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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 SEPTEMBER 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 October 31, 2002, WESCO International, Inc. had 40,450,493 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 September 30, 2002 (unaudited) and
December 31, 2001................................................................ 2
Condensed Consolidated Statements of Operations for the three months and nine
months ended September 30, 2002 and 2001 (unaudited) ............................ 3
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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.. 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 21
ITEM 4. Controls and Procedures................................................................ 21
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 22
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 22
Signatures and Certifications.......................................................... 23
- ------------------------------------------------------------------------------------------------------------------
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except share data 2002 2001
-------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 25,767 $ 75,057
Trade accounts receivable, net of allowance for doubtful
accounts of $11,900 and $11,816 in 2002 and 2001,
respectively (NOTE 5) ........................................................ 238,049 217,920
Other accounts receivable........................................................ 18,541 26,413
Inventories, net................................................................. 353,080 380,022
Income taxes receivable ......................................................... 10,811 3,643
Prepaid expenses and other current assets........................................ 7,254 6,639
Deferred income taxes ........................................................... -- 8,341
----------------------------
Total current assets.......................................................... 653,502 718,035
Property, buildings and equipment, net .............. 111,530 120,599
Goodwill......................................................................... 311,791 311,073
Other assets......................................................................... 14,645 8,251
----------------------------
Total assets.................................................................. $1,091,468 $1,157,958
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 389,709 $ 469,107
Accrued payroll and benefit costs................................................ 15,131 16,480
Current portion of long-term debt................................................ 5,530 5,530
Current deferred income taxes.................................................... 1,342 --
Other current liabilities........................................................ 28,410 38,362
----------------------------
Total current liabilities..................................................... 440,122 529,479
Long-term debt (NOTE 8) ............................................................. 453,595 446,436
Other noncurrent liabilities......................................................... 6,160 10,086
Deferred income taxes ............................................................... 27,051 27,306
----------------------------
Total liabilities............................................................. 926,928 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, 44,483,513 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............................................................. 570,924 569,997
Retained earnings (deficit) ................................................... (371,525) (389,919)
Treasury stock, at cost; 4,033,020 and 4,032,648 shares in 2002 and 2001,
respectively................................................................. (33,842) (33,852)
Accumulated other comprehensive income (loss) ................................. (1,508) (2,064)
----------------------------
Total stockholders' equity.................................................. 164,540 144,651
----------------------------
Total liabilities and stockholders' equity.................................. $1,091,468 $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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except share data 2002 2001 2002 2001
- ---------------------------------------------------------------- ------------------------------------------------------------
Net sales..................................................... $852,949 $905,554 $2,510,315 $2,777,747
Cost of goods sold ........................................... 706,462 746,335 2,068,731 2,286,578
------------------------------------------------------------
Gross profit............................................... 146,487 159,219 441,584 491,169
Selling, general and administrative expenses ................. 123,157 127,043 368,649 393,055
Depreciation and amortization................................. 4,999 7,901 14,568 22,900
------------------------------------------------------------
Income from operations..................................... 18,331 24,275 58,367 75,214
Interest expense, net......................................... 10,725 11,929 32,799 33,863
Other expense................................................. 1,790 3,854 4,904 14,518
------------------------------------------------------------
Income before income taxes and extraordinary item.......... 5,816 8,492 20,664 26,833
(Benefit from) provision for income taxes...................... (3,167) 3,397 1,591 10,733
------------------------------------------------------------
Income before extraordinary item........................... 8,983 5,095 19,073 16,100
Extraordinary item, net of tax................................. -- -- (679) --
------------------------------------------------------------
Net income................................................. $ 8,983 $ 5,095 $18,394 $ 16,100
============================================================
Earnings per share:
Basic:
Income before extraordinary item........................... $0.20 $0.11 $0.42 $0.36
Extraordinary item......................................... -- -- (0.02) --
