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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, 1998
Commission file number 333-43225
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723345
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
COMMERCE COURT
FOUR STATION SQUARE, SUITE 700 (412) 454-2254
PITTSBURGH, PENNSYLVANIA 15219 (Registrant's telephone number
(Address of principal executive offices) including area code)
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 ____ No X.
WESCO International, Inc. has been subject to the filing requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934 since August 12,
1998, the effective date of its Registration Statement on Form S-4 (File
No. 333-43225) which registered certain debt instruments.
As of June 30, 1998, WESCO International, Inc. had 500,210 shares and 80,504
shares of Class A and Class B of its common stock outstanding, respectively.
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TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997 2
Condensed Consolidated Statement of Operations for the three
months and six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 14
Signatures 14
Exhibit Index 15
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
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JUNE 30 DECEMBER 31
Dollars in thousands, except par values 1998 1997
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(unaudited)
ASSETS
CURRENT ASSETS
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Cash and cash equivalents $58,929 $7,620
Trade accounts receivable, net of allowance for doubtful accounts of
$7,984 and $10,814, in 1998 and 1997, respectively 179,200 351,170
Other accounts receivable 16,414 17,261
Inventories 335,271 299,406
Income taxes receivable 24,542 3,405
Prepaid expenses and other current assets 3,520 3,699
Deferred income taxes 16,052 14,277
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Total current assets 633,928 696,838
Property, buildings and equipment, net 101,803 95,082
Trademarks, net of accumulated amortization of
$692 and $586, in 1998 and 1997, respectively 3,302 3,408
Goodwill, net of accumulated amortization of $6,146
and $4,522, in 1998 and 1997, respectively 101,635 65,923
Other assets 15,718 9,609
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Total assets $856,386 $870,860
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $392,408 $311,796
Accrued payroll and benefit costs 13,810 27,694
Restructuring reserve 4,533 3,982
Other current liabilities 26,042 17,063
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Total current liabilities 436,793 360,535
Long-term debt 526,962 294,275
Other noncurrent liabilities 7,466 5,875
Deferred income taxes 18,211 16,662
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Total liabilities 989,432 677,347
Redeemable Class A common stock, $.01 par value; 65,484 and 89,306 shares
issued and outstanding, in 1998 and 1997, respectively, and options
(redemption value of redeemable common stock and vested options of
$99,570 and $68,597, in 1998 and 1997, respectively) 12,872 8,978
STOCKHOLDERS' EQUITY
Class A common stock, $.01 par value; 2,000,000 authorized, 434,726 and
933,280 shares issued and outstanding, in 1998 and 1997, respectively 6 9
Class B nonvoting convertible common stock, $.01 par value; 2,000,000
shares authorized, 80,504 issued and outstanding in 1998 - -
Additional capital 324,210 93,319
Retained (deficit) earnings (469,198) 89,366
Common stock to be issued under option - 2,500
Accumulated other comprehensive loss (936) (659)
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Total stockholders' equity (145,918) 184,535
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Total liabilities and stockholders' equity $856,386 $870,860
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
In thousands 1998 1997 1998 1997
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Sales, net $748,307 $659,377 $1,441,755 $1,236,153
Cost of goods sold (exclusive of depreciation and amortization) 615,015 544,679 1,181,769 1,017,115
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Gross profit 133,292 114,698 259,986 219,038
Selling, general and administrative expenses 101,543 91,158 205,107 177,837
Depreciation and amortization 3,372 2,796 6,328 5,567
Recapitalization costs 51,800 - 51,800 -
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Income (loss) from operations (23,423) 20,744 (3,249) 35,634
Interest expense, net 10,278 4,911 16,480 9,709
Other expenses 2,570 - 2,570 -
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Income (loss) before income taxes (36,271) 15,833 (22,299) 25,925
Provision (benefit) for income taxes (18,142) 6,300 (12,693) 10,307
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Net income (loss) $(18,129) $9,533 $(9,606) $15,618
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</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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SIX MONTHS ENDED
JUNE 30
In thousands 1998 1997
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OPERATING ACTIVITIES
Net income (loss) $(9,606) $15,618
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Recapitalization costs 40,500 -
Depreciation and amortization 6,328 5,567
Amortization of debt issuance costs and interest rate caps 331 188
Deferred income taxes (226) (3,105)
Changes in assets and liabilities, excluding the effects of acquisitions:
Sale of trade accounts receivable 249,802 -
Trade and other receivables (12,602) (19,217)
Inventories 1,115 (43,153)
Prepaid and other current assets (20,875) (6,149)
Other assets 5,878 (1,722)
Accounts payable 41,005 39,347
Accrued payroll and benefit costs (14,184) (13,122)
Restructuring reserve (2,170) (830)
Other current and noncurrent liabilities 2,574 (849)
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Net cash provided by (used for) operating activities 287,870 (27,427)
INVESTING ACTIVITIES
Capital expenditures (6,592) (6,030)
Proceeds from the sale of property, buildings and equipment 1,139 1,920
Acquisitions, net of cash acquired (90,641) (13,914)
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Net cash used for investing activities (96,094) (18,024)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 850,228 295,426
Debt issuance costs (10,570) (184)
Repayments of long-term debt (634,228) (219,225)
Recapitalization costs (18,174) -
Repurchase of common stock and options (653,528) -
Proceeds from issuance of common stock 319,999 -
Proceeds from contributed capital 5,806 -
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Net cash (used for) provided by financing activities (140,467) 76,017
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Net change in cash and cash equivalents 51,309 30,566
Cash and cash equivalents at the beginning of period 7,620 -
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Cash and cash equivalents at the end of period $58,929 $30,566
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
WESCO International, Inc. (formerly CDW Holding Corporation) ("Holdings") and
its subsidiaries (collectively, "WESCO"), headquartered in Pittsburgh,
Pennsylvania, is a full-line distributor of electrical supplies and equipment
and currently operates branch locations in the United States, Canada, Mexico,
Puerto Rico and Guam.
