SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 1-4720

WESCO FINANCIAL CORPORATION

301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901

     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 o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No  o

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 x No o

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 August 3, 2004

PART I. FINANCIAL INFORMATION

     Reference is made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk appearing on pages 29 and 30 of the Form 10-K Annual Report for the year ended December 31, 2003, filed by Wesco Financial Corporation (“Wesco”), for information on equity price risk and interest rate risk at Wesco. There have been no material changes through June 30, 2004.

Item 4. Controls and Procedures.

     An evaluation was performed under the supervision and with the participation of the management of Wesco, including Charles T. Munger (Chief Executive Officer) and Jeffrey L. Jacobson (Chief Financial Officer), of the effectiveness of the design and operation of Wesco’s disclosure controls and procedures as of June 30, 2004. Based on that evaluation, Mr. Munger and Mr. Jacobson concluded that Wesco’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by Wesco in reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in Wesco’s internal controls over financial reporting during the quarter ended June 30, 2004 that have materially affected or are reasonably likely to materially affect the internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security-Holders

     Following is a table showing the votes cast for, and withheld from voting for, each nominee at the annual meeting of shareholders of Wesco held May 5, 2004, at which meeting the shareholders elected the following Directors:

Item 6. Exhibits and Reports on Form 8-K

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WESCO FINANCIAL CORPORATION

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

     See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION

Note 1

     The unaudited condensed consolidated financial statements of which these notes are an integral part include the accounts of Wesco Financial Corporation (“Wesco”) and its subsidiaries. In management’s opinion, such statements reflect all adjustments (all of them of a normal recurring nature) necessary to a fair statement of interim results in accordance with accounting principles generally accepted in the United States.

     Reference is made to the notes to Wesco’s consolidated financial statements appearing on pages 40 through 48 of its 2003 Form 10-K Annual Report for other information deemed generally applicable to the condensed consolidated financial statements. In particular, Wesco’s significant accounting policies and practices are set forth in Note 1 on pages 40 through 42.

     Wesco’s management does not believe that any accounting pronouncements issued by the Financial Accounting Standards Board or other applicable authorities that are required to be adopted after June 30, 2004 are likely to have a material effect on reported shareholders’ equity.

Note 2

     In January 2001, Wesco’s furniture rental subsidiary, CORT Business Services Corporation (“CORT”), formed a subsidiary which partially financed its start-up by issuing convertible notes primarily to unrelated parties. During 2003 most of these notes were converted into equity of the subsidiary, after which the resulting minority interest was purchased at a discount from an agreed option price. These transactions resulted in an increase in additional paid-in capital of $2,885. The minority interest in the net loss sustained by the subsidiary prior to the buyout, $1,128 for the six-month period ended June 30, 2003, including $568 for the second quarter, is set out separately on the condensed consolidated statement of income.

Note 3

     Following is a summary of securities with fixed maturities:

     There were no unrealized losses with respect to securities with fixed maturities at June 30, 2004 or December 31, 2003.

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Following is a summary of marketable equity securities (all common stocks):

Note 4

     The following table sets forth Wesco“s consolidated comprehensive income for the three- and six-month periods ended June 30, 2004 and 2003:

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Note 5

     Following is condensed consolidated financial information for Wesco, by business segment:

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WESCO FINANCIAL CORPORATION

     Reference is made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 19 through 30 of the Form 10-K Annual Report filed by Wesco Financial Corporation (“Wesco”) for the year 2003 for information deemed generally appropriate to an understanding of the accompanying unaudited condensed consolidated financial statements. The information set forth in the following paragraphs updates such discussion. Further, in reviewing the following paragraphs, attention is directed to the accompanying unaudited condensed consolidated financial statements.

OVERVIEW

Financial Condition

     Wesco continues to have an exceptionally strong balance sheet at June 30, 2004, with relatively little debt and no hedging or off-balance sheet financing. Liquidity, which has traditionally been high, is even higher than usual due principally to sales, maturities and early redemptions of fixed-maturity investments during 2003 and 2004, and reinvestment of the proceeds in lower-yielding cash equivalents pending redeployment.

Results of Operations

     Investment gains were realized in 2003 for the first time in three years. As is usual for Wesco, realization of these gains had little effect on shareholders’ equity, because the gains had essentially been reflected, net of taxes, in the unrealized appreciation component of shareholders’ equity. Decisions to sell investments at Wesco are made without regard to the effect on periodic earnings, and the amounts and timing of realizations have no predictive or practical analytic value.

