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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
For the quarterly period ended MARCH 31, 2004
Commission file number 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
225 WEST STATION SQUARE DRIVE
SUITE 700
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2200
(Address of principal executive offices) (Registrant's telephone number,
including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of April 30, 2004, WESCO International, Inc. had 41,503,183 shares common
stock outstanding.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
- ------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December
31, 2003......................................................................... 2
Condensed Consolidated Statements of Operations for the three months ended March
31, 2004 and 2003 (unaudited) ................................................... 3
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 2004 and 2003 (unaudited) ................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited) ................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 18
ITEM 4. Controls and Procedures................................................................ 19
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 20
Signatures and Certifications.......................................................... 21
- ------------------------------------------------------------------------------------------------------------
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
Dollars in thousands, except share data 2004 2003
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 13,800 $ 27,495
Trade accounts receivable, net of allowance for doubtful
accounts of $11,459 and $11,422 in 2004 and 2003,
respectively (NOTE 4) .................................................. 325,436 266,589
Other accounts receivable ................................................. 12,918 18,223
Inventories, net .......................................................... 349,146 320,975
Income taxes receivable ................................................... 8,200 13,628
Prepaid expenses and other current assets ................................. 9,137 9,378
----------- -----------
Total current assets ................................................... 718,637 656,288
Property, buildings and equipment, net ........................................ 96,479 98,937
Goodwill ...................................................................... 398,656 398,673
Other assets .................................................................. 9,296 7,307
----------- -----------
Total assets ........................................................... $ 1,223,068 $ 1,161,205
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 434,863 $ 366,380
Accrued payroll and benefit costs ......................................... 18,364 47,110
Current portion of long-term debt ......................................... 2,146 2,120
Current deferred income taxes ............................................. 2,231 2,379
Deferred acquisition payable .............................................. 31,303 31,303
Other current liabilities ................................................. 37,172 30,418
----------- -----------
Total current liabilities .............................................. 526,079 479,710
Long-term debt ................................................................ 422,649 420,042
Long-term deferred acquisition payable ........................................ 53,040 53,040
Other noncurrent liabilities .................................................. 6,854 6,574
Deferred income taxes ......................................................... 34,244 34,151
----------- -----------
Total liabilities ...................................................... 1,042,866 993,517
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares
issued or outstanding ................................................... -- --
Common stock, $.01 par value; 210,000,000 shares authorized, 45,447,763 and
44,999,794 shares issued in 2004 and 2003, respectively ................ 454 450
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,339,431 issued in 2004 and 2003, respectively ..... 43 43
Additional capital ........................................................ 562,868 559,651
Retained earnings (deficit) ............................................... (327,069) (336,790)
Treasury stock, at cost; 8,407,365 and 8,400,499 shares in 2004 and 2003,
respectively ............................................................ (61,438) (61,370)
Accumulated other comprehensive income (loss) ............................. 5,344 5,704
----------- -----------
Total stockholders' equity ............................................. 180,202 167,688
----------- -----------
Total liabilities and stockholders' equity ............................. $ 1,223,068 $ 1,161,205
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS
ENDED MARCH 31
Dollars in thousands, except share data 2004 2003
- --------------------------------------------------------------------------------
Net sales .................................. $847,793 $790,807
Cost of goods sold ......................... 686,941 645,375
-------- --------
Gross profit ........................... 160,852 145,432
Selling, general and administrative expenses 129,588 121,740
Depreciation and amortization .............. 5,005 5,133
-------- --------
Income from operations ................. 26,259 18,559
Interest expense, net ...................... 9,979 10,388
Other expense .............................. 1,076 1,410
-------- --------
Income before income taxes ............. 15,204 6,761
Provision for income taxes ................. 5,483 1,921
-------- --------
Net income ............................. $ 9,721 $ 4,840
======== ========
Earnings per share:
Basic: $ 0.24 $ 0.11
======== ========
Diluted: $ 0.23 $ 0.10
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31
In thousands 2004 2003
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ................................................................... $ 9,721 $ 4,840
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization ........................................... 5,005 5,133
Accretion of original issue and amortization of purchase discounts ...... 700 743
Amortization of debt issuance costs ..................................... 387 259
Deferred income taxes ................................................... (55) 175
Amortization of gain on interest rate swap .............................. (228) --
Stock option expense .................................................... 363 --
Gain on the sale of property, buildings and equipment ................... -- (487)
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ........................................ (10,000) (41,000)
Trade and other receivables ........................................... (43,970) (9,607)
Inventories ........................................................... (28,528) 4,177
Prepaid expenses and other current assets ............................. 6,637 225
Accounts payable ...................................................... 69,018 17,892
Accrued payroll and benefit costs ..................................... (8,602) (6,757)
Other current and noncurrent liabilities .............................. 7,282 7,628
-------- --------
Net cash provided (used) by operating activities ................... 7,730 (16,779)
INVESTING ACTIVITIES:
Capital expenditures ......................................................... (2,655) (1,763)
Acquisition payments ......................................................... -- (604)
Proceeds from the sale of property, buildings and equipment .................. -- 1,174
-------- --------
Net cash used by investing activities .............................. (2,655) (1,193)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ..................................... 57,600 71,580
Repayments of long-term debt ................................................. (57,879) (44,089)
Redemption of stock options .................................................. (20,144) --
Debt issuance costs .......................................................... -- (944)
Proceeds from the exercise of stock options .................................. 1,743 9
-------- --------
Net cash (used) provided by financing activities ................... (18,680) 26,556
Effect of exchange rate changes on cash and cash equivalents ................. (90) 231
Net change in cash and cash equivalents ................................. (13,695) 8,815
Cash and cash equivalents at the beginning of period .................... 27,495 22,570
-------- --------
Cash and cash equivalents at the end of period .......................... $ 13,800 $ 31,385
======== ========
Supplemental disclosures:
Non-cash financing activities:
Increase in fair value of interest rate swap ............................ $ (2,440) $ (2,211)
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, "WESCO"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of
electrical supplies and equipment and is a provider of integrated supply
procurement services. WESCO currently operates over approximately 350 branch
locations and five distribution centers in the United States, Canada, Mexico,
Puerto Rico, Guam, the United Kingdom, Nigeria and Singapore.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of WESCO and all of its subsidiaries and have been prepared in
accordance with Rule 10-01 of the Securities and Exchange Commission. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in WESCO's 2003 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The unaudited condensed consolidated balance sheet as of March 31, 2004,
the unaudited condensed consolidated statements of operations for the three
months ended March 31, 2004 and March 31, 2003 and the unaudited condensed
consolidated statements of cash flows for the three months ended March 31, 2004
and March 31, 2003, in the opinion of management, have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments necessary for the fair presentation of the results of the interim
periods. All adjustments reflected in the condensed consolidated financial
statements are of a normal recurring nature unless indicated. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
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 $0.4 million of compensation expense for the three months ended March
31, 2004. There were no options granted during the three months ended March 31,
2004 and March 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:
5
THREE MONTHS ENDED MARCH 31
----------------------------
2004 2003
--------- ---------
(IN THOUSANDS)
----------------------------
Net income, as reported .................................... $ 9,721 $ 4,840
Add: Stock-based compensation expense included in
reported net income, net of related tax ................... 236 --
Deduct: Stock-based employee compensation expense determined
under SFAS No. 123 for all awards, net of related tax ..... 429 371
--------- ---------
Pro forma net income ....................................... $ 9,528 $ 4,469
Earnings per share:
Basic as reported ....................................... $ 0.24 $ 0.11
Basic pro forma ......................................... $ 0.23 $ 0.10
Diluted as reported ..................................... $ 0.23 $ 0.10
Diluted pro forma ....................................... $ 0.22 $ 0.10
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 (revised December
2003), "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. The adoption of this interpretation did not have an impact on the
Company's consolidated financial statements.
3. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings
per share:
THREE MONTHS ENDED MARCH 31
Dollars in thousands, except per share amounts 2004 2003
----------------------------------------------------------------------------------------
Reported net income ................................ $ 9,721 $ 4,840
=========== ===========
Weighted average common shares outstanding used in
computing basic earnings per share .............. 41,144,791 45,107,957
Common shares issuable upon exercise of
dilutive stock options .......................... 1,646,390 1,306,206
----------- -----------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share ...................... 42,791,181 46,414,163
=========== ===========
Earnings per share:
Basic ........................................... $ 0.24 $ 0.11
Diluted ......................................... $ 0.23 $ 0.10
----------------------------------------------------------------------------------------
4. 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.
