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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD from ______ to ______
For the quarterly period ended JUNE 30, 2002
Commission file number 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
COMMERCE COURT
FOUR STATION SQUARE, SUITE 700
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2200
(Address of principal executive offices) (Registrant's telephone number,
including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
--- ---
As of July 31, 2002, WESCO International, Inc. had 40,441,873 shares and
4,653,131 shares of common stock and Class B common stock outstanding,
respectively.
===============================================================================
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
- ----------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December
31, 2001......................................................................... 2
Condensed Consolidated Statements of Operations for the three months and six months
ended June 30, 2002 and 2001 (unaudited) ........................................ 3
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited) .............................................. 4
Notes to Condensed Consolidated Financial Statements (unaudited) ................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 21
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 21
Signatures............................................................................. 22
- ----------------------------------------------------------------------------------------------------------------
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
Dollars in thousands, except share data 2002 2001
- -----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 24,471 $ 75,057
Trade accounts receivable, net of allowance for doubtful
accounts of $11,174 and $11,816 in 2002 and 2001,
respectively (NOTE 5) .................................................. 242,625 217,920
Other accounts receivable ................................................. 15,408 26,413
Inventories, net .......................................................... 365,780 380,022
Income taxes receivable ................................................... 4,196 3,643
Prepaid expenses and other current assets ................................. 7,289 6,639
Deferred income taxes ..................................................... 7,931 8,341
----------------------------
Total current assets ................................................... 667,700 718,035
Property, buildings and equipment, net ........................................ 114,654 120,599
Goodwill ...................................................................... 311,804 311,073
Other assets .................................................................. 9,996 8,251
----------------------------
Total assets ........................................................... $ 1,104,154 $ 1,157,958
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 379,399 $ 469,107
Accrued payroll and benefit costs ......................................... 12,761 16,480
Current portion of long-term debt ......................................... 5,530 5,530
Other current liabilities ................................................. 31,518 38,362
----------------------------
Total current liabilities .............................................. 429,208 529,479
Long-term debt (NOTE 8) ....................................................... 485,184 446,436
Other noncurrent liabilities .................................................. 6,282 10,086
Deferred income taxes ......................................................... 26,348 27,306
----------------------------
Total liabilities ...................................................... 947,022 1,013,307
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares
issued or outstanding ................................................... -- --
Common stock, $.01 par value; 210,000,000 shares authorized, 44,466,916 and
44,269,810 shares issued in 2002 and 2001, respectively ................ 445 443
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,653,131 issued in 2002 and 2001 ................... 46 46
Additional capital ........................................................ 570,857 569,997
Retained earnings (deficit) ............................................... (380,508) (389,919)
Treasury stock, at cost; 4,032,019 and 4,032,648 shares in 2002 and 2001,
respectively ............................................................ (33,835) (33,852)
Accumulated other comprehensive income (loss) ............................. 127 (2,064)
----------------------------
Total stockholders' equity ............................................. 157,132 144,651
----------------------------
Total liabilities and stockholders' equity ............................. $ 1,104,154 $ 1,157,958
============================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
In thousands, except share data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Net sales .......................................... $ 848,449 $ 944,136 $ 1,657,366 $ 1,872,193
Cost of goods sold ................................. 698,996 779,305 1,362,269 1,540,243
------------------------------------------------------------
Gross profit .................................... 149,453 164,831 295,097 331,950
Selling, general and administrative expenses ....... 123,424 129,187 245,492 266,012
Depreciation and amortization ...................... 4,407 7,636 9,569 14,999
------------------------------------------------------------
Income from operations .......................... 21,622 28,008 40,036 50,939
Interest expense, net .............................. 11,130 10,937 22,074 21,934
Other expense ...................................... 1,687 4,599 3,114 10,664
------------------------------------------------------------
Income before income taxes and extraordinary
item ........................................ 8,805 12,472 14,848 18,341
Provision for income taxes ......................... 3,232 4,959 4,758 7,336
------------------------------------------------------------
Income before extraordinary item ............... 5,573 7,513 10,090 11,005
Extraordinary item, net of tax ..................... -- -- (679) --
------------------------------------------------------------
Net income ..................................... $ 5,573 $ 7,513 $ 9,411 $ 11,005
============================================================
Earnings per share:
Basic:
Income before extraordinary item ............... $ 0.12 $ 0.17 $ 0.22 $ 0.25
Extraordinary item ............................. -- -- (0.02) --
------------------------------------------------------------
Net income ..................................... $ 0.12 $ 0.17 $ 0.20 $ 0.25
============================================================
Diluted:
Income before extraordinary item ............... $ 0.12 $ 0.16 $ 0.22 $ 0.23
Extraordinary item ............................. -- -- (0.02) --
------------------------------------------------------------
Net income ..................................... $ 0.12 $ 0.16 $ 0.20 $ 0.23
============================================================
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ..................................................................... $ 9,411 $ 11,005
Adjustments to reconcile net income to net cash (used for) provided by operating
activities:
Extraordinary item, net of tax benefits ................................... 679 --
Depreciation and amortization ............................................. 9,569 14,999
Accretion of original issue and amortization of purchase discounts ........ 1,485 557
Amortization of debt issuance costs and interest rate caps ................ 492 357