------------------------------------------------------------
Net income ................................................ $0.20 $0.11 $0.40 $0.36
============================================================
Diluted:
Income before extraordinary item........................... $0.19 $0.11 $0.41 $0.34
Extraordinary item......................................... -- -- (0.02) --
------------------------------------------------------------
Net income ................................................ $0.19 $0.11 $0.39 $0.34
============================================ ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income......................................................................... $ 18,394 $ 16,100
Adjustments to reconcile net income to net cash (used for) provided by operating
activities:
Extraordinary item, net of tax benefits....................................... 679 --
Depreciation and amortization................................................. 14,568 22,900
Accretion of original issue and amortization of purchase discounts............ 2,229 1,058
Amortization of debt issuance costs........................................... 694 975
Gain on sale of property, buildings and equipment ............................ (256) (641)
Deferred income taxes ........................................................ 9,428 5,074
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ........................................... (47,500) (20,000)
Trade and other receivables............................................... 35,243 50,023
Inventories............................................................... 26,942 12,381
Other current and noncurrent assets....................................... (5,189) 2,103
Accounts payable.......................................................... (79,398) (65,970)
Accrued payroll and benefit costs......................................... (1,349) (11,076)
Other current and noncurrent liabilities.................................. 3,529 5,550
---------------------------
Net cash (used for) provided by operating activities................. (21,986) 18,477
INVESTING ACTIVITIES:
Capital expenditures............................................................... (5,431) (10,844)
Proceeds from the sale of property, buildings and equipment ....................... 755 905
Acquisitions....................................................................... (14,137) (55,874)
---------------------------
Net cash used for investing activities............................... (18,813) (65,813)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................................... 440,596 635,885
Repayments of long-term debt....................................................... (445,703) (606,351)
Debt issuance costs................................................................ (4,004) (733)
Proceeds from exercise of stock options............................................ 620 416
---------------------------
Net cash (used for) provided by financing activities................. (8,491) 29,217
---------------------------
Net change in cash and cash equivalents....................................... (49,290) (18,119)
Cash and cash equivalents at the beginning of period.......................... 75,057 21,079
---------------------------
Cash and cash equivalents at the end of period................................ $25,767 $ 2,960
===========================
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 September 30,
2002, the unaudited condensed consolidated statements of operations for the
three months and nine months ended September 30, 2002 and 2001, and the
unaudited condensed consolidated statements of cash flows for the nine months
ended September 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.
Revenue Recognition
Revenues are recognized when title, ownership and risk of loss pass to the
customer, or services rendered. In nearly all cases, this occurs at the time of
shipment from our distribution point, as the terms of virtually all of WESCO's
sales are "FOB shipping point."
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 adoption of this statement did
not have a material impact on WESCO's 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
seven 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. During the 4th
quarter of 2002, WESCO intends to complete the required annual impairment
testing of goodwill as of September 30, 2002.
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 nine months ended September 30,
2002 and September 30, 2001.
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2002 2001
----------------------------------------------------------- --------------- ------------
Reported net income....................................... $8,983 $5,095
Add: Goodwill amortization, net of tax .................. -- 1,827
----------------------------
Adjusted net income....................................... $8,983 $6,922
Basic earnings per share:
Reported net income .................................. $0.20 $0.11
Goodwill amortization, net of tax per share........... -- 0.04
----------------------------
Adjusted net income................................... $0.20 $0.15
============================
Diluted earnings per share:
Reported net income................................... $0.19 $0.11
Goodwill amortization, net of tax per share........... -- 0.04
----------------------------
Adjusted net income................................... $0.19 $0.15
============================
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2002 2001
----------------------------------------------------------------------------------------
Reported net income before extraordinary item............. $19,073 $16,100
Add: Goodwill amortization, net of tax ................... -- 5,311
----------------------------
Adjusted income before extraordinary item................. $19,073 $21,411
Basic earnings per share:
Reported income before extraordinary item............. $0.42 $0.36
Goodwill amortization, net of tax per share........... -- 0.12
----------------------------
Adjusted income before extraordinary item............. $0.42 $0.48
============================
Diluted earnings per share:
Reported income before extraordinary item............. $0.41 $0.34
Goodwill amortization, net of tax per share........... -- 0.12
