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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 WEST STATION SQUARE DRIVE 15219
SUITE 700 (Zip Code)
PITTSBURGH, PENNSYLVANIA
(Address of principal executive offices)
(412) 454-2200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The registrant estimates that the aggregate market value of the voting
shares held by non-affiliates of the registrant was approximately $114.5 million
based on the June 28, 2002, the last business day of the registrant's most
recently completed second fiscal quarter, closing price on the New York Stock
Exchange for such stock.
As of February 28, 2003, 40,455,493 shares of Common Stock, par value $.01
per share ("Common Stock") and 4,653,131 shares of Class B Common Stock, par
value $.01 per share ("Class B Common Stock") of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates by reference portions of the
registrant's Proxy Statement for its 2003 Annual Meeting of Stockholders.
WESCO INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business ..................................................................... 2
Item 2. Properties ................................................................... 14
Item 3. Legal Proceedings ............................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders .......................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........ 15
Item 6. Selected Financial Data ...................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risks .................. 26
Item 8. Financial Statements and Supplementary Data .................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures .................................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 55
Item 11. Executive Compensation ....................................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................... 56
Item 13. Certain Relationships and Related Transactions ............................... 56
Item 14. Controls and Procedures ...................................................... 56
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 56
Signatures and Certifications ................................................ 63
PART I
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "WESCO" refers to WESCO International,
Inc., and its subsidiaries and its predecessors unless the context otherwise
requires. References to "we," "us," "our" and the "Company" refer to WESCO and
its subsidiaries. Our subsidiaries include WESCO Distribution, Inc. ("WESCO
Distribution") and WESCO Distribution Canada, Inc. ("WESCO Canada"), both of
which are wholly-owned by WESCO.
THE COMPANY
With sales of approximately $3.3 billion in 2002, we are a leading North
American provider of electrical construction products and electrical and
industrial maintenance, repair and operating supplies, commonly referred to as
"MRO." We are the second largest distributor in the estimated $72 billion U.S.
electrical distribution industry, and the largest provider of integrated supply
services. Our integrated supply solutions and outsourcing services are designed
to fulfill a customer's industrial MRO procurement needs through a highly
automated, proprietary electronic procurement and inventory replenishment
system. This allows our customers to consolidate suppliers and reduce their
procurement and operating costs. We have over 350 branches and five distribution
centers located in 48 states, nine Canadian provinces, Puerto Rico, Mexico,
Guam, the United Kingdom, Nigeria and Singapore. We serve over 100,000 customers
worldwide, offering over 1,000,000 products from over 24,000 suppliers. Our
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. Our leading
market positions, extensive geographic reach, broad product and service
offerings and acquisition program have enabled us to compete effectively against
the companies in our industry.
INDUSTRY OVERVIEW
The electrical distribution industry serves customers in a number of
markets including the industrial, commercial, construction and utility markets.
Electrical distributors, such as WESCO, provide logistical and technical
services for customers by bundling together a wide range of products typically
required for the construction and maintenance of electrical supply networks,
including wire, lighting, distribution and control equipment and a wide variety
of electrical supplies. This distribution channel enables customers to
efficiently access a broad range of products and has the capacity to deliver
value-added services. Customers are increasingly demanding that distributors
provide a broader and more complex package of services as they seek to outsource
non-core functions and achieve documented cost savings in purchasing, inventory
and supply chain management.
ELECTRICAL DISTRIBUTION. The U.S. electrical distribution industry had
sales of approximately $72 billion in 2002. While overall weakness in the
current economic environment has contributed to recent industry sales decline of
approximately $2 billion since 2000, industry growth has averaged 5% per year
from 1985 to 2002. This expansion has been driven by general economic growth,
increased use of electrical products in businesses and industries, new products
and technologies, and customers who are seeking to more efficiently purchase a
broad range of products and services from a single point of contact, thereby
eliminating the costs and expenses of purchasing directly from manufacturers or
multiple sources. The U.S. electrical distribution industry is highly
fragmented. The four national distributors, including WESCO, account for
approximately 19% of estimated total industry sales.
INTEGRATED SUPPLY. The market for integrated supply services has more than
doubled from $5 billion in 1997 to over $12 billion in 2001, an increase of 25%
per year. Recent projections estimate that the integrated supply market will
reach $26 billion by 2005. Growth is being driven by the desire of large
industrial companies to reduce operating expenses by implementing comprehensive
third-party programs, which outsource the cost-intensive procurement, stocking
and administrative functions associated with the purchase and consumption of MRO
supplies. For our customers, these costs can account for over 50% of the total
costs for MRO products and services. The total potential in the United States
for integrated supply services, measured as all purchases of industrial MRO
supplies and services, is currently estimated to be approximately $260 billion.
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COMPETITIVE STRENGTHS
MARKET LEADERSHIP. Our ability to manage large construction projects and
complex multi-site plant maintenance programs and procurement projects that
require special sourcing, technical advice, logistical support and locally based
service has enabled us to establish leadership positions in our principal
markets. We have utilized these skills to generate significant revenues in
industries with intensive use of electrical and MRO products, including
electrical contracting, utilities, original equipment manufacturing, process
manufacturing and other commercial, institutional and governmental entities. We
also have extended our position within these industries to expand our customer
base.
VALUE-ADDED SERVICES. We are a leader in providing a wide range of
services and procurement solutions that draw on our product knowledge, supply
and logistics expertise and systems capabilities, enabling our customers to
reduce supply chain costs and improve efficiency. These programs include:
- National Accounts -- we coordinate product supply and materials
management activities for MRO supplies, project needs and direct
material for customers with multiple locations who seek purchasing
leverage through a single electrical products provider;
- Integrated Supply -- we design and implement programs that enable
our customers to significantly reduce the number of MRO suppliers
they use through services that include highly automated, proprietary
electronic procurement and inventory replenishment systems and
on-site materials management and logistics services; and
- Construction National Accounts -- we have a dedicated team of
experienced construction sales management personnel to service the
needs of the regional and national contractors. Top engineering and
construction firms which specialize in major projects such as
airport expansions, power plants and oil and gas facilities are also
a focus group.
BROAD PRODUCT OFFERING. We provide our customers with a broad product
selection consisting of over 1,000,000 electrical, industrial and data
communications products sourced from over 24,000 suppliers. Our broad product
offering enables us to meet virtually all of a customer's electrical product and
other MRO requirements.
EXTENSIVE DISTRIBUTION NETWORK. Our distribution network consists of over
350 branches and five distribution centers located in 48 states, nine Canadian
provinces, Puerto Rico, Mexico, Guam, the United Kingdom, Nigeria and Singapore.
This extensive network, which would be extremely difficult and expensive to
duplicate, allows us to:
- maintain local sourcing of customer service, technical support and
sales coverage;
- tailor branch products and services to local customer needs;
- offer multi-site distribution capabilities to large customers and
national accounts; and
- provide same-day deliveries.
LOW COST OPERATOR. Our competitive position has been enhanced by our low
cost position, which is based on:
- extensive use of automation and technology;
- centralization of functions such as purchasing and accounting;
- strategically located distribution centers;
- purchasing economies of scale; and
- incentive programs that increase productivity and encourage
entrepreneurship.
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Our low cost position enables us to generate a significant amount of cash flow
as the capital investment required to maintain our business is low. This cash
flow is available for debt reduction, strategic acquisitions and continued
investment in the growth of the business.
BUSINESS STRATEGY
Our objective is to be the leading provider of electrical products and
other MRO supplies and services to companies in North America and selected
international markets. In achieving this leadership position, our goal is to
grow earnings at a faster rate than sales by focusing on margin enhancement and
continuous productivity improvement. Our growth strategy leverages our existing
strengths and focuses on developing new initiatives and programs.
ENHANCE OUR LEADERSHIP POSITION IN ELECTRICAL DISTRIBUTION. We intend to
leverage our extensive market presence and brand equity in the WESCO name to
further our leadership position in electrical distribution. We are focusing our
sales and marketing on existing industries where we are expanding our product
and service offerings as well as targeting new clients, both within industries
we currently serve and in new markets which provide significant growth
opportunities. Markets where we believe such opportunities exist include retail,
education, financial services and health care. We are the second largest
electrical distributor in the United States and, through our value-added
products and services, we believe we have become the industry leader in serving
several important and growing markets including:
- industrial customers with large, complex plant maintenance
operations, many of which require a national multi-site service
solution for their electrical product needs;
- large contractors for major industrial and commercial construction
projects;
- the electric utility industry; and
- manufacturers of factory-built homes, recreational vehicles and
other modular structures.
GROW NATIONAL ACCOUNTS PROGRAMS. From 1994 through 2002, revenue from our
national accounts program increased in excess of 10% annually. We will continue
to invest in the expansion of this program. Through our national accounts
program, we coordinate electrical MRO procurement and purchasing activities
primarily for large industrial and commercial companies across multiple
locations. We have well-established relationships with over 300 companies,
providing us with a recurring base of revenue through multi-year agreements. Our
objective is to continue to increase revenue generated through our national
accounts program by:
- offering existing national account customers new products and
services and serving additional locations;
- extending certain established national account relationships to
include integrated supply; and
- expanding our customer base by leveraging our existing industry
expertise in markets we currently serve as well as entering into new
markets.
FOCUS ON CONSTRUCTION NATIONAL ACCOUNTS. We are increasing our focus on
large construction, renovation and institutional projects. We seek to secure new
major project contracts through:
- active national marketing of our demonstrated project management
capabilities;
- further development of relationships with leading regional and
national contractors and engineering firms;
- close coordination with national account customers on their major
project requirements; and
- offering an integrated supply service approach to contractors for
major projects.
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EXTEND OUR LEADERSHIP POSITION IN INTEGRATED SUPPLY. We are the largest
provider of integrated supply services for MRO goods and services in the United
States. We provide a full complement of outsourcing solutions, focusing on
improving the supply chain management process for our customers' indirect
purchases. Our integrated supply programs replace the traditional multi-vendor,
resource-intensive procurement process with a single, outsourced, fully
automated process capable of managing all MRO and related service requirements.
Our solutions range from timely product delivery to assuming full responsibility
for the entire procurement function. Our customers include some of the largest
industrial companies in the United States. We intend to expand our leadership
position as the largest integrated supply service provider by:
- continuing to tailor our proven and profitable business model to the
scale and scope of our customers' operations;
- maximizing the use of our highly automated proprietary information
systems;
- leveraging established relationships with our large industrial
customer base, especially among existing national account customers
who could benefit from our integrated supply model; and
- being a low cost provider of integrated supply services.
We intend to utilize these competitive strengths to increase our
integrated supply sales to both new and existing customers, including our
existing national account customers.
GAIN SHARE IN KEY LOCAL MARKETS. Significant opportunities exist to gain
market share in the highly fragmented local markets. We intend to increase our
market share in key geographic markets through a combination of increased sales
and marketing efforts at existing branches, acquisitions that expand our product
and customer base and new branch openings. We intend to leverage our existing
relationships with preferred suppliers to increase sales of their products in
local markets through various initiatives, including sales promotions,
cooperative marketing efforts, direct participation by suppliers in national
accounts implementation, dedicated sales forces and product exclusivity. To
promote growth, we have instituted a compensation system for branch managers
that encourages our branch managers to increase sales and optimize business
activities in their local markets, including managing the sales force,
configuring inventories, targeting potential customers for marketing efforts and
tailoring local service options.
PURSUE STRATEGIC ACQUISITIONS. Since 1995, we have completed and
successfully integrated 25 acquisitions, which represent annual sales of
approximately $1.4 billion. We believe that the highly fragmented nature of the
electrical and industrial MRO distribution industry will continue to provide us
with acquisition opportunities. Our most recent acquisition was completed in
March 2001. We have not been as active in pursuing acquisition candidates given
the weak economy and the uncertain future earnings streams of acquisition
candidates. We would expect our acquisition activities to increase as the
economy improves. We expect that any future acquisitions will be financed out of
available internally generated funds, additional debt and/or the issuance of
equity securities. However, our ability to make acquisitions will be subject to
our compliance with certain conditions under the terms of our revolving credit
facility. See Part II, Item 7. - "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for a further description of the revolving credit facility.
EXPAND PRODUCT AND SERVICE OFFERINGS. We continue to build on our
demonstrated ability to introduce new products and services to meet existing
customer demands and capitalize on new market opportunities. In addition, we
have the platform to sell integrated lighting control and power distribution
equipment in a single package for multi-site specialty retailers, restaurant
chains and department stores. These are strong growth markets where our national
accounts strategies and logistics infrastructure provide significant benefits
for our customers.
LEVERAGE OUR E-COMMERCE AND INFORMATION SYSTEM CAPABILITIES. We conduct a
significant amount of business electronically. Our electronic transaction
management capabilities lower costs and shorten cycle time in the supply chain
process for us and for our customers. We intend to continue to invest in
information technology to create more effective linkages with both customers and
suppliers.
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EXPAND OUR INTERNATIONAL OPERATIONS. Our international sales, the majority
of which are in Canada, accounted for approximately 11% of total sales in 2002.
We believe that there is significant additional demand for our products and
services outside the United States and Canada. Many of our multinational
domestic customers are seeking distribution, integrated supply and project
management solutions globally. Our approach to international operations is
consistent with our domestic philosophy. We follow our established customers and
pursue business that we believe utilizes and extends our existing capabilities.
This strategy of working through well-developed customer and supplier
relationships significantly reduces risks and provides the opportunity to
establish a profitable business. We have five locations in Mexico headquartered
in Tlalnepantla that serve all of metropolitan Mexico City and the Federal
District and the states of Mexico, Morelos and Hidalgo. We continue to pursue
growth opportunities in existing locations such as Aberdeen, Scotland and
London, England, which support our sales efforts in Europe and the former Soviet
Union. We have an operation in Nigeria to serve West Africa and an office in
Singapore to support our sales to customers in Asia. We are working toward
forming strategic alliances in critical markets, where appropriate.
PRODUCTS AND SERVICES
Products
Our network of branches and distribution centers stocks over 215,000
product stock keeping units ("SKUs"). Each branch tailors its inventory to meet
the needs of the customers in its local market, typically stocking approximately
4,000 to 8,000 SKUs. Our integrated supply business allows our customers to
access over 1,000,000 products for direct shipment.
Representative products that we sell include:
- Electrical Supplies. Fuses, terminals, connectors, boxes, fittings,
tools, lugs, tape and other MRO supplies
- Industrial Supplies. Cutting and other tools, abrasives, filters and
safety equipment
- Distribution. Circuit breakers, transformers, switchboards,
panelboards and busway
- Lighting. Lamps, fixtures and ballasts
- Wire and Conduit. Wire, cable and metallic and non-metallic conduit
- Control, Automation and Motors. Motor control devices, drives,
programmable logic controllers, pushbuttons and operator interfaces
- Data Communications. Premise wiring, patch panels, terminals and
connectors
We purchase products from a diverse group of over 24,000 suppliers. In
2002, our ten largest suppliers accounted for approximately 33% of our
purchases. The largest of these was Eaton Corporation, through its Cutler-Hammer
division, accounting for approximately 13% of total purchases. No other supplier
accounted for more than 5% of total purchases.
Our supplier relationships are important to us, providing access to a wide
range of products, technical training and sales and marketing support. We have
preferred supplier agreements with approximately 179 of our suppliers and
purchase approximately 65% of our stock inventory pursuant to these agreements.
Consistent with industry practice, most of our agreements with suppliers,
including both distribution agreements and preferred supplier agreements, are
terminable by either party on 60 days' notice or less.
Services
In conjunction with product sales, we offer customers a wide range of
services and procurement solutions that draw on our product and supply
management expertise and systems capabilities. These services include national
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accounts programs, integrated supply programs and major project programs. We are
responding to the needs of our customers, particularly those in processing and
manufacturing industries. To more efficiently manage the MRO process on behalf
of our customers, we offer a range of supply management services, including:
- outsourcing of the entire MRO purchasing process;
- providing technical support for manufacturing process improvements
using state-of-the-art automated solutions;
- implementing inventory optimization programs;
- participating in joint cost savings teams;
- assigning our employees as on-site support personnel;
- recommending energy-efficient product upgrades; and
- offering safety and product training for customer employees.
National accounts programs. The typical national account customer is a
Fortune 500 industrial company, a large utility or other major customer, in each
case with multiple locations. Our national accounts programs are designed to
provide customers with total supply chain cost reductions by coordinating
purchasing activity for MRO supplies across multiple locations. Comprehensive
implementation plans establish jointly managed teams at the local and national
level to prioritize activities, identify key performance measures and track
progress against objectives. We involve our preferred suppliers early in the
implementation process, where they can contribute expertise and product
knowledge to accelerate program implementation and the achievement of cost
savings and process improvements.
Integrated supply programs. Our integrated supply programs offer customers
a variety of services to support their objectives for improved supply chain
management. We integrate our personnel, product and distribution expertise,
electronic technologies and service capabilities with the customer's own
internal resources to meet particular service requirements. Each integrated
supply program is uniquely configured to deliver a significant reduction in the
number of MRO suppliers, reduce total procurement costs, improve operating
controls and lower administrative expenses. Our solutions range from
just-in-time fulfillment to assuming full responsibility for the entire
procurement function for all indirect purchases. We believe that customers will
increasingly seek to utilize us as an "integrator," responsible for selecting
and managing the supply of a wide range of MRO and original equipment
manufacturers ("OEMs") products.
Construction national accounts. We have a construction national accounts
group, comprised of our most experienced construction management personnel,
which focuses on serving the complex needs of North America's largest
engineering and construction firms and the top 50 U.S. electrical contractors on
a multi-regional basis. These contractors typically specialize in building
industrial sites, water treatment plants, airport expansions, healthcare
facilities, correctional institutions and new sports stadiums.
