<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from ______ to ______
For the quarterly period ended SEPTEMBER 30, 2000
Commission file number 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
COMMERCE COURT
FOUR STATION SQUARE, SUITE 700
PITTSBURGH, PENNSYLVANIA 15219 (412) 454-2200
(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 October 31, 2000, WESCO International, Inc. had 40,026,188 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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PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999................................................................ 3
Condensed Consolidated Statements of Operations for the three months and nine
months ended September 30, 2000 and 1999 (unaudited) ............................ 4
Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2000 and 1999 (unaudited) ................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) ................... 6
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....................................................... 15
Signatures............................................................................. 16
</TABLE>
2
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except share data 2000 1999
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,064 $ 8,819
Trade accounts receivable, net of allowance for doubtful
accounts of $7,668 and $7,023 in 2000 and 1999, respectively 255,149 188,307
Other accounts receivable 26,510 31,829
Inventories 434,712 397,669
Income taxes receivable 3,109 10,667
Prepaid expenses and other current assets 4,600 4,930
Deferred income taxes 11,943 11,580
---------- ----------
Total current assets 754,087 653,801
Property, buildings and equipment, net 121,081 116,638
Goodwill and other intangibles, net of accumulated amortization of $26,369 and
$18,956 in 2000 and 1999, respectively 260,073 249,240
Other assets 8,186 9,114
---------- ----------
Total assets $1,143,427 $1,028,793
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 461,116 $ 406,963
Accrued payroll and benefit costs 20,993 18,171
Current portion of long-term debt 2,160 3,831
Other current liabilities 38,463 25,820
---------- ----------
Total current liabilities 522,732 454,785
Long-term debt 457,634 422,539
Other noncurrent liabilities 7,645 7,504
Deferred income taxes 26,949 26,660
---------- ----------
Total liabilities 1,014,960 911,488
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares
issued -- --
Common stock, $.01 par value; 210,000,000 shares authorized, 43,925,391 and
43,291,319 shares issued in 2000 and 1999, respectively 440 433
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,653,131 issued in 2000 and 1999 46 46
Additional capital 568,840 565,897
Retained earnings (deficit) (406,992) (443,582)
Treasury stock, at cost; 3,874,403 and 637,259 shares in 2000 and 1999,
respectively (32,635) (4,790)
Accumulated other comprehensive income (loss) (1,232) (699)
---------- ----------
Total stockholders' equity 128,467 117,305
---------- ----------
Total liabilities and stockholders' equity $1,143,427 $1,028,793
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
3
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WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except share data 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 974,671 $ 903,216 $ 2,887,342 $ 2,544,782
Cost of goods sold 797,382 746,860 2,374,444 2,092,632
----------- ----------- ----------- -----------
Gross profit 177,289 156,356 512,898 452,150
Selling, general and administrative expenses 128,591 113,034 383,238 338,659
Depreciation and amortization 6,344 5,082 17,855 14,810
----------- ----------- ----------- -----------
Income from operations 42,354 38,240 111,805 98,681
Interest expense, net 11,046 10,683 32,665 37,474
Other expense 6,994 4,692 18,243 14,239
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 24,314 22,865 60,897 46,968
Provision for income taxes 9,711 9,108 24,308 18,746
----------- ----------- ----------- -----------
Income before extraordinary item 14,603 13,757 36,589 28,222
Extraordinary item, net of tax benefits of $6,711 (Note 4) -- -- -- (10,507)
----------- ----------- ----------- -----------
Net income $ 14,603 $ 13,757 $ 36,589 $ 17,715
=========== =========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 0.32 $ 0.29 $ 0.80 $ 0.68
Extraordinary item -- -- -- (0.25)
----------- ----------- ----------- -----------
Net income $ 0.32 $ 0.29 $ 0.80 $ 0.43
=========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.31 $ 0.27 $ 0.76 $ 0.62
Extraordinary item -- -- -- (0.23)
----------- ----------- ----------- -----------
Net income $ 0.31 $ 0.27 $ 0.76 $ 0.39
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 36,589 $ 17,715
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary item, net of tax benefit -- 10,507
Depreciation and amortization 17,855 14,810
Accretion of original issue and amortization of purchase discounts 861 4,154
Amortization of debt issuance costs and interest rate caps 455 929
Gain on sale of property, buildings and equipment (298) (240)
Deferred income taxes (74) 5,006
Changes in assets and liabilities, excluding the effects of acquisitions:
Sale of trade accounts receivable 40,000 60,000
Trade and other receivables (94,055) (78,328)
Inventories (32,758) (34,403)
Other current and noncurrent assets 8,806 9,236
Accounts payable 50,763 69,129
Accrued payroll and benefit costs 2,589 (8,516)
Other current and noncurrent liabilities 7,847 10,705
--------- ---------
Net cash provided by operating activities 38,580 80,704
INVESTING ACTIVITIES:
Capital expenditures (14,845) (16,299)
Proceeds from the sale of property, buildings and equipment 687 323
Receipts from affiliate 224 8,667
Acquisitions, net of cash acquired (17,414) (58,611)
--------- ---------
Net cash used by investing activities (31,348) (65,920)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 547,331 559,616
Repayments of long-term debt (518,975) (736,023)
Debt issuance costs -- (2,103)
Repurchase of common stock (27,686) --
Proceeds from issuance of common stock, net of offering costs, and
exercise of stock options 1,343 187,445
--------- ---------
Net cash provided by financing activities 2,013 8,935
--------- ---------
Net change in cash and cash equivalents 9,245 23,719
Cash and cash equivalents at the beginning of period 8,819 8,093
--------- ---------
Cash and cash equivalents at the end of period $ 18,064 $ 31,812
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
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 is engaged principally in one line of business - the
sale of electrical products and maintenance, repair and operating supplies.
WESCO currently operates over 340 branch locations and five distribution centers
in the United States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, the
Balkans and Singapore.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of WESCO and all of its subsidiaries and have been prepared in
accordance with Rule 10-01 of the Securities and Exchange Commission. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in WESCO's 1999 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The unaudited condensed consolidated balance sheet as of September 30,
2000, the unaudited condensed consolidated statements of operations for the
three months and nine months ended September 30, 2000 and 1999, and the
unaudited condensed consolidated statements of cash flows for the nine months
ended September 30, 2000 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 Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
as amended, is required to be adopted by WESCO as of January 1, 2001, 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 operations
or financial position of WESCO.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the
basic criteria that must be met to recognize revenue, and provides guidelines
for disclosure related to revenue recognition policies. This guidance is
required to be implemented in the fourth quarter of 2000. The Company is
currently completing its review of this guidance in order to determine the
impact of its provisions, if any, on the consolidated financial statements.
3. INITIAL PUBLIC OFFERING
On May 17, 1999, WESCO completed its initial public offering of 11,183,750
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 were terminated and approximately $31.5 million of
convertible notes were converted into 1,747,228 shares of common stock. Proceeds
from the Offering (after deducting Offering costs of $14.5 million) totaling
$186.8 million and borrowings of approximately $65 million were used to redeem
all of the 11 1/8% senior discount notes ($62.8 million) and to repay the
existing revolving credit and term loan facilities ($188.8 million).
6
<PAGE> 7
In connection with the Offering, 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 value preferred stock, all effective May 11, 1999.
In this report, all share and per share data have been restated to reflect the
stock split.
4. EXTRAORDINARY ITEM
In the second quarter of 1999, WESCO: (i) entered into a new $400 million
revolving credit facility and retired its existing term loans and revolving
facility; (ii) terminated its existing accounts receivable securitization
program and entered into a new accounts receivable securitization program; and
(iii) retired all of its outstanding 11 1/8% senior discount notes. In
conjunction with these transactions, approximately $8.9 million of deferred
financing charges were written off and redemption costs of $8.3 million were
incurred to redeem the 11 1/8% senior discount notes. These transactions
resulted in an extraordinary loss of $10.5 million, net of income tax benefits
of $6.7 million.
5. ACQUISITIONS
On February 29, 2000, WESCO acquired substantially all the assets and
assumed substantially all liabilities and obligations relating to the operations
of Control Corporation of America ("CCA"), a privately-owned company
headquartered in Richmond, Virginia. CCA, an electrical distributor specializing
in industrial automation solutions, had net sales of approximately $50 million
in 1999. The CCA acquisition is being accounted for under the purchase method of
accounting. Pro forma results of this acquisition, assuming it had occurred at
the beginning of the periods presented, would not be materially different from
the actual results reported.