----------------------------
Adjusted income before extraordinary item............. $0.41 $0.46
============================
6
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2002 2001
----------------------------------------------------------- --------------- ------------
Reported net income....................................... $18,394 $16,100
Add: Goodwill amortization, net of tax .................. -- 5,311
--------------- ------------
Adjusted net income....................................... $18,394 $21,411
Basic earnings per share:
Reported net income .................................. $ 0.40 $0.36
Goodwill amortization, net of tax per share........... -- 0.12
--------------- ------------
Adjusted net income................................... $0.40 $0.48
=============== ============
Diluted earnings per share:
Reported net income................................... $0.39 $0.34
Goodwill amortization, net of tax per share........... -- 0.12
--------------- ------------
Adjusted net income................................... $0.39 $0.46
=============== ============
4. EARNINGS PER SHARE
The following tables set forth the details of basic and diluted earnings
per share before extraordinary item:
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2002 2001
-----------------------------------------------------------------------------------------
Net income $8,983 $5,095
Weighted average common shares outstanding used in
computing basic earnings per share 45,097,383 44,863,290
Common shares issuable upon exercise of dilutive
stock options 1,807,543 2,046,303
-------------------------------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings per share 46,904,926 46,909,593
===============================
Earnings per share:
Basic $0.20 $0.11
Diluted $0.19 $0.11
-----------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2002 2001
-----------------------------------------------------------------------------------------
Income before extraordinary item $19,073 $16,100
Weighted average common shares outstanding used in
computing basic earnings per share 45,010,489 44,810,802
Common shares issuable upon exercise of dilutive
stock options 1,886,699 2,151,527
-------------------------------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings per share 46,897,188 46,962,329
===============================
Earnings per share before extraordinary item:
Basic $0.42 $0.36
Diluted $0.41 $0.34
-----------------------------------------------------------------------------------------
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 September 30, 2002 and December 31, 2001, securitized accounts
receivable totaled approximately $361 million and $395 million, respectively, of
which the subordinated retained interest was approximately $78 million and $65
million, respectively. Accordingly, approximately $283 million and $330 million
of accounts receivable balances were removed from the consolidated balance
sheets at September 30, 2002 and December 31, 2001, respectively. WESCO reduced
its accounts receivable securitization program by $47 million in 2002. Costs
associated with the Receivables Facility totaled $4.9 million and $14.5 million
for the nine months ended September 30, 2002 and September 30, 2001,
respectively. These amounts are recorded as other expense 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 September 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
SEPTEMBER 30
In thousands 2002 2001
----------------------------------------------------------------------------------
Net income $ 8,983 $ 5,095
Foreign currency translation adjustment (1,635) (444)
---------------------------
Comprehensive income $ 7,348 $ 4,651
----------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2002 2001
----------------------------------------------------------------------------------
Net income $18,394 $16,100
Foreign currency translation adjustment 556 (656)
---------------------------
Comprehensive income $18,950 $15,444
----------------------------------------------------------------------------------
8
7. CASH FLOW STATEMENT
The following table sets forth supplemental cash flow information with
respect to acquisitions:
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2002 2001
------------------------------------------------------ ------------- -------------
Details of acquisitions:
Fair value of assets acquired $ -- $61,678
Deferred acquisition payment 14,137 14,461
Liabilities assumed -- (15,265)
Deferred acquisition payable -- (5,000)
---------------------------
Cash paid for acquisitions $14,137 $55,874
----------------------------------------------------------------------------------
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
SEPTEMBER 30
2002 2001
------------ ------------
Federal statutory rate................................................. 35.0% 35.0%
State income taxes..................................................... 1.4 1.5
Nondeductible expenses................................................. 3.9 4.4
Foreign taxes ......................................................... (0.6) --
Reversal of income tax contingency accruals(1) ........................ (91.1) --
Other(2)............................................................... (3.1) (0.9)
-------------------------
(54.5)% 40.0%
=========================
9
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
-------------------------
Federal statutory rate................................................. 35.0% 35.0%
State income taxes..................................................... 1.2 1.5
Nondeductible expenses................................................. 3.6 4.4
Foreign taxes.......................................................... (1.7) --
Remeasurement of deferred taxes(3)..................................... (3.3) --
Reversal of income tax contingency accrual(1).......................... (25.6) --
Other(2)............................................................... (1.5) (0.9)
-------------------------
7.7% 40.0%
=========================
(1) Represents a benefit of $5.3 million from the resolution of
prior tax year contingencies upon acceptance by the IRS of tax
returns filed through 1998 and the expected favorable
conclusion of the IRS examination for 1999.