Gain on sale of property, buildings and equipment ......................... (250) (447)
Deferred income taxes ..................................................... (548) 1,977
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ........................................ (55,000) --
Trade and other receivables ........................................... 41,300 39,473
Inventories ........................................................... 14,242 (4,348)
Other current and noncurrent assets ................................... 393 (1,680)
Accounts payable ...................................................... (89,708) 44,149
Accrued payroll and benefit costs ..................................... (3,719) (12,061)
Other current and noncurrent liabilities .............................. 3,024 (1,826)
------------------------
Net cash (used for) provided by operating activities ............. (68,630) 92,155
INVESTING ACTIVITIES:
Capital expenditures ........................................................... (3,376) (7,972)
Proceeds from the sale of property, buildings and equipment .................... 755 534
Acquisitions ................................................................... (10,741) (52,052)
------------------------
Net cash used for investing activities ........................... (13,362) (59,490)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ....................................... 380,096 298,263
Repayments of long-term debt ................................................... (346,195) (347,415)
Debt issuance costs ............................................................ (3,067) --
Proceeds from exercise of stock options ........................................ 572 299
------------------------
Net cash provided by (used for) financing activities ............. 31,406 (48,853)
------------------------
Net change in cash and cash equivalents ................................... (50,586) (16,188)
Cash and cash equivalents at the beginning of period ...................... 75,057 21,079
------------------------
Cash and cash equivalents at the end of period ............................ $ 24,471 $ 4,891
========================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, "WESCO"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of
electrical supplies and equipment and is a provider of integrated supply
procurement services. WESCO currently operates over 350 branch locations and
five distribution centers in the United States, Canada, Mexico, Puerto Rico,
Guam, the United Kingdom, Nigeria, Singapore and Venezuela.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of WESCO and all of its subsidiaries and have been prepared in
accordance with Rule 10-01 of the Securities and Exchange Commission. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in WESCO's 2001 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The unaudited condensed consolidated balance sheet as of June 30, 2002, the
unaudited condensed consolidated statements of operations for the three months
and six months ended June 30, 2002 and 2001, and the unaudited condensed
consolidated statements of cash flows for the six months ended June 30, 2002 and
2001, in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments necessary
for the fair presentation of the results of the interim periods. All adjustments
reflected in the condensed consolidated financial statements are of a normal
recurring nature. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of and supersedes SFAS No. 121. This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. This statement was adopted by WESCO as of January 1, 2002. The
adoption of this statement did not have a material impact on the results of
operations or financial position of WESCO.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 prescribes amendments to existing pronouncements on
accounting for early retirements of debt and modifications of capital leases to
operating leases. The provisions of this statement are effective for financial
statements issued on or after May 15, 2002. The Company does not believe that
the adoption of this statement will have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not believe that the adoption of this statement will have a
material impact on its financial statements.
5
3. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, WESCO adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS No. 141, all business combinations are accounted for under the purchase
method. Under SFAS No. 142, goodwill is no longer amortized, but will be reduced
if it is found to be impaired. Goodwill is tested for impairment annually or
more frequently when events or circumstances occur indicating that goodwill
might be impaired. During the six months ended June 30, 2002, WESCO completed
the transitional impairment review required by SFAS No. 142. Each of WESCO's
reporting units was tested for impairment by comparing the implied fair value of
each reporting unit with its carrying value using discounted cash flow analyses.
Considerable management judgment is necessary to estimate discounted future cash
flows. Assumptions used for these estimated cash flows were based on a
combination of historical results and current internal forecasts. No impairment
losses were identified as a result of this review.
In conformity with SFAS No. 142, the results of prior periods have not been
restated. The following is a reconciliation of the impact of not amortizing
goodwill in prior periods of WESCO's income before extraordinary item, net
income and earnings per share for the three and six months ended June 30, 2002
and June 30, 2001.
THREE MONTHS
ENDED JUNE 30
Dollars in thousands, except per share amounts 2002 2001
-----------------------------------------------------------------------------------
Reported net income ................................... $ 5,573 $ 7,513
Add: Goodwill amortization, net of tax ............... -- 1,811
-----------------------
Adjusted net income ................................... $ 5,573 $ 9,324
Basic earnings per share:
Reported net income ............................... $ 0.12 $ 0.17
Goodwill amortization, net of tax per
basic share ................................... -- $ 0.04
-----------------------
Adjusted net income ............................... $ 0.12 $ 0.21
=======================
Diluted earnings per share:
Reported net income ............................... $ 0.12 $ 0.16
Goodwill amortization, net of tax per
diluted share ................................. -- 0.04
-----------------------
Adjusted net income ............................... $ 0.12 $ 0.20
=======================
SIX MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2002 2001
-----------------------------------------------------------------------------------
Reported net income before extraordinary item ......... $ 10,090 $ 11,005
Add: Goodwill amortization, net of tax ................ -- 3,484
-----------------------
Adjusted income before extraordinary item ............. $ 10,090 $ 14,489
Basic earnings per share:
Reported income before extraordinary item ......... $ 0.22 $ 0.25
Goodwill amortization, net of tax per
basic share ................................... -- 0.08
-----------------------
Adjusted income before extraordinary item ......... $ 0.22 $ 0.33
=======================
Diluted earnings per share:
Reported income before extraordinary item ......... $ 0.22 $ 0.23
Goodwill amortization, net of tax per
diluted share ................................. -- 0.08
-----------------------
Adjusted income before extraordinary item ......... $ 0.22 $ 0.31
=======================
6
Dollars in thousands, except per share amounts 2002 2001
------------------------------------------------------------------------------------