6. EARNINGS PER SHARE
The following tables set forth the details of basic and diluted earnings
per share before extraordinary item:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Income before extraordinary item $ 14,603 $ 13,757
=========== ===========
Weighted average common shares outstanding used in
computing basic earnings per share 44,938,713 47,737,465
Common shares issuable upon exercise of
dilutive stock options 2,414,878 3,958,098
----------- -----------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share 47,353,591 51,695,563
=========== ===========
Earnings per share before extraordinary item:
Basic $ 0.32 $ 0.29
Diluted 0.31 0.27
----------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands, except per share amounts 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Income before extraordinary item $ 36,589 $ 28,222
Interest on convertible debt -- 595
----------- -----------
Earnings used in diluted earnings per share
before extraordinary item $ 36,589 $ 28,817
=========== ===========
Weighted average common shares outstanding
used in computing basic earnings per share
45,543,223 41,461,797
Common shares issuable upon exercise of
dilutive stock options 2,478,928 3,946,624
Assumed conversion of convertible debt -- 1,169,393
----------- -----------
Weighted average common shares outstanding and
common share equivalents used in computing
diluted earnings per share 48,022,151 46,577,814
=========== ===========
Earnings per share before extraordinary item:
Basic $ 0.80 $ 0.68
Diluted 0.76 0.62
----------------------------------------------------------------------------------
</TABLE>
7. COMPREHENSIVE INCOME
The following tables set forth comprehensive income and its components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 14,603 $ 13,757
Foreign currency translation adjustment (149) 98
-------- --------
Comprehensive income $ 14,454 $ 13,855
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 36,589 $ 17,715
Foreign currency translation adjustment (533) 615
-------- --------
Comprehensive income $ 36,056 $ 18,330
-------------------------------------------------------------------------------
</TABLE>
8. CASH FLOW STATEMENT
Supplemental cash flow information with respect to acquisitions was as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Details of acquisitions:
Fair value of assets acquired 29,537 37,511
Deferred acquisition payment 3,353 30,000
Liabilities assumed (7,726) (6,600)
Deferred acquisition payable (7,750) (2,300)
------- -------
Cash paid for acquisitions 17,414 58,611
-------------------------------------------------------------------------------
</TABLE>
The consolidated statement of cash flows for the nine months ended
September 30, 1999 reflects a reclass of certain amounts in order to conform to
the full year presentation in the Company's 1999 Annual Report on Form 10-K.
Noncash financing activities not reflected in the consolidated statement of
cash flows for the nine months ended September 30, 1999, consisted of $21.5
million related to the termination of the redemption feature for redeemable
Class A common stock and the conversion of $31.5 million of convertible notes
into WESCO common stock.
8
<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:
BALANCE SHEET DATA
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
In thousands 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Current assets 754,087 $ 653,801
Noncurrent assets 389,340 374,992
Current liabilities 522,732 454,785
Long-term debt 457,634 422,539
Other noncurrent liabilities 34,594 34,164
Total liabilities and stockholders' equity 1,143,427 1,028,793
-----------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales 974,671 903,216
Gross profit 177,289 156,356
Income from operations 42,354 38,240
Net income 14,603 13,757
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Net sales 2,887,342 2,544,782
Gross profit 512,898 452,150
Income from operations 111,805 98,681
Net income 36,589 20,117
--------------------------------------------------------------------------------
</TABLE>
Prior to the June 1998 issuance of the senior discount notes and subsequent
to the offering in May 1999, WESCO Distribution, Inc. financial information was
identical to that of WESCO's presented herein.
10. SUBSEQUENT EVENT
In October 2000, WESCO acquired a significant portion of the assets and
assumed a significant portion of the liabilities of KVA Supply Company, an
electrical distributor with locations in Colorado and California. This
transaction will be accounted for under the purchase method of accounting. The
acquired business had net sales of approximately $30 million in 1999.
9
<PAGE> 10
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 1999 Annual Report on Form 10-K.