6
As of March 31, 2004 and December 31, 2003, securitized accounts receivable
totaled approximately $358 million and $330 million, respectively, of which the
subordinated retained interest was approximately $143 million and $105 million,
respectively. Accordingly, approximately $215 million and $225 million of
accounts receivable balances were removed from the consolidated balance sheets
at March 31, 2004 and December 31, 2003, respectively. WESCO reduced its
accounts receivable securitization program by $10 million in 2004. Costs
associated with the Receivables Facility totaled $1.1 million for the three
months ended March 31, 2004 and $1.4 million for the three months ended March
31, 2003. 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 2004 were a discount
rate of 2% and an estimated life of 1.5 months. At March 31, 2004, an immediate
adverse change in the discount rate or estimated life of 10% and 20% would
result in a reduction in the fair value of the retained interest of $0.1 million
and $0.2 million, respectively. These sensitivities are hypothetical and should
be used with caution. As the figures indicate, changes in fair value based on a
10% variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. Also, in this example, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may result in
changes in another.
5. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED
MARCH 31
In thousands 2004 2003
-------------------------------------------------------------------------
Net income $9,721 $4,840
Foreign currency translation adjustment (360) 2,890
--------------------
Comprehensive income $9,361 $7,730
-------------------------------------------------------------------------
6. ACQUISITIONS
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. 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. No additional amounts can be earned under
this agreement.
Certain other acquisitions also contain contingent consideration
provisions, only one of which could require a significant payment. Management
estimates this payment could range up to $0 to $20 million and would be made in
2008.
The following table sets forth supplemental cash flow information with
respect to acquisitions:
THREE MONTHS ENDED
MARCH 31,
In thousands 2004 2003
------------------------------------------------------------------------
Details of acquisitions:
Deferred acquisition payments $ -- $ 604
-------------------
Cash paid for acquisitions $ -- $ 604
------------------------------------------------------------------------
7
7. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
------ ------
Federal statutory rate....................................... 35.0% 35.0%
State taxes, net of federal tax benefit...................... 0.5 0.8
Nondeductible expenses....................................... 1.6 2.0
Foreign tax rate differences................................. (0.8) (0.4)
Net operating loss utilization(1)............................ -- (8.6)
Other........................................................ (0.2) (0.4)
----- -----
36.1% 28.4%
===== =====
- --------------
(1) Represents the result of the recognition of a $0.6 million benefit
associated with net operating loss carryforwards previously reserved.
8
8. OTHER FINANCIAL INFORMATION (UNAUDITED)
WESCO Distribution, Inc. has issued $400 million of 9 1/8% senior
subordinated notes. The senior subordinated notes are fully and unconditionally
guaranteed by WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Condensed
consolidating financial information for WESCO International, Inc., WESCO
Distribution, Inc. and the non-guarantor subsidiaries are as follows:
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------------------------------------------------------------------------------
Cash and cash equivalents ......... $ -- $ 2,908 $ 10,892 $ -- $ 13,800
Trade accounts receivable ......... -- 16,232 309,204 -- 325,436
Inventories ....................... -- 296,983 52,163 -- 349,146
Other current assets .............. -- 16,717 17,484 (3,946) 30,255
------------------------------------------------------------------------------------
Total current assets ........... -- 332,840 389,743 (3,946) 718,637
Intercompany receivables, net ..... -- 286,042 -- (286,042) --
Property, buildings and equipment,
net ............................ -- 27,848 68,631 -- 96,479
Goodwill .......................... -- 360,656 38,000 -- 398,656
Investments in affiliates and other
noncurrent assets .............. 418,221 375,091 3,503 (787,519) 9,296
------------------------------------------------------------------------------------
Total assets ................... $ 418,221 $ 1,382,477 $ 499,877 $(1,077,507) $ 1,223,068
====================================================================================
Accounts payable .................. $ -- $ 409,814 $ 25,049 $ -- $ 434,863
Other current liabilities ......... -- 92,323 2,839 (3,946) 91,216
------------------------------------------------------------------------------------
Total current liabilities ...... -- 502,137 27,888 (3,946) 526,079
Intercompany payables, net ........ 243,363 -- 42,679 (286,042) --
Long-term debt .................... -- 373,578 49,071 -- 422,649
Other noncurrent liabilities ...... -- 88,541 5,597 -- 94,138
Stockholders' equity .............. 174,858 418,221 374,642 (787,519) 180,202
------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ........... $ 418,221 $ 1,382,477 $ 499,877 $(1,077,507) $ 1,223,068
====================================================================================
9
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
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 .......................... -- 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
====================================================================================
10
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------------
Net sales ......................... $ -- $ 727,770 $ 120,023 $ -- $ 847,793
Cost of goods sold ................ -- 590,493 96,448 -- 686,941
Selling, general and administrative
expenses ....................... -- 111,551 18,037 -- 129,588
Depreciation and amortization ..... -- 4,200 805 -- 5,005
Results of affiliates' operations . 7,839 7,154 -- (14,993) --
Interest expense (income), net .... (2,891) 13,815 (945) -- 9,979
Other (income) expense ............ -- 6,045 (4,969) -- 1,076
Provision for income taxes ........ 1,009 981 3,493 -- 5,483
--------------------------------------------------------------------------------
Net income (loss) .............. $ 9,721 $ 7,839 $ 7,154 $ (14,993) $ 9,721
================================================================================
THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------------
Net sales ......................... $ -- $ 681,072 $ 109,735 $ -- $ 790,807
Cost of goods sold ................ -- 555,910 89,465 -- 645,375
Selling, general and administrative
expenses ....................... -- 104,820 16,920 -- 121,740
Depreciation and amortization ..... -- 4,339 794 -- 5,133
Results of affiliates' operations . 2,974 6,542 -- (9,516) --
Interest expense (income), net .... (2,870) 14,628 (1,370) -- 10,388
Other (income) expense ............ -- 8,015 (6,605) -- 1,410
Provision for income taxes ........ 1,004 (3,072) 3,989 -- 1,921
---------------------------------------------------------------------------------
Net income (loss) .............. $ 4,840 $ 2,974 $ 6,542 $ (9,516) $ 4,840
=================================================================================
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------------
Net cash (used) provided by
operating activities ........... $ (7,856) $ 15,190 $ 396 $ $ 7,730
Investing activities:
Capital expenditures ........... -- (2,447) (208) -- (2,655)
--------------------------------------------------------------------------------
Net cash used in investing
activities ..................... -- (2,447) (208) -- (2,655)
Financing activities:
Net borrowings (repayments) .... 26,256 (26,256) (279) -- (279)
Redemption of stock options ... (20,144) -- -- -- (20,144)
Equity transactions ............ 1,743 -- -- -- 1,743
--------------------------------------------------------------------------------
Net cash provided (used) by
financing activities ........... 7,855 (26,256) (279) -- (18,680)
--------------------------------------------------------------------------------
Effect of exchange rate changes on -- -- (90) -- (90)
cash and cash equivalents
Net change in cash and cash
equivalents .................... (1) (13,513) (181) -- (13,695)
Cash and cash equivalents at
beginning of year .............. 1 16,421 11,073 -- 27,495
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period ......................... $ -- $ 2,908 $ 10,892 $ -- $ 13,800
================================================================================
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-----------------------------------------------------------------------------------
Net cash provided (used) by
operating activities ........... $ 1,872 $ 19,517 $(38,168) $ $(16,779)
Investing activities:
Capital expenditures ........... -- (1,645) (118) -- (1,763)
Acquisitions ................... -- (604) -- -- (604)
Proceeds from sale of property . -- 1,174 -- -- 1,174
--------------------------------------------------------------------------------
Net cash used by investing
activities ..................... -- (1,075) (118) -- (1,193)
Financing activities:
Net borrowings (repayments) .... (1,881) (8,627) 37,999 -- 27,491
Equity transaction ............. 9 -- -- -- 9
Other .......................... -- -- (944) -- (944)
--------------------------------------------------------------------------------
Net cash (used) provided by
financing activities ........... (1,872) (8,627) 37,055 -- 26,556
--------------------------------------------------------------------------------
Effect of exchange rate changes on -- -- 231 -- 231
cash and cash equivalents
Net change in cash and cash
equivalents .................... -- 9,815 (1,000) -- 8,815
Cash and cash equivalents at
beginning of year .............. 4 12,449 10,117 -- 22,570
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period ......................... $ 4 $ 22,264 $ 9,117 $ -- $ 31,385
================================================================================
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
in the unaudited condensed consolidated financial statements and notes thereto
included herein and WESCO International Inc.'s Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its 2003 Annual Report on Form 10-K.
