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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 WEST STATION SQUARE DRIVE 15219
SUITE 700 (Zip Code)
PITTSBURGH, PENNSYLVANIA
(Address of principal executive offices)
(412) 454-2200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The registrant estimates that the aggregate market value of the voting
shares held by non-affiliates of the registrant was approximately $109.0 million
as of June 30, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, based on the closing price on the New York
Stock Exchange for such stock.
As of February 27, 2004, 41,186,011 shares of Common Stock, par value
$.01 per share of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates by reference portions of the
registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders.
WESCO INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................... 2
Item 2. Properties................................................................. 16
Item 3. Legal Proceedings.......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........................ 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities...................................... 17
Item 6. Selected Financial Data.................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risks................ 29
Item 8. Financial Statements and Supplementary Data................................ 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures................................................................ 57
Item 9A. Controls and Procedures.................................................... 57
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 58
Item 11. Executive Compensation..................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................ 58
Item 13. Certain Relationships and Related Transactions............................. 58
Item 14. Principal Accountant Fees and Services..................................... 59
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 59
Signatures................................................................. 65
PART I
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "WESCO" refers to WESCO
International, Inc., and its subsidiaries and its predecessors unless the
context otherwise requires. References to "we," "us," "our" and the "Company"
refer to WESCO and its subsidiaries. Our subsidiaries include WESCO
Distribution, Inc. ("WESCO Distribution") and WESCO Distribution Canada, Inc.
("WESCO Canada"), both of which are wholly-owned by WESCO.
THE COMPANY
With sales of approximately $3.3 billion in 2003, we are a leading
North American provider of electrical construction products and electrical and
industrial maintenance, repair and operating supplies, commonly referred to as
"MRO." We are the second largest distributor in the estimated $74 billion U.S.
electrical distribution industry, and the largest provider of integrated supply
services. Our integrated supply solutions and outsourcing services are designed
to fulfill a customer's industrial MRO procurement needs through a highly
automated, proprietary electronic procurement and inventory replenishment
system. This allows our customers to consolidate suppliers and reduce their
procurement and operating costs. We have approximately 350 branches and five
distribution centers located in 48 states, nine Canadian provinces, Puerto Rico,
Mexico, Guam, the United Kingdom, Nigeria and Singapore. We serve over 100,000
customers worldwide, offering over 1,000,000 products from over 24,000
suppliers. Our diverse customer base includes a wide variety of industrial
companies; contractors for industrial, commercial and residential projects;
utility companies; and commercial, institutional and governmental customers. Our
leading market positions, experienced workforce, extensive geographic reach,
broad product and service offerings and acquisition program have enabled us to
compete effectively against the companies in our industry.
INDUSTRY OVERVIEW
The electrical distribution industry serves customers in a number of
markets including the industrial, electrical contractors, utilities, government
and institutional markets. Electrical distributors, such as we are, provide
logistical and technical services for customers by bundling a wide range of
products typically required for the construction and maintenance of electrical
supply networks, including wire, lighting, distribution and control equipment
and a wide variety of electrical supplies. This distribution channel enables
customers to efficiently access a broad range of products and has the capacity
to deliver value-added services. Customers are increasingly demanding that
distributors provide a broader and more complex package of services as they seek
to outsource non-core functions and achieve documented cost savings in
purchasing, inventory and supply chain management.
ELECTRICAL DISTRIBUTION. The U.S. electrical distribution industry had
sales of approximately $74 billion in 2003. While overall weakness in the
current economic environment has contributed to static sales since 2000,
industry growth has averaged 5% per year from 1985 to 2003. This long-term
expansion has been driven by general economic growth, increased use of
electrical products in businesses and industries, new products and technologies,
and customers who are seeking to more efficiently purchase a broad range of
products and services from a single point of contact, thereby eliminating the
costs and expenses of purchasing directly from manufacturers or multiple
sources. The U.S. electrical distribution industry is highly fragmented. The
four national distributors, including WESCO, account for approximately 17% of
estimated total industry sales.
INTEGRATED SUPPLY. The market for integrated supply services has more
than doubled from $5 billion in 1997 to over $12 billion in 2001, an increase of
25% per year. Industry projections estimate that the integrated supply market
will reach $26 billion by 2005. Growth is being driven by the desire of large
industrial companies to reduce operating expenses by implementing comprehensive
third-party programs, which outsource the cost-intensive procurement, stocking
and administrative functions associated with the purchase and consumption of MRO
supplies. For our customers, these costs can account for over 50% of the total
costs for MRO products and services. The total potential in the U.S. for
integrated supply services, measured as all purchases of industrial MRO supplies
and services, is currently estimated to be approximately $260 billion.
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COMPETITIVE STRENGTHS
MARKET LEADERSHIP. Our ability to manage large construction projects
and complex multi-site plant maintenance programs and procurement projects that
require special sourcing, technical advice, logistical support and locally based
service has enabled us to establish leadership positions in our principal
markets. We have utilized these skills to generate significant revenues in
industries with intensive use of electrical and MRO products, including
electrical contracting, utilities, original equipment manufacturing, process
manufacturing and other commercial, institutional and governmental entities. We
also have extended our position within these industries to expand our customer
base.
VALUE-ADDED SERVICES. We are a leader in providing a wide range of
services and procurement solutions that draw on our product knowledge, supply
and logistics expertise and systems capabilities, enabling our customers to
reduce supply chain costs and improve efficiency. These programs include:
- National Accounts -- we coordinate product supply and materials
management activities for MRO supplies, project needs and direct
material for customers with multiple locations who seek purchasing
leverage through a single electrical products provider;
- Integrated Supply -- we design and implement programs that enable
our customers to significantly reduce the number of MRO suppliers
they use through services that include highly automated, proprietary
electronic procurement and inventory replenishment systems and
on-site materials management and logistics services; and
- Construction National Accounts -- we have a dedicated team of
experienced construction sales management personnel to service the
needs of the regional and national contractors. Top engineering and
construction firms which specialize in major projects such as
airport expansions, power plants and oil and gas facilities are also
a focus group.
BROAD PRODUCT OFFERING. We provide our customers with a broad product
selection consisting of over 1,000,000 electrical, industrial and data
communications products sourced from over 24,000 suppliers. Our broad product
offering enables us to meet virtually all of a customer's electrical product and
other MRO requirements.
EXTENSIVE DISTRIBUTION NETWORK. Our distribution network consists of
approximately 350 branches and five distribution centers located in 48 states,
nine Canadian provinces, Mexico, the United Kingdom, Singapore, Puerto Rico,
Nigeria and Guam. This extensive network, which would be extremely difficult and
expensive to duplicate, allows us to:
- maintain local sourcing of customer service, technical support and
sales coverage;
- tailor branch products and services to local customer needs;
- offer multi-site distribution capabilities to large customers and
national accounts; and
- provide same-day deliveries.
LOW COST OPERATOR. Our competitive position has been enhanced by our
low cost position, which is based on:
- extensive use of automation and technology;
- centralization of functions such as purchasing, accounting and
information systems;
- strategically located distribution centers;
- purchasing economies of scale; and
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- incentive programs that increase productivity and encourage
entrepreneurship.
Our low cost position enables us to generate a significant amount of net cash
flow as the capital investment required to maintain our business is low. This
cash flow is available for debt reduction, continued investment in the growth of
the business and strategic acquisitions.
BUSINESS STRATEGY
Our objective is to be the leading provider of electrical products and
other MRO supplies and services to companies in North America and selected
international markets. In achieving this leadership position, our goal is to
grow earnings at a faster rate than sales by focusing on margin enhancement and
continuous productivity improvement. Our growth strategy leverages our existing
strengths and focuses on developing new initiatives and programs.
ENHANCE OUR LEADERSHIP POSITION IN ELECTRICAL DISTRIBUTION. We will
continue to leverage our extensive market presence and brand equity in the WESCO
name to further our leadership position in electrical distribution. We are
focusing our sales and marketing on existing industries where we are expanding
our product and service offerings as well as targeting new clients, both within
industries we currently serve and in new markets which provide significant
growth opportunities. Markets where we believe such opportunities exist include
retail, education, financial services and health care. We are the second largest
electrical distributor in the United States and, through our value-added
products and services, we believe we have become the industry leader in serving
several important and growing markets including:
- industrial customers with large, complex plant maintenance
operations, many of which require a national multi-site service
solution for their electrical product needs;
- large contractors for major industrial and commercial construction
projects;
- the electric utility industry; and
- manufacturers of factory-built homes, recreational vehicles and
other modular structures.
GROW NATIONAL ACCOUNTS PROGRAMS. From 1994 through 2003, revenue from
our national accounts program increased 10% annually. We will continue to invest
in the expansion of this program. Through our national accounts program, we
coordinate electrical MRO procurement and purchasing activities primarily for
large industrial and commercial companies across multiple locations. We have
well-established relationships with over 250 companies, providing us with a
recurring base of revenue through multi-year agreements. Our objective is to
continue to increase revenue generated through our national accounts program by:
- offering existing national account customers new products and
services and serving additional locations;
- extending certain established national account relationships to
include integrated supply; and
- expanding our customer base by leveraging our existing industry
expertise in markets we currently serve as well as entering into new
markets.
FOCUS ON CONSTRUCTION NATIONAL ACCOUNTS. We are increasing our focus on
large construction, renovation and institutional projects. We seek to secure new
major project contracts through:
- active national marketing of our demonstrated project management
capabilities;
- further development of relationships with leading regional and
national contractors and engineering firms;
- close coordination with national account customers on their major
project requirements; and
- offering an integrated supply service approach to contractors for
major projects.
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EXTEND OUR LEADERSHIP POSITION IN INTEGRATED SUPPLY. We are the largest
provider of integrated supply services for MRO goods and services in the United
States. We provide a full complement of outsourcing solutions, focusing on
improving the supply chain management process for our customers' indirect
purchases. Our integrated supply programs replace the traditional multi-vendor,
resource-intensive procurement process with a single, outsourced, fully
automated process capable of managing all MRO and related service requirements.
Our solutions range from timely product delivery to assuming full responsibility
for the entire procurement function. Our customers include some of the largest
industrial companies in the United States. We will continue to expand our
leadership position as the largest integrated supply service provider by:
- continuing to tailor our proven and profitable business model to the
scale and scope of our customers' operations;
- maximizing the use of our highly automated proprietary information
systems;
- leveraging established relationships with our large industrial
customer base, especially among existing national account customers
who could benefit from our integrated supply model; and
- being a low cost provider of integrated supply services.
We intend to utilize these competitive strengths to increase our
integrated supply sales to both new and existing customers, including our
existing national account customers.
GAIN SHARE IN KEY LOCAL MARKETS. Significant opportunities exist to
gain market share in the highly fragmented local markets. We intend to increase
our market share in key geographic markets through a combination of increased
sales and marketing efforts at existing branches, acquisitions that expand our
product and customer base and new branch openings. We will continue to leverage
our existing relationships with preferred suppliers to increase sales of their
products in local markets through various initiatives, including sales
promotions, cooperative marketing efforts, direct participation by suppliers in
national accounts implementation, dedicated sales forces and product
exclusivity. To promote growth, we have instituted a compensation system for
branch managers that encourages our branch managers to increase sales and
optimize business activities in their local markets, including managing the
sales force, configuring inventories, targeting potential customers for
marketing efforts and tailoring local service options.
LEAN. Our LEAN initiative was launched in the first half of 2003 and
was implemented in approximately 100 branches by the end of the year. LEAN is an
organized series of continuous improvement events focusing on simplification,
elimination of waste and achieving significant improvement throughout the
business enterprise. Although LEAN is most often associated with manufacturing
operations, we are applying LEAN thinking to all of our processes, activities
and systems. Our focus is in seven key areas: sales, margin, warehouse
operations, purchasing, inventory, accounts receivable and accounts payable. Our
objective is to have most branches exposed to some or all of the LEAN activities
by the end of 2004 and to continuously develop improvement processes for all
operations.
PURSUE STRATEGIC ACQUISITIONS. Since 1995, we have completed and
successfully integrated 25 acquisitions, which represented in 2003 annual sales
of approximately $1.4 billion. We believe that the highly fragmented nature of
the electrical and industrial MRO distribution industry will continue to provide
us with acquisition opportunities. Our most recent acquisition was completed in
March 2001. We have not been as active in pursuing acquisition candidates given
the weak economy in recent years and the uncertainty of future earnings streams
of potential acquisition candidates. We would expect our acquisition activities
to increase as the economy improves. We expect that any future acquisitions will
be financed out of available internally generated funds, additional debt and/or
the issuance of equity securities. However, our ability to make acquisitions
will be subject to our compliance with certain conditions under the terms of our
revolving credit facility. See Part II, Item 7. - "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for a further description of the revolving credit facility.
EXPAND PRODUCT AND SERVICE OFFERINGS. We continue to build on our
demonstrated ability to introduce new
5
products and services to meet existing customer demands and capitalize on new
market opportunities. In addition, we have the platform to sell integrated
lighting control and power distribution equipment in a single package for
multi-site specialty retailers, restaurant chains and department stores. These
are strong growth markets where our national accounts strategies and logistics
infrastructure provide significant benefits for our customers.
LEVERAGE OUR E-COMMERCE AND INFORMATION SYSTEM CAPABILITIES. Our
transaction volume via electronic business means continues to increase year over
year. Sales volume generated via the Internet has doubled year over year for the
last four years. We remain focused on our commitment to "E-enable" our existing
customers and to promote our e-commerce capabilities to all potential customers.
We continue to invest in information technology to streamline the supply chain
for customer and supplier alike, and maximize our efficiencies.
EXPAND OUR INTERNATIONAL OPERATIONS. Our international sales, the
majority of which are in Canada, accounted for approximately 13% of total sales
in 2003. We believe that there is significant additional demand for our products
and services outside the United States and Canada. Many of our multinational
domestic customers are seeking distribution, integrated supply and project
management solutions globally. Our approach to international operations is
consistent with our domestic philosophy. We follow our established customers and
pursue business that we believe utilizes and extends our existing capabilities.
This strategy of working through well-developed customer and supplier
relationships significantly reduces risks and provides the opportunity to
establish a profitable business. We have five locations in Mexico headquartered
in Tlalnepantla that serve all of metropolitan Mexico City and the Federal
District and the states of Mexico, Morelos and Hidalgo. We continue to pursue
growth opportunities in existing locations such as Aberdeen, Scotland and
London, England, which support our sales efforts in Europe and the former Soviet
Union. We have an operation in Nigeria to serve West Africa and an office in
Singapore to support our sales to customers in Asia. We are working toward
forming strategic alliances in critical markets, where appropriate.
PRODUCTS AND SERVICES
Products
Our network of branches and distribution centers stocks over 215,000
product stock keeping units ("SKUs"). Each branch tailors its inventory to meet
the needs of the customers in its local market, typically stocking approximately
4,000 to 8,000 SKUs. Our integrated supply business allows our customers to
access over 1,000,000 products for direct shipment.
Representative products that we sell include:
- Electrical Supplies. Fuses, terminals, connectors, boxes, fittings,
tools, lugs, tape and other MRO supplies;
- Industrial Supplies. Cutting and other tools, abrasives, filters and
safety equipment;
- Power Distribution. Circuit breakers, transformers, switchboards,
panelboards and busway;
- Lighting. Lamps, fixtures and ballasts;
- Wire and Conduit. Wire, cable and metallic and non-metallic conduit;
- Control, Automation and Motors. Motor control devices, drives,
programmable logic controllers, pushbuttons and operator interfaces;
and
- Data Communications. Premise wiring, patch panels, terminals and
connectors.
We purchase products from a diverse group of over 24,000 suppliers. In
2003, our ten largest suppliers accounted for approximately 32% of our
purchases. The largest of these was Eaton Corporation, through its Eaton
Electrical division, accounting for approximately 13% of total purchases. No
other supplier accounted for more than 5% of total purchases.
6
Our supplier relationships are important to us, providing access to a
wide range of products, technical training and sales and marketing support. We
have preferred supplier agreements with over 200 of our suppliers and purchase
over 50% of our stock inventory pursuant to these agreements. Consistent with
industry practice, most of our agreements with suppliers, including both
distribution agreements and preferred supplier agreements, are terminable by
either party on 60 days' notice or less.
Services
In conjunction with product sales, we offer customers a wide range of
services and procurement solutions that draw on our product and supply
management expertise and systems capabilities. These services include national
accounts programs, integrated supply programs and major project programs. We are
responding to the needs of our customers, particularly those in processing and
manufacturing industries. To more efficiently manage the MRO process on behalf
of our customers, we offer a range of supply management services, including:
- outsourcing of the entire MRO purchasing process;
- providing technical support for manufacturing process improvements
using state-of-the-art automated solutions;
- implementing inventory optimization programs;
- participating in joint cost savings teams;
- assigning our employees as on-site support personnel;
- recommending energy-efficient product upgrades; and
- offering safety and product training for customer employees.
National accounts programs. The typical national account customer is a
Fortune 500 industrial company, a large utility or other major customer, in each
case with multiple locations. Our national accounts programs are designed to
provide customers with total supply chain cost reductions by coordinating
purchasing activity for MRO supplies across multiple locations. Comprehensive
implementation plans establish jointly managed teams at the local and national
level to prioritize activities, identify key performance measures and track
progress against objectives. We involve our preferred suppliers early in the
implementation process, where they can contribute expertise and product
knowledge to accelerate program implementation and the achievement of cost
savings and process improvements.
Integrated supply programs. Our integrated supply programs offer
customers a variety of services to support their objectives for improved supply
chain management. We integrate our personnel, product and distribution
expertise, electronic technologies and service capabilities with the customer's
own internal resources to meet particular service requirements. Each integrated
supply program is uniquely configured to deliver a significant reduction in the
number of MRO suppliers, reduce total procurement costs, improve operating
controls and lower administrative expenses. Our solutions range from
just-in-time fulfillment to assuming full responsibility for the entire
procurement function for all indirect purchases. We believe that customers will
increasingly seek to utilize us as an "integrator," responsible for selecting
and managing the supply of a wide range of MRO and original equipment
manufacturers ("OEMs") products.
Construction national accounts. We have a construction national
accounts group, comprised of our most experienced construction management
personnel, which focuses on serving the complex needs of North America's largest
engineering and construction firms and the top 50 U.S. electrical contractors on
a multi-regional basis. These contractors typically specialize in building
industrial sites, water treatment plants, airport expansions, healthcare
facilities, correctional institutions, sports stadiums and convention centers.
MARKETS AND CUSTOMERS
We have a large base of approximately 100,000 customers diversified
across our principal markets. One
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customer accounted for over 4% of 2003 sales and another customer accounted for
2% of 2003 sales. Except for these two customers, no other customer accounted
for more than 2% of 2003 sales.
Industrial customers. Sales to industrial customers, which include
numerous manufacturing and process industries, and OEMs accounted for
approximately 41% of our sales in 2003.
MRO products are needed to maintain and upgrade the electrical and
communications networks at industrial sites. Expenditures are greatest in the
heavy process industries, such as food processing, metals, pulp and paper and
petrochemical. Typically, electrical MRO is the first or second ranked product
category by purchase value for total MRO requirements for an industrial site.