     Consolidated net income includes significant after-tax realized investment gains in the 2003 periods. Excluding such after-tax gains, consolidated earnings decreased slightly in the 2004 periods from the comparable 2003 figures. Investment income of the insurance segment declined due to a shift from long-term to short-term fixed-maturity investments bearing lower interest rates, and underwriting gain decreased. These adverse changes were partially offset by improved results of the furniture rental and industrial segments.

FINANCIAL CONDITION

     Wesco’s shareholders’ equity at June 30, 2004 was approximately $2.12 billion ($298 per share), compared to $2.08 billion ($292 per share) at December 31, 2003. The 2004 figure included $450 million of after-tax unrealized appreciation in market value of investments, versus $427 million at December 31, 2003. Because unrealized appreciation is recorded based upon current market quotations, gains or losses ultimately realized upon sale of investments could differ substantially from recorded unrealized appreciation.

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     At June 30, 2004, Wesco’s consolidated cash and cash equivalents totaled $1.14 billion, up from $1.05 billion at December 31, 2003. The $89 million increase resulted mainly from operating cash flow from Wesco’s insurance businesses plus maturities and early redemptions of fixed-income securities, reduced by purchases of rental furniture.

     Wesco’s consolidated borrowings totaled $25.2 million at June 30, 2004 versus $12.7 million at December 31, 2003. The increased borrowings related to a revolving line of credit used in the furniture rental business.

     Wesco’s management continues to believe that the Wesco group has adequate liquidity and financial resources to provide for contingent needs.

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. (Amounts are in thousands, all after income tax effect.)

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Insurance Segment

     The insurance segment comprises Wesco-Financial Insurance Company ( “Wes-FIC” ) and The Kansas Bankers Surety Company (“KBS”). Their operations are conducted or supervised by wholly owned subsidiaries of Berkshire Hathaway Inc., Wesco’s ultimate parent company. Following is a summary of the results of segment operations, which represent essentially the combination of underwriting results with dividend and interest income. (Amounts are in thousands.)

     Premiums written for the second quarters of 2004 and 2003 included $8.2 million and $8.3 million written by Wes-FIC. Premiums written for the six-month periods ended June 30, 2004 and 2003 included $15.1 million and $24.5 million of reinsurance written by Wes-FIC. The remainder for each period was attributable to primary insurance written by KBS.

     Earned premiums for the second quarters of 2004 and 2003 included $10.1 million and $17.4 million attributable to Wes-FIC. Earned premiums for the first six months of 2004 and 2003 included $23.6 million and $46.4 million attributable to Wes-FIC. The balance for each period was attributable to KBS.

     At June 30, 2004, Wes-FIC’s in-force reinsurance business consists of: (1) a contract under which Wes-FIC participates in various pools of aviation-related risks, and (2) a multi-year contract covering certain multi-line property and casualty risks of a large, unaffiliated insurer. Each of these arrangements is administered by a Berkshire affiliate, which also participates with Wes-FIC in the underlying risks as an insurer.

     Reinsurance premiums written in the first six months of 2004 declined $9.0 million (26%) from the 2003 level. Prices in certain aviation markets have declined, which has resulted in fewer opportunities in 2004 to write business at prices considered acceptable. Also, a much lower level of business has been written in 2004 under the multi-line contract due principally to the imposition of tighter underwriting standards with respect to business written. Consequently, the level of reinsurance premiums written and earned over the remainder of 2004 may decline from amounts in comparable 2003 periods.

     Underwriting gain for the second quarters of 2004 and 2003 included $4.6 million and $4.3 million, respectively, attributable to Wes-FIC and $1.0 million and $2.3 million attributable to KBS. Underwriting gain for the first six months of 2004 included $9.2 million and $11.0 million attributable to Wes-FIC and $4.1 million and $3.0 million attributable to KBS. Although Wes-FIC’s earned premiums have declined, its underwriting gain has decreased to a lesser degree, mainly because pricing and risk selection have improved. KBS’s underwriting results fluctuated mainly due to greater-than-usual losses in the second quarter of 2004 and first

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quarter of 2003. KBS, like Wes-FIC, accepts volatility in its underwriting results in return for better potential aggregate results over the long term.

     Dividend and interest income earned by the insurance segment declined for the second quarter and first six months of 2004 from the corresponding prior year figures principally as proceeds from sales, maturities and early redemptions of higher-yielding, long-term investments were reinvested in lower-yielding, short-term investments.