Reported net income ................................... $ 9,411 $ 11,005
Add: Goodwill amortization, net of tax ............... -- 3,484
------------------------
Adjusted net income ................................... $ 9,411 $ 14,489
Basic earnings per share:
Reported net income ............................... $ 0.20 $ 0.25
Goodwill amortization, net of tax per
basic share ................................... -- 0.08
------------------------
Adjusted net income ............................... $ 0.20 $ 0.33
========= ==========
Diluted earnings per share:
Reported net income ............................... $ 0.20 $ 0.23
Goodwill amortization, net of tax per
diluted share ................................. -- 0.08
------------------------
Adjusted net income ............................... $ 0.20 $ 0.31
========= ==========
4. EARNINGS PER SHARE
The following tables set forth the details of basic and diluted earnings
per share before extraordinary item:
THREE MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2002 2001
- ---------------------------------------------------------------------------------------
Net income ......................................... $ 5,573 $ 7,513
Weighted average common shares outstanding used in
computing basic earnings per share .............. 45,033,911 44,872,816
Common shares issuable upon exercise of
dilutive stock options .......................... 2,042,889 2,153,061
---------------------------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share ...................... 47,076,800 47,025,877
===========================
Earnings per share before extraordinary item:
Basic ........................................... $ 0.12 $ 0.17
Diluted ......................................... $ 0.12 $ 0.16
- ---------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2002 2001
- ----------------------------------------------------------------------------------------
Net income ......................................... $ 10,090 $ 11,005
Weighted average common shares outstanding
used in computing basic earnings per share ...... 44,966,322 44,839,917
Common shares issuable upon exercise of
dilutive stock options .......................... 2,001,988 2,201,155
---------------------------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share ...................... 46,968,310 47,041,072
===========================
Earnings per share before extraordinary item:
Basic ........................................... $ 0.22 $ 0.25
Diluted ......................................... $ 0.22 $ 0.23
- ----------------------------------------------------------------------------------------
7
5. ACCOUNTS RECEIVABLE SECURITIZATION
Under its accounts receivable securitization program ("Receivables
Facility"), WESCO sells, on a continuous basis, to WESCO Receivables
Corporation, a wholly-owned, special purpose company ("SPC"), an undivided
interest in all domestic accounts receivable. The SPC sells without recourse to
a third-party conduit all the eligible receivables while maintaining a
subordinated interest, in the form of overcollateralization, in a portion of the
receivables. WESCO has agreed to continue servicing the sold receivables for the
financial institution at market rates; accordingly, no servicing asset or
liability has been recorded.
As of June 30, 2002 and December 31, 2001, securitized accounts receivable
totaled approximately $356 million and $395 million, respectively, of which the
subordinated retained interest was approximately $81 million and $65 million,
respectively. Accordingly, approximately $275 million and $330 million of
accounts receivable balances were removed from the consolidated balance sheets
at June 30, 2002 and December 31, 2001, respectively. WESCO reduced its accounts
receivable securitization program by $55 million in 2002. Costs associated with
the Receivables Facility totaled $3.1 million and $10.7 million for the six
months ended June 30, 2002 and June 30, 2001, respectively. These amounts are
recorded as other expenses in the consolidated statements of operations and are
primarily related to the discount and loss on the sale of accounts receivables,
partially offset by related servicing revenue.
The key economic assumptions used to measure the retained interest at the
date of the securitization for securitizations completed in 2002 were a discount
rate of 2% and an estimated life of 1.5 months. At June 30, 2002, an immediate
adverse change in the discount rate or estimated life of 10% and 20% would
result in a reduction in the fair value of the retained interest of $0.1 million
and $0.3 million, respectively. These sensitivities are hypothetical and should
be used with caution. As the figures indicate, changes in fair value based on a
10% variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. Also, in this example, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may result in
changes in another.
6. COMPREHENSIVE INCOME
The following tables set forth comprehensive income and its components:
THREE MONTHS ENDED
JUNE 30
In thousands 2002 2001
---------------------------------------------------------------------------------
Net income $ 5,573 $ 7,513
Foreign currency translation adjustment 2,240 360
---------------------
Comprehensive income $ 7,813 $ 7,873
---------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
---------------------------------------------------------------------------------
Net income $ 9,411 $11,005
Foreign currency translation adjustment 2,191 (212)
---------------------
Comprehensive income $11,602 $10,793
---------------------------------------------------------------------------------
8
7. CASH FLOW STATEMENT
Supplemental cash flow information with respect to acquisitions was as
follows:
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
----------------------------------------------------------------------------------
Details of acquisitions:
Fair value of assets acquired $ -- $ 63,732
Deferred acquisition payment 10,741 8,585
Liabilities assumed -- (15,265)
Deferred acquisition payable -- (5,000)
------------------------
Cash paid for acquisitions $ 10,741 $ 52,052
----------------------------------------------------------------------------------
8. LONG-TERM DEBT
In March 2002, WESCO Distribution, Inc. entered into a $290 million
revolving credit agreement that is collateralized by substantially all inventory
owned by WESCO and also by the accounts receivable of WESCO Distribution Canada,
Inc. Availability under the agreement, which matures in 2007, is limited to the
amount of eligible inventory and Canadian receivables applied against certain
advance rates. Proceeds from this agreement were used to retire WESCO
Distribution, Inc.'s existing revolving credit facility. Interest on this new
facility is at LIBOR plus a margin that will range between 2.0% to 2.75%
depending upon the amount of excess availability under the facility. As long as
the average daily excess availability for both the preceding and projected
succeeding 90 day period is greater than $50 million, WESCO would be permitted
to make acquisitions and repurchase outstanding public stock and bonds.
The above permitted transactions would also be allowed if such excess
availability is between $25 million and $50 million and WESCO's fixed charge
coverage ratio, as defined by the agreement, is at least 1.25 to 1.0 after
taking into consideration the permitted transaction. Additionally, if WESCO's
excess availability under the agreement is less than $50 million, WESCO must
maintain a fixed charge coverage ratio of 1.1 to 1.0.
Upon entering the new agreement, WESCO incurred a $0.7 million
extraordinary charge, net of tax, related to the write-off of debt issuance
costs associated with the former agreement.
9. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective income tax rate:
THREE MONTHS ENDED
JUNE 30
2002 2001
-------------------------
Federal statutory rate............................. 35.0% 35.0%
State income taxes................................. 1.4 1.5
Nondeductible expenses............................. 1.7 4.4
Other(1)........................................... (1.4) (1.1)
-------------------------
36.7% 39.8%
=========================
9
SIX MONTHS ENDED
JUNE 30
2002 2001
-------------------------
Federal statutory rate............................ 35.0% 35.0%
State income taxes................................ 1.4 1.5
Nondeductible expenses............................ 1.6 4.4
Foreign taxes..................................... 0.2 --
Remeasurement of deferred taxes(2)................ (4.7) --
Other(1).......................................... (1.5) (0.9)
-------------------------
32.0% 40.0%
=========================
(1) Includes the impact of adjustments for certain tax liabilities and the
effect of differences between the recorded provision and the final filed
tax return for the prior year.
(2) Reflects a decrease in the rate applied to deferred tax items from 40% to
38.25%. Management believes this revised estimate reflects the rate that
will be in effect when these items reverse.
10. OTHER FINANCIAL INFORMATION (UNAUDITED)
WESCO Distribution, Inc. has issued $400 million of 9 1/8% senior
subordinated notes. The senior subordinated notes are fully and unconditionally
guaranteed by WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Condensed
consolidating financial information for WESCO International, Inc., WESCO
Distribution, Inc. and the non-guarantor subsidiaries are as follows:
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2002
-------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------------------------------------------------------------------------------
Cash and cash equivalents ......... $ 2 $ 22,833 $ 1,636 $ -- $ 24,471
Trade accounts receivable ......... -- 45,874 196,751 -- 242,625
Inventories ....................... -- 322,840 42,940 -- 365,780
Other current assets .............. -- 23,734 20,609 (9,519) 34,824
-----------------------------------------------------------------------------------
Total current assets ........... 2 415,281 261,936 (9,519) 667,700
Intercompany receivables, net ..... -- 240,426 -- (240,426) --
Property, buildings and equipment,
net ............................ -- 44,997 69,657 -- 114,654
Goodwill .......................... -- 272,620 39,184 -- 311,804
Investments in affiliates and other
noncurrent assets .............. 377,711 304,709 2,698 (675,122) 9,996
-----------------------------------------------------------------------------------
Total assets ................... $ 377,713 $1,278,033 $ 373,475 $ (925,067) $1,104,154
===================================================================================
Accounts payable .................. $ -- $ 373,312 $ 6,087 $ -- $ 379,399
Other current liabilities ......... -- 27,194 32,134 (9,519) 49,809
-----------------------------------------------------------------------------------
Total current liabilities ...... -- 400,506 38,221 (9,519) 429,208
Intercompany payables, net ........ 220,708 -- 19,718 (240,426) --
Long-term debt .................... -- 470,694 14,490 -- 485,184
Other noncurrent liabilities ...... -- 29,122 3,508 -- 32,630
Stockholders' equity .............. 157,005 377,711 297,538 (675,122) 157,132
-----------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ........... $ 377,713 $1,278,033 $ 373,475 $ (925,067) $1,104,154
===================================================================================
10
DECEMBER 31, 2001
-------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------------------
Cash and cash equivalents ......... $ 2 $ 17,877 $ 57,178 $ -- $ 75,057
Trade accounts receivable ......... -- 45,873 172,047 -- 217,920
Inventories ....................... -- 341,597 38,425 -- 380,022
Other current assets .............. -- 50,514 24,481 (29,959) 45,036
-----------------------------------------------------------------------------------
Total current assets ........... 2 455,861 292,131 (29,959) 718,035
Intercompany receivables, net ..... -- 290,021 -- (290,021) --
Property, buildings and equipment,
net ............................ -- 49,330 71,269 -- 120,599
Goodwill .......................... -- 272,281 38,792 -- 311,073
Investments in affiliates and other
noncurrent assets .............. 372,598 276,886 2,869 (644,102) 8,251
-----------------------------------------------------------------------------------
Total assets ................... $ 372,600 $1,344,379 $ 405,061 $ (964,082) $1,157,958
===================================================================================
Accounts payable .................. $ -- $ 450,107 $ 19,000 $ -- $ 469,107
Other current liabilities ......... -- 53,858 36,473 (29,959) 60,372
-----------------------------------------------------------------------------------
Total current liabilities ...... -- 503,965 55,473 (29,959) 529,479
Intercompany payables, net ........ 225,886 -- 64,135 (290,021) --
Long-term debt .................... -- 433,808 12,628 -- 446,436
Other noncurrent liabilities ...... -- 34,008 3,384 -- 37,392
Stockholders' equity .............. 146,714 372,598 269,441 (644,102) 144,651
-----------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ........... $ 372,600 $1,344,379 $ 405,061 $ (964,082) $1,157,958
===================================================================================
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------------
Net sales ......................... $ -- $ 739,453 $ 108,996 $ -- $ 848,449
Cost of goods sold ................ -- 609,855 89,141 -- 698,996
Selling, general and administrative
expenses ....................... -- 107,290 16,134 -- 123,424
Depreciation and amortization ..... -- 3,629 778 -- 4,407
Results of affiliates' operations . 3,377 13,574 -- (16,951) --
Interest expense (income), net .... (3,250) 14,794 (414) -- 11,130
Other (income) expense ............ -- 19,407 (17,720) -- 1,687
Provision for income taxes ........ 1,054 (5,325) 7,503 -- 3,232
---------------------------------------------------------------------------------
Net income (loss) .............. $ 5,573 $ 3,377 $ 13,574 $ (16,951) $ 5,573
=================================================================================
THREE MONTHS ENDED JUNE 30, 2001
------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------------------
