Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
For the quarterly period ended JUNE 30, 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 of (IRS Employer Identification No.)
incorporation or organization)
225 WEST STATION SQUARE DRIVE
SUITE 700 (412) 454-2200
PITTSBURGH, PENNSYLVANIA 15219 (Registrant's telephone number,
(Address of principal executive offices) including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No[ ]
As of July 31, 2004, WESCO International, Inc. had 41,837,061 shares of common
stock.
================================================================================
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and
December 31, 2003.............................................. 2
Condensed Consolidated Statements of Operations for the three months and six
months ended June 30, 2004 and 2003 (unaudited) ............ 3
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 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......................................................... 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 21
ITEM 4. Controls and Procedures................................................................................. 21
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................... 22
ITEM 6. Exhibits and Reports on Form 8-K........................................................................ 22
Signatures.............................................................................................. 23
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
Dollars in thousands, except share data 2004 2003*
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 9,419 $ 27,495
Trade accounts receivable, net of allowance for doubtful accounts
of 12,874 and $11,422 in 2004 and 2003, respectively (NOTE 4) ........................ 269,413 266,589
Other accounts receivable ................................................................. 17,221 18,223
Inventories, net .......................................................................... 379,583 320,975
Income taxes receivable ................................................................... -- 13,628
Prepaid expenses and other current assets ................................................. 10,456 9,378
----------- -----------
Total current assets ................................................................. 686,092 656,288
Property, buildings and equipment, net .......................................................... 93,997 98,937
Goodwill ........................................................................................ 398,009 398,673
Other assets .................................................................................... 6,286 7,307
----------- -----------
Total assets ......................................................................... $ 1,184,384 $ 1,161,205
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................... $ 443,782 $ 366,380
Accrued payroll and benefit costs ......................................................... 24,048 47,110
Current portion of long-term debt ......................................................... 32,165 2,120
Current deferred income taxes ............................................................. 2,075 2,379
Deferred acquisition payable .............................................................. -- 31,303
Other current liabilities ................................................................. 32,879 30,418
----------- -----------
Total current liabilities ............................................................ 534,949 479,710
Long-term debt .................................................................................. 403,431 420,042
Long-term deferred acquisition payable .......................................................... 2,026 53,040
Other noncurrent liabilities .................................................................... 8,331 6,574
Deferred income taxes ........................................................................... 34,241 34,151
----------- -----------
Total liabilities .................................................................... 982,978 993,517
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, 45,812,829
and 44,999,794 shares issued in 2004 and 2003, respectively ........................... 458 450
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,339,431 issued in 2004 and 2003 .................................. 43 43
Additional capital ......................................................................... 566,640 559,651
Retained earnings (deficit) ................................................................ (307,983) (336,790)
Treasury stock, at cost; 8,407,384 and 8,400,499 shares in 2004 and 2003, respectively ..... (61,438) (61,370)
Accumulated other comprehensive income (loss) .............................................. 3,686 5,704
----------- -----------
Total stockholders' equity ............................................................ 201,406 167,688
----------- -----------
Total liabilities and stockholders' equity ............................................ $ 1,184,384 $ 1,161,205
=========== ===========
* Summarized from audited December 31, 2003 balance sheet.
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 JUNE 30 SIX MONTHS ENDED JUNE 30
In thousands, except share data 2004 2003 2004 2003
--------- --------- ---------- ----------
Net sales .................................. $ 931,020 $ 820,238 $1,778,814 $1,611,046
Cost of goods sold ......................... 747,313 669,338 1,434,255 1,314,714
--------- --------- --------- ---------
Gross profit ........................... 183,707 150,900 344,559 296,332
Selling, general and administrative expenses 136,181 126,820 265,768 248,561
Depreciation and amortization .............. 4,655 5,121 9,661 10,254
--------- --------- --------- ---------
Income from operations ................. 42,871 18,959 69,130 37,517
Interest expense ........................... 10,148 10,820 19,988 21,208
Loss (gain) on debt extinguishments ........ 1,625 (307) 1,625 (307)
Other expense .............................. 1,292 1,279 2,507 2,689
--------- --------- --------- ---------
Income before income taxes ............. 29,806 7,167 45,010 13,927
Provision (benefit) for income taxes ....... 10,720 (183) 16,203 1,738
--------- --------- --------- ---------
Net income ........................... $ 19,086 $ 7,350 $ 28,807 $ 12,189
========= ========= ========= =========
Earnings per share:
Basic: ............................... $ 0.46 $ 0.16 $ 0.70 $ 0.27
========= ========= ========= =========
Diluted: ............................. $ 0.44 $ 0.16 $ 0.67 $ 0.26
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
In thousands 2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income ..................................................................... $ 28,807 $ 12,189
Adjustments to reconcile net income to net cash used by operating activities:
Loss (gain) on debt extinguishment ...................................... 1,625 (307)
Depreciation and amortization ........................................... 9,661 10,254
Accretion of original issue and amortization of purchase discounts ...... 1,402 1,475
Amortization of debt issuance costs ..................................... 774 547
Deferred income taxes ................................................... (214) (1,081)
Amortization of gain on interest rate swap .............................. (456) --
Stock option expense .................................................... 726 --
Loss (gain) on the sale of property, buildings and equipment ............ 15 (491)
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ...................................... 75,000 (68,000)
Trade and other receivables ......................................... (78,751) (8,189)
Inventories ......................................................... (59,920) 5,441
Prepaid expenses and other current assets ........................... 14,924 191
Accounts payable .................................................... 79,367 24,188
Accrued payroll and benefit costs ................................... (2,918) (1,810)
Other current and noncurrent liabilities ............................ 2,118 7,269
--------- ---------
Net cash provided (used) by operating activities ............... 72,160 (18,324)
INVESTING ACTIVITIES:
Capital expenditures ........................................................... (5,219) (3,439)
Acquisition payments ........................................................... (30,703) (2,028)
Proceeds from the sale of property, buildings and equipment .................... -- 1,177
--------- ---------
Net cash used by investing activities .......................... (35,922) (4,290)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ....................................... 165,800 87,180
Repayments of long-term debt ................................................... (203,439) (57,646)
Redemption of stock options .................................................... (20,144) 4,563
Debt issuance costs ............................................................ -- (1,431)
Proceeds from the exercise of stock options .................................... 3,800 29
--------- ---------
Net cash (used) provided by financing activities ............... (53,983) 32,695
Effect of exchange rate changes on cash and cash equivalents ................... (331) 554
Net change in cash and cash equivalents ................................. (18,076) 10,635
Cash and cash equivalents at the beginning of period .................... 27,495 22,570
--------- ---------
Cash and cash equivalents at the end of period .......................... $ 9,419 $ 33,205
========= =========
Supplemental disclosures:
Non-cash financing activities:
Decrease in fair value of interest rate swap ............................ $ 1,498 $ --
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 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 June 30, 2004,
the unaudited condensed consolidated statements of operations for the three
months and six months ended June 30, 2004 and June 30, 2003 and the unaudited
condensed consolidated statements of cash flows for the six months ended June 30
2004, and June 30, 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 and $0.7 million of compensation expense for the three
months and six months ended June 30, 2004. There were no options granted during
the six months ended June 30, 2004 and June 30, 2003.
The following table presents the pro forma results as if the fair-value
based method of accounting for stock-based awards had been applied to all
outstanding options:
5
IN THOUSANDS EXCEPT PER SHARE DATA
THREE MONTHS SIX MONTHS
------------------ --------------------
ENDED JUNE 30 ENDED JUNE 30
------------------ --------------------
2004 2003 2004 2003
------- -------- --------- ---------
Net income, as reported ............................................. $19,086 $ 7,350 $ 28,807 $ 12,189
Add: Stock-based employee compensation expense
included in reported net income,
net of related tax .................................................. 236 -- 472 --
Deduct: Stock-based employee compensation
expense determined under SFAS No. 123 for
all awards net of related tax ...................................... 429 371 858 741
------- -------- -------- --------
Pro forma net income................................................ $18,893 $ 6,979 $ 28,421 $ 11,448
Earnings per share:
Basic as reported................................................ $ 0.46 $ 0.16 $ 0.70 $ 0.27
Basic pro forma.................................................. $ 0.45 $ 0.15 $ 0.69 $ 0.25
Diluted as reported.............................................. $ 0.44 $ 0.16 $ 0.67 $ 0.26
Diluted pro forma................................................ $ 0.43 $ 0.15 $ 0.66 $ 0.25
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
JUNE 30
Dollars in thousands, except per share amounts 2004 2003
-------------- --------------
Reported net income $ 19,086 $ 7,350
============== ==============
Weighted average common shares outstanding
used in computing basic earnings per share 41,562,343 45,114,271
Common shares issuable upon exercise
of dilutive stock options 2,158,108 1,429,219
-------------- --------------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings per share 43,720,451 46,543,490
============== ==============
Earnings per share:
Basic $ 0.46 $ 0.16
Diluted $ 0.44 $ 0.16
-------------- --------------
6
SIX MONTHS ENDED
JUNE 30
Dollars in thousands, except per share amounts 2004 2003
------------ ------------
Reported net income $ 28,807 $ 12,189
============ ============
Weighted average common shares outstanding
used in computing basic earnings per share 41,354,040 45,111,131
Common shares issuable upon exercise of
dilutive stock options 1,950,382 1,371,041
------------ ------------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings per share 43,304,422 46,482,172
============ ============
Earnings per share:
Basic $ 0.70 $ 0.27
Diluted $ 0.67 $ 0.26
------------ ------------
4. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO maintains an accounts receivable securitization program
("Receivables Facility") and the facility provides for a $165 million purchase
commitment with a term of 364 days and a $135 million purchase commitment with a
term of three years. Under the Receivables Facility, WESCO sells, on a
continuous basis, to WESCO Receivables Corporation, a wholly-owned, special
purpose company ("SPC"), an undivided interest in all domestic accounts
receivable. The SPC sells without recourse to a third-party conduit all the
eligible receivables while maintaining a subordinated interest, in the form of
overcollateralization, in a portion of the receivables. WESCO has agreed to
continue servicing the sold receivables for the financial institution at market
rates; accordingly, no servicing asset or liability has been recorded.
As of June 30, 2004 and December 31, 2003, securitized accounts receivable
totaled approximately $408 million and $330 million, respectively, of which the
subordinated retained interest was approximately $108 million and $105 million,
respectively. Accordingly, approximately $300 million and $225 million of
accounts receivable balances were removed from the consolidated balance sheets
at June 30, 2004 and December 31, 2003, respectively. Costs associated with the
Receivables Facility totaled $1.3 million for the three months ended June 30,
2004 and June 30, 2003. Costs associated with the Receivables Facility totaled
$2.5 million and $2.7 million for the six-months ended June 30, 2004 and June
30, 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 June 30, 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
JUNE 30
In thousands 2004 2003
-------- --------
Net income $ 19,086 $ 7,350
Foreign currency translation adjustment (1,658) 4,320
-------- --------
Comprehensive income $ 17,428 $ 11,670
-------- --------
7
SIX MONTHS ENDED
JUNE 30
In thousands 2004 2003
-------- --------
Net income $ 28,807 $ 12,189
Foreign currency translation adjustment (2,018) 7,210
-------- --------
Comprehensive income $ 26,789 $ 19,399
-------- --------
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 earn-out 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
recorded a liability of $80 million as of December 31, 2003 for contingent
consideration relating to the Bruckner agreement. During the first six months of
2004 WESCO paid $30 million pursuant to this agreement. The remaining $50
million due under the agreement was converted into a note payable ($30 million,
due in June 2005, classified as current and $20 million, due in June 2006,
classified as long-term debt) and pays interest at 10%. 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 $20 million and would be made in 2008.
7. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
THREE MONTHS ENDED
JUNE 30,
-----------------
2004 2003
---- ----
Federal statutory rate............................................. 35.0% 35.0%
State taxes, net of federal tax benefit............................ 1.5 0.2
Nondeductible expenses............................................. 1.0 2.3
Domestic tax benefit from foreign operations....................... (1.2) (3.2)
Foreign tax rate differences....................................... (0.4) (0.3)
Favorable impact resulting from prior year tax contingencies(1).... -- (34.1)
Other.............................................................. 0.1 (2.5)
---- -----
36.0% (2.6)%
==== ====
SIX MONTHS ENDED
JUNE 30,
-----------------
2004 2003
----- -----
Federal statutory rate............................................. 35.0% 35.0%
State taxes, net of federal tax benefit............................ 1.2 0.2
Nondeductible expenses............................................. 1.2 2.3
Domestic tax benefit from foreign operations....................... (0.8) (3.2)
Foreign tax rate differences....................................... (0.6) (0.3)
Favorable impact resulting from prior year tax contingencies (1)... -- (17.5)
Net operating loss utilization(2).................................. -- (4.0)
---- -----
36.0% 12.5%
==== =====
- ----------
(1) Represents a benefit of $2.4 million from the resolution of prior year tax
contingencies.
(2) Represents the recognition of a $0.6 million benefit associated with the
utilization of a net operating loss.
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
JUNE 30, 2004
----------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO WESCO and
International, Distribution, Non-Guarantor Eliminating
Inc. Inc. Subsidiaries Entries Consolidated
-------------- ------------- ------------- ------------ ------------
Cash and cash equivalents ........................... $ -- $ 4,088 $ 5,333 $ (2) $ 9,419
Trade accounts receivable ........................... -- 16,155 253,258 -- 269,413
Inventories ......................................... -- 323,136 56,447 -- 379,583
Other current assets ................................ -- 7,628 17,974 2,075 27,677
-------- ---------- -------- ----------- ----------
Total current assets ............................. -- 351,007 333,012 2,073 686,092
Intercompany receivables, net ....................... -- 217,082 20,644 (237,726) --
Property, buildings and equipment, net .............. -- 26,041 67,956 -- 93,997
Goodwill ............................................ -- 360,056 37,953 -- 398,009
Investments in affiliates and other noncurrent assets 435,448 381,600 3,281 (814,043) 6,286
-------- ---------- -------- ----------- ----------
Total assets ..................................... $435,448 $1,335,786 $462,846 $(1,049,696) $1,184,384
======== ========== ======== =========== ==========
Accounts payable .................................... $ 2 $ 420,042 $ 23,740 $ (2) $ 443,782
Other current liabilities ........................... -- 85,541 3,551 2,075 91,167
-------- ---------- -------- ----------- ----------
Total current liabilities ........................ 2 505,583 27,291 2,073 534,949
Intercompany payables, net .......................... 237,726 -- -- (237,726) --
Long-term debt ...................................... -- 353,490 49,941 -- 403,431
Other noncurrent liabilities ........................ -- 41,289 3,309 -- 44,598
Stockholders' equity ................................ 197,720 435,424 382,305 (814,043) 201,406
-------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity ....... $435,448 $1,335,786 $462,846 $(1,049,696) $1,184,384
======== ========== ======== =========== ==========
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 JUNE 30, 2004
------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
------------- ---------------=-- ------------- ----------- ------------
Net sales .................................. $ -- $ 796,419 $ 134,601 $ -- $931,020
Cost of goods sold ......................... -- 642,012 105,301 -- 747,313
Selling, general and administrative expenses -- 118,549 17,632 -- 136,181
Depreciation and amortization .............. -- 3,867 788 -- 4,655
Results of affiliates' operations .......... 17,227 11,297 -- (28,524) --
Interest expense (income), net ............. (2,862) 14,114 (1,104) -- 10,148
Other (income) expense ..................... -- 6,714 (3,797) -- 2,917
Provision (benefit) for income taxes ....... 1,003 5,233 4,484 -- 10,720
-------- --------- --------- --------- --------
Net income (loss) ....................... $ 19,086 $ 17,227 $ 11,297 $ (28,524) $ 19,086
======== ========= ========= ========= ========
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
------------- ------------------ ------------- ----------- ------------
Net sales .................................. $ -- $ 700,941 $ 119,297 $ -- $820,238
Cost of goods sold ......................... -- 572,067 97,271 -- 669,338
Selling, general and administrative expenses -- 110,141 16,679 -- 126,820
Depreciation and amortization .............. -- 4,354 767 -- 5,121
Results of affiliates' operations .......... 5,421 6,441 -- (11,862) --
Interest expense (income), net ............. (2,968) 14,449 (661) -- 10,820
Other (income) expense ..................... -- 4,876 (3,904) -- 972
Provision (benefit) for income taxes ....... 1,039 (3,926) 2,704 -- (183)
------- --------- --------- --------- --------
Net income (loss) ....................... $ 7,350 $ 5,421 $ 6,441 $ (11,862) $ 7,350
======= ========= ========= ========= ========
11
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
--------------- ----------------- ------------- ----------- ------------
Net sales .................................. $ -- $ 1,524,190 $ 254,624 $ -- $1,778,814
Cost of goods sold ......................... -- 1,232,506 201,749 -- 1,434,255
Selling, general and administrative expenses -- 230,069 35,699 -- 265,768
Depreciation and amortization .............. -- 8,068 1,593 -- 9,661
Results of affiliates' operations .......... 25,066 18,451 -- (43,517) --
Interest expense (income), net ............. (5,753) 27,928 (2,187) -- 19,988
Other (income) expense ..................... -- 12,790 (8,658) -- 4,132
Provision for income taxes ................. 2,012 6,214 7,977 -- 16,203
-------- ----------- --------- -------- ----------
Net income (loss) ....................... $ 28,807 $ 25,066 $ 18,451 $(43,517) $ 28,807
======== =========== ========= ======== ==========
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
---------------- ----------------- ------------- ----------- ------------
Net sales....................................... $ -- $ 1,382,014 $ 229,032 $ -- $1,611,046
Cost of goods sold.............................. -- 1,127,978 186,736 -- 1,314,714
Selling, general and administrative expenses.... -- 214,962 33,599 -- 248,561
Depreciation and amortization................... -- 8,693 1,561 -- 10,254
Results of affiliates' operations............... 8,394 12,983 -- (21,377) --
Interest expense (income), net.................. (5,838) 29,077 (2,031) -- 21,208
Other (income) expense.......................... -- 12,891 (10,509) -- 2,382
Provision for income taxes...................... 2,043 (6,998) 6,693 -- 1,738
----------- ----------- --------- --------- ----------
Net income (loss)............................ $ 12,189 $ 8,394 $ 12,983 $ (21,377) $ 12,189
=========== =========== ========= ========= ==========
12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net cash provided (used) by
operating activities $ 27,016 $ 49,719 $ (4,573) $ (2) $ 72,160
Investing activities:
Capital expenditures -- (4,932) (287) -- (5,219)
Acquisitions -- (30,703) -- -- (30,703)
-------- -------- -------- -------- --------
Net cash used in investing
activities -- (35,635) (287) -- (35,922)
Financing activities:
Net borrowings (repayments) (10,673) (26,417) (549) -- (37,639)
Redemption of stock options (20,144) -- -- -- (20,144)
Equity transactions 3,800 -- -- -- 3,800
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (27,017) (26,417) (549) -- (53,983)
-------- -------- -------- -------- --------
Effect of exchange rate changes on
Cash and cash equivalents -- -- (331) -- (331)
-------- -------- -------- -------- --------
Net change in cash and cash
equivalents (1) (12,333) (5,740) (2) (18,076)
Cash and cash equivalents at
beginning of year 1 16,421 11,073 -- 27,495
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period $ -- $ 4,088 $ 5,333 $ (2) $ 9,419
======== ======== ======== ======== ========
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution, Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ------------- ------------
Net cash provided (used) by
operating activities $ 3,819 $ 12,210 $(34,353) $ -- $(18,324)
Investing activities:
Capital expenditures -- (3,225) (214) -- (3,439)
Acquisitions -- (2,028) -- -- (2,028)
Proceeds from sale of property -- 1,177 -- -- 1,177
-------- -------- -------- -------- --------
Net cash used in investing
activities -- (4,076) (214) -- (4,290)
Financing activities:
Net borrowings (repayments) (3,851) 197 37,751 -- 34,097
Equity transactions 29 -- -- -- 29
Other -- -- (1,431) -- (1,431)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (3,822) 197 36,320 -- 32,695
-------- -------- -------- -------- --------
Effect of exchange rate changes on
Cash and cash equivalents -- -- 554 -- 554
-------- -------- -------- -------- --------
Net change in cash and cash
equivalents (3) 8,331 2,307 -- 10,635
Cash and cash equivalents at
beginning of year 4 12,449 10,117 -- 22,570
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period $ 1 $ 20,780 $ 12,424 $ -- $ 33,205
======== ======== ======== ======== ========
14
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.
GENERAL
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
six months of 2004. Sales increased 10.4% over the same period last year and the
gross margin percentage of 19.4% is our historical best. Operating income
improved by 84.3% compared with last year's comparable period and the year to
date net income was $28.8 million versus $12.2 million in last year's comparable
period. As a result, our earnings per share were $0.67 for the six month period,
a 157% improvement over earnings per share during the same period last year.
CASH FLOW
We generated $72.2 million in operating cash flow during the first six
months of 2004. Included in this amount was a $75.0 million cash inflow from an
increase in our Receivables Facility. During the six month period ended June 30,
2004 we repurchased $36.0 million in aggregate principal amount of senior
subordinated notes at a net loss of $1.6 million. During the second quarter we
paid $30 million pursuant to the terms of the Bruckner purchase agreement.
