1 =============================================================================== 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, 2001 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 April 30, 2001, WESCO International, Inc. had 40,215,532 shares and 4,653,131 shares of common stock and Class B common stock outstanding, respectively. +===============================================================================
2 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS <TABLE> <CAPTION> Page - ------------------------------------------------------------------------------------------------------------ <S> <C> PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000............................................................ 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (unaudited) ............................................. 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (unaudited) ............................................. 5 Notes to Condensed Consolidated Financial Statements (unaudited) ................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K....................................................... 16 Signatures............................................................................. 17 - ------------------------------------------------------------------------------------------------------------ </TABLE> 2
3 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> MARCH 31 DECEMBER 31 Dollars in thousands, except share data 2001 2000 --------------------------------------------------------------------------------------------------------------------- (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,143 $ 21,079 Trade accounts receivable, net of allowance for doubtful 250,488 259,988 accounts of $10,074 and $9,794 in 2001 and 2000, respectively Other accounts receivable 26,389 31,365 Inventories 439,068 421,083 Income taxes receivable 12,567 10,951 Prepaid expenses and other current assets 7,578 5,602 Deferred income taxes 12,317 14,157 ---------- ---------- Total current assets 751,550 764,225 Property, buildings and equipment, net 122,967 123,477 Goodwill and other intangibles, net of accumulated amortization of $31,855 and $29,053 in 2001 and 2000, respectively 310,280 277,763 Other assets 5,549 4,568 ---------- ---------- Total assets $1,190,346 $1,170,033 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 469,564 $ 460,535 Accrued payroll and benefit costs 16,654 27,027 Current portion of long-term debt 30 585 Other current liabilities 46,757 35,695 ---------- ---------- Total current liabilities 533,005 523,842 Long-term debt 488,667 482,740 Other noncurrent liabilities 7,989 6,823 Deferred income taxes 32,563 31,641 ---------- ---------- Total liabilities 1,062,224 1,045,046 Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, $.01 par value; 210,000,000 shares authorized, 44,144,076 and 44,093,664 shares issued in 2001 and 2000, respectively 442 441 Class B nonvoting convertible common stock, $.01 par value; 20,000,000 shares authorized, 4,653,131 issued in 2001 and 2000 46 46 Additional capital 569,502 569,288 Retained earnings (deficit) (406,652) (410,144) Treasury stock, at cost; 3,976,897 shares in 2001 and 2000 (33,406) (33,406) Accumulated other comprehensive income (loss) (1,810) (1,238) ---------- ---------- Total stockholders' equity 128,122 124,987 ---------- ---------- Total liabilities and stockholders' equity $1,190,346 $1,170,033 ========== ========== </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements. 3
4 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 In thousands, except share data 2001 2000 - ----------------------------------------------------------------------------------------------- <S> <C> <C> Net sales $928,057 $925,022 Cost of goods sold 760,938 760,004 -------- -------- Gross profit 167,119 165,018 Selling, general and administrative expenses 136,825 128,119 Depreciation and amortization 7,363 5,525 -------- -------- Income from operations 22,931 31,374 Interest expense, net 10,997 10,878 Other expense 6,065 5,263 -------- -------- Income before income taxes 5,869 15,233 Provision for income taxes 2,377 6,078 -------- -------- Net income $ 3,492 $ 9,155 ======== ======== Earnings per share: Basic $0.08 $0.20 ===== ===== Diluted $0.07 $0.19 ===== ===== </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements. 4
5 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 In thousands 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 3,492 $ 9,155 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,363 5,525 Accretion of original issue and amortization of purchase discounts 287 280 Amortization of debt issuance costs and interest rate caps 179 155 Deferred income taxes 2,762 (29) Changes in assets and liabilities, excluding the effects of acquisitions: Sale of trade accounts receivable -- 5,000 Trade and other receivables 29,303 (34,303) Inventories (9,580) (11,910) Prepaid expenses and other current assets (3,033) 5,482 Other assets (136) (63) Accounts payable (5,502) 63,534 Accrued payroll and benefit costs (10,373) (4,979) Other current and noncurrent liabilities 4,495 10,808 --------- --------- Net cash provided by operating activities 19,257 48,655 INVESTING ACTIVITIES: Capital expenditures (2,433) (3,272) Acquisitions (41,413) (14,058) --------- --------- Net cash used by investing activities (43,846) (17,330) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 178,646 237,870 Repayments of long-term debt (172,133) (223,885) Repurchase of common stock -- (15,889) Proceeds from the exercise of stock options 140 395 --------- --------- Net cash provided (used) by financing activities 6,653 (1,509) --------- --------- Net change in cash and cash equivalents (17,936) 29,816 Cash and cash equivalents at the beginning of period 21,079 8,819 --------- --------- Cash and cash equivalents at the end of period $ 3,143 $ 38,635 ========= ========= </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements. 5
