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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
For the quarterly period ended SEPTEMBER 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
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2200
(Address of principal executive (Registrant's telephone number,
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 October 29, 2004, WESCO International, Inc. had 42,253,211 shares of
common stock.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and
December 31, 2003 ............................................................................. 2
Condensed Consolidated Statements of Income for the three months and
nine months ended September 30, 2004 and 2003 (unaudited) ..................................... 3
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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................. 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 22
ITEM 4. Controls and Procedures............................................................................... 22
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................................................... 23
Signatures............................................................................................ 24
1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except share data 2004 2003*
- ----------------------------------------------------------------------------------------------- ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 19,247 $ 27,495
Trade accounts receivable, net of allowance for doubtful accounts of $13,722
and $11,422 in 2004 and 2003, respectively (NOTE 4) ................................... 294,731 266,589
Other accounts receivable ................................................................. 21,472 18,223
Inventories, net .......................................................................... 381,865 320,975
Income taxes receivable ................................................................... 5,103 13,628
Prepaid expenses and other current assets ................................................. 10,569 9,378
----------- -----------
Total current assets .................................................................. 732,987 656,288
Property, buildings and equipment, net ........................................................ 92,132 98,937
Goodwill ...................................................................................... 401,638 398,673
Other assets .................................................................................. 6,626 7,307
----------- -----------
Total assets .......................................................................... $ 1,233,383 $ 1,161,205
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................... $ 454,672 $ 366,380
Accrued payroll and benefit costs ......................................................... 32,312 47,110
Current portion of long-term debt ......................................................... 31,184 2,120
Current deferred income taxes ............................................................. 2,039 2,379
Deferred acquisition payable .............................................................. 3,373 31,303
Other current liabilities ................................................................. 41,837 30,418
----------- -----------
Total current liabilities ............................................................. 565,417 479,710
Long-term debt ................................................................................ 396,416 420,042
Long-term deferred acquisition payable ........................................................ 1,969 53,040
Other noncurrent liabilities .................................................................. 7,102 6,574
Deferred income taxes ......................................................................... 34,248 34,151
----------- -----------
Total liabilities ..................................................................... 1,005,152 993,517
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, 46,182,273 and 44,999,794
shares issued in 2004 and 2003, respectively .......................................... 462 450
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares
authorized, 4,339,431 issued in 2004 and 2003, no shares outstanding in 2004 .......... 43 43
Additional capital ........................................................................ 571,301 559,651
Retained earnings (deficit) ............................................................... (288,947) (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 .................................................... 6,810 5,704
----------- -----------
Total stockholders' equity ............................................................ 228,231 167,688
----------- -----------
Total liabilities and stockholders' equity ............................................ $ 1,233,383 $ 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 INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except share data 2004 2003 2004 2003
- -------------------------------------------- ---------- ---------- ---------- ----------
Net sales .................................. $ 974,508 $ 825,601 $2,753,321 $2,436,647
Cost of goods sold ......................... 791,942 671,942 2,226,196 1,986,656
---------- ---------- ---------- ----------
Gross profit ............................ 182,566 153,659 527,125 449,991
Selling, general and administrative expenses 137,246 124,680 403,015 373,241
Depreciation and amortization .............. 4,432 5,148 14,093 15,402
---------- ---------- ---------- ----------
Income from operations .................. 40,888 23,831 110,017 61,348
Interest expense ........................... 10,310 10,848 30,297 32,058
Loss on debt extinguishments, net .......... 444 487 2,069 180
Other expense .............................. 1,931 724 4,439 3,412
---------- ---------- ---------- ----------
Income before income taxes .............. 28,203 11,772 73,212 25,698
Provision for income taxes ................. 9,166 3,399 25,369 5,137
---------- ---------- ---------- ----------
Net income ............................. $ 19,037 $ 8,373 $ 47,843 $ 20,561
========== ========== ========== ==========
Earnings per share:
Basic: ................................. $ 0.45 $ 0.19 $ 1.15 $ 0.46
========== ========== ========== ==========
Diluted: ............................... $ 0.43 $ 0.18 $ 1.10 $ 0.44
========== ========== ========== ==========
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)
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2004 2003
- --------------------------------------------------------------------------------------- --------- ---------
OPERATING ACTIVITIES:
Net income ............................................................................. $ 47,843 $ 20,561
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Loss on debt extinguishment ....................................................... 2,069 180
Depreciation and amortization ..................................................... 14,093 15,402
Accretion of original issue and amortization of purchase discounts ................ 2,058 2,195
Amortization of debt issuance costs ............................................... 1,131 879
Deferred income taxes ............................................................. (243) (1,332)
Amortization of gain on interest rate swap ........................................ (684) (304)
Stock option expense .............................................................. 1,288 242
Gain on the sale of property, buildings and equipment ............................. 12 (513)
Changes in assets and liabilities, excluding the effects of acquisitions:
Change in receivables facility ................................................. 75,000 (88,000)
Trade and other receivables .................................................... (105,801) (19,771)
Inventories .................................................................... (60,220) 19,697
Prepaid expenses and other current assets ...................................... 12,526 1,415
Accounts payable ............................................................... 87,289 29,294
Accrued payroll and benefit costs .............................................. 5,214 2,032
Other current and noncurrent liabilities ....................................... 10,738 16,544
--------- ---------
Net cash provided (used) by operating activities ........................... 92,313 (1,479)
INVESTING ACTIVITIES:
Capital expenditures ................................................................... (6,894) (5,550)
Acquisition payments ................................................................... (31,125) (2,028)
Proceeds from the sale of property, buildings and equipment ............................ -- 1,177
--------- ---------
Net cash used by investing activities ...................................... (38,019) (6,401)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................................... 309,000 144,480
Repayments of long-term debt ........................................................... (357,553) (131,845)
Redemption of stock options ............................................................ (20,144) --
Proceeds from settlement of interest rate swap ......................................... -- 4,563
Debt issuance costs .................................................................... -- (2,166)
Proceeds from the exercise of stock options ............................................ 5,986 53
--------- ---------
Net cash (used) provided by financing activities ........................... (62,711) 15,085
Effect of exchange rate changes on cash and cash equivalents ........................... 169 549
Net change in cash and cash equivalents ........................................... (8,248) 7,754
Cash and cash equivalents at the beginning of period .............................. 27,495 22,570
--------- ---------
Cash and cash equivalents at the end of period .................................... $ 19,247 $ 30,324
========= =========
Supplemental disclosures:
Non-cash financing activities:
Increase (decrease) in fair value of interest rate swap ........................... $ 548 $ (780)
Conversion of acquisition payable to note payable ................................. $ 50,000 $ --
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 September 30,
2004, the unaudited condensed consolidated statements of income for the three
months and nine months ended September 30, 2004 and September 30, 2003,
respectively and the unaudited condensed consolidated statements of cash flows
for the nine months ended September 30, 2004, and September 30, 2003,
respectively, 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 unaudited 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 Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". This change in accounting method was
applied on a prospective basis in accordance with SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." Stock options awarded prior to 2003 are accounted for under the intrinsic
value method under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company recognized $0.6 million and $1.3 million
of compensation expense for the three months and nine months ended September 30,
2004, respectively. The Company recognized $0.2 million during the three months
and nine months ended September 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 NINE MONTHS
------------------------ ------------------------
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported .................................... $ 19,037 $ 8,373 $ 47,843 $ 20,561
Add: Stock-based employee compensation expense included in
reported net income,net of related tax ..................... 365 157 837 157
Deduct: Stock-based employee compensation expense determined
under SFAS No. 123 for all awards, net of related tax ...... 558 528 1,416 1,269
---------- ---------- ---------- ----------
Pro forma net income ....................................... $ 18,844 $ 8,002 $ 47,264 $ 19,449
Earnings per share:
Basic as reported ....................................... $ 0.45 $ 0.19 $ 1.15 $ 0.46
Basic pro forma ......................................... $ 0.45 $ 0.18 $ 1.14 $ 0.43
Diluted as reported ..................................... $ 0.43 $ 0.18 $ 1.10 $ 0.44
Diluted pro forma ....................................... $ 0.43 $ 0.17 $ 1.08 $ 0.42
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.
In September 2004, the FASB issued EITF 04-10 "Applying Paragraph 19 of
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, in Determining Whether to Aggregate Operating Segments That Do Not
Meet the Quantitative Thresholds," Issue Summary No. 1. ("EITF 04-10"). EITF
04-10 establishes evaluation criteria for an enterprise to use when determining
whether operating segments that do not meet the quantitative thresholds can
still be aggregated in accordance with paragraph 19 of SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." ("FAS 131"). We have
evaluated EITF 04-10 and have determined that it has no impact on our financial
statements.
3. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings
per share:
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2004 2003
- -------------------------------------------------------- ----------- -----------
Reported net income .................................... $ 19,037 $ 8,373
=========== ===========
Weighted average common shares outstanding used in
computing basic earnings per share ................. 41,851,989 45,129,308
Common shares issuable upon exercise of dilutive
stock options ...................................... 2,383,600 1,790,875
----------- -----------
Weighted average common shares outstanding and common
share equivalents used in computing diluted earnings
per share .......................................... 44,235,589 46,920,183
=========== ===========
Earnings per share:
Basic .............................................. $ 0.45 $ 0.19
Diluted ............................................ $ 0.43 $ 0.18
----------- -----------
6
Options to purchase 5.8 million shares of common stock at a weighted
average exercise price of $9.23 per share were outstanding as of September 30,
2003 but were not included in the computation of diluted earnings per share
because the option exercise prices were greater than the average market price of
WESCO common stock.
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2004 2003
- -------------------------------------------------------- ----------- -----------
Reported net income .................................... $ 47,843 $ 20,561
=========== ===========
Weighted average common shares outstanding used in
computing basic earnings per share ................. 41,534,864 45,117,257
Common shares issuable upon exercise of dilutive
stock options ...................................... 2,067,954 1,540,266
----------- -----------
Weighted average common shares outstanding and common
share equivalents used in computing diluted earnings
per share .......................................... 43,602,818 46,657,523
=========== ===========
Earnings per share:
Basic .............................................. $ 1.15 $ 0.46
Diluted ............................................ $ 1.10 $ 0.44
----------- -----------
Options to purchase 0.2 million and 5.8 million shares of common stock at
a weighted average exercise price of $16.98 per share and $9.23 per share were
outstanding as of September 30, 2004 and 2003, respectively, but were not
included in the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of WESCO common
stock.
4. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO maintains an accounts receivable securitization program
("Receivables Facility") that was amended and increased to $325 million in
August, 2004. The facility provides for a $190 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 September 30, 2004 and December 31, 2003, securitized accounts
receivable totaled approximately $427 million and $330 million, respectively, of
which the subordinated retained interest was approximately $127 million and $105
million, respectively. Accordingly, approximately $300 million and $225 million
of accounts receivable balances were removed from the consolidated balance
sheets at September 30, 2004 and December 31, 2003, respectively. Costs
associated with the Receivables Facility totaled $1.9 million for the three
months ended September 30, 2004 and $ 0.7 million for the three months ended
September 30, 2003. Costs associated with the Receivables Facility totaled $4.4
million and $3.4 million for the nine-months ended September 30, 2004 and 2003,
respectively. These amounts are recorded as other expenses in the consolidated
statements of income 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 September 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 $0.3 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.
7
5. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2004 2003
-------------------------------------------------------- ----------- -----------
Net income............................................... $ 19,037 $ 8,373
Foreign currency translation adjustment.................. 3,124 (1,672)
----------- -----------
Comprehensive income..................................... $ 22,161 $ 6,701
=========== ===========
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2004 2003
- -------------------------------------------------------- ----------- -----------
Net income.............................................. $ 47,843 $ 20,561
Foreign currency translation adjustment................. 1,106 5,538
----------- -----------
Comprehensive income.................................... $ 48,949 $ 26,099
=========== ===========
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 nine months
of 2004 WESCO paid $30 million pursuant to this agreement. In June 2004, 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
multiple payments between 2004 and 2008. Under this provision, a payment of $3.1
million is due in the fourth quarter of 2004.
7. INCOME TAXES
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2004 2003
---- ----
Federal statutory rate ............................................ 35.0% 35.0%
State taxes, net of federal tax benefit ........................... 1.8 0.2
Nondeductible expenses ............................................ 0.8 2.3
Domestic tax benefit from foreign operations ...................... (1.7) (7.0)
Foreign tax rate differences(1) ................................... (4.6) (0.3)
Favorable impact resulting from prior year tax contingencies(2) ... (0.7) --
Other ............................................................. 1.9 (1.3)
---- ----
32.5% 28.9%
==== ====
8
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
---- ----
Federal statutory rate ............................................. 35.0% 35.0%
State taxes, net of federal tax benefit ............................ 1.4 0.2
Nondeductible expenses ............................................. 1.1 2.3
Domestic tax benefit from foreign operations ....................... (1.2) (4.9)
Foreign tax rate differences(1) .................................... (2.5) (0.4)
Favorable impact resulting from prior year tax contingencies (2) ... (0.3) (10.1)
Net operating loss utilization(3) .................................. -- (2.2)
Other .............................................................. 1.2 0.1
---- ----
34.7% 20.0%
==== ====
- ----------
(1) In 2004, includes tax benefit of $0.7 million for the quarter and
nine-months ended September 30 from recapitalization of our Canadian operations.
(2) Represents a benefit of $0.2 million and $2.6 million in 2004 and 2003,
respectively from the resolution of prior year tax contingencies.
(3) Represents the recognition of a $0.6 million benefit associated with the
utilization of a net operating loss.
9
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
SEPTEMBER 30, 2004
----------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
-------------- ----------------- -------------- ------------- ------------
Cash and cash equivalents .................. $ 2 $ 6,079 $ 13,166 $ -- $ 19,247
Trade accounts receivable .................. -- 10,891 283,840 -- 294,731
Inventories ................................ -- 322,668 59,197 -- 381,865
Other current assets ....................... -- 18,694 26,392 (7,942) 37,144
----------- ----------- ------------- ----------- -----------
Total current assets .................... 2 358,332 382,595 (7,942) 732,987
Intercompany receivables, net .............. -- 295,296 49,228 (344,524) --
Property, buildings and equipment, net ..... -- 24,200 67,932 -- 92,132
Goodwill ................................... -- 363,166 38,472 -- 401,638
Investments in affiliates and other
noncurrent assets ....................... 572,753 452,620 3,093 (1,021,840) 6,626
----------- ----------- ------------- ----------- -----------
Total assets ............................ $ 572,755 $ 1,493,614 $ 541,320 $(1,374,306) $ 1,233,383
=========== =========== ============= =========== ===========
Accounts payable ........................... $ -- $ 426,582 $ 28,090 $ -- $ 454,672
Other current liabilities .................. -- 107,514 11,173 (7,942) 110,745
----------- ----------- ------------- ----------- -----------
Total current liabilities ............... -- 534,096 39,263 (7,942) 565,417
Intercompany payables, net ................. 344,524 -- -- (344,524) --
Long-term debt ............................. -- 346,749 49,667 -- 396,416
Other noncurrent liabilities ............... -- 40,016 3,303 -- 43,319
Stockholders' equity ....................... 228,231 572,753 449,087 (1,021,840) 228,231
----------- ----------- ------------- ----------- -----------
Total liabilities and stockholders'
equity .................................. $ 572,755 $ 1,493,614 $ 541,320 $(1,374,306) $ 1,233,383
=========== =========== ============= =========== ===========
10
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 ........... -- 208,947 39,452 (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 .................... 416,086 361,824 3,727 (774,330) 7,307
------------ ------------ ------------ ------------ ------------
Total assets ......................... $ 416,087 $ 1,327,290 $ 444,278 $ (1,026,450) $ 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 .................... 167,688 416,086 358,244 (774,330) 167,688
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity ............................... $ 416,087 $ 1,327,290 $ 444,278 $ (1,026,450) $ 1,161,205
============ ============ ============ ============ ============
11
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
-------------- ----------------- ------------- ------------ ------------
Net sales .............................. $ -- $ 833,855 $ 140,653 $ -- $ 974,508
Cost of goods sold ..................... -- 679,672 112,270 -- 791,942
Selling, general and administrative
expenses ............................ -- 121,015 16,231 -- 137,246
Depreciation and amortization .......... -- 3,673 759 -- 4,432
Results of affiliates' operations ...... 16,915 7,318 -- (24,233) --
Interest expense (income), net ......... (3,265) 12,744 831 -- 10,310
Loss on debt extinguishments, net ...... -- 444 -- -- 444
Other (income) expense ................. -- 2,006 (75) -- 1,931
Provision for income taxes ............. 1,143 4,704 3,319 -- 9,166
------------- -------------- ------------ ------------ ----------
Net income .......................... $ 19,037 $ 16,915 $ 7,318 $ (24,233) $ 19,037
============= ============== ============ ============ ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
---------------- ----------------- ------------- ------------ ------------
Net sales ............................ $ -- $ 705,442 $ 120,159 $ -- $ 825,601
Cost of goods sold ................... -- 575,373 96,569 -- 671,942
Selling, general and administrative
expenses .......................... -- 106,235 18,445 -- 124,680
Depreciation and amortization ........ -- 4,359 789 -- 5,148
Results of affiliates' operations .... 6,530 5,497 -- (12,027) --
Interest (income) expense, net ....... (2,836) 14,356 (672) -- 10,848
Loss on debt extinguishments, net .... -- 487 -- -- 487
Other expense (income) ............... -- 5,315 (4,591) -- 724
Provision (benefit) for income taxes . 993 (1,716) 4,122 -- 3,399
-------------- ---------------- ------------- ------------ ------------
Net income ........................ $ 8,373 $ 6,530 $ 5,497 $ (12,027) $ 8,373
============== ================ ============= ============ ============
12
NINE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
-------------- ----------------- ------------- ------------- ------------
Net sales ............................. $ -- $ 2,358,045 $ 395,276 $ -- $ 2,753,321
Cost of goods sold .................... -- 1,912,178 314,018 -- 2,226,196
Selling, general and administrative
expenses ........................... -- 351,082 51,933 -- 403,015
Depreciation and amortization ......... -- 11,741 2,352 -- 14,093
Results of affiliates' operations ..... 41,980 25,768 -- (67,748) --
Interest (income) expense, net ........ (9,018) 40,674 (1,359) -- 30,297
Loss on debt extinguishments, net ..... -- 2,069 -- -- 2,069
Other expense (income) ................ -- 13,171 (8,732) -- 4,439
Provision for income taxes ............ 3,155 10,918 11,296 -- 25,369
------------- --------------- ------------- ------------- ------------
Net income ......................... $ 47,843 $ 41,980 $ 25,768 $ (67,748) $ 47,843
============= =============== ============= ============= ============
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
-------------- ------------------ ------------- ----------- ------------
Net sales ............................. $ -- $ 2,087,456 $ 349,191 $ -- $ 2,436,647
Cost of goods sold .................... -- 1,703,351 283,305 -- 1,986,656
Selling, general and administrative
expenses ........................... -- 321,199 52,042 -- 373,241
Depreciation and amortization ......... -- 13,052 2,350 -- 15,402
Results of affiliates' operations ..... 14,928 18,480 -- (33,408) --
Interest (income) expense, net ........ (8,669) 43,428 (2,701) -- 32,058
Loss on debt extinguishments, net ..... -- 180 -- -- 180
Other expense (income) ................ -- 18,512 (15,100) -- 3,412
Provision (benefit)for income taxes ... 3,036 (8,714) 10,815 -- 5,137
------------- ------------------ ------------- ------------ ------------
Net income ......................... $ 20,561 $ 14,928 $ 18,480 $ (33,408) $ 20,561
============= ================== ============= ============ ============
13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
------------- ----------------- ------------ ------------ ------------
Net cash (used in) provided by operating
activities ............................. $ (81,966) $ 170,094 $ 4,185 $ -- $ 92,313
Investing activities:
Capital expenditures ................... -- (6,453) (441) -- (6,894)
Acquisitions ........................... -- (31,125) -- -- (31,125)
----------- --------------- ------------ ------------ ------------
Net cash used in investing activities .. -- (37,578) (441) -- (38,019)
Financing activities:
Net borrowings (repayments) ............ 96,125 (142,858) (1,820) -- (48,553)
Redemption of stock options ............ (20,144) -- -- -- (20,144)
Proceeds from the exercise of stock
options ................................ 5,986 -- -- -- 5,986
----------- --------------- ------------ ------------ ------------
Net cash provided by (used in) pr
financing activities ................... 81,967 (142,858) (1,820) -- (62,711)
----------- --------------- ------------ ------------ ------------
Effect of exchange rate changes on
Cash and cash equivalents .............. -- -- 169 169
----------- --------------- ------------ ------------ ------------
Net change in cash and cash equivalents ... 1 (10,342) 2,093 -- (8,248)
Cash and cash equivalents at beginning of
year ................................... 1 16,421 11,073 -- 27,495
----------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2 $ 6,079 $ 13,166 -- $ 19,247
=========== =============== ============ ============ ============
14
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidating
WESCO and
International, WESCO Non-Guarantor Eliminating
Inc. Distribution,Inc. Subsidiaries Entries Consolidated
-------------- ----------------- ------------- ------------- ------------
Net cash provided by (used in) operating
activities ................................ $ 5,900 $ 28,576 $ (35,955) $ -- $ (1,479)
Investing activities:
Capital expenditures ...................... -- (5,212) (338) -- (5,550)
Acquisitions .............................. -- (2,028) -- -- (2,028)
Proceeds from sale of property ............ -- 1,177 -- -- 1,177
----------- -------------- ----------- --------- -----------
Net cash used in investing activities ..... -- (6,063) (338) -- (6,401)
Financing activities:
Net borrowings (repayments) ............... (5,954) (14,255) 37,407 -- 17,198
Proceeds from the exercise of stock
options ................................... 53 -- -- -- 53
Debt issuance costs ....................... -- -- (2,166) -- (2,166)
----------- -------------- ----------- --------- -----------
Net cash (used in) provided by
financing activities ...................... (5,901) (14,255) 35,241 -- 15,085
----------- -------------- ----------- --------- -----------
Effect of exchange rate changes on
Cash and cash equivalents ................. -- -- 549 -- 549
----------- -------------- ----------- --------- -----------
Net change in cash and cash equivalents ...... (1) 8,258 (503) -- 7,754
Cash and cash equivalents at beginning of
year ...................................... 4 12,449 10,117 -- 22,570
----------- -------------- ----------- --------- -----------
Cash and cash equivalents at end of period.... $ 3 $ 20,707 $ 9,614 $ -- $ 30,324
=========== ============== =========== ========= ===========
15
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
nine months of 2004. Sales increased 13.0% over the same period last year and
our gross margin percentage was 19.1% for the current year. Operating income
increased by 79.3% compared with last year's comparable period and the year to
date net income was $47.8 million versus $20.6 million in last year's comparable
period. As a result, our diluted earnings per share were $1.10 for the
nine-month period, a 150% improvement over earnings per share during the same
period last year.
CASH FLOW
We generated $92.3 million in operating cash flow during the first nine
months of 2004. Included in this amount was a $75.0 million cash inflow from an
increase in our Receivables Facility. During the nine-month period ended
September 30, 2004, we repurchased $45.3 million in aggregate principal amount
of senior subordinated notes at a net loss of $2.1 million, paid $30 million
pursuant to the terms of the Bruckner purchase agreement and made 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 September 30, 2004, we had approximately $175 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 the remainder of 2004. Though we continue to see
favorable macroeconomic data that reflects 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 further 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, enhance 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 nine-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
Third Quarter of 2004 versus Third Quarter of 2003
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's unaudited condensed consolidated statements of income
for the periods presented:
16
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
2004 2003
---- ----
Net sales 100.0% 100.0%
Gross profit 18.7 18.6
Selling, general and administrative expenses 14.1 15.1
Depreciation and amortization 0.4 0.6
----- -----
Income from operations 4.2 2.9
Interest expense 1.0 1.3
Loss on debt extinguishments 0.1 0.1
Other expense 0.2 0.1
----- -----
Income before income taxes 2.9 1.4
Provision for income taxes 0.9 0.4
----- -----
Net income 2.0% 1.0%
===== =====
Net sales in the third quarter of 2004 totaled $974.5 million versus
$825.6 million in the comparable 2003 quarter, an 18.0% increase. Approximately
15% of the increase in sales was attributable to stronger demand resulting from
favorable economic activity and market share gain. The remaining increase was
due to improved pricing on commodity products, approximately 2%, and the
strength of the Canadian dollar.
Gross profit for the third quarter of 2004 totaled $182.6 million and was
up compared to 2003's third quarter, as the gross margin percentage increased to
18.7% versus 18.6% last year. The slight improvement in gross margin percentage
was the result of improved performance with supplier volume rebate and cash
discount programs offset somewhat by sales mix differences.
Selling, general and administrative ("SG&A") expenses in the third quarter
of 2004 totaled $137.2 million versus $124.7 million in last year's comparable
quarter. Total payroll expense increased approximately $11.0 million over last
year's third quarter principally from increased variable incentive compensation
costs of $7.1 million, increased health care and benefits costs of $1.3 million
and stock options of $0.3 million associated with the adoption of SFAS No. 123
in 2003. Shipping and handling expense included in SG&A was $9.5 million in the
third quarter of 2004 compared with $9.3 million in last year's third quarter.
As a percentage of net sales, SG&A expenses decreased to 14.1% from 15.1% in the
prior year quarter reflecting LEAN initiatives and the leverage of higher sales
volume.
Depreciation and amortization was $4.4 million in the third quarter of
2004 versus $5.1 million in last year's third quarter. The decline in
depreciation and amortization was primarily due to less depreciation expense on
computer hardware and less software amortization as the applicable assets became
fully depreciated.
Interest expense totaled $10.3 million for the third 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 third quarter of 2003 offset somewhat by slightly higher effective
interest rates. Loss on debt extinguishments of $0.4 million for the third
quarter of 2004 represented the loss on the repurchase of our senior
subordinated notes versus a loss on debt extinguishments of $0.5 million during
last year's comparable period. Other expense during the third quarter of 2004
totaled $1.9 million compared with $0.7 million in the third quarter of 2003,
reflecting a higher receivable level in 2004 leading to more costs associated
with the Receivables Facility.
Income tax expense totaled $9.2 million in the third quarter of 2004 and
the effective tax rate was a 32.5%. Income tax expense totaled $3.4 million in
the third quarter of 2003 and the effective tax rate was a 28.9%. We
recapitalized our Canadian operations to reflect the proportionate debt
structure of the Canadian and US operations and to improve efficiency in cash
flow movement of funds for business and tax purposes. As a result of this
recapitalization, the effective tax rate was reduced by 2.4% during the third
quarter of 2004. Last year's effective tax rate differed from the statutory rate
primarily as a result of the recognition of certain foreign tax credits that
became available in last year's third quarter.
For the third quarter of 2004, net income totaled $19.0 million, or $0.43
per diluted share, compared with $8.4 million, or $0.18 per diluted share, in
the third 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.
17
Nine Months Ended September 30, 2004 versus Nine Months Ended September 30, 2003
The following table sets forth the percentage relationship to net sales of
certain items in WESCO's unaudited condensed consolidated statements of income
for the periods presented:
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
----- -----
Net sales 100.0% 100.0%
Gross profit 19.1 18.5
Selling, general and administrative expenses 14.6 15.3
Depreciation and amortization 0.5 0.7
----- -----
Income from operations 4.0 2.5
Interest expense 1.1 1.3
Loss on debt extinguishment - -
Other expense 0.2 0.1
----- -----
Income before income taxes 2.7 1.1
Provision for income taxes 0.9 0.2
----- -----
Net income 1.8% 0.9%
----- -----
Net sales in the nine months ended September 30, 2004 totaled $2,753.3
million versus $2,436.6 million in the comparable 2003 period, a 13.0% increase.
Approximately 10% of the increase in sales was attributable to stronger demand
resulting from expanding economic activity. The remaining 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 nine months ended September 30, 2004 of $527.1
million was up versus last year's comparable period, as the gross margin
percentage improved to 19.1% versus 18.5% last year. The increase in gross
margin percentage was favorably impacted by approximately 45 basis points from
improved performance with supplier volume rebate and cash discount programs,
along with the positive effect of approximately 40 basis points due to the pass
through of rising commodity prices.
SG&A expenses during the nine months ended September 30, 2004 totaled
$403.0 million versus $373.2 million in last year's comparable period. Total
payroll expense increased approximately $26.9 million over last year's
comparable period principally from increased variable incentive compensation
costs of $15.8 million, increased health care and benefits costs of $4.5 million
and stock options of $1.0 million associated with the adoption of SFAS No. 123
in 2003. Shipping and handling expense included in SG&A was $27.3 million versus
$27.1 during last year's comparable period. As a percentage of net sales, SG&A
expenses decreased to 14.6% compared with 15.3% in last year's nine-month period
reflecting LEAN initiatives and the leverage of higher sales volume.
Depreciation and amortization was $14.1 million in the first nine months
of 2004 versus $15.4 million in last year's comparable period. The decline in
depreciation and amortization was primarily due to less depreciation expense on
computer hardware and less software amortization as the applicable assets became
fully depreciated.
Interest expense totaled $30.3 million for the nine months ended September
30, 2004 versus $32.1 million in last year's comparable period, a decrease of
5.5%. The decline was due to a lower amount of indebtedness outstanding during
the current period. Loss on debt extinguishments of $2.1 million for the nine
months ended September 30, 2004 represented the loss on the repurchase of our
senior subordinated notes compared with a loss on debt extinguishments of $0.2
million last year. Other expense totaled $4.4 million in 2004, an increase from
$3.4 million in the comparable 2003 period, principally reflecting costs
associated with the accounts receivable securitization program.
For the nine months ended September 30, 2004, income tax expense totaled
$25.4 million and the effective tax rate was 34.7%. Income tax expense totaled
$5.1 million in last year's comparable period and the effective tax rate was
20.0%. We recapitalized our Canadian operations to reflect the proportionate
debt structure of the Canadian and US operations and to improve efficiency in
cash flow movement of funds for business and tax purposes. As a result of this
recapitalization, the effective tax rate was reduced by 1.3% during the nine
months ended September 30, 2004.
18
The effective tax rate in the prior-year period differs from the statutory
rate primarily as a result of the recognition of a $2.6 million benefit
associated with the favorable resolution of certain prior year tax
contingencies, combined with the recognition of a $0.6 million benefit
associated with the utilization of a net operating loss. In addition, foreign
tax credits contributed to the reduction in the effective rate during 2003.
For the nine months ended September 30, 2004, net income totaled $47.8
million, or $1.10 per diluted share, versus $20.6 million, or $0.44 per diluted
share, in last year's comparable period. 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.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.2 billion at September 30, 2004 and December 31,
2003, respectively. During the first nine months of 2004, total liabilities
increased to $1.0 billion from $993.5 million at December 31, 2003. An increase
in accounts payable of $88.3 million as a result of increased purchase activity
was offset by $45 million in repurchases of senior subordinated notes, a $30
million payment made pursuant to earn-out provisions of the Bruckner acquisition
agreement. During the first nine months of 2004, stockholders' equity increased
$60.5 million to $228.2 million at September 30, 2004 principally as a result of
$47.8 million of net income and increases in common stock and additional capital
due to equity activity of $11.6 million.
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 nine 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 multiple
payments between 2004 and 2008. Under this provision, a payment of $3.1 million
is due in the fourth quarter. To meet our funding requirements, we use a mix of
internally generated cash flow, our revolving credit facility and our
Receivables Facility.
During October 2004, we filed a universal shelf registration statement
with the SEC for a public offering of debt and equity securities of WESCO
International and our wholly owned subsidiary, WESCO Distribution. The purpose
of the offering is to raise funds for general corporate purposes, including but
not limited to, reduction of our indebtedness.
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
19
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 September 30, 2004, the interest
rate was 3.6%. As of September 30, 2004, we had no borrowings outstanding under
this facility and approximately $175 million in availability, and consequently,
we were not subject to any covenants in the agreement.
Senior Notes
As of September 30, 2004, we had $333.5 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 nine months of 2004, we
repurchased $45.3 million in aggregate principal amount of senior subordinated
notes at a net loss of $2.1 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 September 30, 2004, the rates ranged from 6.50% to 6.72%. 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 facility was amended and
increased to $325 million in August 2004. The current facility provides for a
$190 million purchase commitment with a term of 364 days, expiring August 30,
2005, and a $135 million purchase commitment with a term of three years or
August 27, 2007. Presently, we expect the $190 million portion of the facility
to be renewed in August 2005. 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
September 30, 2004, $300 million in funding was outstanding under the
Receivables Facility.