Subsequent to the completion in June 1998 of a leveraged recapitalization (see
Note 3), WESCO is 88.7% owned by an investor group led by affiliates of The
Cypress Group L.L.C. ("Cypress") with the remaining interest held by members of
WESCO's management.
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
notes included herein should be read in conjunction with the audited
consolidated financial statements included in WESCO's Registration Statement on
Form S-4 (File No. 333-43225) filed with the Securities and Exchange Commission.
The unaudited condensed consolidated balance sheet as of June 30, 1998, the
unaudited condensed consolidated statement of operations for the three months
and six months ended June 30, 1998 and 1997, and the unaudited condensed
consolidated statement of cash flows for the six months ended June 30, 1998 and
1997, 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. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
ASSET SECURITIZATIONS WESCO accounts for the securitization of accounts
receivable in accordance with Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). At the time the receivables
are sold, the balances are removed from the balance sheet and the related
financial assets controlled are measured at fair value, if practicable. SFAS No.
125 also requires retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold and retained
interests, if any, based on their relative fair values at the date of transfer.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
is required to be adopted in years beginning after June 15, 1999, although early
adoption is permitted. This Statement requires the recognition of the fair value
of any derivative financial instrument on the balance sheet. Changes in fair
value of the derivative and, in certain instances, changes in the fair value of
an underlying hedged asset or liability, are recognized through either income or
as a component of other comprehensive income. Management does not expect this
Statement will have a material impact on the results of operation or financial
position of WESCO.
3. RECAPITALIZATION
On June 5, 1998, Holdings repurchased and retired substantially all of its
common stock from the then existing shareholders for an aggregate consideration
of approximately $653.5 million (the "Equity Consideration"), repaid
approximately $379.1 million of then outstanding indebtedness, and sold common
stock to an investor group led by affiliates of Cypress representing
approximately 88.7% of WESCO for an aggregate cash consideration of $318.1
million ("Cash Equity Consideration"). WESCO funded the Equity Consideration and
the repayment of indebtedness from proceeds of the Cash Equity Consideration,
issuance of approximately $351 million of Senior Subordinated and Senior
Discount Notes, a new $170 million credit facility and the sale of approximately
$250 million of accounts receivable. The transaction was treated as a
recapitalization for financial reporting purposes and, accordingly, the
historical bases of Holdings' assets and liabilities were not affected.
In connection with the recapitalization, WESCO recorded a one-time charge of
$51.8 million primarily related to noncapitalized financing expenses,
professional and legal fees and management compensation costs.
4. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO and certain of its subsidiaries entered into a "Receivables Facility" with
a financial institution and a multi-seller asset-backed commercial paper issuer
whereby it sells on a continuous basis an undivided interest in all eligible
accounts receivable while maintaining a subordinated interest in a portion of
the receivables. Pursuant to the Receivables Facility, WESCO formed WESCO
Receivables Corp., a wholly-owned, special purpose subsidiary ("SPC"). SPC was
formed to purchase, on a revolving basis and not to exceed $300 million, trade
accounts receivables generated by certain subsidiaries of WESCO. WESCO may,
under certain circumstances, increase the size of the Receivables Facility when
the amount of eligible trade receivables exceeds $300 million. The SPC will
transfer to a trust all the receivables and the
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commercial paper issuer will provide financing to the SPC, which in turn will
use such financing to pay a portion of the purchase price of the receivables.
In June 1998, WESCO securitized approximately $340 million of trade accounts
receivable, which includes a subordinated retained interest of approximately $87
million, and, accordingly, approximately $253 million of trade accounts
receivables were removed from the consolidated balance sheet. Net proceeds from
the transaction totaled $250 million and were partially used to complete the
recapitalization discussed in Note 3. WESCO incurred costs associated with the
Receivables Facility of $2.6 million, which principally includes the discount
and loss on the sale of such receivables, partially offset by servicing revenue
associated with the transaction. This amount is recorded as "other expenses" in
the Statement of Operations.
5. ACQUISITIONS
During the first six months of 1998, WESCO completed the following acquisitions
("1998 Acquisitions"):
On January 1, 1998, WESCO acquired the electrical distribution businesses of
Avon Electrical Supplies, Inc., and its affiliates, a leading distributor in
the New York metropolitan area, and Brown Wholesale Electric Company, a
leader in the high-growth Phoenix market.
