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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD from ______ to ______
For the quarterly period ended SEPTEMBER 30, 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 (IRS Employer Identification No.)
of incorporation or
organization)
225 WEST STATION SQUARE DRIVE
SUITE 700 (412) 454-2200
PITTSBURGH, PENNSYLVANIA 15219 (Registrant's telephone number,
(Address of principal executive offices) 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 October 31, 2003, WESCO International, Inc. had 40,483,301 shares and
4,653,131 shares of common stock and Class B common stock outstanding,
respectively.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited) and
December 31, 2002................................................................ 2
Condensed Consolidated Statements of Operations for the three months and nine
months ended September 30, 2003 and 2002 (unaudited) ............................ 3
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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............................. 22
ITEM 4. Controls and Procedures................................................................ 22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................................... 23
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 23
Signatures............................................................................. 24
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except share data 2003 2002
--------------------------------------- -------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 30,324 $ 22,570
Trade accounts receivable, net of allowance for doubtful
accounts of $11,554 and $10,261 in 2003 and 2002, respectively ............... 300,726 182,249
Other accounts receivable ....................................................... 16,115 19,921
Inventories, net ................................................................ 323,608 338,781
Income taxes receivable ......................................................... 123 6,103
Prepaid expenses and other current assets ....................................... 12,381 7,433
-------------- --------------
Total current assets ......................................................... 683,277 577,057
Property, buildings and equipment, net .............................................. 101,322 110,174
Goodwill ............................................................................ 359,260 314,078
Other assets ........................................................................ 9,624 13,809
-------------- --------------
Total assets ................................................................. $ 1,153,483 $ 1,015,118
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 381,449 $ 346,513
Accrued payroll and benefit costs ............................................... 22,172 19,736
Current portion of long-term debt ............................................... 2,102 5,778
Current deferred income taxes ................................................... 3,382 3,408
Deferred acquisition payable .................................................... 30,000 --
Other current liabilities ....................................................... 38,937 23,040
-------------- --------------
Total current liabilities .................................................... 478,042 398,475
Long-term debt ...................................................................... 430,497 412,196
Long-term deferred acquisition payable .............................................. 15,000 --
Other noncurrent liabilities ........................................................ 6,068 5,684
Deferred income taxes ............................................................... 28,169 29,475
-------------- --------------
Total liabilities ............................................................ 957,776 845,830
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, 44,514,073 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 .............................................................. 571,260 570,923
Retained earnings (deficit) ..................................................... (346,235) (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) ................................... 4,049 (1,489)
-------------- --------------
Total stockholders' equity ................................................... 195,707 169,288
-------------- --------------
Total liabilities and stockholders' equity ................................... $ 1,153,483 $ 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except share data 2003 2002 2003 2002
- ------------------------------- ---------- ---------- ---------- ----------
Net sales ........................................ $ 825,601 $ 852,949 $2,436,647 $2,510,315
Cost of goods sold ............................... 671,942 706,462 1,986,656 2,068,731
---------- ---------- ---------- ----------
Gross profit .................................. 153,659 146,487 449,991 441,584
Selling, general and administrative expenses ..... 124,983 123,157 373,853 368,649
Depreciation and amortization .................... 5,148 4,999 15,402 14,568
---------- ---------- ---------- ----------
Income from operations ........................ 23,528 18,331 60,736 58,367
Interest expense, net ............................ 10,545 10,725 31,446 32,799
Loss on debt extinguishments ..................... 487 -- 180 1,073
Other expense .................................... 724 1,790 3,412 4,904
---------- ---------- ---------- ----------
Income before income taxes .................... 11,772 5,816 25,698 19,591
Provision (benefit) for income taxes ............. 3,399 (3,167) 5,137 1,197
---------- ---------- ---------- ----------
Net income ................................... $ 8,373 $ 8,983 $ 20,561 $ 18,394
========== ========== ========== ==========
Earnings per share:
Basic: ....................................... $ 0.19 $ 0.20 $ 0.46 $ 0.41
========== ========== ========== ==========
Diluted: ..................................... $ 0.18 $ 0.19 $ 0.44 $ 0.39
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002
- ------------ ----------- -----------
OPERATING ACTIVITIES:
Net income .......................................................................... $ 20,561 $ 18,394
Adjustments to reconcile net income to net cash used by operating activities:
Loss on debt extinguishment .................................................... 180 1,073
Depreciation and amortization .................................................. 15,402 14,568
Amortization of gain on interest rate swap ..................................... (304) --
Stock option costs ............................................................. 242 --
Accretion of original issue and amortization of purchase discounts ............. 2,195 2,229
Amortization of debt issuance costs ............................................ 879 694
Deferred income taxes .......................................................... (1,332) 9,428
Gain on the sale of property, buildings and equipment .......................... (513) (256)
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ............................................... (88,000) (47,500)
Trade and other receivables .................................................. (19,771) 35,537
Inventories .................................................................. 19,697 27,142
Prepaid expenses and other current assets .................................... 1,415 (5,189)
Accounts payable ............................................................. 29,294 (79,764)
Accrued payroll and benefit costs ............................................ 2,032 (1,349)
Other current and noncurrent liabilities ..................................... 16,544 2,932
----------- -----------
Net cash used by operating activities ..................................... (1,479) (22,061)
INVESTING ACTIVITIES:
Capital expenditures ................................................................ (5,550) (5,431)
Acquisition payments ................................................................ (6,528) (14,137)
Proceeds from the sale of property, buildings and equipment ......................... 1,177 755
----------- -----------
Net cash used by investing activities ..................................... (10,901) (18,813)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................................ 144,480 440,596
Repayments of long-term debt ........................................................ (127,345) (445,703)
Proceeds from settlement of interest rate swap ...................................... 4,563 --
Debt issuance costs ................................................................. (2,166) (4,004)
Proceeds from the exercise of stock options ......................................... 53 620
----------- -----------
Net cash provided(used) by financing activities ........................... 19,585 (8,491)
Effect of exchange rate changes on cash and cash equivalents ........................ 549 75
Net change in cash and cash equivalents ........................................ 7,754 (49,290)
Cash and cash equivalents at the beginning of period ........................... 22,570 75,057
----------- -----------
Cash and cash equivalents at the end of period ................................. $ 30,324 $ 25,767
=========== ===========
Supplemental disclosures:
Non-cash financing activities:
Increase in fair value of interest rate swap ................................... $ (780) $ (10,037)
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 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, the United Kingdom, Singapore, Puerto
Rico, Nigeria and Guam.
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 September 30,
2003, the unaudited condensed consolidated statements of operations for the
three months and nine months ended September 30, 2003 and September 30, 2002 and
the unaudited condensed consolidated statements of cash flows for the nine
months ended September 30 2003 and September 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 a fair statement
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
During the three months ended September 30, 2003, WESCO has adopted the
measurement provisions of SFAS #123, "Accounting for Stock-Based Compensation".
This change in accounting method was applied on a prospective basis in
accordance with SFAS #148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of SFAS #123." Stock options awarded prior to 2003
are accounted for under the intrinsic value method under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." During the
first six months of 2003, no options or stock-based awards were granted to
employees. The Company recognized $0.2 million of compensation expense in the
three and nine months ended September 30, 2003.
The following table presents the pro forma results as if the fair-value
based method of accounting for stock-based awards had been applied to all
outstanding options:
5
IN THOUSANDS EXCEPT PER SHARE DATA
THREE MONTHS NINE MONTHS
---------------------------- ----------------------------
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported ................................... $ 8,373 $ 8,983 $ 20,561 $ 18,394
Add: Stock-based compensation expense included in
Reported net income, net of related tax ................... 157 -- 157 --
Deduct: Stock-based employee compensation expense
determined under SFAS No. 123 for all awards,
net of related tax ........................................ (528) (575) (1,269) (1,725)
------------ ------------ ------------ ------------
Pro forma net income ...................................... $ 8,002 $ 8,408 $ 19,449 $ 16,669
Earnings per share:
Basic as reported ...................................... $ 0.19 $ 0.20 $ 0.46 $ 0.41
Basic pro forma ........................................ $ 0.18 $ 0.19 $ 0.43 $ 0.37
Diluted as reported .................................... $ 0.18 $ 0.19 $ 0.44 $ 0.39
Diluted pro forma ...................................... $ 0.17 $ 0.18 $ 0.42 $ 0.36
Recent Accounting Pronouncements
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 generally 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 currently effective for all variable interest entities created after
February 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 December 31, 2003. The adoption of this
interpretation did not have a material impact on the Company's consolidated
financial statements.
