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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
(Mark One)
     
x
  Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934
  For the Quarterly period ended June 30, 2004 or
 
   
  Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934
o
  For the transition period from                     to                    

Commission file number 1-4720

WESCO FINANCIAL CORPORATION


(Exact name of Registrant as Specified in its Charter)
     
DELAWARE   95-2109453

 
 
 
(State or Other Jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901


(Address of Principal Executives Offices)
(Zip Code)
626/585-6700

(Registrant’s Telephone Number, Including Area Code)
     
(Former Name, Former Address and Former Fiscal Year, 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 the past 90 days.  Yes x No o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No  o

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 7,119,807 as of August 3, 2004

 


PART I. FINANCIAL INFORMATION

         
    Page(s)
Item 1. Financial Statements (unaudited).
       
    4  
    5  
    6  
    7-9  
    10-17  
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
       
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32(a)
 EXHIBIT 32(b)

     Reference is made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk appearing on pages 29 and 30 of the Form 10-K Annual Report for the year ended December 31, 2003, filed by Wesco Financial Corporation (“Wesco”), for information on equity price risk and interest rate risk at Wesco. There have been no material changes through June 30, 2004.

Item 4. Controls and Procedures.

     An evaluation was performed under the supervision and with the participation of the management of Wesco, including Charles T. Munger (Chief Executive Officer) and Jeffrey L. Jacobson (Chief Financial Officer), of the effectiveness of the design and operation of Wesco’s disclosure controls and procedures as of June 30, 2004. Based on that evaluation, Mr. Munger and Mr. Jacobson concluded that Wesco’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by Wesco in reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in Wesco’s internal controls over financial reporting during the quarter ended June 30, 2004 that have materially affected or are reasonably likely to materially affect the internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security-Holders

     Following is a table showing the votes cast for, and withheld from voting for, each nominee at the annual meeting of shareholders of Wesco held May 5, 2004, at which meeting the shareholders elected the following Directors:

                 
    Favorable   Votes
Name
  Votes
  Withheld
Charles T. Munger
    6,679,827       242,180  
Robert H. Bird
    6,679,947       242,060  
Carolyn H. Carlburg
    6,906,713       15,294  
Robert E. Denham
    6,679,632       242,375  
Robert T. Flaherty
    6,907,874       14,133  
Peter D. Kaufman
    6,913,653       8,354  
Elizabeth Caspers Peters
    6,905,562       16,445  

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:

31   (a) — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (chief executive officer)
 
31   (b) — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (chief financial officer)
 
32   (a) — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief executive officer)
 
32   (b) — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief financial officer)

(b)   Reports on Form 8-K – Report filed May 10, 2004. Item reported: 12.

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WESCO FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS

(Dollar amounts in thousands except for amounts per share)
(Unaudited)
                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Revenues:
                               
Sales and service revenues
  $ 103,934     $ 103,745     $ 204,421     $ 209,437  
Insurance premiums earned
    15,122       22,480       33,588       56,513  
Dividend and interest income
    8,431       12,889       16,922       27,388  
Realized investment gains
          52,208             53,019  
Other
    824       803       1,623       1,607  
 
   
 
     
 
     
 
     
 
 
 
    128,311       192,125       256,554       347,964  
 
   
 
     
 
     
 
     
 
 
Costs and expenses:
                               
Cost of products and services sold
    36,789       35,785       72,357       74,020  
Insurance losses, loss adjustment and underwriting expenses
    9,513       15,937       20,281       42,481  
Selling, general and administrative expenses
    66,836       72,177       131,166       144,456  
Interest expense
    156       140       323       380  
 
   
 
     
 
     
 
     
 
 
 
    113,294       124,039       224,127       261,337  
 
   
 
     
 
     
 
     
 
 
Income before income taxes and minority interest
    15,017       68,086       32,427       86,627  
Income taxes
    4,456       22,673       9,668       29,270  
Minority interest in loss of subsidiary
          (568 )           (1,128 )
 
   
 
     
 
     
 
     
 