MARKETS AND CUSTOMERS
We have a large base of approximately 100,000 customers diversified across
our principal markets. One customer accounted for over 3% of 2002 sales and
another customer accounted for over 2% of 2002 sales. Except for these two
customers, no other customer accounted for more than 2% of 2002 sales.
Industrial customers. Sales to industrial customers, which include
numerous manufacturing and process industries, and OEMs accounted for
approximately 42% of our sales in 2002.
MRO products are needed to maintain and upgrade the electrical and
communications networks at all industrial sites. Expenditures are greatest in
the heavy process industries, such as food processing, pulp and paper and
petrochemical. Typically, electrical MRO is the first or second ranked product
category by purchase value for total MRO requirements for an industrial site.
Other MRO product categories include, among others, lubricants, pipe,
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valves and fittings, fasteners, cutting tools and power transmission products.
OEM customers incorporate electrical components and assemblies into their
own products. OEMs typically require a reliable, high volume supply of a narrow
range of electrical items. Customers in this segment are particularly service
and price sensitive due to the volume and the critical nature of the product
used, and they also expect value-added services such as design and technical
support, just-in-time supply and electronic commerce.
Electrical contractors. Sales to electrical contractors accounted for
approximately 35% of our sales in 2002. These customers range from large
contractors for major industrial and commercial projects, the customer types we
principally serve, to small residential contractors, which represent a small
portion of our sales. Electrical products purchased by electrical
sub-contractors typically account for approximately 40% to 50% of their
installed project cost, and, therefore, accurate cost estimates and competitive
material costs are critical to a contractor's success in obtaining profitable
projects.
Utilities. Sales to utilities accounted for approximately 17% of our sales
in 2002. This market includes large investor-owned utilities, rural electric
cooperatives and municipal power authorities. We provide our utility customers
with power line products and an extensive range of supplies to meet their MRO
and capital projects needs. Full materials management and procurement
outsourcing arrangements are also important in this market as cost pressures and
deregulation cause utility customers to streamline purchasing and inventory
control practices.
Commercial, institutional and governmental customers ("CIG"). Sales to CIG
customers accounted for approximately 6% of our sales in 2002. This fragmented
market includes schools, hospitals, property management firms, retailers and
government agencies of all types. Through our WR Controls Branch, we have a
platform to sell integrated lighting control and distribution equipment in a
single package for multi-site specialty retailers, restaurant chains and
department stores.
DISTRIBUTION NETWORK
Branch network. We have over 350 branches, of which approximately 290 are
located in the United States, approximately 50 are located in Canada and the
remainder are located in Puerto Rico, Mexico, Guam, the United Kingdom, Nigeria
and Singapore. Over the last three years, we have opened approximately seven
branches per year, principally to service national account customers. In
addition to consolidations in connection with acquisitions, we occasionally
close or consolidate existing branch locations to improve operating efficiency.
Distribution centers. To support our branch network, we have five
distribution centers located in the United States and Canada, including
facilities located near Pittsburgh, Pennsylvania, serving the Northeast and
Midwest United States; near Reno, Nevada, serving the Western United States;
near Memphis, Tennessee, serving the Southeast and Central United States; near
Montreal, Quebec, serving Eastern and Central Canada; and near Vancouver,
British Columbia, serving Western Canada.
Our distribution centers add value for our branches and customers through
the combination of a broad and deep selection of inventory, on-line ordering,
same day shipment and central order handling and fulfillment. Our distribution
center network reduces the lead-time and improves the reliability of our supply
chain, giving us a distinct competitive advantage in customer service.
Additionally, the distribution centers reduce the time and cost of supply chain
activities through automated replenishment and warehouse management systems, and
economies of scale in purchasing, inventory management, administration and
transportation.
SALES ORGANIZATION
General sales force. Our general sales force is based at the local
branches and comprises approximately 2,100 of our employees, almost half of whom
are outside sales representatives and the remainder are inside sales personnel.
Outside sales representatives are paid under a compensation structure which is
primarily weighted towards commissions. They are responsible for making direct
customer calls, performing on-site technical support,
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generating new customer relations and developing existing territories. The
inside sales force is a key point of contact for responding to routine customer
inquiries such as price and availability requests and for entering and tracking
orders.
National accounts. Our national accounts sales force is comprised of an
experienced group of sales executives who negotiate and administer contracts,
coordinate branch participation and identify sales and service opportunities.
National accounts managers' efforts target specific customer industries,
including automotive, pulp and paper, petrochemical, steel, mining and food
processing.
Data communications. Sales of premise cable, connectors, hardware, network
electronics and outside plant products are generated by our general sales force
and a dedicated group of outside and inside data communications sales
representatives. They are supported by a centralized customer service center and
additional resources in product management, purchasing, inventory control and
sales management.
Construction national accounts. We have a sales management group,
comprised of our most experienced construction management personnel, which
focuses on serving the complex needs of North America's largest engineering and
construction firms and the top regional and national electrical contractors.
These contractors typically specialize in large, complex projects such as
building industrial sites, water treatment plants, airport expansions,
healthcare facilities, correctional institutions and new sports stadiums.
E-Commerce. We established our initial electronic catalog on the Internet
in 1996. Since that time, we have worked with a variety of large customers to
establish customized electronic catalogs for their use in internal systems.
Additionally, in 1999 we began a process of providing electronic catalogs to
multiple e-commerce service providers, trade exchanges and industry specific
electronic commerce portals. Our primary e-business strategy is to serve
existing customers by tailoring our catalog and Internet-based procurement
applications to their internal systems or through their preferred technology and
trading exchange partnerships. We believe that we lead our industry in rapid
e-implementation to customers' procurement systems and provide integrated
procurement functionality using "punch-out" technology, a direct
system-to-system link with our customers.
We continue to enhance "WESCOExpress," a direct ship fulfillment operation
responsible for supporting smaller customers and select national account
locations. Customers can order over 65,000 electrical and data communications
products stocked in our warehouses through a centralized customer service center
or over the Internet on WESCOdirect.com. We use a proactive telesales approach
utilizing catalogs, direct mail, e-mail and personal phone selling to provide a
high level of customer service. A new 2003-2004 Buyer's Guide is in production
and scheduled for release in the third quarter of 2003.
INTERNATIONAL OPERATIONS
To serve the Canadian market, we operate a network of approximately 50
branches in nine provinces. Branch operations are supported by two distribution
centers located near Montreal and Vancouver. With sales of approximately US$300
million, Canada represented 9.0% of our total sales in 2002. The Canadian market
for electrical distribution is considerably smaller than the U.S. market, with
roughly US$2.7 billion in total sales in 2002, according to industry sources.
We also have five locations in Mexico headquartered in Tlalnepantla, that
serve all of metropolitan Mexico City and the Federal District and the states of
Mexico, Morelos and Hidalgo.
We sell internationally through domestic export sales offices located
within North America and sales offices in international locations. WESCO
operations are in Aberdeen, Scotland and London, England to support sales
efforts in Europe and the former Soviet Union. We have an operation in Nigeria
to serve West Africa and an office in Singapore to support our sales to Asia.
All of the international locations have been established to primarily serve
WESCO's growing list of customers with global operations referenced under
National Accounts above.
MANAGEMENT INFORMATION SYSTEMS
Our branch information system, WESNET, provides processing for a full
range of our business operations, such
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as customer service, inventory and logistics management, accounting and
administrative support. The branch system utilizes decision support, executive
information system analysis and retrieval capabilities to provide extensive
operational analysis and detailed income statement and balance sheet variance
and trend reporting at the branch level. The corporate system also provides
activity-based costing capabilities for analyzing profitability by customer,
sales representative and shipment type. Sales and margin trends and variances
can be analyzed by branch, customer, product category, supplier or account
representative.
The WESNET system operates as a distributed network of fully functional
operating units, and every branch (other than our Bruckner Integrated Supply
Division and certain acquired branches) utilizes its own computer system to
support local business activities. All branch operations are linked through a
wide area network to centralized information on inventory status in our
distribution centers as well as other branches and an increasing number of
on-line suppliers. Recent advances in WESNET capabilities make it possible to
consolidate administrative and procurement functions, and bring systematic
improvement through new pricing systems and controls.
We routinely process customer orders, shipping notices, suppliers'
purchase orders, and funds transfer via EDI transactions with our trading
partners. Our e-commerce strategy calls for more effective linkages to both
customers and suppliers through greater use of technological advances, including
Internet and electronic catalogs, enhanced EDI and other innovative
improvements.
Our integrated supply services are supported by our proprietary
procurement and inventory management systems. These systems provide a fully
integrated, flexible supply chain platform that currently handles over 95% of
our integrated supply customers' transactions electronically. Our configuration
options for a customer range from on-line linkages to the customer's business
and purchasing systems, to total replacement of a customer's procurement and
inventory management system for MRO supplies.
COMPETITION
We operate in a highly competitive industry. We compete directly with
national, regional and local providers of electrical and other industrial MRO
supplies. Competition is primarily focused on the local service area, and is
generally based on product line breadth, product availability, service
capabilities and price. Another source of competition is buying groups formed by
smaller distributors to increase purchasing power and provide some cooperative
marketing capability. While increased buying power may improve the competitive
position of buying groups locally, we believe these groups have not been able to
compete effectively with us for national account customers due to the difficulty
in coordinating a diverse ownership group. During 1999 and 2000, numerous
special purpose Internet-based procurement service companies, auction
businesses, and trade exchanges were organized. Many of them targeted industrial
MRO and contractor customers of the type served by WESCO. We responded with our
own e-commerce capabilities and believe that we have successfully outpaced our
competitors in the deployment of electronic catalogs and Internet-based
connectivity with more than 50 national customers.
EMPLOYEES
As of December 31, 2002, we had approximately 5,400 employees worldwide,
of which approximately 4,700 were located in the United States and approximately
700 in Canada and our other international locations. Less than 5% of our
employees are represented by unions. We believe our labor relations are
generally good.
INTELLECTUAL PROPERTY
Our trade and service marks, including "WESCO," "the extra effort
people(R)," and the running man design, are filed in the U.S. Patent and
Trademark Office, the Canadian Trademark Office and the Mexican Instituto de la
Propriedad Industrial.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to federal, state and local laws
and regulations relating to environmental
10
protection and human health and safety. Some of these laws and regulations may
impose strict, joint and several liability on certain persons for the cost of
investigation or remediation of contaminated properties. These persons may
include former, current or future owners or operators of properties, and persons
who arranged for the disposal of hazardous substances. Our owned and leased real
property may give rise to such investigation, remediation and monitoring
liabilities under environmental laws. In addition, anyone disposing of certain
products we distribute, such as ballasts, fluorescent lighting and batteries,
must comply with environmental laws that regulate certain materials in these
products.
We believe that we are in compliance, in all material respects, with
applicable environmental laws. As a result, we will not make significant capital
expenditures for environmental control matters either in the current year or in
the near future.
AVAILABLE INFORMATION
WESCO's Internet address is www.wescodist.com. WESCO makes available free
of charge through its website its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such documents are electronically filed with the
Securities and Exchange Commission.
FORWARD LOOKING INFORMATION
This Annual Report on Form 10-K contains various "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve certain unknown risks and uncertainties,
including, among others, those contained in Item 1, "Business" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." When used in this Annual Report on Form 10-K, the words
"anticipates," "plans," "believes," "estimates," "intends," "expects,"
"projects" and similar expressions may identify forward looking statements,
although not all forward looking statements contain such words. Such statements,
including, but not limited to, our statements regarding business strategy,
growth strategy, productivity and profitability enhancement, competition, 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,
some of which are beyond our control. Our actual results could differ materially
from those expressed in any forward looking statement made by or on our behalf.
In light of these risks and uncertainties, there can be no assurance that the
forward looking information will in fact prove to be accurate. We have
undertaken no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
RISK FACTORS
Important factors that could cause actual results to differ materially
from the forward looking statements we make are described below. All forward
looking statements attributable to us or persons working on our behalf are
expressly qualified by the following cautionary statements:
OUR SUBSTANTIAL AMOUNT OF DEBT REQUIRES SUBSTANTIAL DEBT SERVICE OBLIGATIONS
THAT COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL OUR OBLIGATIONS AND COULD
LIMIT OUR GROWTH AND IMPOSE RESTRICTIONS ON OUR BUSINESS.
We are and will continue to be for the foreseeable future significantly
leveraged. As of December 31, 2002, we had $418.0 million of consolidated
indebtedness and stockholders' equity of $169.3 million. We and our subsidiaries
may incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing our indebtedness. Accordingly, we will
have significant debt service obligations. These amounts exclude WESCO's
accounts receivable securitization program, through which WESCO sells accounts
receivable to a third party conduit and removes these receivables from its
consolidated balance sheet. See Part II, Item 7. -"Management's Discussion and
Analysis of Financial Condition and Results of Operations-Critical Accounting
Policies and Estimates."
Our debt service obligations have important consequences, including the
following:
- a substantial portion of cash flow from our operations will be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available for operations,
future business opportunities and acquisitions and other purposes
and increasing our vulnerability to adverse general economic and
industry conditions;
- our ability to obtain additional financing in the future may be
limited;
11
- approximately $110 million of our indebtedness is at variable rates
of interest, which will make us vulnerable to increases in interest
rates;
- we are substantially more leveraged than certain of our competitors,
which might place us at a competitive disadvantage; and
- we may be hindered in our ability to adjust rapidly to changing
market conditions.
Our ability to make scheduled payments of the principal of, or to pay
interest on, or to refinance our indebtedness and to make scheduled payments
under our operating leases or to fund planned capital expenditures or finance
acquisitions will depend on our future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond our
control. There can be no assurance that our business will continue to generate
sufficient cash flow from operations in the future to service our debt, make
necessary capital expenditures or meet other cash needs. If unable to do so, we
may be required to refinance all or a portion of our existing debt, to sell
assets or to obtain additional financing. In addition, our Receivables Facility
requires an annual renewal of its terms. The current arrangement expires on June
20, 2003. There can be no assurance that available funding or that any sale of
assets or additional financing would be possible in amounts on terms favorable
to us. See Part II, Item 7. - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
RESTRICTIVE DEBT COVENANTS CONTAINED IN OUR REVOLVING CREDIT FACILITY AND THE
INDENTURE TO OUR SENIOR SUBORDINATED NOTES MAY LIMIT OUR ABILITY TO TAKE CERTAIN
ACTIONS.
The revolving credit facility and the indenture contain financial and
operating covenants that will limit the discretion of our management with
respect to certain business matters including, incurring additional indebtedness
and paying dividends. The revolving credit facility also requires us to meet
certain fixed charge tests depending on credit line availability. Our ability to
comply with these and other provisions of the revolving credit facility and the
indenture may be affected by changes in economic or business conditions or other
events beyond our control. A failure to comply with the obligations contained in
the revolving credit facility or the indenture could result in an event of
default under either the revolving credit facility or the indenture which could
result in acceleration of the related debt and the acceleration of debt under
other instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the revolving credit
facility were to be accelerated, there can be no assurance that our assets would
be sufficient to repay in full such indebtedness and our other indebtedness. See
Part II, Item 7. - "Management's Discussion and Analysis of Financial Condition
and Results of Operations ?- Liquidity and Capital Resources."
DOWNTURNS IN THE ELECTRICAL DISTRIBUTION INDUSTRY HAVE HAD IN THE PAST, AND MAY
IN THE FUTURE HAVE, AN ADVERSE EFFECT ON OUR SALES AND PROFITABILITY.
The electrical distribution industry is affected by changes in economic
conditions, including national, regional and local slowdowns in construction and
industrial activity, which are outside our control. Our operating results may
also be adversely affected by increases in interest rates that may lead to a
decline in economic activity, particularly in the construction market, while
simultaneously resulting in higher interest payments under the revolving credit
facility. In addition, during periods of economic slowdown such as the one we
are currently experiencing, our credit losses could increase. There can be no
assurance that economic slowdowns, adverse economic conditions or cyclical
trends in certain customer markets will not have a material adverse effect on
our operating results and financial condition.
AN INCREASE IN COMPETITION COULD DECREASE SALES OR EARNINGS.
We operate in a highly competitive industry. We compete directly with
national, regional and local providers of electrical and other industrial MRO
supplies. Competition is primarily focused in the local service area and is
generally based on product line breadth, product availability, service
capabilities and price. Other sources of competition are buying groups formed by
smaller distributors to increase purchasing power and provide some cooperative
marketing capability. During 1999 and 2000, numerous special purpose
Internet-based procurement service companies, auction businesses and trade
exchanges were organized. Many of them targeted industrial MRO
12
and contractor customers of the type served by us. While the entrants did not
have a noticeable impact on our business we expect that new competitors could
develop over time as Internet-based enterprises become more established and
refine their service capabilities.
Some of our existing competitors have, and new market entrants may have,
greater financial and marketing resources than we do. To the extent existing or
future competitors seek to gain or retain market share by reducing prices, we
may be required to lower our prices, thereby adversely affecting financial
results. Existing or future competitors also may seek to compete with us for
acquisitions, which could have the effect of increasing the price and reducing
the number of suitable acquisitions. In addition, it is possible that
competitive pressures resulting from the industry trend toward consolidation
could affect growth and profit margins.
LOSS OF KEY SUPPLIERS OR LACK OF PRODUCT AVAILABILITY COULD DECREASE SALES AND
EARNINGS.
Most of our agreements with suppliers are terminable by either party on 60
days' notice or less. Our ten largest suppliers in 2002 accounted for
approximately 33% of our purchases for the period. Our largest supplier was
Eaton Corporation, through its Cutler-Hammer division, accounting for
approximately 13% of our purchases. The loss of, or a substantial decrease in
the availability of, products from any of these suppliers, or the loss of key
preferred supplier agreements, could have a material adverse effect on our
business. In addition, supply interruptions could arise from shortages of raw
materials, labor disputes or weather conditions affecting products or shipments,
transportation disruptions, or other reasons beyond our control. An interruption
of operations at any of our five distribution centers could have a material
adverse effect on the operations of branches served by the affected distribution
center. Furthermore, we cannot be certain that particular products or product
lines will be available to us, or available in quantities sufficient to meet
customer demand. Such limited product access could put us at a competitive
disadvantage.
A DISRUPTION OF OUR INFORMATION SYSTEMS COULD INCREASE EXPENSES, DECREASE SALES
OR REDUCE EARNINGS.
A serious disruption of our information systems could have a material
adverse effect on our business and results of operations. Our computer systems
are an integral part of our business and growth strategies. We depend on our
information systems to process orders, manage inventory and accounts receivable
collections, purchase products, ship products to our customers on a timely
basis, maintain cost-effective operations and provide superior service to our
customers.
WESCO INTERNATIONAL'S CONTROLLING SHAREHOLDERS OWN APPROXIMATELY 44% OF ITS
COMMON STOCK AND CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
Approximately 44% of the issued and outstanding shares of common stock of
WESCO International is held by Cypress and its affiliates. Accordingly, Cypress
and its affiliates can exercise significant influence over our affairs,
including the election of our directors, appointment of our management and
approval of actions requiring the approval of our stockholders, including the
adoption of amendments to our certificate of incorporation and approval of
mergers or sales of substantially all of our assets.
13
ITEM 2. PROPERTIES.
We have over 350 branches, of which approximately 290 are located in the
United States, approximately 50 are located in Canada and the remainder are
located in Puerto Rico, Mexico, Guam, the United Kingdom, Nigeria and Singapore.
Approximately 25% of branches are owned facilities, and the remainder are
leased.
The following table summarizes our distribution centers:
LOCATION SQUARE FEET LEASED/OWNED
-------- ----------- ------------
Warrendale, PA ......... 194,200 Owned
Sparks, NV ............. 196,800 Leased
Byhalia, MS ............ 148,000 Owned
Dorval, QE ............. 90,000 Leased
Burnaby, BC ............ 64,865 Owned
We also lease our 76,200 square foot headquarters in Pittsburgh,
Pennsylvania. We do not regard the real property associated with any single
branch location as material to our operations. We believe our facilities are in
good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, a number of lawsuits, claims and proceedings have been
or may be asserted against us relating to the conduct of our business, including
routine litigation relating to commercial and employment matters. While the
outcome of litigation cannot be predicted with certainty, and some of these
lawsuits, claims or proceedings may be determined adversely to the Company, the
Company does not believe, based on information presently available to it, that
the outcome of any of such pending matters is likely to have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2002.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On May 17, 1999, WESCO completed its initial public offering of common
stock ("the Offering"). Our common stock is listed on the New York Stock
Exchange under the symbol "WCC." As of February 28, 2003, there were 40,455,493
shares of common stock and 4,653,131 shares of Class B common stock outstanding
and held by approximately 100 holders of record. We have not paid dividends on
the common stock, and do not presently plan to pay dividends in the foreseeable
future. It is currently expected that earnings will be retained and reinvested
to support either business growth or debt reduction. In addition, our revolving
credit facility and our indenture restrict our ability to pay dividends. See
Part II, Item 7. - "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." The following
table sets forth the high and low close price of the shares of common stock for
the periods indicated.
CLOSING PRICES
-----------------------
QUARTER HIGH LOW
------- -------- --------
2001
First $ 11.00 $ 7.06
Second 9.25 7.30
Third 9.20 4.65
Fourth 6.50 3.95
2002
First $ 7.13 $ 4.15
Second 7.40 6.08
Third 7.25 4.23
Fourth 5.49 3.14
WESCO's board of directors has authorized a $25 million share repurchase
program which expires in May 2003. WESCO's common stock may be purchased at
management's discretion, subject to meeting certain financial ratios in its
revolving credit facility, in open market transactions and the program may be
discontinued at any time. Under previous share repurchase programs, WESCO
purchased approximately 3.9 million shares of its common stock for approximately
$32.8 million pursuant to this program. No shares were repurchased during 2002.
15
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA:
Net sales ...................................... $ 3,325.8 $ 3,658.0 $ 3,881.1 $ 3,423.9 $ 3,025.4
Gross profit ................................... 590.8 643.5 684.1 616.6 537.6
Selling, general and administrative expenses ... 494.4 517.2 524.3 471.2 415.0
Depreciation and amortization(1) ............... 19.8 31.0 25.0 20.4 14.8
Restructuring charge (2) ....................... -- -- 9.4 -- --
Recapitalization costs(3) ...................... -- -- -- -- 51.8
----------- ----------- ----------- ----------- -----------
Income from operations ......................... 76.6 95.3 125.4 125.0 56.0
Interest expense, net .......................... 43.0 45.1 43.8 47.0 45.1
Loss on debt extinguishment(4) ................. 1.1 -- -- 17.2 --
Other expenses(5) .............................. 6.6 16.9 24.9 19.5 10.1
----------- ----------- ----------- ----------- -----------
Income before income taxes ..................... 25.9 33.3 56.7 41.3 0.8
Provision for income taxes(6) .................. 2.8 13.1 23.3 16.7 8.5
----------- ----------- ----------- ----------- -----------
Net income (loss) .............................. $ 23.1 $ 20.2 $ 33.4 $ 24.6 $ (7.7)
=========== =========== =========== =========== ===========
Earnings (loss) per common share(7)
Basic ....................................... $ 0.51 $ 0.45 $ 0.74 $ 0.57 $ (0.17)
Diluted ..................................... $ 0.49 $ 0.43 $ 0.70 $ 0.53 $ (0.17)
Weighted average common shares outstanding(7)
Basic ....................................... 45,033,964 44,862,087 45,326,475 43,057,894 45,051,632
Diluted ..................................... 46,820,093 46,901,673 47,746,607 47,524,539 45,051,632
OTHER FINANCIAL DATA:
EBITDA(8) ...................................... $ 96.4 $ 126.4 $ 158.4 $ 145.3 $ 74.9
Capital expenditures ........................... 9.3 13.8 21.6 21.2 10.7
Net cash provided by operating activities ...... 20.4 161.1 46.9 66.4 276.9
Net cash used for investing activities ......... (23.1) (69.2) (60.7) (71.9) (184.1)
Net cash provided by (used for) financing
activities .................................. (49.9) (38.0) 26.0 6.3 (92.3)
BALANCE SHEET DATA:
Total assets ................................... $ 1,015.1 $ 1,158.0 $ 1,161.5 $ 1,028.8 $ 950.5
Total long-term debt (including current
portion) .................................... 418.0 452.0 483.3 426.4 595.8
Redeemable common stock ........................ -- -- -- -- 21.5
Stockholders' equity (deficit) ................. 169.3 144.7 125.0 117.3 (142.6)
(1) Effective for 2002, WESCO adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") as described in Note 4 to the
Consolidated Financial Statements.
(2) Represents a restructuring charge taken in the fourth quarter of 2000 as
described in Note 5 to the Consolidated Financial Statements. Cash
expenses included in the total amount to $1.4 million.
(3) Represents a one-time charge primarily related to noncapitalized financing
expenses, professional and legal fees and management compensation costs as
a result of the recapitalization described in Note 1 to the Consolidated
Financial Statements. Cash expenses included in the total amount to $47.7
million.
(4) Represents a charge, relating to the write-off of unamortized debt
issuance and other costs associated with the early extinguishment of debt
and the 1999 termination of the existing accounts receivable
securitization program. Prior year amounts have been adjusted to conform
with current presentation.
(5) Represents costs relating to the sale of accounts receivable pursuant to
the accounts receivable securitization program as described in Note 6 to
the Consolidated Financial Statements.
(6) In 2002, a benefit of $5.3 million from the resolution of prior year tax
contingencies resulted in an unusually low provision for income taxes. In
1998, certain nondeductible recapitalization costs and other permanent
differences significantly exceeded income before income taxes and resulted
in an unusually high provision for income taxes.
(7) Reflects a 57.8 to one stock split effected in the form of a stock
dividend of WESCO common stock effective May 11, 1999.
(8) EBITDA represents income from operations plus depreciation, amortization,
non-cash recapitalization and non-cash restructuring costs. EBITDA is
presented since management believes that such information is considered by
certain investors to be an additional basis for evaluating the Company's
liquidity and its ability to service its financing and investing needs.
EBITDA should not be considered an alternative to measures of operating
performance as determined in accordance with generally accepted accounting
principles or as a measure of the Company's operating results and cash
flows or as a measure of the Company's liquidity. Since EBITDA is not
calculated identically by all companies, the presentation herein may not
be comparable to other similarly titled measures of other companies. Prior
year amounts have been adjusted to conform with current presentation.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
GENERAL
WESCO's sales can be categorized as stock, direct ship and special order.
Stock orders are filled directly from existing inventory and generally represent
approximately 45% of total sales. Approximately 45% of WESCO's total sales are
direct ship sales. Direct ship sales are typically custom-built products, large
orders or products that are too bulky to be easily handled and, as a result, are
shipped directly to the customer from the supplier. Special orders are for
products that are not ordinarily stocked in inventory and are ordered based on a
customer's specific request. Special orders represent the remainder of total
sales. Gross profit margins on stock and special order sales are approximately
60% higher than those on direct ship sales. Although direct ship gross margins
are lower, operating profit margins are often comparable, since the product
handling and fulfillment costs associated with direct shipments are much lower.
WESCO has historically financed its working capital needs, capital
expenditures, acquisitions and new branch openings through internally generated
cash flow and borrowings under its credit facilities and funding through its
accounts receivable securitization program. During the initial phase of an
acquisition or new branch opening, WESCO typically incurs expenses related to
installing or converting information systems, training employees and other
initial operating activities. With some acquisitions, WESCO may incur expenses
in connection with the closure of any of its own redundant branches.
Historically, the costs associated with opening new branches, and closing
branches in connection with certain acquisitions, have not been material. WESCO
has accounted for its acquisitions under the purchase method of accounting.
WESCO is a leading consolidator in its industry, having acquired 25
companies since August 1995, representing annual sales of approximately $1.4
billion. Management distinguishes sales attributable to core operations
separately from sales of acquired businesses. The distinction between sales from
core operations and from acquired businesses is based on the Company's internal
records and on management estimates where the integration of acquired businesses
results in the closing or consolidation of branches. However, "core operations"
typically refer to all internally started branches and all acquired branches
that have been in operation for the entire current and prior year-to-date
periods. "Acquired businesses" generally refer to branch operations purchased by
WESCO where the branches have not been under WESCO ownership for the entire
current and prior year-to-date periods.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
WESCO's discussion and analysis of its financial condition and results of
operations are based upon WESCO's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
WESCO to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, WESCO evaluates its estimates,
including those related to supplier programs, bad debts, inventories, insurance
costs, goodwill, income taxes, restructuring cost, contingencies and litigation.
WESCO bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. If actual market conditions are
less favorable than those projected by management, additional adjustments to
reserve items may be required. WESCO believes the following critical accounting
policies affect its judgments and estimates used in the preparation of its
consolidated financial statements.
Allowance for Doubtful Accounts
WESCO maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. WESCO
has a systematic procedure using estimates based on historical data and
reasonable assumptions of collectibility made at the local branch level and at
the consolidated corporate basis to calculate the allowance for doubtful
accounts. The allowance for doubtful accounts was $10.3 million at December
17
31, 2002 and $11.8 million at December 31, 2001. The total amount recorded as
selling, general and administrative expense related to bad debts was $9.0
million, $10.3 million and $10.0 million for 2002, 2001 and 2000, respectively.
Excess and Obsolete Inventory
WESCO writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. A systematic procedure is used to determine excess and obsolete
inventory using historical data and reasonable assumptions for the percentage of
excess and obsolete inventory on a consolidated basis. The valuation allowance
for excess and obsolete inventories was $11.9 million at December 31, 2002 and
$16.8 million at December 31, 2001, respectively. Direct write-offs against the
reserve related to inventory disposals during 2002, totaled $6.4 million. The
total expense related to excess and obsolete inventories, included in cost of
goods sold, was $1.4 million, $2.6 million and $4.3 million for 2002, 2001 and
2000, respectively.
Supplier Rebates
WESCO receives rebates from certain suppliers based on contractual
arrangements with such suppliers. Since there is a lag between actual sales and
the rebates received from the suppliers WESCO must estimate the approximate
amount of rebates available at a specific date. The asset recorded for the
supplier rebate program is within other accounts receivable and was $15.9
million at December 31, 2002 and $23.5 million at December 31, 2001. The total
amount recorded as a reduction to cost of goods sold was $24.7 million, $31.4
million and $39.7 million for 2002, 2001 and 2000, respectively.
Goodwill
As described in Note 4 to the Consolidated Financial Statements, WESCO
tests goodwill for impairment annually or more frequently when events or
circumstances occur indicating goodwill might be impaired. This process involves
estimating fair 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. WESCO cannot predict certain
events that could adversely affect the reported value of goodwill, which totaled
$314.1 million at December 31, 2002 and $311.1 million at December 31, 2001.
Insurance Programs
WESCO uses commercial insurance for auto, workers' compensation, casualty
and health claims as a risk reduction strategy to minimize catastrophic losses.
Such strategy involves large deductibles where WESCO must pay all costs up to
the deductible amount. WESCO estimates its reserve based on historical incident
rates and costs. The total liability related to the insurance programs was $5.8
million at December 31, 2002 and $4.0 million at December 31, 2001.
Taxes
WESCO records its deferred tax assets at amounts that are expected to be
realized. WESCO is evaluating future taxable income and potential tax planning
strategies in assessing the potential need for a valuation allowance. Should
WESCO determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
Accounts Receivable Securtitization Program
WESCO maintains an accounts receivable securitization program (the
"Receivables Facility"), whereby it 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.
18
WESCO accounts for the Receivables Facility in accordance with Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time
the receivables are sold, the balances are removed from the balance sheet. The
Receivables Facility represents "off-balance sheet financing," since the
conduit's ownership interest in the accounts receivable of the SPC results in
the removal of accounts receivable from WESCO's consolidated balance sheets,
rather than resulting in the addition of a liability to the conduit.
WESCO believes that the terms of the agreements governing this facility
qualify our trade receivable sales transactions for "sale treatment" under
generally accepted accounting principles, which require WESCO to remove the
accounts receivable from our consolidated balance sheets. Absent this "sale
treatment," our consolidated balance sheet would reflect additional accounts
receivable and debt. Our consolidated statements of operations would not be
impacted, except that other expenses would be classified as interest expense.
2002 DEVELOPMENTS
Developments affecting the 2002 results of operations and financial
position of WESCO include the following:
Economic Trends
The electrical distribution industry experienced a continued overall sales
decline in the markets where WESCO participates. The 2002 decrease varies
dramatically depending upon the product category as well as the market channel
used to distribute such product. Based upon our internal estimates, certain of
our more significant competitors and suppliers, as a group, experienced an
average sales decline of approximately 7.5% in 2002. WESCO's net sales decreased
approximately 9.1% in 2002 due to lower capacity utilization by many of our
industrial and MRO customers, coupled with a lower level of plant expansion and
upgrading activity in 2002.
Refinancing
The Company has taken the following steps to improve its liquidity:
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. ("WESCO Canada"). 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 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 December 31, 2002, amounts available under the
agreement were approximately $153.9 million and WESCO was in compliance with all
covenants of the new facility.
WESCO has entered into a $51 million mortgage financing facility, $13
million of which was outstanding as of December 31, 2002. Total borrowings under
the mortgage financing are subject to a 22-year amortization schedule with a
balloon payment due at the end of the 10-year term. This mortgage financing
facility provides additional liquidity and financial flexibility for WESCO as
well as locks in fixed interest rates for longer-term capital. Proceeds from the
borrowings were used to reduce outstanding borrowings under WESCO's 2002
Revolving Credit Facility.
19
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of
certain items in the Company's Consolidated Statements of Operations for the
periods presented:
YEAR ENDED DECEMBER 31
-----------------------------
2002 2001 2000
----- ----- -----
Net sales ...................................... 100.0% 100.0% 100.0%
----- ----- -----
Gross profit ................................... 17.8 17.6 17.6
Selling, general and administrative expenses ... 14.9 14.1 13.5
Depreciation and amortization .................. 0.6 0.9 0.7
Restructuring charge ........................... -- -- 0.2
----- ----- -----
Income from operations .................... 2.3 2.6 3.2
Interest expense ............................... 1.3 1.2 1.1
Loss on debt extinguishment .................... -- -- --
Other expenses ................................. 0.2 0.5 0.6
----- ----- -----
Net income before income taxes ............ 0.8 0.9 1.5
Provision for income taxes ..................... 0.1 0.3 0.6
----- ----- -----
Net income ................................ 0.7% 0.6% 0.9%
===== ===== =====
2002 Compared to 2001
Net Sales. Net sales for 2002 decreased by approximately $330 million, or
9.1%, to $3.3 billion compared with $3.7 billion in the prior year. The
continuing weakness in the North American economy has adversely affected the
major industrial and MRO markets where WESCO participates.
Gross Profit. Gross profit in 2002 decreased by $52.7 million, or 8.2%, to
$590.8 million from $643.5 million in the prior year due principally to the
decline in net sales. Gross profit margin was 17.8% in 2002 compared with 17.6%
in 2001. Billing margin improvements of 30 basis points over 2001 and a lower
level of provision for slow moving and obsolete inventory, 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 ("SG&A"). SG&A expenses
decreased by $22.8 million, or 4.4%, to $494.4 million. The decrease is
primarily due to compensation and benefit program expense reductions in the
current period. Employee headcount has been reduced by 4.4% since December 2001.
