================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from ______ to ______ For the quarterly period ended JUNE 30, 2004 Commission file number 001-14989 WESCO INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 25-1723342 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 225 WEST STATION SQUARE DRIVE SUITE 700 (412) 454-2200 PITTSBURGH, PENNSYLVANIA 15219 (Registrant's telephone number, (Address of principal executive offices) including area code) N/A (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No[ ] As of July 31, 2004, WESCO International, Inc. had 41,837,061 shares of common stock. ================================================================================
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003.............................................. 2 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003 (unaudited) ............ 3 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) ................................................................. 4 Notes to Condensed Consolidated Financial Statements (unaudited) ...................................... 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 21 ITEM 4. Controls and Procedures................................................................................. 21 PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders..................................................... 22 ITEM 6. Exhibits and Reports on Form 8-K........................................................................ 22 Signatures.............................................................................................. 23 1
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30 DECEMBER 31 Dollars in thousands, except share data 2004 2003* ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................................................. $ 9,419 $ 27,495 Trade accounts receivable, net of allowance for doubtful accounts of 12,874 and $11,422 in 2004 and 2003, respectively (NOTE 4) ........................ 269,413 266,589 Other accounts receivable ................................................................. 17,221 18,223 Inventories, net .......................................................................... 379,583 320,975 Income taxes receivable ................................................................... -- 13,628 Prepaid expenses and other current assets ................................................. 10,456 9,378 ----------- ----------- Total current assets ................................................................. 686,092 656,288 Property, buildings and equipment, net .......................................................... 93,997 98,937 Goodwill ........................................................................................ 398,009 398,673 Other assets .................................................................................... 6,286 7,307 ----------- ----------- Total assets ......................................................................... $ 1,184,384 $ 1,161,205 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................................................... $ 443,782 $ 366,380 Accrued payroll and benefit costs ......................................................... 24,048 47,110 Current portion of long-term debt ......................................................... 32,165 2,120 Current deferred income taxes ............................................................. 2,075 2,379 Deferred acquisition payable .............................................................. -- 31,303 Other current liabilities ................................................................. 32,879 30,418 ----------- ----------- Total current liabilities ............................................................ 534,949 479,710 Long-term debt .................................................................................. 403,431 420,042 Long-term deferred acquisition payable .......................................................... 2,026 53,040 Other noncurrent liabilities .................................................................... 8,331 6,574 Deferred income taxes ........................................................................... 34,241 34,151 ----------- ----------- Total liabilities .................................................................... 982,978 993,517 Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or outstanding ........................................................................... -- -- Common stock, $.01 par value; 210,000,000 shares authorized, 45,812,829 and 44,999,794 shares issued in 2004 and 2003, respectively ........................... 458 450 Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,339,431 issued in 2004 and 2003 .................................. 43 43 Additional capital ......................................................................... 566,640 559,651 Retained earnings (deficit) ................................................................ (307,983) (336,790) Treasury stock, at cost; 8,407,384 and 8,400,499 shares in 2004 and 2003, respectively ..... (61,438) (61,370) Accumulated other comprehensive income (loss) .............................................. 3,686 5,704 ----------- ----------- Total stockholders' equity ............................................................ 201,406 167,688 ----------- ----------- Total liabilities and stockholders' equity ............................................ $ 1,184,384 $ 1,161,205 =========== =========== * Summarized from audited December 31, 2003 balance sheet. The accompanying notes are an integral part of the condensed consolidated financial statements. 2
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 In thousands, except share data 2004 2003 2004 2003 --------- --------- ---------- ---------- Net sales .................................. $ 931,020 $ 820,238 $1,778,814 $1,611,046 Cost of goods sold ......................... 747,313 669,338 1,434,255 1,314,714 --------- --------- --------- --------- Gross profit ........................... 183,707 150,900 344,559 296,332 Selling, general and administrative expenses 136,181 126,820 265,768 248,561 Depreciation and amortization .............. 4,655 5,121 9,661 10,254 --------- --------- --------- --------- Income from operations ................. 42,871 18,959 69,130 37,517 Interest expense ........................... 10,148 10,820 19,988 21,208 Loss (gain) on debt extinguishments ........ 1,625 (307) 1,625 (307) Other expense .............................. 1,292 1,279 2,507 2,689 --------- --------- --------- --------- Income before income taxes ............. 29,806 7,167 45,010 13,927 Provision (benefit) for income taxes ....... 10,720 (183) 16,203 1,738 --------- --------- --------- --------- Net income ........................... $ 19,086 $ 7,350 $ 28,807 $ 12,189 ========= ========= ========= ========= Earnings per share: Basic: ............................... $ 0.46 $ 0.16 $ 0.70 $ 0.27 ========= ========= ========= ========= Diluted: ............................. $ 0.44 $ 0.16 $ 0.67 $ 0.26 ========= ========= ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements. 3