GENERAL
WESCO is a full-line distributor of electrical supplies and equipment and
is a provider of integrated supply procurement services. WESCO currently
operates more than 340 branch locations and five distribution centers in the
United States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom, the
Balkans 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., 8% 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:
In October 2000, WESCO acquired a significant portion of the assets and
assumed a significant portion of the liabilities of KVA Supply Company, an
electrical distributor with locations in Colorado and California. This
transaction will be accounted for under the purchase method of accounting. The
acquired business had net sales of approximately $30 million in 1999.
In May 2000, WESCO's board of directors authorized an additional $25
million to be added to its existing $25 million share repurchase program which
was authorized in November 1999. As of October 31, 2000, WESCO has purchased
$32.7 million of common stock pursuant to this program. Approximately $27.7
million was spent during the nine-month period ended September 30, 2000.
During the first quarter, WESCO acquired substantially all the assets and
assumed substantially all liabilities and obligations relating to the operations
of Control Corporation of America ("CCA"), a privately-owned company
headquartered in Richmond, Virginia. CCA, an electrical distributor specializing
in industrial automation solutions, had net sales of approximately $50 million
in 1999. The CCA acquisition is being accounted for under the purchase method of
accounting.
RESULTS OF OPERATIONS
Third Quarter of 2000 versus Third Quarter of 1999
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
SEPTEMBER 30
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 18.2 17.3
Selling, general and administrative expenses 13.2 12.5
Depreciation and amortization 0.7 0.6
----- -----
Income from operations 4.3 4.2
Interest expense 1.1 1.2
Other expense 0.7 0.5
----- -----
Income before income taxes 2.5 2.5
Provision for income taxes 1.0 1.0
----- -----
Net income 1.5% 1.5%
-----------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Net Sales. Net sales in the third quarter of 2000 increased $71.5 million,
or 7.9%, to $974.7 million compared with $903.2 million in the prior-year
quarter, primarily due to sales growth attributable to the Company's core
business and, to a lesser extent, sales of acquired companies. Core business net
sales increased approximately 6% over the prior year quarter.
Gross Profit. Gross profit for the third quarter of 2000 increased $20.9
million to $177.3 million from $156.4 million in the third quarter of 1999.
Gross profit margin increased to 18.2% in the current-year quarter from 17.3% in
the third quarter of 1999. This increase was principally due to a higher billing
margin as well as benefits related to the higher sales volumes in the current
year such as supplier purchase rebates, offset, in part, by continued increased
inbound transportation costs.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased $15.6 million, or 13.8%, to $128.6
million. Excluding SG&A expenses associated with companies acquired during the
current year, SG&A expenses increased 11.1%. The increase was due to increased
payroll related costs in the quarter to quarter comparison principally due to a
$5.5 million reduction in incentive-based compensation expenses and a $4.3
million reduction in certain discretionary benefits in the third quarter of
1999. As a percentage of sales, SG&A expenses increased to 13.2% compared with
12.5% in the prior year quarter reflecting the aforementioned compensation
expense reduction in the prior year quarter.
Depreciation and Amortization. Depreciation and amortization increased $1.3
million to $6.3 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 $11.0 million for the
third quarter of 2000, an increase of $0.4 million from the same period in 1999.
Other expense totaled $7.0 million and $4.7 million in the third quarter of 2000
and 1999, respectively, reflecting costs associated with the accounts receivable
securitization. The $2.3 million increase was due to an increase in the amount
of securitized accounts receivable.
Income Taxes. Income tax expense totaled $9.7 million in the third quarter
of 2000 and the effective tax rate was 39.9%. In the third quarter of 1999,
income tax expense totaled $9.1 million and the effective tax rate was 39.8%.
The effective tax rates differ from the federal statutory rate primarily due to
state income taxes and nondeductible expenses.
Net Income. For the third quarter of 2000, net income totaled $14.6
million, or $0.31 per diluted share, compared with $13.8 million and $0.27 per
diluted share, respectively, in the third quarter of 1999. The increases in the
comparison are primarily due to increased operating income partially offset by
increased interest expense, increased other expense, and increased income tax
expense.
