, limited assembly of products and installation enhancement. We operate approximately 800 branches, warehouses and sales offices in more than 50 countries, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations.

In 2021, we established a new corporate brand strategy to adopt a single, master brand architecture. This initiative reflects our corporate integration strategy and simplifies engagement for our customers and suppliers. In 2022, we launched the master brand identity in North America and began migrating certain legacy sub-brands to the master brand architecture, a process that will continue for the next several years. Due to the strength of its recognition with customers and suppliers, we will continue to use the Anixter brand name globally for the foreseeable future.

We have operating segments comprising three strategic business units consisting of Electrical & Electronic Solutions (“EES”), Communications & Security Solutions (“CSS”) and Utility & Broadband Solutions (“UBS”). These operating segments are equivalent to our reportable segments. See Item 1, “Business” in this Annual Report on Form 10-K for a description of each of our reportable segments and their business activities.

Overall Financial Performance

Our financial results for 2022 compared to 2021 reflect double-digit sales growth driven by the benefits of price inflation and higher volumes, increased scale, secular demand trends and execution of our cross-sell program, as well as margin expansion and the realization of integration synergies, partially offset by higher selling, general and administrative (“SG&A”) payroll and payroll-related expenses, volume-related costs, along with expenses associated with our digital transformation initiatives.

Net sales for 2022 increased $3.2 billion, or 17.6%, over the prior year. The increase reflects price inflation and volume growth, secular demand trends, and execution of our cross-sell program, as well as the acquisition of Rahi Systems Holdings, Inc. (“Rahi Systems”) in the fourth quarter of 2022, partially offset by the negative impacts of fluctuations in foreign exchange rates and the divestiture of Wesco's legacy utility and data communications businesses in Canada in the first quarter of 2021. Cost of goods sold as a percentage of net sales was 78.2% and 79.2% for 2022 and 2021, respectively. The improvement of 100 basis points reflects our focus on value-driven pricing and pass-through of inflationary costs, along with the continued momentum of our gross margin improvement program and higher supplier volume rebates as a percentage of net sales. Cost of

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goods sold for 2021 included a write-down to the carrying value of certain personal protective equipment inventories, which increased cost of goods sold as a percentage of net sales by approximately 14 basis points.

Income from operations was $1.4 billion for 2022, compared to $0.8 billion for 2021. Income from operations as a percentage of net sales was 6.7% for the current year, compared to 4.4% for the prior year. Income from operations for 2022 includes merger-related and integration costs of $67.4 million. Additionally, in connection with an integration initiative to review our brand strategy, certain legacy trademarks are migrating to a master brand architecture, which resulted in $9.8 million of accelerated amortization expense in 2022. Adjusted for these items, income from operations was 7.1% of net sales in 2022. For 2021, income from operations adjusted for merger-related and integration costs of $158.5 million, accelerated trademark amortization expense of $32.0 million, and a net gain of $8.9 million resulting from the divestiture of our legacy utility and data communications businesses in Canada was 5.4% of net sales. For 2022, income from operations compared to the prior year improved across all segments and reflects sales growth and lower cost of goods sold as a percentage of net sales, as well as the realization of integration cost synergies and a reduction to incentive compensation expense. Income from operations for 2022 was negatively impacted by higher salaries due to wage inflation and increased headcount, as well as an increase in commissions and volume-related costs driven by significant sales growth. In addition, digital transformation initiatives contributed to higher expenses in 2022, including those related to professional and consulting fees.

Earnings per diluted share for 2022 was $15.33, based on 52.4 million diluted shares, compared to $7.84 for 2021, based on 52.0 million diluted shares. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, and the related income tax effects, earnings per diluted share for 2022 was $16.42. Adjusted for merger-related and integration costs, accelerated trademark amortization expense, net gain on divestitures, a $36.6 million curtailment gain resulting from the remeasurement of our pension obligations in the U.S. and Canada due to amending certain terms of such defined benefit plans, and the related income tax effects, earnings per diluted share for 2021 was $9.98. Adjusted earnings per diluted share increased 64.5% year-over-year.

Our industry and the broader economy are experiencing supply chain challenges, including product delays and backlogged orders, shortages in raw materials and components, labor shortages, transportation challenges, and higher costs. During 2022, we continued to experience strong demand from many of our customers, along with uncertainty in the amount of time it takes to receive products from our suppliers. We are aggressively managing supply chain issues and have begun to experience some improvements, although we anticipate that supply chain constraints and inflationary pressures may extend into 2023. We intend to continue to actively manage the impact of inflation on our results of operations. We cannot reasonably estimate possible future impacts from these disruptions at this time.

There continues to be ongoing uncertainties associated with the COVID-19 pandemic, including with respect to economic conditions and the possible resurgence of COVID-19 whether through the emergence of new variants of the virus or otherwise. As the duration and severity of the COVID-19 pandemic cannot be predicted, there is significant uncertainty as to the ultimate impact that COVID-19 will have on our business, results of operations and financial condition.

Cash Flow

Operating cash flow for 2022 was $11.0 million. Net cash provided by operating activities included net income of $862.1 million and non-cash adjustments to net income totaling $243.1 million, which were primarily comprised of depreciation and amortization of $179.0 million, stock-based compensation expense of $46.4 million, amortization of debt discount and debt issuance costs of $15.2 million, and deferred income taxes of $1.2 million. Operating cash flow also included changes in assets and liabilities of $1.1 billion, which were primarily comprised of an increase in inventories of $817.0 million resulting from supply chain challenges and to support growth in our sales backlog, including project-based business, as well as an increase in trade accounts receivable of $690.6 million due to significant sales growth. These cash outflows were partially offset by an increase in accounts payable of $552.9 million due to the aforementioned higher purchases of inventory.