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) SIX MONTHS ENDED JUNE 30 In thousands 2004 2003 --------- --------- OPERATING ACTIVITIES: Net income ..................................................................... $ 28,807 $ 12,189 Adjustments to reconcile net income to net cash used by operating activities: Loss (gain) on debt extinguishment ...................................... 1,625 (307) Depreciation and amortization ........................................... 9,661 10,254 Accretion of original issue and amortization of purchase discounts ...... 1,402 1,475 Amortization of debt issuance costs ..................................... 774 547 Deferred income taxes ................................................... (214) (1,081) Amortization of gain on interest rate swap .............................. (456) -- Stock option expense .................................................... 726 -- Loss (gain) on the sale of property, buildings and equipment ............ 15 (491) Changes in assets and liabilities, excluding the effects of acquisitions: Change in receivables facility ...................................... 75,000 (68,000) Trade and other receivables ......................................... (78,751) (8,189) Inventories ......................................................... (59,920) 5,441 Prepaid expenses and other current assets ........................... 14,924 191 Accounts payable .................................................... 79,367 24,188 Accrued payroll and benefit costs ................................... (2,918) (1,810) Other current and noncurrent liabilities ............................ 2,118 7,269 --------- --------- Net cash provided (used) by operating activities ............... 72,160 (18,324) INVESTING ACTIVITIES: Capital expenditures ........................................................... (5,219) (3,439) Acquisition payments ........................................................... (30,703) (2,028) Proceeds from the sale of property, buildings and equipment .................... -- 1,177 --------- --------- Net cash used by investing activities .......................... (35,922) (4,290) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt ....................................... 165,800 87,180 Repayments of long-term debt ................................................... (203,439) (57,646) Redemption of stock options .................................................... (20,144) 4,563 Debt issuance costs ............................................................ -- (1,431) Proceeds from the exercise of stock options .................................... 3,800 29 --------- --------- Net cash (used) provided by financing activities ............... (53,983) 32,695 Effect of exchange rate changes on cash and cash equivalents ................... (331) 554 Net change in cash and cash equivalents ................................. (18,076) 10,635 Cash and cash equivalents at the beginning of period .................... 27,495 22,570 --------- --------- Cash and cash equivalents at the end of period .......................... $ 9,419 $ 33,205 ========= ========= Supplemental disclosures: Non-cash financing activities: Decrease in fair value of interest rate swap ............................ $ 1,498 $ -- The accompanying notes are an integral part of the condensed consolidated financial statements. 4
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION WESCO International, Inc. and its subsidiaries (collectively, "WESCO"), headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of electrical supplies and equipment and is a provider of integrated supply procurement services. WESCO currently operates approximately 350 branch locations and five distribution centers in the United States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, Nigeria and Singapore. 2. ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of WESCO and all of its subsidiaries and have been prepared in accordance with Rule 10-01 of the Securities and Exchange Commission. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in WESCO's 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The unaudited condensed consolidated balance sheet as of June 30, 2004, the unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and June 30, 2003 and the unaudited condensed consolidated statements of cash flows for the six months ended June 30 2004, and June 30, 2003, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the results of the interim periods. All adjustments reflected in the condensed consolidated financial statements are of a normal recurring nature unless indicated. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year. Stock Options During the year ended December 31, 2003, WESCO adopted the measurement provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". This change in accounting method was applied on a prospective basis in accordance with SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123." Stock options awarded prior to 2003 are accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company recognized $0.4 million and $0.7 million of compensation expense for the three months and six months ended June 30, 2004. There were no options granted during the six months ended June 30, 2004 and June 30, 2003. The following table presents the pro forma results as if the fair-value based method of accounting for stock-based awards had been applied to all outstanding options: 5
IN THOUSANDS EXCEPT PER SHARE DATA THREE MONTHS SIX MONTHS ------------------ -------------------- ENDED JUNE 30 ENDED JUNE 30 ------------------ -------------------- 2004 2003 2004 2003 ------- -------- --------- --------- Net income, as reported ............................................. $19,086 $ 7,350 $ 28,807 $ 12,189 Add: Stock-based employee compensation expense included in reported net income, net of related tax .................................................. 236 -- 472 -- Deduct: Stock-based employee compensation expense determined under SFAS No. 123 for all awards net of related tax ...................................... 429 371 858 741 ------- -------- -------- -------- Pro forma net income................................................ $18,893 $ 6,979 $ 28,421 $ 11,448 Earnings per share: Basic as reported................................................ $ 0.46 $ 0.16 $ 0.70 $ 0.27 Basic pro forma.................................................. $ 0.45 $ 0.15 $ 0.69 $ 0.25 Diluted as reported.............................................. $ 0.44 $ 0.16 $ 0.67 $ 0.26 Diluted pro forma................................................ $ 0.43 $ 0.15 $ 0.66 $ 0.25 Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities." This interpretation requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risk and rewards of ownership among their owners and other parties involved. This interpretation, as amended, is effective for all entities subject to this interpretation no later than the end of the first period that ends after March 15, 2004. The adoption of this interpretation did not have an impact on the Company's consolidated financial statements. 3. EARNINGS PER SHARE The following table sets forth the details of basic and diluted earnings per share: THREE MONTHS ENDED JUNE 30 Dollars in thousands, except per share amounts 2004 2003 -------------- -------------- Reported net income $ 19,086 $ 7,350 ============== ============== Weighted average common shares outstanding used in computing basic earnings per share 41,562,343 45,114,271 Common shares issuable upon exercise of dilutive stock options 2,158,108 1,429,219 -------------- -------------- Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share 43,720,451 46,543,490 ============== ============== Earnings per share: Basic $ 0.46 $ 0.16 Diluted $ 0.44 $ 0.16 -------------- -------------- 6
SIX MONTHS ENDED JUNE 30 Dollars in thousands, except per share amounts 2004 2003 ------------ ------------ Reported net income $ 28,807 $ 12,189 ============ ============ Weighted average common shares outstanding used in computing basic earnings per share 41,354,040 45,111,131 Common shares issuable upon exercise of dilutive stock options 1,950,382 1,371,041 ------------ ------------ Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share 43,304,422 46,482,172 ============ ============ Earnings per share: Basic $ 0.70 $ 0.27 Diluted $ 0.67 $ 0.26 ------------ ------------ 4. ACCOUNTS RECEIVABLE SECURITIZATION WESCO maintains an accounts receivable securitization program ("Receivables Facility") and the facility provides for a $165 million purchase commitment with a term of 364 days and a $135 million purchase commitment with a term of three years. Under the Receivables Facility, WESCO sells, on a continuous basis, to WESCO Receivables Corporation, a wholly-owned, special purpose company ("SPC"), an undivided interest in all domestic accounts receivable. The SPC sells without recourse to a third-party conduit all the eligible receivables while maintaining a subordinated interest, in the form of overcollateralization, in a portion of the receivables. WESCO has agreed to continue servicing the sold receivables for the financial institution at market rates; accordingly, no servicing asset or liability has been recorded. As of June 30, 2004 and December 31, 2003, securitized accounts receivable totaled approximately $408 million and $330 million, respectively, of which the subordinated retained interest was approximately $108 million and $105 million, respectively. Accordingly, approximately $300 million and $225 million of accounts receivable balances were removed from the consolidated balance sheets at June 30, 2004 and December 31, 2003, respectively. Costs associated with the Receivables Facility totaled $1.3 million for the three months ended June 30, 2004 and June 30, 2003. Costs associated with the Receivables Facility totaled $2.5 million and $2.7 million for the six-months ended June 30, 2004 and June 30, 2003. These amounts are recorded as other expenses in the consolidated statements of operations and are primarily related to the discount and loss on the sale of accounts receivables, partially offset by related servicing revenue. The key economic assumptions used to measure the retained interest at the date of the securitization for securitizations completed in 2004 were a discount rate of 2% and an estimated life of 1.5 months. At June 30, 2004, an immediate adverse change in the discount rate or estimated life of 10% and 20% would result in a reduction in the fair value of the retained interest of $0.1 million and $0.2 million, respectively. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this example, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another. 5. COMPREHENSIVE INCOME The following table sets forth comprehensive income and its components: THREE MONTHS ENDED JUNE 30 In thousands 2004 2003 -------- -------- Net income $ 19,086 $ 7,350 Foreign currency translation adjustment (1,658) 4,320 -------- -------- Comprehensive income $ 17,428 $ 11,670 -------- -------- 7
SIX MONTHS ENDED JUNE 30 In thousands 2004 2003 -------- -------- Net income $ 28,807 $ 12,189 Foreign currency translation adjustment (2,018) 7,210 -------- -------- Comprehensive income $ 26,789 $ 19,399 -------- -------- 6. ACQUISITIONS In 1998, WESCO acquired substantially all the assets and assumed substantially all liabilities and obligations relating to the operations of Bruckner Supply Company, Inc. ("Bruckner"). The terms of the purchase agreement provide for additional contingent consideration to be paid based on achieving certain earnings targets. The amount of earn-out proceeds payable in any single year subsequent to achieving the earnings target is capped under this agreement at $30 million per year. As a result of Bruckner's performance in 2003, WESCO recorded a liability of $80 million as of December 31, 2003 for contingent consideration relating to the Bruckner agreement. During the first six months of 2004 WESCO paid $30 million pursuant to this agreement. The remaining $50 million due under the agreement was converted into a note payable ($30 million, due in June 2005, classified as current and $20 million, due in June 2006, classified as long-term debt) and pays interest at 10%. No additional amounts can be earned under this agreement. Certain other acquisitions also contain contingent consideration provisions, only one of which could require a significant payment. Management estimates this payment could range up to $20 million and would be made in 2008. 7. INCOME TAXES The following table sets forth the reconciliation between the federal statutory income tax rate and the effective rate: THREE MONTHS ENDED JUNE 30, ----------------- 2004 2003 ---- ---- Federal statutory rate............................................. 35.0% 35.0% State taxes, net of federal tax benefit............................ 1.5 0.2 Nondeductible expenses............................................. 1.0 2.3 Domestic tax benefit from foreign operations....................... (1.2) (3.2) Foreign tax rate differences....................................... (0.4) (0.3) Favorable impact resulting from prior year tax contingencies(1).... -- (34.1) Other.............................................................. 0.1 (2.5) ---- ----- 36.0% (2.6)% ==== ==== SIX MONTHS ENDED JUNE 30, ----------------- 2004 2003 ----- ----- Federal statutory rate............................................. 35.0% 35.0% State taxes, net of federal tax benefit............................ 1.2 0.2 Nondeductible expenses............................................. 1.2 2.3 Domestic tax benefit from foreign operations....................... (0.8) (3.2) Foreign tax rate differences....................................... (0.6) (0.3) Favorable impact resulting from prior year tax contingencies (1)... -- (17.5) Net operating loss utilization(2).................................. -- (4.0) ---- ----- 36.0% 12.5% ==== ===== - ---------- (1) Represents a benefit of $2.4 million from the resolution of prior year tax contingencies. (2) Represents the recognition of a $0.6 million benefit associated with the utilization of a net operating loss. 8
8. OTHER FINANCIAL INFORMATION (UNAUDITED) WESCO Distribution, Inc. has issued $400 million of 9 1/8% senior subordinated notes. The senior subordinated notes are fully and unconditionally guaranteed by WESCO International, Inc. on a subordinated basis to all existing and future senior indebtedness of WESCO International, Inc. Condensed consolidating financial information for WESCO International, Inc., WESCO Distribution, Inc. and the non-guarantor subsidiaries are as follows: WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS JUNE 30, 2004 ---------------------------------------------------------------------------- (IN THOUSANDS) Consolidating WESCO WESCO and International, Distribution, Non-Guarantor Eliminating Inc. Inc. Subsidiaries Entries Consolidated -------------- ------------- ------------- ------------ ------------ Cash and cash equivalents ........................... $ -- $ 4,088 $ 5,333 $ (2) $ 9,419 Trade accounts receivable ........................... -- 16,155 253,258 -- 269,413 Inventories ......................................... -- 323,136 56,447 -- 379,583 Other current assets ................................ -- 7,628 17,974 2,075 27,677 -------- ---------- -------- ----------- ---------- Total current assets ............................. -- 351,007 333,012 2,073 686,092 Intercompany receivables, net ....................... -- 217,082 20,644 (237,726) -- Property, buildings and equipment, net .............. -- 26,041 67,956 -- 93,997 Goodwill ............................................ -- 360,056 37,953 -- 398,009 Investments in affiliates and other noncurrent assets 435,448 381,600 3,281 (814,043) 6,286 -------- ---------- -------- ----------- ---------- Total assets ..................................... $435,448 $1,335,786 $462,846 $(1,049,696) $1,184,384 ======== ========== ======== =========== ========== Accounts payable .................................... $ 2 $ 420,042 $ 23,740 $ (2) $ 443,782 Other current liabilities ........................... -- 85,541 3,551 2,075 91,167 -------- ---------- -------- ----------- ---------- Total current liabilities ........................ 2 505,583 27,291 2,073 534,949 Intercompany payables, net .......................... 237,726 -- -- (237,726) -- Long-term debt ...................................... -- 353,490 49,941 -- 403,431 Other noncurrent liabilities ........................ -- 41,289 3,309 -- 44,598 Stockholders' equity ................................ 197,720 435,424 382,305 (814,043) 201,406 -------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity ....... $435,448 $1,335,786 $462,846 $(1,049,696) $1,184,384 ======== ========== ======== =========== ========== 9
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2003 ---------------------------------------------------------------------------- (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated ------------- ------------------ ------------- ----------- ------------ Cash and cash equivalents ........................... $ 1 $ 16,421 $ 11,073 $ -- $ 27,495 Trade accounts receivable ........................... -- 39,900 226,689 -- 266,589 Inventories ......................................... -- 272,597 48,378 -- 320,975 Other current assets ................................ -- 37,259 7,691 (3,721) 41,229 -------- ---------- -------- ----------- ---------- Total current assets ............................. 1 366,177 293,831 (3,721) 656,288 Intercompany receivables, net ....................... -- 203,243 45,156 (248,399) -- Property, buildings and equipment, net .............. -- 29,687 69,250 -- 98,937 Goodwill ............................................ -- 360,655 38,018 -- 398,673 Investments in affiliates and other noncurrent assets 410,382 361,824 3,727 (768,626) 7,307 -------- ---------- -------- ----------- ---------- Total assets ..................................... $410,383 $1,321,586 $449,982 $(1,020,746) $1,161,205 ======== ========== ======== =========== ========== Accounts payable .................................... $ -- $ 345,632 $ 20,748 $ -- $ 366,380 Other current liabilities ........................... -- 105,521 11,530 (3,721) 113,330 -------- ---------- -------- ----------- ---------- Total current liabilities ........................ -- 451,153 32,278 (3,721) 479,710 Intercompany payables, net .......................... 248,399 -- -- (248,399) -- Long-term debt ...................................... -- 370,642 49,400 -- 420,042 Other noncurrent liabilities ........................ -- 89,409 4,356 -- 93,765 Stockholders' equity ................................ 161,984 410,382 363,948 (768,626) 167,688 -------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity ....... $410,383 $1,321,586 $449,982 $(1,020,746) $1,161,205 ======== ========== ======== =========== ========== 10
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 ------------------------------------------------------------------------------ (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated ------------- ---------------=-- ------------- ----------- ------------ Net sales .................................. $ -- $ 796,419 $ 134,601 $ -- $931,020 Cost of goods sold ......................... -- 642,012 105,301 -- 747,313 Selling, general and administrative expenses -- 118,549 17,632 -- 136,181 Depreciation and amortization .............. -- 3,867 788 -- 4,655 Results of affiliates' operations .......... 17,227 11,297 -- (28,524) -- Interest expense (income), net ............. (2,862) 14,114 (1,104) -- 10,148 Other (income) expense ..................... -- 6,714 (3,797) -- 2,917 Provision (benefit) for income taxes ....... 1,003 5,233 4,484 -- 10,720 -------- --------- --------- --------- -------- Net income (loss) ....................... $ 19,086 $ 17,227 $ 11,297 $ (28,524) $ 19,086 ======== ========= ========= ========= ======== THREE MONTHS ENDED JUNE 30, 2003 --------------------------------------------------------------------------------- (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated ------------- ------------------ ------------- ----------- ------------ Net sales .................................. $ -- $ 700,941 $ 119,297 $ -- $820,238 Cost of goods sold ......................... -- 572,067 97,271 -- 669,338 Selling, general and administrative expenses -- 110,141 16,679 -- 126,820 Depreciation and amortization .............. -- 4,354 767 -- 5,121 Results of affiliates' operations .......... 5,421 6,441 -- (11,862) -- Interest expense (income), net ............. (2,968) 14,449 (661) -- 10,820 Other (income) expense ..................... -- 4,876 (3,904) -- 972 Provision (benefit) for income taxes ....... 1,039 (3,926) 2,704 -- (183) ------- --------- --------- --------- -------- Net income (loss) ....................... $ 7,350 $ 5,421 $ 6,441 $ (11,862) $ 7,350 ======= ========= ========= ========= ======== 11
SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------------------- (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated --------------- ----------------- ------------- ----------- ------------ Net sales .................................. $ -- $ 1,524,190 $ 254,624 $ -- $1,778,814 Cost of goods sold ......................... -- 1,232,506 201,749 -- 1,434,255 Selling, general and administrative expenses -- 230,069 35,699 -- 265,768 Depreciation and amortization .............. -- 8,068 1,593 -- 9,661 Results of affiliates' operations .......... 25,066 18,451 -- (43,517) -- Interest expense (income), net ............. (5,753) 27,928 (2,187) -- 19,988 Other (income) expense ..................... -- 12,790 (8,658) -- 4,132 Provision for income taxes ................. 2,012 6,214 7,977 -- 16,203 -------- ----------- --------- -------- ---------- Net income (loss) ....................... $ 28,807 $ 25,066 $ 18,451 $(43,517) $ 28,807 ======== =========== ========= ======== ========== SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------------------- (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated ---------------- ----------------- ------------- ----------- ------------ Net sales....................................... $ -- $ 1,382,014 $ 229,032 $ -- $1,611,046 Cost of goods sold.............................. -- 1,127,978 186,736 -- 1,314,714 Selling, general and administrative expenses.... -- 214,962 33,599 -- 248,561 Depreciation and amortization................... -- 8,693 1,561 -- 10,254 Results of affiliates' operations............... 8,394 12,983 -- (21,377) -- Interest expense (income), net.................. (5,838) 29,077 (2,031) -- 21,208 Other (income) expense.......................... -- 12,891 (10,509) -- 2,382 Provision for income taxes...................... 2,043 (6,998) 6,693 -- 1,738 ----------- ----------- --------- --------- ---------- Net income (loss)............................ $ 12,189 $ 8,394 $ 12,983 $ (21,377) $ 12,189 =========== =========== ========= ========= ========== 12
