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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
For the quarterly period ended MARCH 31, 1999
Commission file number 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723345
(State or other jurisdiction of (IRS Employer Identification No.)
of incorporation or organization)
COMMERCE COURT
FOUR STATION SQUARE, SUITE 700
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2254
(Address of principal executive offices) (Registrant's telephone number,
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 .
--- ---
As of April 30, 1999, WESCO International, Inc. had 30,121,372 shares and
4,653,131 shares of common stock and Class B common stock outstanding,
respectively.
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 (unaudited) 2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1999 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1999 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 14
Signatures 15
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</TABLE>
1
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
Dollars in thousands, except par values 1998 1999
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,093 $ 27,951
Trade accounts receivable, net of allowance for doubtful accounts of
$8,082 and $6,805 in 1998 and 1999, respectively 181,511 182,755
Other accounts receivable 22,265 22,010
Inventories 343,764 349,111
Income taxes receivable 7,329 7,417
Prepaid expenses and other current assets 2,892 4,993
Deferred income taxes 16,217 14,449
---------------------------------
Total current assets 582,071 608,686
Property, buildings and equipment, net 107,596 112,425
Goodwill and other intangibles, net of accumulated amortization
of $10,163 and $11,955 in 1998 and 1999, respectively 234,049 247,172
Other assets 26,806 26,642
---------------------------------
Total assets $ 950,522 $ 994,925
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 378,590 $ 397,107
Accrued payroll and benefit costs 19,614 19,895
Current portion of long-term debt 16,592 12,185
Other current liabilities 51,671 74,890
---------------------------------
Total current liabilities 466,467 504,077
Long-term debt 579,238 582,632
Other noncurrent liabilities 7,040 7,190
Deferred income taxes 18,832 18,873
---------------------------------
Total liabilities 1,071,577 1,112,772
Commitments and contingencies
Redeemable Class A common stock, $.01 par value; 4,901,902 issued and
outstanding in 1998 and 1999 (redemption value of redeemable common
stock and vested options of $130,267 and $169,901 in 1998
and 1999, respectively) 21,506 21,506
STOCKHOLDERS' EQUITY:
Class A common stock, $.01 par value; 210,000,000 shares authorized, 25,209,817
and 25,219,470 shares issued and outstanding in 1998 and 1999, respectively 252 252
Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares
authorized, 4,653,131 issued and outstanding in 1998 and 1999 46 46
Additional capital 326,783 326,815
Retained earnings (deficit) (468,220) (465,303)
Accumulated other comprehensive income (loss) (1,422) (1,163)
---------------------------------
Total stockholders' equity (142,561) (139,353)
---------------------------------
Total liabilities and stockholders' equity $ 950,522 $ 994,925
=================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
2
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands, except share data 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales, net $693,448 $777,415
Cost of goods sold 566,754 638,622
--------------------------
Gross profit 126,694 138,793
Selling, general and administrative expenses 103,564 110,380
Depreciation and amortization 2,956 4,499
--------------------------
Income from operations 20,174 23,914
Interest expense, net 6,202 14,459
Other expenses -- 4,614
--------------------------
Income before income taxes 13,972 4,841
Provision for income taxes 5,449 1,924
--------------------------
Net income $ 8,523 $ 2,917
==========================
Earnings per common share:
Basic $ 0.14 $ 0.08
==========================
Diluted $ 0.13 $ 0.08
==========================
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
3
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands 1998 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,523 $ 2,917
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,956 4,499
Accretion of original issue and amortization of purchase discounts 1,299 2,408
Amortization of debt issuance costs and interest rate caps 121 460
(Gain) loss on sale of property, buildings and equipment 10 (21)
Deferred income taxes (2,099) 1,761