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 approximately 360 branches and five distribution centers in the United States, Canada, Mexico, Puerto Rico, Guam, the United Kingdom 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 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The unaudited condensed consolidated balance sheet as of March 31, 2001, the unaudited condensed consolidated statements of operations for the three months ended March 31, 2001 and 2000, and the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2001 and 2000, 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 ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended by SFAS No. 138, was adopted by WESCO on January 1, 2001. 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. The adoption of this statement did not have a material impact on the results of operations or financial position of WESCO. In September 2000, the FASB issued SFAS No. 140, a modification of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The disclosure provisions of this statement have been adopted. The adoption of this statement for future transfers is not expected to have a material impact on the results of operations or financial position of WESCO. In February 2001, the Financial Accounting Standards Board issued a revision to a previously issued exposure draft covering business combinations proposing new accounting guidance related to goodwill. This proposed standard would not allow for amortization of goodwill. The carrying amount of goodwill would be reduced only if it was found to be impaired. Goodwill would be tested for impairment when events or circumstances occur indicating that goodwill might be impaired. A fair-value based impairment test would be used to measure goodwill for impairment in lieu of the method for measuring impairment of long-lived assets set forth in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As goodwill is measured as a residual amount in an acquisition, it is not possible to directly measure the fair value of goodwill. Under this proposed standard, the net assets of a reporting unit should be subtracted from the fair value of that reporting unit to determine the implied fair value of goodwill. Impairment loss would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. The provisions of this proposed standard would be effective for 6
7 fiscal quarters beginning after the issuance of a final statement. Management believes the adoption of this standard, as it is proposed, will have a material non-cash impact on our financial statements if the final statement is issued prior to the full amortization of our remaining goodwill. 3. ACQUISITIONS In March 2001, WESCO completed its acquisition of all of the outstanding common stock of Herning Underground Supply, Inc. and Alliance Utility Products, Inc. (collectively "Herning") headquartered in Hayward, California. Herning, a distributor of gas, lighting and communication utility products, reported net sales of approximately $112 million in 2000. This acquisition was accounted for under the purchase method of accounting (See Note 6). 4. 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 MARCH 31 Dollars in thousands, except per share amounts 2001 2000 ------------------------------------------------------------------------------------ <S> <C> <C> Income before extraordinary item $ 3,492 $ 9,155 ============================== Weighted average common shares outstanding used in computing basic earnings per share 44,806,653 46,246,497 Common shares issuable upon exercise of dilutive stock options 2,249,584 2,493,486 ------------------------------ Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share 47,056,237 48,739,983 ============================== Earnings per share before extraordinary item: Basic $0.08 $0.20 Diluted $0.07 $0.19 ------------------------------------------------------------------------------------ </TABLE> 5. COMPREHENSIVE INCOME The following tables set forth comprehensive income and its components: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 In thousands 2001 2000 ------------------------------------------------------------------------------------- <S> <C> <C> Net income $3,492 $9,155 Foreign currency translation adjustment (572) (20) -------------------------------- Comprehensive income $2,920 $9,135 ------------------------------------------------------------------------------------- </TABLE> 6. CASH FLOW STATEMENT Supplemental cash flow information with respect to acquisitions was as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 In thousands 2001 2000 ------------------------------------------------------------------------------------- <S> <C> <C> Details of acquisitions: Fair value of assets acquired $61,678 $27,784 Liabilities assumed (15,265) (7,726) Deferred acquisition payable (5,000) (6,000) -------------------------------- Cash paid for acquisitions $41,413 $14,058 ------------------------------------------------------------------------------------- </TABLE> 7