(2) 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.
(3) 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.
Current deferred income taxes changed from an asset of $8.3 million at
December 31, 2001 to a liability of $1.3 million at September 30, 2002. The
primary factors associated with the change in balance were tax accounting method
changes related to certain working capital items.
10
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
SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Cash and cash equivalents............ $ 2 $ 16,581 $ 9,184 $ -- $ 25,767
Trade accounts receivable............ -- 45,874 192,175 -- 238,049
Inventories.......................... -- 309,913 43,167 -- 353,080
Other current assets................. -- 41,695 14,674 (19,763) 36,606
---------------------------------------------------------------------------------------
Total current assets.............. 2 414,063 259,200 (19,763) 653,502
Intercompany receivables, net........ -- 220,879 -- (220,879) --
Property, buildings and equipment,
net.............................. -- 42,620 68,910 -- 111,530
Goodwill............................ -- 272,663 39,128 -- 311,791
Investments in affiliates and other
noncurrent assets................. 384,464 324,545 35 (694,399) 14,645
---------------------------------------------------------------------------------------
Total assets...................... $ 384,466 $1,274,770 $ 367,273 $ (935,041) $1,091,468
=======================================================================================
Accounts payable..................... $ -- $ 382,973 $ 6,736 $ -- $ 389,709
Other current liabilities............ -- 37,004 33,172 (19,763) 50,413
-------------- ------------------- ---------------- ----------------- -----------------
Total current liabilities......... -- 419,977 39,908 (19,763) 440,122
Intercompany payables, net........... 218,418 -- 2,461 (220,879) --
Long-term debt....................... -- 439,594 14,001 -- 453,595
Other noncurrent liabilities......... -- 30,735 2,476 -- 33,211
Stockholders' equity................. 166,048 384,464 308,427 (694,399) 164,540
---------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity........... $384,466 $1,274,770 $ 367,273 $ (935,041) $1,091,468
=======================================================================================
11
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
=======================================================================================
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Net sales............................ $ -- $738,091 $114,858 $ -- $852,949
Cost of goods sold................... -- 613,083 93,379 -- 706,462
Selling, general and administrative
expenses.......................... -- 106,893 16,264 -- 123,157
Depreciation and amortization........ -- 4,174 825 -- 4,999
Results of affiliates' operations.... 6,753 12,524 -- (19,277) --
Interest expense (income), net....... (3,285) 12,690 1,320 -- 10,725
Other (income) expense............... -- 18,192 (16,402) -- 1,790
Provision for (benefit from) income
taxes............................. 1,055 (11,170) 6,948 -- (3,167)
---------------------------------------------------------------------------------------
Net income (loss)................. $ 8,983 $ 6,753 $ 12,524 $(19,277) $ 8,983
=======================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
----------------------------------------------------------------------------------------
Net sales............................ $ -- $785,680 $119,874 $ -- $905,554
Cost of goods sold................... -- 648,587 97,748 -- 746,335
Selling, general and administrative
expenses.......................... -- 109,257 17,786 -- 127,043
Depreciation and amortization........ -- 6,801 1,100 -- 7,901
Results of affiliates' operations.... 8,086 21,127 -- (29,213) --
Interest expense (income), net....... (1,744) 16,476 (2,803) -- 11,929
Other (income) expense............... -- 23,458 (19,604) -- 3,854
Provision for (benefit from) income
taxes............................. 4,735 (5,858) 4,520 -- 3,397
---------------------------------------------------------------------------------------
Net income (loss)................. $ 5,095 $ 8,086 $ 21,127 $(29,213) $ 5,095
=======================================================================================
13
NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Net sales............................ $ -- $2,181,864 $328,451 $ -- $2,510,315
Cost of goods sold................... -- 1,800,713 268,018 -- 2,068,731
Selling, general and administrative
expenses.......................... -- 320,019 48,630 -- 368,649
Depreciation and amortization........ -- 12,142 2,426 -- 14,568