6
3. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings
per share:
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2003 2002
---------------------------------------------- ------------ ------------
Reported net income $ 8,373 $ 8,983
============ ============
Weighted average common shares outstanding used in
computing basic earnings per share 45,129,308 45,097,383
Common shares issuable upon exercise of
dilutive stock options 1,790,875 1,807,543
------------ ------------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share 46,920,183 46,904,926
============ ============
Earnings per share:
Basic $ 0.19 $ 0.20
Diluted $ 0.18 $ 0.19
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2003 2002
---------------------------------------------- ----------- -----------
Reported net income $ 20,561 $ 18,394
=========== ===========
Weighted average common shares outstanding used in
computing basic earnings per share 45,117,257 45,010,489
Common shares issuable upon exercise of
dilutive stock options 1,540,266 1,886,699
----------- -----------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share 46,657,523 46,897,188
=========== ===========
Earnings per share:
Basic $ 0.46 $ 0.41
Diluted $ 0.44 $ 0.39
4. ACCOUNTS RECEIVABLE SECURITIZATION
In September 2003, WESCO entered into a revised $300 million accounts
receivable securitization program ("Receivables Facility") that provides for a
$165 million purchase commitment with a term of 364 days and a $135 million
purchase commitment with a term of three years. 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 September 30, 2003 and December 31, 2002, securitized accounts
receivable totaled approximately $348 million and $346 million, respectively, of
which the subordinated retained interest was approximately $143 million and $53
million, respectively. Accordingly, approximately $205 million and $293 million
of accounts receivable balances were removed from the consolidated balance
sheets at September 30, 2003 and December 31, 2002, respectively. Costs
associated with the Receivables Facility totaled $0.7 million and $1.8 million
for the three months ended September 30, 2003 and September 30, 2002. Costs
associated with the Receivables Facility totaled $3.4 million and $4.9 million
for the nine months ended September 30, 2003 and September 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.
7
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 September 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.
5. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002
- ------------ ------------ ------------
Net income $ 8,373 $ 8,983
Foreign currency translation adjustment (1,672) (1,635)
------------ ------------
Comprehensive income $ 6,701 $ 7,348
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002
- ------------ ------------ ------------
Net income $ 20,561 $ 18,394
Foreign currency translation adjustment 5,538 556
------------ ------------
Comprehensive income $ 26,099 $ 18,950
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 ("Bruckner"), which
provides for a remaining maximum total earn-out potential of $80 million based
on achieving earnings targets during 2003 or 2004. The amount of earn-out
proceeds earned that is payable in any single year subsequent to achieving the
earnings target is capped under this agreement at $30 million per year. As of
September 30, 2003, the Company has accrued a $45.0 million liability ($30.0
million classified as current and $15.0 million classified as non-current) to
recognize the estimated amount owed under the agreement with Bruckner. The
estimated payments accrued were recorded as an increase to goodwill. 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. Payments made
under the Company's various acquisition agreements totaled $6.5 million and
$14.1 million during the nine months ended September 30, 2003 and 2002,
respectively.
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 quarter ended September 30, 2003, the Company recorded a $0.8
million non-cash charge associated with the write-off of deferred financing fees
related to a Company-initiated amendment reducing the size of its revolving
credit facility from $290 million to $200 million.
As of September 30, 2003 WESCO had $378.8 million in aggregate principal
amount of senior subordinated notes due 2008. During the nine months ended
September 30, 2003, the Company repurchased $21.2 million in aggregate principal
amount of senior subordinated notes at a net gain of $0.6 million.
8
In June 2003, the Company's interest rate swap agreements were called by
the issuer and as a result the Company received a $4.6 million payment. 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.
In August 2003, the Company entered into a new, $50 million interest rate
swap agreement similar to the agreements settled in June 2003. The term of this
agreement expires concurrently with the 9.125% senior subordinated notes.
Pursuant to the agreement, WESCO receives fixed interest payments at a rate of
9.125% and pays interest at six-month LIBOR plus a premium.
8. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
THREE MONTHS ENDED
SEPTEMBER 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 3.8
Domestic tax benefit from foreign operations (7.0) (4.1)
Foreign taxes rate differences (0.3) (0.5)
Favorable impact resulting from prior year tax contingencies(1) -- (91.1)
Other (1.3) 1.0
---------- ----------
28.9 (54.5)
========== ==========
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
---------- ----------
Federal statutory rate ............................................. 35.0% 35.0%
State taxes, net of federal tax benefit ............................ 0.2 1.3
Nondeductible expenses ............................................. 2.3 3.7
Domestic tax benefit from foreign operations ....................... (4.9) (3.1)
Foreign taxes rate differences ..................................... (0.4) (0.3)