Furniture Rental Segment

     The furniture rental segment consists of CORT Business Services Corporation (“CORT”) and its subsidiary, Relocation Central Corporation (“Relocation Central”). Following is a summary of segment operating results.

(Amounts are in thousands.)

     Furniture rental revenues for the second quarter of 2004 declined $3.1 million, or 4.3%, from those of the second quarter of 2003, and $8.7 million, or 6.1% for the first six months. Excluding rental revenues from trade shows and locations not in operation throughout each period, rental revenues for 2004 compared to 2003 declined approximately 6.3% for the second quarter and 8.2% for the first six months. Revenues in 2004 reflect the effects of price increases of 4% to 5% in the fourth quarter of 2003. The number of furniture leases in effect, which had been on a downward trend from late 2000 through yearend 2003, has increased modestly in 2004; the number of units out on lease at March 31, 2004 was about 3% higher than at December 31, 2003, and the unit count was up about 8% at June 30, 2004 from the count at 2003 yearend.

     Furniture sales revenues for the second quarter of 2004 were relatively unchanged from those of the second quarter of 2003, following a decrease of 4.1% for the first quarter of 2004 as compared with sales for the first quarter of 2003. The decrease in furniture sales for the first quarter was attributed principally to the closure of several clearance centers and the reduction of advertising of furniture for sale in connection with CORT’s efforts to reduce its operating expenses, as described in more detail below. The improvement in furniture sales revenues for the second quarter of 2004 occurred in the month of June 2004, as sales increased by 6.4% over those of June 2003.

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     Apartment locator fees for the second quarter of 2004 decreased $1.5 million, or 34%, from those of the second quarter last year, and, for the first six months of 2004, decreased $2.8 million, or 33% from those reported for the first six months of 2003. Since late in 2003, Relocation Central’s operations are being reorganized in an effort to sharply reduce operating losses. As a result, some of its walk-in facilities have been merged into CORT’s facilities, and others have been closed, resulting in significant cost and expense reductions. The reduction in Relocation Central’s revenues was more than offset by a reduction in its costs and expenses, discussed below.

     Cost of rentals, sales and fees amounted to 27.3% and 27.6% of revenues for the second quarter and first six months of 2004 versus 28.5% and 29.2% for the corresponding periods of 2003. The decreases in cost percentages for the 2004 periods reflected improved rental margins, as well as lower depreciation expense and lower apartment locator lead acquisition costs. Purchases of new product increased slightly in recent periods after declining generally for several years; rental furniture is depreciated under the declining balance method, whereby recorded depreciation is higher in the first year and declines in each successive year. Costs of generating apartment locator fees were $2.3 million in the second quarter and $5 million in the first six months of 2004, and $3.8 million and $8.3 million in the comparable periods of 2003. Thus, costs of furniture rentals and sales were 25.5% in both the second quarter and first six months of 2004, and 25.6% and 25.9 % in the corresponding periods of 2003.

     Selling, general, administrative and interest expenses (“other operating expenses”) were $63.9 million for the second quarter of 2004 and $125.5 million for the first six months, down 8.0% and 9.9% from the $69.5 million and $139.3 million incurred in the comparable periods of 2003. These amounts include apartment locator-related expenses of $4.3 million in the second quarter and $7.1 million for the first six months of 2004, and $4.7 million and $9.2 million in the second quarter and first six months of 2003. Reductions in expenses in 2004 are the consequence of previously discussed reorganization efforts of the apartment locator business. Otherwise, other operating expenses of the segment amounted to $59.6 million and $118.4 million in the 2004 periods, down $5.2 million and $9.3 million, or 8.0% and 7.3%, from the $64.8 million and $127.7 million incurred in the comparable 2003 periods. Further reductions in these expenses are anticipated as additional efficiencies are realized from CORT’s reorganization of Relocation Central’s operations as well as ongoing efforts to control costs in the furniture rental business..

     Income or loss before income taxes and minority interest for the furniture rental segment amounted to income of $.1 million for the second quarter and $.4 for the first six months of 2004 and losses of $3.3 million and $7.6 million for the corresponding periods of 2003. The improvement in the operating results in 2004 is attributable mainly to the aforementioned reductions in operating and other expenses.