8 7. OTHER FINANCIAL INFORMATION (UNAUDITED) 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. Condensed consolidating financial information for WESCO International, Inc., WESCO Distribution, Inc. and the non-guarantor subsidiaries are as follows: WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS <TABLE> <CAPTION> MARCH 31, 2001 --------------------------------------------------------------------------------------- (IN THOUSANDS) WESCO WESCO Consolidating International, Distribution Non-Guarantor and Eliminating Inc. Inc. Subsidiaries Entries Consolidated --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Cash and cash equivalents............ $ 10 $ -- $ 36,728 $ (33,595) $ 3,143 Trade accounts receivable............ -- 43,200 207,288 -- 250,488 Inventories.......................... -- 395,625 43,443 -- 439,068 Other current assets................. -- 67,379 18,447 (26,975) 58,851 --------------------------------------------------------------------------------------- Total current assets.............. 10 506,204 305,906 (60,570) 751,550 Intercompany receivables, net........ -- 340,962 6,823 (347,785) -- Property, buildings and equipment, net............................... -- 51,633 71,334 -- 122,967 Goodwill and other intangibles, net.. -- 269,094 41,186 -- 310,280 Investments in affiliates and other noncurrent assets................. 484,100 311,522 100 (790,173) 5,549 --------------------------------------------------------------------------------------- Total assets...................... $484,110 $1,479,415 $425,349 $(1,198,528) $1,190,346 ======================================================================================= Accounts payable..................... $ -- $ 443,039 $ 60,120 $ (33,595) $ 469,564 Other current liabilities............ 6,393 51,485 32,538 (26,975) 63,441 --------------------------------------------------------------------------------------- Total current liabilities......... 6,393 494,524 92,658 (60,570) 533,005 Intercompany payables, net........... 347,785 -- -- (347,785) -- Long-term debt....................... -- 463,395 25,272 -- 488,667 Other noncurrent liabilities......... -- 37,396 3,156 -- 40,552 Stockholders' equity................. 129,932 484,100 304,263 (790,173) 128,122 --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.............. $484,110 $1,479,415 $425,349 $(1,198,528) $1,190,346 ======================================================================================= </TABLE> 8
9 <TABLE> <CAPTION> DECEMBER 31, 2000 ---------------------------------------------------------------------------------------- (IN THOUSANDS) WESCO WESCO Consolidating International, Distribution Non-Guarantor and Eliminating Inc. Inc. Subsidiaries Entries Consolidated --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Cash and cash equivalents............ $ 10 $ 14,911 $ -- $ 6,158 $ 21,079 Trade accounts receivable............ -- 43,790 216,198 -- 259,988 Inventories.......................... -- 383,025 38,058 -- 421,083 Other current assets................. -- 63,212 18,768 (19,905) 62,075 --------------------------------------------------------------------------------------- Total current assets.............. 10 504,938 273,024 (13,747) 764,225 Intercompany receivables, net........ -- 317,818 32,364 (350,182) -- Property, buildings and equipment, net............................... -- 53,280 70,197 -- 123,477 Goodwill and other intangibles, net.. -- 271,690 6,073 -- 277,763 Investments in affiliates and other noncurrent assets................. 482,026 295,094 117 (772,669) 4,568 --------------------------------------------------------------------------------------- Total assets...................... $482,036 $1,442,820 $381,775 $(1,136,598) $1,170,033 ======================================================================================= Accounts payable..................... $ -- $ 410,171 $ 44,206 $ 6,158 $ 460,535 Other current liabilities............ 5,629 54,828 22,755 (19,905) 63,307 --------------------------------------------------------------------------------------- Total current liabilities......... 5,629 464,999 66,961 (13,747) 523,842 Intercompany payables, net........... 350,182 -- -- (350,182) -- Long-term debt....................... -- 460,416 22,324 -- 482,740 Other noncurrent liabilities......... -- 35,379 3,085 -- 38,464 Stockholders' equity................. 126,225 482,026 289,405 (772,669) 124,987 --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.............. $482,036 $1,442,820 $381,775 $(1,136,598) $1,170,033 ======================================================================================= </TABLE> 9
10 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 --------------------------------------------------------------------------------------- (IN THOUSANDS) WESCO Consolidating International, WESCO Non-Guarantor and Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales............................ $ -- $ 825,930 $ 102,127 $ -- $928,057 Cost of goods sold................... -- 677,998 82,940 -- 760,938 Selling, general and administrative expenses.......................... -- 120,027 16,798 -- 136,825 Depreciation and amortization........ -- 6,433 930 -- 7,363 Results of affiliates' operations.... 2,074 15,430 -- (17,504) -- Interest expense (income), net....... (2,182) 16,126 (2,947) -- 10,997 Other (income) expense............... -- 26,083 (20,018) -- 6,065 Provision for income taxes........... 764 (7,381) 8,994 -- 2,377 --------------------------------------------------------------------------------------- Net income (loss) $ 3,492 $ 2,074 $ 15,430 $(17,504) $ 3,492 ======================================================================================= </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2000 --------------------------------------------------------------------------------------- (IN THOUSANDS) WESCO Consolidating International, WESCO Non-Guarantor and Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales............................ $ -- $ 831,226 $ 93,796 $ -- $925,022 Cost of goods sold................... -- 683,768 76,236 -- 760,004 Selling, general and administrative expenses.......................... -- 114,520 13,599 -- 128,119 Depreciation and amortization........ -- 4,772 753 -- 5,525 Results of affiliates' operations.... 6,551 15,668 -- (22,219) -- Interest expense (income), net....... (4,006) 16,744 (1,860) -- 10,878 Other (income) expense............... -- 24,611 (19,348) -- 5,263 Provision for income taxes........... 1,402 (4,072) 8,748 -- 6,078 --------------------------------------------------------------------------------------- Net income (loss) $ 9,155 $ 6,551 $ 15,668 $(22,219) $ 9,155 ======================================================================================= </TABLE> 10
11 WESCO INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS) WESCO Consolidating International, WESCO Non-Guarantor and Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated -------------- ------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Net cash provided (used) by operating activities........... $ 2,257 $(22,940) $79,693 $(39,753) $ 19,257 Investing activities: Capital expenditures........... -- (1,899) (534) -- (2,433) Acquisitions................... -- -- (41,413) -- (41,413) --------------------------------------------------------------------------------------- Net cash used in investing activities..................... -- (1,899) (41,947) -- (43,846) Financing activities: Net borrowings (repayments).... (2,397) 9,928 (1,018) -- 6,513 Equity transactions............ 140 -- -- -- 140 --------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities........... (2,257) 9,928 (1,018) -- 6,653 --------------------------------------------------------------------------------------- Net change in cash and cash equivalents.................... -- (14,911) 36,728 (39,753) (17,936) Cash and cash equivalents at beginning of year.............. 10 14,911 -- 6,158 21,079 --------------------------------------------------------------------------------------- Cash and cash equivalents at end of period...................... $ 10 $ -- $ 36,728 $(33,595) $ 3,143 ======================================================================================= </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2000 --------------------------------------------------------------------------------------- (IN THOUSANDS) WESCO Consolidating International, WESCO Non-Guarantor and Eliminating Inc. Distribution, Inc. Subsidiaries Entries Consolidated --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net cash provided (used) by operating activities.............. $ 365 $20,943 $31,527 $(4,180) $48,655 Investing activities: Capital expenditures.............. -- (3,029) (243) -- (3,272) Acquisitions...................... -- (14,058) -- -- (14,058) --------------------------------------------------------------------------------------- Net cash used in investing activities........................ -- (17,087) (243) -- (17,330) Financing activities: Net borrowings (repayments) ...... 16,236 (3,856) 2,712 (1,107) 13,985 Equity transactions............... (16,601) -- -- 1,107 (15,494) ---------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities.............. (365) (3,856) 2,712 -- (1,509) --------------------------------------------------------------------------------------- Net change in cash and cash equivalents....................... -- -- 33,996 (4,180) 29,816 Cash and cash equivalents at beginning of year................. 10 -- 26,812 (18,003) 8,819 --------------------------------------------------------------------------------------- Cash and cash equivalents at end of period............................ $ 10 $ -- $60,808 $(22,183) $38,635 ======================================================================================= </TABLE> 11