Remeasurement of deferred taxes(2) ................................. -- (3.5)
Favorable impact resulting from prior year tax contingencies (1) ... (10.1) (27.1)
Net operating loss utilization(3) .................................. (2.2) --
Other .............................................................. 0.1 0.1
---------- ----------
20.0% 6.1%
========== ==========
- -------------
(1) Represents a benefit of $5.3 million during the quarter and nine months
ended September 30, 2002 and $2.6 million during the nine months ended
September 30, 2003 from the resolution of prior year tax contingencies
upon the IRS's acceptance of tax returns filed through 1998 and the
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) 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 nine months
ended September 30, 2003 includes $4.7 million associated with discretionary
retirement related contributions. The Company did not have any expenses for
discretionary retirement plan contributions for the comparable 2002 period. In
addition, the nine months ended September 30, 2003 included $3.9 million in fees
and expenses associated with certain legal matters. The Company has reached a
tentative settlement agreement related to an employment and wages claim. The
Company currently expects this claim to be resolved by the end of its fiscal
year 2003. The expected amount necessary to provide for the resolution of this
matter has been previously accrued and reflected in the condensed consolidated
financial statements as of September 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
SEPTEMBER 30, 2003
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents ................ $ 3 $ 20,707 $ 9,614 $ -- $ 30,324
Trade accounts receivable ................ -- 41,697 259,029 -- 300,726
Inventories .............................. -- 278,093 45,515 -- 323,608
Other current assets ..................... -- 22,448 8,985 (2,814) 28,619
-------------- -------------- -------------- -------------- --------------
Total current assets .................. 3 362,945 323,143 (2,814) 683,277
Intercompany receivables, net ............ -- 218,947 -- (218,947) --
Property, buildings and equipment,
net ................................... -- 32,375 68,947 -- 101,322
Goodwill ................................. -- 321,312 37,948 -- 359,260
Investments in affiliates and other
noncurrent assets ..................... 402,815 347,159 3,762 (744,112) 9,624
-------------- -------------- -------------- -------------- --------------
Total assets .......................... $ 402,818 $ 1,282,738 $ 433,800 $ (965,873) $ 1,153,483
============== ============== ============== ============== ==============
Accounts payable ......................... $ -- $ 364,563 $ 16,886 $ -- $ 381,449
Other current liabilities ................ -- 92,055 7,352 (2,814) 96,593
-------------- -------------- -------------- -------------- --------------
Total current liabilities ............. -- 456,618 24,238 (2,814) 478,042
Intercompany payables, net ............... 211,160 -- 7,787 (218,947) --
Long-term debt ........................... -- 380,822 49,675 -- 430,497
Other noncurrent liabilities ............. -- 42,483 6,754 -- 49,237
Stockholders' equity ..................... 191,658 402,815 345,346 (744,112) 195,707
-------------- -------------- -------------- -------------- --------------
Total liabilities and
stockholders' equity .................. $ 402,818 $ 1,282,738 $ 433,800 $ (965,873) $ 1,153,483
============== ============== ============== ============== ==============
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 SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
--------------- ------------------ ---------------- ----------------- -------------
Net sales ........................... $ -- $ 705,442 $ 120,159 $ -- $ 825,601
Cost of goods sold .................. -- 575,373 96,569 -- 671,942
Selling, general and administrative
expenses ......................... -- 106,235 18,748 -- 124,983
Depreciation and amortization ....... -- 4,359 789 -- 5,148
Results of affiliates' operations ... 6,530 5,497 -- (12,027) --
Interest expense (income), net ...... (2,836) 14,356 (975) -- 10,545
Other (income) expense .............. -- 5,802 (4,591) -- 1,211
(Benefit) provision for income taxes 993 (1,716) 4,122 -- 3,399
--------------- ------------------ ---------------- ----------------- -------------
Net income (loss) ................ $ 8,373 $ 6,530 $ 5,497 $ (12,027) $ 8,373
=============== ================== ================ ================= =============
THREE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- --------------- ------------
Net sales .......................... $ -- $ 738,091 $ 114,858 $ -- $ 852,949
Cost of goods sold ................. -- 613,083 93,379 -- 706,462
Selling, general and administrative
expenses ........................ -- 106,893 16,264 -- 123,157
Depreciation and amortization ...... -- 4,174 825 -- 4,999
Results of affiliates' operations .. 6,753 12,524 -- (19,277) --
Interest expense (income), net ..... (3,285) 12,690 1,320 -- 10,725
Other (income) expense ............. -- 18,192 (16,402) -- 1,790
Provision for income taxes ......... 1,055 (11,170) 6,948 -- (3,167)
-------------- --------------- ------------- ------------- ------------
Net income (loss) ............... $ 8,983 $ 6,753 $ 12,524 $ (19,277) $ 8,983
============== =============== ============= ============= ============
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- --------------- -------------
Net sales .......................... $ -- $ 2,087,456 $ 349,191 $ -- $ 2,436,647
Cost of goods sold ................. -- 1,703,351 283,305 -- 1,986,656
Selling, general and administrative
expenses ........................ -- 321,199 52,654 -- 373,853
Depreciation and amortization ...... -- 13,052 2,350 -- 15,402
Results of affiliates' operations .. 14,928 18,480 -- (33,408) --
Interest expense (income), net ..... (8,669) 43,428 (3,313) -- 31,446
