SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2001 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 1-4720
WESCO FINANCIAL CORPORATION
---------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2109453
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901
--------------------------------------------------------------------------------
(Address of Principal Executives Offices)
(Zip Code)
626/585-6700
----------------
(Registrant"s Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
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 the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer"s classes of
common stock, as of the latest practicable date. 7,119,807 as of November 10,
2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Wesco Financial
Corporation ("Wesco"), listed in the accompanying index, are
incorporated as an integral part of this report.
Item 2. Management"s Discussion and Analysis of Financial Condition and
Results of Operations.
See pages 11 through 16.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- None
(b) Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESCO FINANCIAL CORPORATION
Date: November 12, 2001 By: /s/ Jeffrey L. Jacobson
--------------------- -------------------------------------
Jeffrey L. Jacobson
Vice President and Chief Financial
Officer principal financial and
accounting officer)
-2-
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page(s)
-------
Condensed consolidated statement of income and retained earnings --
three- and nine-month periods ended September 30, 2001 and
September 30, 2000................................................................ 4
Condensed consolidated balance sheet --
September 30, 2001 and December 31, 2000.......................................... 5
Condensed consolidated statement of cash flows --
nine-month periods ended September 30, 2001 and September 30, 2000................ 6
Notes to condensed consolidated financial statements.................................. 7-10
-3-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Sales and service revenues ................................... $ 109,009 $ 125,210 $ 345,743 $ 309,857
Insurance premiums earned .................................... 9,703 6,418 27,280 16,264
Dividend and interest income ................................. 17,362 14,441 55,391 39,629
Realized net securities gains ................................ -- 653,407 -- 1,267,134
Other ........................................................ 835 771 2,406 2,313
----------- ----------- ----------- -----------
136,909 800,247 430,820 1,635,197
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products and services sold ........................... 35,423 41,951 111,830 107,756
Insurance losses, loss adjustment and underwriting expenses .. 18,908 6,440 33,344 15,042
Selling, general and administrative expenses ................. 68,697 66,299 211,225 161,112
Interest expense ............................................. 843 1,658 3,556 3,693
Goodwill amortization ........................................ 1,884 1,796 5,593 4,539
----------- ----------- ----------- -----------
125,755 118,144 365,548 292,142
----------- ----------- ----------- -----------
Income before income taxes ...................................... 11,154 682,103 65,272 1,343,055
Income tax (provision) benefit .................................. 37 (238,917) (19,158) (469,076)
----------- ----------- ----------- -----------
Net income ................................................... 11,191 443,186 46,114 873,979
Retained earnings -- beginning of period ........................ 1,496,564 978,792 1,466,126 552,343
Cash dividends declared and paid ................................ (2,243) (2,172) (6,728) (6,516)
----------- ----------- ----------- -----------
Retained earnings -- end of period ........................... $ 1,505,512 $ 1,419,806 $ 1,505,512 $ 1,419,806
=========== =========== =========== ===========
Amounts per capital share based on 7,119,807 shares
outstanding throughout each period:
Net income .............................................. $ 1.57 $ 62.24 $ 6.47 $ 122.75
=========== =========== =========== ===========
Cash dividends .......................................... $ .315 $ .305 $ .945 $ .915
=========== =========== =========== ===========
See notes beginning on page 7.
-4-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
---------- ----------
ASSETS
Cash and cash equivalents ............................... $ 358,062 $ 153,810
Investments:
Securities with fixed maturities ...................... 696,394 839,683
Marketable equity securities .......................... 630,179 833,937
Rental furniture, net ................................... 230,121 244,847
Goodwill of acquired businesses, net .................... 265,806 260,037
Other assets ............................................ 130,855 128,601
---------- ----------
$2,311,417 $2,460,915
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ........... $ 58,292 $ 39,959
Deferred furniture rental income and security deposits .. 23,980 27,669
Notes payable ........................................... 60,435 56,035
Income taxes payable, principally deferred .............. 216,628 305,175
Other liabilities ....................................... 61,412 55,043
---------- ----------
Total liabilities ..................................... 420,747 483,881
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ...... 30,439 30,439
Unrealized appreciation of investments, net of taxes .. 354,719 480,469
Retained earnings ..................................... 1,505,512 1,466,126
---------- ----------
Total shareholders' equity ........................... 1,890,670 1,977,034
---------- ----------
$2,311,417 $2,460,915
========== ==========
See notes beginning on page 7.