On May 8, 1998, WESCO acquired certain assets and assumed certain liabilities
of Reily Electric Supply Inc., a distributor headquartered in New Orleans,
Louisiana.
The aggregate purchase price of the 1998 Acquisitions was $110.3 million
resulting in goodwill of $34.0 million. The 1998 Acquisitions were accounted for
under the purchase method of accounting and, accordingly, the results of
operations of the respective companies are included in WESCO's consolidated
financial statements prospectively from the date of acquisition. Pro forma
financial information assuming the transactions occurred as of the beginning of
each year presented would not be materially different from the results reported.
6. LONG TERM DEBT
The following table sets forth WESCO's outstanding indebtedness.
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JUNE 30 DECEMBER 31
In thousands 1998 1997
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Term loans $170,000 -
Revolving facility 6,801 -
Old revolving facility - $226,145
Senior subordinated notes(1) 288,768 -
Senior discount notes(2) 49,066 -
Mortgage notes(3) - 65,291
Other 19,676 3,730
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534,311 295,166
Less current portion (7,349) (891)
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Total $526,962 $294,275
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(1) Net of original issue and purchase discount of $11,232
(2) Net of original issue and purchase discount of $37,934
(3) Net of original issue of $16,601
The term loans and revolving facility borrowings were made pursuant to a credit
agreement ("Credit Agreement") entered into by and between WESCO and certain
financial institutions. The Credit Agreement provides for three term loan
facilities in an aggregate principal amount of $270 million, consisting of
Tranche A, Tranche B and a Delayed Draw Term Loan Facility, and a $100 million
revolving credit facility. Tranche A provides for aggregate borrowings of $80
million, Tranche B provides for aggregate borrowings of $90 million and the
Delayed Draw Term Loan Facility provides for up to $100 million aggregate
principal. The term loan facilities mature in various periods from 2004 through
2006. The revolving credit facility provides for up to $100 million of revolving
credit denominated in U.S. dollars or Canadian dollars. The maximum Canadian
sublimit is approximately $46 million. The revolving credit facility matures in
2004. At June 30, 1998, the aggregate outstanding term loans and revolving
facility borrowings totaled $176.8 million.
Borrowings under the Credit Agreement are collateralized by substantially all
the assets of WESCO and bear rates of interest equal to various indices, at
WESCO's option, such as LIBOR, prime rate or the Federal Funds rate, plus a
borrowing margin based on WESCO's financial performance. At June 30, 1998, the
interest rate on Tranche A and Tranche B was LIBOR (or 5.69%) plus 2.25% and
LIBOR plus 2.50%, respectively.
The Senior Subordinated Notes in an aggregate principal amount of $300 million
were issued by WESCO Distribution, Inc., a wholly-owned subsidiary of Holdings.
The notes are unsecured obligations and are fully and unconditionally guaranteed
by Holdings. The Senior Subordinated Notes bear interest at 9-1/8%, payable
semiannually on June 1 and December 1 beginning December 1, 1998. The notes are
due June 1, 2008. The Senior Subordinated Notes are redeemable at the option of
WESCO, in whole or in part, at any time after June 1, 2003 at certain specified
prices. Prior to June 1, 2003,
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the notes may be redeemed in certain specified instances at certain specified
prices.
The Senior Discount Notes, issued by Holdings, have an aggregate principal
amount of $87 million. The notes were issued with an original issue discount
("OID") of $36.5 million that is being accreted over the period ending June 1,
2003. Beginning June 1, 2003, interest accrues at 11 1/8% payable semiannually
on June 1 and December 1. Approximately $30.9 million of the notes must be
redeemed on June 1, 2003. The remaining notes are due June 1, 2008 and are
redeemable at the option of Holdings, in whole or in part, at any time after
June 1, 2003 at certain specified prices. Prior to June 1, 2003, the notes may
be redeemed in certain specified instances at certain specified prices.
Other borrowings primarily consist of notes issued to sellers in connection with
acquisitions.
At June 30, 1998, the weighted average rate of interest on all indebtedness was
approximately 9.10%. Aggregate principal repayment requirements for all
indebtedness for 1998 and the next five years is as follows:
In thousands
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For the year ending December 31
1998 $1,837
1999 21,662
2000 8,980
2001 13,071
2002 16,530
2003 51,412
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The credit agreements contain various restrictive covenants that, among other
things, impose limitations on (i) dividend payments or certain other restricted
payments or investments; (ii) the incurrence of additional indebtedness and
guarantees or issuance of additional stock; (iii) creation of liens; (iv)
mergers, consolidation or sales of substantially all of WESCO's assets (v)
certain transactions among affiliates; (vi) payments by certain subsidiaries to
Holdings; (vii) on capital expenditures. In addition, the agreements require
WESCO to meet certain leverage, working capital and interest coverage ratios.
7. INCOME TAXES
For the first six months of 1998 and 1997, WESCO recorded income tax benefits of
$12.7 million and income tax expense of $10.3 million, respectively. For the
three months ended June 30, 1998 income tax benefits totaled $18.1 million and
for the three months ended June 30, 1997, income tax expense totaled $6.3
million.