Changes in assets and liabilities, excluding the effects of acquisitions:
Sale of trade accounts receivable -- 20,000
Trade and other receivables (4,181) (18,187)
Inventories 6,302 (2,045)
Prepaid expenses and other current assets 467 (2,156)
Other assets (2) (160)
Accounts payable 3,581 29,441
Accrued payroll and benefit costs (12,129) 221
Other current and noncurrent liabilities 8,332 9,661
-----------------------------
Net cash provided by operating activities 13,180 48,799
INVESTING ACTIVITIES:
Capital expenditures (3,668) (6,247)
Proceeds from the sale of property, buildings and equipment 7 21
Advances to affiliates -- (1,877)
Acquisitions, net of cash acquired (43,951) (3,932)
-----------------------------
Net cash used by investing activities (47,612) (12,035)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 225,906 125,294
Repayments of long-term debt (182,186) (142,232)
Debt issuance costs (204) --
Proceeds from issuance of common stock and exercise of stock options 1,701 32
-----------------------------
Net cash provided (used) by financing activities 45,217 (16,906)
-----------------------------
Net change in cash and cash equivalents 10,785 19,858
Cash and cash equivalents at the beginning of period 7,620 8,093
-----------------------------
Cash and cash equivalents at the end of period $ 18,405 $ 27,951
=============================
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
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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 branch locations in the United
States, Canada, Mexico, Puerto Rico, Guam, Singapore and the United Kingdom.
Subsequent to the completion in June 1998 of a leveraged recapitalization,
WESCO was substantially owned by an investor group led by affiliates of The
Cypress Group L.L.C. ("Cypress") with WESCO's management retaining the remaining
interest.
On May 11,1999, WESCO announced the pricing of its initial public offering
of 11,183,750 shares of common stock at $18.00 per share. The net proceeds of
approximately $187 million will be used to repay existing indebtedness
(see Note 11).
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 1998 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The unaudited condensed consolidated balance sheet as of March 31, 1999, and
the unaudited condensed consolidated statements of operations and cash flows for
the three months ended March 31, 1998 and 1999, 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.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for fiscal 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.
5
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3. RECAPITALIZATION
On June 5, 1998, WESCO repurchased and retired 61,862,068 shares of common
stock held by certain shareholders for net consideration of approximately $653.5
million ("Equity Consideration"). In addition, WESCO repaid approximately $379.1
million of then outstanding indebtedness, and sold 29,604,351 shares of 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 Contribution") (collectively, "Recapitalization").
Existing management retained approximately 11.3% interest in WESCO after the
Recapitalization. WESCO funded the Equity Consideration and the repayment of
indebtedness from proceeds of the Cash Equity Contribution, 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.
4. ACCOUNTS RECEIVABLE SECURITIZATION
WESCO and certain of its subsidiaries entered into an agreement with a
financial institution and a multi-seller asset-backed commercial paper issuer
("Receivables Facility") 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. As of December 31, 1998 and March 31,
1999, securitized accounts receivable totaled $360.1 million and $401.6 million,
respectively, of which the subordinated retained interest was $84.1 million and
$105.3 million, respectively. Accordingly, $276.0 million and $296.3 million of
accounts receivable balances were removed from the consolidated balance sheet at
December 31, 1998 and March 31, 1999. Net proceeds from the transactions totaled
$274.2 million in 1998 and $20.0 million in the first quarter of 1999. Proceeds
from securitized receivables were used primarily to complete the
Recapitalization discussed in Note 3 and for general working capital needs.
During the first quarter of 1999, WESCO incurred costs associated with the
Receivables Facility of $4.6 million, primarily related to the discount and loss
on the sale of such receivables, partially offset by related servicing revenue.
This amount is recorded as other expenses in the condensed consolidated
statement of operations.
5. ACQUISITIONS
On September 11, 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 following unaudited pro forma information assumes that the Bruckner
acquisition had occurred as of January 1, 1998. Adjustments to arrive at the pro
forma information include, among others, those related to acquisition financing,
amortization of goodwill and the related tax effects of such adjustments at an
assumed rate of 39%.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
In thousands MARCH 31, 1998
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<S> <C>
Sales, net $759,740
Net income 9,352
Basic earnings per share 0.15
Diluted earnings per share 0.13
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</TABLE>
The pro forma financial information does not purport to present what WESCO's
results of operations would have been if the Bruckner acquisition had actually
occurred as of January 1, 1998, or to project WESCO's results of operations for
any future period.
6
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6. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
Dollars in thousands, except share data 1998 1999
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<S> <C> <C>
Net income $8,523 $2,917
Interest on convertible debt 85 406
-------------------------
Net income used in diluted earnings per share $8,608 $3,323
=========================
Weighted average common shares outstanding used
in computing basic earnings per share 59,188,430 34,768,068
Common shares issuable upon exercise of
dilutive stock options 8,059,565 3,809,153
Assumed conversion of convertible debt 721,203 2,579,975
-------------------------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share 67,969,198 41,157,196
=========================
Basic earnings per share $0.14 $0.08
Diluted earnings per share 0.13 0.08
---------------------------------------------------------------------------------
</TABLE>
7. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $8,523 $2,917
Foreign currency translation adjustment 67 259
------------------
Comprehensive income $8,590 $3,176
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</TABLE>
8. CASH FLOW STATEMENT
Supplemental cash flow information with respect to acquisitions was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands 1998 1999
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<S> <C> <C>
Details of acquisitions
Fair value of assets acquired $79,691 $6,994
Fair value of liabilities assumed (20,970) (3,062)
Notes issued to seller (14,770) --
-------------------
Cash paid for acquisitions $43,951 $3,932
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</TABLE>
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<PAGE> 9
9. 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 WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Summarized financial
information for WESCO Distribution, Inc. is as follows:
<TABLE>
<CAPTION>
BALANCE SHEET DATA
DECEMBER 31 MARCH 31
In thousands 1998 1999
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<S> <C> <C>
Current assets $582,071 $608,686
Noncurrent assets 368,451 386,239
Current liabilities 466,467 504,077
Long-term debt 527,167 528,974
Other noncurrent liabilities 25,872 26,063
Total liabilities and stockholder's equity 950,522 994,925
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</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
THREE MONTHS ENDED
In thousands MARCH 31, 1999
-------------------------------------------------------------------------------
<S> <C>
Sales, net $777,415
Gross profit 138,793
Income from operations 23,914
Net income 4,504
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</TABLE>
Prior to the June 5, 1998 issuance of the senior discount notes, the
financial information of WESCO Distribution, Inc. was identical to that of
WESCO presented herein.
10. SEGMENTS
In 1998, WESCO adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which established standards for
disclosure of operating segments under the "management approach." For purposes
of this standard, WESCO is engaged principally in one line of business-the sale
of electrical products and maintenance, repair and operating supplies.
8
<PAGE> 10
11. SUBSEQUENT EVENTS
Stock Split
On April 11, 1999, the Board of Directors approved a 57.8 to one stock split
effected in the form of a stock dividend of WESCO's common stock. The Board of
Directors also reclassified the Class A common stock into common stock,
increased the authorized common stock to 210,000,000 shares and the authorized
Class B common stock to 20,000,000 shares and authorized 20,000,000 shares of
$.01 par preferred stock, all effective May 11, 1999. In this report, all per
share amounts and number of shares have been restated to reflect the stock
split.
Initial Public Offering
On May 11, 1999, WESCO announced the pricing of its initial public offering
of 9,725,000 shares of common stock ("Offering") at $18.00 per share. In
connection with the Offering, certain employee rights to require WESCO to
repurchase outstanding redeemable common stock will be terminated and
approximately $31 million of convertible notes will be converted into common
stock. Net proceeds from the Offering, including the net proceeds from the
exercise of the underwriters' overallotment to purchase an additional 1,458,750
shares of common stock, will be approximately $187 million. The net proceeds
will be used to retire all of the outstanding senior discount notes and to repay
all or a portion of the revolving credit and term loan facilities. Pending
application of the Offering net proceeds, WESCO may borrow under the delayed
draw term loan facility to reduce further certain outstanding indebtedness.