-5-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months Ended
---------------------------
Sept. 30, Sept. 30,
2001 2000
--------- -----------
Cash flows from operating activities, net ............................... $ 126,074 $ (346,797)
--------- -----------
Cash flows from investing activities:
Sales and maturities of investments ................................... 499,053 1,643,434
Purchases of investments .............................................. (348,014) (510,140)
Acquisition of businesses, net of cash and cash equivalents acquired .. (17,683) (380,460)
Purchases of rental furniture ......................................... (50,818) (54,535)
Other, net ............................................................ (2,031) (4,149)
--------- -----------
Net cash flows from investing activities .......................... 80,507 694,150
--------- -----------
Cash flows from financing activities:
Net borrowings ........................................................ 4,399 21,000
Payment of cash dividends ............................................. (6,728) (6,516)
--------- -----------
Net cash flows from financing activities .......................... (2,329) 14,484
--------- -----------
Increase in cash and cash equivalents ................................... 204,252 361,837
Cash and cash equivalents -- beginning of period ........................ 153,810 66,331
--------- -----------
Cash and cash equivalents -- end of period .............................. $ 358,062 $ 428,168
========= ===========
Supplementary information:
Interest paid during period .......................................... $ 3,639 $ 3,055
========= ===========
Income taxes paid, net, during period ................................ $ 39,651 $ 451,906
========= ===========
See notes beginning on page 7.
-6-
WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
Note 1
Reference is made to the following for information deemed generally
applicable to the condensed consolidated financial statements of Wesco Financial
Corporation ("Wesco") and its subsidiaries: (1) the notes to Wesco"s
consolidated financial statements appearing on pages 34 through 41 of its 2000
Form 10-K Annual Report, and (2) the audited consolidated financial statements
of CORT, attached as Exhibit 99 to Wesco's Form 8-K/A filed April 28, 2000. The
information set forth below in these notes updates such information.
As explained in Note 1 to the consolidated financial statements on page
34 of Wesco's 2000 Form 10-K Annual Report, the preparation of financial
statements in conformity with generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions based on its evaluation of
facts and circumstances using information available at the time such estimates
and assumptions are made. For example, in the third quarter of 2001, Wesco's
Wesco-Financial Insurance Company subsidiary recorded a charge of $10,000 before
income taxes ($6,500 after taxes), reflecting estimated insurance losses and
expenses that may result from the September 11 terrorist activity. The amount is
an estimate and is subject to considerable estimation error. Management believes
it will take years to resolve complicated coverage issues, as well as to develop
an accurate estimation of insured losses that will ultimately be incurred.
In addition to the aforementioned loss provision, in management's
opinion, the condensed consolidated financial statements reflect all adjustments
(all of them of a normal recurring nature) necessary to a fair statement of
interim results in accordance with GAAP.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which changes the current accounting model that requires
amortization of intangible assets, supplemented by impairment tests to determine
whether such assets have become permanently impaired, to an accounting model
that continues to require impairment tests to determine whether permanent
impairment exists but no longer calls for amortization except for intangible
assets with finite lives. The provisions of SFAS No. 142 will generally be
effective for Wesco at the beginning of 2002. Although Wesco has not completed
its assessment of this new accounting standard, its management believes that its
implementation may have a material effect on Wesco's consolidated earnings
beginning in 2002 and on the comparability of such earnings with those of prior
periods. The accompanying condensed consolidated statement of income for the
nine-month periods ended September 30, 2001 and 2000 include goodwill
amortization of $5,113 and $4,281, after income taxes, respectively.
