e10vk
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, 2004 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
Incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
301 East Colorado Boulevard, Suite 300,
Pasadena, California |
|
91101-1901 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
(626) 585-6700
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act:
|
|
|
Title of Each Class |
|
Name of Each Exchange on Which Registered |
|
Capital Stock, $1 par value
|
|
American Stock Exchange
and Pacific Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
(Title of Class)
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
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
registrants 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
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes X No
The aggregate market value of voting and non-voting stock of the
registrant held by non-affiliates of the registrant as of
June 30, 2004 was: $483,613,000.
The number of shares outstanding of the registrants
Capital Stock as of March 14, 2005 was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
|
|
|
Title of Document |
|
Parts of Form 10-K |
Proxy Statement for 2005
Annual Meeting of Shareholders
|
|
Part III. Items 10, 11, 12, 13 and 14 |
9
TABLE OF CONTENTS
PART I
GENERAL
Wesco Financial Corporation (Wesco) was incorporated
in Delaware on March 19, 1959. Wesco, through subsidiaries,
engages in three principal businesses: (1) the insurance
business, through Wesco-Financial Insurance Company
(Wes-FIC), which was incorporated in 1985 and
engages in the property and casualty insurance business, and The
Kansas Bankers Surety Company (KBS), which was
incorporated in 1909, was purchased by Wes-FIC in 1996 and
provides specialized insurance coverages for banks; (2) the
furniture rental business, through CORT Business Services
Corporation (CORT), which traces its national
presence to the combination of five regional furniture rental
companies in 1972 and was purchased by Wesco in 2000; and
(3) the steel service center business, through Precision
Steel Warehouse, Inc. (Precision Steel), which was
begun in 1940 and acquired by Wesco in 1979. The subsidiaries
are wholly owned, either directly or indirectly.
Wescos operations also include, through another wholly
owned subsidiary, MS Property Company (MS Property),
management of owned commercial real estate in downtown Pasadena,
California, a portion of which it plans to redevelop. MS
Property began its operations in late 1993, upon transfer to it
of real properties previously owned by Wesco and by a former
savings and loan subsidiary of Wesco.
Since 1973, Wesco has been 80.1%-owned by Blue Chip Stamps
(Blue Chip), a wholly owned subsidiary of Berkshire
Hathaway Inc. (Berkshire). Thus, Wesco and its
subsidiaries are controlled by Blue Chip and Berkshire. All of
these companies may also be deemed to be controlled by Warren E.
Buffett, who is Berkshires chairman and chief executive
officer and economic owner of 33% of its stock. Charles T.
Munger, the chairman of Wesco, is also vice chairman of
Berkshire, and consults with Mr. Buffett with respect to
Wescos investment decisions and major capital allocations.
Wescos activities fall into three business
segments insurance, furniture rental and industrial.
The insurance segment consists of the operations of Wes-FIC and
KBS. The furniture rental segment consists of the operations of
CORT. The industrial segment comprises Precision Steels
steel service center and other operations. Wesco is also engaged
in several activities not identified with the three business
segments; these include (1) investment activity unrelated
to the insurance segment, (2) MS Propertys real
estate activities, and (3) parent company activities.
INSURANCE SEGMENT
Wes-FIC was incorporated in 1985 to engage in the property and
casualty insurance and reinsurance business. Its insurance
operations are managed by National Indemnity Company
(NICO), which is headquartered in Omaha, Nebraska.
To simplify discussion, the term Berkshire Insurance
Group, as used in this report, refers to NICO and certain
other wholly owned insurance subsidiaries of Berkshire,
individually or collectively, although Berkshire also includes
in its insurance group the insurance subsidiaries that are
80.1%-owned through Berkshires ownership of Wesco.
Wes-FICs high net worth (about $2.1 billion at
December 31, 2004) has enabled Berkshire to offer Wes-FIC
the opportunity to participate, from time to time, in contracts
in which Wes-FIC effectively has reinsured certain property and
casualty risks of unaffiliated property and casualty insurers.
These arrangements have included excess-of-loss
contracts. Excess-of-loss contracts include
super-catastrophe reinsurance, which subjects the
reinsurer to especially large amounts of losses from
mega-catastrophes such as hurricanes or earthquakes.
Super-catastrophe policies, which indemnify the ceding companies
for all or part of covered losses in excess of large, specified
retentions, have been subject to aggregate limits. Wes-FIC has
also been party to quota-share reinsurance, under
which it shares in premiums and losses proportionately with the
ceding company.
10
Wescos and Wes-FICs boards of directors have
authorized automatic acceptance of retrocessions of
super-catastrophe reinsurance offered by the Berkshire Insurance
Group provided the following guidelines and limitations are
complied with: (1) in order not to delay the acceptance
process, the retrocession is to be accepted without delay in
writing in Nebraska by agents of Wes-FIC who are salaried
employees of the Berkshire Insurance Group; (2) any ceding
commission received by the Berkshire Insurance Group cannot
exceed 3% of premiums, which is believed to be less than the
Berkshire Insurance Group could get in the marketplace;
(3) Wes-FIC is to assume 20% or less of the total risk;
(4) the Berkshire Insurance Group must retain at least 80%
of the identical risk; and (5) the aggregate premiums from
this type of business in any twelve-month period cannot exceed
10% of Wes-FICs net worth. Occasionally, the Berkshire
Insurance Group will also have an upper-level reinsurance
interest with interests different from Wes-FICs,
particularly in the event of one or more large losses.