Shipping and handling expense included in SG&A was $37.2 million in 2002
compared with $38.2 million in 2001. Bad debt expense was $9.0 million for 2002
compared to $10.3 million for 2001. The improvement in 2002 results primarily
from reducing exposure to troubled accounts and industries through more
stringent credit policies. SG&A expense expressed as a percentage of sales was
14.9% for 2002 compared with 14.1% in 2001. The increase in SG&A expense as a
percentage of sales resulted from lower net sales in 2002.
Depreciation and Amortization. Depreciation and amortization decreased
$11.2 million to $19.8 million in 2002 reflecting WESCO's adoption of SFAS No.
142. WESCO recorded goodwill amortization expense of $11.9 million in 2001.
Income from Operations. Income from operations decreased $18.7 million to
$76.6 million in 2002, compared with $95.3 million in 2001. The decrease in
operating income is principally attributable to lower gross profit caused by the
decline in sales, partially offset by the decrease in SG&A expenses and
discontinuing amortization of goodwill.
Interest and Other Expenses. Interest expense totaled $43.0 million for
2002, a decrease of $2.1 million from 2001. The decrease in interest expense
results primarily from a lower level of average debt as well as lower net
interest rates including the full year impact in 2002 of WESCO's interest rate
swap agreement. Loss on debt extinguishment of $1.1 million represents non-cash
charges recognized upon the replacement of WESCO's previous revolving credit
agreement. Other expense totaled $6.6 million and $16.9 million in 2002 and
2001, respectively,
20
reflecting costs associated with the Receivables Facility. The $10.3 million
decrease was principally due to a decrease in the program's advance rates and a
lower average level of securitized accounts receivable.
Income Taxes. Income tax expense totaled $2.8 million in 2002, a decrease
of $10.3 million from 2001. The effective tax rates for 2002 and 2001 were 11.0%
and 39.4%, respectively. The decrease in the rate in 2002 is principally related
to the reversal of income tax contingency accruals of $5.3 million 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 the items described above was approximately 34.0% compared with
39.4% in 2001. The decrease in the effective rate is the result of the creation
of a foreign finance company and decreased amortization expense from the
adoption of SFAS No. 142.
Net Income. Net income and diluted earnings per share totaled $23.1
million and $0.49 per share, respectively, in 2002, compared with $20.2 million
and $0.43 per share, respectively, in 2001.
2001 Compared to 2000
Net Sales. Net sales for the year ended December 31, 2001, decreased by
$223.1 million, or 5.7%, to $3.7 billion compared with $3.9 billion in the prior
year. The decrease was due principally to sales declines attributable to core
business operations of 8.6%, partially offset by sales from acquired companies.
Gross Profit. Gross profit for the year ended December 31, 2001, decreased
by $40.6 million, or 5.9%, to $643.5 million from $684.1 million in the prior
year due principally to the decline in net sales. Gross profit margin was 17.6%
in both 2001 and 2000. Gross profit included other charges of $4.4 million in
2000 related to inventory write-downs. Excluding these charges, gross profit was
17.7% of sales in 2000. The decline in the gross profit percentage is due
principally to a decline in supplier rebates, partially offset by increased
billing margins.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
decreased by $7.2 million, or 1.4%, to $517.2 million. The year 2000 includes
$7.0 million of other charges, related primarily to a deteriorating credit
environment and customer bankruptcies that continued at similar levels in 2001.
Core business SG&A expenses decreased $15.7 million or 3.1% from 2000, due
principally to decreased payroll costs as the Company reduced its headcount
throughout the year as it rebalanced its branch and headquarters staff to be in
line with developing economic activity. Additionally, incentive compensation
expense decreased in 2001 as sales and profitability declines reduced both
commission and bonus requirements. Shipping and handling expense included in
SG&A was $38.2 million in 2001 compared with $33.7 million in 2000. Bad debt
expense was $10.3 million for 2001 compared to $11.2 million for 2000. As a
percentage of sales, excluding the other charges, SG&A expenses increased to
14.1% in 2001 from 13.3% in 2000, reflecting the negative leverage of lower
sales volume.
Depreciation and Amortization. Depreciation and amortization increased
$6.0 million to $31.0 million in 2001, reflecting depreciation related to
increases in property, buildings and equipment over the prior year, higher
amortization of goodwill from acquisitions and higher amortization of software
costs.
Income from Operations. Income from operations decreased $30.1 million to
$95.3 million in 2001, compared with $125.4 million in 2000. Income from
operations in 2000 includes a restructuring charge of $9.4 million.
Approximately $8.0 million of the charge was inventory and investment write-offs
associated with management's decision to close branches and no longer pursue its
business strategy with an affiliate. The remaining $1.4 million in charges
related to other costs associated with the branch closures, including $1.0
million for lease termination payments and $0.4 million in severance payments.
Excluding the restructuring charge and the aforementioned other charges of $11.4
million, operating income decreased by $50.8 million, due principally to the
decline in gross profit and the increase in depreciation and amortization.
Interest and Other Expenses. Interest expense totaled $45.1 million for
2001, an increase of $1.4 million from 2000. The increase in interest expense
results primarily from an increase in average debt level compared to the
previous year somewhat offset by lower average interest rates. Other expense
totaled $16.9 million and $24.9
21
million in 2001 and 2000, respectively, reflecting costs associated with the
Receivables Facility. The $8.0 million decrease was principally due to a
decrease in the program's advance rates.
Income Taxes. Income tax expense totaled $13.1 million in 2001, a decrease
of $10.1 million from 2000. The effective tax rates for 2001 and 2000 were 39.4%
and 41.0%, respectively. The decrease in the rate in 2001 is principally related
to the effect of foreign tax credits on decreased pretax income as compared to
the prior year.
Net Income. Net income and diluted earnings per share totaled $20.2
million and $0.43 per share, respectively, in 2001, compared with $33.4 million
and $0.70 per share, respectively, in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were approximately $1.0 billion at December 31, 2002, a
$142.8 million decrease from December 31, 2001. Stockholders' equity totaled
$169.3 million at December 31, 2002, compared with $144.7 million at December
31, 2001.
The following table sets forth WESCO's outstanding indebtedness:
DECEMBER 31
------------------
2002 2001
------ ------
(IN MILLIONS)
Mortgage facility ......................................... $ 13.3 $ --
Revolving credit facility ................................. 10.0 68.6
Senior subordinated notes ................................. 389.0 377.7
Other ..................................................... 5.7 5.6
------ ------
418.0 451.9
Less current portion ...................................... (5.8) (5.5)
------ ------
$412.2 $446.4
====== ======
The following table sets forth details of WESCO's Receivables Facility:
DECEMBER 31
------------------
2002 2001
------ ------
(IN MILLIONS)
Securitized accounts receivable ........................... $346.0 $395.0
Subordinated retained interest ............................ (53.0) (65.0)
------ ------
Net accounts receivable removed from balance sheet ... $293.0 $330.0
====== ======
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 these agreements
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. 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.
22
The following table summarizes the impact of these items for the fiscal years
presented:
DECEMBER 31
2002 2001 2000
------- ------- -------
(IN MILLIONS)
Working capital and other assets and liabilities ... $ (4.3) $ 140.4 $ (64.1)
Capital expenditures, net of asset sales ........... (8.6) (12.9) (20.0)
Acquisitions of businesses ......................... (14.5) (56.3) (40.9)
Scheduled debt service obligations ................. -- (0.6) (3.8)
Internally generated cash flow ..................... 61.8 65.7 71.0
Credit facility activity ........................... (45.3) (36.6) 57.1
Receivables facility ............................... (37.0) (45.0) 40.0
Stock transactions ................................. 0.6 0.5 (26.8)
Other .............................................. (5.2) (1.2) (0.2)
------- ------- -------
Net change in cash ................................. $ (52.5) $ 54.0 $ 12.3
======= ======= =======
In 2003, WESCO anticipates capital expenditures to be similar to 2002. As
of February 28, 2003, the Company has no specific near-term plans to make an
acquisition. Acquisition-related earn-out payments, if required, will be based
on the performance of acquired companies.
The required annual principal repayments for the next five years and
thereafter, as of December 31, 2002 (in thousands):
2003 .................................................. $ 5,778
2004 .................................................. 315
2005 .................................................. 336
2006 .................................................. 334
2007 .................................................. 10,350
Thereafter ............................................ 411,824
Mortgage Financing Facility
WESCO has entered into a $51 million mortgage financing facility, $13
million of which was outstanding as of December 31, 2002. Total borrowings under
the mortgage financing are subject to a 22-year amortization schedule with a
balloon payment due at the end of the 10-year term. Proceeds from the borrowings
were used to reduce outstanding borrowings under the 2002 Revolving Credit
Facility.
2002 Revolving Credit Facility
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 Canada. 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 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, then 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 excess availability under the agreement is less than $50
million, then WESCO must maintain a fixed charge coverage ratio of 1.1 to 1.0.
At December 31, 2002 the interest rate was 4.0%. This facility also had various
restrictive covenants including financial ratios. WESCO
23
was in compliance with all such covenants as of December 31, 2002. At December
31, 2002, WESCO had approximately $154 million available under its 2002
Revolving Credit Facility compared to approximately $47 million available at
December 31, 2001.
Senior Notes
WESCO has $400 million in aggregate principal amount of senior
subordinated notes due 2008. The notes were issued with an average issue price
of 98%. The net proceeds received by the Company from the notes were
approximately $376 million.
Interest Rate Swap Agreements
During September and October of 2001, WESCO entered into four separate
fixed-to-floating interest rate swap agreements, each with a notional amount of
$25 million. These agreements have six-year terms expiring concurrently with the
9.13% senior subordinated notes with the intent of converting $100 million of
the senior subordinated notes from a fixed-to-floating rate facility. Pursuant
to these agreements, WESCO will receive fixed interest payments at the rate of
9.13% and will pay interest at three-month LIBOR plus a premium. The LIBOR rates
in the agreements are reset quarterly. In 2002, the agreements had the effect of
reducing the interest cost on $100 million of the senior notes from 9.13% to
6.00%. The agreements can be terminated by the counterparty in accordance with a
redemption schedule that is consistent with the redemption schedule for the
senior subordinated notes.
WESCO entered into interest rate swap agreements as a means to hedge its
interest rate exposure and maintain certain amounts of variable rate and fixed
rate debt. Since the swaps have been designated as hedging instruments, their
fair values are reflected in the Company's Consolidated Balance Sheets. Net
amounts to be received or paid under the swap agreements are reflected as
adjustments to interest expense.
Accounts Receivable Securitization Program
WESCO maintains a Receivables Facility with a group of financial
institutions with a purchase commitment up to $396 million. Under the
Receivables Facility, which is subject to an annual renewal in June 2003, WESCO
sells, on a continuous basis, to WESCO Receivables Corporation, a wholly-owned
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. See Note 6 to the Consolidated
Financial Statements.
Cash Flow
An analysis of cash flows for 2002 and 2001 follows:
Operating Activities. Cash provided by operating activities totaled $20.4
million for the year ended December 31, 2002, compared to $161.1 million a year
ago. Cash provided by operations in 2002 and 2001 included $37.0 million and
$45.0 million, respectively, of net cash outflows related to WESCO's Receivables
Facility. Excluding these transactions, operating activities provided $57.4
million in 2002 and $206.1 million in 2001. On this basis, the year-to-year
decrease in operating cash flow of $148.7 million was primarily due to a
decrease of accounts payable.
Investing Activities. Net cash used in investing activities was $23.1
million in 2002, compared to $69.2 million in 2001. Cash used for investing
activities was higher in 2001 due to $41.8 million more in acquisition payments
and $4.5 million more in capital expenditures. Capital expenditures in 2002 were
$9.3 million compared to $13.8 million in 2001 and were for computer equipment
and software, and branch and distribution center facility improvements.
Financing Activities. Cash used by financing activities in 2002 was $49.9
million primarily for net debt repayments and costs associated with the issuance
of debt. Cash used by financing activities was $38.0 million in 2001 that was
primarily due to net debt repayments of $37.2 million.
24
Contractual Cash Obligations and Other Commercial Commitments
The following summarizes WESCO's contractual obligations at December 31,
2002, and the effect such obligations are expected to have on its liquidity and
cash flow in future periods.
(IN MILLIONS)
--------------------------------------------------
2004 TO 2006 TO AFTER
TOTAL 2003 2005 2007 2007
------ ------ ------- ------- ------
Contractual cash obligations:
Mortgage facility .................... $ 13.3 $ 0.2 $ 0.6 $ 0.7 $ 11.8
Revolving credit facility ............ 10.0 -- -- 10.0 --
Senior subordinated notes ............ 400.0 -- -- -- 400.0
Non-cancelable operating leases ...... 92.1 24.7 38.4 19.9 9.1
Other long-term obligations .......... 5.7 5.6 0.1 -- --
------ ------ ------ ------ ------
Total contractual cash obligations ... $521.1 $ 30.5 $ 39.1 $ 30.6 $420.9
====== ====== ====== ====== ======
(IN MILLIONS)
--------------------------------------------------
2004 TO 2006 TO AFTER
TOTAL 2003 2005 2007 2007
------ ------ ------- ------- ------
Other commercial commitments:
Standby letters of credit ............ $ 16.6 $ 16.6 $ -- $ -- $ --
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 or will continue to be the case.
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
The Company'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 winter months. Sales increase during the warmer
months beginning in March and continuing through November. Sales drop again
slightly in December as the weather cools and also as a result of a reduced
level of activity during the holiday season. As a result, the Company reports
sales and earnings in the first quarter that are generally lower than that of
the remaining quarters.
25
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS
No. 123." SFAS No. 148 was issued to provide alternative methods of transition
for a voluntary change to the fair-value-based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS No. 123 in paragraphs 2(a)-2(e) of this
statement shall be effective for financial statements for fiscal years ending
after December 15, 2002. Currently, WESCO is evaluating the impact of adopting
the fair-value-based method of accounting for stock-based compensation under
SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. This interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 and
the disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. WESCO
includes the required disclosure of this interpretation in Notes 10 and 18 to
the Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risk and rewards of ownership among
their owners and other parties involved. The provisions of this interpretation
are effective immediately to all variable interest entities created after
January 1, 2003 and variable interest entities in which an enterprise obtains an
interest in after that date. For variable interest entities created before this
date, the provisions are effective July 31, 2003. WESCO is currently evaluating
the potential impact of this interpretation on its consolidated financial
statements, however, WESCO does not believe it will affect the accounting
treatment for its Receivables Facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
FOREIGN CURRENCY RISKS
Over 90% of WESCO's sales are denominated in U. S. dollars and are
primarily from customers in the United States. As a result, currency
fluctuations are currently not material to WESCO's operating results. WESCO does
have foreign subsidiaries located in North America, Europe and Asia and may
establish additional foreign subsidiaries in the future. Accordingly, WESCO may
derive a more significant portion of its sales from international operations and
a portion of these sales may be denominated in foreign currencies. As a result,
WESCO's future operating results could become subject to fluctuations in the
exchange rates of those currencies in relation to the U. S. dollar. Furthermore,
to the extent that WESCO engages in international sales denominated in U. S.
dollars, an increase in the value of the U. S. dollar relative to foreign
currencies could make WESCO's products
26
less competitive in international markets. WESCO has and will continue to
monitor its exposure to currency fluctuations.
INTEREST RATE RISKS
WESCO's indebtedness as of December 31, 2002 is comprised of $10.0 million
of variable-rate borrowings outstanding under its revolving credit facility and
$408.0 million of fixed-rate borrowings. Interest cost under the revolving
credit facility is based on various indices plus a borrowing margin.
In September and October of 2001, WESCO entered into several
fixed-to-floating interest rate swap agreements with an aggregate notional
amount of $100 million. Under the terms of these agreements, WESCO pays interest
on the notional amount of the swap at LIBOR plus a premium and receives fixed
payments at the rate of 9 1/8%. The LIBOR rates in the agreements are reset
quarterly. At December 31, 2002, the net fair value of interest-rate-related
derivatives designated as fair value hedges of debt resulted in an increase of
$5.1 million. These interest rate swap agreements reduced interest expense by
approximately $3.1 million in 2002. The agreements can be terminated under
certain conditions. There is no assurance WESCO could find comparable interest
rate swap agreements to continue to reduce interest expense at current levels.
At December 31, 2002, WESCO had approximately $110.0 million of variable
rate debt, which includes the effect of $100 million in interest rate swaps. A
hypothetical 10% change in interest rates based on these variable-rate borrowing
levels would result in a $0.6 million increase or decrease in interest expense.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth in the Company's
Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Specific financial statements can be found at the pages listed below:
WESCO International, Inc. PAGE
----
Report of Independent Accountants ........................................................................ 29
Consolidated Balance Sheets as of December 31, 2002 and 2001 ............................................. 30
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 ............... 31
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 ..... 32
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 ............... 33
Notes to Consolidated Financial Statements ............................................................... 34
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of WESCO International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of WESCO
International, Inc. and its subsidiaries (collectively, "WESCO") at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of WESCO's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 4 to the Consolidated Financial Statements, WESCO
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." Accordingly, WESCO changed its method of accounting for
goodwill in 2002.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 12, 2003
29
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 22,570 $ 75,057
Trade accounts receivable, net of allowance for doubtful accounts of
$10,261 and $11,816 in 2002 and 2001, respectively (NOTE 6) ............... 182,249 217,920
Other accounts receivable ................................................... 19,921 26,413
Inventories, net ............................................................ 338,781 380,022
Income taxes receivable ..................................................... 6,103 3,643
Prepaid expenses and other current assets ................................... 7,433 6,639
Current deferred income taxes (NOTE 12) .................................... -- 8,341
----------- -----------
Total current assets .................................................... 577,057 718,035
Property, buildings and equipment, net (NOTE 9) .................................. 110,174 120,599
Goodwill ......................................................................... 314,078 311,073
Other assets ..................................................................... 13,809 8,251
----------- -----------
Total assets ............................................................ $ 1,015,118 $ 1,157,958
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 346,513 $ 469,107
Accrued payroll and benefit costs ........................................... 19,736 16,480
Current portion of long-term debt ........................................... 5,778 5,530
Current deferred income taxes (NOTE 12) ..................................... 3,408 --
Other current liabilities ................................................... 23,040 38,362
----------- -----------
Total current liabilities ............................................... 398,475 529,479
Long-term debt (NOTE 10) ......................................................... 412,196 446,436
Other noncurrent liabilities ..................................................... 5,684 10,086
Deferred income taxes (NOTE 12) .................................................. 29,475 27,306
----------- -----------
Total liabilities ....................................................... 845,830 1,013,307
Commitments and contingencies (NOTE 16)
STOCKHOLDERS' EQUITY (NOTES 3 AND 11):
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 .......................................................... 570,923 569,997
Retained earnings (deficit) ................................................. (366,796) (389,919)
Treasury stock, at cost; 4,033,020 and 4,032,648 shares in 2002 and
2001, respectively ........................................................ (33,841) (33,852)
Accumulated other comprehensive income (loss) ............................... (1,489) (2,064)
----------- -----------
Total stockholders' equity .............................................. 169,288 144,651
----------- -----------
Total liabilities and stockholders' equity .............................. $ 1,015,118 $ 1,157,958
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
30
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
----------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales ........................................ $3,325,780 $3,658,033 $3,881,096
Cost of goods sold ............................... 2,735,006 3,014,520 3,196,952
---------- ---------- ----------
Gross profit .................................. 590,774 643,513 684,144
Selling, general and administrative expenses ..... 494,382 517,156 524,309
Depreciation and amortization .................... 19,767 30,972 24,993
Restructuring charge (NOTE 5) .................... -- -- 9,404
---------- ---------- ----------
Income from operations ........................ 76,625 95,385 125,438
Interest expense, net ............................ 42,985 45,140 43,780
Loss on debt extinguishment ...................... 1,073 -- --
Other expenses (NOTE 6) .......................... 6,597 16,877 24,945
---------- ---------- ----------
Income before income taxes .................... 25,970 33,368 56,713
Provision for income taxes (NOTE 12) ............. 2,847 13,143 23,275
---------- ---------- ----------
Net income .................................... $ 23,123 $ 20,225 $ 33,438
========== ========== ==========
Earnings per share (NOTE 13)
Basic ......................................... $ 0.51 $ 0.45 $ 0.74
========== ========== ==========
Diluted ....................................... $ 0.49 $ 0.43 $ 0.70
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
CLASS B RETAINED COMPREHENSIVE
COMPREHENSIVE COMMON COMMON ADDITIONAL EARNINGS TREASURY INCOME
INCOME STOCK STOCK CAPITAL (DEFICIT) STOCK (LOSS)
------------- --------- --------- ---------- --------- --------- -------------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1999 ...... $ 433 $ 46 $ 565,897 $(443,582) $ (4,790) $ (699)
Repurchase of common stock ...... (28,064)
Exercise of stock options,
including tax benefit, net . 8 3,391 (552)
Net income ...................... $ 33,438 33,438
Translation adjustment .......... (539) (539)
---------
Comprehensive income ............ $ 32,899
========= --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 ...... 441 46 569,288 (410,144) (33,406) (1,238)
Exercise of stock options,
including tax benefit, net . 2 709 (446)
Net income ...................... $ 20,225 20,225
Translation adjustment .......... (826) (826)
---------
Comprehensive income ............ $ 19,399
========= --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2001 ...... 443 46 569,997 (389,919) (33,852) (2,064)
--------- --------- --------- --------- --------- ---------
Exercise of stock options,
including tax benefit, net . 2 926 (73)
Treasury stock issuance ......... 84
Net income ...................... $ 23,123 23,123
Translation adjustment .......... 575 575
---------
Comprehensive income ............ $ 23,698
========= --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2002 ...... $ 445 $ 46 $ 570,923 $(366,796) $ (33,841) $ (1,489)
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
32
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income ........................................................ $ 23,123 $ 20,225 $ 33,438
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on debt extinguishment .................................... 1,073 -- --
Restructuring charge ........................................... -- -- 9,404
Depreciation and amortization .................................. 19,767 30,972 24,993
Accretion of original issue and amortization of purchase
discounts .................................................... 2,972 1,799 1,147
Amortization of debt issuance and interest rate cap costs ...... 945 1,168 608
Gain on sale of property, buildings and equipment .............. (43) (520) (841)
Deferred income taxes .......................................... 13,918 12,035 2,260
Changes in assets and liabilities, excluding the effects of
acquisitions:
Change in receivables facility ............................... (37,000) (45,000) 40,000
Trade and other receivables .................................. 79,163 106,072 (97,570)
Inventories .................................................. 41,241 48,511 (16,047)
Prepaid expenses and other current assets .................... (2,935) (1,642) (1,609)
Other assets ................................................. 2,402 (836) (99)
Accounts payable ............................................. (122,594) 3,402 39,345
Accrued payroll and benefit costs ............................ 3,256 (10,547) 8,488
Other current and noncurrent liabilities ..................... (4,860) (4,547) 3,394
--------- --------- ---------
Net cash provided by operating activities ................ 20,428 161,092 46,911
INVESTING ACTIVITIES:
Capital expenditures .............................................. (9,349) (13,820) (21,552)
Proceeds from the sale of property, buildings and equipment ....... 755 933 1,543
Receipts from affiliate ........................................... -- -- 224
Acquisitions, net of cash acquired ................................ (14,466) (56,269) (40,904)
--------- --------- ---------
Net cash used by investing activities .................... (23,060) (69,156) (60,689)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .......................... 552,436 766,363 724,038
Repayments of long-term debt ...................................... (597,710) (803,548) (670,734)
Debt issuance costs ............................................... (5,201) (1,262) (475)
Proceeds from issuance of common stock, net of offering
costs, and exercise of options ............................. 620 489 1,273
Repurchase of common stock ........................................ -- -- (28,064)
--------- --------- ---------
Net cash (used) provided by financing activities ........ (49,855) (37,958) 26,038
--------- --------- ---------
Net change in cash and cash equivalents ........................... (52,487) 53,978 12,260
Cash and cash equivalents at the beginning of period .............. 75,057 21,079 8,819
--------- --------- ---------
Cash and cash equivalents at the end of period .................... $ 22,570 $ 75,057 $ 21,079
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ............................................ $ 38,885 $ 41,914 $ 41,676
Cash (refund) paid for taxes ...................................... (9,061) 3,259 19,589
Other non-cash activities:
(Increase) decrease in fair value of interest rate swap ...... (8,310) 3,177 --
Write-off of investment in affiliate ......................... -- -- 4,000
The accompanying notes are an integral part of the consolidated financial
statements.
33
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and Singapore.
On June 5, 1998, WESCO repurchased and retired all of the common stock of
WESCO principally held by non-management shareholders for $10.75 per share for
net consideration of approximately $653.5 million. In addition, WESCO repaid
approximately $379.1 million of then outstanding indebtedness, and sold
29,604,351 shares of common stock to an investor group led by affiliates of the
Cypress Group LLC ("Cypress") representing approximately 88.7% of WESCO at that
time for an aggregate cash consideration of $318.1 million. Existing management
retained approximately an 11.3% interest in WESCO immediately following the
transaction. WESCO funded the equity consideration and the repayment of
indebtedness from proceeds of the cash equity contribution, issuance of
approximately $351 million of senior subordinated and senior discount notes, a
$170 million credit facility and the sale of approximately $250 million of
accounts receivable. Given the 11.3% retained ownership, the transaction was
treated as a recapitalization for financial reporting purposes and, accordingly,
the historical bases of WESCO's assets and liabilities were not affected.
2. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of WESCO
International, Inc. and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying disclosures. Although
these estimates are based on management's best knowledge of current events and
actions WESCO may undertake in the future, actual results may ultimately differ
from the estimates.
Revenue Recognition
Revenues are recognized when title, ownership and risk of loss pass to the
customer, or services are 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.
Supplier Volume Rebates
WESCO receives rebates from certain suppliers based on contractual
arrangements with such suppliers. An asset on the balance sheet represents the
estimated amounts due to WESCO under the rebate provisions of such contracts.
The corresponding rebate income is recorded as a reduction of cost of goods
sold. The appropriate level of such income is derived from the level of actual
purchases being made by WESCO from suppliers, in accordance with the provisions
of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a
Reseller for Cash Consideration Received from a Vendor."
Shipping and Handling Costs and Fees
WESCO records the majority of costs and fees associated with transporting
its products to customers as a component of selling, general and administrative
expenses. These costs totaled $37.2 million, $38.2 million and $33.7 million in
2002, 2001 and 2000, respectively.
34
The remaining shipping and handling costs relate to costs that are billed
to our customers. These costs and the related revenue are included in net sales
in the consolidated statement of operations.
Cash Equivalents
Cash equivalents are defined as highly liquid investments with original
maturities of 90 days or less when purchased.
Asset Securitization
WESCO accounts for the securitization of accounts receivable in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." At the time the receivables are sold the balances are removed from
the balance sheet. SFAS No. 140 also requires retained interests in the
transferred assets to be measured by allocating the previous carrying amount
between the assets sold and retained interests based on their relative fair
values at the date of transfer. The Company estimates fair value based on the
present value of expected future cash flows discounted at a rate commensurate
with the risks involved.
Allowance for Doubtful Accounts
WESCO maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. WESCO
has a systematic procedure using estimates based on historical data and
reasonable assumptions of collectibility made at the local branch level and at
the consolidated corporate basis to calculate the allowance for doubtful
accounts. If the financial condition of WESCO's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The allowance for doubtful accounts was $10.3
million at December 31, 2002 and $11.8 million at December 31, 2001.
Inventories
Inventories primarily consist of merchandise purchased for resale and are
stated at the lower of cost or market. Cost is determined principally under the
average cost method. The Company makes provisions for obsolete or slow-moving
inventories as necessary to properly reflect inventory value. Reserves for
excess and obsolete inventories were $11.9 million and $16.8 million at December
31, 2002 and 2001, respectively.
Property, Buildings and Equipment
Property, buildings and equipment are recorded at cost. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over either their
respective lease terms or their estimated lives, whichever is shorter. Estimated
useful lives range from five to forty years for buildings and leasehold
improvements, three to seven years for furniture, fixtures and equipment and two
to five years for software costs.
Expenditures for new facilities and improvements that extend the useful
life of an asset are capitalized. Ordinary repairs and maintenance are expensed
as incurred. When property is retired or otherwise disposed of, the cost and the
related accumulated depreciation are removed from the accounts and any related
gains or losses are recorded.
Goodwill
Prior to the adoption of SFAS No. 142 discussed in Note 4, goodwill
arising from acquisitions was amortized on a straight-line basis over periods
ranging from 25 to 35 years. The carrying value of goodwill was regularly
reviewed by evaluating the estimated future undiscounted cash flows to determine
recoverability of the assets.
Intangible Assets
WESCO's intangible assets consist primarily of non-compete agreements with
contractually determined lives. The carrying value of these intangible assets
were $3.2 million and $3.6 million at December 31, 2002 and 2001, respectively
and are regularly reviewed by evaluating the estimated future undiscounted cash
flows to determine recoverability of the assets. Any decrease in value is
recognized on a current basis.
35
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances, if any, are provided when a portion
or all of a deferred tax asset may not be realized.
Foreign Currency Translation
The local currency is the functional currency for all of WESCO's
operations outside the United States. Assets and liabilities of these operations
are translated to U.S. dollars at the exchange rate in effect at the end of each
period. Income statement accounts are translated at the average exchange rate
prevailing during the period. Translation adjustments arising from the use of
differing exchange rates from period to period are included as a component of
stockholders' equity. Gains and losses from foreign currency transactions are
included in net income for the period.
Treasury Stock
Common stock purchased for treasury is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the weighted average cost basis.
Stock Options
WESCO accounts for stock-based compensation arrangements under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and related interpretations. WESCO
currently records compensation expense for its stock options utilizing the
intrinsic value method in accordance with APB 25. No stock-based employee
compensation cost has been reflected in net income, as all options granted in
the years ended December 31, 2002, 2001 and 2000 had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
WESCO had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to measure stock-based compensation:
YEAR ENDED DECEMBER 31
----------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Net income, as reported .......................... $ 23,123 $ 20,225 $ 33,438
Stock-based employee compensation expense
determined under SFAS No. 123 for all awards,
net of related tax .............................. 2,429 2,874 2,459
---------- ---------- ----------
Pro forma net income ............................. $ 20,694 $ 17,351 $ 30,979
Earnings per share:
Basic as reported ........................... $ 0.51 $ 0.45 $ 0.74
Basic pro forma ............................. $ 0.46 $ 0.39 $ 0.68
Diluted as reported ......................... $ 0.49 $ 0.43 $ 0.70
Diluted pro forma ........................... $ 0.44 $ 0.37 $ 0.65
The weighted average fair value per option granted was $4.57, $2.99 and
$4.82 for the years ended December 31, 2002, 2001 and 2000, respectively.
36
For purposes of presenting pro forma results, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model and the following assumptions:
YEAR ENDED DECEMBER 31
----------------------------
2002 2001 2000
---- ---- ----
Risk-free interest rate .................... 3.4% 4.9% 6.0%
Expected life (years) ...................... 6.0 6.0 6.0
Stock price volatility ..................... 75.0% 65.0% 45.0%
Employee turnover .......................... 5.0% 5.0% 5.0%
Fair Value of Financial Instruments
For certain of WESCO's financial instruments, including cash and cash
equivalents, accounts receivable, notes payable and variable-rate borrowings,
accounts payable and other accrued liabilities, the carrying values approximate
fair value due to their short maturities. WESCO's $400 million senior
subordinated notes were issued at an average discount of 2.1% and were trading
at a discount of 20% at December 31, 2002.
Interest Rate Swaps
WESCO enters into interest rate swap agreements to reduce the exposure of
its debt to interest rate risk and formally documents this strategy as part of
its risk management program. Interest rate swaps are used to modify the market
risk exposures for a portion of WESCO's debt to achieve LIBOR-based floating
interest expense. The swap transactions generally involve the exchange of
fixed-for-floating interest payment obligations and are accounted for as fair
value hedges. The gain or loss on the derivative instrument, as well as the
offsetting gain or loss on the hedged item, is recognized in earnings in the
current period.
WESCO estimates the fair value of derivatives based on quoted market
prices or pricing models using current market rates, and records all derivatives
on the balance sheet at fair value. At December 31, 2002, the fair value of
interest-rate-related derivatives designated as fair value hedges of debt was
$5.1 million and is recorded in non-current assets. Cash flows from derivative
instruments are presented in a manner consistent with the underlying
transaction.
Environmental Expenditures
WESCO has facilities and operations that distribute certain products that
must comply with environmental regulations and laws. Expenditures for current
operations are expensed or capitalized, as appropriate. Expenditures relating to
existing conditions caused by past operations, and which do not contribute to
future revenue, are expensed. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies 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. WESCO does not believe that the adoption
of this statement will have a material impact on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS
No. 123." SFAS No. 148 was issued to provide alternative methods of transition
for a voluntary change to the fair-value-based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based
37
employee compensation and the effect of the method used on reported results. The
amendments to SFAS No. 123 in paragraphs 2(a)-2(e) of this statement shall be
effective for financial statements for fiscal years ending after December 15,
2002. Currently, WESCO is evaluating the impact of adopting the fair-value-based
method of accounting for stock-based compensation under SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. This interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 and
the disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. WESCO
includes the required disclosure of this interpretation in Notes 10 and 18 to
the Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risk and rewards of ownership among
their owners and other parties involved. The provisions of this interpretation
are effective immediately to all variable interest entities created after
January 1, 2003 and variable interest entities in which an enterprise obtains an
interest in after that date. For variable interest entities created before this
date, the provisions are effective July 31, 2003. WESCO is currently evaluating
the potential impact of this interpretation on its consolidated financial
statements, however, WESCO does not believe it will affect the accounting
treatment for its Receivables Facility.
3. INITIAL PUBLIC OFFERING
On May 17, 1999, WESCO completed its initial public offering of 11,183,750
shares of common stock ("Offering") at $18.00 per share. In connection with the
Offering, certain employee rights to require WESCO to repurchase outstanding
redeemable common stock were terminated and approximately $31.5 million of
convertible notes were converted into 1,747,228 shares of common stock. Proceeds
from the Offering (after deducting Offering costs of $14.5 million) totaling
$186.8 million and borrowings of approximately $65 million were used to redeem
all of the 11 1/8% senior discount notes ($62.8 million) and to repay the
existing revolving credit and term loan facilities ($188.8 million).
In connection with the Offering, the Board of Directors approved a 57.8 to
one stock split effected in the form of a stock dividend of WESCO's common
stock. The Board of Directors also reclassified the Class A common stock into
common stock, increased the authorized common stock to 210,000,000 shares and
the authorized Class B common stock to 20,000,000 shares and authorized
20,000,000 shares of $.01 par value preferred stock, all effective May 11, 1999.
In this report, all share and per share data have been restated to reflect the
stock split.