Other MRO product categories include, among others, lubricants, pipe, valves and
fittings, fasteners, cutting tools and power transmission products.
OEM customers incorporate electrical components and assemblies into
their own products. OEMs typically require a reliable, high volume supply of a
narrow range of electrical items. Customers in this segment are particularly
service and price sensitive due to the volume and the critical nature of the
product used, and they also expect value-added services such as design and
technical support, just-in-time supply and electronic commerce.
Electrical contractors. Sales to electrical contractors accounted for
approximately 36% of our sales in 2003. These customers range from large
contractors for major industrial and commercial projects, the customer types we
principally serve, to small residential contractors, which represent a small
portion of our sales. Electrical products purchased by electrical
sub-contractors typically account for approximately 40% to 50% of their
installed project cost, and, therefore, accurate cost estimates and competitive
material costs are critical to a contractor's success in obtaining profitable
projects.
Utilities. Sales to utilities accounted for approximately 16% of our
sales in 2003. This market includes large investor-owned utilities, rural
electric cooperatives and municipal power authorities. We provide our utility
customers with transmission and distribution products and an extensive range of
supplies to meet their MRO and capital projects needs. Full materials management
and procurement outsourcing arrangements are also important in this market as
cost pressures and deregulation cause utility customers to streamline purchasing
and inventory control practices.
Commercial, institutional and governmental customers ("CIG"). Sales to
CIG customers accounted for approximately 6% of our sales in 2003. This
fragmented market includes schools, hospitals, property management firms,
retailers and government agencies of all types. Through our WR Controls Branch,
we have a platform to sell integrated lighting control and distribution
equipment in a single package for multi-site specialty retailers, restaurant
chains and department stores.
DISTRIBUTION NETWORK
Branch network. We have approximately 350 branches, of which
approximately 290 are located in the United States, approximately 50 are located
in Canada and the remainder are located in Mexico, the United Kingdom,
Singapore, Puerto Rico, Nigeria and Guam. Over the last three years, we have
opened on average seven branches per year, principally to service national
account customers. In addition to consolidations in connection with
acquisitions, we occasionally close or consolidate existing branch locations to
improve operating efficiency.
Distribution centers. To support our branch network, we have five
distribution centers located in the United States and Canada, including
facilities located near Pittsburgh, Pennsylvania, serving the Northeast and
Midwest United States; near Reno, Nevada, serving the Western United States;
near Memphis, Tennessee, serving the Southeast and Central United States; near
Montreal, Quebec, serving Eastern and Central Canada; and near Vancouver,
British Columbia, serving Western Canada.
Our distribution centers add value for our branches, suppliers and
customers through the combination of a broad and deep selection of inventory,
on-line ordering, same day shipment and central order handling and fulfillment.
Our distribution center network reduces the lead-time and improves the
reliability of our supply chain, giving us a distinct competitive advantage in
customer service. Additionally, the distribution centers reduce the time and
cost of supply chain activities through automated replenishment and warehouse
management systems, and economies of
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scale in purchasing, inventory management, administration and transportation.
SALES ORGANIZATION
Sales force. Our general sales force is based at the local branches and
comprises approximately 2,000 of our employees, almost half of whom are outside
sales representatives and the remainder are inside sales personnel. Outside
sales representatives are paid under a compensation structure which is primarily
weighted towards commissions. They are responsible for making direct customer
calls, performing on-site technical support, generating new customer relations
and developing existing territories. The inside sales force is a key point of
contact for responding to routine customer inquiries such as price and
availability requests and for entering and tracking orders.
National accounts. Our national accounts sales force is comprised of an
experienced group of sales executives who negotiate and administer contracts,
coordinate branch participation and identify sales and service opportunities.
National accounts managers' efforts target specific customer industries,
including automotive, pulp and paper, petrochemical, steel, mining and food
processing.
Data communications. Sales of premise cable, connectors, hardware,
network electronics and outside plant products are generated by our general
sales force with support from a group of outside and inside data communications
sales representatives. They are supported by customer service representatives
and additional resources in product management, purchasing, inventory control
and sales management.
Construction national accounts. We have a sales management group,
comprised of our most experienced construction management personnel, which
focuses on serving the complex needs of North America's largest engineering and
construction firms and the top regional and national electrical contractors.
These contractors typically specialize in large, complex projects such as
building industrial sites, water treatment plants, airport expansions,
healthcare facilities, correctional institutions, sports stadiums and convention
centers.
E-Commerce. We established our initial electronic catalog on the
Internet in 1996. Since that time, we have worked with a variety of large
customers to establish customized electronic catalogs for their use in internal
systems. Additionally, in 1999 we began a process of providing electronic
catalogs to multiple e-commerce portals. Our primary e-business strategy is to
serve existing customers by tailoring our catalog and Internet-based procurement
applications to their internal systems or through their preferred technology and
trading exchange partnerships. We believe that we lead our industry in rapid
e-implementation to customers' procurement systems and provide integrated
procurement functionality using "punch-out" technology, a direct
system-to-system link with our customers.
We continue to enhance "WESCOExpress," a direct ship fulfillment
operation responsible for supporting smaller customers and select national
account locations. Customers can order from over 65,000 electrical and data
communications products stocked in our warehouses through a centralized customer
service center or over the Internet on WESCOdirect.com. We also use a proactive
sales approach utilizing catalogs, direct mail, e-mail and personal phone
selling to provide a high level of customer service. A new 2003-2004 Buyer's
Guide was produced and released in 2003.
INTERNATIONAL OPERATIONS
To serve the Canadian market, we operate a network of approximately 50
branches in nine provinces. Branch operations are supported by two distribution
centers located near Montreal and Vancouver. With sales of over US$335 million,
Canada represented 10.2% of our total sales in 2003. The Canadian market for
electrical distribution is considerably smaller than the U.S. market, with
roughly US$3.0 billion in total sales in 2003, according to industry sources.
We also have five locations in Mexico headquartered in Tlalnepantla,
that serve all of metropolitan Mexico City and the Federal District and the
states of Mexico, Morelos and Hidalgo.
We sell to other international customers through domestic export sales
offices located within North America and
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sales offices in international locations. Our operations are in Aberdeen,
Scotland and London, England to support sales efforts in Europe and the former
Soviet Union. We have an operation in Nigeria to serve West Africa and an office
in Singapore to support our sales to Asia. All of the international locations
have been established to primarily serve our growing list of customers with
global operations referenced under National Accounts above.
The following table sets forth information about us by geographic area:
NET SALES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------- --------------------
2003 2002 2001 2003 2002
---------- ---------- ---------- --------- --------
(IN THOUSANDS)
United States.................... $2,872,239 $2,943,740 $3,266,352 $ 491,515 $421,047
Canada........................... 335,695 299,844 311,471 11,926 10,509
Other foreign.................... 78,832 82,196 80,210 1,341 1,371
---------- ---------- ---------- --------- --------
$3,286,766 $3,325,780 $3,658,033 $ 504,782 $432,927
========== ========== ========== ========= ========
MANAGEMENT INFORMATION SYSTEMS
Our branch information system, WESNET, provides processing for a full
range of our business operations, such as customer service, inventory and
logistics management, accounting and administrative support. The centralized
corporate information system leverages decision support, executive information
system analysis and retrieval capabilities to provide extensive operational
analysis and detailed income statement and balance sheet variance and trend
reporting for the branch level. The corporate system also provides
activity-based costing capabilities for analyzing profitability by customer,
sales representative and shipment type. Sales and margin trends and variances
can be analyzed by branch, customer, product category, supplier or account
representative.
The WESNET system operates as a distributed network of fully functional
operating units, and every branch (other than our Bruckner Integrated Supply
Division and certain acquired branches) utilizes its own computer system to
support local business activities. All branch operations are linked through a
wide area network to provide centralized information on inventory status in our
distribution centers as well as other branches and an increasing number of
on-line suppliers. Recent advances in WESNET capabilities make it possible to
consolidate administrative and procurement functions, and bring systematic
improvement through new pricing systems and controls.
All of the branch operational data is retrieved and stored on a
centralized datawarehouse that provides capabilities similar to the most
advanced enterprise resource planning (ERP) packages. WESCO's datawarehouse is
considered an 'active' datawarehouse, containing both real-time transactional
data from each of WESCO's primary systems, as well as, multiple years of
historical transaction data. The centralized information system and
datawarehouse technology provide a cost effective, yet powerful mechanism to
better monitor, manage and enhance operational processes. These systems have
become the principal technology supporting inventory management, purchasing
management, automated stock replenishment, margin analysis and both financial
and operational oversight.
We routinely process customer orders, shipping notices, suppliers'
purchase orders and funds transfer via EDI transactions with our trading
partners. Our e-commerce strategy calls for more effective linkages to both
customers and suppliers through greater use of technological advances, including
Internet and electronic catalogs, enhanced EDI and other innovative
improvements.
Our integrated supply services are supported by our proprietary
procurement and inventory management systems. These systems provide a fully
integrated, flexible supply chain platform that currently handles over 95% of
our integrated supply customers' transactions electronically. Our configuration
options for a customer range from on-line linkages to the customer's business
and purchasing systems, to total replacement of a customer's procurement and
inventory management system for MRO supplies.
10
COMPETITION
We operate in a highly competitive industry. We compete directly with
national, regional and local providers of electrical and other industrial MRO
supplies. Competition is primarily focused on the local service area, and is
generally based on product line breadth, product availability, service
capabilities and price. Another source of competition is buying groups formed by
smaller distributors to increase purchasing power and provide some cooperative
marketing capability. While increased buying power may improve the competitive
position of buying groups locally, we believe these groups have not been able to
compete effectively with us for national account customers due to the difficulty
in coordinating a diverse ownership group. During 1999 and 2000, numerous
special purpose Internet-based procurement service companies, auction
businesses, and trade exchanges were organized. Many of them targeted industrial
MRO and contractor customers of the type served by us. We responded with our own
e-commerce capabilities and believe that we have successfully outpaced our
competitors in the deployment of electronic catalogs and Internet-based
connectivity with more than 50 national customers.
EMPLOYEES
As of December 31, 2003, we had approximately 5,200 employees
worldwide, of which approximately 4,500 were located in the United States and
approximately 700 in Canada and our other international locations. Less than 5%
of our employees are represented by unions. We believe our labor relations are
generally good.
INTELLECTUAL PROPERTY
Our trade and service marks, including "WESCO," "the extra effort
people(R)," and the running man design, are filed in the U.S. Patent and
Trademark Office, the Canadian Trademark Office and the Mexican Instituto de la
Propriedad Industrial.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to federal, state and local
laws and regulations relating to environmental protection and human health and
safety. Some of these laws and regulations may impose strict, joint and several
liability on certain persons for the cost of investigation or remediation of
contaminated properties. These persons may include former, current or future
owners or operators of properties, and persons who arranged for the disposal of
hazardous substances. Our owned and leased real property may give rise to such
investigation, remediation and monitoring liabilities under environmental laws.
In addition, anyone disposing of certain products we distribute, such as
ballasts, fluorescent lighting and batteries, must comply with environmental
laws that regulate certain materials in these products.
We believe that we are in compliance, in all material respects, with
applicable environmental laws. As a result, we will not make significant capital
expenditures for environmental control matters either in the current year or in
the near future.
SEASONALITY
Our 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, we report sales and earnings in
the first quarter that are generally lower than that of the remaining quarters.
WEBSITE ACCESS
Our Internet address is www.wescodist.com. We make available free of
charge under the "Investors" heading on our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 as
11
soon as reasonably practicable after such documents are electronically filed or
furnished, as applicable, with the Securities and Exchange Commission.
In addition, our Charters for our Executive Committee, Nominating and
Governance Committee, Audit Committee and Compensation Committee as well as our
Independence Standards and Governance Guidelines and our Code of Ethics and
Business Conduct for our directors, officers and employees are all available on
our website in the "Corporate Governance" link under the Investors heading.
FORWARD LOOKING INFORMATION
This Annual Report on Form 10-K contains various "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve certain unknown risks and uncertainties,
including, among others, those contained in Item 1, "Business" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." When used in this Annual Report on Form 10-K, the words
"anticipates," "plans," "believes," "estimates," "intends," "expects,"
"projects", "will" and similar expressions may identify forward looking
statements, although not all forward looking statements contain such words. Such
statements, including, but not limited to, our statements regarding business
strategy, growth strategy, productivity and profitability enhancement,
competition, new product and service introductions and liquidity and capital
resources are based on management's beliefs, as well as on assumptions made by,
and information currently available to, management, and involve various risks
and uncertainties, some of which are beyond our control. Our actual results
could differ materially from those expressed in any forward looking statement
made by or on our behalf. In light of these risks and uncertainties, there can
be no assurance that the forward looking information will in fact prove to be
accurate. We have undertaken no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
events or otherwise.
RISK FACTORS
Important factors that could cause actual results to differ materially
from the forward looking statements we make are described below. All forward
looking statements attributable to us or persons working on our behalf are
expressly qualified by the following cautionary statements:
OUR SUBSTANTIAL AMOUNT OF DEBT REQUIRES SUBSTANTIAL DEBT SERVICE OBLIGATIONS
THAT COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL OUR OBLIGATIONS AND COULD
LIMIT OUR GROWTH AND IMPOSE RESTRICTIONS ON OUR BUSINESS.
We are and will continue to be for the foreseeable future significantly
leveraged. As of December 31, 2003, we had $422.2 million of consolidated
indebtedness and stockholders' equity of $167.7 million. We and our subsidiaries
may incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing our indebtedness. Accordingly, we will
have significant debt service obligations. These amounts exclude our accounts
receivable securitization program, through which we sell accounts receivable to
a third party conduit and remove these receivables from our consolidated balance
sheet. See Part II, Item 7. -"Management's Discussion and Analysis of Financial
Condition and Results of Operations-Critical Accounting Policies and Estimates."
Our debt service obligations have important consequences, including the
following:
- a substantial portion of cash flow from our operations will be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available for operations,
future business opportunities and acquisitions and other purposes
and increasing our vulnerability to adverse general economic and
industry conditions;
- our ability to obtain additional financing in the future may be
limited;
- as a result of our interest rate swap agreements, approximately $100
million of our fixed rate indebtedness has been effectively
converted to variable rates of interest, which will make us
vulnerable to increases in interest rates;
12
- we are substantially more leveraged than certain of our competitors,
which might place us at a competitive disadvantage; and
- we may be hindered in our ability to adjust rapidly to changing
market conditions.
Our ability to make scheduled payments of the principal of, or to pay
interest on, or to refinance our indebtedness and to make scheduled payments
under our operating leases or to fund planned capital expenditures or finance
acquisitions will depend on our future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond our
control. There can be no assurance that our business will continue to generate
sufficient cash flow from operations in the future to service our debt, make
necessary capital expenditures or meet other cash needs. If unable to do so, we
may be required to refinance all or a portion of our existing debt, to sell
assets or to obtain additional financing.
A portion of the purchase commitments under our Receivables Facility
($165 million) requires an annual renewal of its terms. That portion of the
arrangement expires on August 31, 2004. The remaining portion of the purchase
commitments under the facility ($135 million) has a three-year term. There can
be no assurance that available funding or that any sale of assets or additional
financing would be possible in amounts on terms favorable to us.
Over the next three years, we are obligated to pay approximately $84
million relating to earnout agreements associated with past acquisitions. See
Part II, Item 7. - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
RESTRICTIVE DEBT COVENANTS CONTAINED IN OUR REVOLVING CREDIT FACILITY AND THE
INDENTURE TO OUR SENIOR SUBORDINATED NOTES MAY LIMIT OUR ABILITY TO TAKE CERTAIN
ACTIONS.
The revolving credit facility and the indenture contain financial and
operating covenants that limit the discretion of our management with respect to
certain business matters including incurring additional indebtedness and paying
dividends. The revolving credit facility also requires us to meet certain fixed
charge tests depending on credit line availability. Our ability to comply with
these and other provisions of the revolving credit facility and the indenture
may be affected by changes in economic or business conditions or other events
beyond our control. A failure to comply with the obligations contained in the
revolving credit facility or the indenture could result in an event of default
under either the revolving credit facility or the indenture which could result
in acceleration of the related debt and the acceleration of debt under other
instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the revolving credit
facility were to be accelerated, there can be no assurance that our assets would
be sufficient to repay in full such indebtedness and our other indebtedness. See
Part II, Item 7. - "Management's Discussion and Analysis of Financial Condition
and Results of Operations U - Liquidity and Capital Resources."
DOWNTURNS IN THE ELECTRICAL DISTRIBUTION INDUSTRY HAVE HAD IN THE PAST, AND MAY
IN THE FUTURE HAVE, AN ADVERSE EFFECT ON OUR SALES AND PROFITABILITY.
The electrical distribution industry is affected by changes in economic
conditions, including national, regional and local slowdowns in construction and
industrial activity, which are outside our control. Our operating results may
also be adversely affected by increases in interest rates that may lead to a
decline in economic activity, particularly in the construction market, while
simultaneously resulting in higher interest payments under the revolving credit
facility. In addition, during periods of economic slowdown such as the one we
recently experienced, our credit losses, based on history, could increase. There
can be no assurance that economic slowdowns, adverse economic conditions or
cyclical trends in certain customer markets will not have a material adverse
effect on our operating results and financial condition.
AN INCREASE IN COMPETITION COULD DECREASE SALES OR EARNINGS.
We operate in a highly competitive industry. We compete directly with
national, regional and local providers of electrical and other industrial MRO
supplies. Competition is primarily focused in the local service area and is
generally based on product line breadth, product availability, service
capabilities and price. Other sources of
13
competition are buying groups formed by smaller distributors to increase
purchasing power and provide some cooperative marketing capability. During 1999
and 2000, numerous special purpose Internet-based procurement service companies,
auction businesses and trade exchanges were organized. Many of them targeted
industrial MRO and contractor customers of the type served by us. While the
entrants did not have a noticeable impact on our business we expect that new
competitors could develop over time as Internet-based enterprises become more
established and refine their service capabilities.
Some of our existing competitors have, and new market entrants may
have, greater financial and marketing resources than we do. To the extent
existing or future competitors seek to gain or retain market share by reducing
prices, we may be required to lower our prices, thereby adversely affecting
financial results. Existing or future competitors also may seek to compete with
us for acquisitions, which could have the effect of increasing the price and
reducing the number of suitable acquisitions. In addition, it is possible that
competitive pressures resulting from the industry trend toward consolidation
could affect growth and profit margins.
LOSS OF KEY SUPPLIERS OR LACK OF PRODUCT AVAILABILITY COULD DECREASE SALES AND
EARNINGS.
Most of our agreements with suppliers are terminable by either party on
60 days' notice or less. Our ten largest suppliers in 2003 accounted for
approximately 32% of our purchases for the period. Our largest supplier was
Eaton Corporation, through its Eaton Electrical division, accounting for
approximately 13% of our purchases. The loss of, or a substantial decrease in
the availability of, products from any of these suppliers, or the loss of key
preferred supplier agreements, could have a material adverse effect on our
business. In addition, supply interruptions could arise from shortages of raw
materials, labor disputes or weather conditions affecting products or shipments,
transportation disruptions, or other reasons beyond our control. An interruption
of operations at any of our five distribution centers could have a material
adverse effect on the operations of branches served by the affected distribution
center. Furthermore, we cannot be certain that particular products or product
lines will be available to us, or available in quantities sufficient to meet
customer demand. Such limited product access could put us at a competitive
disadvantage.