Results of affiliates' operations.... 11,866 38,436 -- (50,302) --
Interest expense (income), net....... (9,749) 41,786 762 -- 32,799
Other (income) expense............... -- 55,654 (50,750) -- 4,904
Provision for (benefit from) income
taxes............................. 3,221 (22,516) 20,886 -- 1,591
---------------------------------------------------------------------------------------
Income (loss) before extraordinary
item ............................ 18,394 12,502 38,479 (50,302) 19,073
Extraordinary item................... -- (636) (43) -- (679)
---------------------------------------------------------------------------------------
Net income (loss)................. $18,394 $ 11,866 $ 38,436 $(50,302) $ 18,394
=======================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------------------------------------------------------------------------------
Net sales............................ $ -- $2,441,064 $336,683 $ -- $2,777,747
Cost of goods sold................... -- 2,012,733 273,845 -- 2,286,578
Selling, general and administrative
expenses.......................... 11 339,085 53,959 -- 393,055
Depreciation and amortization........ -- 19,718 3,182 -- 22,900
Results of affiliates' operations.... 16,459 46,754 -- (63,213) --
Interest expense (income), net....... (5,805) 48,501 (8,833) -- 33,863
Other (income) expense............... -- 71,746 (57,228) -- 14,518
Provision for (benefit from) income
taxes............................. 6,153 (20,424) 25,004 -- 10,733
---------------------------------------------------------------------------------------
Net income (loss)................. $16,100 $ 16,459 $ 46,754 $(63,213) $ 16,100
=======================================================================================
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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.............. $ 6,848 $ 20,188 $ (49,022) $-- $(21,986)
Investing activities:
Capital expenditures.............. -- (5,086) (345) -- (5,431)
Acquisitions and other............ -- (13,382) -- -- (13,382)
---------------------------------------------------------------------------------------
Net cash used in investing
activities........................ -- (18,468) (345) -- (18,813)
Financing activities:
Net borrowings (repayments) ...... (7,468) 988 1,373 -- (5,107)
Equity transactions............... 620 -- -- -- 620
Other............................. -- (4,004) -- -- (4,004)
---------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities........... (6,848) (3,016) 1,373 -- (8,491)
---------------------------------------------------------------------------------------
Net change in cash and cash
equivalents....................... -- (1,296) (47,994) -- (49,290)
Cash and cash equivalents at
beginning of year................. 2 17,877 57,178 -- 75,057
---------------------------------------------------------------------------------------
Cash and cash equivalents at end of
period............................ $ 2 $ 16,581 $ 9,184 $-- $ 25,767
=======================================================================================
NINE MONTHS ENDED SEPTEMBER 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.............. $ 15,844 $(43,628) $ 58,316 $(12,055) $ 18,477
Investing activities:
Capital expenditures.............. -- (6,324) (4,520) -- (10,844)
Acquisitions and other............ -- (9,591) (45,378) -- (54,969)
---------------------------------------------------------------------------------------
Net cash used in investing
activities........................ -- (15,915) (49,898) -- (65,813)
Financing activities:
Net borrowings (repayments) ...... (16,264) 44,632 433 -- 28,801
Equity transactions............... 416 -- -- -- 416
---------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities........... (15,848) 44,632 433 -- 29,217
---------------------------------------------------------------------------------------
Net change in cash and cash
equivalents....................... (4) (14,911) 8,851 (12,055) (18,119)
Cash and cash equivalents at
beginning of year................. 10 14,911 -- 6,158 21,079
---------------------------------------------------------------------------------------
Cash and cash equivalents at end of
period............................ $ 6 $ -- $ 8,851 $ (5,897) $ 2,960
========================================================================================
15
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 ranges 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 September 30, 2002, amounts available under the agreement were
approximately $104.6 million and WESCO was in compliance with all covenants of
the new facility.