 
Net income
    10,561       45,981       22,759       58,485  
Retained earnings — beginning of period
    1,628,067       1,563,273       1,618,324       1,553,152  
Cash dividends declared and paid
    (2,456 )     (2,386 )     (4,911 )     (4,769 )
 
   
 
     
 
     
 
     
 
 
Retained earnings — end of period
  $ 1,636,172     $ 1,606,868     $ 1,636,172     $ 1,606,868  
 
   
 
     
 
     
 
     
 
 
Amounts per capital share based on 7,119,807 shares outstanding throughout each period:
                               
Net income
  $ 1.49     $ 6.45     $ 3.20     $ 8.21  
 
   
 
     
 
     
 
     
 
 
Cash dividends
  $ .345     $ .335     $ .690     $ .670  
 
   
 
     
 
     
 
     
 
 

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
                 
    June 30,   Dec. 31,
    2004
  2003
ASSETS
               
Cash and cash equivalents
  $ 1,140,970     $ 1,052,462  
Investments:
               
Securities with fixed maturities
    121,853       167,390  
Marketable equity securities
    793,401       754,634  
Rental furniture
    170,435       163,699  
Goodwill of acquired businesses
    266,607       266,607  
Other assets
    117,698       133,603  
 
   
 
     
 
 
 
  $ 2,610,964     $ 2,538,395  
 
   
 
     
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Insurance losses and loss adjustment expenses
  $ 97,748     $ 102,526  
Unearned insurance premiums
    21,088       28,993  
Deferred furniture rental income and security deposits
    20,422       19,835  
Notes payable
    25,218       12,679  
Income taxes payable, principally deferred
    271,871       247,241  
Other liabilities
    54,669       48,931  
 
   
 
     
 
 
 
    491,016       460,205  
 
   
 
     
 
 
Shareholders’ equity:
               
Capital stock and additional paid-in capital
    33,324       33,324  
Unrealized appreciation of investments, net of taxes
    450,452       426,542  
Retained earnings
    1,636,172       1,618,324  
 
   
 
     
 
 
Total shareholders’ equity
    2,119,948       2,078,190  
 
   
 
     
 
 
 
  $ 2,610,964     $ 2,538,395  
 
   
 
     
 
 

     See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
                 
    Six Months Ended
    June 30,   June 30,
    2004
  2003
Cash flows from operating activities, net
  $ 80,375     $ 88,035  
 
   
 
     
 
 
Cash flows from investing activities:
               
Maturities and redemptions of securities with fixed maturities
    46,236       193,908  
Sales of securities with fixed maturities
          351,180  
Purchases of securities with fixed maturities
    (2,907 )     (2,561 )
Acquisitions of businesses, net of cash and cash equivalents acquired
          (3,440 )
Purchases of rental furniture
    (44,936 )     (32,304 )
Other, net
    1,740       (3,880 )
 
   
 
     
 
 
Net cash flows from investing activities
    133       502,903  
 
   
 
     
 
 
Cash flows from financing activities:
               
Net increase (decrease) in notes payable, principally line of credit
    12,900       (3,600 )
Payment of cash dividends
    (4,911 )     (4,769 )
Other, net
    11       761  
 
   
 
     
 
 
Net cash flows from financing activities
    8,000       (7,608 )
 
   
 
     
 
 
Increase in cash and cash equivalents
    88,508       583,330  
Cash and cash equivalents — beginning of period
    1,052,462       349,812  
 
   
 
     
 
 
Cash and cash equivalents — end of period
  $ 1,140,970     $ 933,142  
 
   
 
     
 
 
Supplementary information:
               
Interest paid during period
  $ 101     $ 415  
Income taxes paid (recovered), net, during period
    (2,133 )     12,056  
Noncash activities – conversion of debt to equity in subsidiary
          9,808  
 
   
 
     
 
 

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)

Note 1

     The unaudited condensed consolidated financial statements of which these notes are an integral part include the accounts of Wesco Financial Corporation (“Wesco”) and its subsidiaries. In management’s opinion, such statements reflect all adjustments (all of them of a normal recurring nature) necessary to a fair statement of interim results in accordance with accounting principles generally accepted in the United States.

     Reference is made to the notes to Wesco’s consolidated financial statements appearing on pages 40 through 48 of its 2003 Form 10-K Annual Report for other information deemed generally applicable to the condensed consolidated financial statements. In particular, Wesco’s significant accounting policies and practices are set forth in Note 1 on pages 40 through 42.

     Wesco’s management does not believe that any accounting pronouncements issued by the Financial Accounting Standards Board or other applicable authorities that are required to be adopted after June 30, 2004 are likely to have a material effect on reported shareholders’ equity.

Note 2

     In January 2001, Wesco’s furniture rental subsidiary, CORT Business Services Corporation (“CORT”), formed a subsidiary which partially financed its start-up by issuing convertible notes primarily to unrelated parties. During 2003 most of these notes were converted into equity of the subsidiary, after which the resulting minority interest was purchased at a discount from an agreed option price. These transactions resulted in an increase in additional paid-in capital of $2,885. The minority interest in the net loss sustained by the subsidiary prior to the buyout, $1,128 for the six-month period ended June 30, 2003, including $568 for the second quarter, is set out separately on the condensed consolidated statement of income.

Note 3

     Following is a summary of securities with fixed maturities:

                                 
    June 30, 2004
  December 31, 2003
    Amortized   Fair   Amortized   Fair
    Cost
  Value
  Cost
  Value
Mortgage-backed securities
  $ 102,761     $ 108,267     $ 146,793     $ 154,623  
Other
    12,683       13,586       12,160       12,767  
 
   
 
     
 
     
 
     
 
 
 
  $ 115,444     $ 121,853     $ 158,953     $ 167,390  
 
   
 
     
 
     
 
     
 
 

     There were no unrealized losses with respect to securities with fixed maturities at June 30, 2004 or December 31, 2003.

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Following is a summary of marketable equity securities (all common stocks):

                                 
    June 30, 2004
  December 31, 2003
            Fair           Fair
    Cost
  Value
  Cost
  Value
The Coca-Cola Company
  $ 40,761     $ 363,739     $ 40,761     $ 365,684  
The Gillette Company
    40,000       271,360       40,000       235,072  
American Express Company
    20,687       99,836       20,687       93,716  
Wells Fargo & Company
    6,333       58,466       6,333       60,162  
 
   
 
     
 
     
 
     
 
 
 
  $ 107,781     $ 793,401     $ 107,781     $ 754,634  
 
   
 
     
 
     
 
     
 
 

Note 4

     The following table sets forth Wesco“s consolidated comprehensive income for the three- and six-month periods ended June 30, 2004 and 2003:

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30, June 30,
    2004
  2003
  2004
  2003
Net income
  $ 10,561     $ 45,981     $ 22,759     $ 58,485  
Increase in unrealized appreciation of investments, net of income tax effect of $7,016, $11,212, $12,829 and $570
    12,995       20,526       23,910       865  
 
   
 
     
 
     
 
     
 
 
Comprehensive income
  $ 23,556     $ 66,507     $ 46,669     $ 59,350  
 
   
 
     
 
     
 
     
 
 

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Note 5

     Following is condensed consolidated financial information for Wesco, by business segment:

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Insurance segment:
                               
Revenues
  $ 23,365     $ 35,246     $ 50,135     $ 83,650  
Net income
    9,657       12,716       20,759       27,528  
Assets at end of period
    2,048,723       1,894,283       2,048,723       1,894,283  
 
   
 
     
 
     
 
     
 
 
Furniture rental segment:
                               
Revenues
  $ 88,088     $ 92,657     $ 173,835     $ 186,027  
Net income (loss)
    220       (633 )     604       (3,655 )
Assets at end of period
    241,021       266,667       241,021       266,667  
 
   
 
     
 
     
 
     
 
 
Industrial segment:
                               
Revenues
  $ 15,856     $ 11,093     $ 30,596     $ 23,428  
Net income (loss)
    582       (103 )     1,212       (40 )
Assets at end of period
    20,540       19,317       20,540       19,317  
 