A DISRUPTION OF OUR INFORMATION SYSTEMS COULD INCREASE EXPENSES, DECREASE SALES
OR REDUCE EARNINGS.
A serious disruption of our information systems could have a material
adverse effect on our business and results of operations. Our computer systems
are an integral part of our business and growth strategies. We depend on our
information systems to process orders, manage inventory and accounts receivable
collections, purchase products, ship products to our customers on a timely
basis, maintain cost-effective operations and provide superior service to our
customers.
WESCO INTERNATIONAL'S CONTROLLING SHAREHOLDERS OWN APPROXIMATELY 48% OF ITS
COMMON STOCK AND CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
Approximately 48% of the issued and outstanding shares of common stock
of WESCO International is held by Cypress and its affiliates. Accordingly,
Cypress and its affiliates can exercise significant influence over our affairs,
including the election of our directors, appointment of our management and
approval of actions requiring the approval of our stockholders, including the
adoption of amendments to our certificate of incorporation and approval of
mergers or sales of substantially all of our assets.
14
EXECUTIVE OFFICERS
Our executive officers and their respective ages and positions are set
forth below.
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------
Roy W. Haley..................... 57 Chairman and Chief Executive Officer
William M. Goodwin............... 58 Vice President, Operations
James H. Mehta................... 48 Vice President, Business Development
Robert B. Rosenbaum.............. 46 Vice President, Operations
Patrick M. Swed.................. 60 Vice President, Operations
Donald H. Thimjon................ 60 Vice President, Operations
Ronald P. Van, Jr................ 43 Vice President, Operations
Stephen A. Van Oss............... 49 Vice President and Chief Financial Officer
Daniel A. Brailer................ 46 Secretary and Treasurer
Set forth below is biographical information for our executive officers
listed above.
ROY W. HALEY became Chairman of the Board in August 1998. Mr. Haley has
been Chief Executive Officer and a director of WESCO since February 1994. From
1988 to 1993, Mr. Haley was an executive at American General Corporation, a
diversified financial services company, where he served as Chief Operating
Officer and as President and Director. Mr. Haley is also a director of United
Stationers, Inc. and Cambrex Corporation.
WILLIAM M. GOODWIN has been Vice President, Operations of WESCO since
March 1994. Since 1987, Mr. Goodwin has served as a branch, district and region
manager for WESCO in various locations and also served as Managing Director of
WESCOSA, a former Westinghouse affiliated manufacturing and distribution
business in Saudi Arabia.
JAMES H. MEHTA has been Vice President, Business Development of WESCO
since November 1995. From 1993 to 1995, Mr. Mehta was a principal with Schroder
Ventures, a private equity investment firm based in London, England.
ROBERT B. ROSENBAUM has been Vice President, Operations of WESCO since
September 1998. From 1982 until 1998, Mr. Rosenbaum was the President of the
Bruckner Supply Company, Inc., an integrated supply company WESCO acquired in
September 1998.
PATRICK M. SWED has been Vice President, Operations of WESCO since
March 1994. Mr. Swed had been Vice President of Branch Operations for WESCO from
1991 to 1994.
DONALD H. THIMJON has been Vice President, Operations of WESCO since
1991. Mr. Thimjon served as Regional Manager from 1980 to 1991.
RONALD P. VAN, JR. has been Vice President, Operations of WESCO since
October 1998. Mr. Van was a Vice President and Controller of EESCO, an
electrical distributor WESCO acquired in 1996.
STEPHEN A. VAN OSS has been Vice President and Chief Financial Officer
of WESCO since October 2000. Mr. Van Oss served as Director, Information Systems
for WESCO from 1997 to 2000 and as Director, Acquisition Management in 1997.
From 1995 to 1996, Mr. Van Oss served as Chief Operating Officer and Chief
Financial Officer of Paper Back Recycling of America, Inc. From 1979 to 1995,
Mr. Van Oss held various management positions with Reliance Electric
Corporation.
DANIEL A. BRAILER has been Treasurer and Director of Investor Relations
of WESCO since March 1999. During 1999, Mr. Brailer was also appointed to the
position of Corporate Secretary. From 1982 to 1999, Mr. Brailer held various
positions at Mellon Financial Corporation, most recently as Senior Vice
President.
15
ITEM 2. PROPERTIES.
We have approximately 350 branches, of which approximately 290 are
located in the United States, approximately 50 are located in Canada and the
remainder are located in Puerto Rico, Mexico, Guam, the United Kingdom, Nigeria
and Singapore. Approximately 25% of branches are owned facilities, and the
remainder are leased.
The following table summarizes our distribution centers:
LOCATION SQUARE FEET LEASED/OWNED
- -------- ----------- ------------
Warrendale, PA........................................ 194,200 Owned
Sparks, NV............................................ 196,800 Leased
Byhalia, MS........................................... 148,000 Owned
Dorval, QE............................................ 90,000 Leased
Burnaby, BC........................................... 64,865 Owned
We also lease our 76,200 square foot headquarters in Pittsburgh,
Pennsylvania. We do not regard the real property associated with any single
branch location as material to our operations. We believe our facilities are in
good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, a number of lawsuits, claims and proceedings have
been or may be asserted against us relating to the conduct of our business,
including routine litigation relating to commercial and employment matters.
While the outcome of litigation cannot be predicted with certainty, and some of
these lawsuits, claims or proceedings may be determined adversely to us, we do
not believe, based on information presently available, that the outcome of any
of such pending matters is likely to have a material adverse effect on us.
We reached a final settlement agreement related to an employment and
wages claim with the case being dismissed with prejudice. We settled the case
for $3.4 million and received a refund of approximately $300,000 of that amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of 2003.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
On May 17, 1999, we completed our initial public offering of common
stock ("the Offering"). Our common stock is listed on the New York Stock
Exchange under the symbol "WCC." As of February 27, 2004, there were 41,104,483
shares of common stock outstanding held by approximately 100 holders of record.
We have not paid dividends on the common stock, and do not presently plan to pay
dividends in the foreseeable future. It is currently expected that earnings will
be retained and reinvested to support either business growth or debt reduction.
In addition, our revolving credit facility and our indenture restrict our
ability to pay dividends. See Part II, Item 7. - "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The following table sets forth the high and low close price
of the shares of common stock for the periods indicated.
CLOSING PRICES
------------------
QUARTER HIGH LOW
- ------- ----- ----
2002
First $7.13 $4.15
Second 7.40 6.08
Third 7.25 4.23
Fourth 5.49 3.14
2003
First $5.53 $3.44
Second 6.00 3.44
Third 7.00 5.10
Fourth 9.13 5.41
Our board of directors authorized a $25 million share repurchase
program with respect to our common stock which expired in May 2003. Under
previous share repurchase programs, we purchased in prior years approximately
3.9 million shares of our common stock at an aggregate purchase price of
approximately $32.8 million. No shares were repurchased pursuant to the share
repurchase program during 2003.
In November 2003, our board of directors authorized a special
repurchase of the Class B common stock. Pursuant to this authorization, we
repurchased 4.3 million shares of Class B common stock in December 2003 from an
institutional holder, at a discount to then market prices, for a purchase price
of approximately $27.3 million.
17
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA:
Net sales................................... $ 3,286.8 $ 3,325.8 $ 3,658.0 $ 3,881.1 $ 3,423.9
Gross profit................................ 610.1 590.8 643.5 684.1 616.6
Selling, general and administrative expenses 501.5 494.4 517.2 524.3 471.2
Depreciation and amortization(1)............ 22.5 19.8 31.0 25.0 20.4
Restructuring charge (2) ................... -- -- -- 9.4 --
----------- ----------- ----------- ----------- -----------
Income from operations...................... 86.1 76.6 95.3 125.4 125.0
Interest expense, net....................... 42.3 43.0 45.1 43.8 47.0
Loss on debt extinguishment(3).............. 0.2 1.1 -- -- 17.2
Other expenses.............................. 4.5 6.6 16.9 24.9 19.5
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 39.1 25.9 33.3 56.7 41.3
Provision for income taxes(4)............... 9.1 2.8 13.1 23.3 16.7
----------- ----------- ----------- ----------- -----------
Net income ................................. $ 30.0 $ 23.1 $ 20.2 $ 33.4 $ 24.6
=========== =========== =========== =========== ===========
Earnings per common share
Basic.................................... $ 0.67 $ 0.51 $ 0.45 $ 0.74 $ 0.57
Diluted.................................. $ 0.65 $ 0.49 $ 0.43 $ 0.70 $ 0.53
Weighted average common shares outstanding
Basic.................................... 44,631,459 45,033,964 44,862,087 45,326,475 43,057,894
Diluted.................................. 46,349,082 46,820,093 46,901,673 47,746,607 47,524,539
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 8.4 $ 9.3 $ 13.8 $ 21.6 $ 21.2
Net cash provided by operating activities... 35.8 20.3 161.3 46.9 66.4
Net cash used by investing activities....... (9.2) (23.1) (69.2) (60.7) (71.9)
Net cash (used) provided by financing
activities............................... (22.5) (49.9) (38.0) 26.0 6.3
BALANCE SHEET DATA:
Total assets................................ $ 1,161.2 $ 1,019.5 $ 1,170.8 $ 1,173.1 $ 1,039.4
Total long-term debt (including current
portion)................................. 422.2 418.0 452.0 483.3 426.4
Long-term obligations(5).................... 53.0 -- -- -- --
Stockholders' equity........................ 167.7 169.3 144.7 125.0 117.3
(1) Effective for 2002, WESCO adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") as described in Note 4 to the
Consolidated Financial Statements.
(2) Represents a restructuring charge taken in the fourth quarter of 2000.
Cash expenses included in the total amount to $1.4 million.
(3) Represents a charge, relating to the write-off of unamortized debt
issuance and other costs associated with the early extinguishment of
debt and the 1999 termination of the existing accounts receivable
securitization program. Prior year amounts have been adjusted to
conform with current presentation.
(4) Benefits of $2.6 million and $5.3 million in 2003 and 2002,
respectively, from the resolution of prior year tax contingencies
resulted in an unusually low provision for income taxes.
(5) Includes amounts due under earnout agreements for past acquisitions.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
COMPANY OVERVIEW
During 2003, we saw a continuation of lower product demand from the
majority of the end-markets we serve, although demand for our products
strengthened in the fourth quarter consistent with an improving U.S. economy.
Our financial results in 2003 reflected the positive impact of our margin
improvement and cost containment programs, in the face of weaker product demand.
Operating income increased 12.3% on the strength of an 80 basis point
improvement in gross margins. Lower fees associated with our Receivables
Facility and lower debt levels translated into lower financing costs, which
contributed to our income before taxes increasing 50.5% over 2002 performance.
In addition, our effective tax rate was 23.2%, versus last year's rate of 11.0%.
The combination of all of these factors led to an improvement of $0.16 per share
to $0.65 per share.
Our sales can be categorized as stock, direct ship and special order.
Stock orders are filled directly from existing inventory and generally represent
approximately 45% of total sales. Approximately 45% of our total sales are
direct ship sales. Direct ship sales are typically custom-built products, large
orders or products that are too bulky to be easily handled and, as a result, are
shipped directly to the customer from the supplier. Special orders are for
products that are not ordinarily stocked in inventory and are ordered based on a
customer's specific request. Special orders represent the remainder of total
sales. Gross profit margins on stock and special order sales are approximately
60% higher than those on direct ship sales. Although direct ship gross margins
are lower, operating profit margins are often comparable, since the product
handling and fulfillment costs associated with direct shipments are much lower.
We have historically financed our working capital needs, capital
expenditures, acquisitions and new branch openings through internally generated
cash flow and borrowings under our credit facilities and funding through our
accounts receivable securitization program. During the initial phase of an
acquisition or new branch opening, we typically incur expenses related to
installing or converting information systems, training employees and other
initial operating activities. With some acquisitions, we may incur expenses in
connection with the closure of any of our own redundant branches. Historically,
the costs associated with opening new branches, and closing branches in
connection with certain acquisitions, have not been material. We have accounted
for our acquisitions under the purchase method of accounting.
CASH FLOW
We generated $35.8 million in operating cash flow during 2003. Included
in this amount was a $68.0 million cash outflow from a reduction in our
Receivables Facility. This operating cash flow, coupled with proceeds from our
borrowings, was used for $8.4 million in capital expenditures and $27.3 million
in repurchases of our Class B common stock, as more fully described below.
EQUITY ACTIVITY
During 2003, we completed two equity transactions for the benefit of
our shareholders. In November, we purchased from an institutional holder, at a
discount to market, approximately 4.3 million shares of our outstanding Class B
common stock at a purchase price of $27.3 million, representing about 9.5% of
our outstanding common stock. In December, we redeemed at a discount to market,
the net equity value of employee held stock options originally granted in 1994
and 1995, representing options to purchase approximately 2.9 million shares or
approximately 7% of our common stock outstanding. The cash payment of $20.1
million was made in January 2004. The Company recognized a tax benefit of $7.3
million as a result of this transaction.
FINANCING ACTIVITY
We completed the following transactions in 2003 to improve our
liquidity and capital resources:
In February 2003, we finalized a $51 million mortgage financing
facility, $13 million of which was outstanding
19
as of December 31, 2002. Total borrowings under the mortgage financing are
subject to a 22-year amortization schedule with a balloon payment due at the end
of the 10-year term. This mortgage financing facility provides additional
liquidity and financial flexibility for us as well as locks in longer-term fixed
interest rates.
In June 2003, the issuer called our $100 million in interest rate swap
agreements relating to indebtedness under our senior subordinated notes and as a
result we received a $4.6 million payment. In September 2003, we entered into a
new $50 million interest rate swap agreement and in December 2003 we entered
into two additional $25 million interest rate swap agreements with respect to
indebtedness under our senior subordinated notes.
In September 2003, we 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.
We recorded liabilities of approximately $84 million relating to
earnout agreements associated with past acquisitions.
As of year-end, we had approximately $190 million in available
borrowing capacity under our financing facilities, including $30 million under
our Receivables Facility, with no significant debt maturities until 2008.
OUTLOOK
The improvements in operations and capital structure achieved in 2003
have positioned us well for growth in 2004. Management believes that if the
overall economic recovery forecasted for 2004 occurs, it will translate into
improved product demand and moderate sales growth. Focus on margin expansion and
cost containment should continue to drive improved operating performance in
2004. Our operating cash flow will be utilized to fund any required working
capital additions, capital expenditures and to the extent available continue our
deleveraging efforts, as well as fund earnout payments related to the Bruckner
acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to supplier programs, bad debts, inventories, insurance costs, goodwill,
income taxes, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates. If actual market conditions are less favorable than those projected
by management, additional adjustments to reserve items may be required. We
believe the following critical accounting policies affect our judgments and
estimates used in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We have
a systematic procedure using estimates based on historical data and reasonable
assumptions of collectibility made at the local branch level and at the
consolidated corporate basis to calculate the allowance for doubtful accounts.
The allowance for doubtful accounts was $11.4 million at December 31, 2003 and
$10.3 million at December 31, 2002. The total amount recorded as selling,
general and administrative expense related to bad debts was $10.2 million, $9.0
million and $10.3 million for 2003, 2002 and 2001, respectively.
20
Excess and Obsolete Inventory
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. A systematic procedure is used to determine excess and obsolete
inventory using historical data and reasonable assumptions for the percentage of
excess and obsolete inventory on a consolidated basis. The valuation allowance
for excess and obsolete inventories was $9.8 million at December 31, 2003 and
$11.9 million at December 31, 2002. Direct write-offs against the reserve
related to inventory disposals during 2003 totaled $5.0 million. The total
expense related to excess and obsolete inventories, included in cost of goods
sold, was $2.9 million, $1.4 million and $2.6 million for 2003, 2002 and 2001,
respectively.
Supplier Rebates
We receive rebates from certain suppliers based on contractual
arrangements with them. Since there is a lag between actual purchases and the
rebates received from the suppliers we must estimate the approximate amount of
rebates available at a specific date. The asset recorded for the supplier rebate
program is within other accounts receivable and was $15.6 million at December
31, 2003 and $15.9 million at December 31, 2002. The total amount recorded as a
reduction to cost of goods sold was $29.3 million, $24.7 million and $31.4
million for 2003, 2002 and 2001, respectively.
Goodwill
As described in Note 4 to the Consolidated Financial Statements, we
test goodwill for impairment annually or more frequently when events or
circumstances occur indicating goodwill might be impaired. This process involves
estimating fair value using discounted cash flow analyses. Considerable
management judgment is necessary to estimate discounted future cash flows.
Assumptions used for these estimated cash flows were based on a combination of
historical results and current internal forecasts. Two primary assumptions were
an average revenue growth rate of 4% and an average discount rate of 8%. We
cannot predict certain events that could adversely affect the reported value of
goodwill, which totaled $398.7 million at December 31, 2003 and $314.1 million
at December 31, 2002.
Insurance Programs
We use commercial insurance for auto, workers' compensation, casualty
and health claims as a risk reduction strategy to minimize catastrophic losses.
Our strategy involves large deductibles where we must pay all costs up to the
deductible amount. We estimate our reserve based on historical incident rates
and costs. The assumptions included in developing this accrual include the
period of time from incurrence of a medical claim until the claim is paid by the
insurance provider. Presently, this period is estimated to be eight weeks. The
total liability related to the insurance programs was $6.9 million at December
31, 2003 and $5.8 million at December 31, 2002.
Taxes
We record our deferred tax assets at amounts that are expected to be
realized. We evaluate future taxable income and potential tax planning
strategies in assessing the potential need for a valuation allowance. Should we
determine that we would not be able to realize all or part of our deferred tax
asset in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. We review tax issues and
positions taken on tax returns and determine the need and amount of contingency
reserves necessary to cover any potential audit adjustments.
Accounts Receivable Securitization Program
We maintain an accounts receivable securitization program (the
"Receivables Facility"), whereby we sell, 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
21
receivables.
We account for the Receivables Facility in accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." At the time the
receivables are sold, the balances are removed from the balance sheet. The
Receivables Facility represents "off-balance sheet financing," since the
conduit's ownership interest in the accounts receivable of the SPC results in
the removal of accounts receivable from our consolidated balance sheets, rather
than resulting in the addition of a liability to the conduit.
