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| Wesco International 1998 10-K Report (Partial 10-K shown; subscribers can see the entire 10-K report.) |
0000950128-99-000630.hdr.sgml : 19990331
ACCESSION NUMBER: 0000950128-99-000630
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990330
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WESCO INTERNATIONAL INC
CENTRAL INDEX KEY: 0000929008
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPARATUS & EQUIPMENT, WIRING SUPPLIES [5063]
IRS NUMBER: 251723345
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 333-43225
FILM NUMBER: 99578924
BUSINESS ADDRESS:
STREET 1: COMMERCE COURT 4 STATION SQUARE
STREET 2: STE 700
CITY: PITTSBURGH
STATE: PA
ZIP: 15219
BUSINESS PHONE: 4124542200
MAIL ADDRESS:
STREET 1: COMMERCE COURT 4 STATION SQUARE
STREET 2: STE 700
CITY: PITTSBURGH
STATE: PA
ZIP: 15219
FORMER COMPANY:
FORMER CONFORMED NAME: CDW HOLDING CORP
DATE OF NAME CHANGE: 19971217
10-K405
1
WESCO INTERNATIONAL INC.
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-43225
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
COMMERCE COURT 15219
FOUR STATION SQUARE, SUITE 700 (Zip Code)
PITTSBURGH, PENNSYLVANIA
(Address of principal executive offices)
(412) 454-2254
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of February 27, 1999, 520,964 shares of Class A Common Stock, par value
$.01 per share ("Common Stock") and 80,504 shares of Class B Common Stock, par
value $.01 per share ("Class B Common Stock") of the registrant were issued and
outstanding. There is no public market for the registrant's Common Stock or
Class B Common Stock. Substantially all of the Common Stock and Class B Common
Stock is held by affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
WESCO INTERNATIONAL, INC.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks..................................................... 22
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 34
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 37
3
PART I
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "WESCO" refers to WESCO International,
Inc., and its subsidiaries and its predecessors unless the context otherwise
requires. References to "we," "us," "our" and the "Company" refer to WESCO and
its subsidiaries. Our subsidiaries include WESCO Distribution, Inc. ("WESCO
Distribution") and WESCO Distribution -- Canada, Inc. ("WESCO Canada"), both of
which are wholly-owned by WESCO. We acquired our business, formerly the
Westinghouse Electric Supply division (the "Predecessor"), from Westinghouse
Electric Corporation, now know as CBS Corporation ("Westinghouse") in February
1994. In June 1998, we completed a recapitalization (the "Recapitalization"), as
more fully described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OVERVIEW
With sales of over $3 billion in 1998, we are a leading provider of
electrical products and other industrial MRO supplies and services in North
America. We are the second largest distributor in the $72 billion U.S.
electrical distribution industry, which has grown at a compounded annual rate of
7% over the last 15 years. We are also a provider of Integrated Supply services.
Our Integrated Supply solutions and outsourcing services fulfill all of a
customer's industrial MRO procurement needs through a highly automated,
proprietary electronic procurement and inventory replenishment system. Demand
for Integrated Supply services has increased approximately 90% annually since
1994, and the total U.S. market potential, measured as all purchases of
industrial MRO supplies and services, is estimated to be $250 billion.
We have over 330 branches and five distribution centers located in 48
states, nine Canadian provinces, Puerto Rico, Guam, Mexico, the United Kingdom
and Singapore. We serve over 130,000 customers worldwide, offering over
1,000,000 products from over 23,000 suppliers. Our diverse customer base
includes a wide variety of industrial companies; contractors for industrial,
commercial, and residential projects; utility companies; and commercial,
institutional and governmental customers.
We have acquired 18 companies since August 1995, representing annual sales
of over $1.1 billion. Combining strong internal growth with acquisitions, our
sales and EBITDA increased at a compounded annual growth rate ("CAGR") of over
16% and over 42%, respectively, since 1994.
INDUSTRY OVERVIEW
Electrical Distribution
With 1998 sales estimated at $72 billion, the U.S. industry is large and
growing. The industry is also stable with compounded annual growth of 7% since
1982, and it is projected to grow another 7% in 1999. The U.S. electrical
distribution industry is also highly fragmented. In 1997, the latest year for
which data is available, the four national distributors, including WESCO,
accounted for less than 15% of estimated total industry sales.