During the first 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 June 30, 2004 we had approximately $180 million in available
borrowing capacity under our financing facilities.
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
remains 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, improve margin expansion programs and focus on cost
containment as we drive to improve our operating performance for the rest of
2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the six-month period ended 2004, there were no significant changes
to WESCO's Critical Accounting Policies and Estimates referenced in the 2003
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Second Quarter of 2004 versus Second Quarter of 2003
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's condensed consolidated statements of operations for the
periods presented:
15
THREE MONTHS ENDED JUNE 30
--------------------------
2004 2003
----- -----
Net sales 100.0% 100.0%
Gross profit 19.7 18.4
Selling, general and administrative expenses 14.6 15.5
Depreciation and amortization 0.5 0.6
----- -----
Income from operations 4.6 2.3
Interest expense 1.1 1.2
Loss on debt extinguishments 0.1 -
Other expense 0.1 0.2
----- -----
Income before income taxes 3.3 0.9
Provision for income taxes 1.2 0.0
----- -----
Net income 2.1% 0.9%
===== =====
Net sales in the second quarter of 2004 totaled $931.0 million versus
$820.2 million in the comparable 2003 quarter, a 13.5% increase. Approximately
10% of the increase in sales was attributable to stronger demand resulting from
improving economic activity and market share gain. The remaining portion of the
increase was due to improved pricing on commodity products, approximately 3%,
and the strength of the Canadian dollar.
Gross profit for the second quarter of 2004 totaled $183.7 million and was
up compared to 2003's second quarter, as the gross margin percentage improved to
19.7% versus 18.4% last year. The improvement in gross margin percentage was
comprised of a 70 basis point favorable impact from improved performance with
supplier volume rebate and cash discount programs, a 50 basis point favorable
impact due to pass through of increased commodity prices, and favorable sales
mix of 20 basis points.
Selling, general and administrative ("SG&A") expenses in the second
quarter of 2004 totaled $136.2 million versus $126.8 million in last year's
comparable quarter. Total payroll expense increased approximately $9.2 million
over last year's second quarter principally from increased variable incentive
compensation costs of $5.7 million, increased health care and benefits costs of
$2.1 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 $9.2
million in the second quarter of 2004 compared with $9.0 million in last year's
second quarter. As a percentage of net sales, SG&A expenses decreased to 14.6%
from 15.5% in the prior year quarter reflecting LEAN initiatives and the
leverage of higher sales volume.
Depreciation and amortization was $4.7 million in the second quarter of
2004 versus $5.1 million in last year's second quarter. The decline in
depreciation and amortization was primarily due to less depreciation expense on
computer hardware and less software amortization.
Interest expense totaled $10.1 million for the second quarter of 2004
versus $10.8 million in last year's comparable quarter. The decline was due to a
lower amount of indebtedness outstanding during the current quarter as compared
to the second quarter of 2003 offset somewhat by a slightly higher effective
interest rate resulting from a higher proportion of fixed rate debt. Loss on
debt extinguishments of $1.6 million represented the loss on the repurchase of
our senior subordinated notes versus a gain on debt extinguishments of $0.3
million during last year's comparable period. Other expense during the second
quarter of 2004 and 2003 totaled $1.3 million, reflecting costs associated with
the Receivables Facility.
Income tax expense totaled $10.7 million in the second quarter of 2004 and
the effective tax rate was a 36.0%. Income tax benefit totaled $0.2 million in
the second quarter of 2003 and the effective tax rate was a 2.6% benefit. Last
year's effective tax rate differed from the statutory rate primarily as a result
of the recognition of a $2.4 million benefit associated with the favorable
resolution of an IRS examination.
For the second quarter of 2004, net income totaled $19.1 million, or $0.44
per diluted share, compared with $7.4 million, or $0.16 per diluted share, in
the second 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.
16
Six Months Ended June 30, 2004 versus Six Months Ended June 30, 2003
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's condensed consolidated statements of operations for the
periods presented:
SIX MONTHS
ENDED JUNE 30
2004 2003
------ ------
Net sales 100.0% 100.0%
Gross profit 19.4 18.4
Selling, general and administrative expenses 14.9 15.4
Depreciation and amortization 0.6 0.7
------ ------
Income from operations 3.9 2.3
Interest expense 1.1 1.3
Loss on debt extinguishment 0.1 -
Other expense 0.1 0.1
------ ------
Income before income taxes 2.6 0.9
Provision for income taxes 0.9 0.1
------ ------
Net income 1.7% 0.8%
------ ------
Net sales in the six months ended June 30, 2004 totaled $1,778.8 million
versus $1,611.0 million in the comparable 2003 period, a 10.4% increase.