We believe that the terms of the agreements governing this facility
qualify our trade receivable sales transactions for "sale treatment" under
generally accepted accounting principles, which requires us to remove the
accounts receivable from our consolidated balance sheets. Absent this "sale
treatment," our consolidated balance sheet would reflect additional accounts
receivable and debt. Our consolidated statements of operations would not be
impacted, except that other expenses would be classified as interest expense.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales
of certain items in our Consolidated Statements of Operations for the periods
presented:
YEAR ENDED DECEMBER 31
-----------------------
2003 2002 2001
----- ----- -----
Net sales.................................................................. 100.0% 100.0% 100.0%
Gross profit............................................................... 18.6 17.8 17.6
Selling, general and administrative expenses............................... 15.3 14.9 14.1
Depreciation and amortization.............................................. 0.7 0.6 0.9
----- ----- -----
Income from operations................................................ 2.6 2.3 2.6
Interest expense........................................................... 1.3 1.3 1.2
Loss on debt extinguishment................................................ -- -- --
Other expenses............................................................. 0.1 0.2 0.5
----- ----- -----
Net income before income taxes........................................ 1.2 0.8 0.9
Provision for income taxes................................................. 0.3 0.1 0.3
----- ----- -----
Net income ........................................................... 0.9% 0.7% 0.6%
===== ===== =====
2003 Compared to 2002
Net Sales. Net sales for 2003 decreased by approximately $39 million,
or 1.2%, compared with the prior year. The continuing weakness in the North
American economy has adversely affected capital spending and industrial project
activity in the major industrial and MRO markets where we participate. These
results were somewhat offset by increased sales of approximately $58 million to
customers served by our integrated supply and national accounts groups. In
addition, sales to international customers improved principally due to the
strength of the Canadian dollar.
Gross Profit. Gross profit in 2003 increased to $610.1 million from
$590.8 million as the gross profit percentage improved by 80 basis points to
18.6%. The improvement in gross profit was driven primarily by improved product
billing margins which increased 50 basis points over 2002. A primary reason for
the improvement is a company-wide focus on pricing, procurement and
administration of supplier contracts. Improved performance with supplier volume
rebate programs as well as lower inventory adjustments also contributed to the
improvement in gross profit.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
include costs associated with all personnel, shipping and handling, travel and
entertainment, advertising, utilities and bad debts. SG&A expenses increased by
$7.1 million, or 1.4%, to $501.5 million. The current year's total includes $4.2
million of expenses associated with discretionary retirement related
contributions made in 2003 which had not been made since 1998. Fees and expenses
associated with certain legal matters increased SG&A by $3.1 million relating to
a settlement agreement with regard to an employment and wages claim which was
resolved in 2003. Bad debt expense was $10.2 million for 2003 compared to $9.0
million for 2002. We have seen an increase in low-profile, smaller dollar
22
bankruptcies and troubled accounts as companies try to cope with the prolonged
economic downturn. We are monitoring creditworthiness of our customer base
closely and believe our credit limits and reserves are appropriate at this time.
Shipping and handling expense included in SG&A was $36.2 million in 2003
compared with $37.2 million in 2002.
Depreciation and Amortization. Depreciation and amortization increased
$2.8 million to $22.6 million in 2003 versus $19.8 million in 2002. Amortization
increased by $1.7 million due to increased amortization associated with a
non-compete agreement and increased amortization of capitalized software due to
higher expenditures in prior years. Depreciation increased $1.0 million
principally due to a higher level of spending on assets with shorter estimated
lives.
Income from Operations. Income from operations increased $9.5 million
to $86.1 million in 2003, compared with $76.6 million in 2002. The increase in
operating income is principally attributable to the increase in gross profit
partially offset by the increase in SG&A expenses and depreciation and
amortization.
Interest and Other Expenses. Interest expense totaled $42.3 million for
2003, a decrease of $0.7 million from 2002. The decline was primarily due to a
lower average amount of indebtedness outstanding during the current period as
compared to 2002 as we continued to improve our liquidity by reducing debt. Loss
on debt extinguishments related to our recording net charges of $0.2 million and
$1.1 million during 2003 and 2002, respectively, related to the write-off of
deferred financing costs associated with our revolving credit facilities. The
2003 loss was partially offset by a $0.6 million gain on the repurchase of $21.2
million in outstanding principal amounts of our senior subordinated notes during
2003. Other expenses totaled $4.5 million and $6.6 million in 2003 and 2002,
respectively, reflecting costs associated with the accounts receivable
securitization program.
Income Taxes. Income tax expense totaled $9.1 million in 2003, an
increase of $6.3 million from 2002. The effective tax rates for 2003 and 2002
were 23.2% and 11.0%, respectively. The 2003 tax provision included a benefit of
$2.6 million as a result of the favorable conclusion of an IRS examination. The
2002 tax provision included a $5.3 million benefit for favorable conclusion to
other IRS examinations. In addition, the 2002 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. Additionally, foreign tax
credits contributed to the reduction in the effective rate during both 2003 and
2002.
Net Income. Net income and diluted earnings per share totaled $30.0
million and $0.65 per share, respectively, in 2003, compared with $23.1 million
and $0.49 per share, respectively, in 2002.
2002 Compared to 2001
Net Sales. Net sales for 2002 decreased by approximately $330 million,
or 9.1%, to $3.3 billion compared with $3.7 billion in the prior year. The
continuing weakness in the North American economy has adversely affected the
major industrial and MRO markets where we participate.
Gross Profit. Gross profit in 2002 decreased by $52.7 million, or 8.2%,
to $590.8 million from $643.5 million in the prior year due principally to the
decline in net sales. Gross profit margin was 17.8% in 2002 compared with 17.6%
in 2001. Billing margin improvements of 30 basis points over 2001 and a lower
level of provision for slow moving and obsolete inventory, were partially offset
by lower levels of supplier rebates and cash discounts that resulted from lower
purchasing activity and working capital improvements.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
decreased by $22.8 million, or 4.4%, to $494.4 million. The decrease was
primarily due to compensation and benefit program expense reductions in the
current period. Employee headcount was reduced by 4.4% since December 2001.
Shipping and handling expense included in SG&A was $37.2 million in 2002
compared with $38.2 million in 2001. Bad debt expense was $9.0 million for 2002
compared to $10.3 million for 2001. The improvement in 2002 resulted primarily
from reducing exposure to troubled accounts and industries through more
stringent credit policies. SG&A expense expressed as a
23
percentage of sales was 14.9% for 2002 compared with 14.1% in 2001. The increase
in SG&A expense as a percentage of sales resulted from lower net sales in 2002.
Depreciation and Amortization. Depreciation and amortization decreased
$11.2 million to $19.8 million in 2002 reflecting our adoption of SFAS No. 142.
We recorded goodwill amortization expense of $11.9 million in 2001.
Income from Operations. Income from operations decreased $18.7 million
to $76.6 million in 2002, compared with $95.3 million in 2001. The decrease in
operating income was principally attributable to lower gross profit caused by
the decline in sales, partially offset by the decrease in SG&A expenses and
discontinuing amortization of goodwill.
Interest and Other Expenses. Interest expense totaled $43.0 million for
2002, a decrease of $2.1 million from 2001. The decrease in interest expense
resulted primarily from a lower level of average debt as well as lower net
interest rates including the full year impact in 2002 of our interest rate swap
agreement. Loss on debt extinguishment of $1.1 million represented non-cash
charges recognized upon the replacement of our previous revolving credit
agreement. Other expenses totaled $6.6 million and $16.9 million in 2002 and
2001, respectively, reflecting costs associated with the Receivables Facility.
The $10.3 million decrease was principally due to a decrease in the program's
advance rates and a lower average level of securitized accounts receivable.
Income Taxes. Income tax expense totaled $2.8 million in 2002, a
decrease of $10.3 million from 2001. The effective tax rates for 2002 and 2001
were 11.0% and 39.4%, respectively. The decrease in the rate in 2002 was
principally related to the reversal of income tax contingency accruals of $5.3
million upon acceptance by the IRS of tax returns filed through 1998 and the
expected favorable conclusion of the IRS examination for 1999, as well as a
first quarter income tax benefit of approximately $0.7 million related to the
re-measurement of deferred taxes related to the cumulative impact of a change in
the expected tax rate that will be applicable when these items reverse. The
decrease in the effective rate was lower as a result of the creation of a
foreign finance company and decreased amortization expense from the adoption of
SFAS No. 142.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were approximately $1.2 billion at December 31, 2003, a
$141.7 million increase from December 31, 2002 principally attributable to an
increase in goodwill of $84.6 million for amounts earned under acquisition
earnout agreements and an increase in accounts receivable attributable to
reduced utilization of our Receivables Facility. Stockholders' equity totaled
$167.7 million at December 31, 2003, compared with $169.3 million at December
31, 2002.
The following table sets forth our outstanding indebtedness:
DECEMBER 31
------------------
2003 2002
------ ------
(IN MILLIONS)
Mortgage facility.............................................. $ 50.5 $ 13.3
Revolving credit facility...................................... -- 10.0
Senior subordinated notes...................................... 370.6 389.0
Other.......................................................... 1.1 5.7
------ ------
422.2 418.0
Less current portion........................................... (2.1) (5.8)
------ ------
$420.1 $412.2
====== ======
24
The following table sets forth details of our Receivables Facility:
DECEMBER 31
------------------
2003 2002
------ ------
(IN MILLIONS)
Securitized accounts receivable................................ $ 330.0 $346.0
Subordinated retained interest ................................ (105.0) (53.0)
------- ------
Net accounts receivable removed from balance sheet........ $ 225.0 $293.0
======= ======
Our liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. In addition,
certain of our acquisition agreements contain earnout provisions based
principally on future earnings targets. The most significant of these agreements
relates to the acquisition of Bruckner Supply Company, the terms of which
provide for additional contingent consideration to be paid based on achieving
earnings targets of earnings before interest, taxes, depreciation and
amortization of Bruckner during 2003 and 2004. Under the Bruckner acquisition
agreement the maximum remaining earnout available was $80 million. The amount of
earnout 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 December 31, 2003, we accrued an $80 million liability ($30 million
classified as current and $50 million classified as non-current) for the
estimated amount owed based on 2003 performance for contingent consideration
relating to the Bruckner agreement. Based on 2003 performance and the accrual of
$80 million no further earnout is available. Certain other acquisitions also
contain contingent consideration provisions, only one of which could require a
significant payment. Management estimates this payment could be up to $20
million and would be made in 2008. To meet our funding requirements, we use a
mix of internally generated cash flow, our revolving credit facility, our
Receivables Facility and equity transactions.
In 2004, we anticipate capital expenditures to increase by
approximately $7 million from 2003 capital expenditures of approximately $8.4
million. As of February 29, 2004, we have no specific near-term plans to make an
acquisition.
The required annual principal repayments for the next five years and
thereafter, as of December 31, 2003 (in thousands):
2004..................................................... $ 2,120
2005..................................................... 1,203
2006..................................................... 1,259
2007..................................................... 1,338
2008..................................................... 380,250
Thereafter............................................... 44,215
Mortgage Financing Facility
In February 2003, we finalized a mortgage financing facility of $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 primarily 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 2003,
we executed an amendment reducing the size of this revolving credit facility to
$200 million. We recorded a $0.8 million non-cash charge associated with the
write-off of deferred financing fees related to this reduction. Availability
under the facility, which matures in 2007, is limited to the amount of U.S. and
Canadian eligible inventory and Canadian receivables applied against certain
advance rates. Borrowings under the facility
25
were used to retire a previous revolving credit facility. Interest on this
facility is at LIBOR plus a margin that ranges between 2.0% to 2.75% depending
upon the amount of excess availability under the facility. As long as the
average daily excess availability for both the preceding and projected
succeeding 90-day period is greater than $50 million, then we 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 our 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 we must maintain
a fixed charge coverage ratio of 1.1 to 1.0. We were in compliance with all such
covenants as of December 31, 2003. At December 31, 2003, there were no
borrowings outstanding under the facility. At December 31, 2003, we had
approximately $161 million available for borrowing under our facility compared
to approximately $154 million available at December 31, 2002.
Senior Notes
At December 31, 2003, we have $378.8 million in aggregate outstanding
principal amount of 9.125% senior subordinated notes due 2008. The notes were
issued with an average issue price of 98%. During 2003, we repurchased $21.2
million in aggregate principal amount of senior subordinated notes at a net gain
of $0.6 million.
Interest Rate Swap Agreements
In September and October 2001, we entered into four separate
fixed-to-floating interest rate swap agreements, each with a notional amount of
$25 million. In June 2003, these agreements were called by the issuer and as a
result we 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 term of the senior subordinated
notes.
In September 2003, we entered into a new $50 million interest rate swap
agreement and in December 2003, we entered into two additional $25 million
interest rate swap agreements. These agreements have terms expiring concurrently
with the maturity of our 9.125% senior subordinated notes and were entered into
with the intent of converting $100 million of the senior subordinated notes from
a fixed-to-floating rate. Pursuant to these agreements, we receive semi-annual
fixed interest payments at the rate of 9.125% commencing December 1, 2003 and
make semi-annual variable interest rate payments at six-month LIBOR rates plus a
premium in arrears. The LIBOR rates in the agreements reset every six months and
at December 31, 2003, the rates ranged from 5.96% to 5.99%. In 2003, for the
months they were in existence, the agreements had the effect of reducing the
interest cost on $100 million of the senior notes from 9.125% to 6.5%. The
agreements can be terminated by the counterparty in accordance with a redemption
schedule that is consistent with the redemption schedule for the senior
subordinated notes.
We enter into interest rate swap agreements as a means to hedge our
interest rate exposure and maintain certain amounts of variable rate and fixed
rate debt. Since the swaps have been designated as hedging instruments, their
fair values are reflected in our Consolidated Balance Sheets. Net amounts to be
received or paid under the swap agreements are reflected as adjustments to
interest expense.
OFF-BALANCE SHEET ARRANGEMENTS
Accounts Receivable Securitization Program
In September 2003, we 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. Presently, we expect the
$165 million portion of the facility to be renewed in September 2004. 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.
26
See Note 5 to the Consolidated Financial Statements.
As of December 31, 2003 and 2002, securitized accounts receivable
totaled approximately $330 million and $346 million, respectively, of which the
subordinated retained interest was approximately $105 million and $53 million,
respectively. Accordingly, approximately $225 million and $293 million of
accounts receivable balances were removed from the consolidated balance sheets
at December 31, 2003 and 2002, respectively. WESCO reduced its Receivables
Facility by $68.0 million in 2003 and by $37.0 million in 2002. Costs associated
with the Receivables Facility totaled $4.5 million, $6.6 million and $16.9
million in 2003, 2002 and 2001, respectively. These amounts are recorded as
other expenses in the consolidated statements of operations and are primarily
related to the discount and loss on the sale of accounts receivables, partially
offset by related servicing revenue.
Cash Flow
An analysis of cash flows for 2003 and 2002 follows:
Operating Activities. Cash provided by operating activities totaled
$35.8 million for the year ended December 31, 2003, compared to $20.3 million a
year ago. Cash provided by operations in 2003 and 2002 included net outflows of
$68.0 million and $37.0 million, respectively, associated with changes related
to our Receivables Facility. In 2003, cash generated by net income of $30.0
million plus adjustments for non-cash items totaling $30.1 million along with
cash inflows for reductions in inventory of $25.2 million and increases in
accounts payable and other liabilities of $22.8 million were partially offset by
the previously mentioned $68 million reduction in our Receivables Facility. In
2002, cash generated by net income of $23.1 million plus adjustments for
non-cash items totaling $38.6 million along with cash inflows for reductions in
accounts receivable of $79.5 million and reductions in inventory of $41.5
million were partially offset by decreases in accounts payable and the
previously mentioned $37.0 million reduction in our Receivables Facility.
Investing Activities. Net cash used by investing activities was $9.2
million in 2003, compared to $23.1 million in 2002. Cash used for investing
activities was higher in 2002 due to $12.4 million more in acquisition payments
and $1.0 million more in capital expenditures. Capital expenditures in 2003 were
$8.4 million and were for computer equipment and software and branch and
distribution center facility improvements. In 2004, we expect to pay $30 million
pursuant to an earnout agreement associated with the Bruckner acquisition.
Financing Activities. Cash used by financing activities in 2003 was
$22.3 million primarily due to a $27.3 million payment relating to the
repurchase of our Class B common stock from an institutional holder.
Additionally, $21.2 million of outflows related to the repurchase of senior
notes and a net $10.0 million was used to pay down the 2002 revolving credit
facility. Offsetting these payments were net proceeds from debt attributable to
borrowing $38.1 million from the mortgage financing facility. Cash used by
financing activities was $49.9 million in 2002 that was primarily due to net
debt repayments of $45.3 million.
Contractual Cash Obligations and Other Commercial Commitments
The following summarizes our contractual obligations at December 31,
2003, and the effect such obligations are expected to have on liquidity and cash
flow in future periods.
27
(IN MILLIONS)
------------------------------------------
2005 TO 2007 TO AFTER
2004 2006 2008 2008 TOTAL
------ ------- ------- ------- -------
Contractual cash obligations:
Mortgage facility................................... $ 1.1 $ 2.4 $ 2.8 $ 44.2 $ 50.5
Revolving credit facility........................... -- -- -- -- --
Senior subordinated notes........................... -- -- 378.8 -- 378.8
Acquisition earnout agreements...................... 31.3 52.0 1.0 -- 84.3
Non-cancelable operating leases..................... 24.2 33.3 22.1 5.2 84.8
Other long-term obligations......................... 1.0 0.1 -- -- 1.1
------ ------- ------- ------- -------
Total contractual cash obligations.................. $ 57.6 $ 87.8 $ 404.7 $ 49.4 $ 599.5
====== ======= ======= ======= =======
(IN MILLIONS)
------------------------------------------
2005 TO 2007 TO AFTER
2004 2006 2008 2008 TOTAL
------ ------- ------- ------- -------
Other commercial commitments:
Standby letters of credit .......................... $ 14.4 $ -- $ -- $ -- $ 14.4
Purchase orders for inventory requirements and service contracts are
not included in the table above. Generally, our purchase orders and contracts
contain clauses allowing for cancellation. We do not have significant agreements
to purchase material or goods that would specify minimum order quantities.
Management believes that cash generated from operations, together with
amounts available under the credit facility and the Receivables Facility, will
be sufficient to meet our working capital, capital expenditures and other cash
requirements for the foreseeable future. There can be no assurance, however,
that this will be or will continue to be the case.
INFLATION
The rate of inflation, as measured by changes in the consumer price
index, did not have a material effect on our sales or operating results during
the periods presented. However, inflation in the future could affect our
operating costs. Price changes from suppliers have historically been consistent
with inflation and have not had a material impact on the results of operations.
SEASONALITY
Our 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, we report sales and earnings in
the first quarter that are generally lower than that of the remaining quarters.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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. This interpretation, as amended, is
effective for all entities subject to this interpretation no later than the end
of the first period that ends after March 15, 2004. We are currently evaluating
the impact of this interpretation on our financial statements.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
FOREIGN CURRENCY RISKS
Approximately 90% of our sales are denominated in U. S. dollars and are
primarily from customers in the U. S. As a result, currency fluctuations are
currently not material to our operating results. We do have foreign subsidiaries
located in North America, Europe and Asia and may establish additional foreign
subsidiaries in the future. Accordingly, we may derive a more significant
portion of our sales from international operations and a portion of these sales
may be denominated in foreign currencies. As a result, our future operating
results could become subject to fluctuations in the exchange rates of those
currencies in relation to the U.S. dollar. Furthermore, to the extent that we
engage in international sales denominated in U.S. dollars, an increase in the
value of the U. S. dollar relative to foreign currencies could make our products
less competitive in international markets. We have and will continue to monitor
our exposure to currency fluctuations.