Integrated Supply
Demand for Integrated Supply services is growing rapidly, as more companies
realize they can lower costs by outsourcing their MRO procurement and related
services. Since the customers' costs of procuring MRO supplies can be over 50%
of the cost of the products, such improvements can be significant. The total
market for MRO industrial supplies is approximately $250 billion. Within that
market, Integrated Supply is projected to grow from approximately $5 billion in
sales from 1997 to $11 billion in 2000, or 30% per year.
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OUR BUSINESS STRATEGY
Our objective is to be the leading provider of electrical products and
other MRO supplies and services to companies in North America and selected
international markets. In achieving this leadership position, our goal is to
grow earnings at a faster rate than sales by focusing on continuous productivity
improvement. Our growth strategy leverages our existing strengths and focuses on
developing new initiatives and programs.
ENHANCE OUR LEADERSHIP POSITION IN ELECTRICAL DISTRIBUTION. We are the
second largest electrical distributor in the U.S. and, through our value-added
products and services, we believe we have become the industry leader in serving
several important and growing markets. We intend to leverage our extensive
market presence and brand equity in the WESCO name to further our leadership
position in electrical distribution.
GROW NATIONAL PROGRAMS. Since 1994, revenue from our National Accounts
program has increased in excess of 20% annually. We will continue to invest in
the expansion of this program. Through our National Accounts program, we
coordinate electrical MRO procurement and purchasing activities primarily for
large industrial companies across multiple locations. We have well established
relationships with over 300 companies, providing us with a recurring base of
revenue through multi-year agreements.
EXTEND OUR POSITION IN INTEGRATED SUPPLY. We intend to build upon our
existing position as a provider of Integrated Supply services for MRO goods and
services in the United States. Our Integrated Supply and outsourcing services
replace the traditional multi-vendor, resource-intensive procurement process
with a single fully automated process capable of managing all MRO and related
service requirements. Our solutions range from just-in-time fulfillment to
taking over the entire procurement function. We believe we are advantaged as an
Integrated Supply provider due to our national branch system and low cost
structure. Our customers include some of the largest industrial companies in the
United States.
GAIN SHARE IN KEY LOCAL MARKETS. Significant opportunities exist to gain
local market share, since many local markets are highly fragmented. We intend to
increase our market share in key geographic markets through a combination of
increased sales and marketing efforts at existing branches, acquisitions to
expand our product and customer base and new branch openings.
ACTIVELY PURSUE STRATEGIC ACQUISITIONS. We have completed 18 acquisitions
since August 1995, which represent annual sales of over $1.1 billion. We believe
that the highly fragmented nature of the electrical and industrial MRO
distribution industry will provide us with a significant number of acquisition
opportunities. We utilize a disciplined approach toward acquisitions which
includes well defined strategic criteria and established targets for return on
investment and earnings accretion.
LEVERAGE OUR E-COMMERCE AND INFORMATION SYSTEM CAPABILITIES. We conduct a
significant amount of business electronically. For example, 95% of our
Integrated Supply transactions are completed through EDI. We will continue to
make significant investments in information technology in order to conduct more
business electronically. Our e-commerce applications, including EDI, the
internet, CD-ROM catalogs and direct customer access, create tighter linkages
with both customers and suppliers and provide low cost, highly functional
processing of a full range of business transactions.
CONTINUE TO IMPROVE PROFIT MARGINS. We have more than doubled our EBITDA
margins since 1994 and are committed to seeking continuous improvement in
productivity and profitability. We operate with one of the lowest cost
structures in our industry and will utilize this low cost advantage to continue
to offer our customers competitive pricing while improving our overall
profitability.
EXPAND OUR INTERNATIONAL OPERATIONS. Our international sales, the majority
of which are in Canada, accounted for 10% of sales in 1998. We believe that
there is significant additional demand for
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our products and services outside the U.S. and Canada. Many of our multinational
domestic customers are seeking distribution, Integrated Supply and project
management solutions globally.