Other (income) expense ............. -- 18,692 (15,100) -- 3,592
Provision for income taxes ......... 3,036 (8,714) 10,815 -- 5,137
-------------- ------------------ ------------- ------------- -------------
Net income (loss) ............... $ 20,561 $ 14,928 $ 18,480 $ (33,408) $ 20,561
============== ================== ============= ============= =============
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- --------------- -------------
Net sales ........................... $ -- $ 2,181,864 $ 328,451 $ -- $ 2,510,315
Cost of goods sold .................. -- 1,800,713 268,018 -- 2,068,731
Selling, general and administrative
expenses ......................... -- 320,019 48,630 -- 368,649
Depreciation and amortization ....... -- 12,142 2,426 -- 14,568
Results of affiliates' operations ... 11,866 38,436 -- (50,302) --
Interest expense (income), net ...... (9,749) 41,786 762 -- 32,799
Other (income) expense .............. -- 56,657 (50,680) -- 5,977
Provision for income taxes .......... 3,221 (22,883) 20,859 -- 1,197
-------------- ------------------ ------------- --------------- -------------
Net income (loss) ................ $ 18,394 $ 11,866 $ 38,436 $ (50,302) $ 18,394
============== ================== ============= =============== =============
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- --------------- -------------
Net cash provided (used) by
operating activities ............. $ 5,900 $ 28,576 $ (35,955) $ -- $ (1,479)
Investing activities:
Capital expenditures ............. -- (5,212) (338) -- (5,550)
Acquisitions ..................... -- (6,528) -- -- (6,528)
Proceeds from sale of property ... -- 1,177 -- -- 1,177
-------------- ------------------ ------------- --------------- -------------
Net cash used in investing
activities ....................... -- (10,563) (338) -- (10,901)
Financing activities:
Net borrowings (repayments) ...... (5,954) (9,755) 37,407 -- 21,698
Equity transactions .............. 53 -- -- -- 53
Other ............................ -- -- (2,166) -- (2,166)
-------------- ------------------ ------------- --------------- -------------
Net cash (used in) provided by
financing activities ............. (5,901) (9,755) 35,241 -- 19,585
Effect of exchange rate changes on
Cash and cash equivalents ........ -- -- 549 -- 549
-------------- ------------------ ------------- --------------- -------------
Net change in cash and cash
equivalents ...................... (1) 8,258 (503) -- 7,754
Cash and cash equivalents at
beginning of year ................ 4 12,449 10,117 -- 22,570
-------------- ------------------ ------------- --------------- -------------
Cash and cash equivalents at end of
period ........................... $ 3 $ 20,707 $ 9,614 $ -- $ 30,324
============== ================== ============= =============== =============
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
WESCO Consolidating
International, WESCO Non-Guarantor and Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- --------------- -------------
Net cash provided (used) by
operating activities ............. $ 6,848 $ 20,188 $ (49,097) $ -- $ (22,061)
Investing activities:
Capital expenditures ............. -- (5,086) (345) -- (5,431)
Acquisitions and other ........... -- (13,382) -- -- (13,382)
-------------- ------------------ ------------- --------------- -------------
Net cash used in investing
activities ....................... -- (18,468) (345) -- (18,813)
Financing activities:
Net borrowings (repayments) ...... (7,468) 988 1,373 -- (5,107)
Equity transaction ............... 620 -- -- -- 620
Other ............................ -- (4,004) -- -- (4,004)
-------------- ------------------ ------------- --------------- -------------
Net cash (used in) provided by
financing activities ............. (6,848) (3,016) 1,373 -- (8,491)
Effect of exchange rate changes on
cash and cash equivalents ........ -- -- 75 -- 75
-------------- ------------------ ------------- --------------- -------------
Net change in cash and cash
equivalents ...................... $ -- $ (1,296) $ (47,994) $ -- $ (49,290)
Cash and cash equivalents at
beginning of year ................ 2 17,877 57,178 -- 75,057
-------------- ------------------ ------------- --------------- -------------
Cash and cash equivalents at end of
period ........................... $ 2 $ 16,581 $ 9,184 $ -- $ 25,767
============== ================== ============= =============== =============
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, the United Kingdom, Singapore, Puerto Rico, Nigeria and
Guam. 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 the nine months ended September 30, 2003, the Company adopted the
measurement provisions of SFAS #123, "Accounting for Stock-Based Compensation"
on a prospective basis in accordance with SFAS #148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment to SFAS #123." See
"Recently Issued Accounting Pronouncements" for further information. There were
no other significant changes to WESCO's Critical Accounting Policies and
Estimates referenced in the 2002 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Third Quarter of 2003 versus Third 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 SEPTEMBER 30
2003 2002
----- -----
Net sales 100.0% 100.0%
Gross profit 18.6 17.2
Selling, general and administrative expenses 15.1 14.4
Depreciation and amortization 0.6 0.6
----- -----
Income from operations 2.9 2.2
Interest expense 1.3 1.3
Loss on debt extinguishments 0.1 --
Other expense 0.1 0.2
----- -----
Income before income taxes 1.4 0.7
Provision (benefit) for income taxes 0.4 (0.4)
----- -----
Net income 1.0% 1.1%
----- -----
Net sales in the third quarter of 2003 totaled $825.6 million versus $852.9
million in the comparable 2002 quarter, a 3.2% decline. The decline in net sales
during 2003 is primarily attributable to weaker product demand resulting from
depressed economic activity in the industrial production and commercial
construction markets.