Investing activities primarily included $255.4 million of cash paid to acquire Rahi Systems, less cash acquired of $68.6 million, and $99.4 million of capital expenditures mostly consisting of internal-use computer software and information technology hardware to support our digital transformation initiatives, as well as equipment and leasehold improvements to support our global network of branches, warehouses and sales offices.

Financing activities were primarily comprised of net borrowings of $433.0 million related to our revolving credit facility (the “Revolving Credit Facility”) and net borrowings of $265.0 million related to our accounts receivable securitization facility (the “Receivables Facility”). Financing activities for 2022 also included $57.4 million of dividends paid to holders of our Series A Preferred Stock, $25.8 million of payments for taxes related to the exercise and vesting of stock-based awards, borrowings and repayments of $19.5 million and $19.5 million, respectively, related to our various international lines of credit, and $11.1 million of common stock repurchases.

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Financing Availability

During 2022 we amended our Receivables Facility and Revolving Credit Facility to, among other things, increase their borrowing capacities, extend their maturity dates, and replace the London Inter-Bank Offered Rate-based (“LIBOR”) interest rate options with Secured Overnight Financing Rate-based (“SOFR”) interest rate options.

See Note 9, “Debt” of our Notes to Consolidated Financial Statements for additional disclosure regarding the amendments to these facilities.

As of December 31, 2022, we had $664.9 million in total available borrowing capacity under our Revolving Credit Facility. Available borrowing capacity under our Receivables Facility was $50.0 million. The Revolving Credit Facility and the Receivables Facility mature in March 2027 and March 2025, respectively. As of December 31, 2022, we also had $10.1 million of borrowing capacity available under our international lines of credit that did not directly reduce availability under the Revolving Credit Facility.

Critical Accounting 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 U.S. 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 that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations, including those related to goodwill and indefinite-lived intangible assets, defined benefit pension plans, and income taxes. 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 accounting estimates are the most critical to the understanding of our consolidated financial statements as they require subjective or complex judgments by management.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually as of October 1, or more frequently if triggering events occur, indicating that their carrying values may not be recoverable. We test for goodwill impairment on a reporting unit level. We first assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant events such as changes in key personnel, changes in the composition or carrying amount of the net assets of a reporting unit, and changes in share price, to determine whether it is more likely than not that the fair value of our reporting units are less than their carrying values. If the qualitative assessment indicates that the fair values of our reporting units may not exceed their respective carrying values, then we perform a quantitative test for impairment by comparing the fair value of each reporting unit to its carrying value. We determine the fair values of our reporting units using a discounted cash flow analysis and consideration of market multiples. The discounted cash flow analysis uses certain assumptions, including expected operating margins supported by a combination of historical results, current forecasts, market data and recent economic events, which are categorized within Level 3 of the fair value hierarchy. We use a discount rate that reflects market participants' cost of capital. We evaluate the recoverability of indefinite-lived intangible assets using the relief-from-royalty method based on projected financial information. Significant inputs used in the relief-from-royalty method include projected revenues, discount rates, royalty rates, and applicable income tax rates.

We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the fourth quarter of 2022 by assessing qualitative factors to determine whether it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets were less than their respective carrying amounts. As a result of this assessment, we determined that it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets continued to exceed their respective carrying amounts and, therefore, a quantitative impairment test was not necessary.

The determination of fair value involves significant management judgment, particularly as it relates to the underlying assumptions and factors around future expected operating margins and discount rate. 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.

See Note 5, “Goodwill and Intangible Assets” of our Notes to Consolidated Financial Statements for additional disclosure regarding goodwill and indefinite-lived intangible assets.

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Defined Benefit Pension Plans

Liabilities and expenses for defined benefit pension plans 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).

Liabilities for defined benefit pension plans are particularly sensitive to changes in the discount rate. At the end of each fiscal year, we determine the discount rate to measure our defined benefit pension plan liabilities at their present value. The discount rate reflects the current rate at which the defined benefit pension plan liabilities could be effectively settled at the end of the year. This rate is estimated using a yield curve based on corporate bond data, which we believe is consistent with observable market conditions and industry standards for developing spot rate curves. The consolidated weighted-average discount rate used to measure the projected benefit obligation of all plans was 4.6% and 2.6% at December 31, 2022 and 2021, respectively. As a sensitivity measure, the effect of a 50-basis-point decline in the assumed discount rate would result in an increase in the expense for 2023 of approximately $1.0 million, and an increase in our projected benefit obligations at December 31, 2022 of $41.0 million. The impact of a 50-basis-point increase in the assumed discount rate would result in a decrease in the expense for 2023 of approximately $3.0 million, and a decrease in our projected benefit obligations at December 31, 2022 of $37.0 million. Changes in the expected long-term rate of return on plan assets and assumptions relating to the employee workforce are less likely to have a material impact on the measurement of defined benefit pension plan liabilities.

See Note 13, “Employee Benefit Plans” of our Notes to Consolidated Financial Statements for additional disclosure regarding defined benefit pension plans.

Income Taxes

We recognize deferred tax assets consistent with amounts 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 taxable 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 recognized in the consolidated financial statements. We recognize interest and penalties related to uncertain tax benefits as part of interest expense and income tax expense, respectively.

See Note 11, “Income Taxes” of our Notes to Consolidated Financial Statements for additional disclosure regarding income taxes.

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Results of Operations

The following table sets forth the percentage relationship to net sales of the financial statement line items in our Consolidated Statements of Income and Comprehensive Income for the periods presented:

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2022 Compared to 2021

Net Sales

The following table sets forth net sales and organic sales growth by segment for the periods presented: