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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from to
------ ------
For the quarterly period ended JUNE 30, 2003
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 (IRS Employer Identification No.)
incorporation or organization)
225 WEST STATION SQUARE DRIVE
SUITE 700
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2200
(Address of principal executive offices) (Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes X No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of July 31, 2003, WESCO International, Inc. had 40,476,131 shares and
4,653,131 shares of common stock and Class B common stock outstanding,
respectively.
===============================================================================
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
- -------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002................................. 2
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2003 and 2002 (unaudited) ... 3
Condensed Consolidated Statements of Cash Flows for the six months
ended
June 30, 2003 and 2002 (unaudited) ............................... 4
Notes to Condensed Consolidated Financial Statements (unaudited) ... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............. 21
ITEM 4. Controls and Procedures................................................ 22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................... 23
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 23
ITEM 6. Exhibits and Reports on Form 8-K....................................... 23
Signatures............................................................. 24
- -------------------------------------------------------------------------------------------
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
Dollars in thousands, except share data 2003 2002
----------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 33,205 $ 22,570
Trade accounts receivable, net of allowance for
doubtful accounts of $10,172 and $10,261 in 2003
and 2002, respectively (NOTE 4) .................. 272,418 182,249
Other accounts receivable......................................... 12,905 19,921
Inventories, net.................................................. 337,906 338,781
Income taxes receivable .......................................... 1,317 6,103
Prepaid expenses and other current assets......................... 12,354 7,433
-----------------------
Total current assets........................................... 670,105 577,057
Property, buildings and equipment, net .... 104,302 110,174
Goodwill.......................................................... 314,262 314,078
Other assets......................................................... 9,347 13,809
-----------------------
Total assets................................................... $ 1,098,016 $1,015,118
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 374,601 $ 346,513
Accrued payroll and benefit costs................................. 18,334 19,736
Current portion of long-term debt................................. 6,084 5,778
Current deferred income taxes..................................... 3,482 3,408
Other current liabilities......................................... 28,642 23,040
-----------------------
Total current liabilities...................................... 431,143 398,475
Long-term debt (NOTE 7) ............................................. 444,246 412,196
Other noncurrent liabilities......................................... 5,567 5,684
Deferred income taxes ............................................... 28,320 29,475
-----------------------
Total liabilities.............................................. 909,276 845,830
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no
shares issued or outstanding.................................... -- --
Common stock, $.01 par value; 210,000,000 shares authorized,
44,506,903 and 44,483,513 shares issued in 2003 and 2002,
respectively................................................ 445 445
Class B nonvoting convertible common stock, $.01 par value;
20,000,000 shares authorized, 4,653,131 issued in 2003 and
2002....................................................... 46 46
Additional capital.......................................... 570,993 570,923
Retained earnings (deficit) ................................ (354,607) (366,796)
Treasury stock, at cost; 4,036,552 and 4,033,020 shares in 2003
and 2002, respectively.......................................... (33,858) (33,841)
Accumulated other comprehensive income (loss) .............. 5,721 (1,489)
-----------------------
Total stockholders' equity............................... 188,740 169,288
-----------------------
Total liabilities and stockholders' equity............... $ 1,098,016 $1,015,118
=======================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
In thousands, except share data 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------
Net sales.......................................... $820,238 $848,449 $1,611,046 $1,657,366
Cost of goods sold ................................ 669,338 698,996 1,314,714 1,362,269
------------------------------------------------
Gross profit..................................... 150,900 149,453 296,332 295,097
Selling, general and administrative expenses..... 126,820 123,424 248,561 245,492
Depreciation and amortization...................... 5,121 4,407 10,254 9,569
------------------------------------------------
Income from operations........................... 18,959 21,622 37,517 40,036
Interest expense, net.............................. 10,513 11,130 20,901 22,074
Loss on debt extinguishments -- -- -- 1,073
Other expense...................................... 1,279 1,687 2,689 3,114
------------------------------------------------
Income before income taxes....................... 7,167 8,805 13,927 13,775
(Benefit) provision for income taxes............... (183) 3,232 1,738 4,364
------------------------------------------------
Net income...................................... $ 7,350 $ 5,573 $ 12,189 $ 9,411
================================================
Earnings per share:
Basic: ......................................... $0.16 $0.12 $0.27 $0.21
================================================
Diluted:........................................ $0.16 $0.12 $0.26 $0.20
================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
In thousands 2003 2002
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income......................................................... $ 12,189 $ 9,411
Adjustments to reconcile net income to net cash used by operating
activities:
Loss on debt extinguishment.................................... -- 1,073
Depreciation and amortization.................................. 10,254 9,569
Accretion of original issue and amortization of purchase
discounts.................................................... 1,475 1,485
Amortization of debt issuance costs............................ 547 492
Deferred income taxes ......................................... (1,081) (548)
Gain on the sale of property, buildings and equipment.......... (491) (250)
Gain on bond repurchase........................................ (307) --
Changes in assets and liabilities, excluding the effects of
acquisitions:
Change in receivables facility............................... (68,000) (55,000)
Trade and other receivables.................................. (8,189) 43,227
Inventories.................................................. 5,441 15,525
Prepaid expenses and other current assets.................... 191 393
Accounts payable............................................. 24,188 (92,050)
Accrued payroll and benefit costs............................ (1,810) (3,719)
Other current and noncurrent liabilities..................... 7,269 1,282
-----------------------------
Net cash used by operating activities...................... (18,324) (69,110)
INVESTING ACTIVITIES:
Capital expenditures............................................... (3,439) (3,376)
Acquisition payments............................................... (2,528) (10,741)
Proceeds from the sale of property, buildings and equipment........ 1,177 755
-----------------------------
Net cash used by investing activities...................... (4,790) (13,362)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................... 87,180 380,096
Repayments of long-term debt....................................... (57,146) (346,195)
Proceeds from settlement of interest rate swap..................... 4,563 --
Debt issuance costs................................................ (1,431) (3,067)
Proceeds from the exercise of stock options........................ 29 572
-----------------------------
Net cash provided by financing activities.................. 33,195 31,406
Effect of exchange rate changes on cash and cash equivalents....... 554 480
Net change in cash and cash equivalents........................ 10,635 (50,586)
Cash and cash equivalents at the beginning of period........... 22,570 75,057
-----------------------------
Cash and cash equivalents at the end of period................. $ 33,205 24,471
=============================
Supplemental disclosures:
Non-cash financing activities:
Decrease (increase) in fair value of interest rate swap $ - $ (3,362)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, "WESCO"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of
electrical supplies and equipment and is a provider of integrated supply
procurement services. WESCO is engaged principally in one line of business - the
sale of electrical products and maintenance, repair and operating supplies.
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.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of WESCO and all of its subsidiaries and have been prepared in
accordance with Rule 10-01 of the Securities and Exchange Commission. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in WESCO's 2002 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The unaudited condensed consolidated balance sheet as of June 30, 2003,
the unaudited condensed consolidated statements of operations for the three
months and six months ended June 30, 2003 and June 30, 2002 and the unaudited
condensed consolidated statements of cash flows for the six months ended June 30
2003 and June 30, 2002, in the opinion of management, have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments necessary for the fair presentation of the results of the interim
periods. All adjustments reflected in the condensed consolidated financial
statements are of a normal recurring nature unless indicated. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
Goodwill
Annually, goodwill is tested for impairment as of October 1 or sooner if
events or circumstances occur indicating that goodwill might be impaired. No
impairment losses were identified as a result of past reviews.
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 six months ended June 30, 2003 and 2002 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 for past awards:
5
IN THOUSANDS EXCEPT PER SHARE DATA
THREE MONTHS SIX MONTHS
-------------------------------------------------
ENDED JUNE 30 ENDED JUNE 30
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
Net income, as reported .................. 7,350 $5,573 $12,189 $9,411
Stock-based employee compensation expense
determined under SFAS No. 123 for all
awards, net of related tax................. 371 575 741 1,150
------------------------------------------------
Pro forma net income....................... $6,979 $4,998 $11,448 $8,261
Earnings per share:
Basic as reported....................... $0.16 $0.12 $0.27 $0.21
Basic pro forma......................... $0.15 $0.11 $0.25 $0.18
Diluted as reported..................... $0.16 $0.12 $0.26 $0.20
Diluted pro forma....................... $0.15 $0.11 $0.25 $0.18
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:
SIX MONTHS ENDED JUNE 30
----------------------------
2003(1) 2002
----------------------------
Risk-free interest rate -- 3.4%
Expected life (years) -- 6.0
Stock price volatility -- 75.0%
Employee turnover -- 5.0%
(1) There were no option grants during the first six months of 2003.
Recent Accounting Pronouncements
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.
Effective June 30, 2003, WESCO adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies financial accounting and reporting for derivatives and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard had no impact on WESCO's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." This standard
requires that certain financial instruments embodying an obligation to transfer
assets or to issue equity securities be classified as liabilities. It is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective July 1, 2003. This standard had no impact on WESCO's
financial statements.
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
6
guarantees issued or modified beginning January 1, 2003. The adoption of this
statement did not have a material impact on WESCO's 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 does not believe the
adoption of this interpretation will have a material impact on its consolidated
financial statements.
3. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings
per share:
THREE MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2003 2002
------------------------------------------------------------------------------------------
Reported net income $7,350 $5,573
=======================
Weighted average common shares
outstanding used in computing basic
earnings per share 45,114,271 45,033,911
Common shares issuable upon exercise
of dilutive stock options 1,429,219 2,042,889
-----------------------
Weighted average common shares
outstanding and common share
equivalents used in computing
diluted earnings per share 46,543,490 47,076,800
=======================
Earnings per share:
Basic $0.16 $0.12
Diluted $0.16 $0.12
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2003 2002
------------------------------------------------------------------------------------------
Reported net income $12,189 $9,411
=======================
Weighted average common shares
outstanding used in computing basic
earnings per share 45,111,131 44,966,322
Common shares issuable upon exercise
of dilutive stock options 1,371,041 2,001,988
-----------------------
Weighted average common shares
outstanding and common share
equivalents used in computing
diluted earnings per share 46,482,172 46,968,310
=======================
Earnings per share:
Basic $0.27 $0.21
Diluted $0.26 $0.20
------------------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO maintains an accounts receivable securitization program
("Receivables Facility") that requires annual renewal. 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 June 30, 2003 and December 31, 2002, securitized accounts
receivable totaled approximately $361 million and $346 million, respectively, of
which the subordinated retained interest was approximately $136 million and $53
million, respectively. Accordingly, approximately $225 million and $293 million
of accounts receivable
7
balances were removed from the consolidated balance sheets at June 30, 2003 and
December 31, 2002, respectively. WESCO reduced its accounts receivable
securitization program by $68 million in 2003. Costs associated with the
Receivables Facility totaled $1.3 million and $1.7 million for the three months
ended June 30, 2003 and June 30, 2002. Costs associated with the Receivables
Facility totaled $2.7 million and $3.1 million for the six months ended June 30,
2003 and June 30, 2002. These amounts are recorded as other expenses in the
consolidated statements of operations and are primarily related to the discount
and loss on the sale of accounts receivables, partially offset by related
servicing revenue.
The key economic assumptions used to measure the retained interest at
the date of the securitization for securitizations completed in 2003 were a
discount rate of 2% and an estimated life of 1.5 months. At June 30, 2003, an
immediate adverse change in the discount rate or estimated life of 10% and 20%
would result in a reduction in the fair value of the retained interest of $0.1
million and $0.2 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.
On June 28, 2003, this facility was extended until August 31, 2003 with
a total purchase commitment of up to $242 million. The Company expects to enter
into a similar facility with a purchase commitment of up to $350 million before
the expiration date of the current facility. This new structure is expected to
include the addition of a three-year commitment of up to $150 million that will
minimize the amount that is subject to an annual renewal.
5. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED
JUNE 30
In thousands 2003 2002
-------------------------------------------------------------------
Net income $7,350 $5,573
Foreign currency translation adjustment 4,320 2,240
---------------------
Comprehensive income $11,670 $7,813
-------------------------------------------------------------------
-------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
In thousands 2003 2002
-------------------------------------------------------------------
Net income $12,189 $9,411
Foreign currency translation adjustment 7,210 2,191
---------------------
Comprehensive income $19,399 $11,602
-------------------------------------------------------------------
6. ACQUISITIONS
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 either one of the next two years if
certain earnings targets are achieved. The amount of earn-out proceeds earned
that is payable in any single year is capped under this agreement at $30 million
per year. 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.
The following table sets forth supplemental cash flow information with
respect to acquisitions:
SIX MONTHS ENDED
JUNE 30,
In thousands 2003 2002
--------------------------------------------------------------------
Details of acquisitions:
Deferred acquisition payments $2,528 $10,741
----------------------
Cash paid for acquisitions $2,528 $10,741
--------------------------------------------------------------------
8
7. LONG-TERM DEBT
In March 2003, WESCO successfully completed a series of mortgage
financings which totaled $51 million. 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 borrowing under the 2002 Revolving Credit Facility. Interest
rates on borrowings under this facility are fixed at 6.5%.
During the six months ended June 30, 2003, the Company's interest rate
swap agreements were settled and as a result the Company received $4.6 million.
The gain resulting from the settlement of these agreements has been deferred and
is being amortized as a reduction of interest expense over the remaining life of
the senior subordinated notes.
8. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
THREE MONTHS ENDED
JUNE 30,
----------------------
2003 2002
----------------------
Federal statutory rate.................................... 35.0% 35.0%
State taxes, net of federal tax benefit................... 0.2 1.4
Nondeductible expenses.................................... 2.3 1.7
Foreign taxes, credits and exclusions..................... (3.5) (1.4)
Favorable impact resulting from prior year tax
contingencies(1).......................................... (34.1) --
Other..................................................... (2.5) --
----------------------
(2.6)% 36.7%
======================
SIX MONTHS ENDED
JUNE 30,
----------------------
2003 2002
----------------------
Federal statutory rate.................................... 35.0% 35.0%
State taxes, net of federal tax benefit................... 0.2 1.4
Nondeductible expenses.................................... 2.3 1.6
Foreign taxes, credits and exclusions..................... (3.5) (1.6)
Remeasurement of deferred taxes(2)........................ -- (4.7)
Favorable impact resulting from prior year tax
contingencies (1)......................................... (17.5) --
Acquired company net operating loss utilization(3)........ (4.0) --
----------------------
12.5% 31.7%
======================
- ------------------------------
(1) Represents a $1.4 million benefit from a change in a tax accounting
method and $1.0 from the reversal of a prior tax contingency reserve.
(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) Represents the recognition of a $0.6 million benefit associated with
the utilization of a net operating loss.
9. SELLING GENERAL AND ADMINISTRATIVE EXPENSE
Selling general and administrative ("SG&A") expenses for the three and
six months ended June 30, 2003 include $5.7 million and $8.1 million,
respectively, associated with discretionary retirement plan contributions and
out of the ordinary fees and expenses associated with certain legal matters.
In August 2003, the Company reached a tentative settlement agreement
related to an employment and wages claim. The Company currently expects this
claim to be resolved around the end of its fiscal year 2003. The expected amount
necessary to provide for the resolution of this matter has been accrued in the
condensed consolidated financial statements of June 30, 2003.
9
10. OTHER FINANCIAL INFORMATION (UNAUDITED)
WESCO Distribution, Inc. has issued $400 million of 9 1/8% senior
subordinated notes. The senior subordinated notes are fully and unconditionally
guaranteed by WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Condensed
consolidating financial information for WESCO International, Inc., WESCO
Distribution, Inc. and the non-guarantor subsidiaries are as follows:
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2003
------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------
Cash and cash equivalents..... $ 1 $ 20,780 $ 12,424 $ -- $ 33,205
Trade accounts receivable..... -- 47,171 225,247 -- 272,418
Inventories................... -- 290,327 47,579 -- 337,906
Other current assets.......... -- 18,611 9,872 (1,907) 26,576
------------------------------------------------------------------------
Total current assets....... 1 376,889 295,122 (1,907) 670,105
Intercompany receivables, net. -- 183,889 29,374 (213,263) --
Property, buildings and
equipment, net............. -- 34,964 69,338 -- 104,302
Goodwill...................... -- 276,312 37,950 -- 314,262
Investments in affiliates and
other noncurrent assets..... 396,281 349,181 2,804 (738,919) 9,347
------------------------------------------------------------------------
Total assets............... $396,282 $1,221,235 $ 434,588 $(954,089) $ 1,098,016
========================================================================
Accounts payable.............. $ -- $ 358,169 $ 16,432 $ -- $ 374,601
Other current liabilities..... -- 46,499 11,950 (1,907) 56,542
------------------------------------------------------------------------
Total current liabilities.. -- 404,668 28,382 (1,907) 431,143
Intercompany payables, net.... 213,263 -- -- (213,263) --
Long-term debt................ -- 393,158 51,088 -- 444,246
Other noncurrent liabilities.. -- 27,128 6,759 -- 33,887
Stockholders' equity.......... 183,019 396,281 348,359 (738,919) 188,740
------------------------------------------------------------------------
Total liabilities and
stockholders' equity...... $396,282 $1,221,235 $ 434,588 $(954,089) $ 1,098,016
========================================================================
10
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
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...................... -- 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
========================================================================
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------
Net sales..................... $ -- $ 700,941 $119,297 $ -- $ 820,238
Cost of goods sold............ -- 572,067 97,271 -- 669,338
Selling, general and
administrative expenses..... -- 110,141 16,679 -- 126,820
Depreciation and amortization. -- 4,354 767 -- 5,121
Results of affiliates'
operations.................. 5,421 6,441 -- (11,862) --
Interest expense (income), net (2,968) 14,449 (968) -- 10,513
Other (income) expense........ -- 4,876 (3,597) -- 1,279
(Benefit) provision for
income taxes................ 1,039 (3,926) 2,704 -- (183)
------------------------------------------------------------------------
Net income (loss).......... $ 7,350 $ 5,421 $ 6,441 $ (11,862) $ 7,350
========================================================================
THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------------------------------------------------------------------
Net sales..................... $ -- $ 739,453 $ 108,996 $ -- $ 848,449
Cost of goods sold............ -- 609,855 89,141 -- 698,996
Selling, general and
administrative expenses..... -- 107,290 16,134 -- 123,424
Depreciation and amortization. -- 3,629 778 -- 4,407
Results of affiliates'
operations.................. 3,377 13,574 -- (16,951) --
Interest expense (income), net (3,250) 14,794 (414) -- 11,130
Other (income) expense........ -- 19,407 (17,720) -- 1,687
Provision for income taxes.... 1,054 (5,325) 7,503 -- 3,232
------------------------------------------------------------------------
Net income (loss).......... $ 5,573 $ 3,377 $ 13,574 $(16,951) $ 5,573
========================================================================
12
SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------
Net sales..................... $ -- $ 1,382,014 $ 229,032 $ -- $ 1,611,046
Cost of goods sold............ -- 1,127,978 186,736 -- 1,314,714
Selling, general and
administrative expenses..... -- 214,962 33,599 -- 248,561
Depreciation and amortization. -- 8,693 1,561 -- 10,254
Results of affiliates'
operations.................. 8,394 12,983 -- (21,377) --
Interest expense (income), net (5,838) 29,077 (2,338) -- 20,901
Other (income) expense........ -- 12,891 (10,202) -- 2,689
Provision for income taxes.... 2,043 (6,998) 6,693 -- 1,738
------------------------------------------------------------------------
Net income (loss).......... $ 12,189 $ 8,394 $ 12,983 $ (21,377) $ 12,189
========================================================================
SIX MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------
Net sales..................... $ -- $1,443,773 $ 213,593 $ -- $ 1,657,366
Cost of goods sold............ -- 1,187,630 174,639 -- 1,362,269
Selling, general and
administrative expenses..... -- 213,126 32,366 -- 245,492
Depreciation and amortization. -- 7,968 1,601 -- 9,569
Results of affiliates'
operations.................. 5,113 25,912 -- (31,025) --
Interest expense (income), net (6,464) 29,096 (558) -- 22,074
Other (income) expense........ -- 38,465 (34,278) -- 4,187
Provision for income taxes.... 2,166 (11,713) 13,911 -- 4,364
------------------------------------------------------------------------
Net income (loss).......... $ 9,411 $ 5,113 $ 25,912 $ (31,025) $ 9,411
========================================================================
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------
Net cash provided (used) by
operating activities............. $ 3,819 $ 12,210 $(34,353) $ -- $(18,324)
Investing activities:
Capital expenditures............ -- (3,225) (214) -- (3,439)
Acquisitions.................... -- (2,528) -- -- (2,528)
Proceeds from sale of
property...................... -- 1,177 -- -- 1,177
-----------------------------------------------------------------------------
Net cash used in investing
activities.................... -- (4,576) (214) -- (4,790)
Financing activities:
Net borrowings (repayments)...... (3,851) 697 37,751 -- 34,597
Equity transactions.............. 29 -- -- -- 29
Other............................ -- -- (1,431) -- (1,431)
-----------------------------------------------------------------------------
Net cash (used in)
provided by financing
activities..................... (3,822) 697 36,320 -- 33,195
-----------------------------------------------------------------------------
Effect of exchange rate changes on
Cash and cash equivalents........ -- -- 554 -- 554
-----------------------------------------------------------------------------
Net change in cash and cash
equivalents....................... (3) 8,331 2,307 -- 10,635
Cash and cash equivalents at
beginning of year................. 4 12,449 10,117 -- 22,570
-----------------------------------------------------------------------------
Cash and cash equivalents at
end of period..................... $ 1 $ 20,780 $ 12,424 $ -- $ 33,205
=============================================================================
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
------------------------------------------------------------------------
Net cash provided (used) by
operating activities........... $ 4,606 $(16,064) $(57,652) $ -- $(69,110)
Investing activities:
Capital expenditures.......... -- (3,144) (232) -- (3,376)
Acquisitions and other........ -- (9,986) -- -- (9,986)
------------------------------------------------------------------------
Net cash used in investing
activities.................. -- (13,130) (232) -- (13,362)
Financing activities:
Net borrowings (repayments)... (5,178) 37,217 1,862 -- 33,901
Equity transactions........... 572 -- -- -- 572
Other.......................... -- (3,067) -- -- (3,067)
------------------------------------------------------------------------
Net cash (used in)
provided by financing
activities.................. (4,606) 34,150 1,862 -- 31,406
------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents -- -- 480 -- 480
------------------------------------------------------------------------
Net change in cash and cash
equivalents.................... -- 4,956 (55,542) -- (50,586)
Cash and cash equivalents at
beginning of year.............. 2 17,877 57,178 -- 75,057
------------------------------------------------------------------------
Cash and cash equivalents at
end of period.................. $ 2 $ 22,833 $ 1,636 $ -- $ 24,471
========================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
information in the unaudited condensed consolidated financial statements and
notes thereto included herein and WESCO International Inc.'s Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in its 2002 Annual Report on Form 10-K.
GENERAL
WESCO is a full-line distributor of electrical supplies and equipment
and is a provider of integrated supply procurement services. WESCO currently
operates over 350 branch locations and five distribution centers in the United
States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, Nigeria and
Singapore. WESCO serves over 100,000 customers worldwide, offering over
1,000,000 products from over 24,000 suppliers. WESCO's diverse customer base
includes a wide variety of industrial companies; contractors for industrial,
commercial and residential projects; utility companies, and commercial,
institutional and governmental customers. Approximately 89% of WESCO's net sales
are generated from operations in the U.S., 9% from Canada and the remainder from
other countries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During six-month period ended 2003, there were no significant changes to
WESCO's Critical Accounting Policies and Estimates referenced in the 2002 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Second Quarter of 2003 versus Second Quarter of 2002
The following table sets forth the percentage relationship to net sales
of certain items in WESCO's condensed consolidated statements of operations for
the periods presented:
THREE MONTHS ENDED JUNE 30
---------------------------
2003 2002
---------------------------
Net sales 100.0% 100.0%
Gross profit 18.4 17.6
Selling, general and administrative expenses 15.5 14.6
Depreciation and amortization 0.6 0.5
--- ---
Income from operations 2.3 2.5
Interest expense 1.2 1.3
Other expense 0.2 0.2
--- ---
Income before income taxes 0.9 1.0
Provision for income taxes 0.0 0.3
--- ---
Net income 0.9% 0.7%
==== ====
Net sales in the second quarter of 2003 total $820.2 million versus
$848.4 million in the comparable 2002 quarter, a 3.3% decline. The decline in
net sales was primarily attributable to weaker demand resulting from depressed
economic activity in the industrial production and commercial construction
markets.
Gross profit for the second quarter of 2003 of $150.9 million was up
slightly as compared to 2002's second quarter, as the gross margin percentage
improved to 18.4% versus 17.6% last year. The improvement in the gross margin
percentage was primarily due to improvements in billing margins, which increased
70 basis points over last year's comparable quarter.
Selling, general and administrative ("SG&A") expenses in the second
quarter of 2003 totaled $126.8 million versus $123.4 million in last year's
comparable quarter. The current quarter's total includes $5.7 million of
expenses associated with discretionary retirement plan contributions and out of
the ordinary fees and expenses associated with certain legal matters. In August
2003, the Company reached a tentative settlement agreement related to an
employment and wages claim. The Company accrued the expected amount necessary to
provide for the resolution of this matter during the fiscal quarter ended June
30, 2003. Partially offsetting these amounts were decreases in other SG&A
expenses, the most significant of which was transportation costs. Shipping and
handling expense included in SG&A was $9.0 million in the second quarter of
2003, compared with $9.8 million in last
16
year's second quarter. As a percentage of net sales, SG&A expenses increased to
15.5%, compared with 14.6% in the prior year quarter, reflecting the higher
amount of SG&A expenses in the current quarter combined with the negative
leverage of lower sales volume.
Depreciation and amortization was $5.1 million in the second quarter of
2003 versus $4.4 million in last year's second quarter.
Interest expense totaled $10.5 million for the second quarter of 2003
versus $11.1 million in last year's comparable quarter, a decrease of 5.4%. The
decline was due to a lower amount of indebtedness outstanding during the current
quarter as compared to the second quarter of 2002. Other expense totaled $1.3
million in 2003 second quarter, down from $1.7 million in the comparable 2002
second quarter, principally reflecting lower costs and outstanding balances
associated with the accounts receivable securitization program.
Income tax benefit totaled $0.2 million in the second quarter of 2003
and the effective tax rate was a 2.6% benefit. Income tax expense totaled $3.2
million in the second quarter of 2002 and the effective tax rate was 36.7%. The
effective tax rate in the second quarter of 2003 differs from the statutory rate
primarily as a result of the recognition of a $2.4 million benefit associated
with the favorable resolution of certain prior year tax contingencies. Last
year's effective tax rate differed from the statutory rate primarily due to
state taxes and non-deductible expenses.
For the second quarter of 2003, net income totaled $7.4 million, or
$0.16 per diluted share, compared with $5.6 million, or $0.12 per diluted share,
in the second quarter of 2002. The improvements in net income and earnings per
share were primarily attributable to lower financing costs and the lower
effective tax rate in the current quarter.
Six Months Ended June 30, 2003 versus Six Months Ended June 30, 2002
The following table sets forth the percentage relationship to net sales
of certain items in WESCO's condensed consolidated statements of operations for
the periods presented:
SIX MONTHS
ENDED JUNE 30
2003 2002
--------------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 18.4 17.8
Selling, general and administrative expenses 15.4 14.8
Depreciation and amortization 0.7 0.6
----------------------
Income from operations 2.3 2.4
Interest expense 1.3 1.3
Loss on debt extinguishment - -
Other expense 0.1 0.2
----------------------
Income before income taxes 0.9 0.9
Provision for income taxes 0.1 0.3
----------------------
Net income 0.8% 0.6%
--------------------------------------------------------------------
Net sales in the six months ended June 30, 2003 total $1,611.0 million
versus $1,657.4 million in the comparable 2002 period, a 2.8% decline. The
decline in net sales was primarily attributable to weaker demand resulting from
depressed economic activity in the industrial production and commercial
construction markets.
Gross profit for the six months ended June 30, 2003 of $296.3 million
was up slightly versus last year's comparable period, as the gross margin
percentage improved to 18.4% versus 17.8% last year. The improvement in the
gross margin percentage was primarily due to improvements in billing margins,
which increased 50 basis points over last year's comparable period.
SG&A expenses during the six months ended June 30, 2003 totaled $248.5
million versus $245.5 million in last year's comparable period. The current
year's total includes $8.1 million of expenses associated with discretionary
retirement plan contributions and out of the ordinary fees and expenses
associated with certain legal matters. In August 2003, the Company reached a
tentative settlement agreement related to an employment and wages claim. The
Company accrued the expected amount necessary to provide for the resolution of
this matter during the six months ended June 30, 2003. Partially offsetting
these amounts were decreases in other SG&A expenses the most
17
significant of which was transportation costs. Shipping and handling expense
included in SG&A was $17.8 million during the 2003 six-month period versus $18.9
million in last year's comparable period. As a percentage of net sales, SG&A
expenses increased to 15.4% compared with 14.8% in the last year's six-month
period reflecting the higher amount of SG&A expenses in the period, combined
with the negative leverage of lower sales volume.
Depreciation and amortization was $10.3 million in the first six months
of 2003 versus $9.6 million in last year's comparable period.
Interest expense totaled $20.9 million for the six months ended June 30,
2003 versus $22.1 million in last year's comparable period, a decrease of 5.0%.