Following are some of the more significant reinsurance
arrangements in which Wes-FIC has participated:
|
|
|
|
|
A quota-share agreement entered into in 1985 whereby Wes-FIC
effectively reinsured through the Berkshire
Insurance Group, as intermediary-without-profit 2%
of essentially all insurance business of a major property and
casualty insurer written during a four-year coverage period that
expired in 1989. Wes-FIC remains liable for its share of
remaining unpaid losses and loss adjustment expenses, an
estimate of which is included in insurance liabilities on
Wescos consolidated balance sheet. |
|
|
|
Several contracts for super-catastrophe reinsurance retroceded
by the Berkshire Insurance Group beginning in 1994, including 3%
participations in two super-catastrophe reinsurance policies
covering hurricane risks in Florida: (1) a 12-month policy
effective June 1, 1996; and (2) a three-year policy
effective January 1, 1997. No losses were incurred under
these contracts. |
|
|
|
Participation to the extent of 10% in a catastrophic
excess-of-loss contract effective for the 1999 calendar year
covering property risks of a major international reinsurer, also
retroceded by the Berkshire Insurance Group. No liabilities
remain under this contract. |
|
|
|
A multi-year, quota-share arrangement, entered into in 2000
through NICO, as intermediary without profit, for participation
in a pool of certain property and casualty risks written by a
large, unaffiliated insurer, under which Wes-FICs
participation increased from approximately 3.3% of certain risks
associated with policy years 2000 through 2002 to 6% of certain
risks thereafter. The terms of this arrangement were identical
to those accepted by another member of the Berkshire Insurance
Group, except as to the amount of the participation. This
arrangement was commuted (terminated) in the fourth quarter
of 2004, at which time Wes-FIC returned $43.1 million,
cash, to the ceding company, representing all unearned premiums,
less unamortized costs and expenses, and the ceding company
assumed the liabilities for any and all insurance risks
previously undertaken under the contract. Thus, at
December 31, 2004, Wes-FIC was no longer liable for any
claims or losses, or for adjustments to losses previously
recorded, under the contract. |
|
|
|
Participation in four risk pools managed by a Berkshire
Insurance Group member covering hull, liability, workers
compensation and satellite exposures relating to the aviation
industry, as follows: with respect to 2001, to the extent of 3%
for each pool, with satellite exposures effective June 1;
for 2002, 13% of the hull and liability pools, increasing to
15.5% in August, and 3% of the workers compensation pool
(satellite exposures were not renewed in June); and, for 2003
and 2004, 10% of the hull and liability pools only. The
Berkshire Insurance Group member provides a portion of the
upper-level reinsurance protection to these aviation risk pools,
and therefore to Wes-FIC, on terms that could cause some
conflict of interest under certain conditions, e.g., in settling
a large loss. |
11
The insurance industry, including Wes-FIC, experienced
significant reinsurance and insurance losses from the
September 11, 2001 terrorist attack. The Terrorism Risk
Insurance Act of 2002 (TRIA), enacted in 2002,
established for commercial property and casualty insurers (but
not as reinsurers see next paragraph) a program
providing for federal reinsurance of insured terrorism losses
occurring after enactment. Under TRIA, a terrorism loss must
have resulted from a terrorist act undertaken on behalf of a
foreign person or interest which has resulted in an insured loss
in excess of $5 million, as certified by the federal
government. To be eligible for federal reinsurance, insurers
must make available insurance coverage for acts of terrorism by
providing policyholders with clear and conspicuous notice of the
amount of premium that will be charged for this coverage and of
the federal share of any insured losses resulting from any act
of terrorism. In the event of a certified act of terrorism, the
federal government will reimburse each insurer (conditioned on
its satisfaction of policyholder notification requirements) for
90% of its insured losses in excess of the insurers
deductible. The insurers deductible is calculated based on
the direct earned premiums for relevant commercial lines written
by the insurers entire insurance group. The insurers
deductible amounts increased from 7% of its groups earned
premiums for 2003 to 10% for 2004 and 15% for 2005. The
aggregate deductible amount for the Berkshire insurance group
(including Wescos insurance subsidiaries), believed to
have approximated $200 million for 2004, is estimated to
approximate $300 million for 2005. There is a
$100 billion cap per TRIA program year on aggregate
certified losses (all eligible insurers deductibles plus
their 15% share and the federal 85% share above the
deductibles), and insurers are free to exclude their liability
for terrorism losses in excess of the cap. Unless extended, TRIA
will expire at the end of 2005.
Assumed reinsurance is specifically excluded from TRIA
participation. Thus, terrorism exclusions contained within
reinsurance contracts remain in effect. Reinsurers are not
required to offer terrorism coverage and are not eligible for
federal reinsurance of terrorism losses. Wes-FIC, as a
reinsurer, however, could indirectly benefit under TRIA
essentially in proportion to applicable federal loss limitations
that may be available to its ceding insurer customers. Although
Wes-FICs (and thus Wescos) exposure to terrorism
losses as a reinsurer or insurer, whether or not mitigated by
TRIA, cannot be predicted, Wes-FICs management does not
believe it likely that, on a worst-case basis, Wes-FICs
shareholders equity would be severely impacted by future
terrorism-related insurance losses under reinsurance or
insurance contracts currently in effect.
Although Wes-FIC has no active super-catastrophe reinsurance
contracts in force, Wes-FIC will likely have opportunities to
participate in such business from time to time in the future.
Management believes that an insurer in the reinsurance business
must maintain large net worth in relation to annual premiums in
order to remain solvent when called upon to pay claims when a
loss occurs. In this respect Wes-FIC and KBS are competitively
well positioned, inasmuch as their net premiums written for
calendar 2004 amounted to only 2% of their combined statutory
surplus, compared to an industry average of 117% based on
figures reported for 2003.
Wes-FIC is also licensed to write direct insurance
business (as distinguished from reinsurance) in Nebraska, Utah
and Iowa, and may write direct insurance in the non-admitted
excess and surplus lines market in several other states, but the
volume written to date has been minimal.
In July 1996, Wes-FIC purchased KBS for approximately
$80 million in cash. KBS provides specialized insurance
coverage to more than 20% of the banks in the United States,
mostly small and medium-sized banks in the Midwest. It is
licensed to write business in 30 states. KBS is also
subject to regulation by the Department of the Treasury. Its
product line for financial institutions includes policies for
crime insurance, check kiting fraud indemnification, Internet
banking catastrophe theft insurance, directors and officers
liability, bank employment practices, and bank insurance agents
professional errors and omissions indemnity, as well as deposit
guaranty bonds, which insure deposits in excess of federal
deposit insurance limits. KBS purchases reinsurance for
indemnification against large losses, ceding 50% of a layer of
loss exposure to an unaffiliated reinsurer and the other 50% to
a Berkshire subsidiary, on identical terms. A layer of losses
above such layer is 30%-retained by KBS; the other 70% is
reinsured by another Berkshire insurance subsidiary. In 2004,
premiums of $2.1 million
12
were ceded to Berkshire subsidiaries; no incurred reinsured
losses were allocated to them. For many years, KBS had ceded
more of its risks to third party reinsurers. By retaining a
larger amount of risk than previously, Wescos management
seeks satisfactory operating results over the long term in
return for greater short-term volatility.
KBS markets its products in some states through exclusive,
commissioned agents, and directly to insureds in other states.
Inasmuch as the number of small midwestern banks is declining as
the banking industry consolidates, KBS relies for growth on an
extraordinary level of service provided by its dedicated
employees and agents, and on new products such as deposit
guaranty bonds, which were introduced in 1993 and currently
account for approximately 45 percent of premiums written.
A significant marketing advantage enjoyed by Berkshires
insurance subsidiaries, including Wescos insurance
segment, is the maintenance of exceptional capital strength. The
combined statutory surplus of Wescos insurance businesses
totaled approximately $2.1 billion at December 31,
2004. This capital strength creates opportunities for the Wesco
subsidiaries to participate in reinsurance and insurance
contracts not necessarily available to many of their competitors.
Standard & Poors Corporation, in recognition of
Wes-FICs strong competitive position as a member of
Berkshires group of insurance subsidiaries and its unusual
capital strength, has assigned its highest rating, AAA, to
Wes-FICs claims-paying ability. This rating recognizes the
commitment of Wes-FICs management to a disciplined
approach to underwriting, conservative reserving, and
Wes-FICs extremely strong capital base.
Management is hopeful, but has no assurance, that the business
activities of Wes-FIC and KBS will grow. It welcomes the
opportunity to participate in additional reinsurance
retrocessions and other insurance arrangements with the
Berkshire Insurance Group, as well as acquisitions of other
insurance companies.