Gross profit for the third quarter of 2003 was $153.7 million versus $146.5
million in 2002, as the gross margin percentage improved to 18.6% versus 17.2%
last year. The current quarter's results reflect improved performance in billing
margins and supplier volume rebate programs, contributing a combined 60 basis
point improvement in gross margin over last year's results. Last year's gross
margin results included a $5.2 million charge for excess specialized inventory
for customers in the telecommunications industry and inventory associated with
exiting certain international operations.
Selling, general and administrative ("SG&A") expenses in the third quarter
of 2003 totaled $125.0 million versus $123.2 million in last year's comparable
quarter. The increase was principally due to a $1.9 million, or
16
19.8%, increase in employee benefit costs during the quarter. The increase was
largely due to accruals for discretionary retirement-related contributions,
coupled with higher medical and workers compensation charges. In addition,
expenses associated with uncollectable accounts receivable were $0.8 million
higher in 2003. Shipping and handling expense included in SG&A was $9.3 million
in both the 2003 and 2002 third quarter. As a percentage of net sales, SG&A
expenses increased to 15.1%, compared with 14.4% in the last year's comparable
quarter, primarily due to the negative leverage of lower sales volume.
Depreciation and amortization was $5.1 million in the third quarter of 2003
versus $5.0 million in last year's third quarter.
Interest expense totaled $10.6 million for the third quarter of 2003 versus
$10.7 million in last year's comparable quarter. The slight decline was
primarily due to a lower amount of indebtedness outstanding during the current
quarter as compared to last year's third quarter, partially offset by a $0.4
million lower benefit from. WESCO's interest rate swap agreements in this year's
third quarter. Loss on debt extinguishments relates to the Company recording a
$0.8 million non-cash charge associated with the write-off of deferred financing
fees related to a Company-initiated amendment reducing the size of its revolving
credit facility that was partially offset by a $0.3 million gain on the
repurchase of Senior Notes. Other expense totaled $0.7 million in 2003 third
quarter, down from $1.8 million last year, principally reflecting lower costs
and outstanding balances associated with the accounts receivable securitization
program.
Income tax expense totaled $3.4 million in the third quarter of 2003 and
the effective tax rate was a 28.9%. This rate differed from the statutory tax
rate primarily due to the recognition of certain foreign tax credits that became
available in this year's third quarter. Last year's comparable income taxes were
a benefit of $3.2 million and the effective rate was a 54.5% benefit. This
resulted from a $5.3 million tax benefit from the reversal of income tax
contingency accruals upon acceptance by the IRS of tax returns filed through
1998 and the favorable conclusion of the IRS examination for 1999.
For the third quarter of 2003, net income totaled $8.4 million, or $0.18
per diluted share, compared with $9.0 million, or $0.19 per diluted share, in
the third quarter of 2002.
Nine Months Ended September 30, 2003 versus Nine Months Ended September 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:
NINE MONTHS ENDED
SEPTEMBER 30
2003 2002
----- -----
Net sales 100.0% 100.0%
Gross profit 18.5 17.6
Selling, general and administrative expenses 15.3 14.7
Depreciation and amortization 0.6 0.6
----- -----
Income from operations 2.6 2.3
Interest expense 1.3 1.3
Loss on debt extinguishments -- --
Other expense 0.2 0.2
----- -----
Income before income taxes 1.1 0.8
Provision for income taxes 0.3 0.1
----- -----
Net income 0.8% 0.7%
----- -----
Net sales in the nine months ended September 30, 2003 total $2,436.6
million versus $2,510.3 million in the comparable 2002 period, a 2.9% 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 nine months ended September 30, 2003 was $450.0
million versus $441.6 million in 2002, as the gross margin percentage improved
to 18.5% versus 17.6% last year. The gross margin benefited from improved
product billing margins, which increased 40 basis points over last year's
comparable period, as well as lower inventory adjustments and improved
performance with supplier volume rebate programs in the current quarter. Last
year's results included a $5.2 million charge to reserve for excess specialized
inventory for customers
17
in the telecommunications industry and inventory associated with exiting certain
international operations.