12 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 2000 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 approximately 360 branch locations and five distribution centers in the United States, Canada, Mexico, Puerto Rico, Guam, 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., 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 March 2001, WESCO completed its acquisition of all of the outstanding common stock of Herning Underground Supply, Inc. and Alliance Utility Products, Inc. (collectively "Herning") headquartered in Hayward, California. Herning, a distributor of gas, lighting and communication utility products, reported net sales of approximately $112 million in 2000. This acquisition was accounted for under the purchase method of accounting. RESULTS OF OPERATIONS First Quarter of 2001 versus First Quarter of 2000 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 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> Net sales 100.0% 100.0% Gross profit 18.0 17.8 Selling, general and administrative expenses 14.7 13.8 Depreciation and amortization 0.8 0.6 ----- ----- Income from operations 2.5 3.4 Interest expense 1.2 1.2 Other expense 0.7 0.6 ----- ----- Income before income taxes 0.6 1.6 Income taxes 0.2 0.6 ----- ----- Net income 0.4% 1.0% ====== ====== </TABLE> 12
13 Net Sales. Net sales in the first quarter of 2001 increased $3.1 million to $928.1 million compared with $925.0 million in the prior-year quarter, primarily due to sales of acquired companies, offset by decreases attributable to the Company's core business. Core business net sales decreased approximately 2% from the prior year quarter. Gross Profit. Gross profit for the first quarter of 2001 increased $2.1 million to $167.1 million from $165.0 million in the first quarter of 2000. Gross profit margin increased to 18.0% in the current-year quarter from 17.8% in the first quarter of 2000. This increase was principally due to our margin improvement initiatives offset somewhat by lower levels of supplier discounts as a percentage of sales. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $8.7 million, or 6.8%, to $136.8 million. Excluding SG&A expenses associated with companies acquired during 2000 and 2001, SG&A expenses increased 3.4%. The increase was due principally to increased payroll related costs in the quarter to quarter comparison and, to a lesser extent, increased transportation costs. As a percentage of sales, SG&A expenses increased to 14.7% compared with 13.8% in the prior year quarter as expense growth outpaced sales growth in the current quarter. Depreciation and Amortization. Depreciation and amortization increased $1.8 million to $7.4 million reflecting higher goodwill due to recent acquisitions and increased depreciation related to capitalized software and property, buildings and equipment over the prior year. Interest and Other Expense. Interest expense totaled $11.0 million for the first quarter of 2001, an increase of $0.1 million from the same period in 2000. Other expense totaled $6.1 million and $5.3 million in the first quarter of 2001 and 2000, respectively, reflecting costs associated with the accounts receivable securitization program. The $0.8 million increase was principally due to the increased level of securitized accounts receivable. Income Taxes. Income tax expense totaled $2.4 million in the first quarter of 2001 and the effective tax rate was 40.5%. In the first quarter of 2000, income tax expense totaled $6.1 million and the effective tax rate was 39.9%. The effective tax rates differ from the federal statutory rate primarily due to state income taxes and nondeductible expenses. Net Income. For the first quarter of 2001, net income totaled $3.5 million, or $0.07 per diluted share, compared with $9.2 million and $0.19 per diluted share, respectively, in the first quarter of 2000. The decreases in the comparison are primarily due to decreased operating income and to a lesser extent increased interest and other expense, offset by decreased income tax expense. LIQUIDITY AND CAPITAL RESOURCES Total assets were $1.19 billion and $1.17 billion at March 31, 2001 and December 31, 2000, respectively. In addition, stockholders' equity was $128.1 million at March 31, 2001 compared to $125.0 million at December 31, 2000. Debt was $488.7 million at March 31, 2001 as compared to $482.7 million at December 31, 2000, an increase of $6.0 million. Amounts available under the company's revolving credit agreement as of March 31, 2001 were approximately $188 million. An analysis of cash flows for the first three months of 2001 and 2000 follows: Operating Activities. Cash provided by operating activities totaled $19.3 million in the first three months of 2001, compared to $48.7 million in the prior year. In connection with WESCO's asset securitization program, cash provided by operations in 2000 included proceeds of $5.0 million from the sale of accounts receivable. Excluding this transaction, cash provided by operating activities was $19.3 million in 2001 compared to cash provided of $43.7 million in 2000. On this basis, the $24.4 million decrease in operating cash flow was primarily due to an increase in cash utilized to fund working capital requirements and lower net income as compared to 2000. 13