As a result of the early extinguishment of the debt obligations, WESCO
expects to record in the second quarter of 1999 an extraordinary charge of
approximately $7 million, after-tax, relating to the write-off of unamortized
debt issuance costs and payment of a premium associated with the retirement of
the senior discount notes. This extraordinary charge does not include the effect
of other anticipated refinancing initiatives.
Long-Term Incentive Plan
On April 26, 1999, the Board of Directors approved the Long-Term Incentive
Plan ("LTIP"). The LTIP provides for stock participation in the form of options,
restricted stock awards and performance awards by certain key employees of
WESCO. The LTIP covers a maximum of 6,936,000 shares of WESCO's common stock.
The exercise price is determined by the Compensation Committee of the Board of
Directors to represent the fair market value at the date of grant. Each award
terminates on the tenth anniversary of its grant date unless sooner under
certain conditions.
9
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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 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 1998 Annual Report on Form 10-K.
GENERAL
WESCO is a leading distributor of electrical products and other industrial
MRO supplies and related services in North America. WESCO has over 330 branches
and five distribution centers strategically located in 48 states, nine Canadian
provinces, Puerto Rico, Guam, Mexico, the United Kingdom and Singapore. WESCO
serves over 130,000 customers worldwide, offering over 1,000,000 products from
over 23,000 suppliers. WESCO's 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 90% of WESCO's net sales are generated from operations
in the U.S., 9% from Canada and the remainder from other countries.
RECENT DEVELOPMENTS
Recent developments affecting the results of operations and financial
position of WESCO include the following:
Initial Public Offering. On May 11, 1999, WESCO announced the pricing of its
initial public offering of 9,725,000 shares of common stock ("Offering") at
$18.00 per share. In connection with the Offering, certain employee rights to
require WESCO to repurchase outstanding redeemable common stock will be
terminated and approximately $31 million of convertible notes will be converted
into common stock. Net proceeds from the Offering, including the net proceeds
from the exercise of the underwriters' overallotment to purchase an
additional 1,458,750 shares of common stock, will be approximately $187 million.
The net proceeds will be used to retire all of the outstanding senior discount
notes and to repay all or a portion of the revolving credit and term loan
facilities. Pending application of the Offering net proceeds, WESCO may borrow
under the delayed draw term loan facility to reduce further certain outstanding
indebtedness.
As a result of the early extinguishment of the debt obligations, WESCO
expects to record in the second quarter of 1999 an extraordinary charge of
approximately $7 million, after-tax, relating to the write-off of unamortized
debt issuance costs and payment of a premium associated with the retirement of
the senior discount notes. As a result of certain other anticipated refinancing
initiatives, WESCO may incur in the second quarter an additional extraordinary
charge of approximately $3 million, after-tax.
RESULTS OF OPERATIONS
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands 1998 1999
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<S> <C> <C>
Sales, net 100.0% 100.0%
Gross profit 18.3 17.9
Selling, general and administrative expenses 14.9 14.2
Depreciation and amortization 0.5 0.6
-----------------
Income from operations 2.9 3.1
Interest expense 0.9 1.9
Other expense - 0.6
-----------------
Income before income taxes 2.0 0.6
Income taxes 0.8 0.2
-----------------
Net income 1.2% 0.4%
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</TABLE>
10
<PAGE> 12
First Quarter 1999 versus First Quarter 1998
Net Sales. Sales in the first quarter of 1999 increased $84.0 million, or
12.1%, to $777.4 million compared with $693.4 million in the prior-year quarter,
primarily due to sales growth attributable to acquired companies. The mix of
direct shipment sales increased to approximately 46% in the first quarter of
1999 from 39% in the first quarter of 1998 as a result of the Bruckner
acquisition completed in September 1998. Substantially all of Bruckner's sales
are direct shipment.