INTEREST RATE RISKS
Our outstanding indebtedness as of December 31, 2003 is comprised of
$422.2 million of fixed-rate borrowings.
In September and October 2001, we entered into four fixed-to-floating
interest rate swap agreements with an aggregate notional amount of $100 million.
In June 2003, these agreements were called by the issuer and we received a
payment of $4.6 million.
In September 2003, we entered into a new $50 million interest rate swap
agreement and in December 2003, we entered into two additional $25 million
interest rate swap agreements. At December 31, 2003, the net fair value of
outstanding interest rate derivatives designated as fair value hedges was $0.1
million. These interest rate swap agreements combined to reduce interest expense
by approximately $2.6 million in 2003. Our weighted average interest rate was
6.0% on the notional amount of $100 million as of December 31, 2003. The
agreements can be terminated under certain conditions. There is no assurance we
could find comparable interest rate swap agreements to continue to reduce
interest expense at current levels.
As a result of $100 million in fixed-to-floating interest rate swaps, a
hypothetical 10% change in interest rates based on these variable-rate borrowing
levels would result in a $0.7 million increase or decrease in annual interest
expense.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth in our Consolidated
Financial Statements contained in this Annual Report on Form 10-K. Specific
financial statements can be found at the pages listed below:
PAGE
----
WESCO International, Inc.
Report of Independent Auditors........................................................................ 31
Consolidated Balance Sheets as of December 31, 2003 and 2002.......................................... 32
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001............ 33
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001.. 34
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001............ 35
Notes to Consolidated Financial Statements............................................................ 36
30
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
of WESCO International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of WESCO
International, Inc. and its subsidiaries (collectively, "WESCO") at December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of WESCO's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 4 to the Consolidated Financial Statements, WESCO adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." Accordingly, WESCO changed its method of accounting for
goodwill in 2002.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 12, 2004
31
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------
2003 2002
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 27,495 $ 22,570
Trade accounts receivable, net of allowance for doubtful accounts of
$11,422 and $10,261 in 2003 and 2002, respectively (NOTE 5)........... 266,589 182,249
Other accounts receivable............................................... 18,223 19,921
Inventories, net........................................................ 320,975 340,350
Income taxes receivable................................................. 13,628 8,935
Prepaid expenses and other current assets............................... 9,378 7,433
----------- ------------
Total current assets................................................ 656,288 581,458
Property, buildings and equipment, net (NOTE 8).............................. 98,937 110,174
Goodwill (NOTE 4)............................................................ 398,673 314,078
Other assets................................................................. 7,307 13,809
----------- ------------
Total assets........................................................ $ 1,161,205 $ 1,019,519
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 366,380 $ 346,513
Accrued payroll and benefit costs (NOTES 13 AND 14)..................... 47,110 19,736
Current portion of long-term debt....................................... 2,120 5,778
Current deferred income taxes (NOTE 11)................................. 2,379 3,408
Deferred acquisition payable (NOTE 6)................................... 31,303 2,000
Other current liabilities............................................... 30,418 25,441
----------- ------------
Total current liabilities........................................... 479,710 402,876
Long-term debt (NOTE 9)...................................................... 420,042 412,196
Long-term deferred acquisition payable (NOTE 6).............................. 53,040 --
Other noncurrent liabilities................................................. 6,574 5,684
Deferred income taxes (NOTE 11).............................................. 34,151 29,475
----------- ------------
Total liabilities................................................... 993,517 850,231
Commitments and contingencies (NOTE 15)
STOCKHOLDERS' EQUITY (NOTES 3 AND 10):
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, 44,999,794
and 44,483,513 shares issued in 2003 and 2002, respectively........... 450 445
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,339,431 and 4,653,131, respectively issued in
2003 and 2002, respectively........................................... 43 46
Additional capital...................................................... 559,651 570,923
Retained earnings (deficit)............................................. (336,790) (366,796)
Treasury stock, at cost; 8,400,499 and 4,033,020 shares in 2003 and
2002, respectively.................................................... (61,370) (33,841)
Accumulated other comprehensive income (loss)........................... 5,704 (1,489)
----------- ------------
Total stockholders' equity.......................................... 167,688 169,288
----------- ------------
Total liabilities and stockholders' equity.......................... $ 1,161,205 $ 1,019,519
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
32
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales.................................................... $3,286,766 $3,325,780 $3,658,033
Cost of goods sold........................................... 2,676,701 2,735,006 3,014,520
---------- ---------- ----------
Gross profit.............................................. 610,065 590,774 643,513
Selling, general and administrative expenses................. 501,462 494,382 517,156
Depreciation and amortization................................ 22,558 19,767 30,972
---------- ---------- ----------
Income from operations.................................... 86,045 76,625 95,385
Interest expense, net........................................ 42,317 42,985 45,140
Loss on debt extinguishment.................................. 180 1,073 --
Other expenses (NOTE 5)...................................... 4,457 6,597 16,877
---------- ---------- ----------
Income before income taxes................................ 39,091 25,970 33,368
Provision for income taxes (NOTE 11)......................... 9,085 2,847 13,143
---------- ---------- ----------
Net income ............................................... $ 30,006 $ 23,123 $ 20,225
========== ========== ==========
Earnings per share (NOTE 12)
Basic..................................................... $ 0.67 $ 0.51 $ 0.45
========== ========== ==========
Diluted .................................................. $ 0.65 $ 0.49 $ 0.43
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
33
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
CLASS B RETAINED OTHER
COMPREHENSIVE COMMON COMMON ADDITIONAL EARNINGS TREASURY COMPREHENSIVE
INCOME STOCK STOCK CAPITAL (DEFICIT) STOCK INCOME (LOSS)
------------- ------ ------- ---------- --------- -------- -------------
(IN THOUSANDS)
----------------------------------------------------------------
BALANCE, DECEMBER 31, 2000... $ 441 $ 46 $ 569,288 $(410,144) $(33,406) $ (1,238)
Exercise of stock options,
including tax benefit...... 2 709 (446)
Net income .................. $ 20,225 20,225
Translation adjustment....... (826) (826)
------------
Comprehensive income......... $ 19,399
============ ------ ------ ---------- --------- -------- ------------
BALANCE, DECEMBER 31, 2001... 443 46 569,997 (389,919) (33,852) (2,064)
Exercise of stock options,
including tax benefit...... 2 926 (73)
Treasury stock issuance...... 84
Net income .................. $ 23,123 23,123
Translation adjustment....... 575 575
------------
Comprehensive income......... $ 23,698
============ ------ ------ ---------- --------- -------- ------------
BALANCE, DECEMBER 31, 2002... 445 46 570,923 (366,796) (33,841) (1,489)
Exercise of stock options,
including tax benefit...... 2 937 (234)
Stock option expense......... 605
Redemption of stock options,
including tax benefit...... (12,814)
Repurchase of Class B common
stock...................... (27,295)
Conversion of Class B common
stock...................... 3 (3)
Net income .................. $ 30,006 30,006
Translation adjustment....... 7,193 7,193
------------
Comprehensive income......... $ 37,199
============= ------ ------ ---------- --------- -------- ------------
BALANCE, DECEMBER 31, 2003... $ 450 $ 43 $ 559,651 $(336,790) $(61,370) $ 5,704
====== ====== ========== ========= ======== ============
The accompanying notes are an integral part of the consolidated financial
statements.
34
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income .................................................... $ 30,006 $ 23,123 $ 20,225
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on debt extinguishment................................. 180 1,073 --
Depreciation and amortization............................... 22,558 19,767 30,972
Accretion of original issue and amortization of purchase
discounts................................................. 2,898 2,972 1,799
Amortization of gain on interest rate swap.................. (533) -- --
Stock option expense........................................ 605 -- --
Amortization of debt issuance costs ........................ 1,248 945 1,168
Gain on sale of property, buildings and equipment........... (513) (43) (520)
Deferred income taxes....................................... 3,647 13,918 12,035
Changes in assets and liabilities, excluding the effects of
acquisitions:
Change in receivables facility............................ (68,000) (37,000) (45,000)
Trade and other receivables............................... (5,699) 79,488 103,705
Inventories............................................... 25,238 41,463 46,653
Prepaid expenses and other current assets................. 1,347 (2,935) (2,810)
Other assets.............................................. -- 2,623 (836)
Accounts payable.......................................... 12,405 (122,999) 5,680
Accrued payroll and benefit costs......................... 6,706 3,256 (10,547)
Other current and noncurrent liabilities.................. 3,665 (5,306) (1,253)
--------- --------- ---------
Net cash provided by operating activities............. 35,758 20,345 161,271
INVESTING ACTIVITIES:
Capital expenditures........................................... (8,379) (9,349) (13,820)
Proceeds from the sale of property, buildings and equipment.... 1,177 755 933
Acquisitions, net of cash acquired ............................ (2,028) (14,466) (56,269)
--------- --------- ---------
Net cash used by investing activities................. (9,230) (23,060) (69,156)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................... 169,180 552,436 766,363
Repayments of long-term debt................................... (166,811) (597,710) (803,548)
Proceeds from interest rate swap............................... 4,563 -- --
Debt issuance costs............................................ (2,389) (5,201) (1,262)
Proceeds from exercise of options ............................. 438 620 489
Repurchase of Class B common stock............................. (27,295) -- --
--------- --------- ---------
Net cash used by financing activities................. (22,314) (49,855) (37,958)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents... 711 83 (179)
Net change in cash and cash equivalents........................ 4,925 (52,487) 53,978
Cash and cash equivalents at the beginning of period........... 22,570 75,057 21,079
--------- --------- ---------
Cash and cash equivalents at the end of period................. $ 27,495 $ 22,570 $ 75,057
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest......................................... $ 38,814 $ 38,885 $ 41,914
Cash paid (refund) paid for taxes.............................. 2,544 (9,061) 3,259
Other non-cash activities:
Redemption of stock options............................... 20,144 -- --
(Increase) decrease in fair value of outstanding interest
rate swaps................................................ (135) (8,310) 3,176
The accompanying notes are an integral part of the consolidated financial
statements.
35
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, "WESCO"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of
electrical supplies and equipment and is a provider of integrated supply
procurement services. WESCO currently operates approximately 350 branch
locations and five distribution centers in the United States, Canada, Mexico,
Puerto Rico, Guam, the United Kingdom, Nigeria and Singapore.
On June 5, 1998, WESCO repurchased and retired all of the common stock
of WESCO principally held by non-management shareholders for $10.75 per share
for net consideration of approximately $653.5 million. In addition, WESCO repaid
approximately $379.1 million of then outstanding indebtedness, and sold
29,604,351 shares of common stock to an investor group led by affiliates of the
Cypress Group LLC ("Cypress") representing approximately 88.7% of WESCO at that
time for an aggregate cash consideration of $318.1 million. Existing management
retained approximately an 11.3% interest in WESCO immediately following the
transaction. WESCO funded the equity consideration and the repayment of
indebtedness from proceeds of the cash equity contribution, issuance of
approximately $351 million of senior subordinated and senior discount notes, a
$170 million credit facility and the sale of approximately $250 million of
accounts receivable. Given the 11.3% retained ownership, the transaction was
treated as a recapitalization for financial reporting purposes and, accordingly,
the historical bases of WESCO's assets and liabilities were not affected.
2. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of WESCO
International, Inc. and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying disclosures. Although
these estimates are based on management's best knowledge of current events and
actions WESCO may undertake in the future, actual results may ultimately differ
from the estimates.
Revenue Recognition
Revenues are recognized when title, ownership and risk of loss pass to
the customer, or services are rendered. In nearly all cases, this occurs at the
time of shipment from our distribution point, as the terms of nearly all of
WESCO's sales are FOB shipping point.
Supplier Volume Rebates
WESCO receives rebates from certain suppliers based on contractual
arrangements with such suppliers. An asset, included within other accounts
receivable on the balance sheet, represents the estimated amounts due to WESCO
under the rebate provisions of such contracts. The corresponding rebate income
is recorded as a reduction of cost of goods sold. The appropriate level of such
income is derived from the level of actual purchases made by WESCO from
suppliers, in accordance with the provisions of Emerging Issues Task Force
("EITF") Issue No. 02-16, "Accounting by a Reseller for Cash Consideration
Received from a Vendor."
Shipping and Handling Costs and Fees
WESCO records the majority of costs and fees associated with
transporting its products to customers as a component of selling, general and
administrative expenses. These costs totaled $36.2 million, $37.2 million and
$38.2 million in 2003, 2002 and 2001, respectively.
36
The remaining shipping and handling costs relate to costs that are
billed to our customers. These costs and the related revenue are included in net
sales in the consolidated statements of operations.
Cash Equivalents
Cash equivalents are defined as highly liquid investments with original
maturities of 90 days or less when purchased.
Asset Securitization
WESCO accounts for the securitization of accounts receivable in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." At the time the receivables are sold the balances are removed
from the balance sheet. SFAS No. 140 also requires retained interests in the
transferred assets to be measured by allocating the previous carrying amount
between the assets sold and retained interests based on their relative fair
values at the date of transfer. The Company estimates fair value based on the
present value of expected future cash flows discounted at a rate commensurate
with the risks involved.
Allowance for Doubtful Accounts
WESCO maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. WESCO
has a systematic procedure using estimates based on historical data and
reasonable assumptions of collectibility made at the local branch level and at
the consolidated corporate basis to calculate the allowance for doubtful
accounts. If the financial condition of WESCO's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The allowance for doubtful accounts was $11.4
million at December 31, 2003 and $10.3 million at December 31, 2002.
Inventories
Inventories primarily consist of merchandise purchased for resale and
are stated at the lower of cost or market. Cost is determined principally under
the average cost method. The Company makes provisions for obsolete or
slow-moving inventories as necessary to properly reflect inventory value.
Reserves for excess and obsolete inventories were $9.8 million and $11.9 million
at December 31, 2003 and 2002, respectively.
Property, Buildings and Equipment
Property, buildings and equipment are recorded at cost. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over either their
respective lease terms or their estimated lives, whichever is shorter. Estimated
useful lives range from five to forty years for buildings and leasehold
improvements, and three to seven years for furniture, fixtures and equipment.
Computer software is accounted for in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Capitalized computer software costs are amortized
over its estimated useful life, typically two to five years and are reported at
the lower of unamortized cost or net realizable value.
Expenditures for new facilities and improvements that extend the useful
life of an asset are capitalized. Ordinary repairs and maintenance are expensed
as incurred. When property is retired or otherwise disposed of, the cost and the
related accumulated depreciation are removed from the accounts and any related
gains or losses are recorded.
Goodwill
Effective January 1, 2002, WESCO adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized,
but will be reduced if it is found to be impaired. Goodwill is tested for
impairment annually or more frequently when events or circumstances occur
indicating that goodwill might be impaired.
Prior to the adoption of SFAS No. 142 discussed in Note 4, goodwill
arising from acquisitions was amortized on
37
a straight-line basis over periods ranging from 25 to 35 years.
Intangible Assets
WESCO's intangible assets consist primarily of non-compete agreements
with contractually determined lives. The carrying values of these intangible
assets were $1.3 million and $3.2 million at December 31, 2003 and 2002,
respectively and are regularly reviewed by evaluating the estimated future
undiscounted cash flows to determine recoverability of the assets. Any decrease
in value is recognized on a current basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances, if any, are provided when a portion
or all of a deferred tax asset may not be realized.
Foreign Currency Translation
The local currency is the functional currency for all of WESCO's
operations outside the U. S. Assets and liabilities of these operations are
translated to U.S. dollars at the exchange rate in effect at the end of each
period. Income statement accounts are translated at the average exchange rate
prevailing during the period. Translation adjustments arising from the use of
differing exchange rates from period to period are included as a component of
stockholders' equity. Gains and losses from foreign currency transactions are
included in net income for the period.
Treasury Stock
Common stock purchased for treasury is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the weighted average cost basis.
Stock Options
During the year ended December 31, 2003, WESCO adopted the measurement
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". This
change in accounting method was applied on a prospective basis in accordance
with SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 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." The Company
recognized $0.6 million of compensation expense in the year ended December 31,
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:
38
YEAR ENDED DECEMBER 31
Dollars in thousands, except per share amounts 2003 2002 2001
---------------------------------------------- ------- ------- -------
Net income reported..................................... $30,006 $23,123 $20,225
Add: Stock-based compensation expense included in
reported net income, net of related tax............. 393 -- --
Deduct: Stock-based employee compensation expense
determined under SFAS No. 123 for all awards, net
of related tax...................................... (1,876) (2,429) (2,874)
------- ------- -------
Pro forma net income.................................... $28,523 $20,694 $17,351
Earnings per share:
Basic as reported.................................. $ 0.67 $ 0.51 $ 0.45
Basic pro forma.................................... $ 0.64 $ 0.46 $ 0.39
Diluted as reported................................ $ 0.65 $ 0.49 $ 0.43
Diluted pro forma.................................. $ 0.62 $ 0.44 $ 0.37
The weighted average fair value per option granted was $4.00, $4.57 and
$2.99 for the years ended December 31, 2003, 2002 and 2001, respectively.
For purposes of presenting pro forma results, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model and the following assumptions:
YEAR ENDED DECEMBER 31
----------------------
2003 2002 2001
---- ---- ----
Risk-free interest rate................................ 4.0% 3.4% 4.9%
Expected life (years).................................. 7.0 6.0 6.0
Stock price volatility................................. 67.0% 75.0% 65.0%
Employee turnover...................................... 5.0% 5.0% 5.0%
Fair Value of Financial Instruments
For certain of WESCO's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying values approximate fair value due to their short
maturities. WESCO's senior subordinated notes with an aggregate principal amount
of $378.8 million were issued at an average discount of 2% and were trading at a
premium of 5% ($397.7 million) at December 31, 2003.
Interest Rate Swaps
WESCO enters into interest rate swap agreements to reduce the exposure
of its debt to interest rate risk and formally documents this strategy as part
of its risk management program. Interest rate swaps are used to modify the
market risk exposures for a portion of WESCO's debt to achieve LIBOR-based
floating interest expense. The swap transactions generally involve the exchange
of fixed-for-floating interest payment obligations and are accounted for as fair
value hedges. The gain or loss on the derivative instrument, as well as the
offsetting gain or loss on the hedged item, is recognized in earnings in the
current period.
WESCO estimates the fair value of derivatives based on quoted market
prices or pricing models using current market rates, and records all derivatives
on the balance sheet at fair value. At December 31, 2003, the fair value of
interest-rate-related derivatives designated as fair value hedges of debt was
$0.1 million and is recorded in non-current assets. Cash flows from derivative
instruments are presented in a manner consistent with the underlying
transaction.
39
Environmental Expenditures
WESCO has facilities and operations that distribute certain products
that must comply with environmental regulations and laws. Expenditures for
current operations are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations, and which do not
contribute to future revenue, are expensed. Liabilities are recorded when
remedial efforts are probable and the costs can be reasonably estimated.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
Recent Accounting Pronouncements
In 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. This interpretation is effective for
all entities subject to this interpretation no later than the end of the first
period that ends after March 15, 2004. The Company is currently evaluating the
impact of this interpretation on its financial statements.