Net sales ......................... $ -- $ 829,454 $ 114,682 $ -- $ 944,136
Cost of goods sold ................ -- 686,148 93,157 -- 779,305
Selling, general and administrative
expenses ....................... -- 109,812 19,375 -- 129,187
Depreciation and amortization ..... -- 6,484 1,152 -- 7,636
Results of affiliates' operations . 6,299 10,197 -- (16,496) --
Interest expense (income), net .... (1,868) 15,888 (3,083) -- 10,937
Other (income) expense ............ -- 22,205 (17,606) -- 4,599
Provision for income taxes ........ 654 (7,185) 11,490 -- 4,959
---------------------------------------------------------------------------------
Net income (loss) .............. $ 7,513 $ 6,299 $ 10,197 $ (16,496) $ 7,513
=================================================================================
12
SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Net sales ......................... $ -- $ 1,443,773 $ 213,593 $ -- $ 1,657,366
Cost of goods sold ................ -- 1,187,630 174,639 -- 1,362,269
Selling, general and administrative
expenses ....................... -- 213,126 32,366 -- 245,492
Depreciation and amortization ..... -- 7,968 1,601 -- 9,569
Results of affiliates' operations . 5,113 25,912 -- (31,025) --
Interest expense (income), net .... (6,464) 29,096 (558) -- 22,074
Other (income) expense ............ -- 37,462 (34,348) -- 3,114
Provision for income taxes ........ 2,166 (11,346) 13,938 -- 4,758
---------------------------------------------------------------------------------------
Income (loss) before extraordinary
item ........................... 9,411 5,749 25,955 (31,025) 10,090
Extraordinary item ................ -- (636) (43) -- (679)
---------------------------------------------------------------------------------------
Net income (loss) .............. $ 9,411 $ 5,113 $ 25,912 $ (31,025) $ 9,411
=======================================================================================
SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Net sales ......................... $ -- $ 1,655,384 $ 216,809 $ -- $ 1,872,193
Cost of goods sold ................ -- 1,364,146 176,097 -- 1,540,243
Selling, general and administrative
expenses ....................... -- 229,839 36,173 -- 266,012
Depreciation and amortization ..... -- 12,917 2,082 -- 14,999
Results of affiliates' operations . 8,373 25,627 -- (34,000) --
Interest expense (income), net .... (4,050) 32,014 (6,030) -- 21,934
Other (income) expense ............ -- 48,288 (37,624) -- 10,664
Provision for income taxes ........ 1,418 (14,566) 20,484 -- 7,336
---------------------------------------------------------------------------------------
Net income (loss) .............. $ 11,005 $ 8,373 $ 25,627 $ (34,000) $ 11,005
=======================================================================================
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
----------------------------------------------------------------------------------
Net cash provided (used) by
operating activities ........... $ 4,606 $(16,064) $(57,172) $ -- $(68,630)
Investing activities:
Capital expenditures ........... -- (3,144) (232) -- (3,376)
Acquisitions and other ......... -- (9,986) -- -- (9,986)
-------------------------------------------------------------------------------
Net cash used in investing
activities ..................... -- (13,130) (232) -- (13,362)
Financing activities:
Net borrowings (repayments) .... (5,178) 37,217 1,862 -- 33,901
Equity transactions ............ 572 -- -- -- 572
Other .......................... -- (3,067) -- -- (3,067)
-------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities ........... (4,606) 34,150 1,862 -- 31,406
-------------------------------------------------------------------------------
Net change in cash and cash
equivalents .................... -- 4,956 (55,542) -- (50,586)
Cash and cash equivalents at
beginning of year .............. 2 17,877 57,178 -- 75,057
-------------------------------------------------------------------------------
Cash and cash equivalents at end of
period ......................... $ 2 $ 22,833 $ 1,636 $ -- $ 24,471
===============================================================================
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
--------------------------------------------------------------------------------------
Net cash provided (used) by
operating activities ........... $ 6,848 $ 34,248 $ 52,332 $ (1,273) $ 92,155
Investing activities:
Capital expenditures ........... -- (4,773) (3,199) -- (7,972)
Acquisitions and other ......... -- 534 (52,052) -- (51,518)
--------------------------------------------------------------------------------
Net cash used in investing
activities ..................... -- (4,239) (55,251) -- (59,490)
Financing activities:
Net borrowings (repayments) .... (7,151) (44,920) 2,919 -- (49,152)
Equity transactions ............ 299 -- -- -- 299
--------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities ........... (6,852) (44,920) 2,919 -- (48,853)
--------------------------------------------------------------------------------
Net change in cash and cash
equivalents .................... (4) (14,911) -- (1,273) (16,188)
Cash and cash equivalents at
beginning of year .............. 10 14,911 -- 6,158 21,079
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period.......................... $ 6 $ -- $ -- $ 4,885 $ 4,891
================================================================================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
in the unaudited condensed consolidated financial statements and notes thereto
included herein and WESCO International Inc.'s Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its 2001 Annual Report on Form 10-K.
GENERAL
WESCO is a full-line distributor of electrical supplies and equipment and
is a provider of integrated supply procurement services. WESCO currently
operates over 350 branch locations and five distribution centers in the United
States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, Nigeria,
Singapore and Venezuela. WESCO serves over 100,000 customers worldwide, offering
over 1,000,000 products from over 24,000 suppliers. WESCO's diverse customer
base includes a wide variety of industrial companies; contractors for
industrial, commercial and residential projects; utility companies, and
commercial, institutional and governmental customers. Approximately 89.5% of
WESCO's net sales are generated from operations in the U.S., 8.5% from Canada
and the remainder from other countries.
