WESCO International, Inc., incorporated in 1993 and formed in February 1994 upon acquiring a distribution business from Westinghouse Electric Corporation, is a leading North American distributor of products and provider of supply chain services used primarily in the industrial, construction, utility and commercial, institutional and government markets. We serve over 100,000 customers globally, including a majority of the Fortune 1000, through approximately 380 full service branches and seven distribution centers located primarily in the United States, Canada and Mexico, with additional locations in the United Kingdom, Singapore, China, Australia, Africa and the United Arab Emirates. At the end of 2009, we had approximately 6,100 employees worldwide.
We sell electrical and industrial maintenance, repair and operating supplies, commonly referred to as “MRO”, and electrical and non-electrical construction and original equipment manufacturer (“OEM”) products and services. Our primary product categories include general electrical and industrial supplies, wire, cable and conduit, data communications, power distribution equipment, lighting and lighting control systems, control and automation and motors. We distribute more than 1,000,000 products from more than 17,000 suppliers utilizing a highly automated, proprietary electronic procurement and inventory replenishment system. In addition, we offer a comprehensive portfolio of value-added services, which include supply chain management, logistics and transportation procurement, warehousing and inventory management as well as kitting and limited assembly of products. Our value-added capabilities, extensive geographic reach, experienced workforce and broad product and supply chain solutions have enabled us to grow our business and establish a leading position in North America.
We operate in highly fragmented markets that include thousands of small regional and locally based, privately owned competitors. In 2008, the latest year for which market share data is available, the five largest national distributors, including us, accounted for approximately 26% of estimated total electrical distribution industry sales in the United States. Our global account, integrated supply and OEM programs provide customers with a regional, national, North American and, in some cases, global supply chain consolidation opportunity. The demand for these programs has grown in recent years, driven primarily by the desire of companies to reduce operating expenses by implementing third-party programs for the operational and administrative functions associated with the procurement, management and utilization of MRO supplies and OEM components. We believe that significant opportunities exist for further expansion of these programs, as the total potential in the United States for purchases of supplies and services across all channels is currently estimated to be greater than $500 billion.
According to published sources, the electrical distribution industry has grown at an approximately 5% compound annual rate over the past 20 years. This expansion has been driven by general economic growth, increased price levels for key commodities, increased use of electrical products in businesses and industries, new products and technologies and the proliferation of enhanced building and safety codes and the internet. Wholesale distributors have also grown as a result of a long term shift in procurement preferences that favor the use of distributors over direct relationships with manufacturers.
Markets and Customers
We have a large base of over 100,000 customers across a diverse set of end markets. Our top ten customers accounted for approximately 11% of our sales in 2009. No one customer accounted for more than 4% of our total sales in 2009.
Industrial. Sales to industrial customers, which include manufacturing and process industries, accounted for approximately 40% of our sales in 2009. We provide MRO and OEM products and services for maintenance, repair and product assembly operations. MRO expenditures are greatest in the heavy process industries, such as food processing, metals, pulp and paper and petrochemical. MRO product categories include a broad range of electrical supplies as well as lubricants, pipe, valves and fittings, fasteners, cutting tools and power transmission products. OEM customers require a reliable supply of products or components to incorporate into their own products. In addition, OEM customers are particularly service and price sensitive due to the volume and the critical specifications of the product used, and they also expect value-added services such as supplier consolidation, design and technical support, just-in-time supply and electronic commerce.
Construction. Sales of electrical and data communications products to construction contractors accounted for approximately 36% of our sales in 2009. Customers range from large contractors for major industrial, infrastructure, commercial and data communication projects such as refineries, railways, hospitals, wastewater treatment facilities, data centers, security installations and offices, to small residential contractors. Electrical products purchased by electrical subcontractors typically account for approximately 40% to 50% of their installed project cost, making accurate cost estimates and competitive material costs critical to a contractor’s success in winning and completing profitable projects. In addition to a wide array of electrical products, we offer contractors data communications products such as IT/network modernization, physical security upgrades, broadband deployments, network security, and disaster recovery.
Utility. Sales to utilities and utility contractors accounted for approximately 17% of our sales in 2009. Customers include large investor-owned utilities, rural electric cooperatives, municipal power authorities and contractors that serve these customers. We provide our utility customers with products and services to support the construction and maintenance of their transmission and distribution lines along with an extensive range of supplies to meet their power plant MRO and capital projects needs. Full materials management and procurement outsourcing arrangements are also important in this market, as cost pressures and deregulation have caused utility customers to seek improvements in the efficiency and effectiveness of their supply chains.
Commercial, Institutional and Governmental(“CIG”). Sales to CIG customers accounted for approximately 7% of our sales in 2009. Customers include schools, hospitals, property management firms, retailers and federal, state and local government agencies of all types.