-7-
Note 2
In late February 2000, a wholly owned subsidiary of Wesco acquired all
of the outstanding common stock of CORT pursuant to a tender offer and merger.
The acquisition has been accounted for as a purchase, with CORT's accounts
included in the condensed consolidated financial statements as of the date of
acquisition.
The following unaudited table presents pro forma consolidated operating
data for Wesco and its subsidiaries for the nine months ended September 30, 2000
as if CORT had been acquired on January 1, 2000. It reflects (1) elimination of
estimated income that would have been earned during the period if investments
liquidated in 2000 to fund most of the purchase had been liquidated on January
1, 2000, (2) inclusion of interest expense throughout the period as if
line-of-credit borrowings to fund a portion of the purchase had been made on
January 1, 2000, and (3) amortization of the excess of purchase price over fair
value of identified net assets acquired (goodwill) over 40 years beginning
January 1, 2000.
Nine Months
Ended
Sept. 30,
2000
----------
Sales and service revenues......................................... $ 360,084
Total revenues..................................................... 1,670,424
Net income......................................................... 868,513
Per Wesco capital share.......................................... 121.99
==========
Note 3
Following is a summary of securities with fixed maturities:
September 30, 2001 December 31, 2000
--------------------- ---------------------
Quoted Market Quoted Market
Amortized (Carrying) Amortized (Carrying)
Cost Value Cost Value
--------- --------- --------- ---------
Mortgage-backed securities .. $668,618 $690,480 $635,173 $647,210
Other ....................... 5,807 5,914 192,495 192,473
-------- -------- -------- --------
$674,425 $696,394 $827,668 $839,683
======== ======== ======== ========
Following is a summary of marketable equity securities (all common
stocks):
September 30, 2001 December 31, 2000
--------------------- ---------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
--------- --------- --------- ---------
The Coca-Cola Company ....... $ 40,761 $337,582 $ 40,761 $439,095
The Gillette Company ........ 40,000 190,720 40,000 231,200
Other ....................... 27,020 101,877 27,020 163,642
-------- -------- -------- --------
$107,781 $630,179 $107,781 $833,937
======== ======== ======== ========
-8-
Note 4
The following table sets forth Wesco's consolidated comprehensive income
(loss) for the three- and nine-month periods ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income .............................................. $ 11,191 $ 443,186 $ 46,114 $ 873,979
Increase (decrease) in unrealized appreciation of
investments, net of income tax effect of $(2,150),
$(32,309), $68,054 and $17,860 ....................... 4,502 59,463 (125,750) (33,264)
Reversal of unrealized appreciation upon inclusion of
realized net gains in net income, net of income tax
effect of $228,634 and $443,439 in the 2000 periods .. -- (424,773) -- (823,695)
----------- ----------- ----------- -----------
Comprehensive income (loss) ............................. $ 15,693 $ 77,876 $ (79,636) $ 17,020
=========== =========== =========== ===========
Note 5
Following is condensed consolidated financial information for Wesco,
broken down by business segment, including a furniture rental segment created in
2000 by the acquisition of CORT (see Note 3):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Insurance segment:
Revenues .............................................. $ 26,853 $ 21,543 $ 81,901 $ 56,319
Net income ............................................ 9,580 10,147 37,129 29,879
Assets at end of period ............................... 1,683,937 1,766,869 1,683,937 1,766,869
=========== =========== =========== ===========
Furniture rental segment:
Revenues .............................................. $ 97,533 $ 109,127 $ 307,451 $ 258,500
Net income ............................................ 3,246 9,543 13,515 22,813
Assets at end of period ............................... 314,604 340,828 314,604 340,828
=========== =========== =========== ===========
Industrial segment:
Revenues .............................................. $ 11,505 $ 16,104 $ 38,315 $ 51,449
Net income (loss) ..................................... (71) 291 204 1,553
Assets at end of period ............................... 20,961 26,464 20,961 26,464
=========== =========== =========== ===========
Goodwill of acquired businesses:
Amortization, net of income taxes ................... $ (1,729) $ (1,709) $ (5,113) $ (4,281)
Assets at end of period ............................. 265,806 260,080 265,806 260,080
=========== =========== =========== ===========
-9-
Realized net securities gains:
Before taxes (included in revenues) ................. $ -- $ 653,407 $ -- $ 1,267,134
After taxes (included in net income) ................ -- 424,773 -- 823,695
=========== =========== =========== ===========
Other items unrelated to business segments:
Revenues .............................................. $ 1,018 $ 66 $ 3,153 $ 1,795
Net income ............................................ 165 141 379 320
Assets at end of period ............................... 26,109 27,353 26,109 27,353
=========== =========== =========== ===========
Consolidated totals:
Revenues .............................................. $ 136,909 $ 800,247 $ 430,820 $ 1,635,197
Net income ............................................ 11,191 443,186 46,114 873,979
Assets at end of period ............................... 2,311,417 2,421,594 2,311,417 2,421,594
=========== =========== =========== ===========
-10-
WESCO FINANCIAL CORPORATION
MANAGEMENT"S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to management"s discussion and analysis of Wesco"s
consolidated financial condition and results of operations appearing on pages 18
through 26 of its 2000 Form 10-K Annual Report and to Exhibit 99 to Wesco's Form
8-K/A filed April 28, 2000 for information deemed generally appropriate to an
understanding of the accompanying condensed consolidated financial statements.
The information set forth in the following paragraphs updates such information.
Further, in reviewing the following paragraphs, attention is directed to the
accompanying condensed consolidated financial statements including the notes
thereto.
FINANCIAL CONDITION
Wesco's shareholders' equity at September 30, 2001 was approximately $1.9
billion ($266 per share). Of this amount, 19% represented unrealized
appreciation of securities, which could differ substantially from gains
ultimately realized. Wesco's management continues to believe that the Wesco
group has adequate liquidity and financial resources to minimize the impact of a
downturn in its fortunes.
RESULTS OF OPERATIONS
The following summary sets forth the contribution to Wesco's consolidated
net income of each business segment -- insurance, furniture rental and
industrial -- as well as activities not considered related to such segments.
Realized net securities gains and goodwill amortization are excluded from
segment activities, consistent with the way Wesco's management views the
business operations. (Amounts are in thousands, all after income tax effect.)
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Insurance segment ............................... $ 9,580 $ 10,147 $ 37,129 $ 29,879
Furniture rental segment ........................ 3,246 9,543 13,515 22,813
Industrial segment .............................. (71) 291 204 1,553
Unrelated to business segment operations --
Goodwill amortization ....................... (1,729) (1,709) (5,113) (4,281)
Other nonsegment items ...................... 165 141 379 320
-------- --------- -------- ---------
Income before realized securities gains .. 11,191 18,413 46,114 50,284
Realized net securities gains ............... -- 424,773 -- 823,695
-------- --------- -------- ---------
Consolidated net income ................ $ 11,191 $ 443,186 $ 46,114 $ 873,979
======== ========= ======== =========
-11-
Insurance Segment
The insurance segment comprises Wesco-Financial Insurance Company
("Wes-FIC") and The Kansas Bankers Surety Company ("KBS"). Following is a
summary of the results of segment operations, which represent essentially the
combination of underwriting results with dividend and interest income (in
thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Premiums written ....................... $ 9,199 $ 7,997 $ 29,091 $ 23,483
======== ======== ======== ========
Premiums earned ........................ $ 9,703 $ 6,418 $ 27,280 $ 16,264
======== ======== ======== ========
Underwriting gain (loss) ............... $ (9,206) $ (22) $ (6,065) $ 1,222
Dividend and interest income ........... 17,150 15,125 54,621 40,055
-------- -------- -------- --------
Income before income taxes ............. 7,944 15,103 48,556 41,277
Income tax (provision) benefit ......... 1,636 (4,956) (11,427) (11,398)
-------- -------- -------- --------
Segment net income ..................... $ 9,580 $ 10,147 $ 37,129 $ 29,879
======== ======== ======== ========
Premiums written for the first nine months of 2001 included $15.6
million attributable to Wes-FIC and $13.5 million attributable to KBS. Of those
amounts, $5.0 million and $4.2 million were written in the third quarter,
respectively. Premiums written for the first nine months of 2000 included $10.3
million attributable to Wes-FIC and $13.2 million attributable to KBS. Of those
amounts, $3.5 million and $4.5 million were written in the third quarter,
respectively. The increase in Wes-FIC's premiums written in 2001 was
attributable principally to its ongoing participation in a three-year
arrangement for the reinsurance of certain property and casualty exposure ceded
by a large, unaffiliated insurer.
Earned premiums for the third quarter and first nine months of 2001
included $5.2 million and $14.2 million attributable to Wes-FIC, versus $2.2
million and $4.0 million attributable to Wes-FIC for the comparable periods of
2000. The remainder in each period was attributable to KBS. The increase in
Wes-FIC's earned premiums in 2001 related mainly to the reinsurance
participation described in the preceding paragraph.
The underwriting losses reported for the 2001 periods resulted from a
loss provision of $10 million before income taxes ($6.5 million after taxes)
recorded by Wes-FIC in the third quarter as a result of the terrorist activity
of September 11, 2001. The amount is an estimate and is subject to considerable
estimation error. Managements of Wes-FIC and Berkshire Hathaway Inc., Wesco's
ultimate parent, have indicated that they believe that it will take years to
resolve complicated coverage issues, as well as to develop an accurate
estimation of insured losses that will ultimately be incurred. The underwriting
gain reported for the first nine months of 2000 resulted from KBS underwriting
gains exceeding Wes-FIC losses. The small underwriting loss reported for the
third quarter of 2000 was caused by KBS's incurring larger-than-usual losses;
KBS's reinsurance program had been restructured effective January 1, 1998 in an
effort to improve operating results over the long term in return for greater
short-term volatility.
Pre-tax dividend and interest income earned by Wesco's insurance segment
for the third quarter of 2001 increased $2.0 million over the comparable figure
for the third quarter of 2000 and $14.6 million for the first nine months of
2001 over the corresponding 2000 figure. These reflect principally the growth in
the portfolio of fixed-maturity investments.
-12-
The income tax provision or benefit of the insurance segment generally
fluctuates somewhat as a percentage of its pre-tax income or loss mainly due to
fluctuations in the relationship of substantially tax-exempt components of
income to total pre-tax income.
Furniture Rental Segment
The furniture rental segment consists of CORT Business Services
Corporation ("CORT"), which was acquired in late February 2000 (see Note 2 to
the accompanying condensed consolidated financial statements). Following is a
summary of CORT's operating results for the third quarters of 2001 and 2000, and
first nine months of 2001. For comparison, we also present (1) unaudited data
for the entire nine-month period ended September 30, 2000, excluding items not
classified as segment-related by Wesco -- goodwill amortization, securities
gains or losses, and income tax provisions or benefits related thereto, and (2)
data included in Wesco's consolidated results from late February to September
30, 2000. (Amounts are in thousands.)