The effective tax rate for the first three months and six months of 1998 were
50.0% and 56.9%, respectively. In the same periods of 1997, the effective tax
rates were 39.8% and 39.7%. The increase in the effective tax rate was primarily
attributable to certain nondeductible recapitalization costs.
8. COMPREHENSIVE INCOME
Comprehensive income and its components was as follows:
In thousands 1998 1997
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For the three months ended June 30
Net income (loss) $(18,129) $9,533
Foreign currency translation
adjustment (344) 5
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Comprehensive income (loss) $(18,473) $9,538
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For the six months ended June 30
Net income (loss) $(9,606) $15,618
Foreign currency translation
adjustment (277) (65)
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Comprehensive income (loss) $(9,883) $15,553
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9. CASH FLOW STATEMENT
Supplemental cash flow information is as follows:
In thousands
Six Months Ended June 30 1998 1997
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Details of acquisitions
Fair value of assets acquired $142,664 $21,498
Fair value of liabilities assumed (32,403) (5,334)
Notes issued to seller (19,620) (2,250)
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Cash paid for acquisitions $90,641 $13,914
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10. OTHER FINANCIAL INFORMATION
In June 1998, WESCO Distribution, Inc. issued $300 million of 9-1/8% Senior
Subordinated Notes. The Senior Subordinated Notes are fully and unconditionally
guaranteed by Holdings on a subordinated basis to all existing and future senior
indebtedness of Holdings. Summarized financial information for WESCO
Distribution, Inc. is as follows:
BALANCE SHEET DATA
JUNE 30
In thousands 1998
- ---------------------------------------------------------------
Current assets $633,928
Noncurrent assets 222,458
Current liabilities 436,793
Long-term debt 477,896
Other noncurrent liabilities 25,677
Total liabilities and stockholder's
equity 856,386
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STATEMENT OF OPERATIONS DATA
In thousands
Six Months Ended June 30 1998
- ---------------------------------------------------------------
Sales, net $1,441,755
Gross profit 259,986
Loss from operations (3,249)
Net loss (9,123)
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11. SUBSEQUENT EVENT
In September 1998, WESCO acquired substantially all the assets and assumed
substantially all liabilities and obligations relating to the operations of
Bruckner Supply Company, Inc. ("Bruckner"), a privately owned company
headquartered in Port Washington, New York. Bruckner is a provider of integrated
supply procurement and outsourcing activities for large industrial companies.
Net sales totaled approximately $222 million in 1997.
The transaction will be accounted for under the purchase method of accounting.
At closing, the purchase price paid at closing was $99.1 million, consisting of
$72.5 million in cash and a noninterest bearing convertible note valued at $26.6
million for financial reporting purposes. The note is automatically convertible
into common stock of WESCO in the event of a public offering of WESCO's common
stock prior to March 31, 2000. The purchase agreement also provides for certain
post-closing adjustments, which would be made in 1998, and for additional
contingent consideration to be paid based on a multiple of earnings before
interest, taxes, depreciation and amortization of Bruckner with respect to
calendar year 1998 and future years through 2004.
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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 consolidated financial statements and notes thereto included
herein and WESCO International, Inc.'s audited Consolidated Financial
Statements, notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in its Registration Statement on
Form S-4 (File No. 333-43225) filed with the Securities and Exchange Commission.
Financial information presented herein for interim periods is unaudited.
OVERVIEW
WESCO International, Inc. ("Holdings") and its subsidiaries (collectively
"WESCO") believes it is the second largest electrical wholesale distributor in
North America, with over 325 branches located in 48 states and nine Canadian
provinces. WESCO sells over 210,000 products, sourced from over 6,000 suppliers,
to more than 130,000 customers. WESCO complements its product offerings with a
range of services and procurement solutions.
RECENT DEVELOPMENTS
During the past six months, WESCO completed several strategic initiatives that
affected the reported results of operations and financial position of WESCO,
including:
RECAPITALIZATION On June 5, 1998, Holdings repurchased substantially all of
its common stock from the then existing shareholders for an aggregate
consideration of approximately $653.5 million (the "Equity Consideration"),
repaid approximately $379.1 million of then outstanding indebtedness and sold
common stock to an investor group led by affiliates of The Cypress Group
L.L.C. ("Cypress") representing approximately 88.7% of WESCO for an aggregate
cash consideration of $318.1 million ("Cash Equity Consideration"). WESCO
funded the Equity Consideration and the repayment of indebtedness from
proceeds of the Cash Equity Consideration, issuance of approximately $351
million of Senior Subordinated and Senior Discount Notes, a new $170 million
credit facility and the sale of approximately $250 million of accounts
receivable.
ACQUISITIONS During the first six months of 1998, WESCO completed three
acquisitions for an aggregate purchase price of $110.3 million. Acquisitions
completed in the first half of 1998 were:
On January 1, 1998, WESCO acquired the electrical distribution businesses
of Avon Electrical Supplies, Inc., and its affiliates, a leading
distributor in the New York metropolitan area, and Brown Wholesale
Electric Company, a leader in the high-growth Phoenix market.