SG&A expenses during the nine months ended September 30, 2003 totaled
$373.9 million versus $368.6 million in last year's comparable period. The
current year's total includes $4.7 million of expenses associated with
discretionary retirement related contributions and $3.9 million in fees and
expenses associated with certain legal matters. The Company reached a tentative
settlement agreement related to an employment and wages claim. In addition,
other employee benefit costs were $0.9 million higher during the current
nine-month period. Partially offsetting these amounts were decreases in other
SG&A expenses, including lower transportation costs. Shipping and handling
expense included in SG&A was $27.1 million during the 2003 nine-month period
versus $28.2 million in last year's comparable period. As a percentage of net
sales, SG&A expenses increased to 15.3% compared with 14.7% in the last year's
nine-month period, primarily due to the negative leverage of lower sales volume.
Depreciation and amortization was $15.4 million in the first nine months of
2003 versus $14.6 million in last year's comparable period.
Interest expense totaled $31.4 million for the nine months ended September
30, 2003 versus $32.8 million in last year's comparable period. The decline was
primarily due to a lower amount of indebtedness outstanding during the current
period. Loss on debt extinguishments related to the Company recording non-cash
charges of $0.8 million and $1.1 million during the nine month periods ended
September 30, 2003 and 2002, respectively, related to the write-off of deferred
financing costs associated with its revolving credit facilities partially offset
by a $0.6 million gain on repurchase of Senior Notes in 2003 Other expense
totaled $3.4 million in 2003, down from $4.9 million in the comparable 2002
period, principally reflecting costs associated with the accounts receivable
securitization program.
For the nine months ended September 30, 2003, income tax expense totaled
$5.1 million and the effective tax rate was 20.0%. Income tax expense totaled
$1.2 million in last year's comparable period and the effective tax rate was
6.1%. The effective tax rate in the current-year period differs from the
statutory rate primarily as a result of the recognition of a $2.6 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. The 2002 effective tax
rate differed from the statutory rate primarily due to a $5.3 million benefit
for the reversal of income tax contingency accruals upon acceptance by the IRS
of tax returns filed through 1998 and the favorable conclusion of the IRS
examination for 1999. In addition, the prior year effective rate was lower than
the statutory rate 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 nine months ended September 30, 2003, net income totaled $20.6
million, or $0.44 per diluted share, versus $18.4 million, or $0.39 per diluted
share, in last year's comparable period.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.2 billion and $1.0 billion at September 30, 2003 and
December 31, 2002, respectively. The increase in total assets was principally
attributable to a $118.5 million increase in trade accounts receivable, with $88
million of the increase being attributable to reduced utilization of the
Company's accounts receivable securitization program. In addition, non-current
assets increased $32.1 million during the nine months ended September 30, 2003,
principally due to payments and estimated payments expected to be due under the
Company's various earnout agreements. Such payments were recorded as an increase
to goodwill. During the first nine months of 2003, total liabilities increased
$112.0 million to $957.8 million. The increase was principally the result of a
$79.6 million increase in current liabilities, with trade accounts payable
increasing $34.9 million and other current liabilities increasing $44.7 million.
The increase in other current liabilities is principally due to an increase in
estimated payments expected to be due under the Company's various earnout
agreements, coupled with a $8.9 million increase in accrued interest payable and
a $3.4 million increase in legal reserves. Long-term debt increased a net $18.3
million, primarily due to a $37.7 million increase in borrowings under the real
estate financing that closed during the first nine months of 2003. Partially
offsetting this increase was a reduction in debt associated with the repurchase
of $21.2 million of its Senior Notes during the nine-month period. Stockholders'
equity increased $26.4 million to $195.7 million as of September 30, 2003 as a
result of $20.6 million in net income, coupled with a $5.5 million favorable
adjustment related to foreign currency translation.
18
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 ("Bruckner"), which
provides for a maximum total earn-out potential of $80 million based on
achieving earnings targets during 2003 or 2004. The amount of earn-out proceeds
earned that is payable in any single year subsequent to achieving the earnings
target is capped under this agreement at $30 million per year. As of September
30, 2003, the Company has accrued a $45.0 million liability ($30.0 million
classified as current and $15.0 million classified as non-current) to recognize
the estimated amount owed under the agreement with Bruckner. The estimated
payments accrued were recorded as an increase to goodwill. 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. Payments made under the
Company's various acquisition agreements totaled $6.5 million and $14.1 million
during the nine months ended September 30, 2003 and 2002, respectively. 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
In September 2003, the Company entered into a new, $300 million Receivables
Facility agreement with four financial institutions. The new facility provides
for a $165 million purchase commitment with a term of 364 days and a $135
million purchase commitment with a term of three years. 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 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 September 30, 2003, $205 million in funding was outstanding under
the Receivables Facility and excess availability was $37.5 million.