   
 
     
 
     
 
     
 
 
Goodwill of acquired businesses, included in assets at end of period
  $ 266,607     $ 266,455     $ 266,607     $ 266,455  
 
   
 
     
 
     
 
     
 
 
Realized investment gains:
                               
Before taxes (included in revenues)
  $     $ 52,208     $     $ 53,019  
After taxes (included in net income)
          33,935             34,462  
 
   
 
     
 
     
 
     
 
 
Other items unrelated to business segments:
                               
Revenues
  $ 1,002     $ 921     $ 1,988     $ 1,840  
Net income
    102       66       184       190  
Assets at end of period
    34,073       28,228       34,073       28,228  
 
   
 
     
 
     
 
     
 
 
Consolidated totals:
                               
Revenues
  $ 128,311     $ 192,125     $ 256,554     $ 347,964  
Net income
    10,561       45,981       22,759       58,485  
Assets at end of period
    2,610,964       2,474,950       2,610,964       2,474,950  
 
   
 
     
 
     
 
     
 
 

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WESCO FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Reference is made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 19 through 30 of the Form 10-K Annual Report filed by Wesco Financial Corporation (“Wesco”) for the year 2003 for information deemed generally appropriate to an understanding of the accompanying unaudited condensed consolidated financial statements. The information set forth in the following paragraphs updates such discussion. Further, in reviewing the following paragraphs, attention is directed to the accompanying unaudited condensed consolidated financial statements.

OVERVIEW

Financial Condition

     Wesco continues to have an exceptionally strong balance sheet at June 30, 2004, with relatively little debt and no hedging or off-balance sheet financing. Liquidity, which has traditionally been high, is even higher than usual due principally to sales, maturities and early redemptions of fixed-maturity investments during 2003 and 2004, and reinvestment of the proceeds in lower-yielding cash equivalents pending redeployment.

Results of Operations

     Investment gains were realized in 2003 for the first time in three years. As is usual for Wesco, realization of these gains had little effect on shareholders’ equity, because the gains had essentially been reflected, net of taxes, in the unrealized appreciation component of shareholders’ equity. Decisions to sell investments at Wesco are made without regard to the effect on periodic earnings, and the amounts and timing of realizations have no predictive or practical analytic value.

     Consolidated net income includes significant after-tax realized investment gains in the 2003 periods. Excluding such after-tax gains, consolidated earnings decreased slightly in the 2004 periods from the comparable 2003 figures. Investment income of the insurance segment declined due to a shift from long-term to short-term fixed-maturity investments bearing lower interest rates, and underwriting gain decreased. These adverse changes were partially offset by improved results of the furniture rental and industrial segments.

FINANCIAL CONDITION

     Wesco’s shareholders’ equity at June 30, 2004 was approximately $2.12 billion ($298 per share), compared to $2.08 billion ($292 per share) at December 31, 2003. The 2004 figure included $450 million of after-tax unrealized appreciation in market value of investments, versus $427 million at December 31, 2003. Because unrealized appreciation is recorded based upon current market quotations, gains or losses ultimately realized upon sale of investments could differ substantially from recorded unrealized appreciation.

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     At June 30, 2004, Wesco’s consolidated cash and cash equivalents totaled $1.14 billion, up from $1.05 billion at December 31, 2003. The $89 million increase resulted mainly from operating cash flow from Wesco’s insurance businesses plus maturities and early redemptions of fixed-income securities, reduced by purchases of rental furniture.

     Wesco’s consolidated borrowings totaled $25.2 million at June 30, 2004 versus $12.7 million at December 31, 2003. The increased borrowings related to a revolving line of credit used in the furniture rental business.

     Wesco’s management continues to believe that the Wesco group has adequate liquidity and financial resources to provide for contingent needs.

RESULTS OF OPERATIONS

     The following summary sets forth the contribution to Wesco’s consolidated net income of each business segment — insurance, furniture rental and industrial — as well as activities not considered related to such segments. (Amounts are in thousands, all after income tax effect.)