Insurance companies are subject to regulation by the departments
of insurance of the various states in which they write policies
as well as the states in which they are domiciled and, if
applicable, as is the case with KBS, by the Department of the
Treasury. Regulations relate to, among other things, capital
requirements, shareholder and policyholder dividend
restrictions, reporting requirements, annual audits by
independent accountants, periodic regulatory examinations, and
limitations on the size and types of investments that can be
made.
Wes-FIC, which is operated by NICO, has no employees of its own.
KBS has 17 employees.
FURNITURE RENTAL SEGMENT
CORT, acquired in February 2000 by a subsidiary of Wesco, is the
largest, and only national, provider of rental furniture,
accessories and related services in the rent-to-rent
(as opposed to rent-to-own) segment of the furniture
industry. CORT rents high-quality furniture to corporate and
individual customers who desire flexibility in meeting their
temporary office, residential or trade show furnishing needs,
and who typically do not seek to own such furniture. In
addition, CORT sells previously rented furniture through
company-owned clearance centers, thereby enabling it to
regularly renew its inventory and update styles. CORTs
network of facilities (in 34 states and the District of
Columbia) comprises 100 showrooms, 87 clearance centers and
82 warehouses, as well as four websites
www.cort1.com, www.corttradeshow.com, www.relocationcentral.com
and www.myrelocationcentral.com.
CORTs rent-to-rent business is differentiated from
rent-to-own businesses primarily by the terms of the rental
arrangements and the type of customer served. Rent-to-rent
customers generally desire high-quality furniture to meet
temporary needs, have established credit, and pay on a monthly
basis. Typically, these customers do not seek to acquire the
property on a permanent basis. In a typical rent-to-rent
transaction, the customer agrees to rent furniture for a minimum
of three months, subject to extension by the customer on a
month-to-month basis. By contrast, rent-to-own arrangements are
generally made by customers lacking established credit whose
objective is the eventual ownership of
13
the property; these transactions are typically entered into on a
month-to-month basis and may require weekly rental payments.
CORTs customer base includes Fortune 500 companies,
small businesses, professionals, and owners and operators of
apartment communities. CORTs management believes its size,
national presence, brand awareness, consistently high level of
customer service, product quality and breadth of selection,
depth and experience of management, and efficient clearance
centers have been key contributors to the companys
success. CORT offers a wide variety of office and home
furnishings, including commercial panel systems, televisions,
housewares and accessories. CORT emphasizes its ability to
furnish an apartment, home or entire suite of offices with
high-quality furniture, housewares and accessories in two
business days. CORTs objective is to build upon these core
competencies and competitive advantages to increase revenues and
market share. Key to CORTs growth strategies are
(1) expanding its corporate customer base,
(2) enhancing its ability to capture an increasing number
of Internet customers through its on-line catalog and other web
services, (3) making selective acquisitions, and
(4) continuing to develop various products and services.
In order to capitalize on the significant profit potential
available from longer average rental periods and the higher
average monthly rent typically available for office products,
CORTs strategy is to place greater emphasis on rentals of
office furniture than on residential furniture. In order to
promote longer office lease terms, CORT offers lower rates on
leases where lease terms exceed six months. A significant
portion of CORTs residential furniture rentals are derived
from corporate relocations and temporary assignments, as new and
transferred employees of CORTs corporate customers enter
into leases for residential furniture. Sales personnel maintain
contact with corporate relocation departments and present the
possibility of obtaining fully furnished rental apartments as a
lower-cost alternative to hotel accommodations. Thus, CORT
offers its corporate rental customers a way to reduce the costs
of corporate relocation and travel while developing residential
business with new and transferred employees. CORT also provides
short-term rentals for trade shows and conventions. Its
www.corttradeshow.com website assists in providing information
to and gathering leads from prospects.
Until the economy weakened beginning late in 2000, CORT was
benefiting from an increasing demand for furniture rental
services. Management believes that the increasing demand was
caused by continued growth in business and professional
employment, the increasing importance to American business of
flexibility and outsourcing, and the impact of a more mobile and
transitory population. From late 2000 until the latter part of
2004, CORTs business declined steadily by over 20%.
Management attributes the decline mainly to a slowdown in new
business formation and business failures notably in the
high-technology industry, exacerbated to some degree by the
terrorist activity on September 11, 2001. At yearend 2004
the number of furniture leases was about 2% higher than at
yearend 2003. Management believes that the downward trend in
business has possibly ended.
CORTs Relocation Central operation (Relocation
Central) provides the nations largest apartment
locator service through its websites, (www.relocationcentral.com
and www.myrelocationcentral.com), customer call centers and
walk-in locations. More than 350 apartment communities
refer their tenants to CORT. Relocation Central started up as a
subsidiary of CORT in 2001 and was reorganized as a division of
CORT as of yearend 2004; it now relies more on internet traffic
and less on separate, fully staffed facilities than previously.
The integration of Relocation Central into CORT was begun in
2003 as part of a corporate-wide program to reduce operating
expenses, including the number of facilities and personnel.
CORTs management is hopeful that Relocation Central, which
has sustained losses since inception, will enhance corporate
operating results in the future. Overall, it is believed that
CORT is well positioned to benefit from domestic job growth and
any corresponding economic expansion.
The rent-to-rent segment of the furniture rental industry is
highly competitive. There are several large regional as well as
a number of smaller regional and local rent-to-rent competitors.
In addition, numerous retailers offer residential and office
furniture under rent-to-own arrangements. Management
14
believes that the principal competitive factors in the furniture
rental industry are product value, furniture condition, extent
of furniture selection, terms of rental agreement, speed of
delivery, exchange privilege, option to purchase, deposit
requirements and customer service.
The majority of CORTs furniture sales revenue is from its
clearance center sales. The remaining furniture sales revenue is
derived primarily from lease conversions and sales of new
furniture. The sale of previously leased furniture allows CORT
to control inventory quantities and to maintain inventory
quality at showroom level. On the average, furniture is
typically sold through the clearance centers three years after
its initial purchase by CORT.
With respect to sales of furniture through its clearance
centers, CORT competes with numerous new and used furniture
retailers, some of which are larger than CORT. CORTs
management believes that price and value are its principal
competitive advantages in this activity.
CORT has approximately 2,250 full-time employees, including
50 union members. Management considers labor relations to
be good.
INDUSTRIAL SEGMENT
Precision Steel, acquired in 1979, and one of its subsidiaries
operate steel service centers in the Chicago and Charlotte
metropolitan areas. The service centers buy stainless steel, low
carbon sheet and strip steel, coated metals, spring steel,
brass, phosphor bronze, aluminum and other metals, cut these
metals to order, and sell them to a wide variety of customers.
The service center business is highly competitive. Precision
Steels annual sales volume of approximately 24 thousand
tons of flat rolled products compares with the domestic steel
service industrys annual volume of approximately
13 million tons of comparable products. Precision Steel
competes not only with other service centers but also with mills
which supply metal to the service centers. Sales competition
exists in the areas of price, quality, availability and speed of
delivery. Because it is willing to sell in relatively small
quantities, Precision Steel has been able to compete in
geographic areas distant from its service center facilities.