11
<PAGE> 12
Nine Months Ended September 30, 2000 versus Nine Months Ended September 30, 1999
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>
NINE MONTHS ENDED
SEPTEMBER 30
2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 17.8 17.8
Selling, general and administrative expenses 13.3 13.3
Depreciation and amortization 0.6 0.6
----- -----
Income from operations 3.9 3.9
Interest expense 1.1 1.5
Other expense 0.7 0.6
----- -----
Income before income taxes and
extraordinary item 2.1 1.8
Provision for income taxes 0.8 0.7
----- -----
Income before extraordinary item 1.3 1.1
Extraordinary item -- (0.4)
----- -----
Net income 1.3% 0.7%
--------------------------------------------------------------------------
</TABLE>
Net Sales. Net sales in the first nine months of 2000 increased $342.6
million, or 13.5%, to $2.89 billion primarily due to sales growth attributable
to the Company's core business and, to a lesser extent, net sales of acquired
businesses. Core business sales increased approximately 11% over the prior year
period.
Gross Profit. Gross profit for the first nine months of 2000 increased
$60.7 million or 13.4% to $512.9 million from $452.2 million in 1999. Gross
profit margin remained flat at 17.8%. Billing margins were also even with the
prior year.
Selling, General and Administrative Expenses. SG&A expenses increased $44.6
million, or 13.2%, to $383.2 million. Excluding SG&A expenses associated with
companies acquired during 1999 and 2000, SG&A expenses increased 9.6%. The
increase was principally due to increased payroll-related costs due, in part, to
reductions in certain incentive-based compensation expenses and a reduction in
certain discretionary benefits in the prior year. The remainder of the increase
was associated with certain expenses that are variable in nature and increase
when sales increase. As a percentage of net sales, SG&A expenses remained
constant with the prior year at 13.3%.
Depreciation and Amortization. Depreciation and amortization increased $3.0
million to $17.9 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 $32.7 million for the
first nine months of 2000, a decrease of $4.8 million from the same period in
1999. The decrease was primarily due to the lower level of borrowings since
WESCO completed its initial public offering in the second quarter of 1999, as
well as the increased level of securitized accounts receivable. Other expense
totaled $18.2 million and $14.2 million for the first nine months of 2000 and
1999, respectively, reflecting costs associated with the accounts receivable
securitization. The $4.0 million increase was principally due to the increased
level of securitized accounts receivable noted above.
Income Taxes. Income tax expense totaled $24.3 million and $18.7 million in
the first nine months of 2000 and 1999, respectively. The effective tax rate for
both 2000 and 1999 was 39.9%. The effective tax rate differs from the federal
statutory rate primarily due to state income taxes and nondeductible expenses.
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Income Before Extraordinary Item and Net Income. For the first nine months
of 2000, income before extraordinary item totaled $36.6 million, or $0.76 per
diluted share, compared with $28.2 million, or $0.62 per diluted share, in the
first nine months of 1999. The increases are due primarily to increased
operating income and decreased interest costs, net of taxes.
Net income and diluted earnings per share totaled $36.6 million and $0.76,
respectively, for the first nine months of 2000, compared with $17.7 million, or
$0.39 per diluted share, for the first nine months of 1999. Net income in 1999
includes an extraordinary loss of $10.5 million, or $0.23 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.14 billion and $1.03 billion at September 30, 2000 and
December 31, 1999, respectively. In addition, stockholders' equity was $128.5
million at September 30, 2000 compared to $117.3 million at December 31, 1999.
Debt was $459.8 million at September 30, 2000 as compared to $426.4 million at
December 31, 1999, an increase of $33.4 million.
On May 17, 1999, WESCO completed its initial public offering of 11,183,750
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 were terminated and approximately $31.5 million of
convertible notes were converted into 1,747,228 shares of common stock. Proceeds
from the Offering (after deducting Offering costs of $14.5 million) totaled
$186.8.
An analysis of cash flows for the first nine months of 2000 and 1999
follows:
Operating Activities. Cash provided by operating activities totaled $38.6
million in the first nine months of 2000, compared to $80.7 million in the prior
year. In connection with WESCO's asset securitization program, cash provided by
operations in 2000 and 1999 included proceeds of $40.0 million and $60.0
million, respectively, from the sale of accounts receivable. Excluding these
transactions, cash used in operating activities was $1.4 million in 2000
compared to cash provided of $20.7 million in 1999. On this basis, the $22.1
million decrease in operating cash flow was primarily due to a net increase in
the change in certain components of working capital compared to 1999. This
increase was due principally to the increased sales volume in the current year.