14 Investing Activities. Net cash used in investing activities was $43.8 million in the first three months of 2001, compared to $17.3 million in 2000. Cash used for investing activities was higher in 2001 primarily due to a $27.4 million increase in cash paid for acquisitions, offset somewhat by lower capital expenditures in 2001. WESCO's capital expenditures for the three months of 2001 were for computer equipment and software and branch and distribution center facility improvements. Financing Activities. Cash provided by financing activities totaled $6.7 million for the first three months of 2001 primarily reflecting increased borrowings. In the first three months of 2000, cash used by financing activities totaled $1.5 million, principally related to the Company's common stock purchase program offset by increased borrowings. 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 typically based on future earnings targets. The most significant of these agreements relates to the Bruckner acquisition which provides for an earn-out potential of $100 million during the next four years if certain earnings targets are achieved. Certain other acquisitions also contain contingent consideration provisions, one of which could be significant, as it is based on, among other things, a multiple of increases in operating income. In addition to cash generated from operations and amounts available under the credit facilities, WESCO utilizes a receivables facility to provide liquidity. At March 31, 2001 WESCO's securitized accounts receivable balance totaled $375 million, unchanged from December 31, 2000. WESCO's board of directors authorized a $50 million share repurchase program. As of April 30, 2001, WESCO has purchased $32.8 million of common stock pursuant to this program, since its inception. WESCO did not repurchase any shares under this program during the quarter ended March 31, 2001, and does not expect to in the foreseeable future. The company intends to prioritize accretive acquisitions and possible reductions of debt. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended by SFAS No. 138, was adopted by WESCO on January 1, 2001. 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. The adoption of this statement did not have a material impact on the results of operations or financial position of WESCO. In September 2000, the FASB issued SFAS No. 140, a modification of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The disclosure provisions of this statement have been adopted. The adoption of this statement for future transfers is not expected to have a material impact on the results of operations or financial position of WESCO. In February 2001, the Financial Accounting Standards Board issued a revision to a previously issued exposure draft covering business combinations proposing new accounting guidance related to goodwill. This proposed standard would not allow for amortization of goodwill. The carrying amount of goodwill would be reduced only if it was found to be impaired. Goodwill would be tested for impairment when events or circumstances occur indicating that goodwill might be impaired. A fair-value based impairment test would be used to measure goodwill for impairment in lieu of the method for measuring impairment of long-lived assets set forth in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As goodwill is measured as a residual amount in an acquisition, it is not possible to directly measure the fair value of goodwill. Under this proposed standard, the net assets of a reporting unit should be subtracted from the fair value of that reporting unit to determine the implied fair value of goodwill. Impairment loss would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. The provisions of this proposed standard would be effective for fiscal quarters beginning after the issuance of a final statement. Management believes the adoption of this standard, as it is proposed, will have a material non-cash impact on our financial statements if the final statement is issued prior to the full amortization of our remaining goodwill. 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 14
15 that might cause actual results to differ from such forward-looking statements include, but are not limited to, an increase in competition, the amount of outstanding indebtedness, the availability of appropriate acquisition opportunities, availability of key products, functionality of information systems, international operating environments and other risks that are described in WESCO's Annual Report on Form 10-K for the year ended December 31, 2000 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 There have not been any material changes to WESCO's exposures to market risk during the quarter ended March 31, 2001 that would require an update to the disclosures provided in WESCO's Form 10-K for the year-ended December 31, 2000. 15
16 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None were filed in the quarter ended March 31, 2001. (b) REPORTS ON FORM 8-K On January 30th, 2001, WESCO filed a Current Report on Form 8-K reporting under Item 5 announced initiatives to streamline operations, certain non-recurring charges, its outlook for the fourth quarter of 2000 and expectations for the year 2001. 16
17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 15, 2001 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 17