Competitive pressure has been intensified by imports, a shift to
production abroad and an increasing tendency of domestic
manufacturers to use less costly materials in making parts.
Precision Brand Products, Inc. (Precision Brand), a
wholly owned subsidiary of Precision Steel that is also located
in the Chicago area, manufactures shim stock and other toolroom
specialty items, and distributes a line of hose clamps and
threaded rod. These products are sold under the Precision Brand
and DuPage names nationwide, generally through industrial
distributors. This business is highly competitive. Precision
Brands share of the toolroom specialty products market is
believed to approximate .5%; statistics are not available with
respect to its share of the market for hose clamps and threaded
rod.
Steel service raw materials are obtained principally from major
domestic steel mills, and their availability had generally been
good until approximately one year ago, when the market drifted
into near chaos caused by shortages. Consolidation and
downsizing at the mill level, coupled with an increased use of
steel due to a higher level of manufacturing activity, have
resulted in extended mill lead times and limitations being
placed on order quantities by the producing mills. Precision
Steels service centers maintain extensive inventories in
order to meet customer demand for prompt deliveries; typically,
processed metals are delivered to the customer within one or two
weeks. Precision Brand normally maintains inventories adequate
to allow for off-the-shelf service to customers within
24 hours.
The industrial segment businesses are subject to economic cycles
and other factors. These businesses are not dependent on a few
large customers. The backlog of steel service orders increased
to $4.8 million at December 31, 2004 from
$4.7 million at December 31, 2003.
15
There are 200 full-time employees engaged in the industrial
segment businesses, about 40% of whom are members of unions.
Management considers labor relations to be good.
ACTIVITIES NOT IDENTIFIED WITH A BUSINESS SEGMENT
Certain of Wescos activities are not identified with any
business segment. These include (1) investment activity
unrelated to the insurance segment, (2) management of owned
commercial real property, a portion of which it plans to
redevelop, and (3) parent company activities.
Six full-time employees are engaged in the activities of Wesco
and MS Property.
AVAILABLE INFORMATION
Wescos Forms 10-K, 10-Q and 8-K, and amendments
thereto, may be accessed soon after such material is
electronically filed with the Securities and Exchange Commission
(SEC), through Wescos website,
www.wescofinancial.com, or the SECs, www.sec.gov.
MS Property owns a business block in Pasadena, California
situated between the city hall and a large shopping mall. The
mall has been redeveloped to include residential units and a
multiscreen movie theater. The blocks improvements include
a nine-story office building that was constructed in 1964 and
has approximately 125,000 square feet of net rentable area,
and a multistory garage with space for 425 vehicles. Of the
125,000 square feet of space in the office building,
approximately 5,000 square feet are used by MS Property or
leased to Blue Chip or Wesco. The remaining space is almost
fully leased to outside parties, including Citibank (the ground
floor tenant), law firms and others, under agreements expiring
at dates extending to 2010. Adjacent to the building and garage
is a vacant parcel; MS Property is seeking city approval of its
plans to redevelop the parcel, together with a vacant parcel of
land it owns in the next block, for condominium housing.
MS Property also owns several buildings that are leased to
various small businesses in a small shopping center in Southern
California.
Wes-FICs place of business is the Omaha, Nebraska
headquarters office of NICO.
KBS leases 5,100 square feet of office space in a
multistory office building in Topeka, Kansas under a lease that
expires in 2007.
CORT leases 16,212 square feet of office space in a
multistory office building in Fairfax, Virginia, which it uses
as its headquarters. It has an option to renew the lease for
five years beyond its 2006 expiration.
CORT carries out its rental, sales and warehouse operations in
metropolitan areas in 34 states and the District of
Columbia through 174 facilities, of which 18 were owned and
the balance leased as of December 31, 2004. The leased
facilities lease terms expire at dates ranging from 2005
to 2015. CORT has generally been able to extend expiration dates
of its leases or obtain suitable alternative facilities on
satisfactory terms. As leases expire, CORT has been eliminating
redundant locations. Where locations are desirable, its
management has been attempting to combine rental, clearance and
warehouse operations rather than retain separate showrooms,
because business and residential customers have been
increasingly using the Internet, fax and telephone.
CORTs showrooms generally have 4,000 to 5,000 square
feet of floor space. CORT regularly reviews the presentation and
appearance of its furniture showrooms and clearance centers and
periodically improves or refurbishes them to enhance their
attractiveness to customers.
Relocation Central leases 3,800 square feet of office space
in a multistory office building in Santa Clara, California,
which it uses as its headquarters. The lease expires in February
2006. Its
16
apartment locator services are situated in 24 leased facilities
in 20 metropolitan areas in 16 states under leases expiring
at dates ranging from 2005 to 2007, as well as in 13 of
CORTs showrooms.
Precision Steel and its subsidiaries own three buildings housing
their plant and office facilities, with usable area
approximately as follows: 138,000 square feet in Franklin
Park, Illinois; 63,000 square feet in Charlotte, North
Carolina; and 59,000 square feet in Downers Grove, Illinois.
|
|
Item 3. |
Legal Proceedings |
Wesco and its subsidiaries are not involved in any legal
proceedings that are expected to result in detrimental financial
impact material to its shareholders equity. However, see
Note 5 to the accompanying consolidated financial
statements for an explanation of an environmental matter
involving Precision Steel and one of its subsidiaries that could
materially impact consolidated net income in any given fiscal
period.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity Securities |
Wescos capital stock is traded on the American Stock
Exchange and the Pacific Stock Exchange.
The following table sets forth quarterly ranges of composite
prices for American Stock Exchange trading of Wesco shares for
2004 and 2003, based on data reported by the American Stock
Exchange, as well as cash dividends paid by Wesco on each
outstanding share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Sales Price | |
|
|
|
Sales Price | |
|
|
|
|
| |
|
Dividends | |
|
| |
|
Dividends | |
Quarter Ended |
|
High | |
|
Low | |
|
Paid | |
|
High | |
|
Low | |
|
Paid | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
March 31
|
|
$ |
410 |
|
|
$ |
324 |
|
|
$ |
0.345 |
|
|
$ |
310 |
|
|
$ |
285 |
|
|
$ |
0.335 |
|
June 30
|
|
|
433 |
|
|
|
351 |
|
|
|
0.345 |
|
|
|
322 |
|
|
|
285 |
|
|
|
0.335 |
|
September 30
|
|
|
374 |
|
|
|
339 |
|
|
|
0.345 |
|
|
|
357 |
|
|
|
303 |
|
|
|
0.335 |
|
December 31
|
|
|
419 |
|
|
|
338 |
|
|
|
0.345 |
|
|
|
373 |
|
|
|
315 |
|
|
|
0.335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.380 |
|
|
|
|
|
|
|
|
|
|
$ |
1.340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were approximately 525 shareholders of record of
Wescos capital stock as of the close of business on
March 14, 2005. It is estimated that approximately 4,600
additional Wesco shareholders held shares of Wescos
capital stock in street name at that date.