On May 8, 1998, WESCO acquired certain assets and assumed certain
liabilities of Reily Electric Supply Inc., a distributor headquartered in
New Orleans, Louisiana.
The acquisitions were accounted for under the purchase method of accounting
and, therefore, the results of operations of the respective companies are
included in WESCO's consolidated financial statements prospectively from the
date of acquisition.
In September 1998, WESCO acquired certain assets and assumed certain liabilities
of Bruckner Supply Company, Inc. ("Bruckner"), a provider of integrated supply
procurement services for large industrial companies. Bruckner's annual revenues
approximated $222 million and $145 million in 1997 and 1996, respectively. The
purchase price paid at closing was $99.1 million, consisting of $72.5 million in
cash and a convertible note payable valued at $26.6 million. The purchase
agreement also provides for certain post-closing adjustments, which would be
made in 1998, and for additional contingent consideration to be paid based on a
multiple of Bruckner's annual earnings before interest, taxes, depreciation and
amortization with respect to calendar year 1998 and future years through 2004.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth certain summarized information with respect to
WESCO's results of operations for the periods indicated:
SUMMARY RESULTS OF OPERATIONS
Dollars in millions
Six Months Ended June 30 1998 1997
- ---------------------------------------------------------------
Sales, net $1,441.8 $1,236.1
Gross profit 260.0 219.0
Gross profit margin 18.0% 17.7%
Recapitalization costs $51.8 -
Operating income (loss) (3.2) $35.6
Net income (loss) (9.6) 15.6
EBITDA (1) 54.9 41.2
- ---------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation, amortization,
recapitalization costs and net losses on accounts receivable
securitization
For the first six months of 1998, WESCO's net loss totaled $9.6 million compared
with net income of $15.6 million in the year-earlier period. The results for
1998 included a one-time, pre-tax charge of $51.8 million related to costs
associated with the recapitalization and $2.6 million of net losses on the sale
of accounts receivable completed in June 1998.
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Excluding the recapitalization charge and losses on the accounts receivable
securitization completed in connection with the recapitalization, EBITDA
increased 33.3% to $54.9 million for the first half of 1998 compared to $41.2
million in the same period of 1997. EBITDA is an alternative measure of
operating performance considered by certain investors and differs from measures
determined in accordance with generally accepted accounting principles. Since
EBITDA is not calculated identically by all companies, the presentation set
forth herein may not be comparable to other companies.
SALES AND PROFIT MARGINS
Dollars in millions
Six Months Ended June 30 1998 1997 CHANGE
- ---------------------------------------------------------------
Sales, net $1,441.8 $1,236.1 16.6%
Cost of sales 1,181.8 1,017.1 16.2
-----------------------
Gross profit $260.0 $219.0 18.7
Gross profit margin 18.0% 17.7%
- ---------------------------------------------------------------
NET SALES For the first six months of 1998, net sales increased 16.6%, or $205.6
million, to $1.4 billion compared with $1.2 billion in the comparable period of
1997. The increase was primarily due to $113.9 million of net sales contributed
by companies acquired in the first half of 1998 as well as sales from existing
operations.
GROSS PROFIT Gross profit for the first half of 1998 totaled $260.0 million,
compared with $219.0 million in the year-earlier period. The increase of $41.0
million, or 18.7%, was primarily due to higher sales volume from both
acquisitions and existing operations. Gross profit as a percentage of net sales
increased to 18.0% in the first six months of 1998 from 17.7% in the same period
of 1997. The increase in the gross profit margin was primarily due to the
increase in higher margin stock sales, higher margin sales associated with
acquired companies and other initiatives to improve gross margins.
OPERATING EXPENSES
Dollars in millions
Six Months Ended June 30 1998 1997 CHANGE
- --------------------------------------------------------------
Selling, general and
administrative (SG&A) $205.1 $177.8 15.4%
Depreciation and amortization
6.3 5.6 12.5
Recapitalization costs 51.8 - -
---------------------
Total operating expenses $263.2 $183.4 43.5
- --------------------------------------------------------------
Operating expenses for the first six months of 1998 increased $79.8 million
primarily due to $51.8 million in one-time costs associated with the
recapitalization completed in June 1998 and the operating expenses of purchased
businesses. Excluding the one-time recapitalization costs, operating expenses
increased $28.0 million, or 15.3%. Approximately $14.2 million of this increase
was attributable to businesses acquired in 1998 and the remainder was primarily
due to increased operating costs associated with revenue growth.
Selling, general and administrative ("SG&A") expenses for the first six months
of 1998 totaled $205.1 million compared with $177.8 million in the first half of
1997. The increase was primarily due to expenses associated with companies
acquired in 1998. As a percent of net sales, SG&A expenses declined to 14.2%
compared with 14.4% a year ago, reflecting cost containment initiatives.
In connection with the recapitalization completed in June 1998, WESCO recorded a
one-time charge of $51.8 million primarily related to various financing
expenses, professional and legal fees and management compensation costs.
INTEREST AND OTHER EXPENSES Interest expense totaled $16.5 million, an increase
of $6.8 million in the period-to-period comparison. The increase was primarily
due to the higher levels of borrowings associated with acquisitions and the
recapitalization.. As a result of the recapitalization completed in June 1998,
management expects interest expense in subsequent periods to be higher compared
to comparable periods in 1997.