Gross Profit. Gross profit for the first quarter of 1999 increased $12.1
million to $138.8 million from $126.7 million for the first quarter of 1998.
Gross profit margin declined to 17.9% in the current-year quarter from 18.3% in
the first quarter of 1998. This decrease resulted from a higher proportion of
direct ship sales attributable to the Bruckner acquisition. Direct ship gross
margins are lower than those of other sales; however, operating profit margins
are often higher, since the product handling and fulfillment costs associated
with direct shipments are much lower. Excluding the effects of the Bruckner
acquisition, gross profit margin increased to 18.6% due to gross margin
improvement initiatives.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased $6.8 million, or 6.6%, to $110.4
million. The majority of this increase was associated with companies acquired
during 1998; the remainder was associated with certain expenses that are
variable in nature and increase when sales increase. As a percent of sales, SG&A
expenses declined to 14.2% compared with 14.9% in the year-earlier quarter
reflecting a lower relative cost structure associated with the Bruckner
acquisition.
Depreciation and Amortization. Depreciation and amortization increased $1.5
million to $4.5 million reflecting higher amortization of goodwill from
acquisitions and increases in property, buildings and equipment over the prior
year.
Interest and Other Expense. Interest expense totaled $14.5 million for the
first quarter of 1999, an increase of $8.3 million over same period in 1998. The
increase was primarily due to the higher levels of borrowings associated with
the recapitalization and acquisitions. Other expense totaled $4.6 million in the
first quarter of 1999 reflecting costs associated with the accounts receivable
securitization.
Income Taxes. Income tax expense totaled $1.9 million in the first quarter
of 1999 compared with $5.4 million a year ago. The effective tax rate was 39.7%
and 39.0% in the first quarter of 1999 and 1998, respectively. The effective tax
rates differ from the federal statutory rate primarily due to state income taxes
and nondeductible expenses.
Net Income. Net income and diluted earnings per share totaled $2.9 million
and $0.08, respectively, for the first quarter of 1999, compared with $8.5
million and $0.13, respectively, for the first quarter of 1998. The decreases in
net income and earnings per share were primarily due to an increase in interest
expense associated with higher debt levels as a result of the recapitalization
and acquisitions.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $950.5 million and $994.9 million at December 31, 1998 and
March 31, 1999, respectively. In addition, stockholders' equity was a deficit of
$142.6 million and $139.4 million at December 31, 1998 and March 31, 1999,
respectively.
The following table sets forth WESCO's outstanding indebtedness.
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
In millions 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Term loans $169.5 $168.4
Revolving facility 42.4 44.6
Senior subordinated notes (1) 289.2 289.5
Senior discount notes (2) 52.1 53.6
Other 42.6 38.7
------------------
595.8 594.8
Less current portion (16.6) (12.2)
------------------
Total $579.2 $582.6
-------------------------------------------------------------------------------
</TABLE>
(1) Net of original issue discount and purchase discount of $0.9
and $9.9, respectively, at December 31, 1998 and $0.9 and
$9.6, respectively, at March 31, 1999
(2) Net of original issue discount and purchase discount of
$33.2 and $1.7, respectively, at December 31, 1998 and $31.8
and $1.6, respectively, at March 31, 1999
As previously discussed, on May 11, 1999, WESCO announced the pricing of its
initial public offering of 11,183,750 shares of common stock. Net proceeds from
the Offering will total approximately $187 million and will be used to retire
all of the outstanding senior discount notes and to repay all or a portion of
the revolving credit and term loan facilities. In addition, approximately $31
million of convertible notes will be converted into common stock. Pending
application of the Offering net proceeds, WESCO may borrow under the delayed
draw term loan facility to reduce further certain outstanding indebtedness.