The decline was due to a lower amount of indebtedness outstanding during the
current period. Other expense totaled $2.7 million in 2003, down from $3.1
million in the comparable 2002 period, principally reflecting costs associated
with the accounts receivable securitization program.
For the six months ended June 30, 2003, income tax expense totaled $1.7
million and the effective tax rate was 12.5%. Income tax expense totaled $4.4
million in last year's comparable period and the effective tax rate was 31.7%.
The effective tax rate in the current-year period differs from the statutory
rate primarily as a result of the recognition of a $2.4 million benefit
associated with the favorable resolution of certain prior year tax
contingencies, combined with the recognition of a $0.6 million benefit
associated with the utilization of a net operating loss. Last year's effective
tax rate differed from the statutory rate primarily due to deferred taxes being
remeasured during the period reflecting the cumulative impact of a change in the
expected tax rate that will be applicable when the deferred tax items reverse.
The change in estimate was primarily due to state tax reduction initiatives. In
addition, foreign tax credits contributed to the reduction in the effective rate
during both 2003 and 2002.
For the six months ended June 30, 2003, net income totaled $12.2
million, or $0.26 per diluted share, versus $9.4 million, or $0.20 per diluted
share, in last year's comparable period. The improvements in net income and
earnings per share were primarily attributable to lower financing costs and the
lower effective tax rate in the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.1 billion and $1.0 billion at June 30, 2003 and
December 31, 2002, respectively. The increase in total assets was principally
attributable to a $90.2 million increase in trade accounts receivable, with $68
million of the increase being attributable to reduced utilization of the
Company's accounts receivable securitization program. During the first six
months of 2003, total liabilities increased $63.4 million to $909.2 million. The
increase was the result of a $28.1 million increase in trade accounts payable,
coupled with a $32.0 million increase in long-term debt. The increase in
long-term debt was a result of the closing of a $51.0 million real estate
financing during the first six months of 2003. Borrowings under this financing
total $13.3 million as of December 31, 2002. During the 2003 first quarter,
stockholders' equity increased $19.5 million to $188.8 million as of June 30,
2003 as a result of $12.2 million in net income, coupled with a $7.2 million
favorable adjustment related to foreign currency translation.
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 either one of the next two years
if certain earnings targets are achieved. The amount of earn-out proceeds earned
that is payable in any single year is capped under this agreement at $30 million
per year. 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.
WESCO finances its operating and investing needs, as follows:
Accounts Receivable Securitization Program
WESCO maintains a Receivables Facility with a group of financial
institutions. Under the Receivables Facility, 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
18
has agreed to continue servicing the sold receivables for the financial
institution at market rates; accordingly, no servicing asset or liability has
been recorded. The effective cost of this financing facility is currently
approximately 2.0% per annum. As of June 30, 2003, $225 million in funding was
outstanding under the Receivables Facility and excess availability was $17
million.
On June 28, 2003, this facility was extended until August 31, 2003 with
a total purchase commitment of up to $242 million. The Company expects to enter
into a similar facility with a purchase commitment of up to $350 million before
the expiration date of the current facility. This new structure is expected to
include the addition of a three-year commitment of up to $150 million that will
minimize the amount that is subject to an annual renewal.
Mortgage Financing Facility
During the six months ended June 30, 2003, WESCO finalized a $51 million
mortgage financing facility. 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. In 2003, scheduled principal payments total approximately $0.8
million. Interest cost for the mortgage facility is fixed at 6.5% per annum.
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 June 30, 2003, the interest rate was 3.7%. This facility also has various
restrictive covenants including financial ratios. WESCO was in compliance with
all such covenants as of June 30, 2003. As of June 30, 2003, WESCO had $7
million in borrowings outstanding under this facility and, after deducting $12
million in outstanding letters of credit, $161 million in availability.
Senior Notes
As of June 30, 2003 WESCO had $397 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 on these notes accrues at a rate of 9.125%
per annum and is payable semi-annually on December 1 and June 1.
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 had six-year terms expiring concurrently with the
9.125% 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 received fixed interest payments at the rate of
9.125% and was paid interest at three-month LIBOR plus a premium. The LIBOR
rates in the agreements were reset quarterly. During the six months ended June
30, 2003, these agreements were settled and as a result the Company received
$4.6 million. The gain resulting from the settlement of these agreements has
been deferred and is being amortized as a reduction of interest expense over the
remaining life of the senior subordinated notes.
Management believes that cash generated from operations, together with
amounts available under its credit facilities, 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.
19
Cash Flow
Operating Activities. Cash used by operating activities during the six
months ended June 30, 2003 totaled $18.3 million as compared to $69.1 million in
the prior year. Included in the 2003 use of cash was a $68.0 million use
associated with changes in WESCO's Receivables Facility compared to $55.0
million in the prior year. Cash provided by other operating activities totaled
$49.7 million during the first six months of 2003 compared to cash used by other
operating activities of $14.1 million in the previous year. In 2003, cash
generated by net income of $12.2 million plus non-cash items of $10.4 million
and $37.1 million from changes in inventory, prepaid expenses and other current
assets, accounts payable and other current and non-current liabilities totaling
were partially offset by cash used to fund increases in accounts receivable and
other items totaling $10.0 million. In 2002, cash utilized to reduce accounts
payable of $92.1 million was partially offset by cash generated by reductions in
accounts receivable and inventory of $58.8 million.