RESULTS OF OPERATIONS
Third Quarter of 2002 versus Third 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
SEPTEMBER 30
2002 2001
----------------------------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 17.2 17.6
Selling, general and administrative expenses 14.4 14.0
Depreciation and amortization 0.6 0.9
---------------------------
Income from operations 2.2 2.7
Interest expense 1.3 1.3
Other expense 0.2 0.4
---------------------------
Income before income taxes 0.7 1.0
(Benefit from) provision for income taxes (0.4) 0.4
---------------------------
Net income 1.1% 0.6%
----------------------------------------------------------------------------------
16
Net Sales. Net sales in the third quarter of 2002 decreased $52.6 million,
or 5.8%, to $852.9 million compared with $905.5 million in the prior-year
quarter. Improvement in our industrial accounts MRO sales was offset by
continued weakness in the commercial construction and utility markets. The
continued weakness in the North American economy has affected the markets where
WESCO participates.
Gross Profit. Gross profit for the third quarter of 2002 decreased $12.7
million to $146.5 million from $159.2 million in the third 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 17.2 % for the quarter ended September 30, 2002 and 17.6% for the
quarter ended September 30, 2001. Lower levels of supplier rebates and cash
discounts that resulted from lower purchasing activity and working capital
improvements were partially offset by billing margin improvements of
approximately 30 basis points. In addition, during the fiscal 2002 third
quarter, we recorded non-recurring charges of approximately $5.2 million to
recognize additional inventory reserves. The reserves primarily address excess
specialized inventory for customers in the telecommunications industry which has
continued to show weakness and inventory associated with exiting certain
international operations during the third quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased $3.9 million, or 3.1%, to $123.2
million. The decrease was principally due to compensation and benefit program
expense reductions. Bad debt expense was $2.7 million in both the third quarter
of 2002 and 2001. Shipping and handling expense included in SG&A expenses
amounts to $9.3 million and $9.6 million for the quarters ended September 30,
2002 and 2001, respectively. As a percent of sales, SG&A expenses increased to
14.4% compared with 14.0% in the prior year quarter reflecting lower sales
volume in the current period.
Depreciation and Amortization. Depreciation and amortization decreased
$2.9 million to $5.0 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 $5.9 million or
24.5% from the prior year quarter due primarily to the previously mentioned
lower sales volume.
Interest and Other Expense. Interest expense totaled $10.7 million for the
third quarter of 2002, a decrease of $1.2 million over the same period in 2001.
Other expense totaled $1.8 million and $3.9 million in the third quarter of 2002
and 2001, respectively, and was comprised of costs associated with the accounts
receivable securitization. The decrease was due to reduced fees and a lower
level of securitized accounts receivable.
Income Taxes. For the three months ended September 30, 2002, the effective
tax rate was a negative 54.5%. This is a result of a $5.3 million tax benefit
for the reversal of income tax contingency accruals upon acceptance by the IRS
of tax returns filed through 1998 and the expected favorable conclusion of the
IRS examination for 1999. Excluding the effects of this benefit, the effective
rate would have been 36.4%, compared to 40% for the same three-month period in
2001. This decrease is the result of less amortization in relation to the
adoption of FAS 142 and the creation of a foreign finance company.
Net Income. Net income and diluted earnings per share totaled $9.0 million
and $0.19, respectively, for the third quarter of 2002, compared with net income
of $5.1 million, or $0.11 per diluted share, for the third quarter of 2001.
17
Nine Months Ended September 30, 2002 versus Nine Months Ended September 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:
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
----------------------------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 17.6 17.7
Selling, general and administrative expenses 14.7 14.2
Depreciation and amortization 0.6 0.8
------------------------------
Income from operations 2.3 2.7
Interest expense 1.3 1.2
Other expense 0.2 0.5
------------------------------
Income before income taxes 0.8 1.0
Provision for income taxes 0.1 0.4
------------------------------
Extraordinary item, net of tax benefits 0.0 --
------------------------------
Net income 0.7% 0.6%
----------------------------------------------------------------------------------
Net Sales. Net sales for the first nine months of 2002 decreased $267.4
million, or 9.6%, to $2.5 billion compared with $2.8 billion in the prior year
period, primarily due to a sales decline in the Company's core business of 9.8%.