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Insurance segment:
                               
Underwriting gain
  $ 3,629     $ 4,262     $ 8,633     $ 9,130  
Investment income
    6,028       8,454       12,126       18,398  
Furniture rental segment
    220       (633 )     604       (3,655 )
Industrial segment
    582       (103 )     1,212       (40 )
Nonsegment items other than investment gains
    102       66       184       190  
Realized investment gains
          33,935             34,462  
 
   
 
     
 
     
 
     
 
 
Consolidated net income
  $ 10,561     $ 45,981     $ 22,759     $ 58,485  
 
   
 
     
 
     
 
     
 
 

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Insurance Segment

     The insurance segment comprises Wesco-Financial Insurance Company ( “Wes-FIC” ) and The Kansas Bankers Surety Company (“KBS”). Their operations are conducted or supervised by wholly owned subsidiaries of Berkshire Hathaway Inc., Wesco’s ultimate parent company. Following is a summary of the results of segment operations, which represent essentially the combination of underwriting results with dividend and interest income. (Amounts are in thousands.)

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Premiums written
  $ 13,140     $ 13,028     $ 25,684     $ 34,715  
 
   
 
     
 
     
 
     
 
 
Premiums earned
  $ 15,122     $ 22,480     $ 33,588     $ 56,513  
 
   
 
     
 
     
 
     
 
 
Underwriting gain
  $ 5,583     $ 6,557     $ 13,281     $ 14,046  
Dividend and interest income
    8,235       12,766       16,536       27,137  
 
   
 
     
 
     
 
     
 
 
Income before income taxes
    13,818       19,323       29,817       41,183  
Income taxes
    4,161       6,607       9,058       13,655  
 
   
 
     
 
     
 
     
 
 
Segment net income
  $ 9,657     $ 12,716     $ 20,759     $ 27,528  
 
   
 
     
 
     
 
     
 
 

     Premiums written for the second quarters of 2004 and 2003 included $8.2 million and $8.3 million written by Wes-FIC. Premiums written for the six-month periods ended June 30, 2004 and 2003 included $15.1 million and $24.5 million of reinsurance written by Wes-FIC. The remainder for each period was attributable to primary insurance written by KBS.

     Earned premiums for the second quarters of 2004 and 2003 included $10.1 million and $17.4 million attributable to Wes-FIC. Earned premiums for the first six months of 2004 and 2003 included $23.6 million and $46.4 million attributable to Wes-FIC. The balance for each period was attributable to KBS.

     At June 30, 2004, Wes-FIC’s in-force reinsurance business consists of: (1) a contract under which Wes-FIC participates in various pools of aviation-related risks, and (2) a multi-year contract covering certain multi-line property and casualty risks of a large, unaffiliated insurer. Each of these arrangements is administered by a Berkshire affiliate, which also participates with Wes-FIC in the underlying risks as an insurer.

     Reinsurance premiums written in the first six months of 2004 declined $9.0 million (26%) from the 2003 level. Prices in certain aviation markets have declined, which has resulted in fewer opportunities in 2004 to write business at prices considered acceptable. Also, a much lower level of business has been written in 2004 under the multi-line contract due principally to the imposition of tighter underwriting standards with respect to business written. Consequently, the level of reinsurance premiums written and earned over the remainder of 2004 may decline from amounts in comparable 2003 periods.

     Underwriting gain for the second quarters of 2004 and 2003 included $4.6 million and $4.3 million, respectively, attributable to Wes-FIC and $1.0 million and $2.3 million attributable to KBS. Underwriting gain for the first six months of 2004 included $9.2 million and $11.0 million attributable to Wes-FIC and $4.1 million and $3.0 million attributable to KBS. Although Wes-FIC’s earned premiums have declined, its underwriting gain has decreased to a lesser degree, mainly because pricing and risk selection have improved. KBS’s underwriting results fluctuated mainly due to greater-than-usual losses in the second quarter of 2004 and first

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quarter of 2003. KBS, like Wes-FIC, accepts volatility in its underwriting results in return for better potential aggregate results over the long term.