COMPANY OVERVIEW
WESCO is a full-line distributor of electrical supplies and equipment and
is a provider of integrated supply procurement services. We currently operate
approximately 350 branch locations and five distribution centers in the United
States, Canada, Mexico, Puerto Rico, 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. Approximately 87% of our net sales are generated from
operations in the U.S., 10% from Canada and the remainder from other countries.
Sales growth, along with positive impact from our margin and cost
improvement initiatives contributed to improved financial results for the first
three months of 2004. Sales increased 7.2% over the same period last year and
the gross margin percentage of 19.0% is our historical best. Operating income
improved by 41.5% compared with last year's comparable period and the current
quarter's net income was $9.7 million versus $4.8 million in last year's
comparable quarter. As a result, our earnings per share were $0.23 for the
current quarter, a 130% improvement over earnings per share during the same
period last year.
CASH FLOW
We generated $7.7 in operating cash flow during the first quarter of 2004.
Included in this amount was a $10.0 million cash outflow from a reduction in our
Receivable Facility. During the quarter we funded a payment of $20.1 million to
certain employees for the net equity value of stock options originally granted
in 1994 and 1995.
FINANCING AVAILABILITY
As of March 31, 2004 we had approximately $180 million in available
borrowing capacity under our financing facilities, including $25 million under
our Receivables Facility.
OUTLOOK
Improvements in operations and our capital structure made in 2003 have
positioned us well for 2004. Though we continue to see improvements in the
macroeconomic data that reflect activity levels in our major end markets,
capital spending in the manufacturing and construction markets we serve still
remain well below the higher levels experienced in 1999 and 2000. Even with
improvement, we anticipate a lag before we see a broad based increase in capital
spending. Accordingly, we continue to focus on selling and marketing initiatives
to increase market share, margin expansion and cost containment as we drive to
improve our operating performance for the rest of 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the first quarter of 2004, there were no significant changes to our
Critical Accounting Policies and Estimates referenced in the 2003 Annual Report
on Form 10-K.
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RESULTS OF OPERATIONS
First Quarter of 2004 versus First Quarter of 2003
The following table sets forth the percentage relationship to net sales of
certain items in our condensed consolidated statements of operations for the
periods presented:
THREE MONTHS ENDED MARCH 31
---------------------------
2004 2003
-----------------------
Net sales......................................... 100.0% 100.0%
Gross profit...................................... 19.0 18.4
Selling, general and administrative expenses...... 15.3 15.4
Depreciation and amortization..................... 0.6 0.7
----- -----
Income from operations........................ 3.1 2.3
Interest expense.................................. 1.1 1.3
Other expense..................................... 0.2 0.2
----- -----
Income before income taxes.................... 1.8 0.8
Provision for income taxes........................ 0.7 0.2
----- -----
Net income.................................... 1.1% 0.6%
====== ======
Net sales in the first quarter of 2004 totaled $847.8 million versus
$790.8 million in the comparable period for 2003, a 7.2% increase. Approximately
4% of the increase in sales was attributable to stronger demand resulting from
improving economic activity. The remaining portion of the increase was split
between commodity price increases and the strength of the Canadian dollar.
Gross profit for the first quarter of 2004 was $160.9 million versus $145.4
million for 2003's first quarter, and gross margin percentage improved to 19.0%
versus 18.4% last year. The improvement in gross margin percentage was primarily
due to improvements in billing margins, which increased 50 basis points over
last year's comparable quarter as a result of a focus on improved pricing and
procurement.