Cash Flow
Operating Activities. Cash provided by operating activities for the first
nine months of 2004 totaled $92.3 million compared to cash used by operating
activities of $1.5 million in the prior year. Cash provided by operating
activities in 2004 included cash inflows of $75.0 million associated with
increases in eligible receivables related to our Receivables Facility. In 2003,
cash used by operating activities included a cash outflow of $88.0 million due
to decreases in eligible receivables related to our Receivables Facility. In
2004, cash generated by net income plus other adjustments totaling $67.6
million, along with cash inflows from increases in accounts payable of $87.3
million and prepaid expenses and other current assets of $12.5 million were
partially offset by a $105.8 million use of cash for increased accounts
receivable and a $60.2 million use of cash for increased inventory. The
increases in
20
accounts payable, accounts receivable and inventory result primarily from the
increase in business activity during the first nine 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 $37.3 million and cash generated by increases in accounts payable and
other current and non-current liabilities totaling $45.8 million along with
increased cash inflow from reductions of inventory of $19.7 million was
partially offset by cash used to fund increases in accounts receivable totaling
$19.8 million.
Investing Activities. Net cash used in investing activities was $38.0
million rose during the first nine months of 2004, primarily due to a $30
million payment pursuant to the Bruckner purchase agreement and capital
expenditures of $6.9 million. In 2003, net cash used in investing activities of
$6.4 million included capital expenditures of $5.6 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.
Financing Activities. Net cash used by financing activities during the
first nine months of 2004 totaled $62.7 million primarily as a result of net
debt repayments of $48.6 million and $20.1 million in cash payments made to
certain employees for the redemption of stock options and were offset by $6.0
million in amounts received from the exercise of stock options. In 2003, net
cash provided by financing activities totaled $15.1 million primarily as a
result of completing the mortgage financing facility that 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. Overall, price changes from suppliers have
historically been consistent with inflation and have not had a material impact
on the Company's results of operations. However, as discussed in the results of
operation, we did experience a significant rise in the price of certain
commodity products. We were able to pass through a majority of the increase to
customers in the first nine months of 2004.
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.
In September 2004, the FASB issued EITF 04-10 "Applying Paragraph 19 of
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, in Determining Whether to Aggregate Operating Segments That Do Not
Meet the Quantitative Thresholds," Issue Summary No. 1. ("EITF 04-10"). EITF
04-10 establishes evaluation criteria for an enterprise to use when determining
whether operating segments that do not meet the quantitative thresholds can
still be aggregated in accordance with paragraph 19 of SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." ("FAS 131"). We have
evaluated EITF 04-10 and have determined that it has no impact on our financial
statements.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Except as discussed below there have not been any material changes to
WESCO's exposures to market risk during the nine months ended September 30, 2004
that would require an update to the disclosures provided in
WESCO's Form 10-K for the year-ended December 31, 2003.
As interest rates rose during the first half of 2004, the value of one
of our interest rate swap agreements increased and as such, the counterparty
required us to provide additional collateral. We deposited cash totaling
approximately $0.5 million in an interest bearing account to satisfy the
collateral requirements.
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 third fiscal quarter,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement between WESCO International, Inc. and John
Engel.
10.2 First Amendment to Second Amended and Restated Receivable Purchase
Agreement dated July 30, 2004 among WESCO Receivables Corp, WESCO
Distribution, Inc. and Wachovia Capital Markets LLC.
10.3 Fifth Amendment and Consent to Credit Agreement dated July 29, 2004
between WESCO Distribution, Inc. and General Electric Capital Corporation.
10.4 Second Amendment to Second Amended and Restated Receivables Purchase
Agreement and Waiver dated August 31, 2004 among dated August 31, 2004
among WESCO Receivables Corp, WESCO Distribution, Inc. and Wachovia
Capital Markets LLC.
10.5 Third Amendment to Second Amended and Restated Receivables Purchase
Agreement dated as of September 23, 2004 among dated August 31, 2004
among WESCO Receivables Corp, WESCO Distribution, Inc. and Wachovia
Capital Markets LLC.
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 July 14, 2004, WESCO issued a press release announcing it hired John
Engel in the role of Senior Vice President and Chief Operating Officer and
promoted Steve Van Oss to Senior Vice President and Chief Financial and
Administrative Officer and on the July 15, 2004 WESCO filed a report on
Form 8-K under item 5.
On July 21, 2004, WESCO issued a press release announcing its earnings for
the second quarter of 2004 and filed a report on Form 8-K under item 12.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on November 8, 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
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