Wesco did not purchase any of its own equity securities during
2004.
17
Item 6. Selected Financial Data
Set forth below and on the following page are selected
consolidated financial data for Wesco and its subsidiaries. For
additional financial information, attention is directed to
Wescos audited 2004 consolidated financial statements
appearing elsewhere in this report. (Amounts are in thousands
except for amounts per share.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,161,163 |
|
|
$ |
1,052,462 |
|
|
$ |
349,812 |
|
|
$ |
120,784 |
|
|
$ |
153,810 |
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
94,299 |
|
|
|
167,390 |
|
|
|
827,537 |
|
|
|
924,160 |
|
|
|
839,683 |
|
|
|
Marketable equity securities
|
|
|
759,658 |
|
|
|
754,634 |
|
|
|
626,768 |
|
|
|
667,262 |
|
|
|
833,937 |
|
|
Accounts receivable
|
|
|
46,007 |
|
|
|
60,168 |
|
|
|
67,425 |
|
|
|
43,871 |
|
|
|
38,444 |
|
|
Rental furniture
|
|
|
171,983 |
|
|
|
163,699 |
|
|
|
187,480 |
|
|
|
212,586 |
|
|
|
244,847 |
|
|
Goodwill of acquired businesses
|
|
|
266,607 |
|
|
|
266,607 |
|
|
|
266,203 |
|
|
|
264,465 |
|
|
|
260,037 |
|
|
Other assets
|
|
|
71,818 |
|
|
|
73,435 |
|
|
|
81,750 |
|
|
|
86,565 |
|
|
|
90,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,571,535 |
|
|
$ |
2,538,395 |
|
|
$ |
2,406,975 |
|
|
$ |
2,319,693 |
|
|
$ |
2,460,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss adjustment expenses
|
|
$ |
56,162 |
|
|
$ |
102,526 |
|
|
$ |
73,065 |
|
|
$ |
61,879 |
|
|
$ |
39,959 |
|
|
Unearned insurance premiums
|
|
|
25,341 |
|
|
|
28,993 |
|
|
|
48,681 |
|
|
|
24,897 |
|
|
|
17,006 |
|
|
Deferred furniture rental income and security deposits
|
|
|
20,358 |
|
|
|
19,835 |
|
|
|
21,562 |
|
|
|
23,796 |
|
|
|
27,669 |
|
|
Notes payable
|
|
|
29,225 |
|
|
|
12,679 |
|
|
|
32,481 |
|
|
|
33,649 |
|
|
|
56,035 |
|
|
Income taxes payable, principally deferred
|
|
|
272,005 |
|
|
|
247,241 |
|
|
|
227,902 |
|
|
|
225,665 |
|
|
|
305,175 |
|
|
Other liabilities
|
|
|
51,501 |
|
|
|
48,931 |
|
|
|
45,122 |
|
|
|
37,410 |
|
|
|
38,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
454,592 |
|
|
$ |
460,205 |
|
|
$ |
448,813 |
|
|
$ |
407,296 |
|
|
$ |
483,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock and surplus
|
|
$ |
33,324 |
|
|
$ |
33,324 |
|
|
$ |
30,439 |
|
|
$ |
30,439 |
|
|
$ |
30,439 |
|
|
Unrealized appreciation of investments, net of taxes
|
|
|
427,690 |
|
|
|
426,542 |
|
|
|
374,571 |
|
|
|
372,267 |
|
|
|
480,469 |
|
|
Retained earnings
|
|
|
1,655,929 |
|
|
|
1,618,324 |
|
|
|
1,553,152 |
|
|
|
1,509,691 |
|
|
|
1,466,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$ |
2,116,943 |
|
|
$ |
2,078,190 |
|
|
$ |
1,958,162 |
|
|
$ |
1,912,397 |
|
|
$ |
1,977,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per capital share
|
|
$ |
297.33 |
|
|
$ |
291.89 |
|
|
$ |
275.03 |
|
|
$ |
268.60 |
|
|
$ |
277.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and service revenues
|
|
$ |
414,508 |
|
|
$ |
406,250 |
|
|
$ |
437,099 |
|
|
$ |
443,628 |
|
|
$ |
426,096 |
|
|
Insurance premiums earned
|
|
|
54,589 |
|
|
|
106,651 |
|
|
|
64,627 |
|
|
|
43,031 |
|
|
|
23,783 |
|
|
Dividend and interest income
|
|
|
36,844 |
|
|
|
44,763 |
|
|
|
70,652 |
|
|
|
70,981 |
|
|
|
59,759 |
|
|
Realized net investment gains
|
|
|
|
|
|
|
53,466 |
|
|
|
|
|
|
|
|
|
|
|
1,311,270 |
|
|
Other
|
|
|
3,372 |
|
|
|
3,187 |
|
|
|
3,299 |
|
|
|
3,439 |
|
|
|
3,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,313 |
|
|
|
614,317 |
|
|
|
575,677 |
|
|
|
561,079 |
|
|
|
1,823,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold
|
|
|
146,783 |
|
|
|
144,725 |
|
|
|
145,677 |
|
|
|
144,712 |
|
|
|
146,649 |
|
|
Insurance losses, loss adjustment and underwriting expenses
|
|
|
32,062 |
|
|
|
82,497 |
|
|
|
58,736 |
|
|
|
46,682 |
|
|
|
19,392 |
|
|
Selling, general and administrative
|
|
|
261,434 |
|
|
|
278,090 |
|
|
|
288,353 |
|
|
|
276,712 |
|
|
|
227,954 |
|
|
Interest expense
|
|
|
799 |
|
|
|
749 |
|
|
|
1,994 |
|
|
|
4,169 |
|
|
|
5,235 |
|
|
Goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,476 |
|
|
|
6,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441,078 |
|
|
|
506,061 |
|
|
|
494,760 |
|
|
|
479,751 |
|
|
|
405,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
68,235 |
|
|
|
108,256 |
|
|
|
80,917 |
|
|
|
81,328 |
|
|
|
1,418,392 |
|
Income taxes
|
|
|
20,808 |
|
|
|
34,852 |
|
|
|
28,199 |
|
|
|
28,792 |
|
|
|
495,922 |
|
Minority interest in net loss of subsidiary
|
|
|
|
|
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
$ |
52,536 |
|
|
$ |
922,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per capital share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
6.66 |
|
|
$ |
10.49 |
|
|
$ |
7.40 |
|
|
$ |
7.38 |
|
|
$ |
129.56 |
|
|
|
Cash dividends
|
|
|
1.38 |
|
|
|
1.34 |
|
|
|
1.30 |
|
|
|
1.26 |
|
|
|
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
In reviewing this item, attention is directed to Item 6,
Selected Financial Data, and Item 1, Business.