WESCO recorded a $2.6 million loss on the sale of $250 million of accounts
receivable. This loss is recorded as other expenses in the Statement of
Operations.
INCOME TAXES For the first six months of 1998, WESCO recorded income tax
benefits of $12.7 million compared with tax expense of $10.3 million in the
year-earlier period. The tax benefits in 1998 were primarily due to the one-time
$51.8 million recapitalization charge recorded in the current period. The
effective tax rate increased to 56.9% compared with 39.8% in the year-earlier
period, primarily due to certain nondeductible recapitalization costs. Excluding
the recapitalization costs, the effective tax rate was 39.0% for first six
months of 1998.
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<PAGE> 12
THREE MONTHS ENDED JUNE 30, 1998 COMPARED
WITH THREE MONTHS ENDED JUNE 30, 1997
The following table sets forth certain summarized information with respect to
WESCO's results of operations for the periods indicated:
SUMMARY RESULTS OF OPERATIONS
Dollars in millions
Three Months Ended June 30 1998 1997
- ---------------------------------------------------------------
Sales, net $748.3 $659.4
Gross profit 133.3 114.7
Gross profit margin 17.8% 17.4%
Recapitalization costs $51.8 -
Operating income (loss) (23.4) $20.7
Net income (loss) (18.1) 9.5
EBITDA (1) 31.7 23.5
- ---------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation, amortization,
recapitalization costs and net losses on accounts receivable securitization
For the 1998 second quarter, WESCO's net loss totaled $18.1 million compared
with net income of $9.5 million in the year-earlier period. The results for the
second quarter of 1998 included a one-time, pre-tax charge of $51.8 million
related to costs associated with the recapitalization and $2.6 million of net
losses on the sale of accounts receivable discussed earlier.
Excluding the recapitalization charge and losses on the accounts receivable
securitization completed in connection with the recapitalization, EBITDA
increased 34.9% to $31.7 million for the second quarter of 1998 compared to
$23.5 million in the same period of 1997.
SALES AND PROFIT MARGINS
Dollars in millions
Three Months Ended June 30 1998 1997 CHANGE
- ---------------------------------------------------------------
Sales, net $748.3 $659.4 13.5%
Cost of sales 615.0 544.7 12.9
----------------------
Gross profit $133.3 $114.7 16.2
Gross profit margin 17.8% 17.4%
- ---------------------------------------------------------------
NET SALES For the second quarter of 1998, net sales increased 13.5%, or $88.9
million, to $748.3 million compared with $659.4 million in the comparable period
of 1997. The increase was primarily due to $68.7 million of net sales
contributed by companies acquired in the first half of 1998 as well as increased
sales from existing operations.
GROSS PROFIT Gross profit for the second quarter of 1998 totaled $133.3 million,
compared with $114.7 million in the year-earlier period. The increase of $18.6
million, or 16.2%, was primarily due to higher sales volume from both
acquisitions and existing operations. Gross profit as a percentage of net sales
increased to 17.8% in the second quarter 1998 from 17.4% in the same period of
1997. The increase in the gross profit margin was primarily due to the increase
in higher margin stock sales, higher margin sales associated with acquired
companies and other initiatives to improve gross margins.
OPERATING EXPENSES
Dollars in millions
Three Months Ended June 30 1998 1997 CHANGE
- --------------------------------------------------------------
SG&A $101.5 $91.2 11.3%
Depreciation and amortization
3.4 2.8 21.4
Recapitalization costs 51.8 - -
---------------------
Total operating expenses $156.7 $94.0 66.7
- --------------------------------------------------------------
Operating expenses for the second quarter of 1998 increased $62.7 million
primarily due to $51.8 million in one-time costs associated with the
recapitalization completed in June 1998 and the operating expenses of purchased
businesses. Excluding the one-time recapitalization costs, operating expenses
increased $10.9 million, or 11.6%. Approximately $8.4 million of the increase is
attributable to businesses acquired in 1998.
SG&A expenses for the 1998 second quarter totaled $101.5 million compared with
$91.2 million in second quarter of 1997. The increase was primarily due to
expenses associated with the companies acquired in 1998. As a percent of net
sales, SG&A expenses declined to 13.6% compared with 13.8% a year ago,
reflecting cost containment initiatives.
In connection with the recapitalization completed in June 1998, WESCO recorded a
one-time charge of $51.8 million, the components of which were discussed
earlier.
INTEREST AND OTHER EXPENSES Interest expense totaled $10.3 million, an increase
of $5.4 million in the period-to-period comparison. The increase was primarily
due to the higher levels of borrowings associated with acquisitions and the
recapitalization.
WESCO recorded a $2.6 million loss on the sale of $250 million of accounts
receivable. This loss is recorded as other expenses in the statement of
operations.