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated -------------- ------------------ ------------- ------------- ------------ Net cash provided (used) by operating activities $ 27,016 $ 49,719 $ (4,573) $ (2) $ 72,160 Investing activities: Capital expenditures -- (4,932) (287) -- (5,219) Acquisitions -- (30,703) -- -- (30,703) -------- -------- -------- -------- -------- Net cash used in investing activities -- (35,635) (287) -- (35,922) Financing activities: Net borrowings (repayments) (10,673) (26,417) (549) -- (37,639) Redemption of stock options (20,144) -- -- -- (20,144) Equity transactions 3,800 -- -- -- 3,800 -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (27,017) (26,417) (549) -- (53,983) -------- -------- -------- -------- -------- Effect of exchange rate changes on Cash and cash equivalents -- -- (331) -- (331) -------- -------- -------- -------- -------- Net change in cash and cash equivalents (1) (12,333) (5,740) (2) (18,076) Cash and cash equivalents at beginning of year 1 16,421 11,073 -- 27,495 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 4,088 $ 5,333 $ (2) $ 9,419 ======== ======== ======== ======== ======== 13
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS) Consolidating WESCO and International, WESCO Non-Guarantor Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated -------------- ------------------ ------------- ------------- ------------ Net cash provided (used) by operating activities $ 3,819 $ 12,210 $(34,353) $ -- $(18,324) Investing activities: Capital expenditures -- (3,225) (214) -- (3,439) Acquisitions -- (2,028) -- -- (2,028) Proceeds from sale of property -- 1,177 -- -- 1,177 -------- -------- -------- -------- -------- Net cash used in investing activities -- (4,076) (214) -- (4,290) Financing activities: Net borrowings (repayments) (3,851) 197 37,751 -- 34,097 Equity transactions 29 -- -- -- 29 Other -- -- (1,431) -- (1,431) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (3,822) 197 36,320 -- 32,695 -------- -------- -------- -------- -------- Effect of exchange rate changes on Cash and cash equivalents -- -- 554 -- 554 -------- -------- -------- -------- -------- Net change in cash and cash equivalents (3) 8,331 2,307 -- 10,635 Cash and cash equivalents at beginning of year 4 12,449 10,117 -- 22,570 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ 1 $ 20,780 $ 12,424 $ -- $ 33,205 ======== ======== ======== ======== ======== 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and WESCO International Inc.'s Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 2003 Annual Report on Form 10-K. GENERAL WESCO is a full-line distributor of electrical supplies and equipment and is a provider of integrated supply procurement services. We currently operate approximately 350 branch locations and five distribution centers in the United States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, Nigeria and Singapore. We serve over 100,000 customers worldwide, offering over 1,000,000 products from over 24,000 suppliers. Our diverse customer base includes a wide variety of industrial companies; contractors for industrial, commercial and residential projects; utility companies, and commercial, institutional and governmental customers. Approximately 87% of our net sales are generated from operations in the U.S., 10% from Canada and the remainder from other countries. Sales growth, along with positive impact from our margin and cost improvement initiatives contributed to improved financial results for the first six months of 2004. Sales increased 10.4% over the same period last year and the gross margin percentage of 19.4% is our historical best. Operating income improved by 84.3% compared with last year's comparable period and the year to date net income was $28.8 million versus $12.2 million in last year's comparable period. As a result, our earnings per share were $0.67 for the six month period, a 157% improvement over earnings per share during the same period last year. CASH FLOW We generated $72.2 million in operating cash flow during the first six months of 2004. Included in this amount was a $75.0 million cash inflow from an increase in our Receivables Facility. During the six month period ended June 30, 2004 we repurchased $36.0 million in aggregate principal amount of senior subordinated notes at a net loss of $1.6 million. During the second quarter we paid $30 million pursuant to the terms of the Bruckner purchase agreement. During the first quarter we funded a payment of $20.1 million to certain employees for the net equity value of stock options originally granted in 1994 and 1995. FINANCING AVAILABILITY As of June 30, 2004 we had approximately $180 million in available borrowing capacity under our financing facilities. OUTLOOK Improvements in operations and our capital structure made in 2003 have positioned us well for 2004. Though we continue to see improvements in the macroeconomic data that reflect activity levels in our major end markets, capital spending in the manufacturing and construction markets we serve still remains well below the higher levels experienced in 1999 and 2000. Even with improvement, we anticipate a lag before we see a broad based increase in capital spending. Accordingly, we continue to focus on selling and marketing initiatives to increase market share, improve margin expansion programs and focus on cost containment as we drive to improve our operating performance for the rest of 2004. CRITICAL ACCOUNTING POLICIES AND ESTIMATES During the six-month period ended 2004, there were no significant changes to WESCO's Critical Accounting Policies and Estimates referenced in the 2003 Annual Report on Form 10-K. RESULTS OF OPERATIONS Second Quarter of 2004 versus Second Quarter of 2003 The following table sets forth the percentage relationship to net sales of certain items in WESCO's condensed consolidated statements of operations for the periods presented: 15
THREE MONTHS ENDED JUNE 30 -------------------------- 2004 2003 ----- ----- Net sales 100.0% 100.0% Gross profit 19.7 18.4 Selling, general and administrative expenses 14.6 15.5 Depreciation and amortization 0.5 0.6 ----- ----- Income from operations 4.6 2.3 Interest expense 1.1 1.2 Loss on debt extinguishments 0.1 - Other expense 0.1 0.2 ----- ----- Income before income taxes 3.3 0.9 Provision for income taxes 1.2 0.0 ----- ----- Net income 2.1% 0.9% ===== ===== Net sales in the second quarter of 2004 totaled $931.0 million versus $820.2 million in the comparable 2003 quarter, a 13.5% increase. Approximately 10% of the increase in sales was attributable to stronger demand resulting from improving economic activity and market share gain. The remaining portion of the increase was due to improved pricing on commodity products, approximately 3%, and the strength of the Canadian dollar. Gross profit for the second quarter of 2004 totaled $183.7 million and was up compared to 2003's second quarter, as the gross margin percentage improved to 19.7% versus 18.4% last year. The improvement in gross margin percentage was comprised of a 70 basis point favorable impact from improved performance with supplier volume rebate and cash discount programs, a 50 basis point favorable impact due to pass through of increased commodity prices, and favorable sales mix of 20 basis points. Selling, general and administrative ("SG&A") expenses in the second quarter of 2004 totaled $136.2 million versus $126.8 million in last year's comparable quarter. Total payroll expense increased approximately $9.2 million over last year's second quarter principally from increased variable incentive compensation costs of $5.7 million, increased health care and benefits costs of $2.1 million and stock options of $0.4 million associated with the adoption of SFAS No. 123 in 2003. Shipping and handling expense included in SG&A was $9.2 million in the second quarter of 2004 compared with $9.0 million in last year's second quarter. As a percentage of net sales, SG&A expenses decreased to 14.6% from 15.5% in the prior year quarter reflecting LEAN initiatives and the leverage of higher sales volume. Depreciation and amortization was $4.7 million in the second quarter of 2004 versus $5.1 million in last year's second quarter. The decline in depreciation and amortization was primarily due to less depreciation expense on computer hardware and less software amortization. Interest expense totaled $10.1 million for the second quarter of 2004 versus $10.8 million in last year's comparable quarter. The decline was due to a lower amount of indebtedness outstanding during the current quarter as compared to the second quarter of 2003 offset somewhat by a slightly higher effective interest rate resulting from a higher proportion of fixed rate debt. Loss on debt extinguishments of $1.6 million represented the loss on the repurchase of our senior subordinated notes versus a gain on debt extinguishments of $0.3 million during last year's comparable period. Other expense during the second quarter of 2004 and 2003 totaled $1.3 million, reflecting costs associated with the Receivables Facility. Income tax expense totaled $10.7 million in the second quarter of 2004 and the effective tax rate was a 36.0%. Income tax benefit totaled $0.2 million in the second quarter of 2003 and the effective tax rate was a 2.6% benefit. Last year's effective tax rate differed from the statutory rate primarily as a result of the recognition of a $2.4 million benefit associated with the favorable resolution of an IRS examination. For the second quarter of 2004, net income totaled $19.1 million, or $0.44 per diluted share, compared with $7.4 million, or $0.16 per diluted share, in the second quarter of 2003. The improvements in net income and earnings per share were primarily attributable to increased sales and gross profit offset somewhat by the increase in payroll expense and an increase in the effective tax rate. 16
Six Months Ended June 30, 2004 versus Six Months Ended June 30, 2003 The following table sets forth the percentage relationship to net sales of certain items in WESCO's condensed consolidated statements of operations for the periods presented: SIX MONTHS ENDED JUNE 30 2004 2003 ------ ------ Net sales 100.0% 100.0% Gross profit 19.4 18.4 Selling, general and administrative expenses 14.9 15.4 Depreciation and amortization 0.6 0.7 ------ ------ Income from operations 3.9 2.3 Interest expense 1.1 1.3 Loss on debt extinguishment 0.1 - Other expense 0.1 0.1 ------ ------ Income before income taxes 2.6 0.9 Provision for income taxes 0.9 0.1 ------ ------ Net income 1.7% 0.8% ------ ------ Net sales in the six months ended June 30, 2004 totaled $1,778.8 million versus $1,611.0 million in the comparable 2003 period, a 10.4% increase. Approximately 7% of the increase in sales was attributable to stronger demand resulting from improving economic activity. The remaining portion of the increase was split between improved pricing on commodity products of approximately 2% and the strength of the Canadian dollar of 1%. Gross profit for the six months ended June 30, 2004 of $344.6 million was up versus last year's comparable period, as the gross margin percentage improved to 19.4% versus 18.4% last year. The improvement in gross margin percentage was comprised of a 45 basis point favorable impact from improved performance with supplier volume rebate and cash discount programs, along with a 40 basis point favorable impact due to pass through of rising commodity prices and favorable sales mix of 20 basis points. SG&A expenses during the six months ended June 30, 2004 totaled $265.8 million versus $248.6 million in last year's comparable period. Total payroll expense increased approximately $15.9 million over last year's first half principally from increased variable incentive compensation costs of $8.0 million, increased health care and benefits costs of $3.9 million and stock options of $0.7 million associated with the adoption of SFAS No. 123 in 2003. Shipping and handling expense included in SG&A was $17.8 million for both this year and last year's comparable period. As a percentage of net sales, SG&A expenses decreased to 14.9% compared with 15.4% in last year's six-month period reflecting LEAN initiatives and the leverage of higher sales volume. Depreciation and amortization was $9.7 million in the first six months of 2004 versus $10.3 million in last year's comparable period. Interest expense totaled $20.0 million for the six months ended June 30, 2004 versus $21.2 million in last year's comparable period, a decrease of 5.8%. The decline was due to a lower amount of indebtedness outstanding during the current period. Loss on debt extinguishments of $1.6 million represented the loss on the repurchase of our senior subordinated notes compared with a gain on debt extinguishments of $0.3 million last year. Other expense totaled $2.5 million in 2004, a decline from $2.7 million in the comparable 2003 period, principally reflecting costs associated with the accounts receivable securitization program. For the six months ended June 30, 2004, income tax expense totaled $16.2 million and the effective tax rate was 36.0%. Income tax expense totaled $1.7 million in last year's comparable period and the effective tax rate was 12.5%. The effective tax rate in the prior-year period differs from the statutory rate primarily as a result of the recognition of a $2.4 million benefit associated with the favorable conclusion of an IRS examination. In addition, foreign tax credits contributed to the reduction in the effective rate during 2003. For the six months ended June 30, 2004, net income totaled $28.8 million, or $0.67 per diluted share, versus $12.2 million, or $0.26 per diluted share, in last year's comparable period. The improvements in net income and 17
earnings per share were primarily attributable to increased sales and gross profit offset somewhat by the increase in payroll expense and an increase in the effective tax rate. LIQUIDITY AND CAPITAL RESOURCES Total assets were $1.2 billion at June 30, 2004 and December 31, 2003, respectively. During the first six months of 2004, total liabilities decreased to $983.0 million. An increase in accounts payable of $77.4 million as a result of increased purchase activity was offset by a $30 million payment made pursuant to earn-out provisions of the Bruckner acquisition agreement and a $23.1 million decrease in accrued payroll and benefit costs primarily as a result of a $20.1 million payment related to certain employee stock options. During the first six months of 2004, stockholders' equity increased $33.7 million to $201.4 million at June 30, 2004 principally as a result of $28.8 million of net income. Our liquidity needs arise from seasonal working capital requirements, capital expenditures, acquisitions and debt service obligations. In addition, certain of our acquisition agreements contain earn-out provisions based principally on future earnings targets. The most significant of these agreements relates to the acquisition of Bruckner, the terms of which provide for additional contingent consideration to be paid based on achieving earnings targets of earnings before interest, taxes, depreciation and amortization of Bruckner. The amount of earn-out proceeds earned that is payable in any single year subsequent to achieving the earnings target is capped under this agreement at $30 million per year. During the first six months of 2004 WESCO paid $30 million pursuant to this agreement. The remaining $50 million due under the agreement was converted into a note payable ($30 million, due in June 2005, classified as current and $20 million, due in June 2006, classified as long-term debt) and pays interest at 10%. No additional amounts can be earned under this agreement. Certain other acquisitions also contain contingent consideration provisions, only one of which could require a significant payment. Management estimates this payment could be up to $20 million and would be made in 2008. To meet our funding requirements, we use a mix of internally generated cash flow, our revolving credit facility and our Receivables Facility. We finance our operating and investing needs, as follows: Mortgage Financing Facility In February 2003, we finalized a mortgage financing facility of $51 million. Total borrowings under the mortgage financing are subject to a 22-year amortization schedule with a balloon payment due at the end of the 10-year term. Proceeds from the borrowings were used primarily to reduce outstanding borrowings under the 2002 Revolving Credit Facility. 