3. INITIAL PUBLIC OFFERING
On May 17, 1999, WESCO completed its initial public offering of
11,183,750 shares of common stock ("Offering") at $18.00 per share. In
connection with the Offering, certain employee rights to require WESCO to
repurchase outstanding redeemable common stock were terminated and approximately
$31.5 million of convertible notes were converted into 1,747,228 shares of
common stock. Proceeds from the Offering (after deducting Offering costs of
$14.5 million) totaling $186.8 million and borrowings of approximately $65
million were used to redeem all of the 11 1/8% senior discount notes ($62.8
million) and to repay the existing revolving credit and term loan facilities
($188.8 million).
In connection with the Offering, the Board of Directors approved a 57.8
to one stock split effected in the form of a stock dividend of WESCO's common
stock. The Board of Directors also reclassified the Class A common stock into
common stock, increased the authorized common stock to 210,000,000 shares and
the authorized Class B common stock to 20,000,000 shares and authorized
20,000,000 shares of $.01 par value preferred stock, all effective May 11, 1999.
In this report, all share and per share data have been restated to reflect the
stock split.
4. GOODWILL
During the fourth quarter of 2003, WESCO completed its annual
impairment review required by SFAS No. 142. Each of WESCO's seven reporting
units was tested for impairment by comparing the implied fair value of each
reporting unit with its carrying value using discounted cash flow analyses.
Considerable management judgment is necessary to estimate discounted future cash
flows. Assumptions used for these estimated cash flows were based on a
combination of historical results and current internal forecasts. No impairment
losses were identified as a result of this review.
The changes in the carrying amount of goodwill were as follows:
YEAR ENDED DECEMBER 31
(In thousands) 2003 2002
-------------- -------- --------
Beginning balance January 1, ............................. $314,078 $311,073
Goodwill additions during year ........................... 84,595 3,005
-------- --------
Ending balance December 31,............................... $398,673 $314,078
======== ========
In conformity with SFAS No. 142, the results of prior periods have not
been restated. The following is a reconciliation of the impact of not amortizing
goodwill on prior periods of WESCO's net income and earnings per share:
40
YEAR ENDED DECEMBER 31
Dollars in thousands, except per share amounts 2003 2002 2001
---------------------------------------------- ------- ------- --------
Reported net income.................................... $30,006 $23,123 $ 20,225
Goodwill amortization, net of tax ..................... -- -- 7,236
------- ------- --------
Adjusted net income.................................... $30,006 $23,123 $ 27,461
Basic earnings per share:
Reported net income ............................... $ 0.67 $ 0.51 $ 0.45
Goodwill amortization, net of tax.................. -- -- 0.16
------- ------- --------
Adjusted net income................................ $ 0.67 $ 0.51 $ 0.61
======= ======= ========
Diluted earnings per share:
Reported net income................................ $ 0.65 $ 0.49 $ 0.43
Goodwill amortization, net of tax.................. -- -- 0.15
------- ------- --------
Adjusted net income................................ $ 0.65 $ 0.49 $ 0.58
======= ======= ========
5. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO maintains an accounts receivable securitization program
("Receivables Facility") that requires annual renewal of its terms. Under the
Receivables Facility, WESCO sells, on a continuous basis, to WESCO Receivables
Corporation, a wholly-owned, special purpose company ("SPC"), an undivided
interest in all domestic accounts receivable. The SPC sells without recourse to
a third-party conduit all the eligible receivables while maintaining a
subordinated interest, in the form of overcollateralization, in a portion of the
receivables. WESCO has agreed to continue servicing the sold receivables for the
financial institution at market rates; accordingly, no servicing asset or
liability has been recorded.
As of December 31, 2003 and 2002, securitized accounts receivable
totaled approximately $330 million and $346 million, respectively, of which the
subordinated retained interest was approximately $105 million and $53 million,
respectively. Accordingly, approximately $225 million and $293 million of
accounts receivable balances were removed from the consolidated balance sheets
at December 31, 2003 and 2002, respectively. WESCO reduced its Receivables
Facility by $68.0 million in 2003 and by $37.0 million in 2002. Costs associated
with the Receivables Facility totaled $4.5 million, $6.6 million and $16.9
million in 2003, 2002 and 2001, respectively. These amounts are recorded as
other expenses in the consolidated statements of operations and are primarily
related to the discount and loss on the sale of accounts receivables, partially
offset by related servicing revenue.
The key economic assumptions used to measure the retained interest at
the date of the securitization for securitizations completed in 2003 were a
discount rate of 2% and an estimated life of 1.5 months. At December 31, 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
approximately $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.
6. ACQUISITIONS
In 2001, WESCO acquired a distributor serving contractors who install
gas, lighting and communication utility infrastructure. Total goodwill recorded
as a result of this acquisition was approximately $47 million for the year ended
December 31, 2001. A summary of certain information with respect to all
acquisitions follows:
41
YEAR ENDED DECEMBER 31
-----------------------------
2003 2002 2001
-------- ------- --------
(IN THOUSANDS)
Details of acquisitions:
Fair value of assets acquired (including amounts earned under
acquisition agreements)....................................... $ 84,343 $ 2,000 $ 72,270
Liabilities assumed............................................... -- -- (9,586)
Deferred acquisition payable...................................... (84,343) (2,000) (10,000)
Deferred acquisition payment...................................... 2,028 14,466 8,585
Notes issued to seller............................................ -- -- (5,000)
-------- ------- --------
Cash paid for acquisitions........................................... $ 2,028 $14,466 $ 56,269
======== ======= ========
The 2001 acquisition was accounted for under the purchase method of
accounting for business combinations. The results of operations of the acquired
company are included in the consolidated financial statements prospectively from
the acquisition date. Pro forma results of this acquisition, assuming it had
been made at the beginning of each year presented, would not be materially
different from the consolidated results reported herein.
In 1998, WESCO acquired substantially all the assets and assumed
substantially all liabilities and obligations relating to the operations of
Bruckner Supply Company, Inc. ("Bruckner"). The terms of the purchase agreement
provide for additional contingent consideration to be paid based on achieving
certain earnings targets. Under the Bruckner acquisition agreement, the maximum
remaining earnout available was $80 million. The amount of earnout proceeds
payable in any single year subsequent to achieving the earnings target is capped
under this agreement at $30 million per year. As a result of Bruckner's
performance in 2003, WESCO has recorded a liability of $80 million as of
December 31, 2003 ($30 million classified as current and $50 million classified
as non-current) for the estimated amount owed based on 2003 performance for
contingent consideration relating to the Bruckner agreement. Based on 2003
performance and the accrual of $80 million, no further earnout is available.
The 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 be up to $20 million and would be made in 2008.
7. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT SUPPLIERS
WESCO distributes its products and services and extends credit to a
large number of customers in the industrial, construction, utility and
manufactured structures markets. In addition, one supplier accounted for
approximately 13%, 13% and 14% of WESCO's purchases for each of the three years,
2003, 2002 and 2001, respectively.
8. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth the components of property, buildings
and equipment:
DECEMBER 31
------------------------
2003 2002
--------- --------
(IN THOUSANDS)
Buildings and leasehold improvements................................. $ 68,488 $ 67,321
Furniture, fixtures and equipment.................................... 87,258 80,808
Software costs....................................................... 34,787 31,940
--------- --------
190,533 180,069
Accumulated depreciation and amortization............................ (111,600) (90,981)
--------- --------
78,933 89,088
Land................................................................. 18,983 18,349
Construction in progress............................................. 1,021 2,737
--------- --------
$ 98,937 $110,174
========= ========
Depreciation expense and capitalized software amortization was $20.7
million, $19.2 million and $18.4 million in 2003, 2002 and 2001, respectively.
42
9. LONG-TERM DEBT
The following table sets forth WESCO's outstanding indebtedness:
DECEMBER 31
------------------------
2003 2002
--------- --------
(IN THOUSANDS)
Revolving credit facility........................................... $ - $ 10,000
Mortgage facility................................................... 50,489 13,340
Senior subordinated notes (1)....................................... 370,607 389,038
Other............................................................... 1,066 5,596
--------- --------
422,162 417,974
Less current portion................................................ (2,120) (5,778)
--------- --------
$ 420,042 $412,196
========= ========
- ------------------
(1) Net of original issue discount of $6,459 and $8,410 and purchase
discount of $5,930 and $7,686 in 2003 and 2002, respectively, and of
interest rate swaps of $(4,165) and $(5,134) in 2003 and 2002,
respectively.
1999 Revolving Credit Facility
In June 1999, WESCO Distribution, Inc., a wholly-owned subsidiary of
WESCO, entered into a $400 million revolving credit facility with certain
financial institutions ("1999 Revolving Credit Facility"). In March 2002, the
1999 Revolving Credit Facility was terminated. In conjunction with the
termination, WESCO wrote off debt issuance costs of approximately $1.1 million.
2002 Revolving Credit Facility
In March 2002, WESCO Distribution, Inc. entered into a $290 million
revolving credit agreement ("2002 Revolving Credit Facility") that is
collateralized by substantially all inventory owned by WESCO and also by the
accounts receivable of WESCO Distribution Canada, Inc. Availability under the
agreement, which matures in 2007, is limited to the amount of eligible inventory
and Canadian receivables applied against certain advance rates. Proceeds from
this agreement were used to retire WESCO Distribution, Inc.'s 1999 Revolving
Credit Facility. Interest on the 2002 Revolving Credit Facility is at LIBOR plus
a margin that will range between 2.0% to 2.75% depending upon the amount of
excess availability under the facility. As long as the average daily excess
availability for both the preceding and projected succeeding 90-day period is
greater than $50 million, WESCO would be permitted to make acquisitions and
repurchase outstanding public stock and bonds.
The above permitted transactions would also be allowed if such excess
availability is between $25 million and $50 million and WESCO's fixed charge
coverage ratio, as defined by the agreement, is at least 1.25 to 1.0 after
taking into consideration the permitted transaction. Additionally, if WESCO's
excess availability under the agreement is less than $50 million, WESCO must
maintain a fixed charge coverage ratio of 1.1 to 1.0.
During 2003, the Company executed an amendment reducing the size of
this revolving credit facility to $200 million. WESCO recorded a $0.8 million
non-cash charge associated with the write-off of deferred financing fees related
to this reduction.
At December 31, 2003, there were no borrowings outstanding under this
facility.
Mortgage Financing Facility
In February 2003, WESCO finalized a $51 million mortgage financing
facility, $13 million of which was outstanding as of December 31, 2002.
Borrowings under the mortgage financing are collateralized by 75 domestic
properties and are subject to a 22-year amortization schedule with a balloon
payment due at the end of the 10-year term. Proceeds from the borrowings were
used to reduce outstanding borrowings under the 2002 Revolving Credit Facility.
Interest rates on borrowings under this facility are fixed at 6.5%.
43
Senior Subordinated Notes
In June 1998 and August 2001, WESCO Distribution Inc. completed an
offering of $300 million and $100 million, respectively, in aggregate principal
amount of 9.125% senior subordinated notes due on June 1, 2008. The notes were
issued at an average issue price of 98% of par. The net proceeds received from
the notes were approximately $376 million. The net proceeds were used to repay
outstanding indebtedness. These senior subordinated notes are fully and
unconditionally guaranteed by WESCO International, Inc.
During 2003, WESCO repurchased $21.2 million in aggregate principal
amount of senior subordinated notes at a net gain of $0.6 million. As of
December 31, 2003, WESCO had outstanding $378.8 million in aggregate principal
amount of senior subordinated notes due in 2008.
The senior subordinated notes bear interest at a stated rate of 9.125%
payable semiannually on June 1 and December 1 through June 1, 2008. The
effective interest rate for the senior subordinated notes is 9.4%.
The senior subordinated notes are redeemable at the option of WESCO
Distribution, Inc. in whole or in part, at any time after June 1, 2003 at the
following prices on the June anniversary:
Redemption Price
----------------
2003................................................................. 104.563%
2004................................................................. 103.042
2005................................................................. 101.521
2006 and thereafter.................................................. 100.000
The noteholders have the right to require WESCO Distribution, Inc.,
upon a change of control, to repurchase all or any part of the senior
subordinated notes at a redemption price equal to 101% of the principal amount
provided plus accrued and unpaid interest.
In September and October 2001, WESCO entered into four separate
fixed-to-floating interest rate swap agreements, each with a notional amount of
$25 million. 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. During 2003, interest expense was reduced by $0.5 million due to
amortization of the gain.
In September 2003, WESCO entered into a new $50 million interest rate
swap agreement. In December 2003, WESCO entered into two additional new $25
million interest rate swap agreements. These agreements had terms expiring
concurrently with the 9.125% senior subordinated notes with the intent of
converting $100 million of the senior subordinated notes to variable rates of
interest. Pursuant to these agreements, WESCO receives semi-annual fixed
interest payments at the rate of 9.125% and will make semi-annual variable
interest rate payments at rates based on six-month LIBOR rates plus a premium in
arrears. The LIBOR rates in the agreements reset every six months. These
agreements can be terminated by the counter party in accordance with a
redemption schedule that is consistent with the redemption schedule for the
senior subordinated notes.
Other
At December 31, 2003 and 2002, other borrowings primarily consisted of
notes issued to sellers in connection with acquisitions.
The following table sets forth the aggregate principal repayment requirements
for all indebtedness for the next five years and thereafter (in thousands):
2004................................................................. $ 2,120
2005 ................................................................ 1,203
2006................................................................. 1,259
2007................................................................. 1,338
2008................................................................. 380,250
Thereafter........................................................... 44,215
44
WESCO's credit agreements contain various restrictive covenants that,
among other things, impose limitations on (i) dividend payments or certain other
restricted payments or investments; (ii) the incurrence of additional
indebtedness and guarantees or issuance of additional stock; (iii) creation of
liens; (iv) mergers, consolidation or sales of substantially all of WESCO's
assets; (v) certain transactions among affiliates; (vi) payments by certain
subsidiaries to WESCO; and (vii) capital expenditures. In addition, the
revolving credit agreement requires WESCO to meet certain fixed charge coverage
tests depending on availability.
WESCO is permitted to pay dividends under certain limited
circumstances. At December 31, 2003 and 2002, no retained earnings were
available for dividend payments.
WESCO had $14.4 million and $16.6 million of outstanding letters of
credit at December 31, 2003 and 2002, respectively. These letters of credit are
used as collateral for interest rate swap agreements, potential obligation under
insurance programs as well as certain foreign commercial transactions. The fair
value of the letters of credit approximates the contract value.
10. CAPITAL STOCK
Preferred Stock
There are 20 million shares of preferred stock authorized at a par
value of $.01 per share. The Board of Directors has the authority, without
further action by the stockholders, to issue all authorized preferred shares in
one or more series and to fix the number of shares, designations, voting powers,
preferences, optional and other special rights and the restrictions or
qualifications thereof. The rights, preferences, privileges and powers of each
series of preferred stock may differ with respect to dividend rates, liquidation
values, voting rights, conversion rights, redemption provisions and other
matters.
Common Stock
There are 210 million shares of common stock and 20 million shares of
Class B common stock authorized at a par value of $.01 per share. The Class B
common stock is identical to the common stock, except for voting and conversion
rights. The holders of Class B common stock have no voting rights. With certain
exceptions, Class B common stock may be converted, at the option of the holder,
into the same number of shares of common stock.
The following table sets forth capital stock share activity:
CLASS B
COMMON STOCK TREASURY STOCK COMMON STOCK
------------ -------------- ------------
December 31, 2000............................ 44,093,664 (3,976,897) 4,653,131
Options exercised............................ 176,146 (55,751) --
---------- ---------- ---------
December 31, 2001............................ 44,269,810 (4,032,648) 4,653,131
Treasury share issuance...................... -- 10,000 --
Options exercised............................ 213,703 (10,372) --
---------- ---------- ---------
December 31, 2002............................ 44,483,513 (4,033,020) 4,653,131
Stock repurchase............................. -- (4,339,431) --
Converted to common stock.................... 313,700 -- (313,700)
Options exercised............................ 202,581 (28,048) --
---------- ---------- ---------
December 31, 2003............................ 44,999,794 (8,400,499) 4,339,431
========== ========== =========
Previously, WESCO's board of directors authorized a $25 million share
repurchase program with respect to its common stock which expired in May 2003.
Under previous share repurchase programs, WESCO purchased in prior years
approximately 3.9 million shares of its common stock for approximately $32.8
million. No shares were repurchased pursuant to these plans during 2003.
45
In November 2003, WESCO's board of directors authorized a special
repurchase of the Company's Class B common stock. Pursuant to the authorization,
4.3 million shares of Class B common stock were repurchased from an
institutional holder, at a discount to market, for approximately $27.3 million.
Prior to the repurchase, 0.3 million Class B shares were converted to 0.3
million shares of common stock when they were sold on the secondary markets by
the institutional holder. At December 31, 2003, all the shares of Class B common
stock were held in treasury or had been converted to common stock.
11. INCOME TAXES
The following table sets forth the components of the provision for
income taxes:
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
------- -------- -------
(IN THOUSANDS)
Current taxes:
Federal........................................................... $ 1,466 $(13,670) $ 1,051
State............................................................. (875) 645 (1,502)
Foreign........................................................... 4,847 1,954 1,559
------- -------- -------
Total current................................................... 5,438 (11,071) 1,108
Deferred taxes:
Federal........................................................... 4,409 14,613 9,990
State............................................................. 1,091 (176) 2,297
Foreign........................................................... (1,853) (519) (252)
------- -------- -------
Total deferred.................................................. 3,647 13,918 12,035
------- -------- -------
$ 9,085 $ 2,847 $13,143
======= ======== =======
The following table sets forth the components of income before income
taxes by jurisdiction:
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
------- -------- -------
(IN THOUSANDS)
United States...................................................... $29,925 $ 19,544 $29,921
Foreign............................................................ 9,166 6,426 3,447
------- -------- -------
$39,091 $ 25,970 $33,368
======= ======== =======
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
------- -------- -------
Federal statutory rate................................................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit................................ 0.4 1.2 1.5
Nondeductible expenses................................................. 2.3 4.2 4.2
Domestic tax benefit from foreign operations........................... (3.9) (0.3) (4.1)
Foreign tax rate differences........................................... (1.5) (0.9) 0.4
Favorable impact resulting from prior year tax contingencies(1)........ (6.6) (20.4) --
Remeasurement of deferred taxes(2)..................................... -- (2.7) --
Net operating loss utilization(3)...................................... (1.4) -- --
Other.................................................................. (1.0) (5.1) 2.4
---- ----- ----
23.3% 11.0% 39.4%
==== ===== ====
- ---------------
(1)Represents a benefit of $2.6 million during 2003 and $5.3 million during 2002
from the resolution of prior year tax contingencies.
(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.
46
As of December 31, 2003, the Company had net operating loss
carryforward for state income tax purposes of approximately $12.8 million, which
will expire beginning in 2006. The realization of these state deferred tax
assets is dependent upon future earnings, if any, and the timing and amount are
uncertain. Accordingly, the net deferred tax assets have been fully offset by a
valuation allowance. The valuation allowance increased by approximately $1.7
million during 2003.