ACQUISITION AND INTEGRATION PROGRAM
Our strategic acquisition program is an important element in our objective
to be the leader in the markets we serve. Our philosophy towards growth includes
a continuous evaluation to determine whether a particular opportunity,
capability, or customer need is best developed internally or purchased through a
strategic acquisition. We believe that the highly fragmented nature of the
electrical distribution industry will continue to provide us with a significant
number of acquisition opportunities. We continue to evaluate potential
acquisitions, including those in the electrical distribution industry, the
Integrated Supply market and other non-electrical distributors that would
complement our customers' overall supply needs. We have completed 18
acquisitions representing total annual sales of over $1.1 billion.
WESCO ACQUISITION HISTORY
(DOLLARS IN MILLIONS)
YEAR ACQUISITIONS BRANCH LOCATIONS ANNUAL SALES(1)
- ---- ------------ ---------------- ----------------
1995....................... 2 2 $ 47
1996....................... 7 67 418
1997....................... 2 9 52
1998....................... 6 21 608
1999 to date............... 1 3 25
-- --- ------
Total:................ 18 102 $1,150
---------------------------------
(1) Represents our estimate of annual sales of acquired businesses at
the time of acquisition, based on our review of internal and/or
audited statements of the acquired business.
Our business development department consists of a dedicated team of
professionals who locate, evaluate, and negotiate all aspects of any
acquisition, with particular emphasis on compatibility of management philosophy
and strategic fit. Since 1995 we have considered over 250 potential
acquisitions. We initially evaluate potential acquisitions based on their
ability to:
- better serve our existing customers;
- offer expansion into key growth markets;
- add new product or service capabilities;
- support new National Account customers; and
- strengthen relationships with important manufacturers.
PRODUCTS AND SERVICES
PRODUCTS. Our network of branches and distribution centers stock over
215,000 product stock keeping units ("SKUs"). Each branch tailors its inventory
to meet the needs of the customers in its local market, typically stocking
approximately 4,000 to 8,000 SKUs. Our Integrated Supply business allows our
customers to access over 1,000,000 products for direct shipment.
Representative products that we sell include:
- Supplies: Fuses, terminals, connectors, boxes, fittings, tools, lugs,
tape and other MRO supplies
- Distribution Equipment: Circuit breakers, transformers, switchboards,
panelboards and busway
- Lighting: Lamps (light bulbs), fixtures and ballasts
- Wire and Conduit: Wire, cable, metallic and non-metallic conduit
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6
- Control, Automation and Motors: Motor control devices, drives,
programmable logic controllers, pushbuttons and operator interfaces
- Data Communications: Premise wiring, patch panels, terminals, connectors
We purchase products from a diverse group of over 23,000 suppliers. In
1998, the ten largest suppliers accounted for approximately 38% of our
purchases. The largest of these was Eaton Corporation, through its Cutler-Hammer
division, accounting for approximately 15% of total purchases. No other supplier
accounted for more than 6%.
Our supplier relationships are important to us, providing access to a wide
range of products, technical training and sales and marketing support. We have
preferred supplier agreements with approximately 150 of our suppliers and
purchase approximately 60% of our stock inventory pursuant to these agreements.
Consistent with industry practice, most of our agreements with suppliers,
including both distribution agreements and preferred supplier agreements, are
terminable by either party on no more than 60 days notice. See "Business -- Risk
Factors and Cautionary Statements -- Maintenance of Our Product Supply Present
Certain Risks."
SERVICES. In conjunction with product sales, we offer customers a wide
range of services and procurement solutions that draw on our product and supply
management expertise and systems capabilities. These services include National
Accounts programs, Integrated Supply programs and Major Project programs. We are
responding to the needs of our customers, particularly those in processing and
manufacturing industries. To more efficiently manage the MRO process on behalf
of our customers, we offer a range of supply management services, including:
- outsourcing of the entire MRO purchasing process;
- providing manufacturing process improvements using state-of-the-art
automated solutions;
- implementing inventory optimization programs;
- participating in joint cost savings teams;
- assigning our employees as on-site support personnel;
- recommending energy-efficient product upgrades; and
- offering safety and product training for customer employees.