Following the Offering, WESCO will have approximately $100 million available
under the revolving credit facility, under its current provisions, for working
capital and other corporate purposes and, under the delayed draw term loan
facility component of its current credit agreement, up to approximately $36
million available to fund acquisitions. In addition, WESCO intends to seek
modifications of its credit agreement to increase the amounts available and to
borrow on more favorable terms and conditions. WESCO can give no assurance that
it will be able to negotiate acceptable modifications to the credit agreement.
An analysis of cash flows for the first three months of 1999 and 1998:
Operating Activities. Cash provided by operating activities totaled $48.8
million in the first three months of 1999, compared to $13.2 million a year ago.
In connection with WESCO's asset securitization program, cash provided by
operations in the first quarter of 1999 included proceeds of $20.0 million from
the sale of accounts receivable. Excluding this transaction, operating
activities provided $28.8 million. On this basis, the quarter-to-quarter
increase in operating cash flow was primarily due to a decrease in certain
components of working capital offset by a decrease in net income.
Investing Activities. Net cash used in investing activities was $12.0
million in the first three months of 1999, compared to $47.6 million in the
first quarter of 1998. Cash used for investing activities was higher in the
first quarter of 1998 primarily due to $44.0 million in cash paid for
acquisitions in this period compared with $3.9 million in the first quarter of
1999. WESCO's capital expenditures for the first quarter of 1999 were $6.2
million compared to $3.7 million for first quarter of 1998 and were for computer
equipment and software, branch and distribution center facility improvements,
forklifts and delivery vehicles. The increase from the prior year was primarily
due to the replacement of computer hardware at the branch locations.
Financing Activities. Cash used by financing activities totaled $16.9
million for the first quarter of 1999 primarily reflecting debt repayments. In
the first quarter of 1998, cash provided by financing activities totaled $45.2
million, and reflected additional borrowings for acquisitions and other general
business purposes.
12
<PAGE> 14
WESCO's liquidity needs arise from seasonal working capital requirements,
capital expenditures, debt service obligations and acquisitions. In addition,
with the acquisition of Bruckner, WESCO agreed to pay additional contingent
consideration based on a multiple of annual increases in Bruckner's EBITDA
through 2004, including $30 million which is payable in July 1999. After the
completion of the Offering, at the election of Bruckner, up to 50% of any
additional contingent payment is convertible into WESCO common stock at its then
market value.
In addition to cash generated from operations and amounts available under
the credit facilities, WESCO uses a receivables facility to provide liquidity
and may sell trade accounts receivables, on a revolving basis up, to $300
million. WESCO may, under certain circumstances, increase the size of the
receivables facility when the amount of eligible trade accounts receivables
exceeds $300 million.
Management believes that cash generated from operations, together with
amounts available under the credit agreement after the offering and the
receivables facility, will be sufficient to meet WESCO's working capital,
capital expenditures and other cash requirements for the foreseeable future.
There can be no assurance, however, that this will be the case. Financing of
acquisitions can be funded under the existing credit agreement and may,
depending on the number and size of acquisitions, require the issuance of
additional debt and equity securities.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue concerns the ability of automated applications to
process date-dependent processes, calculations and information by properly
interpreting the year. The Year 2000 issue may potentially impact WESCO's
business-critical computerized applications related to, among others, customer
sales, service and invoicing, purchasing, inventory management, payroll,
financing and financial accounting and reporting. In addition, other non
business-critical systems and services may also be affected. WESCO has assembled
an internal project team composed of information systems, operations, finance
and executive personnel to:
o assess the readiness of our systems, vendors and suppliers, third-party
service providers, customers and financial institutions;
o replace or correct through program changes all non-compliant
applications;
o develop remediation action plans for systems that may not be Year 2000
compliant; and
o develop contingency plans in the event systems and services are not
compliant.
The readiness assessment phase of the project is complete and consisted of a
detailed assessment and testing of substantially all internal computer systems,
surveys of significant vendors and suppliers, service providers and customers.