OVERVIEW
Financial Condition
Wesco continues to have a strong balance sheet at
December 31, 2004, with relatively little debt and no
hedging. Liquidity, which has traditionally been high, has been
even higher than usual for the past two years due principally to
sales, maturities and early redemptions of most of Wescos
mortgage-backed securities and other fixed-maturity investments
and reinvestment of the proceeds in cash equivalents pending
redeployment, mainly in the first half of 2003.
Wescos equity investments are in strong, well-known
companies. The practice of concentrating in a few issues, rather
than diversifying, follows the investment philosophy of the
chairmen-CEOs of Wesco and its parent, Berkshire, who consult
with respect to Wescos investments and major capital
allocations.
Results of Operations
No investment gains or losses were realized in 2004. Investment
gains were realized in 2003 for the first time in three years.
Decisions to sell investments at Wesco are made without regard
to the
19
effect on periodic earnings, and the amounts and timing of
realizations have no predictive or practical analytic value.
As explained in Note 2 to the accompanying consolidated
financial statements, a pre-tax gain of approximately
$290 million, based on current trading prices, is expected
to be realized in 2005.
Ignoring realized investment gains, improved operating results
of the furniture rental and industrial segments were responsible
for an increase in after-tax operating earnings in 2004,
following a decline in such earnings in 2003, when
(1) insurance underwriting results were more than offset by
reduced investment income that resulted from the shift from
longer-term to very-short-term fixed-maturity investments
bearing lower interest rates, and (2) the furniture rental
and industrial segments suffered from the effects of the ongoing
weak economy and other unfavorable factors.
Wesco does not manage with a view toward Wall Street
expectations. Its management is not concerned with the
volatility of short-term operating results, so long as long-term
prospects are satisfactory.
FINANCIAL CONDITION
Wescos shareholders equity at December 31, 2004
was $2.12 billion ($297.33 per share), up from
$2.08 billion ($291.89 per share) at December 31,
2003. Shareholders equity included $427.7 million at
December 31, 2004, and $426.5 million at
December 31, 2003, representing appreciation in market
value of investments, which is credited directly to
shareholders equity, net of taxes, without being reflected
in earnings. Because unrealized appreciation is recorded using
market quotations, gains or losses ultimately realized upon sale
of investments could differ substantially from recorded
unrealized appreciation. Net unrealized appreciation constituted
approximately 20.2% of shareholders equity at
December 31, 2004 and 20.5% at December 31, 2003. (See
Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, as well as Notes 1 and 2 to Wescos
accompanying consolidated financial statements, for additional
information on investments.)
Wescos consolidated cash and cash equivalents, held
principally by its insurance businesses, increased from
$1.1 billion at December 31, 2003 to $1.2 billion
at December 31, 2004.
Wescos consolidated borrowings totaled $29.2 million
at December 31, 2004 versus $12.7 million at
December 31, 2003. Of these amounts, $29.0 million and
$12.1 million related to a $100 million revolving line
of credit used in CORTs furniture rental business. In
addition to this recorded debt, Wesco and its subsidiaries had
operating lease and other contractual obligations at
December 31, 2004 of $130.2 million, down from
$140.6 million a year earlier.
Wescos liability for unpaid losses and loss adjustment
expenses at December 31, 2004 totaled $56.2 million
versus $102.5 million at December 31, 2003. The
decline was attributable primarily to losses paid in connection
with the commutation of a reinsurance contract by Wes-FIC in the
fourth quarter of 2004. (See Item 1, Business,
page 11, for further information on the commutation.)
Wescos management believes the Wesco group has adequate
liquidity and capital resources to provide for any contingent
needs that may arise. Borrowings from banks and others have been
available to Wesco and its subsidiaries under attractive terms
for a number of years. Wes-FIC enjoys Standard &
Poors Corporations highest rating, AAA, with respect
to its claims-paying ability.
RESULTS OF OPERATIONS
The consolidated data in the second table in Item 6 are set
forth essentially in the income statement format customary to
generally accepted accounting principles (GAAP).
Revenues, including realized net securities gains, are followed
by costs and expenses, and a provision for income taxes, to
arrive at net income. The following summary sets forth the
after-tax contribution to GAAP 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 are
excluded from segment
20
activities, consistent with the way Wescos management
views the business operations. (Amounts are in thousands, all
after income tax effect.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Insurance segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
|
|
$ |
14,618 |
|
|
$ |
15,711 |
|
|
$ |
3,829 |
|
|
Investment income
|
|
|
26,302 |
|
|
|
30,925 |
|
|
|
45,642 |
|
Furniture rental segment
|
|
|
5,022 |
|
|
|
(6,257 |
) |
|
|
2,442 |
|
Industrial segment
|
|
|
1,094 |
|
|
|
(860 |
) |
|
|
250 |
|
|
Nonsegment items other than investment gains
|
|
|
391 |
|
|
|
439 |
|
|
|
555 |
|
|
Realized investment gains
|
|
|
|
|
|
|
34,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
|
|
|
|
|
|
|
|
|
In the following sections the data set forth in the foregoing
summary on an after-tax basis are broken down and
discussed. Attention is directed to Note 9 to the
accompanying consolidated financial statements for additional
information.
Insurance Segment
Following is a summary of the results of operations of the
insurance segment (i.e., Wes-FIC and KBS), which represent the
combination of underwriting results with dividend and interest
income. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Premiums written
|
|
$ |
45,042 |
|
|
$ |
86,962 |
|
|
$ |
88,411 |
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$ |
54,589 |
|
|
$ |
106,651 |
|
|
$ |
64,627 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain
|
|
$ |
22,490 |
|
|
$ |
24,171 |
|
|
$ |
5,891 |
|
Dividend and interest income
|
|
|
36,035 |
|
|
|
44,118 |
|
|
|
70,007 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
58,525 |
|
|
|
68,289 |
|
|
|
75,898 |
|
Income taxes
|
|
|
17,605 |
|
|
|
21,653 |
|
|
|
26,427 |
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$ |
40,920 |
|
|
$ |
46,636 |
|
|
$ |
49,471 |
|
|
|
|
|
|
|
|
|
|
|
Premiums written for 2004, 2003 and 2002 included
$24.3 million, $67.1 million and $67.7 million
attributable to Wes-FIC, and $20.7 million,
$19.9 million and $20.7 million attributable to KBS.
Earned premiums for 2004, 2003 and 2002 included
$34.2 million, $86.5 million and $45.4 million
attributable to Wes-FIC, and $20.4 million,
$20.2 million and $19.2 million attributable to KBS.
At December 31, 2004, Wes-FICs in-force reinsurance
business consisted of a contract under which it was
participating in various pools of aviation-related risks. Under
the contract, written premiums in 2004, 2003 and 2002 totaled
$26.7 million, $36.7 million and $40.1 million
and earned premiums were $27.9 million, $44.3 million
and $24.4 million. The decline in written aviation
reinsurance premiums for 2004 was caused mainly by increased
competition. Prices in certain aviation markets declined,
resulting in fewer opportunities to write business at prices
considered acceptable. Also, Wes-FICs participation
dropped; its participation in the aviation pools has generally
varied from year to year.