Selling, general and administrative ("SG&A") expenses in the first quarter
of 2004 totaled $129.6 million versus $121.7 million in last year's comparable
quarter. Total payroll expense increased approximately $6.7 million over last
year's first quarter principally from increased health care and benefits costs
of $2.4 million, increased variable incentive compensation costs of $2.3 million
and stock options of $0.4 million associated with the adoption of SFAS No. 123
in 2003. Shipping and handling expense included in SG&A was $8.6 million in the
first quarter of 2004 compared with $8.8 million in last year's first quarter.
As a percentage of net sales, SG&A expenses decreased to 15.3% from 15.4% in the
prior year quarter reflecting the leverage of higher sales volume.
Depreciation and amortization for the first quarter of 2004 was $5.0
million versus $5.1 million in last year's comparable quarter.
Interest expense totaled $10.0 million for the first quarter of 2004 versus
$10.4 million in last year's comparable quarter, a decrease of 3.9%. The decline
was due to a lower amount of indebtedness outstanding during the current quarter
as compared to the first quarter of 2003 offset somewhat by a slightly higher
effective interest rate resulting from a higher proportion of fixed rate debt.
Other expense during the first quarter of 2004 totaled $1.1 million versus $1.4
million in 2003, reflecting costs associated with the Receivables Facility.
Income tax expense totaled $5.5 million in the first quarter of 2004 and
the effective tax rate was 36.1% compared to 28.4% in 2003. The current
quarter's effective tax rate differed from the statutory rate primarily as a
result of the effect of nondeductible expenses. The effective tax rate in the
first quarter of 2003 differed from the statutory rate primarily as a result of
the recognition of a $0.6 million benefit associated with net operating loss
carryforwards previously reserved. In addition, foreign tax credits contributed
to the reduction in the effective rate during 2003.
For the first quarter of 2004, net income totaled $9.7 million, or $0.23
per diluted share, compared with $4.8 million and $0.10 per diluted share, in
the first quarter of 2003. The improvements in net income and earnings per share
were primarily attributable to increased sales and gross profit offset somewhat
by the increase in payroll expense and an increase in the effective tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.2 billion at March 31, 2004 and December 31, 2003,
respectively. During the first quarter of 2004, total liabilities increased
$49.3 million to $1.0 billion. The increase was the result of a $68.5 million
increase in trade accounts payable, principally due to increased purchase
activity. This increase was partially offset by a $28.7 million decrease in
accrued payroll and benefit costs primarily as a result of a $20.1 million
payment related to certain employee stock options and to a lesser extent a
decrease in accrued incentive compensation. During the 2004 first quarter,
stockholders' equity increased $12.5 million to $180.2 million at March 31, 2004
principally as a result of $9.7 million in net income during the quarter.
Our liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. In addition,
certain of our acquisition agreements contain earn-out provisions based
principally on future earnings targets. The most significant of these agreements
relates to the acquisition of Bruckner, 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. 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. No additional
amounts can be earned under this agreement.
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 and our Receivables Facility.
We finance our operating and investing needs, as follows:
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. 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 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. At March 31, 2004, the interest
rate was 3.56%. We were in compliance with all such covenants as of March 31,
2004. As of March 31, 2004, we had no borrowings outstanding under this facility
and approximately $150 million in availability.
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Senior Notes
As of March 31, 2004, we had $378.8 million in aggregate principal amount
of 9.125% senior subordinated notes due 2008. The notes were issued with an
average issue price of 98%.
Interest Rate Swap Agreements
In September 2003, we entered into a $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 March 31, 2004, the rates ranged from 5.96% to 5.99%. 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 $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 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 March 31, 2004, $215 million in funding was outstanding under the
Receivables Facility and excess availability was $25 million.