     Dividend and interest income earned by the insurance segment declined for the second quarter and first six months of 2004 from the corresponding prior year figures principally as proceeds from sales, maturities and early redemptions of higher-yielding, long-term investments were reinvested in lower-yielding, short-term investments.

Furniture Rental Segment

     The furniture rental segment consists of CORT Business Services Corporation (“CORT”) and its subsidiary, Relocation Central Corporation (“Relocation Central”). Following is a summary of segment operating results.

(Amounts are in thousands.)

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Revenues:
                               
Furniture rentals
  $ 68,055     $ 71,123     $ 134,315     $ 142,981  
Furniture sales
    17,104       17,119       33,829       34,560  
Apartment locator fees
    2,929       4,415       5,691       8,486  
 
   
 
     
 
     
 
     
 
 
Total revenues
    88,088       92,657       173,835       186,027  
 
   
 
     
 
     
 
     
 
 
Cost of rentals, sales and fees
    24,020       26,415       47,907       54,386  
Selling, general and administrative expenses
    63,766       69,363       125,165       138,876  
Interest expense
    160       141       323       378  
 
   
 
     
 
     
 
     
 
 
 
    87,946       95,919       173,395       193,640  
 
   
 
     
 
     
 
     
 
 
Income (loss) before income taxes and minority interest
    142       (3,262 )     440       (7,613 )
Income tax benefit
    (78 )     (2,061 )     (164 )     (2,830 )
Minority interest in net loss of Relocation Central
          (568 )           (1,128 )
 
   
 
     
 
     
 
     
 
 
Segment net income (loss)
  $ 220     $ (633 )   $ 604     $ (3,655 )
 
   
 
     
 
     
 
     
 
 

     Furniture rental revenues for the second quarter of 2004 declined $3.1 million, or 4.3%, from those of the second quarter of 2003, and $8.7 million, or 6.1% for the first six months. Excluding rental revenues from trade shows and locations not in operation throughout each period, rental revenues for 2004 compared to 2003 declined approximately 6.3% for the second quarter and 8.2% for the first six months. Revenues in 2004 reflect the effects of price increases of 4% to 5% in the fourth quarter of 2003. The number of furniture leases in effect, which had been on a downward trend from late 2000 through yearend 2003, has increased modestly in 2004; the number of units out on lease at March 31, 2004 was about 3% higher than at December 31, 2003, and the unit count was up about 8% at June 30, 2004 from the count at 2003 yearend.

     Furniture sales revenues for the second quarter of 2004 were relatively unchanged from those of the second quarter of 2003, following a decrease of 4.1% for the first quarter of 2004 as compared with sales for the first quarter of 2003. The decrease in furniture sales for the first quarter was attributed principally to the closure of several clearance centers and the reduction of advertising of furniture for sale in connection with CORT’s efforts to reduce its operating expenses, as described in more detail below. The improvement in furniture sales revenues for the second quarter of 2004 occurred in the month of June 2004, as sales increased by 6.4% over those of June 2003.

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     Apartment locator fees for the second quarter of 2004 decreased $1.5 million, or 34%, from those of the second quarter last year, and, for the first six months of 2004, decreased $2.8 million, or 33% from those reported for the first six months of 2003. Since late in 2003, Relocation Central’s operations are being reorganized in an effort to sharply reduce operating losses. As a result, some of its walk-in facilities have been merged into CORT’s facilities, and others have been closed, resulting in significant cost and expense reductions. The reduction in Relocation Central’s revenues was more than offset by a reduction in its costs and expenses, discussed below.