     The minority interest in net loss of Relocation Central of $.6 million for the second quarter and $1.1 million for the six-month period ended June 30, 2003 relates to a period of several months during which minority shareholders held an approximately 20% equity interest in Relocation Central. (See further explanation in Note 2 to the accompanying condensed consolidated financial statements.)

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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. (Amounts are in thousands.)

     At the start of 2004, a shortage of raw materials from domestic mills produced near chaos in the steel service industry. Although the impact on Wesco’s industrial segment revenues and earnings has been favorable thus far in 2004, it is not clear how the situation will work out. Industrial segment revenues for the second quarter of 2004 increased $4.8 million, or 42.9%, from those of the second quarter of 2003 and $7.2 million, or 30.6%, for the first six months of 2004 from those reported for the comparable period of 2003. Pounds of steel products sold increased 30.8% for the second quarter and 28.1% for the first six months of the current year from the comparable prior year figures. These increases are reflective of higher demand due to (1) a slight rise in manufacturing activity, and (2) customers’ desire to maintain higher-than-normal levels of inventories during this tumultuous period in the steel service industry, wherein the present lack of domestic steel capacity, and other factors, have enabled steel mills to raise prices, place limits on order quantities and delay deliveries. Precision Steel has reacted to these unusual pressures by restoring margins to historic levels and favoring long-term customer relationships. Despite the favorable, possibly short-lived, upturn in segment operating results, management continues to be concerned about ongoing weakness in the manufacturing sector of the economy, the shift of steel production to overseas facilities, and other conditions.

     Income before income taxes and net income (loss) of the industrial segment are dependent not only on revenues, but also on operating expenses and the cost of products sold. The cost of products sold, as a percentage of revenues, amounted to 80.6% and 84.5% for the second quarters of 2004 and 2003, and 79.9% and 83.9% for the corresponding six-month figures. The cost percentage typically fluctuates slightly from period to period as a result of changes in product mix and price competition at all levels. The unusually large decreases in cost percentages for the 2004 periods were attributable mainly to the acceptance by customers of higher prices in view of metal shortages and higher charges by mills.

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Realized Investment Gains

     Set forth below is a summary of realized investment gains. (Amounts are in thousands.)

     Wesco’s consolidated earnings for the first six months of 2003 contained realized investment gains, after taxes, of $34.5 million, including $33.9 million realized in the second quarter. No gains or losses were realized in the first six months of 2004. Gains or losses, when they occur, are classified by Wesco as nonsegment items; they tend to fluctuate in amount from period to period, and their amounts and timing have no predictive or practical analytical value.

* * * * *

     Wesco’s effective consolidated income tax rate typically fluctuates somewhat from period to period based mainly on the relation of dividend income, which is substantially exempt from income taxes, to other pre-tax earnings or losses, including realized investment gains, which are fully taxable. The respective income tax provisions, expressed as percentages of income before income taxes, amounted to 29.7% and 33.3% for the quarters ended June 30, 2004 and June 30, 2003, and 29.8% and 33.8% for the respective six-month periods.

CONTRACTUAL OBLIGATIONS

     Reference is made to page 27 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for the year ended December 31, 2003 for a table summarizing the contractual obligations of Wesco and its subsidiaries associated with ongoing business activities, which will result in cash payments in periods after yearend 2003. At June 30, 2004, there have been no material changes in contractual obligations of Wesco or its subsidiaries from those reported as of December 31, 2003.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

     Reference is made to pages 27 and 28 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for the year ended December 31, 2003 for the accounting policies and practices considered by Wesco management to be critical to its determination of consolidated financial position and results of operations, as well as to Note 1 to Wesco’s consolidated financial statements appearing on pages 40 through 42 thereof (updated by Note 1 to the accompanying condensed consolidated financial statements) for a description of the significant policies and

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practices followed by Wesco (including those deemed critical) in preparing its consolidated financial statements. There have been no significant changes since December 31, 2003.

FORWARD-LOOKING STATEMENTS

     Certain written or oral representations of management stated in this report 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 it any specific intention, to update them.

     Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause Wesco’s actual performance and future events and actions to differ materially from those expressed in or implied by such forward-looking statements include, but are not limited to, changes in market prices of Wesco’s significant equity investments, the occurrence of one or more catastrophic events such as acts of terrorism, hurricanes, or other events that cause losses insured by Wesco’s insurance subsidiaries, changes in insurance laws or regulations, changes in income tax laws or regulations, and changes in general economic and market factors that affect the prices of investment securities or the industries in which Wesco and its affiliates do business.

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.

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