Approximately 7% of the increase in sales was attributable to stronger demand
resulting from improving economic activity. The remaining portion of the
increase was split between improved pricing on commodity products of
approximately 2% and the strength of the Canadian dollar of 1%.
Gross profit for the six months ended June 30, 2004 of $344.6 million was
up versus last year's comparable period, as the gross margin percentage improved
to 19.4% versus 18.4% last year. The improvement in gross margin percentage was
comprised of a 45 basis point favorable impact from improved performance with
supplier volume rebate and cash discount programs, along with a 40 basis point
favorable impact due to pass through of rising commodity prices and favorable
sales mix of 20 basis points.
SG&A expenses during the six months ended June 30, 2004 totaled $265.8
million versus $248.6 million in last year's comparable period. Total payroll
expense increased approximately $15.9 million over last year's first half
principally from increased variable incentive compensation costs of $8.0
million, increased health care and benefits costs of $3.9 million and stock
options of $0.7 million associated with the adoption of SFAS No. 123 in 2003.
Shipping and handling expense included in SG&A was $17.8 million for both this
year and last year's comparable period. As a percentage of net sales, SG&A
expenses decreased to 14.9% compared with 15.4% in last year's six-month period
reflecting LEAN initiatives and the leverage of higher sales volume.
Depreciation and amortization was $9.7 million in the first six months of
2004 versus $10.3 million in last year's comparable period.
Interest expense totaled $20.0 million for the six months ended June 30,
2004 versus $21.2 million in last year's comparable period, a decrease of 5.8%.
The decline was due to a lower amount of indebtedness outstanding during the
current period. Loss on debt extinguishments of $1.6 million represented the
loss on the repurchase of our senior subordinated notes compared with a gain on
debt extinguishments of $0.3 million last year. Other expense totaled $2.5
million in 2004, a decline from $2.7 million in the comparable 2003 period,
principally reflecting costs associated with the accounts receivable
securitization program.
For the six months ended June 30, 2004, income tax expense totaled $16.2
million and the effective tax rate was 36.0%. Income tax expense totaled $1.7
million in last year's comparable period and the effective tax rate was 12.5%.
The effective tax rate in the prior-year period differs from the statutory rate
primarily as a result of the recognition of a $2.4 million benefit associated
with the favorable conclusion of an IRS examination. In addition, foreign tax
credits contributed to the reduction in the effective rate during 2003.
For the six months ended June 30, 2004, net income totaled $28.8 million,
or $0.67 per diluted share, versus $12.2 million, or $0.26 per diluted share, in
last year's comparable period. The improvements in net income and
17
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.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.2 billion at June 30, 2004 and December 31, 2003,
respectively. During the first six months of 2004, total liabilities decreased
to $983.0 million. An increase in accounts payable of $77.4 million as a result
of increased purchase activity was offset by a $30 million payment made pursuant
to earn-out provisions of the Bruckner acquisition agreement and a $23.1 million
decrease in accrued payroll and benefit costs primarily as a result of a $20.1
million payment related to certain employee stock options. During the first six
months of 2004, stockholders' equity increased $33.7 million to $201.4 million
at June 30, 2004 principally as a result of $28.8 million of net income.
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 earn-out proceeds earned that is payable in any single
year subsequent to achieving the earnings target is capped under this agreement
at $30 million per year. During the first six months of 2004 WESCO paid $30
million pursuant to this agreement. The remaining $50 million due under the
agreement was converted into a note payable ($30 million, due in June 2005,
classified as current and $20 million, due in June 2006, classified as long-term
debt) and pays interest at 10%. 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 June 30, 2004, the interest rate
was 3.04%. As of June 30, 2004, we had no borrowings outstanding under this
facility and approximately $180 million in availability, and consequently, we
were not subject to any covenants in the agreement.
18
Senior Notes
As of June 30, 2004, we had $342.8 million in aggregate principal amount
of 9.125% senior subordinated notes due 2008. The notes were issued with an
average issue price of 98%. During the first six months of 2004 we repurchased
$36.0 million in aggregate principal amount of senior subordinated notes at a
net loss of $1.6 million.