     Cost of rentals, sales and fees amounted to 27.3% and 27.6% of revenues for the second quarter and first six months of 2004 versus 28.5% and 29.2% for the corresponding periods of 2003. The decreases in cost percentages for the 2004 periods reflected improved rental margins, as well as lower depreciation expense and lower apartment locator lead acquisition costs. Purchases of new product increased slightly in recent periods after declining generally for several years; rental furniture is depreciated under the declining balance method, whereby recorded depreciation is higher in the first year and declines in each successive year. Costs of generating apartment locator fees were $2.3 million in the second quarter and $5 million in the first six months of 2004, and $3.8 million and $8.3 million in the comparable periods of 2003. Thus, costs of furniture rentals and sales were 25.5% in both the second quarter and first six months of 2004, and 25.6% and 25.9 % in the corresponding periods of 2003.

     Selling, general, administrative and interest expenses (“other operating expenses”) were $63.9 million for the second quarter of 2004 and $125.5 million for the first six months, down 8.0% and 9.9% from the $69.5 million and $139.3 million incurred in the comparable periods of 2003. These amounts include apartment locator-related expenses of $4.3 million in the second quarter and $7.1 million for the first six months of 2004, and $4.7 million and $9.2 million in the second quarter and first six months of 2003. Reductions in expenses in 2004 are the consequence of previously discussed reorganization efforts of the apartment locator business. Otherwise, other operating expenses of the segment amounted to $59.6 million and $118.4 million in the 2004 periods, down $5.2 million and $9.3 million, or 8.0% and 7.3%, from the $64.8 million and $127.7 million incurred in the comparable 2003 periods. Further reductions in these expenses are anticipated as additional efficiencies are realized from CORT’s reorganization of Relocation Central’s operations as well as ongoing efforts to control costs in the furniture rental business..

     Income or loss before income taxes and minority interest for the furniture rental segment amounted to income of $.1 million for the second quarter and $.4 for the first six months of 2004 and losses of $3.3 million and $7.6 million for the corresponding periods of 2003. The improvement in the operating results in 2004 is attributable mainly to the aforementioned reductions in operating and other expenses.

     The minority interest in net loss of Relocation Central of $.6 million for the second quarter and $1.1 million for the six-month period ended June 30, 2003 relates to a period of several months during which minority shareholders held an approximately 20% equity interest in Relocation Central. (See further explanation in Note 2 to the accompanying condensed consolidated financial statements.)

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Industrial Segment

     Following is a summary of the results of operations of the industrial segment, consisting of the businesses of Precision Steel Warehouse, Inc. and its subsidiaries. (Amounts are in thousands.)

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Revenues, principally sales and services
  $ 15,856     $ 11,093     $ 30,596     $ 23,428  
 
   
 
     
 
     
 
     
 
 
Income (loss) before income taxes
  $ 965     $ (278 )   $ 2,012     $ (172 )
Income taxes
    383       (175 )     800       (132 )
 
   
 
     
 
     
 
     
 
 
Segment net income (loss)
  $ 582     $ (103 )   $ 1,212     $ (40 )
 
   
 
     
 
     
 
     
 
 

     At the start of 2004, a shortage of raw materials from domestic mills produced near chaos in the steel service industry. Although the impact on Wesco’s industrial segment revenues and earnings has been favorable thus far in 2004, it is not clear how the situation will work out. Industrial segment revenues for the second quarter of 2004 increased $4.8 million, or 42.9%, from those of the second quarter of 2003 and $7.2 million, or 30.6%, for the first six months of 2004 from those reported for the comparable period of 2003. Pounds of steel products sold increased 30.8% for the second quarter and 28.1% for the first six months of the current year from the comparable prior year figures. These increases are reflective of higher demand due to (1) a slight rise in manufacturing activity, and (2) customers’ desire to maintain higher-than-normal levels of inventories during this tumultuous period in the steel service industry, wherein the present lack of domestic steel capacity, and other factors, have enabled steel mills to raise prices, place limits on order quantities and delay deliveries. Precision Steel has reacted to these unusual pressures by restoring margins to historic levels and favoring long-term customer relationships. Despite the favorable, possibly short-lived, upturn in segment operating results, management continues to be concerned about ongoing weakness in the manufacturing sector of the economy, the shift of steel production to overseas facilities, and other conditions.