Utilization of the Company's state net operating loss carryforwards is
subject to a substantial annual limitation imposed by state statute. Such an
annual limitation could result in the expiration of the net operating loss and
tax credit carryforwards before utilization.
The following table sets forth deferred tax assets and liabilities:
DECEMBER 31
-----------------------------------------
2003 2002
------------------- -------------------
(IN THOUSANDS)
Assets Liabilities Assets Liabilities
Accounts receivable................................ $2,266 $ -- $1,107 $ --
Inventory.......................................... -- 3,587 -- 1,920
Other.............................................. 2,899 3,957 2,490 5,085
------ ----------- ------ -----------
Current deferred tax ......................... 5,165 7,544 3,597 7,005
------ ----------- ------ -----------
Intangibles........................................ -- 28,985 -- 22,403
Property, buildings and equipment.................. -- 5,043 -- 6,943
Other.............................................. -- 123 -- 129
------ ----------- ------ -----------
Long-term deferred tax........................ $ -- $ 34,151 $ -- $ 29,475
------ ----------- ------ -----------
12. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding during the periods. Diluted earnings
per share are computed by dividing net income by the weighted average common
shares and common share equivalents outstanding during the periods. The dilutive
effect of common share equivalents is considered in the diluted earnings per
share computation using the treasury stock method.
The following table sets forth the details of basic and diluted
earnings per share:
47
YEAR ENDED DECEMBER 31
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net income ........................................... $ 30,006 $ 23,123 $ 20,225
Weighted average common shares outstanding used in
computing basic earnings per share ................ 44,631,459 45,033,964 44,862,087
Common shares issuable upon exercise of dilutive stock
options ........................................... 1,717,623 1,786,129 2,039,586
----------- ----------- -----------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings per share ................................ 46,349,082 46,820,093 46,901,673
=========== =========== ===========
Earnings per share
Basic ............................................. $ 0.67 $ 0.51 $ 0.45
Diluted ........................................... $ 0.65 $ 0.49 $ 0.43
Options to purchase 5.5 million and 5.3 million shares of common stock
at a weighted average exercise price of $9.24 per share and $8.37 per share were
outstanding as of December 31, 2003 and 2002, respectively, but were not
included in the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of WESCO common
stock.
13. EMPLOYEE BENEFIT PLANS
A majority of WESCO's employees are covered by defined contribution
retirement savings plans for their service rendered subsequent to WESCO's
formation. U.S. employee contributions of not more than 6% of eligible
compensation are matched 50% by WESCO. WESCO's contributions for Canadian
employees range from 1% to 6% of eligible compensation based on years of
service. For the years ended December 31, 2003, 2002 and 2001, WESCO contributed
$9.5 million, $4.9 million and $5.5 million, respectively, which was charged to
expense. Contributions may be taken in the form of WESCO's stock at the
employee's election.
In addition, employer contributions may be made at the discretion of
the Board of Directors and can be based on WESCO's financial performance. For
2003, an employer contribution of approximately $4.2 million is included in the
total contribution of $9.5 million. No such contributions were made during 2002
or 2001.
14. STOCK INCENTIVE PLANS
Stock Purchase Plans
In connection with the Recapitalization, WESCO established a stock
purchase plan ("1998 Stock Purchase Plan") under which certain employees may be
granted an opportunity to purchase WESCO's common stock. The maximum number of
shares available for purchase may not exceed 427,720. There were no shares
issued in 2003, 2002 or 2001.
In 1994, WESCO established a stock purchase plan ("1994 Stock Purchase
Plan") under which certain employees were granted an opportunity to purchase
WESCO's common stock. Future purchases of shares under the 1994 Stock Purchase
Plan were terminated in conjunction with the establishment of the 1998 Stock
Purchase Plan.
Stock Option Plans
WESCO has sponsored four stock option plans, the 1999 Long-Term
Incentive Plan ("LTIP"), the 1998 Stock Option Plan, the Stock Option Plan for
Branch Employees and the 1994 Stock Option Plan. The LTIP was designed to be the
successor plan to all prior plans. Outstanding options under prior plans will
continue to be governed by their existing terms, which are substantially similar
to the LTIP. Any remaining shares reserved for future issuance under the prior
plans are available for issuance under the LTIP. The LTIP is administered by the
Compensation Committee of the Board of Directors.
An initial reserve of 6,936,000 shares of common stock has been
authorized for issuance under the LTIP. This
48
reserve automatically increases by (i) the number of shares of common stock
covered by unexercised options granted under prior plans that are canceled or
terminated after the effective date of the LTIP and (ii) the number of shares of
common stock surrendered by employees to pay the exercise price and/or minimum
withholding taxes in connection with the exercise of stock options granted under
our prior plans.
Options granted vest and become exercisable over periods ranging from
three to four years or earlier based on WESCO achieving certain financial
performance criteria. If the financial performance criteria are not met, all the
options will vest after nine years and nine months. All options vest immediately
in the event of a change in control. Each option terminates on the tenth
anniversary of its grant date unless terminated sooner under certain conditions.
During December 2003, in a privately negotiated transaction with 19
employees, WESCO redeemed the net equity value of stock options originally
granted in 1994 and 1995, representing approximately 2.9 million shares. The
options held by the employees had a weighted average price of $1.75. The options
were redeemed at a price of $8.63 per share. The cash payment of $20.1 million
was made in January 2004. The Company recognized a tax benefit of $7.3 million
as a result of this transaction.
All awards under WESCO's stock incentive plans are designed to be
issued at fair market value.
The following sets forth shares of common stock reserved for future issuance at
December 31, 2003:
Stock Purchase Plan...................................... 135,830
LTIP..................................................... 4,927,736
The following table sets forth a summary of stock option activity and
related information for the years indicated:
2003 2002 2001
---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- --------- -------- --------- --------
Beginning of year ........ 9,840,114 $ 5.99 9,999,077 $ 5.96 9,588,306 $ 6.13
Granted .................. 1,093,500 5.92 275,500 6.74 907,350 4.70
Exercised ................ (202,581) 2.63 (213,703) 2.92 (176,146) 2.78
Redeemed ................. (2,920,890) 1.75 -- -- -- --
Cancelled ................ (155,321) 8.91 (220,760) 8.24 (320,433) 9.50
---------- --------- ---------
End of year .............. 7,654,822 7.64 9,840,114 5.99 9,999,077 5.96
========== ========= =========
Exercisable at end of year 3,463,309 $ 7.38 6,477,016 $ 4.70 6,330,661 $ 4.32
The following table sets forth exercise prices for options outstanding
as of December 31, 2003:
OPTIONS OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE REMAINING CONTRACTUAL LIFE
- -------------------------- ----------- ----------- --------------------------
$ 1.73 136,177 136,177 1.1
$ 1.98 360,964 360,964 2.0
$ 3.38 799,888 799,888 3.0
$ 4.34 60,112 60,112 3.9
$ 4.50 - $ 7.75 2,539,601 352,157 8.4
$ 8.13 - $ 9.31 48,000 -- 6.4
$ 9.75 - $ 9.88 913,500 -- 6.4
$ 10.75 2,787,405 1,744,836 4.6
$ 18.00 9,175 9,175 5.4
--------- ---------
7,654,822 3,463,309
========= =========
49
15. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases,
primarily for real property that have noncancelable lease terms in excess of one
year as of December 31, 2003, are as follows:
(IN THOUSANDS)
--------------
2004.................................................................. $24,215
2005.................................................................. 18,973
2006.................................................................. 14,279
2007.................................................................. 10,876
2008.................................................................. 11,264
Thereafter............................................................ 5,250
Rental expense for the years ended December 31, 2003, 2002 and 2001,
was $32.3 million, $32.9 million and $32.5 million, respectively.
WESCO has litigation arising from time to time in the normal course of
business. In management's opinion, any present litigation WESCO is aware of will
not materially affect WESCO's consolidated financial position, results of
operations or cash flows.
We reached a final settlement agreement related to an employment and
wages claim with the case being dismissed with prejudice. We settled the case
for $3.4 million and received a refund of approximately $300,000 of that amount.
16. SEGMENTS AND RELATED INFORMATION
WESCO is engaged principally in one line of business - the sale of
electrical products and maintenance repair and operating supplies - which
represents more than 90% of the consolidated net sales, income from operations
and assets for 2003, 2002 and 2001. WESCO has over 215,000 product stock keeping
units and markets over one million products for direct shipment customers. It is
impractical to disclose net sales by product, major product group or service
group. There were no material amounts of sales or transfers among geographic
areas and no material amounts of export sales.
The following table sets forth information about WESCO by geographic
area:
NET SALES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31 DECEMBER 31
---------------------------------- ----------------------
2003 2002 2001 2003 2002
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
United States ................. $2,872,239 $2,943,740 $3,266,352 $ 491,515 $ 421,047
Canada ........................ 335,695 299,844 311,471 11,926 10,509
Other foreign ................. 78,832 82,196 80,210 1,341 1,371
---------- ---------- ---------- ---------- ----------
$3,286,766 $3,325,780 $3,658,033 $ 504,782 $ 432,927
========== ========== ========== ========== ==========
50
17. OTHER FINANCIAL INFORMATION
WESCO Distribution, Inc. has issued $400 million of 9 1/8% senior
subordinated notes. The senior subordinated notes are fully and unconditionally
guaranteed by WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Condensed
consolidating financial information for WESCO International, Inc., WESCO
Distribution, Inc. and the non-guarantor subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Cash and cash equivalents ........... $ 1 $ 16,421 $ 11,073 $ -- $ 27,495
Trade accounts receivable ........... -- 39,900 226,689 -- 266,589
Inventories ......................... -- 272,597 48,378 -- 320,975
Other current assets ................ -- 37,259 7,691 (3,721) 41,229
-------------- ----------- ----------- ------------- ----------
Total current assets ............. 1 366,177 293,831 (3,721) 656,288
Intercompany receivables, net ....... -- 203,243 45,156 (248,399) --
Property, buildings and equipment,
net .............................. -- 29,687 69,250 -- 98,937
Goodwill and other intangibles, net.. -- 360,655 38,018 -- 398,673
Investments in affiliates and other
noncurrent assets ................ 410,382 361,824 3,727 (768,626) 7,307
-------------- ----------- ----------- ------------- ----------
Total assets ..................... $ 410,383 $ 1,321,586 $ 449,982 $ (1,020,746) $1,161,205
============== =========== =========== ============= ==========
Accounts payable .................... -- $ 345,632 $ 20,748 $ -- $ 366,380
Other current liabilities ........... -- 105,521 11,530 (3,721) 113,330
-------------- ------------ ------------ ------------- ----------
Total current liabilities ........ -- 451,153 32,278 (3,721) 479,710
Intercompany payables, net .......... 248,399 -- -- (248,399) --
Long-term debt ...................... -- 370,642 49,400 -- 420,042
Other noncurrent liabilities ........ -- 89,409 4,356 -- 93,765
Stockholders' equity ................ 161,984 410,382 363,948 (768,626) 167,688
-------------- ----------- ----------- ------------- ----------
Total liabilities and
stockholders' equity ............. $ 410,383 $ 1,321,586 $ 449,982 $ (1,020,746) $1,161,205
============== =========== =========== ============= ==========
51
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, 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 ......................... -- 300,064 40,286 -- 340,350
Other current assets ................ -- 29,584 8,479 (1,774) 36,289
-------------- -------------- ------------- ------------- ------------
Total current assets ............. 4 387,478 195,750 (1,774) 581,458
Intercompany receivables, net ....... -- 174,970 42,144 (217,114) --
Property, buildings and equipment,
net .............................. -- 41,822 68,352 -- 110,174
Goodwill and other intangibles, net . -- 247,671 66,407 -- 314,078
Investments in affiliates and other
noncurrent assets ................ 387,887 347,678 1,081 (722,837) 13,809
-------------- -------------- ------------- ------------- ------------
Total assets ..................... $ 387,891 $ 1,199,619 $ 373,734 $ (941,725) $ 1,019,519
============== ============== ============= ============= ============
Accounts payable .................... $ -- $ 340,748 $ 5,765 $ -- $ 346,513
Other current liabilities ........... -- 43,423 14,714 (1,774) 56,363
-------------- -------------- ------------- ------------- ------------
Total current liabilities ........ -- 384,171 20,479 (1,774) 402,876
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 $ 1,199,619 $ 373,734 $ (941,725) $ 1,019,519
============== ============== ============= ============= ============
52
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net sales............................ $ -- $ 2,806,044 $ 480,722 $ -- $ 3,286,766
Cost of goods sold................... -- 2,287,972 388,729 -- 2,676,701
Selling, general and administrative
expenses.......................... -- 429,567 71,895 -- 501,462
Depreciation and amortization........ -- 19,391 3,167 -- 22,558
Results of affiliates' operations.... 22,495 26,889 -- (49,384) --
Interest expense (income), net....... (11,559) 58,233 (4,357) -- 42,317
Other (income) expense............... -- 24,884 (20,247) -- 4,637
Provision for income taxes........... 4,048 (9,609) 14,646 -- 9,085
-------------- ------------------ ------------- ------------- ------------
Net income (loss)................. $ 30,006 $ 22,495 $ 26,889 $ (49,384) $ 30,006
============== ================== ============= ============= ============
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net sales............................ $ -- $ 2,872,225 $ 453,555 $ -- $ 3,325,780
Cost of goods sold................... -- 2,364,344 370,662 -- 2,735,006
Selling, general and administrative
expenses.......................... -- 427,307 67,075 -- 494,382
Depreciation and amortization........ -- 15,004 4,763 -- 19,767
Results of affiliates' operations.... 15,289 55,894 -- (71,183) --
Interest expense (income), net....... (12,056) 53,338 1,703 -- 42,985
Other (income) expense............... -- 68,942 (61,272) -- 7,670
Provision for income taxes........... 4,222 (16,105) 14,730 -- 2,847
-------------- ------------------ ------------- ------------- ------------
Net income (loss)................. $ 23,123 $ 15,289 $ 55,894 $ (71,183) $ 23,123
============== ================== ============= ============= ============
53
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net sales............................ $ -- $ 3,203,752 $ 454,281 $ -- $ 3,658,033
Cost of goods sold................... -- 2,643,448 371,072 -- 3,014,520
Selling, general and administrative
expenses.......................... -- 487,204 29,952 -- 517,156
Depreciation and amortization........ -- 24,974 5,998 -- 30,972
Results of affiliates' operations.... 15,572 93,384 -- (108,956) --
Interest expense (income), net....... (7,162) 59,045 (6,743) -- 45,140
Other (income) expense............... -- 91,897 (75,020) -- 16,877
Provision for income taxes........... 2,509 (25,004) 35,638 -- 13,143
-------------- ------------------ ------------- ------------- ------------
Net income (loss)................. $ 20,225 $ 15,572 $ 93,384 $ (108,956) $ 20,225
============== ================== ============= ============= ============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net cash (used) provided by
operating activities.............. $ (4,431) $ 74,303 $ (34,114) $ -- $ 35,758
Investing activities:
Capital expenditures.............. -- (7,978) (401) -- (8,379)
Acquisitions...................... -- (2,028) -- -- (2,028)
Other............................. -- 1,177 -- -- 1,177
-------------- ------------------ ------------ ------------- ------------
Net cash used by investing
activities........................ -- (8,829) (401) -- (9,230)
Financing activities:
Net borrowings (repayments) ...... 31,285 (66,065) 37,149 -- 2,369
Equity transactions............... (26,857) -- -- -- (26,857)
Other............................. -- 4,563 (2,389) -- 2,174
-------------- ------------------ ------------ ------------- ------------
Net cash provided (used) provided
by financing activities........... 4,428 (61,502) 34,760 -- (22,314)
-------------- ------------------ ------------ ------------- ------------
Effect of exchange rate changes on
cash and cash equivalents -- -- 711 -- 711
-------------- ------------------ ------------ ------------- ------------
Net change in cash and cash
equivalents....................... (3) 3,972 956 -- 4,925
Cash and cash equivalents at
beginning of period............... 4 12,449 10,117 -- 22,570
-------------- ------------------ ------------ ------------- ------------
Cash and cash equivalents at end of
period............................ $ 1 $ 16,421 $ 11,073 $ -- $ 27,495
============== ================== ============ ============= ============
54
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net cash provided (used) by
operating activities............. $ 8,154 $ 59,642 $ (47,451) $ -- $ 20,345
Investing activities:
Capital expenditures............. -- (8,944) (405) -- (9,349)
Acquisitions..................... -- (14,466) -- -- (14,466)
Other............................ -- 755 -- -- 755
-------------- ------------------ ------------ ------------- ------------
Net cash used by investing
activities....................... -- (22,655) (405) -- (23,060)
Financing activities:
Net (repayments) borrowings ..... (8,772) (37,214) 712 -- (45,274)
Equity transactions.............. 620 -- -- -- 620
Other............................ -- (5,201) -- -- (5,201)
-------------- ------------------ ------------ ------------- ------------
Net cash (used) provided by
financing activities............. (8,152) (42,415) 712 -- (49,855)
-------------- ------------------ ------------ ------------- ------------
Effect of exchange rate changes on
cash and cash equivalents -- -- 83 -- 83
-------------- ------------------ ------------ ------------- ------------
Net change in cash and cash
equivalents...................... 2 (5,428) (47,061) -- (52,487)
Cash and cash equivalents at
beginning of period.............. 2 17,877 57,178 -- 75,057
-------------- ------------------ ------------ ------------- ------------
Cash and cash equivalents at end of
period........................... $ 4 $ 12,449 $ 10,117 $ -- $ 22,570
============== ================== ============ ============= ============
55
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net cash provided (used) by
operating activities.............. $ 9,551 $ 42,793 $ 115,085 $ (6,158) $ 161,271
Investing activities:
Capital expenditures.............. -- (11,654) (2,166) -- (13,820)
Acquisitions...................... -- (10,496) (45,773) -- (56,269)
Other............................. -- 933 -- -- 933
-------------- ------------------ ------------ ------------- ------------
Net cash used by investing
activities........................ -- (21,217) (47,939) -- (69,156)
Financing activities:
Net repayments ................... (10,048) (17,397) (9,740) -- (37,185)
Equity transactions............... 489 -- -- -- 489
Other............................. -- (1,213) (49) -- (1,262)
-------------- ------------------ ------------ ------------- ------------
Net cash used by financing
activities........................ (9,559) (18,610) (9,789) -- (37,958)
-------------- ------------------ ------------ ------------- ------------
Effect of exchange rate changes on
cash and cash equivalents -- -- (179) -- (179)
-------------- ------------------ ------------ ------------- ------------
Net change in cash and cash
equivalents....................... (8) 2,966 57,178 (6,158) 53,978
Cash and cash equivalents at
beginning of period............... 10 14,911 -- 6,158 21,079
-------------- ------------------ ------------ ------------- ------------
Cash and cash equivalents at end of
period............................ $ 2 $ 17,877 $ 57,178 $ -- $ 75,057
============== ================== ============ ============= ============
56
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for
the years ended December 31, 2003 and 2002:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
2003
Net sales............................................ $790,807 $820,238 $825,601 $850,120
Gross profit......................................... 145,432 150,900 153,659 160,074
Income from operations............................... 18,559 18,959 23,528 24,999
Income before income taxes .......................... 6,761 7,167 11,772 13,391
Net income .......................................... 4,840 7,350 8,373 9,443
Basic earnings per share............................. 0.11 0.16 0.19 0.21
Diluted earnings per share........................... 0.10 0.16 0.18 0.21
2002
Net sales............................................ $808,917 $848,449 $852,949 $815,465
Gross profit......................................... 145,644 149,453 146,487 149,190
Income from operations............................... 18,413 21,622 18,331 18,259
Income before income taxes........................... 4,969 8,805 5,816 6,380
Net income........................................... 3,837 5,573 8,983 4,730
Basic earnings per share............................. 0.09 0.12 0.20 0.10
Diluted earnings per share........................... 0.08 0.12 0.19 0.10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this annual report. Based on that evaluation, management, including
the CEO and CFO, concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by WESCO in
reports that it files under the Exchange Act are recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission rules and forms. There have been no significant changes in internal
control over financial reporting that occurred during the fourth fiscal quarter,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
As previously disclosed by the Company on February 12, 2004, the Audit
Committee, following a review of an internal audit report, engaged independent
counsel to assess and make findings and recommendations with respect to one
branch operation (comprising approximately 2% of the Company's sales) and report
back to the Audit Committee promptly. The matters under review relate primarily
to cash management and undocumented expense reimbursement practices by certain
personnel at this branch which were inappropriate and did not follow corporate
policies and procedures. The investigation by independent counsel is
substantially complete. Management and the Audit Committee do not believe that
the amounts involved are material to the Company's consolidated financial
statements and had no impact on the Company's reported results. Management
promptly implemented those remedial actions recommended by the internal auditors
in their January 2004 report. In addition, management has begun to implement
further action plans to address the findings and recommendations of the
independent investigation related to certain internal control and operational
matters at this branch.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Directors and Executive
Officers" in the Proxy Statement is incorporated herein by reference to our
definitive Proxy Statement for our Annual Meeting of Stockholders to be held on
May 19, 2004.