4. GOODWILL
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 2002, WESCO completed its transitional and annual
impairment reviews 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 these reviews.
38
The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows (in thousands):
Balance as of January 1, 2002 ............. $311,073
Goodwill additions during year ............ 3,005
--------
Balance as of December 31, 2002 ........... $314,078
========
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 on prior periods of WESCO's net income and earnings per share for the
years December 31, 2002, 2001 and 2000.
YEAR ENDED DECEMBER 31
Dollars in thousands, except per share amounts 2002 2001 2000
---------- ---------- ----------
Reported net income ......................... $ 23,123 $ 20,225 $ 33,438
Goodwill amortization, net of tax ........... -- 7,236 5,877
---------- ---------- ----------
Adjusted net income ......................... $ 23,123 $ 27,461 $ 39,315
Basic earnings per share:
Reported net income ..................... $ 0.51 $ 0.45 $ 0.74
Goodwill amortization, net of tax ....... -- 0.16 0.13
---------- ---------- ----------
Adjusted net income ..................... $ 0.51 $ 0.61 $ 0.87
========== ========== ==========
Diluted earnings per share:
Reported net income ..................... $ 0.49 $ 0.43 $ 0.70
Goodwill amortization, net of tax ....... -- 0.15 0.12
---------- ---------- ----------
Adjusted net income ..................... $ 0.49 $ 0.58 $ 0.82
========== ========== ==========
5. RESTRUCTURING CHARGE
In the fourth quarter of 2000, WESCO commenced certain programs to reduce
costs, improve productivity and exit certain operations. Total costs under these
programs were $9.4 million, and were comprised of $5.4 million related to the
closure of fourteen branch operations in the United States, Canada and the
Balkans, and $4.0 million related to the non-cash write-down of an investment in
an affiliate. The $5.4 million charge related to the closure of fourteen branch
operations is principally comprised of an inventory write-down of approximately
$4.0 million and lease termination costs of approximately $1.0 million, of which
$0.7 million was paid through December 31, 2002. The $4.0 million investment
write-down was a result of management's decision to no longer pursue its
business strategy with an affiliate.
6. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO maintains an accounts receivable securitization program
("Receivables Facility") that requires an annual renewal of its terms. Under the
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 December 31, 2002 and 2001, securitized accounts receivable totaled
approximately $346 million and $395 million, respectively, of which the
subordinated retained interest was approximately $53 million and $65 million,
respectively. Accordingly, approximately $293 million and $330 million of
accounts receivable balances were removed from the consolidated balance sheets
at December 31, 2002 and 2001, respectively. WESCO reduced its Receivables
Facility by $37.0 million in 2002 and by $45.0 million in 2001. Costs associated
with the Receivables Facility totaled $6.6 million, $16.9 million and $24.9
million in 2002, 2001 and 2000, 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.
39
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 3% and an estimated life of 1.5 months. At December 31, 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 $0.3
million and $0.4 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.
7. ACQUISITIONS
In 2001, WESCO acquired a distributor serving contractors who install gas,
lighting and communication utility infrastructure. In 2000, WESCO acquired three
electrical distributors. Total goodwill recorded as a result of these
acquisitions was approximately $47 million and $38 million for the years ended
December 31, 2001 and 2000, respectively. Certain of these acquisitions also
contain contingent consideration provisions that are not material to the
consolidated financial statements of WESCO. A summary of certain information
with respect to all acquisitions follows:
YEAR ENDED DECEMBER 31
------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Details of acquisitions:
Fair value of assets acquired ..... $ -- $ 72,270 $ 63,764
Deferred acquisition payment ...... 16,466 8,585 3,353
Liabilities assumed ............... -- (9,586) (15,963)
Notes issued to seller ............ -- (5,000) (2,500)
Deferred acquisition payable ...... (2,000) (10,000) (7,750)
-------- -------- --------
Cash paid for acquisitions ........... $ 14,466 $ 56,269 $ 40,904
======== ======== ========
All of the acquisitions were accounted for under the purchase method of
accounting for business combinations. The results of operations of these
companies are included in the consolidated financial statements prospectively
from the acquisition dates. Pro forma results of these acquisitions, assuming
they had been made at the beginning of each year presented, would not be
materially different from the consolidated results reported herein.
In 1998, WESCO acquired substantially all the assets and assumed
substantially all liabilities and obligations relating to the operations of
Bruckner Supply Company, Inc. ("Bruckner"). Under the terms of the purchase
agreement, additional contingent consideration, if any, is to be paid based on a
multiple of increases in earnings before interest, taxes, depreciation and
amortization of Bruckner through 2004. Up to 50% of the additional future
contingent consideration, if any, may be converted at the election of the holder
into common stock at the then market value. The purchase agreement provides for
an additional earn-out potential of $80 million during any one of the next three
years if certain earning targets are achieved. WESCO paid, including interest,
$10 million pursuant to this agreement in 2002. 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.
8. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT SUPPLIERS
WESCO distributes its products and services and extends credit to a large
number of customers in the industrial, construction, utility and manufactured
structures markets. In addition, one supplier accounted for approximately 13%,
14% and 13% of WESCO's purchases for each of the three years, 2002, 2001 and
2000, respectively.
40
9. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth the components of property, buildings and
equipment:
DECEMBER 31
------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Land ............................................. $ 18,349 $ 18,588
Buildings and leasehold improvements ............. 67,321 66,921
Furniture, fixtures and equipment ................ 80,808 76,899
Software costs ................................... 31,940 28,292
--------- ---------
198,418 190,700
Accumulated depreciation and amortization ........ (90,981) (72,705)
--------- ---------
107,437 117,995
Construction in progress ......................... 2,737 2,604
--------- ---------
$ 110,174 $ 120,599
========= =========
10. LONG-TERM DEBT
The following table sets forth WESCO's outstanding indebtedness:
DECEMBER 31
------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Revolving credit facility ........................ $ 10,000 $ 68,584
Mortgage facility ................................ 13,340 --
Senior subordinated notes (1) .................... 389,038 377,756
Other ............................................ 5,596 5,626
--------- ---------
417,974 451,966
Less current portion ............................. (5,778) (5,530)
--------- ---------
$ 412,196 $ 446,436
========= =========
- ----------
(1) Net of original issue discount of $8,410 and $9,963 and purchase discount
of $7,686 and $9,105 in 2002 and 2001, respectively and including net
value of interest rate swap of $(5,134) and $3,176 in 2002 and 2001,
respectively.
1999 Revolving Credit Facility
In June 1999, WESCO Distribution, Inc., a wholly-owned subsidiary of
WESCO, entered into a $400 million revolving credit facility with certain
financial institutions ("1999 Revolving Credit Facility"). The 1999 Revolving
Credit Facility consisted of up to $365 million of revolving loans denominated
in U.S. dollars and a Canadian sublimit totaling US$35 million. Borrowings under
the 1999 Revolving Credit Facility were collateralized by substantially all the
assets of WESCO Distribution, Inc. other than real property and accounts
receivable sold under the Receivables Facility, and are guaranteed by WESCO
International, Inc. and certain subsidiaries. In August 2001, WESCO
Distribution, Inc. entered into an amendment to the 1999 Revolving Credit
Facility, which among other things, affected the pricing and amounts available
under the 1999 Revolving Credit Facility. At December 31, 2001, the average
interest rate on borrowings under this facility was 6.0%.
In March 2002, the 1999 Revolving Credit Facility was terminated. In
conjunction with the termination, WESCO wrote off debt issuance costs of
approximately $1.1 million. In accordance with SFAS No. 145 this amount has not
been treated as an extraordinary item.
41
2002 Revolving Credit Facility
In March 2002, WESCO Distribution, Inc. entered into a $290 million
revolving credit agreement ("2002 Revolving Credit Facility") 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 1999 Revolving
Credit Facility. Interest on the 2002 Revolving Credit 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 December 31, 2002, the average interest rate on borrowings under this
facility was 4.0%.
Mortgage Financing Facility
WESCO has entered into a $51 million mortgage financing facility, $13
million of which was outstanding as of December 31, 2002. Total borrowings under
the mortgage financing are subject to a 22-year amortization schedule with a
balloon payment due at the end of the 10-year term. Proceeds from the borrowings
were used to reduce outstanding borrowings under the 2002 Revolving Credit
Facility. Interest rates on borrowings under this facility are fixed at 6.5%.
Senior Subordinated Notes
In June 1998 and August 2001, WESCO Distribution Inc. completed an
offering of $300 million and $100 million, respectively, in aggregate principal
amount of 9 1/8% senior subordinated notes due on June 1, 2008. The notes were
issued at an average issue price of 98% of par. The net proceeds received from
the notes were approximately $376 million. The net proceeds were used to repay
outstanding indebtedness.
The senior subordinated notes in an aggregate principal amount of $400
million are fully and unconditionally guaranteed by WESCO International, Inc.
The senior subordinated notes bear interest at a stated rate of 9 1/8%
payable semiannually on June 1 and December 1 through June 1, 2008. The
effective interest rate for the senior subordinated notes is 9.5%.
The senior subordinated notes are redeemable at the option of WESCO
Distribution, Inc. in whole or in part, at any time after June 1, 2003 at the
following prices:
Redemption Price
----------------
2003 .................................................. 104.563%
2004 .................................................. 103.042
2005 .................................................. 101.521
2006 and thereafter ................................... 100.000
At any time prior to June 1, 2003, the senior subordinated notes may be
redeemed, in whole but not in part, at the option of WESCO Distribution, Inc. at
any time within 180 days after a change of control, at a redemption price equal
to the principal amount thereof plus accrued and unpaid interest and the then
applicable premium. In addition, the noteholders have the right to require WESCO
Distribution, Inc., upon a change of control, to repurchase all or any part of
the senior subordinated notes at a redemption price equal to 101% of the
principal amount provided plus accrued and unpaid interest.
In September and October 2001, WESCO entered into certain interest rate
swap agreements with respect to $100 million notional amount of indebtedness.
Pursuant to the agreements, WESCO will receive semi-annual fixed
42
interest payments at the rate of 9 1/8% commencing December 1, 2001 and will
make quarterly variable interest rate payments at rates based on LIBOR plus a
margin commencing December 1, 2001 (currently rates range from 5.40% to 5.59%).
The agreements can be terminated by the counterparty in accordance with a
redemption schedule that is consistent with the redemption schedule for the
senior subordinated notes.
Other
At December 31, 2002 and 2001, other borrowings primarily consisted of
notes issued to sellers in connection with acquisitions.
The following table sets forth the aggregate principal repayment requirements
for all indebtedness for the next five years and thereafter (in thousands):
2003 .................................................. $ 5,778
2004 .................................................. 315
2005 .................................................. 336
2006 .................................................. 334
2007 .................................................. 10,350
Thereafter ............................................ 411,824
WESCO's credit agreements contain various restrictive covenants that,
among other things, impose limitations on (i) dividend payments or certain other
restricted payments or investments; (ii) the incurrence of additional
indebtedness and guarantees or issuance of additional stock; (iii) creation of
liens; (iv) mergers, consolidation or sales of substantially all of WESCO's
assets; (v) certain transactions among affiliates; (vi) payments by certain
subsidiaries to WESCO; and (vii) capital expenditures. In addition, the
revolving credit agreement requires WESCO to meet certain fixed charge coverage
tests depending on availability.
WESCO is permitted to pay dividends under certain limited circumstances.
At December 31, 2002 and 2001, no retained earnings were available for dividend
payments.
WESCO had $16.6 million and $1.0 million of outstanding letters of credit
at December 31, 2002 and 2001, respectively. These letters of credit are used as
collateral for interest rate swap agreements, potential obligation under
insurance programs as well as certain foreign commercial transactions. The fair
value of the letters of credit approximates the contract value.
11. CAPITAL STOCK
Preferred Stock
There are 20,000,000 shares of preferred stock authorized at a par value
of $.01 per share. The Board of Directors has the authority, without further
action by the stockholders, to issue all authorized preferred shares in one or
more series and to fix the number of shares, designations, voting powers,
preferences, optional and other special rights and the restrictions or
qualifications thereof. The rights, preferences, privileges and powers of each
series of preferred stock may differ with respect to dividend rates, liquidation
values, voting rights, conversion rights, redemption provisions and other
matters.
Common Stock
There are 210,000,000 shares of common stock and 20,000,000 shares of
Class B common stock authorized at a par value of $.01 per share. The Class B
common stock is identical to the common stock, except for voting and conversion
rights. The holders of Class B common stock have no voting rights. With certain
exceptions, Class B common stock may be converted, at the option of the holder,
into the same number of shares of common stock.
43
The following table sets forth capital stock share activity:
CLASS B
COMMON STOCK TREASURY STOCK COMMON STOCK
------------ -------------- ------------
December 31, 1999 ............... 43,291,319 (637,259) 4,653,131
Treasury shares purchased ....... -- (3,265,300) --
Options exercised ............... 802,345 (74,338) --
---------- ---------- ---------
December 31, 2000 ............... 44,093,664 (3,976,897) 4,653,131
Options exercised ............... 176,146 (55,751) --
---------- ---------- ---------
December 31, 2001 ............... 44,269,810 (4,032,648) 4,653,131
Treasury share issuance ......... -- 10,000 --
Options exercised ............... 213,703 (10,372) --
---------- ---------- ---------
December 31, 2002 ............... 44,483,513 (4,033,020) 4,653,131
========== ========== =========
WESCO's Board of Directors has authorized a $25 million share repurchase
program that expires in May 2003. WESCO's common stock may be purchased at
management's discretion, subject to meeting certain financial ratios, in open
market transactions and the program may be discontinued at any time. Under
previous share repurchase programs, WESCO purchased 3,898,000 shares of its
common stock for $32.8 million pursuant to this program. No shares were
repurchased during 2002.
12. INCOME TAXES
The following table sets forth the components of the provision for income
taxes:
YEAR ENDED DECEMBER 31
-----------------------------------
2002 2001 2000
-------- -------- -------
(IN THOUSANDS)
Current taxes:
Federal ............................. $(13,670) $ 1,051 $19,597
State ............................... 645 (1,502) 1,030
Foreign ............................. 1,954 1,559 388
-------- -------- -------
Total current ..................... (11,071) 1,108 21,015
Deferred taxes:
Federal ............................. 14,613 9,990 832
State ............................... (176) 2,297 183
Foreign ............................. (519) (252) 1,245
-------- -------- -------
Total deferred .................... 13,918 12,035 2,260
-------- -------- -------
$ 2,847 $ 13,143 $23,275
======== ======== =======
The following table sets forth the components of income before income
taxes by jurisdiction:
YEAR ENDED DECEMBER 31
-----------------------------------
2002 2001 2000
-------- -------- -------
(IN THOUSANDS)
United States .......................... $ 19,544 $ 29,921 $52,963
Foreign ................................ 6,426 3,447 3,750
-------- -------- -------
$ 25,970 $ 33,368 $56,713
======== ======== =======
44
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
YEAR ENDED DECEMBER 31
--------------------------------
2002 2001 2000
------ ------ ------
Federal statutory rate .......................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit ......... 1.2 1.5 1.4
Nondeductible expenses .......................... 4.2 4.2 3.4
Foreign taxes ................................... (2.2) -- 0.3
Reversal of income tax contingency accrual(1) ... (20.4) -- --
Remeasurement of deferred taxes(2) .............. (2.7) -- --
Other(3) ........................................ (4.1) (1.3) 0.9
------ ------ ------
11.0% 39.4% 41.0%
====== ====== ======
- ----------
(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) Reflects a decrease in the rate applied to deferred tax items. Management
believes this revised estimate reflects the rate that will be in effect
when these items reverse.
(3) 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.
The following table sets forth deferred tax assets and liabilities:
DECEMBER 31,
---------------------------------------------------
2002 2001
--------------------- ----------------------
(IN THOUSANDS)
Assets Liabilities Assets Liabilities
Accounts receivable ................. $1,107 $ -- $ 6,014 $ --
Inventory ........................... -- 1,920 2,106 972
Other ............................... 2,490 5,085 6,122 4,929
------ ------- ------- -------
Current deferred tax ........... 3,597 7,005 14,242 5,901
------ ------- ------- -------
Intangibles ......................... -- 22,403 -- 16,315
Property, buildings and equipment ... -- 6,943 -- 11,794
Other ............................... -- 129 942 139
------ ------- ------- -------
Long term deferred tax ......... $ -- $29,475 $ 942 $28,248
------ ------- ------- -------
Current deferred income taxes changed from an asset of $8.3 million at
December 31, 2001 to a liability of $3.4 million at December 31, 2002. The
primary factors associated with the change in balance were tax accounting method
changes related to certain working capital items.
13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding during the periods. Diluted earnings
per share are computed by dividing net income by the weighted average common
shares and common share equivalents outstanding during the periods. The dilutive
effect of common share equivalents is considered in the diluted earnings per
share computation using the treasury stock method.
45
The following table sets forth the details of basic and diluted earnings
per share:
YEAR ENDED DECEMBER 31
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net income ................................................ $ 23,123 $ 20,225 $ 33,438
Weighted average common shares outstanding used
in computing basic earnings per share .................. 45,033,964 44,862,087 45,326,475
Common shares issuable upon exercise of dilutive stock
options ................................................ 1,786,129 2,039,586 2,420,132
----------- ----------- -----------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share ............................. 46,820,093 46,901,673 47,746,607
=========== =========== ===========
Earnings per share
Basic .................................................. $ 0.51 $ 0.45 $ 0.74
Diluted ................................................ $ 0.49 $ 0.43 $ 0.70
Options to purchase 5.3 million and 4.4 million shares of common stock at
a weighted average exercise price of $8.37 per share and $10.24 per share were
outstanding as of December 31, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of WESCO common
stock.