RECENT DEVELOPMENTS
Recent developments affecting the results of operations and financial
position of WESCO include the following:
In March 2002, WESCO Distribution, Inc. entered into a $290 million
revolving credit agreement that is collateralized by substantially all inventory
owned by WESCO and also by the accounts receivable of WESCO Distribution Canada,
Inc. Availability under the agreement, which matures in 2007, is limited to the
amount of eligible inventory and Canadian receivables applied against certain
advance rates. Proceeds from this agreement were used to retire WESCO
Distribution, Inc.'s existing revolving credit facility. Interest on this new
facility is at LIBOR plus a margin that will range between 2.0% to 2.75%
depending upon the amount of excess availability under the facility. As long as
the average daily excess availability for both the preceding and projected
succeeding 90 day period is greater than $50 million, WESCO would be permitted
to make acquisitions and repurchase outstanding public stock and bonds.
The above permitted transactions would also be allowed if such excess
availability is between $25 million and $50 million and WESCO's fixed charge
coverage ratio, as defined by the agreement, is at least 1.25 to 1.0 after
taking into consideration the permitted transaction. Additionally, if WESCO's
excess availability under the agreement is less than $50 million, WESCO must
maintain a fixed charge coverage ratio of 1.1 to 1.0.
At June 30, 2002, amounts available under the agreement were approximately
$66.6 million and WESCO was in compliance with all covenants of the new
facility.
RESULTS OF OPERATIONS
Second Quarter of 2002 versus Second Quarter of 2001
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's condensed consolidated statements of operations for the
periods presented:
THREE MONTHS ENDED
JUNE 30
2002 2001
-------------------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 17.6 17.5
Selling, general and administrative expenses 14.6 13.7
Depreciation and amortization 0.5 0.8
----------------------
Income from operations 2.5 3.0
Interest expense 1.3 1.2
Other expense 0.2 0.5
----------------------
Income before income taxes 1.0 1.3
Provision for income taxes 0.3 0.5
----------------------
Net income 0.7% 0.8%
-------------------------------------------------------------------------
15
Net Sales. Net sales in the second quarter of 2002 decreased $95.7 million,
or 10.1%, to $848.4 million compared with $944.1 million in the prior-year
quarter, primarily due to sales decline in the Company's core business. Core
business sales decreased 9.9% from the prior year quarter. The continued
weakness in the North American economy has affected the markets where WESCO
participates.
Gross Profit. Gross profit for the second quarter of 2002 decreased $15.3
million to $149.5 million from $164.8 million in the second quarter of 2001. The
decrease in gross profit compared to prior year is primarily attributable to the
decrease in sales versus prior year. Gross profit margin as a percentage of
sales was 17.6 % for the quarter ended June 30, 2002 and 17.5% for the quarter
ended June 30, 2001. Billing margins increased by approximately 50 basis points
over the second quarter of 2001 and were partially offset by lower levels of
supplier rebates and cash discounts that resulted from lower purchasing activity
and working capital improvements.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased $5.8 million, or 4.5%, to $123.4
million. SG&A expenses associated with WESCO's core business decreased 4.9%. The
decrease was principally due to compensation and benefit program expense
reductions. As a percent of sales, SG&A expenses increased to 14.6% compared
with 13.7% in the prior year quarter reflecting lower sales volume in the
current period.
Depreciation and Amortization. Depreciation and amortization decreased $3.2
million to $4.4 million reflecting the discontinuation of goodwill amortization
based on WESCO's adoption of SFAS No. 142. Depreciation and amortization expense
in 2001 included $3.0 million for amortization of goodwill.
Income From Operations. Income from operations decreased $6.4 million or
22.8% from the prior year quarter due to the previously mentioned lower sales
volume.
Interest and Other Expense. Interest expense totaled $11.1 million for the
second quarter of 2002, an increase of $0.2 million over the same period in
2001. Other expense totaled $1.7 million and $4.6 million in the second quarter
of 2002 and 2001, respectively, reflecting costs associated with the accounts
receivable securitization. The decrease was due to reduced fees and a lower
level of securitized accounts receivable.
Income Taxes. Income tax expense totaled $3.2 million in the second quarter
of 2002 and the effective tax rate was 36.7%. In the second quarter of 2001,
income tax expense totaled $5.0 million and the effective tax rate was 39.8%.
State tax reduction initiatives, the impact of SFAS No. 142 and establishment of
a foreign finance company caused the reduction in the effective tax rate.
Net Income. Net income and diluted earnings per share totaled $5.6 million
and $0.12, respectively, for the second quarter of 2002, compared with net
income of $7.5 million, or $0.16 per diluted share, for the second quarter of
2001.
Six Months Ended June 30, 2002 versus Six Months Ended June 30, 2001
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's condensed consolidated statements of operations for the
periods presented:
SIX MONTHS ENDED
JUNE 30
2002 2001
---------------------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 17.8 17.7
Selling, general and administrative expenses 14.8 14.2
Depreciation and amortization 0.6 0.8
-----------------------
Income from operations 2.4 2.7
Interest expense 1.3 1.2
Other expense 0.2 0.5
-----------------------
Income before income taxes 0.9 1.0
Provision for income taxes 0.3 0.4
-----------------------
Extraordinary item, net of tax benefits 0.0 --
-----------------------
Net income 0.6% 0.6%
---------------------------------------------------------------------------
16
Net Sales. Net sales for the first six months of 2002 decreased $214.8
million, or 11.5%, to $1,657.4 million compared with $1,872.2 million in the
prior year period, primarily due to a sales decline in the Company's core
business of 11.8%. The continued weakness in the North American economy has
affected the markets where WESCO participates.