During 2004, Wes-FIC also participated in a multi-year contract
covering certain multi-line property and casualty risks of a
large, unaffiliated insurer under a contract entered into in
2000. That contract was commuted in the fourth quarter of 2004
at which time Wes-FIC paid the ceding company
$43.1 million, cash, representing all unearned premiums,
reduced by unamortized costs and
21
expenses. After the commutation, Wes-FICs obligation to
indemnify with respect to any further insurance losses under the
contract ceased. Under that contract, there was a net reduction
in written premiums of $2.3 million for 2004, compared with
written premiums of $30.4 million and $27.7 million
for 2003 and 2002; earned premiums were $6.2 million,
$42.0 million and $20.9 million, respectively.
Premiums written by KBS for 2004, 2003 and 2002 were
$20.7 million, $19.9 million and $20.7 million.
The decrease in its written premiums in 2003 resulted from a
change in the cost of ceded reinsurance; premiums written,
before the purchase of reinsurance, increased slightly for the
year. The increases in premiums written by KBS in recent years
have been principally due to growth in volume of bank deposit
guarantee bonds; this product currently accounts for
approximately 45% of premiums written by KBS. Premiums earned by
KBS for those years were $20.4 million, $20.2 million
and $19.2 million.
For 2004, 2003 and 2002, reinsurance generated underwriting
gains, before income taxes, of $17.1 million,
$17.2 million and $0.1 million. Included in those
amounts were underwriting gains of $3.6 million, $15.7 and
$2.6 million relating to the aviation contract.
Underwriting results in 2004 also included a pre-tax gain of
$11.0 million (including $10.7 million in the fourth
quarter) associated with the aforementioned commuted contract.
This contract produced pre-tax underwriting losses of
$1.7 million in 2003 and $3.1 million in 2002.
KBS underwriting gains were $5.3 million,
$7.0 million and $5.8 million for 2004, 2003 and 2002.
Unlike Wes-FIC, KBS writes numerous, relatively small insurance
policies, and thus management considers overall combined ratios
(the sum of insurance losses, loss adjustment expenses and
underwriting expenses divided by premiums) to be meaningful.
KBS combined ratios were 74.9%, 65.0% and 71.3% for 2004,
2003 and 2002. Wescos insurers cede minimal amounts of
business, and as a result, underwriting results may be volatile.
Management accepts volatility provided the prospects of
long-term profitability remain favorable.
Since September 11, 2001, the insurance industry has been
particularly concerned about its exposure to claims resulting
from acts of terrorism. As explained in Item 1, Business,
in spite of partial relief provided by the Terrorism Risk
Insurance Act, enacted in 2002, Wes-FIC is exposed to insurance
losses from terrorist events. Although Wes-FICs (and thus
Wescos) exposure to such losses from an insurance
standpoint cannot be predicted, Wes-FICs management does
not believe it likely that, on a worst-case basis,
Wes-FICs shareholders equity would be severely
impacted by future terrorism-related insurance losses under
reinsurance or insurance contracts currently in effect. It
should be noted that the commutation of the multi-line property
and casualty contract in 2004 resulted in the return to the
ceding company of all remaining liability relating to the
terrorist activity of September 11, 2001.
Other industry concerns in recent years have been exposures to
losses relating to environmental contamination and asbestos.
Wes-FICs management currently believes such exposures to
be minimal.
Dividend and interest income has been earned by the insurance
segment principally from the investment of shareholder capital
(including reinvested earnings) as well as float (premiums
received before payment of related claims and expenses).
Dividend and interest income earned by the insurance segment
declined in each of the past two years from the corresponding
2002 figure principally because proceeds from sales, maturities
and early redemptions of long-term, fixed-maturity investments
were reinvested in lower-yielding, short-term investments and
cash equivalents. This shift occurred since the end of 2002,
principally during the first half of 2003.
22
Furniture Rental Segment
Following is a summary of the results of operations of the
furniture rental segment, which consists of CORT including
Relocation Central. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals
|
|
$ |
275,378 |
|
|
$ |
275,949 |
|
|
$ |
309,341 |
|
|
Furniture sales
|
|
|
67,772 |
|
|
|
68,253 |
|
|
|
72,816 |
|
|
Apartment locator fees
|
|
|
10,844 |
|
|
|
15,910 |
|
|
|
6,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,994 |
|
|
|
360,112 |
|
|
|
388,583 |
|
|
|
|
|
|
|
|
|
|
|
Cost of rentals, sales and fees
|
|
|
96,266 |
|
|
|
105,998 |
|
|
|
116,354 |
|
Selling, general and administrative expenses
|
|
|
249,319 |
|
|
|
265,799 |
|
|
|
266,796 |
|
Interest expense
|
|
|
799 |
|
|
|
749 |
|
|
|
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346,384 |
|
|
|
372,546 |
|
|
|
384,940 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
7,610 |
|
|
|
(12,434 |
) |
|
|
3,643 |
|
Income taxes
|
|
|
2,588 |
|
|
|
(4,870 |
) |
|
|
1,201 |
|
Minority interest in net loss of subsidiary
|
|
|
|
|
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income (loss)
|
|
$ |
5,022 |
|
|
$ |
(6,257 |
) |
|
$ |
2,442 |
|
|
|
|
|
|
|
|
|
|
|
Furniture rental revenues for 2004 were essentially unchanged
from those of 2003 after having declined in 2003 by
$33.4 million, or 10.8%, from those of 2002. Excluding
$31.7 million, $25.9 million and $57.0 million of
rental revenues from trade shows and locations not in operation
throughout each year, rental revenues for 2004 declined 3% from
those of 2003; this followed declines of approximately 12% and
17%, respectively, in the two preceding years in spite of a
price increase of 4% to 5% in each year. The number of furniture
leases at yearend 2004 was about 2% higher than at yearend 2003
after having steadily declined over 20% since the peak level
attained in late 2000. Management believes that the downward
trend in dollars and units has possibly ended. Management
attributes the downward trend prior to 2004 mainly to a slowdown
in new business formation and business failures notably in the
high-technology industry, exacerbated to some degree by the
terrorist activity on September 11, 2001.
Furniture sales revenues decreased 0.7% in 2004 and 6.3% in 2003
from those of each previous year. CORT, in managing the level of
excess, idle inventory, periodically discounts selling prices,
as it did in 2002, resulting in higher-than-normal sales
revenues.
Apartment locator fees for 2004, all generated by Relocation
Central, decreased $5.1 million, or 32%, from those
reported for 2003, after increasing $9.5 million, or 148%
from those for 2002 principally through acquisitions. Since late
in 2003, Relocation Centrals operations have been
undergoing reorganization in order to reduce operating losses.
Some of its walk-in facilities have been merged into CORTs
facilities, and others have been closed, resulting in
significant cost and expense reductions. The reduction in
Relocation Centrals revenues has been more than offset by
a reduction in its costs and expenses, discussed below.