Codes of Ethics and Conduct.
We have adopted a Code of Business Conduct and Ethics ("Code of
Conduct") that applies to our directors, officers and employees which is
available on our website at www.wescodist.com by selecting the "Investors" tab
followed by the "Corporate Governance" heading. Any waiver of the Code of
Conduct for our executive officers or directors will be disclosed promptly at
that location on our website.
We also have adopted a Senior Financial Executive Code of Business
Ethics and Conduct ("Senior Financial Executive Code") that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing these functions. The Senior
Financial Executive Code is also available at that same location on our website.
We intend to timely disclose any amendment or waiver of the Senior Financial
Executive Code on our website and will retain such information on our website as
required by applicable SEC rules.
A copy of the Code of Conduct and/or Senior Financial Executive Code
may be obtained upon request by any stockholder, without charge, by writing to
us at WESCO International, Inc., 225 West Station Square Drive, Suite 700,
Pittsburgh, Pennsylvania 15219, Attention: Corporate Secretary.
Information included on our website is not a part of this annual report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference to our definitive Proxy
Statement for our Annual Meeting of Stockholders to be held on May 19, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information set forth under the caption "Security Ownership" in the
Proxy Statement is incorporated herein by reference to our definitive Proxy
Statement for our Annual Meeting of Stockholders to be held on May 19, 2004.
The following table provides information as of December 31, 2003 with
respect to the shares of our common stock that may be issued under our existing
equity compensation plans:
Number of securities to be Weighted average
issued upon exercise of exercise price of Number of securities remaining
outstanding options, warrants outstanding options, available for future issuance
Plan Category and rights warrants and rights under equity compensation plans
- --------------------------- ----------------------------- -------------------- -------------------------------
Equity compensation plans 7,654,822 $7.64 5,063,566
approved by security
holders
Equity compensation plans -- -- --
not approved by security
holders
--------- ----- ---------
Total 7,654,822 $7.64 5,063,566
--------- ----- ---------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
58
The information set forth under the caption "Certain Transactions and
Relationships with the Company" in the Proxy Statement is incorporated herein by
reference to our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on May 19, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information set forth under the caption "Principal Accountant Fees
and Services" in the Proxy Statement is incorporated herein by reference to the
definitive Proxy Statement for our Annual Meeting of Stockholders to be held on
May 19, 2004.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this annual report:
(a)(1) FINANCIAL STATEMENTS
The list of financial statements required by this item is set forth
in Item 8, "Financial Statements and Supplementary Data" and is
incorporated herein by reference.
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
(b) REPORTS ON FORM 8-K
Form 8-K, Item 12, furnished to the SEC on October 22, 2003 with
respect to WESCO's third quarter 2003 financial results.
Form 8-K, Item 5 and 7, filed with the SEC on November 20, 2003 with
respect to the repurchase by WESCO of certain shares of its Class B
common stock.
(c) EXHIBITS
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ---------------------- -----------------------
2.1 Recapitalization Agreement, dated as of March 27, Incorporated by reference to
1998, among Thor Acquisitions L.L.C., WESCO Exhibit 2.1 to WESCO's
International, Inc. (formerly known as CDW Holding Registration Statement on
Corporation) and certain securityholders of WESCO Form S-4 (No. 333-43225)
International, Inc.
2.2 Purchase Agreement, dated as of May 29, 1998, Incorporated by reference to
among WESCO International, Inc., WESCO Exhibit 2.2 to WESCO's
Distribution, Inc., Chase Securities Inc. and Registration Statement on
Lehman Brothers, Inc. Form S-4 (No. 333-43225)
2.3 Asset Purchase Agreement, dated as of September 11, 1998, Incorporated by reference to
among Bruckner Supply Company, Inc. and WESCO Exhibit 2.01 to WESCO's
Distribution, Inc. Current Report on Form 8-K,
dated September 11, 1998
59
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ---------------------- -----------------------
2.4 Purchase Agreement, dated August 16, 2001, among WESCO Incorporated by reference to
International, Inc., WESCO Distribution, Inc. and the Exhibit 2.4 to WESCO's
Initial Purchasers listed therein. Registration Statement on
Form S-4 (No. 333-70404)
3.1 Restated Certificate of Incorporation of WESCO Incorporated by reference to
International, Inc. Exhibit 3.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
3.2 By-laws of WESCO International, Inc. Incorporated by reference to
Exhibit 3.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
4.1 Indenture, dated as of June 5, 1998, among WESCO Incorporated by reference to
International, Inc., WESCO Distribution, Inc. and Bank Exhibit 4.1 to WESCO's
One, N.A. Registration Statement on
Form S-4 (No. 333-43225)
4.2 Form of 9 1/8% Senior Subordinated Note Due 2008, Series Incorporated by reference to
A (included in Exhibit 4.1). Exhibit 4.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
4.3 Form of 9 1/8% Senior Subordinated Note Due 2008, Series Incorporated by reference to
A (included in Exhibit 4.1). Exhibit 4.3 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
4.4 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
June 5, 1998, among the Company, WESCO International, Exhibit 4.4 to WESCO's
Inc. and the Initial Purchasers (as defined therein). Registration Statement on
Form S-4 (No. 333-43225)
4.5 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
June 5, 1998, among WESCO International, Inc. and the Exhibit 4.8 to WESCO's
Initial Purchasers (as defined therein). Registration Statement on
Form S-4 (No. 333-43225)
4.6 Indenture, dated as of August 23, 2001, among WESCO Incorporated by reference to
International, Inc., WESCO Distribution, Inc. and Bank Exhibit 4.6 to WESCO's
One N.A. Registration Statement on
Form S-4 (No. 333-70404)
4.7 Exchange and Registration Rights Agreement, dated as of Incorporated by reference to
August 23, 2001, among WESCO International, Inc., WESCO Exhibit 4.7 to WESCO's
Distribution, Inc. and the Initial Purchasers listed Registration Statement on
therein. Form S-4 (No. 333-70404)
4.8 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
(included in Exhibit 4.6). Exhibit 4.8 to WESCO's
60
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ---------------------- -----------------------
Registration Statement on
Form S-4 (No. 333-70404)
4.9 Form of 9 1/8% Senior Subordinated Note Due 2008, Incorporated by reference to
(included in Exhibit 4.6). Exhibit 4.9 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
10.1 CDW Holding Corporation Stock Purchase Plan. Incorporated by reference to
Exhibit 10.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.2 Form of Stock Subscription Agreement. Incorporated by reference to
Exhibit 10.2 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.3 CDW Holding Corporation Stock Option Plan. Incorporated by reference to
Exhibit 10.3 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.4 Form of Stock Option Agreement. Incorporated by reference to
Exhibit 10.4 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.5 CDW Holding Corporation Stock Option Plan for Branch Incorporated by reference to
Employees. Exhibit 10.5 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.6 Form of Branch Stock Option Agreement. Incorporated by reference to
Exhibit 10.6 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.7 Non-Competition Agreement, dated as of February 28, 1996, Incorporated by reference to
between Westinghouse, WESCO International, Inc. and WESCO Exhibit 10.8 to WESCO's
Distribution, Inc. Registration Statement on
Form S-4 (No. 333-43225)
10.8 Lease, dated as of May 24, 1995, as amended by Amendment Incorporated by reference to
One, dated as of June 1995, and by Amendment Two, dated Exhibit 10.10 to WESCO's
as of December 24, 1995, by and between WESCO Registration Statement on
Distribution, Inc. as Tenant and Opal Investors, L.P. and Form S-4 (No. 333-43225)
Mural GEM Investors as Landlord.
10.9 Lease, dated as of April 1, 1992, as renewed by Letter of Incorporated by reference to
Notice of Intent to Renew, dated as of December 13, 1996, Exhibit 10.11 to WESCO's
by and between the Company as successor in interest to Registration Statement on
Westinghouse Electric Corporation as Tenant Form S-4 (No. 333-43225)
61
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ---------------------- -----------------------
and Utah State Retirement Fund as Landlord.
10.10 Lease, dated as of September 4, 1997, between WESCO Incorporated by reference to
Distribution, Inc. as Tenant and The Buncher Company as Exhibit 10.12 to WESCO's
Landlord. Registration Statement on
Form S-4 (No. 333-43225)
10.11 Lease, dated as of March 1995, by and between WESCO Incorporated by reference to
Distribution-Canada, Inc. as Tenant and Atlantic Exhibit 10.13 to WESCO's
Construction, Inc. as Landlord. Registration Statement on
Form S-4 (No. 333-43225)
10.12 Amended and Restated Registration and Participation Incorporated by reference to
Agreement, dated as of June 5, 1998, among WESCO Exhibit 10.19 to WESCO's
International, Inc. and certain securityholders of WESCO Registration Statement on
International, Inc. named therein. Form S-4 (No. 333-43225)
10.13 Employment Agreement between WESCO Distribution, Inc. and Incorporated by reference to
Roy W. Haley. Exhibit 10.20 to WESCO's
Registration Statement on
Form S-4 (No. 333-43225)
10.14 WESCO International, Inc. 1998 Stock Option Plan. Incorporated by reference to
Exhibit 10.1 to WESCO's
Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1998
10.15 Form of Management Stock Option Agreement. Incorporated by reference to
Exhibit 10.2 to WESCO's
Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1998
10.16 1999 Deferred Compensation Plan for Non-Employee Incorporated by reference to
Directors. Exhibit 10.22 to WESCO's
Annual Report on Form 10-K
for the year ended December
31, 1998
10.17 Credit Agreement, dated as of June 29, 1999, among WESCO Incorporated by reference to
Distribution, Inc., WESCO Distribution-Canada, Inc., Exhibit 10.1 to WESCO's
WESCO International, Inc. and the Lenders identified Quarterly Report on Form 10-Q
therein. for the quarter ended June
30, 1999
10.18 Amendment, dated as of December 20, 2000, to the Credit Incorporated by reference to
Agreement, dated as of June 29, 1999, among WESCO Exhibit 10.24 to WESCO's
Distribution, Inc., WESCO Distribution-Canada, Inc., Annual Report on Form 10-K
WESCO International, Inc. and the Lenders identified for the year ended December
therein. 31, 2000
62
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ---------------------- -----------------------
10.19 Amendment, dated as of August 3, 2001, to the Credit Incorporated by reference to
Agreement, dated as of June 29, 1999, among WESCO Exhibit 10.19 to WESCO's
Distribution, Inc., WESCO Distribution-Canada, Inc., Registration Statement on
WESCO International, Inc. and the Lenders identified Form S-4 (No. 333-70404)
therein.
10.20 Credit Agreement, dated as of March 19, 2002, among WESCO Incorporated by reference to
Distribution, Inc., the other Credit Parties signatory Exhibit 10.20 to WESCO's
thereto, General Electric Capital Corporation, The CIT Annual Report on Form 10-K
Group/Business Credit, Inc., Fleet Capital Corporation for the year ended December
and the other Lenders signatory thereto. 31, 2001
10.21 Intercreditor Agreement, dated as of March 19, 2002, Incorporated by reference to
among PNC Bank, National Association, General Electric Exhibit 10.21 to WESCO's
Capital Corporation, WESCO Receivables Corp., WESCO Annual Report on Form 10-K
Distribution, Inc., Fifth Third Bank, N.A., Mellon Bank, for the year ended December
N.A., The Bank of Nova Scotia, Herning Enterprises, Inc. 31, 2001
and WESCO Equity Corporation.
10.22 Second Amended and Restated Receivables Purchase Incorporated by reference to
Agreement dated as of September 2, 2003 among WESCO Exhibit 10.1 to WESCO's
Receivables Corp., WESCO Distribution, Inc., and the Quarterly Report on Form 10-Q
Lenders identified therein. for the quarter ended
September 30, 2003
10.23 1999 Long-Term Incentive Plan. Incorporated by reference to
Exhibit 10.22 to WESCO's
Registration Statement on
Form S-1 (No. 333-73299)
10.24 Amendment dated March 29, 2002 to Asset Purchase Incorporated by reference to
Agreement, dated as of September 11, 1998, among Bruckner Exhibit 10.25 to WESCO's
Supply Company, Inc. and WESCO Distribution, Inc. Annual Report on Form 10-K
for the year ended December
31, 2002
10.25 Loan Agreement between Bear Stearns Commercial Mortgage, Incorporated by reference to
Inc. and WESCO Real Estate IV, LLC, dated December 13, Exhibit 10.26 to WESCO's
2002. Annual Report on Form 10-K
for the year ended December
31, 2002
10.26 Lease dated December 13, 2002 between WESCO Distribution, Incorporated by reference to
Inc. and WESCO Real Estate IV, LLC. Exhibit 10.27 to WESCO's
Annual Report on Form 10-K
for the year ended December
31, 2002
63
10.27 Lease Guaranty dated December 13, 2002 by WESCO Incorporated by reference to
International, Inc. in favor of WESCO Real Estate IV, LLC. Exhibit 10.28 to WESCO's
Annual Report on Form 10-K
for the year ended December
31, 2002
10.28 Guaranty of Non-Recourse Exceptions Agreement dated Incorporated by reference to
December 13, 2002 by WESCO International, Inc. in favor Exhibit 10.29 to WESCO's
of Bear Stearns Commercial Mortgage, Inc. Annual Report on Form 10-K
for the year ended December
31, 2002
10.29 Environmental Indemnity Agreement dated December 13, 2002 Incorporated by reference to
made by WESCO Real Estate IV, Inc. and WESCO Exhibit 10.30 to WESCO's
International, Inc. in favor of Bear Stearns Commercial Annual Report on Form 10-K
Mortgage, Inc. for the year ended December
31, 2002
21.1 Significant Subsidiaries of WESCO. Incorporated by reference to
Exhibit 21.1 to WESCO's
Registration Statement on
Form S-4 (No. 333-70404)
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Certification of Chief Executive Officer pursuant to Rule Filed herewith
13a-14(a) promulgated under the Exchange Act
31.2 Certification of Chief Financial Officer pursuant to Rule Filed herewith
13a-14(a) promulgated under the Exchange Act
32.1 Certification of Chief Executive Officer pursuant to Filed herewith
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Filed herewith
Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------------
The registrant hereby agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule to any of the agreements contained
herein.
Copies of exhibits may be retrieved electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
without charge by writing to Stephen A. Van Oss, Vice President, Chief Financial
Officer, 225 West Station Square Drive, Suite 700, Pittsburgh, Pennsylvania
15219. Requests may also be directed to (412) 454-2200.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESCO INTERNATIONAL, INC.
By: /s/ ROY W. HALEY
-----------------------------
Name: Roy W. Haley
Title: Chairman of the Board and
Chief Executive Officer
Date: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROY W. HALEY Chairman and Chief Executive Officer (Principal Executive March 15, 2004
- ----------------------------- Officer)
Roy W. Haley
/s/ STEPHEN A. VAN OSS Vice President, Chief Financial Officer (Principal March 15, 2004
- ----------------------------- Financial and Accounting Officer)
Stephen A. Van Oss
/s/ JAMES L. SINGLETON Director March 15, 2004
- -----------------------------
James L. Singleton
/s/ JAMES A. STERN Director March 15, 2004
- -----------------------------
James A. Stern
/s/ MICHAEL J. CHESHIRE Director March 15, 2004
- -----------------------------
Michael J. Cheshire
/s/ ROBERT J. TARR, JR. Director March 15, 2004
- -----------------------------
Robert J. Tarr, Jr.
/s/ KENNETH L. WAY Director March 15, 2004
- -----------------------------
Kenneth L. Way
/s/ GEORGE L. MILES, JR. Director March 15, 2004
- -----------------------------
George L. Miles, Jr.
/s/ SANDRA BEACH LIN Director March 15, 2004
- -----------------------------
Sandra Beach Lin
/s/ WILLIAM J. VARESCHI Director March 15, 2004
- -----------------------------
William J. Vareschi
65
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
of WESCO International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 12, 2004 also included an audit of the financial statement schedule
listed in the index appearing under Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 12, 2004
S-1
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------- ---------- ---------------------- ------------- ----------
ADDITIONS
----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS(1) DEDUCTIONS(2) PERIOD
---------- ---------- ----------- ------------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2003.... $10,261 $ 10,229 $ -- $ (9,068) $11,422
Year ended December 31, 2002.... 11,816 8,962 -- (10,517) 10,261
Year ended December 31, 2001.... 9,794 10,291 504 (8,773) 11,816
- -------------------
1 Represents allowance for doubtful accounts in connection with certain
acquisitions.
2 Includes a reduction in the allowance for doubtful accounts due to
write-off of accounts receivable.
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------- ---------- ---------------------- ------------- ----------
ADDITIONS
----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS(2) PERIOD
---------- ---------- ----------- ------------- ----------
Inventory reserve:
Year ended December 31, 2003.... $11,873 $2,893 $ -- $(5,007) $ 9,759
Year ended December 31, 2002.... 16,795 1,445 -- (6,367) 11,873
Year ended December 31, 2001.... 18,727 2,607 663 (1) (5,202) 16,795
- -------------
1 Includes inventory reserves in connection with certain acquisitions.
2 Includes a reduction in the inventory reserve due to disposal of inventory.
S-1