INCOME TAXES For the second quarter of 1998, WESCO recorded income tax benefits
of $18.1 million compared with tax expense of $6.3 million in the year-earlier
period. The tax benefits in 1998 were primarily due to the one-time $51.8
million recapitalization costs recorded in the current period. The effective tax
rate increased to 50.0% compared with 39.8% in the prior-year period, primarily
due to certain nondeductible recapitalization costs. Excluding the
recapitalization costs, the effective tax rate was 39.0% for second quarter of
1998.
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<PAGE> 13
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES In June 1998, WESCO completed a
recapitalization. Following the recapitalization, total assets were $856 million
at June 30, 1998 and $871 million at December 31, 1997. Cash and cash
equivalents increased $51 million to $59 million at June 30, 1998, and adjusted
working capital (defined as trade accounts receivable plus inventories less
accounts payable) was $130 million and $339 million at June 30, 1998 and
December 31, 1997, respectively. In addition, stockholders' equity was a deficit
of $146 million at June 30, 1998 compared with total stockholders' equity of
$185 million at December 31, 1997. The changes in these categories, as well as
long-term debt discussed below, reflect the effects of the cash equity
contribution, repurchase of stock, debt refinancing, and sale of accounts
receivable completed in connection with the recapitalization.
As a result of the recapitalization completed in June 1998, WESCO has increased
its debt as set forth below.
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
In thousands 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Term loans $170,000 -
Revolving facility 6,801 -
Old revolving facility - $226,145
Senior subordinated notes(1) 288,768 -
Senior discount notes(2) 49,066 -
Mortgage notes(3) - 65,291
Other 19,676 3,730
--------------------------
534,311 295,166
Less current portion (7,349) (891)
--------------------------
Total $526,962 $294,275
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Net of original issue discount and purchase discount of $11,232
(2) Net of original issue discount and purchase discount of $37,934
(3) Net of original issue discount of $16,601
The Term Loans and Revolving Facility borrowings were made pursuant to a credit
agreement ("Credit Agreement") entered into by and between WESCO, certain of its
subsidiaries and certain financial institutions. The Credit Agreement provides
for three term loan facilities consisting of Tranche A, Tranche B and a Delayed
Draw Term Loan Facility, and a $100 million revolving credit facility. Tranche A
provides for aggregate borrowings of $80 million, Tranche B provides for
aggregate borrowings of $90 million and the Delayed Draw Term Loan Facility
provides for up to $100 million aggregate principal. Borrowings under the Credit
Agreement bear rates of interest equal to various indices, at WESCO's option,
such as LIBOR, prime rate or the Federal Funds rate, plus a borrowing margin
based on WESCO's financial performance. At June 30, 1998, the interest rate on
Tranche A and Tranche B was LIBOR (or 5.69%) plus 2.25% and LIBOR plus 2.50%,
respectively. Term Loan principal repayments are $500 thousand in the second
half of 1998, and $4.5 million, $8.5 million, $12.5 million, $16.5 million and
$20.5 million in each of the next five years beginning in 1999.
The Revolving Facility, which matures in 2004, provides for up to $100 million
of revolving credit denominated in U.S. dollars or Canadian dollars. The maximum
Canadian sublimit is approximately $46 million. At June 30, 1998, approximately
$6.8 million was outstanding under the Revolving Facility.
The Senior Subordinated Notes were issued with an original issue discount
("OID") of $975 thousand that is being accreted over the life of the notes. The
Senior Subordinated Notes bear interest at 9-1/8%, payable semiannually on June
1 and December 1 beginning in 1998. The notes are due June 1, 2008 and are
redeemable at the option of WESCO, in whole or in part, at any time after June
1, 2003 at certain specified prices. Prior to June 1, 2003, the notes may be
redeemed in certain specified instances at certain specified prices.
The Senior Discount Notes, issued by Holdings, have an aggregate principal
amount of $87 million. The notes were issued with OID of $36.5 million that is
being accreted over the period ending June 1, 2003. Beginning June 1, 2003,
interest accrues at 11-1/8% payable semiannually on June 1 and December 1.
Approximately $30.9 million of the notes must be redeemed on June 1, 2003. The
remaining notes are due June 1, 2008 and are redeemable at the option of WESCO,
in whole or in part, at any time after June 1, 2003 at certain specified prices.
Prior to June 1, 2003, the notes may be redeemed in certain specified instances
at certain specified prices.
At June 30, 1998, the weighted average rate of interest on all indebtedness
was approximately 9.10%.
An analysis of cash flows for the first six months of 1998 and 1997 follows:
OPERATING ACTIVITIES For the first six months of 1998, cash provided by
operating activities totaled $287.9 million compared to cash used by
operating activities of $27.4 million for the year-earlier period. Cash
provided by operations in the first six months of 1998 included proceeds of
$249.8 million from the sale of accounts receivable completed in connection
with the recapitalization. Excluding this transaction, operating activities
provided $38.1 million. On this basis, the period-to-period variance in
operating cash flow was primarily due to higher operating income before
recapitalization costs and improved working capital performance.
INVESTING ACTIVITIES Net cash used in investing activities was $96.1 million
for the first half of 1998, compared to $18.0 million for the same period in
1997, primarily reflecting investments in businesses acquired in the current
period.