Mortgage Financing Facility
In February 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. During the
quarter ended September 30, 2003, the Company recorded a $0.8 million non-cash
charge associated with the write-off of deferred financing fees related to a
Company-initiated amendment reducing the size of its revolving credit facility
to $190 million. 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 September 30, 2003, the
interest rate was 3.6%. This facility also has various restrictive covenants
including financial ratios. WESCO was in compliance with all such covenants as
of September 30, 2003. As of September 30, 2003, WESCO had $10 million in
borrowings outstanding under this facility and, after deducting $17 million in
reserves ( principally for outstanding letters of credit), $147.8 million in
availability.
19
Senior Notes
As of September 30, 2003 WESCO had $378.8 million in aggregate principal
amount of senior subordinated notes due 2008. During the nine months ended
September 30, 2003, the Company repurchased $21.2 million in aggregate principal
amount of senior subordinated notes at a net gain of $0.6 million. 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 rates plus a premium. The
LIBOR rates in the agreements were reset quarterly. In June 2003, these
agreements were called by the issuer and as a result the Company received a $4.6
million payment. 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.
In September 2003, the Company entered into a new, $50 million interest rate
swap agreement similar to the 2001 agreements noted above. The term of this
agreement expires concurrently with the 9.125% senior subordinated notes.
Pursuant to the agreement, WESCO receives fixed interest payments at a rate of
9.125% and pays interest at six-month LIBOR rates plus a premium. The LIBOR
rates in the agreement reset every six months.
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.
Cash Flow
Operating Activities. Cash used by operating activities during the nine
months ended September 30, 2003 totaled $1.5 million as compared to $22.1
million in the prior year. Included in the 2003 use of cash was an $88.0 million
use associated with changes in WESCO's Receivables Facility compared to $47.5
million in the prior year. In 2003, cash generated by net income of $20.6
million plus adjustments for non-cash items totaling $16.7 million, coupled with
increased cash inflow for reductions in inventory of $19.7 million, increases in
accounts payable of $29.3 million and other working capital cash inflows
totaling $20.0 million were partially offset by a $19.8 million use of cash for
increased accounts receivable. In 2002, cash generated by net income of $18.4
million plus adjustments for non-cash items totaling $27.7 million, coupled with
increased cash inflow for reductions in inventory of $27.1 million, reductions
in accounts receivable of $35.5 million and other working capital net cash
outflows totaling $3.6 million were more than offset by a $79.8 million
reduction in accounts payable.
Investing Activities. Net cash used for investing activities was $10.9
million during the first nine months of 2003, principally due to acquisition
payments totaling $6.5 million and capital expenditures of $5.6 million,
partially offset by proceeds from the sale of property and buildings totaling
$1.2 million. In 2002, cash used by investing activities totaled $18.8 million
and included capital expenditures of $5.4 million and acquisition payments of
$14.1 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 nine months of 2003 totaled $19.6 million. Sources of cash resulted from
the completion of the real estate financing, which provided $38 million in
funding. and $4.6 million in proceeds from the settlement of its interest rate
swap agreements. Partially offsetting these sources of cash was a $20.8 million
net cash outflow for debt repayments, including the $19.7 million for the
repurchase of senior subordinated notes, and a $2.2 million net cash outflow for
debt issue costs. In 2002, cash used for financing activities totaled $8.5
million, primarily due to net borrowings of $5.1 million and $4.0 million in
debt issue costs.
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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. There have been no other
material changes in the Company's contractual cash obligations and other
commercial commitments since December 31, 2002.
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
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 generally 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 currently effective for all variable interest entities created after
February 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 December 31, 2003. The adoption of this
interpretation did not have a material impact on the Company's consolidated
financial statements.
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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 nine months ended September 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 had interest rate swap agreements that
were called by the issuer during the nine months ended September 30, 2003. The
Company received a $4.6 million payment related to the contracts. During the
quarter ended September 30, 2003, the Company entered into a new interest rate
swap agreement that had a fair value, as of September 30, 2003, of $0.8 million.
ITEM 4. 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. There have been no significant changes in
internal control over financial reporting that occurred during the quarter ended
September 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.
The Company has reached a tentative settlement agreement related to an
employment and wages claim. The Company currently expects this claim to be
resolved by the end of its fiscal year 2003. The expected amount of $3.9 million
necessary to provide for the resolution of this matter has been previously
accrued and reflected in the condensed consolidated financial statements as of
September 30, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Second Amended and Restated Receivables Purchase Agreement dated
as of September 2, 2003 among WESCO Receivables Corp., WESCO
Distribution, Inc., and the Lenders Identified therein.
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 July 23, 2003, WESCO filed a Current Report on Form 8-K pursuant to
Item 9, issuing a press release announcing its earnings for the second
quarter of 2003.
On September 8, 2003, WESCO filed a Current Report on Form 8-K pursuant
to Item 5, issuing a press release announcing the successful completion
of a revised Receivables Purchase facility.
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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 November 12,
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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