     Income before income taxes and net income (loss) of the industrial segment are dependent not only on revenues, but also on operating expenses and the cost of products sold. The cost of products sold, as a percentage of revenues, amounted to 80.6% and 84.5% for the second quarters of 2004 and 2003, and 79.9% and 83.9% for the corresponding six-month figures. The cost percentage typically fluctuates slightly from period to period as a result of changes in product mix and price competition at all levels. The unusually large decreases in cost percentages for the 2004 periods were attributable mainly to the acceptance by customers of higher prices in view of metal shortages and higher charges by mills.

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Realized Investment Gains

     Set forth below is a summary of realized investment gains. (Amounts are in thousands.)

                                 
    Three Months Ended
  Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004
  2003
  2004
  2003
Realized investment gains, before income tax effect
  $     $ 52,208     $     $ 53,019  
Income taxes
          18,273             18,557  
 
   
 
     
 
     
 
     
 
 
Realized investment gains
  $     $ 33,935     $     $ 34,462  
 
   
 
     
 
     
 
     
 
 

     Wesco’s consolidated earnings for the first six months of 2003 contained realized investment gains, after taxes, of $34.5 million, including $33.9 million realized in the second quarter. No gains or losses were realized in the first six months of 2004. Gains or losses, when they occur, are classified by Wesco as nonsegment items; they tend to fluctuate in amount from period to period, and their amounts and timing have no predictive or practical analytical value.

* * * * *

     Wesco’s effective consolidated income tax rate typically fluctuates somewhat from period to period based mainly on the relation of dividend income, which is substantially exempt from income taxes, to other pre-tax earnings or losses, including realized investment gains, which are fully taxable. The respective income tax provisions, expressed as percentages of income before income taxes, amounted to 29.7% and 33.3% for the quarters ended June 30, 2004 and June 30, 2003, and 29.8% and 33.8% for the respective six-month periods.

CONTRACTUAL OBLIGATIONS

     Reference is made to page 27 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for the year ended December 31, 2003 for a table summarizing the contractual obligations of Wesco and its subsidiaries associated with ongoing business activities, which will result in cash payments in periods after yearend 2003. At June 30, 2004, there have been no material changes in contractual obligations of Wesco or its subsidiaries from those reported as of December 31, 2003.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

     Reference is made to pages 27 and 28 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for the year ended December 31, 2003 for the accounting policies and practices considered by Wesco management to be critical to its determination of consolidated financial position and results of operations, as well as to Note 1 to Wesco’s consolidated financial statements appearing on pages 40 through 42 thereof (updated by Note 1 to the accompanying condensed consolidated financial statements) for a description of the significant policies and

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practices followed by Wesco (including those deemed critical) in preparing its consolidated financial statements. There have been no significant changes since December 31, 2003.

FORWARD-LOOKING STATEMENTS

     Certain written or oral representations of management stated in this report or elsewhere constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, as contrasted with statements of historical fact. Forward-looking statements include statements which are predictive in nature, or which depend upon or refer to future events or conditions, or which include words such as expects, anticipates, intends, plans, believes, estimates, may, or could, or which involve hypothetical events. Forward-looking statements are based on information currently available and are subject to various risks and uncertainties that could cause actual events or results to differ materially from those characterized as being likely or possible to occur. Such statements should be considered judgments only, not guarantees, and Wesco’s management assumes no duty, nor has it any specific intention, to update them.

     Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause Wesco’s actual performance and future events and actions to differ materially from those expressed in or implied by such forward-looking statements include, but are not limited to, changes in market prices of Wesco’s significant equity investments, the occurrence of one or more catastrophic events such as acts of terrorism, hurricanes, or other events that cause losses insured by Wesco’s insurance subsidiaries, changes in insurance laws or regulations, changes in income tax laws or regulations, and changes in general economic and market factors that affect the prices of investment securities or the industries in which Wesco and its affiliates do business.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
    WESCO FINANCIAL CORPORATION
 
       
Date: August 6, 2004
  By:   /s/ Jeffrey L. Jacobson
      Jeffrey L. Jacobson
      Vice President and Chief Financial Officer
      (principal financial officer)

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