2002 Revolving Credit Facility In March 2002, WESCO Distribution, Inc. entered into a $290 million revolving credit agreement that is collateralized by substantially all inventory owned by WESCO and also by the accounts receivable of WESCO Canada. During 2003, we executed an amendment reducing the size of this revolving credit facility to $200 million. Availability under the facility, which matures in 2007, is limited to the amount of U.S. and Canadian eligible inventory and Canadian receivables applied against certain advance rates. Borrowings under the facility were used to retire a previous revolving credit facility. Interest on this facility is at LIBOR plus a margin that ranges between 2.0% to 2.75% depending upon the amount of excess availability under the facility. As long as the average daily excess availability for both the preceding and projected succeeding 90-day period is greater than $50 million, then we would be permitted to make acquisitions and repurchase outstanding public stock and bonds. The above permitted transactions would also be allowed if such excess availability is between $25 million and $50 million and our fixed charge coverage ratio, as defined by the agreement, is at least 1.25 to 1.0 after taking into consideration the permitted transaction. Additionally, if excess availability under the agreement is less than $50 million, then we must maintain a fixed charge coverage ratio of 1.1 to 1.0. At June 30, 2004, the interest rate was 3.04%. As of June 30, 2004, we had no borrowings outstanding under this facility and approximately $180 million in availability, and consequently, we were not subject to any covenants in the agreement. 18
Senior Notes As of June 30, 2004, we had $342.8 million in aggregate principal amount of 9.125% senior subordinated notes due 2008. The notes were issued with an average issue price of 98%. During the first six months of 2004 we repurchased $36.0 million in aggregate principal amount of senior subordinated notes at a net loss of $1.6 million. Interest Rate Swap Agreements In September 2003, we entered into a $50 million interest rate swap agreement and in December 2003, we entered into two additional $25 million interest rate swap agreements. These agreements have terms expiring concurrently with the maturity of our 9.125% senior subordinated notes and were entered into with the intent of converting $100 million of the senior subordinated notes from a fixed-to-floating rate. Pursuant to these agreements, we receive semi-annual fixed interest payments at the rate of 9.125% commencing December 1, 2003 and make semi-annual variable interest rate payments at six-month LIBOR rates plus a premium in arrears. The LIBOR rates in the agreements reset every six months and at June 30, 2004, the rates ranged from 6.32% to 6.58%. The agreements can be terminated by the counterparty in accordance with a redemption schedule that is consistent with the redemption schedule for the senior subordinated notes. We enter into interest rate swap agreements as a means to hedge our interest rate exposure and maintain certain amounts of variable rate and fixed rate debt. Since the swaps have been designated as hedging instruments, their fair values are reflected in our Consolidated Balance Sheets. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Off-Balance Sheet Arrangements-Accounts Receivable Securitization Program In September 2003, we entered into a $300 million Receivables Facility agreement with four financial institutions. The new facility provides for a $165 million purchase commitment with a term of 364 days and a $135 million purchase commitment with a term of three years. Presently, we expect the $165 million portion of the facility to be renewed in September 2004. Under the Receivables Facility, WESCO sells, on a continuous basis, to WESCO Receivables Corporation, a wholly-owned special purpose company ("SPC"), an undivided interest in all domestic accounts receivable. The SPC sells without recourse to a third-party conduit, all the eligible receivables while maintaining a subordinated interest, in the form of overcollateralization, in a portion of the receivables. WESCO has agreed to continue servicing the sold receivables for the financial institution at market rates; accordingly, no servicing asset or liability has been recorded. As of June 30, 2004, $300 million in funding was outstanding under the Receivables Facility. Cash Flow Operating Activities. Cash provided by operating activities for the first six months of 2004 totaled $72.2 million compared to cash used by operating activities of $18.3 million in the prior year. Cash provided by operating activities in 2004 included cash inflows of $75 million associated with changes related to our Receivables Facility. In 2003, cash used by operating activities included a cash outflow of $68.0 million due to changes related to our Receivables Facility. In 2004, cash generated by net income plus other adjustments totaling $42.3 million, along with cash inflows from increases in accounts payable of $79.4 million and prepaid expenses and other current assets of $14.9 million were partially offset by a $78.8 million use of cash for increased accounts receivable and a $59.9 million use of cash for increased inventory. The increases in accounts payable, accounts receivable and inventory result primarily from the increase in business activity during the first six months. The change in accounts receivable also includes the impact of a change in cash collection procedures. In 2003, cash generated by net income plus other adjustments totaling $22.6 million and cash generated by increases in accounts payable and other current and non-current liabilities totaling $31.5 million was partially offset by cash used to fund increases in accounts receivable totaling $8.2 million. Investing Activities. Net cash used in investing activities was $35.9 million during the first six months of 2004, due to a $30 million payment pursuant to the Bruckner purchase agreement and capital expenditures of $5.2 million. In 2003, net cash used in investing activities of $4.3 million included capital expenditures of $3.4 million along with acquisition payments totaling $2.0 million and were partially offset by proceeds received from the sale of property and buildings totaling $1.2 million. 19