Our goal is to grow organically and through accretive acquisitions at a rate greater than that of our industry. Our organic growth strategy leverages our existing strengths and focuses on initiatives to enhance our sales and customer service, develop new end markets, broaden our product and service offerings and expand our geographic footprint. To support our organic growth strategy and to expand our ability to serve existing as well as new customers, we intend to pursue strategic acquisitions. We utilize LEAN continuous improvement initiatives on a company-wide basis to deliver operational excellence and improve results. We also extend our LEAN initiatives to customers to improve the efficiency and effectiveness of their operations and supply chains. In addition, we seek to generate a distinct competitive advantage through talent management and employee development processes and programs.
We currently are focusing our growth efforts on the following markets, customers and product solution areas:
Global account and integrated supply programs; Engineering, procurement and construction (“EPC”) firms and construction contractors; Government; Healthcare and Education; Utility; International; Data communication and security products; and Lighting systems and technologies related to sustainability.
Grow Our Global Account Customer Relationships and Base. Our typical global account customer is a Fortune 1000 industrial or commercial company, a large utility, a major contractor, or a governmental or institutional customer, in each case with multiple locations. Our global account program is designed to provide customers with supply chain management and cost reductions by coordinating activity for maintenance, repair and operating (“MRO”) supplies and direct materials across their multiple locations. Comprehensive implementation plans are managed at the local, national and international levels to identify key performance measures, prioritize activities and track progress against objectives. We involve our preferred suppliers early in the implementation process, where they can contribute expertise and product knowledge to accelerate program implementation and achievement of cost savings and process improvements.
Over the past ten years, revenue growth from our global account programs is estimated to have exceeded the compound annual growth rate of the overall electrical distribution industry. Our objective is to continue to increase revenue from our global account programs by expanding our product and service offerings to existing global account customers and expanding our reach to serve additional customer locations. We also plan on expanding our customer base by capitalizing on our industry expertise and supply chain optimization capabilities.
Extend Our Leadership Position in Integrated Supply Programs. Our integrated supply services are focused on customers in the industrial, utility, construction and CIG markets. We combine our personnel, product and distribution expertise, electronic technologies and service capabilities with the customer’s own internal resources to meet particular service requirements. Each integrated supply program is configured to significantly reduce the number of suppliers, total procurement costs, and administrative expenses as well as improve operating controls. Our integrated supply programs focus on supply chain optimization and replace the traditional multi-vendor, resource-intensive procurement process with a single, outsourced, fully automated process. Our services range from timely product delivery to a fully outsourced procurement function. We believe that customers will increasingly seek to utilize such services to consolidate and manage their MRO and OEM supply chains. We plan to expand our leadership position as the largest integrated supply services provider of MRO supplies in the United States by building upon established relationships within our large customer base and premier supplier network, and extending our services to locations outside the United States.
Expand Our Relationships with EPC Firms and Construction Contractors. Our construction sales are focused on contractors, particularly those involved with healthcare, educational facilities, data centers and energy and government infrastructure-related projects. We believe that significant cross selling opportunities exist for electrical and data communication products and we intend to use our global account programs, LEAN initiatives and project management expertise to capitalize on construction business.
Expand Government Business. Our dedicated government business development and sales team is focused on serving federal, state and local government agencies. We are focused on monitoring all activity and opportunities related to the American Recovery and Reinvestment Act and have seen positive results from these efforts, and plan to continue to emphasize this area of our business in 2010 and 2011.
Expand Our Position in Healthcare and Education. Our healthcare and education sales resources are focused on major metropolitan areas where we are well-established and where there is a concentration of these institutions and a desire to maximize productivity, minimize waste, improve safety and reduce cost. We plan on expanding our agreements with group purchasing organizations and integrated delivery networks, capitalizing on our LEAN initiatives, to enhance our position in these markets.
Expand Products and Services for Utilities. Our utility customers continue to be focused on transmission-related and alternative energy projects. As a result, we are focused on expanding our high voltage product categories and combining our integrated supply and project management programs to increase our scope of supply on transmission, generation and alternative energy construction projects. In addition, we have seen an increasing number of investor owned utility and public power customers (municipal utilities) apply for federal grant money under the provisions of the American Recovery and Reinvestment Act. Accordingly, we intend to focus our sales efforts on customers qualifying for federal funds looking to implement energy-efficient lighting system upgrades and “smart grid” programs.