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<PAGE> 14
FINANCING ACTIVITIES Cash used for financing activities totaled $140.5
million for the first six months of 1998 compared to $76.0 million provided
by financing activities in the same period a year ago, primarily reflecting
the recapitalization completed in June 1998.
In addition to operations and the Credit Agreement, liquidity is provided
by WESCO's "Receivables Facility", an agreement between WESCO, a financial
institution and a multi-seller asset-backed commercial paper issuer. Pursuant
to the Receivables Facility WESCO formed a wholly-owned, special purpose
subsidiary ("SPC") to purchase, on a revolving basis and not to exceed $300
million, trade accounts receivables generated by certain subsidiaries of WESCO.
WESCO may, under certain circumstances, increase the size of the Receivables
Facility when the amount of eligible trade receivables exceed $300 million. The
SPC's purchase of the receivables is financed by the commercial paper issuer.
WESCO's liquidity needs arise from seasonal working capital requirements,
capital expenditures, debt service obligations and acquisitions. WESCO intends
to fund its working capital, capital expenditures and debt service requirements
through cash flows generated from operations, borrowings under various credit
agreements and/or cash from the receivable securitization facility. Management
believes that cash generated from operations, together with amounts under the
Credit Agreement and the receivables securitization facility, will be sufficient
to meet WESCO's working capital, capital expenditure and other cash needs,
including financing for acquisitions, in the foreseeable future. There can be no
assurance however, that this will be the case. Management may consider other
options available to them in connection with future liquidity needs, including
the issuance of additional debt and equity securities.
SUBSEQUENT EVENT
In September 1998, WESCO completed the Bruckner acquisition. The purchase price
paid at closing was $99.1 million consisting of (i) $72.5 million in cash,
funded from $60.5 million in operating funds and $12.0 million of borrowings
under the Revolving Facility; and (ii) a convertible note payable valued at
$26.6 million for financial reporting purposes and due March 31, 2000.
The purchase agreement also provides for additional contingent consideration to
be paid based on post-closing adjustments and contingent consideration based on
a multiple of Bruckner's EBITDA in future annual periods through
2004.
MARKET RISK
Approximately 90% of WESCO's net sales are generated from operations in the
United States and 9% from Canada. The remainder is conducted in Mexico, Puerto
Rico and Guam. To the extent operations are conducted in currencies other than
the U.S. dollar, WESCO is subject to certain risks associated with foreign
currency valuation fluctuations. WESCO does not believe such valuation risk is
material to its results of operation or financial position.
YEAR 2000
WESCO is in the process of modifying, upgrading or replacing its computer
software applications and systems to accommodate the "Year 2000" changes
required for correct processing of information based on dates in the year 2000
and beyond. Management does not expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations.
WESCO believes that it will be able to achieve compliance by the middle of 1999,
and does not currently anticipate any material disruption in its operations.
WESCO is conducting Year 2000 compliance surveys of its suppliers and key
customers to assess their readiness. In the event that WESCO or any of its
significant suppliers or key customers do not successfully achieve Year 2000
compliance, WESCO's business or operations could be adversely affected.
FORWARD-LOOKING STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding 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, growth trends in the industry and various markets, acquisitions,
international expansion, 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. These and other risks are set forth in WESCO's Registration
Statement on Form S-4 (File No. 333-43225). 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,
general domestic and global economic conditions, competition, and customer
demands. 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.
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<PAGE> 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
EXHIBITS Exhibit 27, Financial Data Schedule, is filed herewith.
Copies of this Exhibit may be retrieved electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
without charge by writing to Steven A. Burleson, Vice President, Controller,
WESCO at Commerce Court, Four Station Square, Suite 700, Pittsburgh,
Pennsylvania 15219. Requests may also be directed to (412) 454-2500.
REPORTS ON FORM 8-K
On September 24, 1998, WESCO filed a Current Report on Form 8-K, dated September
11, 1998, pursuant to Item 2 to report it acquired substantially all of the
assets and assumed substantially all the liabilities and obligations relating to
the operations of Bruckner Supply Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on September
24, 1998, on its behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By: /s/ David F. McAnally
----------------------------------------
David F. McAnally
Executive Vice President, Treasurer
(principal financial officer)
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<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
27 Financial Data Schedule
15
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WESCO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESCO
INTERNATIONAL, INC. AND SUBSIDIARIES' UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 58,929
<SECURITIES> 0
<RECEIVABLES> 187,184
<ALLOWANCES> 7,984
<INVENTORY> 335,271
<CURRENT-ASSETS> 633,928
<PP&E> 101,803
<DEPRECIATION> 0
<TOTAL-ASSETS> 856,386
<CURRENT-LIABILITIES> 436,793
<BONDS> 526,962
0
0
<COMMON> 6
<OTHER-SE> (145,924)
<TOTAL-LIABILITY-AND-EQUITY> 856,386
<SALES> 1,441,755
<TOTAL-REVENUES> 1,441,755
<CGS> 1,181,769
<TOTAL-COSTS> 1,445,004
<OTHER-EXPENSES> 2,570
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,480
<INCOME-PRETAX> (22,299)
<INCOME-TAX> (12,693)
<INCOME-CONTINUING> (9,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,606)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