WESCO has received, or is seeking, documentation from many external parties,
including its major suppliers, customers and service providers, indicating their
Year 2000 readiness. Over the past three years, WESCO has invested approximately
$5.5 million in new information systems to support the growth and diversity of
its business. In addition to meeting this objective, Year 2000 compliance was
also achieved in many systems. Systems and processes critical to our business
that remain non-compliant are either being replaced or corrected through program
changes and application upgrades.
As of the date of this report, many of WESCO's information technology and
non-information technology systems are Year 2000 compliant, and management
expects to have substantially completed the required remediation efforts by July
1999. The project team is also developing or enhancing contingency plans to
minimize the potential adverse effect the Year 2000 issue could have on WESCO in
the event business-critical systems and processes of WESCO or its suppliers or
customers fail to be compliant. Such contingent plans include identifying
alternative suppliers or service providers. Costs specifically associated with
modifying WESCO's systems for Year 2000 compliance are expensed as incurred.
Through March 31, 1999, such costs totaled approximately $1.6 million. Costs to
be incurred in the remainder of 1999 to address Year 2000 problems are estimated
to be $1.8 million. Such costs do not include normal system upgrades and
replacements.
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<PAGE> 15
Based on current information, WESCO believes that the most likely worst case
scenario to result from a Year 2000 failure by WESCO, its suppliers or customers
would be a temporary limitation in its ability to distribute electrical products
from certain operating locations or provide integrated supply services to its
customers. Based on its own efforts and information received from third parties,
WESCO does not believe that Year 2000 issues are likely to result in significant
operational problems or have a material adverse impact on its consolidated
financial position, operations or cash flow. Nonetheless, failures of suppliers,
third party vendors or customers resulting from Year 2000 issues could result in
a short-term material adverse effect.
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 WESCO during
the periods presented. However, inflation in the future could affect WESCO's
operating costs. Price changes from suppliers have historically been consistent
with inflation and have not had a material impact on WESCO's results of
operations.
SEASONALITY
WESCO'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 reduced level of activity
during the holiday season. As a result, WESCO reports sales and earnings in the
first quarter that are generally lower than that of the remaining quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information required relative to market risk has not been included, as
it is not material to WESCO.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS The following exhibits are incorporated by reference or filed
herewith.
10 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.22 to WESCO International, Inc.'s Registration Statement on Form
S-1 (No. 333-73299))
27 Financial Data Schedule
Copies of these exhibits 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, Chief Financial
Officer and Treasurer, Commerce Court, Four Station Square, Suite 700,
Pittsburgh, Pennsylvania 15219. Requests may also be directed to (412) 454-2200.
(b) REPORTS ON FORM 8-K
None
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on May 17, 1999 on its
behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By:/s/ Steven A. Burleson
---------------------------------------
Steven A. Burleson
Vice President, Chief Financial
Officer and Treasurer
15
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10 1999 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.22 to WESCO International, Inc.'s Registration
Statement on Form S-1 (No. 333-73299))
27 Financial Data Schedule, filed herewith
16
<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 STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 27,951
<SECURITIES> 0
<RECEIVABLES> 189,560
<ALLOWANCES> 6,805
<INVENTORY> 349,111
<CURRENT-ASSETS> 608,686
<PP&E> 112,425
<DEPRECIATION> 0
<TOTAL-ASSETS> 994,925
<CURRENT-LIABILITIES> 504,077
<BONDS> 582,632
0
0
<COMMON> 298
<OTHER-SE> (139,651)
<TOTAL-LIABILITY-AND-EQUITY> 994,925
<SALES> 777,415
<TOTAL-REVENUES> 777,415
<CGS> 638,622
<TOTAL-COSTS> 114,879
<OTHER-EXPENSES> 4,614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,459
<INCOME-PRETAX> 4,841
<INCOME-TAX> 1,924
<INCOME-CONTINUING> 2,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,917
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