Expand International Operations. We seek to capitalize on existing and emerging international market opportunities through collaborative investments with key customers and suppliers. We follow our established customers and pursue business that we believe utilizes and extends our existing capabilities. We believe this strategy of working through well-developed customer and supplier relationships significantly reduces risk and provides the opportunity to establish profitable business. Our priorities are focused on global energy and construction projects, as well as attractive vertical markets such as infrastructure, data communications, alternative energy and integrated supply and procurement outsourcing.
Grow Our Data Communications Position. Over the last several years, there has been a convergence of electrical and data communication contractors. Our ability to provide both electrical and data communication product lines as well as automation, electromechanical, non-electrical MRO, physical security and utility products has presented expanded cross selling opportunities between our industrial, utility, construction, OEM and data communication focused sales forces. Additionally, data communication products have continued to be in strong demand due to networking upgrades, low voltage security investments, data center upgrades and increasing broadband utilization. We are investing in the expansion of our data communication sales force and geographic footprint. We opened nine data communication branches within our existing branch locations in 2009. In 2010, we anticipate opening additional data communication branches within existing branches that do not have focused data communication sales teams.
Grow Lighting System Product Sales. Lighting applications are undergoing significant innovation driven by energy efficiency and sustainability trends. We have expanded our sales team and marketing initiatives, increasing lighting sales from 10% of total sales in 2008 to 11% in 2009. We will continue to focus significant resources on this product category as we believe the trends in lighting systems will provide attractive growth opportunities for the next several years.
Increase Business in Sustainable Technologies. Demand is building for sustainable and energy efficient solutions in the electrical distribution industry, and we are integrating “green” technologies into our product and service offerings. Our goal is to help our customers meet their environmental sustainability objectives by providing world-class sustainable products and solutions from leading manufacturers. We also provide the education and resources that organizations need to deploy these solutions.
Pursue Strategic Acquisitions. Since 1995, we have completed 32 acquisitions. We believe that the highly fragmented nature of the electrical and industrial distribution industry will continue to provide acquisition opportunities. We expect that any future acquisitions will be financed with internally generated funds, additional debt and/or the issuance of equity securities.
Drive Operational Excellence via LEAN. LEAN continuous improvement is a set of company-wide strategic initiatives to increase efficiency and effectiveness across the entire business enterprise, including sales, operations and administrative processes. The basic principles behind LEAN are to systematically identify and implement improvements through simplification, elimination of waste and reduction in errors. We apply LEAN in our distribution environment, and develop and deploy numerous initiatives through the Kaizen approach targeting improvements in sales, margin, warehouse operations, transportation, purchasing, inventory, accounts receivable, accounts payable, and administrative processes. Our objective is to continue to implement LEAN initiatives across our business enterprise and to extend LEAN services to our customers.
Talent Management. Our strategy is to develop a distinct competitive advantage through talent management and employee development. We believe our ability to attract, develop and retain diverse human capital is imperative to business success. We improve workforce capability through various programs and processes that identify, recruit, develop and promote our talent base. We have made significant enhancements in these programs over the last several years and we expect to continue to refine and enhance these programs in the future.
Products and Services
Our network of branches and distribution centers stock more than 250,000 unique product stock keeping units and we provide customers with access to more than 1,000,000 different products. Each branch tailors its inventory to meet the needs of its local customers.
Representative product categories and associated product lines that we offer include:
General and Industrial Supplies. Wiring devices, fuses, terminals, connectors, boxes, enclosures, fittings, lugs, terminations, tape, splicing and marking equipment, tools and testers, safety and security, personal protection, abrasives, cutting tools, tapes, consumables, fasteners, janitorial and other MRO supplies;
Wire, Cable and Conduit. Wire, cable, raceway, metallic and non-metallic conduit;
Data Communications. Structured cabling systems, low voltage specialty systems, specialty wire and cable products, equipment racks and cabinets, access control, alarms, cameras, paging and voice solutions;
Power Distribution Equipment. Circuit breakers, transformers, switchboards, panel boards, metering products and busway products;
Lighting and Controls. Lamps, fixtures, ballasts and lighting control products; and
Control, Automation and Motors. Motor control devices, drives, surge and power protection, relays, timers, pushbuttons, operator interfaces, switches, sensors, and interconnects.
We purchase products from a diverse group of more than 17,000 suppliers. In 2009, our ten largest suppliers accounted for approximately 33% of our purchases. The largest of these was Eaton Corporation, through its Eaton Electrical division, which accounted for approximately 12% of our total purchases. No other supplier accounted for more than 5% of our total purchases.
Our supplier relationships are important to us, providing access to a wide range of products, technical training, and sales and marketing support. We have preferred supplier agreements with more than 300 of our suppliers and purchase over 60% of our products pursuant to these agreements. Consistent with industry practice, most of our agreements with suppliers, including both distribution agreements and preferred supplier agreements, are terminable by either party on 60 days notice or less.