14. EMPLOYEE BENEFIT PLANS
A majority of WESCO's employees are covered by defined contribution
retirement savings plans for their service rendered subsequent to WESCO's
formation. U.S. employee contributions of not more than 6% of eligible
compensation are matched 50% by WESCO. WESCO's contributions for Canadian
employees range from 1% to 6% of eligible compensation based on years of
service. For the years ended December 31, 2002, 2001 and 2000, WESCO contributed
$4.9 million, $5.5 million and $5.5 million, respectively, which was charged to
expense. Contributions may be taken in the form of WESCO's stock at the
employee's election.
In addition, employer profit sharing contributions may be made at the
discretion of the Board of Directors and can be based on WESCO's financial
performance. No such contributions were made during 2002, 2001 or 2000.
15. STOCK INCENTIVE PLANS
Stock Purchase Plans
In connection with the Recapitalization, WESCO established a stock
purchase plan ("1998 Stock Purchase Plan") under which certain employees may be
granted an opportunity to purchase WESCO's common stock. The maximum number of
shares available for purchase may not exceed 427,720. There were no shares
issued in 2002, 2001 or 2000.
In 1994, WESCO established a stock purchase plan ("1994 Stock Purchase
Plan") under which certain employees were granted an opportunity to purchase
WESCO's common stock. Future purchases of shares under the 1994 Stock Purchase
Plan were terminated in conjunction with the establishment of the 1998 Stock
Purchase Plan.
Stock Option Plans
WESCO has sponsored four stock option plans, the 1999 Long-Term Incentive
Plan ("LTIP"), the 1998 Stock Option Plan, the Stock Option Plan for Branch
Employees and the 1994 Stock Option Plan. The LTIP was designed to be the
successor plan to all prior plans. Outstanding options under prior plans will
continue to be governed by their existing terms, which are substantially similar
to the LTIP. Any remaining shares reserved for future issuance under the prior
plans are available for issuance under the LTIP. The LTIP is administered by the
Compensation Committee of the Board of Directors.
46
An initial reserve of 6,936,000 shares of common stock has been authorized
for issuance under the LTIP. This reserve automatically increases by (i) the
number of shares of common stock covered by unexercised options granted under
prior plans that are canceled or terminated after the effective date of the LTIP
and (ii) the number of shares of common stock surrendered by employees to pay
the exercise price and/or minimum withholding taxes in connection with the
exercise of stock options granted under our prior plans.
Options granted vest and become exercisable over periods ranging from four
to five years or earlier based on WESCO achieving certain financial performance
criteria. If the financial performance criteria are not met, all the options
will vest after eight years. All options vest immediately in the event of a
change in control. Each option terminates on the tenth anniversary of its grant
date unless terminated sooner under certain conditions.
All awards under WESCO's stock incentive plans are designed to be issued
at fair market value.
The following sets forth shares of common stock reserved for future issuance at
December 31, 2002:
Stock Purchase Plan ................................... 135,830
LTIP .................................................. 6,824,260
The following table sets forth a summary of stock option activity and
related information for the years indicated:
2002 2001 2000
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Beginning of year ............ 9,999,077 $5.96 9,588,306 $6.13 9,254,770 $5.44
Granted ...................... 275,500 6.74 907,350 4.70 1,606,000 9.21
Exercised .................... (213,703) 2.92 (176,146) 2.78 (802,345) 2.27
Canceled ..................... (220,760) 8.24 (320,433) 9.50 (470,119) 9.54
--------- --------- ---------
End of year .................. 9,840,114 5.99 9,999,077 5.96 9,588,306 6.13
========= ========= =========
Exercisable at end of year ... 6,477,016 $4.70 6,330,661 $4.32 6,043,337 $4.33
The following table sets forth exercise prices for options outstanding as
of December 31, 2002:
OPTIONS OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE REMAINING CONTRACTUAL LIFE
- ------------------------ ----------- ----------- --------------------------
$1.73 2,896,624 2,896,624 1.5
$1.98 617,707 617,707 3.0
$3.38 895,833 895,833 4.0
$4.34 60,112 60,112 4.9
$4.50 - $7.75 1,511,683 223,829 9.0
$8.13 - $9.31 48,000 -- 7.2
$9.75 - $9.88 963,000 -- 7.4
$10.75 2,837,980 1,773,736 5.6
$18.00 9,175 9,175 6.4
--------- ---------
9,840,114 6,477,016
========= =========
47
16. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases, primarily
for real property that have noncancelable lease terms in excess of one year as
of December 31, 2002, are as follows:
(IN THOUSANDS)
--------------
2003 ................................................. $24,682
2004 ................................................. 21,926
2005 ................................................. 16,453
2006 ................................................. 11,595
2007 ................................................. 8,332
Thereafter ........................................... 9,072
Rental expense for the years ended December 31, 2002, 2001 and 2000, was
$32.9 million, $32.5 million and $30.3 million, respectively.
WESCO has litigation arising from time to time in the normal course of
business. In management's opinion, any present litigation WESCO is aware of will
not materially affect WESCO's consolidated financial position, results of
operations or cash flows.
17. SEGMENTS AND RELATED INFORMATION
WESCO is engaged principally in one line of business - the sale of
electrical products and maintenance repair and operating supplies - which
represents more than 90% of the consolidated net sales, income from operations
and assets, for 2002, 2001 and 2000. WESCO has over 215,000 product stock
keeping units and markets over one million products for direct shipment
customers. It is impractical to disclose net sales by product, major product
group or service group. There were no material amounts of sales or transfers
among geographic areas and no material amounts of export sales.
The following table sets forth information about WESCO by geographic area:
NET SALES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31 DECEMBER 31
---------------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
United States ..... $2,943,740 $3,266,352 $3,494,527 $421,048 $427,062 $392,820
Canada ............ 299,844 311,471 319,823 10,509 11,257 11,286
Other foreign ..... 82,196 80,210 66,746 1,371 1,604 1,702
---------- ---------- ---------- -------- -------- --------
$3,325,780 $3,658,033 $3,881,096 $432,928 $439,923 $405,808
========== ========== ========== ======== ======== ========
48
18. OTHER FINANCIAL INFORMATION
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:
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Cash and cash equivalents ............. $ 4 $ 12,449 $ 10,117 $ -- $ 22,570
Trade accounts receivable ............. -- 45,381 136,868 -- 182,249
Inventories ........................... -- 298,495 40,286 -- 338,781
Other current assets .................. -- 15,453 19,778 (1,774) 33,457
-------- ---------- -------- --------- ----------
Total current assets ............... 4 371,778 207,049 (1,774) 577,057
Intercompany receivables, net ......... -- 186,269 30,845 (217,114) --
Property, buildings and equipment,
net ................................ -- 41,822 68,352 -- 110,174
Goodwill and other intangibles, net ... -- 247,671 66,407 -- 314,078
Investments in affiliates and other
noncurrent assets .................. 387,887 347,678 1,081 (722,837) 13,809
-------- ---------- -------- --------- ----------
Total assets ....................... $387,891 $1,195,218 $373,734 $(941,725) $1,015,118
======== ========== ======== ========= ==========
Accounts payable ...................... $ -- $ 340,748 $ 5,765 $ -- $ 346,513
Other current liabilities ............. -- 39,022 14,714 (1,774) 51,962
-------- ---------- -------- --------- ----------
Total current liabilities .......... -- 379,770 20,479 (1,774) 398,475
Intercompany payables, net ............ 217,114 -- -- (217,114) --
Long-term debt ........................ -- 398,856 13,340 -- 412,196
Other noncurrent liabilities .......... -- 28,705 6,454 -- 35,159
Stockholders' equity .................. 170,777 387,887 333,461 (722,837) 169,288
-------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity ............... $387,891 $1,195,218 $373,734 $(941,725) $1,015,118
======== ========== ======== ========= ==========
49
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. 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 .................. -- 47,506 24,481 (26,951) 45,036
-------- ---------- -------- --------- ----------
Total current assets ............... 2 452,853 292,131 (26,951) 718,035
Intercompany receivables, net ......... -- 327,384 -- (327,384) --
Property, buildings and equipment,
net ................................ -- 49,330 71,269 -- 120,599
Goodwill and other intangibles, net ... -- 243,512 67,561 -- 311,073
Investments in affiliates and other
noncurrent assets .................. 372,598 271,300 2,869 (638,516) 8,251
-------- ---------- -------- --------- ----------
Total assets ....................... $372,600 $1,344,379 $433,830 $(992,851) $1,157,958
======== ========== ======== ========= ==========
Accounts payable ...................... $ -- $ 450,107 $ 19,000 $ -- $ 469,107
Other current liabilities ............. -- 53,858 33,465 (26,951) 60,372
-------- ---------- -------- --------- ----------
Total current liabilities .......... -- 503,965 52,465 (26,951) 529,479
Intercompany payables, net ............ 225,886 -- 101,498 (327,384) --
Long-term debt ........................ -- 433,808 12,628 -- 446,436
Other noncurrent liabilities .......... -- 34,008 3,384 -- 37,392
Stockholders' equity .................. 146,714 372,598 263,855 (638,516) 144,651
-------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity ............... $372,600 $1,344,379 $433,830 $(992,851) $1,157,958
======== ========== ======== ========= ==========
50
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net sales ............................. $ -- $2,872,225 $453,555 $ -- $3,325,780
Cost of goods sold .................... -- 2,364,344 370,662 -- 2,735,006
Selling, general and administrative
expenses ........................... -- 427,307 67,075 -- 494,382
Depreciation and amortization ......... -- 15,004 4,763 -- 19,767
Results of affiliates' operations ..... 15,289 55,894 -- (71,183) --
Interest expense (income), net ........ (12,056) 53,338 1,703 -- 42,985
Other (income) expense ................ -- 68,942 (61,272) -- 7,670
Provision for(benefit from) income
taxes .............................. 4,222 (16,105) 14,730 -- 2,847
-------- ---------- -------- --------- ----------
Net income (loss) .................. $ 23,123 $ 15,289 $ 55,894 $ (71,183) $ 23,123
======== ========== ======== ========= ==========
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net sales ............................. $ -- $3,203,752 $454,281 $ -- $3,658,033
Cost of goods sold .................... -- 2,643,448 371,072 -- 3,014,520
Selling, general and administrative
expenses ........................... -- 487,204 29,952 -- 517,156
Depreciation and amortization ......... -- 24,974 5,998 -- 30,972
Results of affiliates' operations ..... 15,572 93,384 -- (108,956) --
Interest expense (income), net ........ (7,162) 59,045 (6,743) -- 45,140
Other (income) expense ................ -- 91,897 (75,020) -- 16,877
Provision for income taxes ............ 2,509 (25,004) 35,638 -- 13,143
-------- ---------- -------- --------- ----------
Net income (loss) .................. $ 20,225 $ 15,572 $ 93,384 $(108,956) $ 20,225
======== ========== ======== ========= ==========
51
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net sales ............................. $ -- $3,497,076 $384,020 $ -- $3,881,096
Cost of goods sold .................... -- 2,882,626 314,326 -- 3,196,952
Selling, general and administrative
expenses ........................... -- 476,680 47,629 -- 524,309
Depreciation and amortization ......... -- 20,456 4,537 -- 24,993
Restructuring charge .................. -- 9,094 310 -- 9,404
Results of affiliates' operations ..... 22,984 55,278 -- (78,262) --
Interest expense (income), net ........ (16,083) 68,164 (8,301) -- 43,780
Other (income) expense ................ -- 85,005 (60,060) -- 24,945
Provision for income taxes ............ 5,629 (12,655) 30,301 -- 23,275
-------- ---------- -------- --------- ----------
Net income (loss) .................. $ 33,438 $ 22,984 $ 55,278 $ (78,262) $ 33,438
======== ========== ======== ========= ==========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net cash provided (used) by
operating activities ............... $ 8,154 $ 59,642 $(47,368) $ -- $ 20,428
Investing activities:
Capital expenditures ............... -- (8,944) (405) -- (9,349)
Acquisitions ....................... -- (14,466) -- -- (14,466)
Other .............................. -- 755 -- -- 755
-------- ---------- -------- --------- ----------
Net cash used in investing
activities ......................... -- (22,655) (405) -- (23,060)
Financing activities:
Net borrowings (repayments) ........ (8,772) (37,214) 712 -- (45,274)
Equity transactions ................ 620 -- -- -- 620
Other .............................. -- (5,201) -- -- (5,201)
-------- ---------- -------- --------- ----------
Net cash (used in) provided by
financing activities ............... (8,152) (42,415) 712 -- (49,855)
-------- ---------- -------- --------- ----------
Net change in cash and cash
equivalents ........................ 2 (5,428) (47,061) -- (52,487)
Cash and cash equivalents at
beginning of year .................. 2 17,877 57,178 -- 75,057
-------- ---------- -------- --------- ----------
Cash and cash equivalents at end of
period ............................. $ 4 $ 12,449 $ 10,117 $ -- $ 22,570
======== ========== ======== ========= ==========
52
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net cash provided (used) by
operating activities ............... $ 9,551 $ 42,793 $114,906 $ (6,158) $ 161,092
Investing activities:
Capital expenditures ............... -- (11,654) (2,166) -- (13,820)
Acquisitions ....................... -- (10,496) (45,773) -- (56,269)
Other .............................. -- 933 -- -- 933
-------- ---------- -------- --------- ----------
Net cash used in investing
activities ......................... -- (21,217) (47,939) -- (69,156)
Financing activities:
Net borrowings ..................... (10,048) (17,397) (9,740) -- (37,185)
Equity transactions ................ 489 -- -- -- 489
Other .............................. -- (1,213) (49) -- (1,262)
-------- ---------- -------- --------- ----------
Net cash used in financing
activities ......................... (9,559) (18,610) (9,789) -- (37,958)
-------- ---------- -------- --------- ----------
Net change in cash and cash
equivalents ........................ (8) 2,966 57,178 (6,158) 53,978
Cash and cash equivalents at
beginning of year .................. 10 14,911 -- 6,158 21,079
-------- ---------- -------- --------- ----------
Cash and cash equivalents at end of
period ............................. $ 2 $ 17,877 $ 57,178 $ -- $ 75,057
======== ========== ======== ========= ==========
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------- ------------
Net cash provided (used) by
operating activities ............... $ 13,585 $ 32,332 $(23,167) $ 24,161 $ 46,911
Investing activities:
Capital expenditures ............... -- (18,167) (3,385) -- (21,552)
Acquisitions ....................... -- (40,904) -- -- (40,904)
Other .............................. -- 267 1,500 -- 1,767
-------- ---------- -------- --------- ----------
Net cash used in investing
activities ......................... -- (58,804) (1,885) -- (60,689)
Financing activities:
Net borrowings (repayments) ........ 13,206 41,858 (1,760) -- 53,304
Equity transactions ................ (26,791) -- -- -- (26,791)
Other .............................. -- (475) -- -- (475)
-------- ---------- -------- --------- ----------
Net cash (used in) provided by
financing activities ............... (13,585) 41,383 (1,760) -- 26,038
-------- ---------- -------- --------- ----------
Net change in cash and cash
equivalents ........................ -- 14,911 (26,812) 24,161 12,260
Cash and cash equivalents at
beginning of year .................. 10 -- 26,812 (18,003) 8,819
-------- ---------- -------- --------- ----------
Cash and cash equivalents at end of
period ............................. $ 10 $ 14,911 $ -- $ 6,158 $ 21,079
======== ========== ======== ========= ==========
53
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for the
years ended December 31, 2002 and 2001:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
2002
Net sales ......................... $808,917 $848,449 $852,949 $815,465
Gross profit ...................... 145,644 149,453 146,487 149,190
Income from operations ............ 18,413 21,622 18,331 18,259
Income before income taxes (1) .... 4,969 8,805 5,816 6,380
Net income ........................ 3,837 5,573 8,983 4,730
Basic earnings per share .......... 0.09 0.12 0.20 0.10
Diluted earnings per share ........ 0.08 0.12 0.19 0.10
2001
Net sales ......................... $928,057 $944,136 $905,554 $880,286
Gross profit ...................... 167,119 164,831 159,219 152,344
Income from operations ............ 22,931 28,008 24,275 20,171
Income before income taxes ........ 5,869 12,472 8,492 6,535
Net income ........................ 3,492 7,513 5,095 4,125
Basic earnings per share .......... 0.08 0.17 0.11 0.09
Diluted earnings per share ........ 0.07 0.16 0.11 0.09
- ----------
(1) The first quarter includes a loss on debt extinguishment totaling $1.1
million. This amount was classified as an extraordinary item prior to the
adoption of SFAS No. 145.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS
Our executive officers and their respective ages and positions are set
forth below.
NAME AGE POSITION
---- --- --------
Roy W. Haley..................... 56 Chairman and Chief Executive Officer
William M. Goodwin............... 57 Vice President, Operations
James H. Mehta................... 47 Vice President, Business Development
Robert B. Rosenbaum.............. 45 Vice President, Operations
Patrick M. Swed.................. 59 Vice President, Operations
Donald H. Thimjon................ 59 Vice President, Operations
Ronald P. Van, Jr................ 42 Vice President, Operations
Stephen A. Van Oss............... 48 Vice President and Chief Financial Officer
Daniel A. Brailer................ 45 Secretary and Treasurer
Set forth below is biographical information for our executive officers and
directors listed above.
ROY W. HALEY became Chairman of the Board in August 1998. Mr. Haley has
been Chief Executive Officer and a director of WESCO since February 1994. From
1988 to 1993, Mr. Haley was an executive at American General Corporation, a
diversified financial services company, where he served as Chief Operating
Officer and as President and Director. Mr. Haley is also a director of United
Stationers, Inc. and Cambrex Corporation.
