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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number 1-4720

WESCO FINANCIAL CORPORATION

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

626/585-6700

     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 o 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 6, 2003

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PART I. FINANCIAL INFORMATION

     An evaluation was performed under the supervision and with the participation of the management of Wesco Financial Corporation (“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, 2003. 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 material changes in Wesco’s internal controls over financial reporting or in other factors reasonably likely to affect the internal controls over financial reporting during the quarter ended June 30, 2003.

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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 7, 2003, at which meeting the shareholders elected the following Directors:

		Shareholders abstained from voting 180 shares with respect to Mr. Flaherty. There were no broker non-votes. No other matters were voted upon at the meeting.
Item 6.		Exhibits and Reports on Form 8-K

(a)

Exhibits:

(b)

Reports on Form 8-K –

Report dated May 9, 2003 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)

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)

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

     In management’s opinion, the condensed consolidated financial statements of Wesco Financial Corporation (“Wesco”) 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 42 through 50 of its 2002 Form 10-K Annual Report for other information deemed generally applicable to the condensed consolidated financial statements.

     Wesco’s management does not believe that any accounting pronouncements issued to date by the Financial Accounting Standards Board and required to be adopted after June 30, 2003 will 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 marketing subsidiary, Relocation Central Corporation (“Relocation Central”), which partially financed its start-up by issuing convertible notes primarily to unrelated parties. In February 2003, most note holders exercised their options to convert their notes into approximately 20% of Relocation Central’s common stock. The minority shareholders also had an option to require CORT to purchase the shares in February 2004 for approximately $6,000. Relocation Central’s operations have not been profitable to date. In recording the retirement of such notes in the first quarter of 2003, the approximately $6,000 contingent liability was included in other liabilities, and the approximately $1,200 anticipated benefit from the conversion was treated as additional paid-in capital; the condensed consolidated balance sheet at June 30, 2003 reflects these amounts. In July 2003, the minority shareholders were permitted to exercise their put option early, and upon reacquisition of the shares CORT’s ownership in Relocation Central increased to approximately 100%.

Note 3

     Following is a summary of securities with fixed maturities:

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

     There were no unrealized losses with respect to securities with fixed maturities or marketable equity securities at June 30, 2003 or December 31, 2002.

Note 4

     The following table sets forth Wesco’s consolidated comprehensive income for the three- and six-month periods ended June 30, 2003 and 2002:

Note 5

     Federal and state environmental agencies have made claims relating to alleged contamination of soil and groundwater against Precision Steel’s Precision Brand Products subsidiary (“PBP”) and various other businesses situated in a business park in Downers Grove, Illinois. The extent of PBP’s liability has not yet been established. Nevertheless, PBP, along with the other businesses, is negotiating remedial actions with various governmental entities. In addition, PBP and other parties have been named in several civil lawsuits, including lawsuits by and on behalf of area residents, relating to this matter. Precision Steel and PBP have notified their insurers relative to the claims and litigation. Inasmuch as the claims and lawsuits are in early stages of development, the cost of the claims, including defense costs, cannot be reasonably estimated at this time. Management does not anticipate that the ultimate financial impact of these matters will be material in relation to Wesco’s shareholders’ equity, although it believes that the effect on consolidated net income in any given period could be material.

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Note 6

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

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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 21 through 29 of the Form 10-K Annual Report filed by Wesco Financial Corporation (“Wesco”) for the year 2002 for information deemed generally appropriate to an understanding of the accompanying 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 condensed consolidated financial statements.

FINANCIAL CONDITION

     Wesco’s shareholders’ equity at June 30, 2003 was approximately $2.01 billion ($283 per share), compared to $1.96 billion ($275 per share) at December 31, 2002. At each date shareholders’ equity included $375 million of after-tax unrealized appreciation in market value of investments. 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.

     At June 30, 2003, Wesco’s consolidated cash and cash equivalents totaled $933.1 million, up from $349.8 million at December 31, 2002. The $583.3 million increase resulted primarily as a result of sales, maturities and early redemptions of fixed-income securities as well as operating cash flow from Wesco’s insurance businesses.

     Wesco’s consolidated notes payable totaled $18.8 million at June 30, 2003 versus $32.5 million at December 31, 2002. The decrease resulted principally from the conversion of convertible debt of a subsidiary of CORT to equity by note holders.

     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.)

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Insurance Segment

     The insurance segment comprises Wesco-Financial Insurance Company (“Wes-FIC”) and The Kansas Bankers Surety Company (“KBS”). 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.)

     Premiums written for the second quarters of 2003 and 2002 included $8.3 million and $14.7 million written by Wes-FIC. Premiums written for the six-month periods ended June 30, 2003 and 2002 included $24.5 million and $22.7 million written by Wes-FIC. The remainder for each period was attributable to KBS.

     Earned premiums for the second quarters of 2003 and 2002 included $17.4 million and $8.5 million attributable to Wes-FIC. Earned premiums for the first six months of 2003 and 2002 included $46.4 million and $16.9 million attributable to Wes-FIC. The balance for each period was attributable to KBS.

     At June 30, 2003, Wes-FIC’s in-force reinsurance business consists principally of a contract that commenced in 2001 under which it assumes aviation risks, as well as a four-year contract for property and casualty exposures assumed from an unaffiliated insurer. Aviation-risk premiums written in 2003 exceeded those written in the corresponding 2002 periods. The aviation business is managed by another insurance subsidiary of Berkshire Hathaway Inc. (“Berkshire”). Other Berkshire affiliates directly participate in the aviation-risk pools, and those affiliates and Wes-FIC reinsure all members of the pools. Other property/casualty premiums written by Wes-FIC decreased in the 2003 periods compared to those of the corresponding 2002

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periods; the decrease was attributed principally to tighter underwriting standards in 2003 with respect to the subject business. The increases in Wes-FIC’s earned premiums for the 2003 periods compared to those of the corresponding 2002 periods were attributable mainly to the increase in aviation premiums written over the past twelve months.

     The underwriting gain for the quarter ended June 30, 2003 amounted to $6.6 million, versus $.3 million for the second quarter of 2002. The underwriting gain for the first six months of 2003 was $14.0 million, versus $1.2 million for the first six months of 2002. The underwriting gains reported for the 2003 periods were principally attributable to Wes-FIC; its business benefited mainly from improved pricing and risk selection, and lower levels of aviation losses. The underwriting gains for the corresponding 2002 periods were attributed to the profitable underwriting results of KBS; Wes-FIC had underwriting losses of $2.0 million for the second quarter and $2.7 million for the first six months of 2002. Both Wes-FIC and KBS, as a matter of policy, accept volatility in their underwriting results in the hope of achieving higher profitability over the long term.

     Dividend and interest income earned by the insurance segment declined for the second quarter and six-month period ended June 30, 2003 from the corresponding prior year figures as proceeds from sales and paydowns of higher-yielding, long-term investments were reinvested in short-term investments whose rates have continued to deteriorate.

     The income tax provision of the insurance segment generally fluctuates somewhat as a percentage of its pre-tax income mainly due to changes in the relationship of substantially tax-exempt components of income to total pre-tax income.

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.)

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     Reference is made to the discussion of the furniture rental business included in Item 1 of Wesco’s 2002 annual report on Form 10-K for information on Relocation Central, considered as still in a start-up phase, and whose operations generated pre-tax losses of $12.8 million for the year ended December 31, 2002 and $10.8 million for the year ended December 31, 2001. Following the acquisition of its largest competitor in December 2002, which brought to it mainly additional apartment locator fees and further geographical expansion, Relocation Central’s operating losses increased sharply. As explained in Note 2 to the accompanying condensed consolidated financial statements, there was an approximately 20% minority interest in Relocation Central’s equity from February through June 2003, thereby reducing the impact of its losses on CORT.

     Relocation Central’s revenues, consisting of apartment locator fees, amounted to $4.4 million for the second quarter of 2003 and $1.4 million for the second quarter of 2002, and $8.5 million and $2.7 million for the respective six-month periods. Costs incurred in generating those fees totaled $3.8 million for the 2003 quarter and $2.4 million for the 2002 quarter, and $8.3 million and $4.7 million for the respective six-month periods. Other operating expenses, including interest, totaled $4.6 million for the 2003 quarter and $1.7 million for the 2002 quarter, and $9.1 million and $3.7 million for the six-month periods. Relocation Central’s loss before income taxes and minority interest was thus $4.0 million for the second quarter of 2003 compared to $2.7 million for the corresponding 2002 quarter, and $8.9 million and $5.7 million for the first six-months of 2003 and 2002.

     Excluding Relocation Central’s loss before income taxes and minority interest, furniture segment income before income taxes and minority interest was $0.8 million for the second quarter of 2003, versus $5.1 million for the comparable 2002 period, and $1.3 million for the first six months of 2003, versus $11.7 million for the corresponding six-month period of 2002. The following three paragraphs analyze and discuss these non-Relocation Central (i.e., CORT parent company) figures.

     Furniture rental revenues for the second quarter of 2003 declined $8.7 million, or 10.9%, from those of the second quarter of 2002, and $17.5 million, or 10.9% for the first six months. Apart from revenues from trade shows in each period, rental revenues for the 2003 quarter declined approximately 12% from those reported for the second quarter of 2002, and 11% for the first six months of 2003 from those reported for the corresponding 2002 period. The number of furniture leases currently in effect has continued a downward trend begun in late 2000, reflecting unabated weakness of the economy, notably in the high-technology sector. Rental revenues on a per-unit basis began to improve toward the end of 2002 due mainly to price increases. The decreases in furniture sales revenues of 6.0% for the second quarter and 5.2.% for the first six months of 2003 from those reported for the comparable 2002 periods were attributed to various factors, principally increased selling prices combined with the weaker economy.

     Cost of furniture rentals and sales amounted to 25.6% of related revenues for the quarter ended June 30, 2003, versus 27.3% for the comparable quarter of 2002, and 25.9% and 27.4% for the first six months of 2003 and 2002. The improved cost percentages for the 2003 periods reflected improved furniture rental and selling prices as well as lower depreciation expense. CORT’s purchases of new product have been generally declining in recent years; it depreciates its rental furniture under the declining balance method, whereby recorded depreciation is higher in the first year and declines in each successive year.

     Selling, general and administrative (“SG&A”) expenses of CORT at the parent company level were $64.8 million for the second quarter of 2003, down 1.7% from the $65.9 million incurred for the second quarter of

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2002, and $129.8 million for the first six months of 2003, down 0.7% from the $130.7 million incurred for the first six months of 2002. The 2003 improvements represent progress made by CORT’s management in reducing such expenses. As CORT completes the combination of Globe Furniture Rental operations, which it acquired early in 2002, with its own, and as it continues its efforts to reduce other SG&A expenses, its management anticipates further reductions in SG&A expenses for 2003.

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.)