Investing Activities. Net cash used in investing activities was $31.3
million in the first nine months of 2000, compared to $65.9 million in 1999.
Cash used for investing activities was lower in 2000 primarily due to a $41.2
million decrease in cash paid for acquisitions, certain cash receipts from an
affiliate in 1999 and, to a lesser extent, lower capital expenditures in 2000.
WESCO's capital expenditures for the nine months of 2000 were for computer
equipment and software and branch and distribution center facility improvements.
The decrease was primarily due to lower expenditures in the current year for
computer equipment and distribution facility improvements and a 1999 land
purchase.
Financing Activities. Cash provided by financing activities totaled $2.0
million for the first nine months of 2000 primarily reflecting WESCO's ongoing
common stock purchase program being offset by increased borrowings. In the first
nine months of 1999, cash provided by financing activities totaled $8.9 million,
principally related to the Company's initial public offering, partially offset
by debt repayments.
WESCO's liquidity needs arise from seasonal working capital requirements,
capital expenditures, debt service obligations and acquisitions. In addition,
certain of the Company's acquisition agreements contain earn-out provisions
usually based on future earnings targets. The most significant of these
agreements relates to the Bruckner acquisition where there is an earn-out
potential of $100 million during the next four years.
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. In the third
quarter of 2000, the Company increased the amount of securitized accounts
receivable by $25 million to the current limit of $375 million.
In May 2000, WESCO's board of directors authorized an additional $25
million to be added to its existing $25 million share repurchase program which
was authorized in November 1999. As of October 31, 2000, WESCO has purchased
$32.7 million of common stock pursuant to this program, since its inception.
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Management believes that cash generated from operations, together with
amounts available under the credit agreement 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.
INFLATION
The rate of inflation, as measured by changes in the consumer price index,
did not have a material effect on the sales or operating results of the Company
during the periods presented. However, inflation in the future could affect the
Company's operating costs. Price changes from suppliers have historically been
consistent with inflation and have not had a material impact on the Company's
results of operations.
SEASONALITY
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 early part of the year due to the cold and unpredictable
weather. Sales increase during the warmer months beginning in March and
continuing through November due to favorable conditions for construction and the
tendency of companies to schedule maintenance and capital improvement spending
during the middle and latter part of the year. 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 and fourth quarters that are generally lower than that of the remaining
quarters.
FORWARD-LOOKING STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding the future performance
of WESCO. When used in this context, the words "anticipates," "plans,"
"believes," "estimates," "intends," "expects," "projects" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. Such statements including,
but not limited to, WESCO's statements regarding its business strategy, growth
strategy, productivity and profitability enhancement, new product and service
introductions and liquidity and capital resources are based on management's
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, certain of which
are beyond WESCO's control. WESCO's actual results could differ materially from
those expressed in any forward-looking statement made by or on behalf of WESCO.
In light of these risks and uncertainties there can be no assurance that the
forward-looking information will in fact prove to be accurate. Factors that
might cause actual results to differ from such forward-looking statements
include, but are not limited to, an increase in competition, the amount of
outstanding indebtedness, the availability of appropriate acquisition
opportunities, availability of key products, functionality of information
systems, Year 2000 readiness, international operating environments and other
risks that are described in WESCO's Annual Report on Form 10-K for the year
ended December 31, 1999 which are incorporated by reference herein. WESCO has
undertaken no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's revolving credit agreement borrowings bear rates of interest
that fluctuate with various indices, at WESCO's option, such as LIBOR, Prime
Rate or the Federal Funds Rate. Additionally other expense related to WESCO's
accounts receivable securitization can fluctuate as the costs are based on
commercial paper rates. While management does not consider this risk to be
material, increases in the aforementioned indices can negatively impact WESCO's
results.
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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.
27 Financial Data Schedule
A copy 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 Stephen A. Van Oss, Vice President,
Chief Financial Officer, 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on November 14, 2000 on its
behalf by the undersigned thereunto duly authorized.
WESCO International, Inc. and Subsidiaries
By: /s/ Stephen A. Van Oss
---------------------------------------
Stephen A. Van Oss
Vice President, Chief Financial Officer
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