The continued weakness in the North American economy has affected the markets
where WESCO participates.
Gross Profit. Gross profit for the first nine months of 2002 decreased
$49.6 million or 10.1% to $441.6 million from $491.2 million in 2001. The
decrease was primarily due to the aforementioned sales deterioration in the
Company's core business. Gross profit margin percentage was 17.6% and 17.7% for
the current and prior year period, respectively. Billing margin improvements in
the first nine months of 2002 of 30 basis points over 2001 were offset by
increased inventory reserves, as well as, 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 $24.4
million, or 6.2%, to $368.6 million. SG&A expenses associated with WESCO's core
business decreased 6.8%. The decrease was principally due to compensation and
benefit program expense reductions in the current period. Permanent employee
headcount has been reduced approximately 12% since March of 2001. Bad debt
expense for the nine months ended September 30, 2002 was $6.5 million compared
to $8.7 million for the same period in 2001. The improvement from 2001 is
primarily due to reducing exposure to troubled accounts and industries through
more stringent credit policies. Shipping and handling expenses included in SG&A
expense amounts to $28.2 million and $28.5 million for the nine months ended
September 30, 2002 and September 30, 2001, respectively. As a percentage of net
sales, SG&A expenses increased to 14.7% compared with 14.2% in the prior year
period reflecting a lower relative sales level.
Depreciation and Amortization. Depreciation and amortization decreased $8.3
million to $14.6 million reflecting the discontinuation of goodwill amortization
based on WESCO's adoption of SFAS No. 142. Depreciation and amortization expense
in 2001 included $8.9 million for amortization of goodwill. Capitalized software
amortization increased $1.6 million and depreciation expense decreased $1.0
million compared to 2001.
Interest and Other Expense. Interest expense totaled $32.8 million for the
first nine months of 2002, a decrease of $1.1 million from the same period in
2001. Other expense totaled $4.9 million and $14.5 million for the first nine
months of 2002 and 2001, respectively, and was comprised of costs associated
with the accounts receivable securitization. The $9.6 million decrease was
principally due to reduced fees and a lower level of securitized accounts
receivable.
Income Taxes. The overall effective tax rate in 2002 is 7.7%, which has
been decreased primarily by a $5.3 million third quarter benefit for the
reversal of income tax contingency accruals upon acceptance by the IRS of tax
returns filed through 1998 and the expected favorable conclusion of the IRS
examination for 1999, as well as a first quarter income tax benefit of
approximately $0.7 million related to the re-measurement of deferred taxes
related to the cumulative impact of a change in the expected tax rate that will
be applicable when these items reverse. The effective tax rate, excluding
unusual items was approximately 36.6% in 2002 compared with 40.0% in 2001. The
18
decrease in the effective tax rate is the result of the creation of a foreign
finance company, and decreased amortization expense from the adoption of FAS
142.
Income Before Extraordinary Item. For the first nine months of 2002, income
before extraordinary item totaled $19.1 million or $0.41 per diluted share,
compared with $16.1 million, or $0.34 per diluted share in 2001. The increase in
earnings is the result of lower income tax expense, lower SG&A, amortization and
other expense, partially offset by lower gross profit in the current year.
Net Income. Net income and diluted earnings per share totaled $18.4 million
and $0.39, respectively, for the first nine months of 2002, compared with $16.1
million, or $0.34 per diluted share, for the first nine 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 September 30, 2002 and
December 31, 2001, respectively. In addition, stockholders' equity was $164.5
million at September 30, 2002 compared to $144.7 million at December 31, 2001.
Debt was $459.1 million at September 30, 2002 as compared to $452.0 million at
December 31, 2001, an increase of $7.1 million.