Investing Activities. Net cash used for investing activities was $4.8
million during the first six months of 2003, principally due to capital
expenditures of $3.4 million. Acquisition payments totaling $2.5 million were
partially offset by proceeds received from the sale of property and buildings
totaling $1.2 million. In 2002, cash used by investing activities totaled $13.4
million and included capital expenditures of $3.4 million and acquisition
payments of $10.7 million, partially offset by proceeds from the sale of
property of $0.8 million.
Financing Activities. Net cash provided by financing activities during
the first six months of 2003 totaled $33.2 million. The cash flow provided was a
result primarily of completing the real estate financing during the period,
which provided $38 million in funding. In addition, the Company received $4.6
million in proceeds from the settlement of its interest rate swap agreements.
Partially offsetting these sources of cash was $8.0 million reduction in net
debt repayments. In 2002, cash provided by financing activities totaled $31.4
million reflecting net borrowings of $33.9 million.
Contractual Cash Obligations and Other Commercial Commitments
As disclosed above, WESCO finalized a $51 million mortgage financing
facility during the first quarter. As a result of finalizing this agreement, the
total debt owed on the mortgage facility increased $38 million to $51 million as
compared to $13 million referenced in WESCO's 2002 Form 10-K. In 2003, scheduled
principal payments total approximately $0.8 million.
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.
Impact of Recently Issued Accounting Standards
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.
20
Effective June 30, 2003, WESCO adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies financial accounting and reporting for derivatives and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard had no impact on WESCO's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." This standard
requires that certain financial instruments embodying an obligation to transfer
assets or to issue equity securities be classified as liabilities. It is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective July 1, 2003. This standard had no impact on WESCO's
financial statements.
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 beginning January 1, 2003.
The adoption of this statement did not have a material impact on WESCO's
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 does not believe the
adoption of this interpretation will have a material impact on its consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding the future performance
of WESCO. When used in this context, the words "anticipates," "plans,"
"believes," "estimates," "intends," "expects," "projects" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. Such statements including,
but not limited to, WESCO's statements regarding its business strategy, growth
strategy, productivity and profitability enhancement, new product and service
introductions and liquidity and capital resources are based on management's
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, certain of which
are beyond WESCO's control. WESCO's actual results could differ materially from
those expressed in any forward-looking statement made by or on behalf of WESCO.
In light of these risks and uncertainties there can be no assurance that the
forward-looking information will in fact prove to be accurate. Factors that
might cause actual results to differ from such forward-looking statements
include, but are not limited to, an increase in competition, the amount of
outstanding indebtedness, the availability of appropriate acquisition
opportunities, availability of key products, functionality of information
systems, international operating environments and other risks that are described
in WESCO's Annual Report on Form 10-K for the year ended December 31, 2002 which
are incorporated by reference herein. WESCO has undertaken no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Except as discussed below, there have not been any material changes to
WESCO's exposures to market risk during the six months ended June 30, 2003 that
would require an update to the disclosures provided in WESCO's Form 10-K for the
year-ended December 31, 2002.
As previously disclosed, the Company's interest rate swap agreements
were settled during the six months ended June 30, 2003. The Company received
$4.6 million related to the contracts.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
WESCO's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), have evaluated the Company's disclosure controls and procedures as of
the end of the period covered by this report and they have concluded that these
controls and procedures are effective.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal control over
financial reporting that occurred during the quarter ended June 30, 2003, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. 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.
In August 2003, the Company reached a tentative settlement agreement
related to an employment and wages claim. The Company currently expects this
claim to be resolved around the end of its fiscal year 2003. The expected amount
necessary to provide for the resolution of this matter has been accrued in the
condensed consolidated financial statements as of June 30, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of WESCO shareholders held on May 21, 2003, Mr.
Michael J. Cheshire, Mr. James A. Stern and Mr. William J. Vareschi were
reelected as directors of WESCO to serve for three-year terms. Votes cast for
Mr. Cheshire were 35,398,596 and votes withheld were 91,378; votes cast for Mr.
Stern were 35,411,960 and votes withheld were 78,374; votes cast for Mr.
Vareschi were 34,963,291 and votes withheld were 527,043.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) promulgated under the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 23, 2003, WESCO issued a press release announcing its earnings
for the first quarter of 2003.
On May 21, 2003, WESCO held its Annual Meeting of Shareholders in
Pittsburgh, Pennsylvania (the "Meeting"). At the Meeting, shareholders
re-elected Mr. Michael J. Cheshire, Mr. James A. Stern and Mr. William J.
Vareschi to the Company's Board of Directors for terms to expire in 2006. In
addition, shareholders approved certain amendments to the Company's 1999
Long-Term Incentive Plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 14, 2003 on its
behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By: /s/ Stephen A. Van Oss
---------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
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