WILLIAM M. GOODWIN has been Vice President, Operations of WESCO since
March 1994. Since 1987, Mr. Goodwin has served as a branch, district and region
manager for WESCO in various locations and also served as Managing Director of
WESCOSA, a former Westinghouse affiliated manufacturing and distribution
business in Saudi Arabia.
JAMES H. MEHTA has been Vice President, Business Development of WESCO
since November 1995. From 1993 to 1995, Mr. Mehta was a principal with Schroder
Ventures, a private equity investment firm based in London, England.
ROBERT B. ROSENBAUM has been Vice President, Operations of WESCO since
September 1998. From 1982 until 1998, Mr. Rosenbaum was the President of the
Bruckner Supply Company, Inc., an integrated supply company WESCO acquired in
September 1998.
PATRICK M. SWED has been Vice President, Operations of WESCO since March
1994. Mr. Swed had been Vice President of Branch Operations for WESCO from 1991
to 1994.
DONALD H. THIMJON has been Vice President, Operations of WESCO since 1991.
Mr. Thimjon served as Regional Manager from 1980 to 1991.
RONALD P. VAN, JR. has been Vice President, Operations of WESCO since
October 1998. Mr. Van was a Vice President and Controller of EESCO, an
electrical distributor WESCO acquired in 1996.
STEPHEN A. VAN OSS has been Vice President and Chief Financial Officer of
WESCO since October 2000. Mr. Van Oss served as Director, Information Systems
for WESCO from 1997 to 2000 and as Director, Acquisition Management in 1997.
From 1995 to 1996, Mr. Van Oss served as Chief Operating Officer and Chief
Financial Officer of Paper Back Recycling of America, Inc. From 1979 to 1995,
Mr. Van Oss held various management positions with Reliance Electric
Corporation.
DANIEL A. BRAILER has been Treasurer and Director of Investor Relations of
WESCO since March 1999. During
55
1999, Mr. Brailer was also appointed to the position of Corporate Secretary.
From 1982 to 1999, Mr. Brailer held various positions at Mellon Financial
Corporation, most recently as Senior Vice President.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference to the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
May 22, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information set forth under the caption "Security Ownership" in the
Proxy Statement is incorporated herein by reference to the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders to be held on May 22,
2003.
The following table provides information as of December 31, 2002 with
respect to the shares of WESCO's common stock that may be issued under WESCO's
existing equity compensation plans:
Plan Category Number of securities to be Weighted average Number of securities remaining
issued upon exercise of exercise price of available for future issuance
outstanding options, outstanding options, under equity compensation plans
warrants warrants and rights
and rights
- ------------- -------------------------- -------------------- ------------------------------
Equity compensation 9,840,114 $5.99 6,824,260
plans approved by
security holders
Equity compensation -- -- --
plans not approved by
security holders
--------- ----- ---------
Total 9,840,114 $5.99 6,824,260
--------- ----- ---------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions and
Relationships with the Company" in the Proxy Statement is incorporated herein by
reference to the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 22, 2003.
ITEM 14. 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 annual 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this annual
56
report:
(a)(1) FINANCIAL STATEMENTS
The list of financial statements required by this item is set forth
in Item 8, "Financial Statements and Supplementary Data" and is
incorporated herein by reference.
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
2.1 Recapitalization Agreement, dated as of March 27, Incorporated by reference to
1998, among Thor Acquisitions L.L.C., WESCO Exhibit 2.1 to WESCO's
International, Inc. (formerly known as CDW Registration Statement on
Holding Corporation) and certain securityholders Form S-4 (No. 333-43225)
of WESCO International, Inc.
2.2 Purchase Agreement, dated as of May 29, 1998, Incorporated by reference to
among WESCO International, Inc., WESCO Exhibit 2.2 to WESCO's
Distribution, Inc., Chase Securities Inc. and Registration Statement on
Lehman Brothers, Inc. Form S-4 (No. 333-43225)
2.3 Asset Purchase Agreement, dated as of September 11, Incorporated by reference to
1998, among Bruckner Supply Company, Inc. and Exhibit 2.01 to WESCO's
WESCO Distribution, Inc. Current Report on Form 8-K,
dated September 11, 1998
2.4 Purchase Agreement, dated August 16, 2001, among Incorporated by reference to
WESCO International, Inc., WESCO Distribution, Inc. Exhibit 2.4 to WESCO's
and the Initial Purchasers listed therein. Registration Statement on
Form S-4 (No. 333-70404)
3.1 Restated Certificate of Incorporation of WESCO Incorporated by reference to
International, Inc. Exhibit 3.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
3.2 By-laws of WESCO International, Inc. Incorporated by reference to
Exhibit 3.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
4.1 Indenture, dated as of June 5, 1998, among WESCO Incorporated by reference to
International, Inc., WESCO Distribution, Inc. and Bank Exhibit 4.1 to WESCO's
One, N.A. Registration Statement on
Form S-4 (No. 333-43225)
57
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
4.2 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
Series A (included in Exhibit 4.1). Exhibit 4.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
4.3 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
Series A (included in Exhibit 4.1). Exhibit 4.3 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
4.4 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
June 5, 1998, among the Company, WESCO Exhibit 4.4 to WESCO's
International, Inc. and the Initial Purchasers (as Registration Statement on
defined therein). Form S-4 (No. 333-43225)
4.5 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
June 5, 1998, among WESCO International, Inc. and the Exhibit 4.8 to WESCO's
Initial Purchasers (as defined therein). Registration Statement on
Form S-4 (No. 333-43225)
4.6 Indenture, dated as of August 23, 2001, among WESCO Incorporated by reference to
International, Inc., WESCO Distribution, Inc. and Bank Exhibit 4.6 to WESCO's
One N.A. Registration Statement on
Form S-4 (No. 333-70404)
4.7 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
August 23, 2001, among WESCO International, Inc., Exhibit 4.7 to WESCO's
WESCO Distribution, Inc. and the Initial Purchasers Registration Statement on
listed therein. Form S-4 (No. 333-70404)
4.8 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
(included in Exhibit 4.6). Exhibit 4.8 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
4.9 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
(included in Exhibit 4.6). Exhibit 4.9 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
10.1 CDW Holding Corporation Stock Purchase Plan. Incorporated by reference to
Exhibit 10.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.2 Form of Stock Subscription Agreement. Incorporated by reference to
Exhibit 10.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.3 CDW Holding Corporation Stock Option Plan. Incorporated by reference to
Exhibit 10.3 to WESCO's
58
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
Registration Statement on
Form S-4 (No. 333-43225)
10.4 Form of Stock Option Agreement. Incorporated by reference to
Exhibit 10.4 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.5 CDW Holding Corporation Stock Option Plan for Branch Incorporated by reference to
Employees. Exhibit 10.5 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.6 Form of Branch Stock Option Agreement. Incorporated by reference to
Exhibit 10.6 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.7 Non-Competition Agreement, dated as of February 28, Incorporated by reference to
1996, between Westinghouse, WESCO International, Inc. Exhibit 10.8 to WESCO's
and WESCO Distribution, Inc. Registration Statement on
Form S-4 (No. 333-43225)
10.8 Lease, dated as of May 24, 1995, as amended by Incorporated by reference to
Amendment One, dated as of June 1995, and by Exhibit 10.10 to WESCO's
Amendment Two, dated as of December 24, 1995, by and Registration Statement on
between WESCO Distribution, Inc. as Tenant and Opal Form S-4 (No. 333-43225)
Investors, L.P. and Mural GEM Investors as Landlord.
10.9 Lease, dated as of April 1, 1992, as renewed by Letter of Incorporated by reference to
Notice of Intent to Renew, dated as of December 13, Exhibit 10.11 to WESCO's
1996, by and between the Company as successor in Registration Statement on
interest to Westinghouse Electric Corporation as Tenant Form S-4 (No. 333-43225)
and Utah State Retirement Fund as Landlord.
10.10 Lease, dated as of September 4, 1997, between WESCO Incorporated by reference to
Distribution, Inc. as Tenant and The Buncher Company as Exhibit 10.12 to WESCO's
Landlord. Registration Statement on
Form S-4 (No. 333-43225)
10.11 Lease, dated as of March 1995, by and between WESCO Incorporated by reference to
Distribution-Canada, Inc. as Tenant and Atlantic Exhibit 10.13 to WESCO's
Construction, Inc. as Landlord. Registration Statement on
Form S-4 (No. 333-43225)
10.12 Amended and Restated Registration and Participation Incorporated by reference to
Agreement, dated as of June 5, 1998, among WESCO Exhibit 10.19 to WESCO's
International, Inc. and certain securityholders of WESCO Registration Statement on
International, Inc. named therein. Form S-4 (No. 333-43225)
10.13 Employment Agreement between WESCO Incorporated by reference to
Distribution, Inc. and Roy W. Haley. Exhibit 10.20 to WESCO's
Registration Statement on
59
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
Form S-4 (No. 333-43225)
10.14 WESCO International, Inc. 1998 Stock Option Plan. Incorporated by reference to
Exhibit 10.1 to WESCO's
Quarterly Report on
Form 10-Q for the quarter
ended September 30, 1998
10.15 Form of Management Stock Option Agreement. Incorporated by reference to
Exhibit 10.2 to WESCO's
Quarterly Report on
Form 10-Q for the quarter
ended September 30, 1998
10.16 1999 Deferred Compensation Plan for Non-Employee Incorporated by reference to
Directors. Exhibit 10.22 to WESCO's
Annual Report on Form 10-K
for the year ended
December 31, 1998
10.17 Credit Agreement, dated as of June 29, 1999, among Incorporated by reference to
WESCO Distribution, Inc., WESCO Exhibit 10.1 to WESCO's
Distribution-Canada, Inc., WESCO International, Inc. and Quarterly Report on
the Lenders identified therein. Form 10-Q for the quarter
ended June 30, 1999
10.18 Amendment, dated as of December 20, 2000, to the Credit Incorporated by reference to
Agreement, dated as of June 29, 1999, among WESCO Exhibit 10.24 to WESCO's
Distribution, Inc., WESCO Distribution-Canada, Inc., Annual Report on Form 10-K
WESCO International, Inc. and the Lenders identified for the year ended
therein. December 31, 2000
10.19 Amendment, dated as of August 3, 2001, to the Credit Incorporated by reference to
Agreement, dated as of June 29, 1999, among WESCO Exhibit 10.19 to WESCO's
Distribution, Inc., WESCO Distribution-Canada, Inc., Registration Statement on
WESCO International, Inc. and the Lenders identified Form S-4 (No. 333-70404)
therein.
10.20 Credit Agreement, dated as of March 19, 2002, among Incorporated by reference to
WESCO Distribution, Inc., the other Credit Parties Exhibit 10.20 to WESCO's
signatory thereto, General Electric Capital Corporation, Annual Report on Form 10-K
The CIT Group/Business Credit, Inc., Fleet Capital for the year ended
Corporation and the other Lenders signatory thereto. December 31, 2001
60
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
10.21 Intercreditor Agreement, dated as of March 19, 2002, Incorporated by reference to
among PNC Bank, National Association, General Electric Exhibit 10.21 to WESCO's
Capital Corporation, WESCO Receivables Corp., WESCO Annual Report on Form 10-K
Distribution, Inc., Fifth Third Bank, N.A., Mellon Bank, for the year ended
N.A., The Bank of Nova Scotia, Herning Enterprises, Inc. December 31, 2001
and WESCO Equity Corporation.
10.22 Receivables Purchase Agreement, dated as of June 30, Incorporated by reference to
1999, among WESCO Receivables Corp., WESCO Exhibit 10.2 to WESCO's
Distribution, Inc., Market Street Capital Corp. and PNC Quarterly Report on
Bank, National Association. Form 10-Q for the quarter
ended June 30, 1999
10.23 Amended and Restated Receivables Purchase Agreement, Incorporated by reference to
dated as of September 28, 1999, among WESCO Exhibit 10.1 to WESCO's
Receivables Corp., WESCO Distribution, Inc. and PNC Quarterly Report on
Bank, National Association. Form 10-Q for the quarter
ended September 30, 1999
10.24 1999 Long-Term Incentive Plan. Incorporated by reference to
Exhibit 10.22 to WESCO's
Registration Statement on
Form S-1 (No. 333-73299)
10.25 Amendment dated March 29, 2002 to Asset Purchase Filed herewith
Agreement, dated as of September 11, 1998, among
Bruckner Supply Company, Inc. and WESCO
Distribution, Inc.
10.26 Loan Agreement between Bear Stearns Commercial Filed herewith
Mortgage, Inc. and WESCO Real Estate IV, LLC, dated
December 13, 2002.
10.27 Lease dated December 13, 2002 between WESCO Filed herewith
Distribution, Inc. and WESCO Real Estate IV, LLC.
10.28 Lease Guaranty dated December 13, 2002 by WESCO Filed herewith
International, Inc. in favor of WESCO Real Estate IV,
LLC.
10.29 Guaranty of Non-Recourse Exceptions Agreement dated Filed herewith
December 13, 2002 by WESCO International, Inc. in
favor of Bear Stearns Commercial Mortgage, Inc.
10.30 Environmental Indemnity Agreement dated December 13, Filed herewith
2002 made by WESCO Real Estate IV, Inc. and WESCO
International, Inc. in favor of Bear Stearns Commercial
Mortgage, Inc.
21.1 Significant Subsidiaries of WESCO. Incorporated by reference to
Exhibit 21.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
61
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------- ---------------------- ----------------------
- ----------
The registrant hereby agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule to any of the agreements contained
herein.
Copies of exhibits may be retrieved electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
without charge by writing to Stephen A. Van Oss, Vice President, Chief Financial
Officer, Commerce Court, Four Station Square, Suite 700, Pittsburgh,
Pennsylvania 15219. Requests may also be directed to (412) 454-2200.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESCO INTERNATIONAL, INC.
By: /s/ ROY W. HALEY
--------------------------------
Name: Roy W. Haley
Title: Chairman of the Board and
Chief Executive Officer
Date: March 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ROY W. HALEY Chairman and Chief Executive Officer (Principal Executive March 14, 2003
- ----------------------------- Officer)
Roy W. Haley
/s/ STEPHEN A. VAN OSS Vice President, Chief Financial Officer (Principal March 14, 2003
- ----------------------------- Financial and Accounting Officer)
Stephen A. Van Oss
/s/ JAMES L. SINGLETON Director March 14, 2003
- -----------------------------
James L. Singleton
/s/ JAMES A. STERN Director March 14, 2003
- -----------------------------
James A. Stern
/s/ MICHAEL J. CHESHIRE Director March 14, 2003
- -----------------------------
Michael J. Cheshire
/s/ ROBERT J. TARR, JR. Director March 14, 2003
- -----------------------------
Robert J. Tarr, Jr.
/s/ KENNETH L. WAY Director March 14, 2003
- -----------------------------
Kenneth L. Way
/s/ GEORGE L. MILES, JR. Director March 14, 2003
- -----------------------------
George L. Miles, Jr.
/s/ ROBERT Q. BRUHL Director March 14, 2003
- -----------------------------
Robert Q. Bruhl
/s/ SANDRA BEACH LIN Director March 14, 2003
- -----------------------------
Sandra Beach Lin
/s/ WILLIAM J. VARESCHI Director March 14, 2003
- -----------------------------
William J. Vareschi
63
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Roy W. Haley, certify that:
1. I have reviewed this annual report on Form 10-K of WESCO
International, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report
(the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 14, 2003 By: /s/ Roy W. Haley
------------------------------------
Roy W. Haley
Chairman and Chief Executive Officer
64
CERTIFICATION PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002
I, Stephen A. Van Oss, certify that:
1. I have reviewed this annual report on Form 10-K of WESCO
International, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report
(the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 14, 2003 By: /s/ Stephen A. Van Oss
------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial
Officer
65
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 Annual Report of WESCO International, Inc. (the
"Company") on Form 10-K for the period ended December 31, 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: March 14, 2003 By: /s/ Roy W. Haley
------------------------------------
Roy W. Haley
Chairman and Chief Executive Officer
66
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 Annual Report of WESCO International, Inc. (the
"Company") on Form 10-K for the period ended December 31, 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: March 14, 2003 By: /s/ Stephen A. Van Oss
------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial
Officer
66
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
of WESCO International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 12, 2003 also included an audit of the financial statement
schedule listed in the index appearing under Item 15(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 12, 2003
S-1
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------ --------- -------------------------- ------------- ----------
ADDITIONS
--------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS(1) DEDUCTIONS(2) PERIOD
--------- ---------- ----------- ------------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2002 .... $11,816 $ 8,962 $ -- $(10,517) $10,261
Year ended December 31, 2001 .... 9,794 10,291 504 (8,773) 11,816
Year ended December 31, 2000 .... 7,023 9,970 574 (7,773) 9,794
- ----------
(1) Represents allowance for doubtful accounts in connection with certain
acquisitions.
(2) Includes a reduction in the allowance for doubtful accounts related to the
sale of receivables at fair market value in connection with the
Receivables Facility.
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------ --------- -------------------------- ------------- ----------
ADDITIONS
--------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS(3) PERIOD
--------- ---------- ----------- ------------- ----------
Inventory reserve:
Year ended December 31, 2002 .... $16,795 $ 1,445 $ -- $ (6,367) $11,873
Year ended December 31, 2001 .... 18,727 2,607 663(1) (5,202) 16,795
Year ended December 31, 2000 .... 16,043 4,342 3,573(1)(2) (5,231) 18,727
- ----------
(1) Includes inventory reserves in connection with certain acquisitions.
(2) Includes inventory reserves in connection with a restructuring charge
taken in 2000.
(3) Includes a reduction in the inventory reserve due to disposal of
inventory.
S-2