An analysis of cash flows for the first nine months of 2002 and 2001
follows:
Operating Activities. Cash used by operating activities totaled $22.0
million in the first nine months of 2002, compared to cash provided of $18.5
million in the prior year. In connection with WESCO's asset securitization
program, cash used by operations in 2002 and 2001 included $47.5 million and $20
million, respectively, used by our accounts receivable securitization program.
Excluding this transaction, cash provided by operating activities was $25.5
million in 2002 compared to cash provided of $38.5 million in 2001. On this
basis, the $13.0 million decrease in operating cash flow was primarily due to
paydowns of accounts payable.
Investing Activities. Net cash used in investing activities was $18.8
million in the first nine months of 2002, compared to $65.8 million in 2001.
Cash used for investing activities was higher in 2001 due to $41.7 million more
in acquisition payments and $5.4 million more in capital expenditures. WESCO's
capital expenditures for the nine months of 2002 were for computer equipment and
software and branch and distribution center facility improvements.
Financing Activities. Cash used for financing activities totaled $8.5
million for the first nine months of 2002 reflecting net repayments of $5.1
million and cash expenditures for debt issuance costs. In the first nine months
of 2001, cash provided by financing activities totaled $29.2 million primarily
reflecting increased net borrowings 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 September 30, 2002, amounts available under the agreement were
approximately $104.6 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 2008. 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 September 30, 2002 WESCO's securitized accounts receivable balance
totaled $283 million.
As of October 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
19
program during the nine months ended September 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 $68.6 million in 2004. WESCO is contractually obligated to repay the
revolving credit facility balance in 2007 and at September 30, 2002 the
revolving credit facility balance was $63.5 million.
WESCO is currently working to complete a mortgage financing transaction to
provide additional liquidity and financial flexibility for the Company, as well
as to lock in attractive fixed interest rates for longer-term capital. Proceeds
from the mortgage financing are expected to be up to approximately $50 million
with a 22-year amortization schedule and a 10-year repayment period. The
proceeds from the financing are expected to be used to reduce outstanding
borrowings under WESCO's revolving credit facility. The mortgage financing,
which is subject to continuing due diligence, market conditions and negotiation
of final terms and agreements, is currently expected to be completed by the end
of 2002.
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 September 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.
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
seven 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. During the 4th
quarter of 2002, WESCO intends to complete the required annual impairment
testing of goodwill as of September 30, 2002.
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.
20
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
adoption of this statement did not have a material impact on WESCO's 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 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 nine months ended September 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 September 30, 2002 the net fair value of interest-rate-related
derivatives designated as fair value hedges of debt resulted in an increase in
the fair value of the hedge of $6.9 million.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days before the
filing date of this quarterly report. Based on that evaluation, management,
including the CEO and CFO, concluded that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by WESCO in
reports that it files under the Exchange Act are recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission rules and forms. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to their evaluation.
21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None were filed in the quarter ended September 30, 2002
(b) REPORTS ON FORM 8-K
On August 15, 2002 WESCO filed a Current Report on Form 8-K pursuant to
Item 9. On August, 15, 2002, WESCO furnished the information pursuant to
Regulation FD promulgated by the Securities and Exchange Commission
("SEC").
On August 22, 2002 WESCO filed a Current Report on Form 8-K pursuant to
Item 5. On August 20, 2002, Standard & Poor's Ratings Services revised its
outlook on WESCO Distribution, Inc., a wholly owned subsidiary of WESCO, to
negative from stable because of the uncertainties regarding the timing and
magnitude of recovery of its key industrial and construction markets.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on November 8,
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
23
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Roy W. Haley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WESCO
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ Roy W. Haley
---------------------------------------
Roy W. Haley
Chairman and Chief Executive Officer
24
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Stephen A. Van Oss, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WESCO
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ Stephen A. Van Oss
------------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
25
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 September 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: November 8, 2002 By: /s/ Roy W. Haley
---------------------------------------
Roy W. Haley
Chairman and Chief Executive Officer
Date: November 8, 2002 By: /s/ Stephen A. Van Oss
---------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
26