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 June 30, 2004, the rates ranged from 6.32% to 6.58%. 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 June 30, 2004, $300 million in funding was outstanding under the
Receivables Facility.
Cash Flow
Operating Activities. Cash provided by operating activities for the first
six months of 2004 totaled $72.2 million compared to cash used by operating
activities of $18.3 million in the prior year. Cash provided by operating
activities in 2004 included cash inflows of $75 million associated with changes
related to our Receivables Facility. In 2003, cash used by operating activities
included a cash outflow of $68.0 million due to changes related to our
Receivables Facility. In 2004, cash generated by net income plus other
adjustments totaling $42.3 million, along with cash inflows from increases in
accounts payable of $79.4 million and prepaid expenses and other current assets
of $14.9 million were partially offset by a $78.8 million use of cash for
increased accounts receivable and a $59.9 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 six
months. The change in accounts receivable also includes the impact of a change
in cash collection procedures. In 2003, cash generated by net income plus other
adjustments totaling $22.6 million and cash generated by increases in accounts
payable and other current and non-current liabilities totaling $31.5 million was
partially offset by cash used to fund increases in accounts receivable totaling
$8.2 million.
Investing Activities. Net cash used in investing activities was $35.9
million during the first six months of 2004, due to a $30 million payment
pursuant to the Bruckner purchase agreement and capital expenditures of $5.2
million. In 2003, net cash used in investing activities of $4.3 million included
capital expenditures of $3.4 million along with acquisition payments totaling
$2.0 million and were partially offset by proceeds received from the sale of
property and buildings totaling $1.2 million.
19
Financing Activities. Net cash used by financing activities during the
first six months of 2004 totaled $54.0 million primarily as a result of net debt
repayments of $37.6 million and $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 $32.7 million as a result of completing the real
estate financing which provided $38 million partially offset by debt repayments.
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 the future performance
of WESCO. When used in this context, the words "anticipates," "plans,"
"believes," "estimates," "intends," "expects," "projects" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. Such statements including,
but not limited to, WESCO's statements regarding its business strategy, growth
strategy, productivity and profitability enhancement, new product and service
introductions and liquidity and capital resources are based on management's
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, certain of which
are beyond WESCO's control. WESCO's actual results could differ materially from
those expressed in any forward-looking statement made by or on behalf of WESCO.
In light of these risks and uncertainties there can be no assurance that the
forward-looking information will in fact prove to be accurate. Factors that
might cause actual results to differ from such forward-looking statements
include, but are not limited to, an increase in competition, the amount of
outstanding indebtedness, the availability of appropriate acquisition
opportunities, availability of key products, functionality of information
systems, international operating environments and other risks that are described
in WESCO's Annual Report on Form 10-K for the year ended December 31, 2003 which
are incorporated by reference herein. WESCO has undertaken no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have not been any material changes to WESCO's exposures to market
risk during the six months ended June 30, 2004 that would require an update to
the disclosures provided in WESCO's Form 10-K for the year-ended December 31,
2003.
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 quarterly 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 second 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).
Independent counsel has completed its investigation and reported 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. Pursuant to a full investigation, independent counsel and the
Company's Board of Directors concluded that certain actions at the branch were
improper. Management has promptly implemented those remedial steps recommended
by its internal auditors in their January 2004 report. In addition, management
is taking further actions to implement a remedial plan recommended by the Audit
Committee and approved by the Board of Directors to address certain internal
control, personnel and operational matters at this branch. These improper
actions at the branch had no material effect on the Company's consolidated
financial statements.
21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of WESCO shareholders held on May 19, 2004, Ms.
Sandra Beach Lin, Mr. Robert J. Tarr, Jr., and Mr. Kenneth L. Way were reelected
as directors of WESCO to serve for three-year terms. Votes cast for Ms. Lin were
37,044,047 and votes withheld were 188,129; votes cast for Mr. Tarr were
36,887,715 and votes withheld were 344,461; votes cast for Mr. Way were
37,071,781 and votes withheld were 160,395.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)
promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)
promulgated under the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 21, 2004, WESCO issued a press release announcing its earnings for the
first quarter of 2004 and filed a report on Form 8-K under item 12.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 9, 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
Senior Vice President and Chief Financial
and Administrative Officer
23