Cash Flow
Operating Activities. Cash provided by operating activities for the first
quarter of 2004 totaled $7.7 million compared to cash used by operating
activities of $16.8 million in the prior year. Cash provided by operating
activities in 2004 and cash used by operating activities in 2003, included cash
outflows of $10.0 million and $41.0 million, respectively, associated with
changes related to our Receivables Facility. In 2004, cash generated by net
income plus other adjustments totaling $15.9 million, along with cash inflows
from increases in accounts payable of $69.0 million were partially offset by a
$44.0 million use of cash for increased accounts receivable and a $28.5 million
use of cash for increased inventory. The increases in accounts payable, accounts
receivable and inventory result primarily from the increase in business activity
during the first quarter. The change in accounts receivable also includes the
impact of a change in cash collection procedures. In 2003, cash generated by
increases in accounts payable and other current and non-current liabilities
totaling $25.5 million was partially offset by cash used to fund increases in
accounts receivable totaling $9.6 million.
Investing Activities. Net cash used in investing activities was $2.7 million
during the first quarter of 2004, due to capital expenditures. In 2003, net cash
used in investing activities of $1.2 million included capital expenditures of
$1.8 million along with acquisition payments totaling $0.6 million and were
partially offset by proceeds received from the sale of property and buildings
totaling $1.2 million.
Financing Activities. Net cash used by financing activities during the first
quarter of 2004 totaled $18.7 million primarily as a result of $20.1 million in
cash payments made to certain employees for the redemption of stock options. In
2003, net cash provided by financing activities totaled $26.6 million as a
result of completing the real estate financing which provided $38 million.
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Contractual Cash Obligations and Other Commercial Commitments
There have not been any material changes in our contractual obligations and
other commercial commitments that would require an update to the disclosure
provided in our Form 10-K for the year-ended December 31, 2003.
Inflation
The rate of inflation, as measured by changes in the consumer price index,
did not have a material effect on the sales or operating results of the Company
during the periods presented. However, inflation in the future could affect the
Company's operating costs. Price changes from suppliers have historically been
consistent with inflation and have not had a material impact on the Company's
results of operations.
Seasonality
The Company's operating results are affected by certain seasonal factors.
Sales are typically at their lowest during the first quarter due to a reduced
level of activity during the winter months. Sales increase during the warmer
months beginning in March and continuing through November. Sales drop again
slightly in December as the weather cools and also as a result of a reduced
level of activity during the holiday season. As a result, the Company reports
sales and earnings in the first quarter that are generally lower than that of
the remaining quarters.
Impact of Recently Adopted Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (revised December
2003), "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. The adoption of this interpretation did not have an impact on our
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding our future
performance. When used in this context, the words "anticipates," "plans,"
"believes," "estimates," "intends," "expects," "projects" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. Such statements including,
but not limited to, our statements regarding our business strategy, growth
strategy, productivity and profitability enhancement, new product and service
introductions and liquidity and capital resources are based on management's
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, certain of which
are beyond 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. Factors that might cause actual
results to differ from such forward-looking statements include, but are not
limited to, an increase in competition, the amount of outstanding indebtedness,
the availability of appropriate acquisition opportunities, availability of key
products, functionality of information systems, international operating
environments and other risks that are described in our Annual Report on Form
10-K for the year ended December 31, 2003 which are incorporated by reference
herein. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have not been any material changes to our exposures to market risk
during the quarter ended March 31, 2004 that would require an update to the
disclosures provided in our Form 10-K for the year-ended December 31, 2003.
At March 31, 2004 the net fair value of interest-rate-related derivatives
designated as fair value hedges of debt was $2.6 million.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation
of our management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
our disclosure controls and procedures 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 first 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. Independent counsel has submitted its preliminary
report to the Audit Committee. The matters reviewed by independent counsel
related 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. Independent counsel concluded that
certain actions at this branch constituted violations of law. These actions had
no material effect on the Company's consolidated financial statements.
Management has promptly implemented those remedial actions recommended by its
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)
promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)
promulgated under the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
On January 6, 2004, we filed a Current Report on Form 8-K pursuant to Item
5 announcing it had redeemed the net equity value of stock options representing
approximately 2.9 million shares.
On February 12, 2004, we filed a Current Report on Form 8-K pursuant to
Item 12 announcing it had issued a press release releasing its earnings for the
first quarter of 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on May 10, 2004 on its
behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By: /s/ Stephen A. Van Oss
-----------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
21