Three Months Ended Nine Months Ended Late
----------------------- ------------------------ February to
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000 2000
-------- --------- --------- --------- ----------
Revenues:
Furniture rentals ........... $ 80,247 $ 91,686 $ 256,044 $ 260,980 $ 218,370
Furniture sales ............. 17,286 17,441 51,407 47,747 40,130
-------- --------- --------- --------- ---------
Total revenues ......... $ 97,533 $ 109,127 $ 307,451 $ 308,727 $ 258,500
======== ========= ========= ========= =========
Income before income taxes ...... $ 5,020 $ 15,510 $ 21,493 $ 44,114 $ 37,000
Income tax provision ............ (1,774) (5,967) (7,978) (17,204) (14,187)
-------- --------- --------- --------- ---------
Segment net income .............. $ 3,246 $ 9,543 $ 13,515 $ 26,910 $ 22,813
======== ========= ========= ========= =========
CORT's furniture rental revenues for the first nine months of 2001
decreased 1.9% from those reported for the entire first nine months of 2000, and
declined 12.5% for the third quarter. Excluding rental revenues from recently
acquired locations, trade show operations and a significant, short-term contract
in 2000 with the U. S. Bureau of the Census, core rental revenues were unchanged
for the first nine months of 2001 from those reported for the same period of
2000, but down 11.0% for the third quarter from the comparable prior year
figure. CORT's management notes that both the number of leases outstanding and
the average revenue per lease were continuing on a downward trend begun in
2001's second quarter and attributes the decline mainly to continued weakness
of the economy, especially in the technology segment. Furniture sales revenues
increased approximately 7.7% for the first nine months but decreased 0.9% for
the third quarter of 2001 from those reported for the comparable periods of
2000.
Income before income taxes decreased to 5.1% of total revenues for the
third quarter of 2001 from 14.2% for the third quarter of 2000. Income before
income taxes amounted to 7.0% of total revenues for the first nine months of
2001 versus 14.3% for the comparable period of 2000. These decreases were due
not only to a reduction in gross profit resulting mainly from the decline in
rental revenues but also to unfavorable operating expense comparisons,
particularly in the employee compensation category. CORT's management is taking
aggressive measures to reduce expenses in an effort to maintain CORT's
profitability.
-13-
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, consisting of the businesses of Precision Steel Warehouse, Inc. and its
subsidiaries (in thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues, principally sales and services ........ $ 11,505 $ 16,104 $ 38,315 $ 51,449
======== ======== ======== ========
Income (loss) before income taxes ............... $ (148) $ 491 $ 340 $ 2,585
Income tax (provision) benefit .................. 77 (200) (136) (1,032)
-------- -------- -------- --------
Segment net income (loss) ....................... $ (71) $ 291 $ 204 $ 1,553
======== ======== ======== ========
Revenues of Precision Steel's businesses for the third quarter and
first nine months of 2001 decreased $4.6 million and $13.1 million, or
approximately 29% and 26%, from the corresponding 2000 figures. Pounds of steel
products sold decreased by approximately 29% for each period. Precision Steel's
management attributes the decline in sales volume principally to deteriorating
activity in the manufacturing sector of the economy coupled with increasing
competitive pressures.
Income before income taxes and net income of the industrial segment are
dependent not only on revenues, but also on operating expenses and the cost of
products sold. The latter, as a percentage of revenues, amounted to 83.2% and
82.8% for the third quarters of 2001 and 2000, and 81.9% and 81.2% for the
corresponding nine-month periods. The cost percentage typically fluctuates
slightly from period to period as a result of changes in product mix and price
competition at all levels.