Gross Profit. Gross profit for the first six months of 2002 decreased $36.9
million or 11.1% to $295.1 million from $332.0 million in 2001. The decrease was
primarily due to the aforementioned sales deterioration in the Company's core
business. Gross profit margin percentage was 17.8% and 17.7% for the current and
prior year period, respectively. Billing margins for the first six months of
2002 are 30 basis points over 2001 and are partially offset by lower levels of
supplier rebates and cash discounts that resulted from lower purchasing activity
and working capital improvements.
Selling, General and Administrative Expenses. SG&A expenses decreased $20.5
million, or 7.7%, to $245.5 million. SG&A expenses associated with WESCO's core
business decreased 8.7%. The decrease was principally due to compensation and
benefit program expense reductions in the period to period comparisons.
Permanent employee headcount has been reduced approximately 11% since March of
2001. As a percentage of net sales, SG&A expenses increased to 14.8% compared
with 14.2% in the prior year period reflecting a lower relative sales level.
Depreciation and Amortization. Depreciation and amortization decreased $5.4
million to $9.6 million reflecting the discontinuation of goodwill amortization
based on WESCO's adoption of SFAS No. 142. Depreciation and amortization expense
in 2001 included $5.8 million for amortization of goodwill. Capitalized software
amortization increased $0.9 million and depreciation expense decreased $0.5
million compared to 2001.
Interest and Other Expense. Interest expense totaled $22.1 million for the
first six months of 2002, an increase of $0.2 million from the same period in
2001. Other expense totaled $3.1 million and $10.7 million for the first six
months of 2002 and 2001, respectively, reflecting costs associated with the
accounts receivable securitization. The $7.6 million decrease was principally
due to reduced fees and a lower level of securitized accounts receivable.
Income Taxes. Income tax expense totaled $4.8 million and $7.3 million in
the first six months of 2002 and 2001, respectively. The effective tax rates for
2002 and 2001 were 32.0% and 40.0%, respectively. The 2002 effective tax rate
differs from the 2001 effective rate because of a decrease in the rate applied
to deferred tax items. WESCO believes this revised estimate reflects the
cumulative impact of a change in the expected tax rate that will be applicable
when these items reverse. The change in estimate was primarily due to state tax
reduction initiatives. In addition, the impact of SFAS No. 142 and establishment
of a foreign finance company contributed to the reduction in the effective tax
rate.
Income Before Extraordinary Item. For the first six months of 2002, income
before extraordinary item totaled $10.1 million or $0.22 per diluted share,
compared with $11.0 million, or $0.23 per diluted share in 2001. The decrease in
earnings is the result of lower gross profit, offset by lower SG&A, Depreciation
and amortization and Other expenses in the current year.
Net Income. Net income and diluted earnings per share totaled $9.4 million
and $0.20, respectively, for the first six months of 2002, compared with $11.0
million, or $0.23 per diluted share, for the first six months of 2001. Net
income includes a $0.7 million extraordinary item net of tax, related to a
charge incurred when WESCO replaced its revolving credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.1 billion and $1.2 billion at June 30, 2002 and
December 31, 2001, respectively. In addition, stockholders' equity was $157.1
million at June 30, 2002 compared to $144.7 million at December 31, 2001. Debt
was $490.7 million at June 30, 2002 as compared to $452.0 million at December
31, 2001, an increase of $38.7 million.
An analysis of cash flows for the first six months of 2002 and 2001
follows:
Operating Activities. Cash used by operating activities totaled $68.6
million in the first six months of 2002, compared to cash provided of $92.2
million in the prior year. In connection with WESCO's asset securitization
program, cash used by operations in 2002 includes $55 million used by our
accounts receivable securitization program. Excluding this transaction, cash
used by operating activities was $13.6 million in 2002 compared to cash
17
provided of $92.2 million in 2001. On this basis, the $105.8 million decrease in
operating cash flow was primarily due to an increase in cash utilized to reduce
accounts payable offset somewhat by reductions in accounts receivable and
inventory.
Investing Activities. Net cash used in investing activities was $13.4
million in the first six months of 2002, compared to $59.5 million in 2001. Cash
used for investing activities was higher in 2001 due to $52.1 million in cash
paid for acquisitions. WESCO's capital expenditures for the six months of 2002
were for computer equipment and software and branch and distribution center
facility improvements.
Financing Activities. Cash provided by financing activities totaled $31.4
million for the first six months of 2002 reflecting net borrowings of $33.9
million. In the first six months of 2001, cash used for financing activities
totaled $48.9 million primarily reflecting increased repayments of long-term
debt.
In March 2002, WESCO Distribution, Inc. entered into a $290 million
revolving credit agreement that is collateralized by substantially all inventory
owned by WESCO and also by the accounts receivable of WESCO Distribution Canada,
Inc. At June 30, 2002, amounts available under the agreement were approximately
$66.6 million, and WESCO was in compliance with all covenants of the new
facility.
WESCO's liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. In addition,
certain of our acquisition agreements contain earn-out provisions based
principally on future earnings targets. The most significant of which relates to
the acquisition of Bruckner Supply Company, which provides for an earn-out
potential of $80 million during any one of the next three years if certain
earnings targets are achieved. WESCO paid $10 million pursuant to this agreement
in April 2002 related to 2000 performance. The maximum amount payable in any
single year under this agreement is $30 million. Certain other acquisitions also
contain contingent consideration provisions, only one of which could require a
significant payment. Management estimates this payment could range from $0 to
$20 million and would be made in 2009. To meet its funding requirements, WESCO
uses a mix of internally generated cash flow, its revolving credit facility, its
Receivables Facility and equity transactions.
At June 30, 2002 WESCO's securitized accounts receivable balance totaled
$275.0 million.