NATIONAL ACCOUNTS PROGRAMS. The typical National Accounts customer is a
Fortune 500 industrial company, a large utility or other major customer, in each
case with multiple locations. Our National Accounts programs provide customers
with total supply chain cost reductions by coordinating purchasing activity for
MRO supplies across multiple locations. Comprehensive implementation plans
establish jointly-managed teams at the local and national level to prioritize
activities, identify key performance measures and track progress against
objectives. We involve our preferred suppliers early in the implementation
process, where they can contribute expertise and product knowledge to accelerate
program implementation and the achievement of cost savings and process
improvements.
INTEGRATED SUPPLY PROGRAMS. Our Integrated Supply programs offer customers
a variety of services to support their objectives for improved supply chain
management. We integrate our personnel, product and distribution expertise,
electronic technologies and service capabilities with the customer's own
internal resources to meet particular service requirements. Each Integrated
Supply program is uniquely configured to deliver a significant reduction in the
number of MRO suppliers, reduce total procurement costs, improve operating
controls and lower administrative expenses. Our solutions range from
just-in-time fulfillment to taking over the entire procurement function for all
indirect purchases. We believe that customers will increasingly seek to utilize
us as an "integrator," responsible for selecting and managing the supply of a
wide range of MRO and OEM products.
MAJOR PROJECTS. We have established a Major Projects Group, comprised of
our most experienced personnel, which focuses on serving the complex needs of
the top 50 U.S. electrical contractors on a
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multi-regional basis. These contractors typically specialize in building
industrial sites, water treatment plants, airport expansions, healthcare
facilities, correctional institutions and new sports stadiums.
MARKETS AND CUSTOMERS
We have a large base of approximately 130,000 customers diversified across
our principal markets. With no customer accounting for more than 3% of 1998
sales, we are not dependent on any single customer.
INDUSTRIAL CUSTOMERS. Sales to industrial customers, which include
numerous manufacturing and process industries, and original equipment
manufacturers ("OEMs") accounted for approximately 40% of our sales in 1998.
MRO products are needed to maintain and upgrade the electrical and
communications networks at all industrial sites. Expenditures are greatest in
the heavy process industries, such as pulp and paper and petrochemical.
Typically, electrical MRO is the first or second ranked product category by
purchase value for total MRO requirements for an industrial site. Other MRO
product categories include, among other things, lubricants; pipe, valves and
fittings; fasteners; and power transmission products.
OEM customers incorporate electrical components and assemblies into their
own products. OEMs typically require a reliable, high volume supply of a narrow
range of electrical items. Customers in this segment are particularly service
and price sensitive due to the volume and the critical nature of the product
used, and they also expect value-added services such as design and technical
support, just-in-time supply and electronic commerce.
ELECTRICAL CONTRACTORS. Sales to electrical contractors accounted for
approximately 39% of our sales in 1998. These customers range from large
contractors for major industrial and commercial projects, the customer types we
principally serve, to small residential contractors which represent a small
portion of our sales. Electrical products purchased by contractors typically
account for approximately 40% to 50% of the total installed project cost, and,
therefore, accurate cost estimates and competitive material costs are critical
to a contractor's success in obtaining profitable projects.
UTILITIES. Sales to utilities accounted for approximately 15% of our sales
in 1998. This market includes large investor-owned utilities, rural electric
cooperatives and municipal power authorities. We provide our utility customers
with an extensive range of supplies to meet their MRO and capital projects
needs. Integrated Supply arrangements are also important in this market as cost
pressures and deregulation cause utility customers to streamline procurement
practices.
COMMERCIAL, INSTITUTIONAL AND GOVERNMENTAL CUSTOMERS. Sales to CIG
customers accounted for approximately 5% of our sales in 1998. This fragmented
market includes schools, hospitals, property management firms, retailers and
government agencies of all types. Through a recent acquisition, we now have a
platform to sell integrated lighting control and distribution equipment in a
single package for multi-site specialty retailers, restaurant chains and
department stores.
DISTRIBUTION NETWORK
BRANCH NETWORK. We have over 330 branches, of which approximately 275 are
located in the U.S., approximately 50 are located in Canada and the remainder
are located in Puerto Rico, Mexico, Guam, Singapore and the United Kingdom. Over
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