Unrelated to Business Segment Operations
Set forth below is a summary of items increasing (decreasing) Wesco's
consolidated net income that are viewed by management as unrelated to the
operations of the insurance, furniture rental and industrial segments (in
thousands):
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- -----------
Goodwill amortization, before income tax effect ....... $(1,884) $ (1,796) $(5,593) $ (4,539)
Income tax benefit .................................... 155 87 480 258
------- --------- ------- -----------
Goodwill amortization ............................... $(1,729) $ (1,709) $(5,113) $ (4,281)
======= ========= ======= ===========
Realized net securities gains, before income tax effect $ -- $ 653,407 $ -- $ 1,267,134
Income tax provision .................................. -- (228,634) -- (443,439)
------- --------- ------- -----------
Realized net securities gains ....................... $ -- $ 424,773 $ -- $ 823,695
======= ========= ======= ===========
-14-
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- -----------
Other nonsegment items, net, before income tax effect $ 222 $ 183 $ 476 $ 394
Income tax provision .................................. (57) (42) (97) (74)
------- --------- ------- -----------
$ 165 $ 141 $ 379 $ 320
======= ========= ======= ===========
Goodwill relates to the acquisitions of CORT and KBS, as well as smaller
entities acquired by CORT following its purchase by Wesco in February 2000. The
increase in amortization of goodwill for the nine months ended September 30,
2001 was due principally to the inclusion of a full nine months' amortization of
CORT goodwill in 2001, versus less than eight months' in 2000. As explained in
Note 1 to the accompanying condensed consolidated financial statements, goodwill
accounting will change significantly in 2002.
Realized gains and losses on the Wesco group's investments have
fluctuated in amount from period to period, sometimes impacting net income
significantly. However, the amounts and timing of these realizations have no
predictive or practical analytical value.
Although there were no realized securities gains or losses in the first
nine months of 2001, Wesco's consolidated earnings for the first nine months of
2000 included realized net gains of $823.7 million, after income taxes,
including $424.8 million realized in the third quarter. The gains realized in
2000, although material in relation to Wesco's earnings, had only a minor impact
on its shareholders' equity: Wesco's investments are carried at market value,
and most of the gains had already been reflected in the unrealized appreciation
component of shareholders' equity in prior accounting periods.
Other non-segment items comprise mainly rental income from owned
commercial real estate and dividend and interest income from investments owned
outside the insurance segment, reduced by interest and other expenses.
* * * * *
Wesco's effective consolidated income tax rate typically fluctuates from
period to period for various reasons, such as the inclusion in consolidated
revenues of significant, varying amounts of dividend income, which is
substantially exempt from income taxes. Income taxes, expressed as percentages
of income before income taxes, amounted to a benefit of 0.3% for the quarter
ended September 30, 2001, a provision of 35.0% for the quarter ended September
30, 2000, and provisions of 29.4% and 34.9% for the nine-month periods ended
September 30, 2001 and 2000.
Consolidated revenues, expenses and net income reported for any period
are not necessarily indicative of future revenues, expenses and net income in
that they are subject to significant variations in amount and timing of
securities gains and losses and the possible occurrence of other unusual
nonoperating items such as the acquisition of CORT in February 2000 (see Note 2
to the accompanying condensed consolidated financial statements). In addition,
consolidated revenues, expenses and net income from operations are expected to
be much more volatile than they were prior to Wes-FIC's entry into the
reinsurance business several years ago and, to a lesser degree, the
restructuring of KBS's reinsurance program in 1998.
Shareholders' equity is impacted not only to the extent that unusual
items affect earnings, but also to reflect changes in unrealized appreciation of
investments, which are not reflected in net income.
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FORWARD-LOOKING STATEMENTS
Certain written or oral representations of Wesco's management stated
herein or elsewhere constitute "forward-looking" statements within the meaning
of the Private Securities Litigation Reform Act of 1995, as contrasted with
statements of historical fact. Forward-looking statements include statements
which are predictive in nature, or which depend upon or refer to future events
or conditions, or which include words such as expects, anticipates, intends,
plans, believes, estimates, may, or could, or which involve hypothetical events.
Forward-looking statements are based on information currently available and are
subject to various risks and uncertainties that could cause actual events or
results to differ materially from those characterized as being likely or
possible to occur. Such statements should be considered judgments only, not
guarantees, and Wesco's management assumes no duty, nor has any specific
intention, to update them.
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