Financing Activities. Net cash used by financing activities during the first six months of 2004 totaled $54.0 million primarily as a result of net debt repayments of $37.6 million and $20.1 million in cash payments made to certain employees for the redemption of stock options. In 2003, net cash provided by financing activities totaled $32.7 million as a result of completing the real estate financing which provided $38 million partially offset by debt repayments. Contractual Cash Obligations and Other Commercial Commitments There have not been any material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our Form 10-K for the year-ended December 31, 2003. Inflation The rate of inflation, as measured by changes in the consumer price index, did not have a material effect on the sales or operating results of the Company during the periods presented. However, inflation in the future could affect the Company's operating costs. Price changes from suppliers have historically been consistent with inflation and have not had a material impact on the Company's results of operations. Seasonality The Company's operating results are affected by certain seasonal factors. Sales are typically at their lowest during the first quarter due to a reduced level of activity during the winter months. Sales increase during the warmer months beginning in March and continuing through November. Sales drop again slightly in December as the weather cools and also as a result of a reduced level of activity during the holiday season. As a result, the Company reports sales and earnings in the first quarter that are generally lower than that of the remaining quarters. Impact of Recently Adopted Accounting Standards In January 2003, the FASB issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities." This interpretation requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risk and rewards of ownership among their owners and other parties involved. This interpretation, as amended, is effective for all entities subject to this interpretation no later than the end of the first period that ends after March 15, 2004. The adoption of this interpretation did not have an impact on our consolidated financial statements. FORWARD-LOOKING STATEMENTS From time to time in this report and in other written reports and oral statements, references are made to expectations regarding the future performance of WESCO. When used in this context, the words "anticipates," "plans," "believes," "estimates," "intends," "expects," "projects" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Such statements including, but not limited to, WESCO's statements regarding its business strategy, growth strategy, productivity and profitability enhancement, new product and service introductions and liquidity and capital resources are based on management's beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, certain of which are beyond WESCO's control. WESCO's actual results could differ materially from those expressed in any forward-looking statement made by or on behalf of WESCO. In light of these risks and uncertainties there can be no assurance that the forward-looking information will in fact prove to be accurate. Factors that might cause actual results to differ from such forward-looking statements include, but are not limited to, an increase in competition, the amount of outstanding indebtedness, the availability of appropriate acquisition opportunities, availability of key products, functionality of information systems, international operating environments and other risks that are described in WESCO's Annual Report on Form 10-K for the year ended December 31, 2003 which are incorporated by reference herein. WESCO has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS There have not been any material changes to WESCO's exposures to market risk during the six months ended June 30, 2004 that would require an update to the disclosures provided in WESCO's Form 10-K for the year-ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by WESCO in reports that it files under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no significant changes in internal control over financial reporting that occurred during the second fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As previously disclosed by the Company on February 12, 2004, the Audit Committee, following a review of an internal audit report, engaged independent counsel to assess and make findings and recommendations with respect to one branch operation (comprising approximately 2% of the Company's sales). Independent counsel has completed its investigation and reported to the Audit Committee. The matters reviewed by independent counsel related primarily to cash management and undocumented expense reimbursement practices by certain personnel at this branch which were inappropriate and did not follow corporate policies and procedures. Pursuant to a full investigation, independent counsel and the Company's Board of Directors concluded that certain actions at the branch were improper. Management has promptly implemented those remedial steps recommended by its internal auditors in their January 2004 report. In addition, management is taking further actions to implement a remedial plan recommended by the Audit Committee and approved by the Board of Directors to address certain internal control, personnel and operational matters at this branch. These improper actions at the branch had no material effect on the Company's consolidated financial statements. 21
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of WESCO shareholders held on May 19, 2004, Ms. Sandra Beach Lin, Mr. Robert J. Tarr, Jr., and Mr. Kenneth L. Way were reelected as directors of WESCO to serve for three-year terms. Votes cast for Ms. Lin were 37,044,047 and votes withheld were 188,129; votes cast for Mr. Tarr were 36,887,715 and votes withheld were 344,461; votes cast for Mr. Way were 37,071,781 and votes withheld were 160,395. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) promulgated under the Exchange Act. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) promulgated under the Exchange Act. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K On April 21, 2004, WESCO issued a press release announcing its earnings for the first quarter of 2004 and filed a report on Form 8-K under item 12. 22
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on August 9, 2004 on its behalf by the undersigned thereunto duly authorized. WESCO International, Inc. and Subsidiaries By: /s/ Stephen A. Van Oss ---------------------------------- Stephen A. Van Oss Senior Vice President and Chief Financial and Administrative Officer 23
EXHIBIT 31.1 CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT OF 2002 I, Roy W. Haley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of WESCO International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2004 By: /s/ Roy W. Haley ------------------------------------ Roy W. Haley Chairman and Chief Executive Officer
EXHIBIT 31.2 CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT OF 2002 I, Stephen A. Van Oss, certify that: 1. I have reviewed this quarterly report on Form 10-Q of WESCO International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2004 By: /s/ Stephen A. Van Oss ----------------------------------------- Stephen A. Van Oss Senior Vice President and Chief Financial and Administrative Officer
EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of WESCO International, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: August 9, 2004 By: /s/ Roy W. Haley -------------------------------------- Roy W. Haley Chairman and Chief Executive Officer
EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of WESCO International, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: August 9, 2004 By: /s/ Stephen A. Van Oss --------------------------------------- Stephen A. Van Oss Senior Vice President, Chief Financial and Administrative Officer