As of July 31, 2002, WESCO has purchased $32.8 million of common stock
pursuant to the WESCO International share repurchase program, since its
inception. WESCO did not repurchase any shares under this program during the six
months ended June 30, 2002.
Management believes that cash generated from operations, together with
amounts available under the credit agreement and the receivables facility, will
be sufficient to meet WESCO's working capital, capital expenditures and other
cash requirements for the foreseeable future. There can be no assurance,
however, that this will be the case. Financing of acquisitions can be funded
under the existing credit agreement and may, depending on the number and size of
acquisitions, require the issuance of additional debt and equity securities.
As discussed above, WESCO refinanced its revolving credit facility in March
2002. The new facility matures in 2007. As a result of this refinancing and
increased borrowings since December 31, 2001, WESCO is no longer obligated to
repay $68.4 million in 2004. WESCO is contractually obligated to repay the
revolving credit facility balance in 2007 and at June 30, 2002 the revolving
credit facility balance was $107.5 million.
Other than the revolving credit facility refinancing, there have been no
material changes in WESCO's contractual cash obligations and other commercial
commitments during the quarter ended June 30, 2002 that would require an update
to the disclosure provided in WESCO's Form 10-K for the year ended December 31,
2001.
INFLATION
The rate of inflation, as measured by changes in the consumer price index,
did not have a material effect on the sales or operating results of the Company
during the periods presented. However, inflation in the future could affect the
Company's operating costs. Price changes from suppliers have historically been
consistent with inflation and have not had a material impact on the Company's
results of operations.
18
SEASONALITY
WESCO's operating results are affected by certain seasonal factors. Sales
are typically at their lowest during the first quarter due to a reduced level of
activity during the early part of the year due to the cold and unpredictable
weather. Sales increase during the warmer months beginning in March and
continuing through November due to favorable conditions for construction and the
tendency of companies to schedule maintenance and capital improvement spending
during the middle and latter part of the year. Sales drop again slightly in
December as the weather cools and also as a result of reduced level of activity
during the holiday season. As a result, WESCO reports sales and earnings in the
first and fourth quarters that are generally lower than that of the remaining
quarters.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, WESCO adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS No. 141, all business combinations are accounted for under the purchase
method. Under SFAS No. 142, goodwill is no longer amortized, but will be reduced
if it is found to be impaired. Goodwill is tested for impairment annually or
more frequently when events or circumstances occur indicating that goodwill
might be impaired. During the six months ended June 30, 2002, WESCO completed
the transitional impairment review required by SFAS No. 142. Each of WESCO's
reporting units was tested for impairment by comparing the implied fair value of
each reporting unit with its carrying value using discounted cash flow analyses.
Considerable management judgment is necessary to estimate discounted future cash
flows. Assumptions used for these estimated cash flows were based on a
combination of historical results and current internal forecasts. No impairment
losses were identified as a result of this review.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of and supersedes SFAS No. 121. This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. This statement was adopted by WESCO as of January 1, 2002. The
adoption of this statement did not have a material impact on the results of
operations or financial position of WESCO.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 prescribes amendments to existing pronouncements on
accounting for early retirements of debt and modifications of capital leases to
operating leases. The provisions of this statement are effective for financial
statements issued on or after May 15, 2002. The Company does not believe that
the adoption of this statement will have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not believe that the adoption of this statement will have a
material impact on its financial statements.
FORWARD-LOOKING STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding the future performance
of WESCO. When used in this context, the words "anticipates," "plans,"
"believes," "estimates," "intends," "expects," "projects" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. Such statements including,
but not limited to, WESCO's statements regarding its business strategy, growth
strategy, productivity and profitability enhancement, new product and service
introductions and liquidity and capital resources are based on management's
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, certain of which
are beyond WESCO's control. WESCO's actual results could differ materially from
those expressed in any forward-looking statement made by or on behalf of WESCO.
In light of these risks and uncertainties there can be no assurance that the
forward-looking information will in fact prove to be accurate. Factors that
might cause actual results to differ from such forward-looking statements
include, but are not limited to, an increase in competition, the amount of
outstanding indebtedness, the availability of appropriate acquisition
opportunities, availability of key products, functionality of information
systems, international operating environments
19
and other risks that are described in WESCO's Annual Report on Form 10-K for the
year ended December 31, 2001 which are incorporated by reference herein. WESCO
has undertaken no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Except as discussed below, there have not been any material changes to
WESCO's exposures to market risk during the six months ended June 30, 2002 that
would require an update to the disclosures provided in WESCO's Form 10-K for the
year-ended December 31, 2001.
At June 30, 2002 the net fair value of interest-rate-related derivatives
designated as fair value hedges of debt resulted in a gain of $0.2 million.
20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of WESCO shareholders held on May 22, 2002, Mr. Roy
W. Haley, Mr. George L. Miles, Jr. and Mr. James L. Singleton were reelected as
directors of WESCO to serve for three-year terms. Votes cast for Mr. Haley were
29,524,855 and votes withheld were 323,769; votes cast for Mr. Miles were
29,565,252 and votes withheld were 283,372; votes cast for Mr. Singleton were
29,523,960 and votes withheld were 324,664.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None were filed in the quarter ended June 30, 2002
(B) REPORTS ON FORM 8-K
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 9, 2002 on its
behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By: /s/ Stephen A. Van Oss
---------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of WESCO International, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Date: August 9, 2002 By: /s/ Roy W. Haley
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Roy W. Haley
Chairman and Chief Executive Officer
Date: August 9, 2002 By: /s/ Stephen A. Van Oss
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Stephen A. Van Oss
Vice President, Chief Financial Officer
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