Cost of rentals, sales and fees amounted to 27.2% of revenues
for 2004 versus 29.4% for 2003 and 29.9% for 2002. The decreases
in cost percentages for 2004 and 2003 reflect improved rental
margins, as well as lower depreciation expense in each year, in
spite of a writedown of obsolete and excess inventories by
$1.6 million in 2003, and lower apartment locator lead
acquisition costs. Purchases of new inventory increased slightly
in 2004 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 $9.4 mil-
23
lion in 2004, down from $15.1 million in 2003 and
$10.3 million in 2002. Excluding such costs, segment costs
for furniture rentals and sales were 25.3% in 2004, 26.4% in
2003 and 27.7% in 2002.
Selling, general, administrative and interest expenses
(operating expenses) for the segment were
$250.1 million for 2004, down 6.2% from the
$266.5 million incurred for 2003, following a decrease of
0.8% from the $268.6 million incurred for 2002. A
contributing factor in the improvement in segment operating
expenses was the previously discussed reorganization of the
apartment locator operation; as a result, apartment
locator-related expenses declined to $11.0 million for 2004
from $16.6 million in 2003 and, on significantly lower
revenues, $8 million in 2002. Excluding apartment
locator-related expenses, segment operating expenses amounted to
$239.1 million for 2004, down $10.8 million and
$21.5 million, or 4.3% and 8.3%, from the
$249.9 million and $260.6 million incurred in 2003 and
2002. Further reductions in segment operating expenses are
anticipated as additional efficiencies are realized from the
reorganization of the apartment locator operation as well as
from ongoing efforts to control expenses in the furniture rental
and sales operations.
Income or loss before income taxes and minority interest for the
furniture rental segment amounted to income of $7.6 million
for the year 2004, a loss of $12.4 million for 2003, and
income of $3.6 million for 2002. If the portion of these
amounts representing Relocation Central losses
($11.4 million for 2004, $15.9 million for 2003, and
$12.8 million for 2002) were eliminated, income before
taxes and minority interest would have been $19.0 million
for 2004, $3.5 million for 2003, and $16.4 million for
2002. The $12.9 million decline from 2002 to 2003 was due
to the fact that CORTs operating and other costs and
expenses, principally fixed, were not sufficiently reduced to
compensate for decreasing revenues. The $15.5 million
improvement in the operating results in 2004 is primarily
attributable to the aforementioned reductions in operating
expenses.
The minority interest in net loss of subsidiary of
$1.3 million in 2003 relates to a period of several months
during which Relocation Central was an 80%-owned subsidiary of
CORT. (See Note 4 to the accompanying consolidated
financial statements for further information.)
Industrial Segment
Following is a summary of the results of operations of the
industrial segment, consisting of the businesses of Precision
Steel and its subsidiaries. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues, principally sales and services
|
|
$ |
60,514 |
|
|
$ |
46,138 |
|
|
$ |
48,567 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$ |
1,758 |
|
|
$ |
(1,531 |
) |
|
$ |
663 |
|
Income taxes
|
|
|
664 |
|
|
|
(671 |
) |
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
Segment net income (loss)
|
|
$ |
1,094 |
|
|
$ |
(860 |
) |
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
For several years prior to 2004, the operations of industrial
segment suffered due to various factors including the following:
a prolonged economic downturn, a shift of production by many
manufacturers from domestic to overseas facilities, periodic
shortages of product from domestic mills, and extraordinary
competitive pressures. Not only was there a decline in the
number of orders placed, but there was also a trend towards
smaller-sized orders. The severity of the impact on the business
is demonstrated by the fact that average annual segment revenues
for the years 2001 through 2003 were down 27% from those
reported for 1998 through 2000. Segment revenues for 2003
decreased 5.0% from the corresponding 2002 figure; pounds of
steel products sold decreased 6.6%.
At the beginning of 2004, a shortage of raw materials from
domestic mills produced near chaos in the steel service
industry. Fortunately, the impact on Wescos industrial
segment revenues to date has been favorable. Segment revenues
for 2004 increased $14.4 million, or 31.2%, from those of
2003. Pounds of steel products sold increased 14.5%. Domestic
steel mills have been operating at capacity and imported steel
has not been readily available. These and other factors have
enabled steel mills to
24
raise prices, place limits on order quantities and extend
delivery times. Precision Steel has reacted to these pressures
by passing the price increases, plus normal mark-ups, on to
customers, and favoring long-term customer relationships.
However, management is concerned that the favorable 2004 segment
operating results may have been anomalous and temporary and that
the steel warehouse business may revert to difficult times.
As explained in Note 5 to the accompanying consolidated
financial statements, Precision Steel and a subsidiary are
involved in an environmental matter the ultimate cost of which
is difficult to estimate. Segment operating results include
provisions of $1.0 million ($.6 million after income
taxes) in 2003 and $0.1 million ($0.1 million after
income taxes) in 2004, representing preliminary estimates of
costs of remediation agreed to with governmental entities and
other parties to date and related expenses. Management
anticipates that additional provisions with respect to such
remediation and other legal matters may be required in the
future, but does not anticipate that the ultimate impact of such
provisions will be material in relation to Wescos
shareholders equity, although it believes that the effect
on industrial segment and consolidated net income in any given
period could be material.
Even without the provisions for remediation discussed above,
operations of the industrial segment for 2003 would have
resulted in a loss before income taxes of $.5 million,
versus pre-tax income of $1.9 million for 2004 and
$.7 million for 2002. Income or loss before income taxes of
the industrial segment is dependent not only on revenues, as was
the case in 2004, but also on operating costs and the cost of
products sold. The latter, as a percentage of revenues, amounted
to 83.5%, 83.9% and 81.7% for 2004, 2003 and 2002. The cost
percentage typically fluctuates slightly from year to year as a
result of changes in product mix and price competition at all
levels. Precision Steels cost of products sold percentage
is very sensitive to current changes in the cost of materials
purchased, because it carries its inventories at the lower of
last-in, first-out (LIFO) cost or market; under this
method, the most recent costs are reflected in cost of products
sold. Cost of products sold for 2004 included adverse LIFO
inventory accounting adjustments of $2.9 million
($1.8 million, after income taxes). LIFO adjustments were
insignificant in 2003, but increased earnings by
$0.3 million ($0.2 million after income taxes) for
2002.
Unrelated to Business Segment Operations
Set forth below is a summary of items increasing
(decreasing) Wescos consolidated net income that are
viewed by management as unrelated to the operations of the
insurance, furniture rental and industrial segments. (Amounts
are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Realized investment gains, before income tax effect
|
|
$ |
|
|
|
$ |
53,466 |
|
|
$ |
|
|
Income taxes
|
|
|
|
|
|
|
18,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
$ |
|
|
|
$ |
34,753 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Other nonsegment items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income from commercial real estate
|
|
$ |
3,372 |
|
|
$ |
3,187 |
|
|
$ |
3,248 |
|
|
Dividend and interest income
|
|
|
786 |
|
|
|
617 |
|
|
|
616 |
|
|
Real estate and general and administrative expenses
|
|
|
(3,815 |
) |
|
|
(3,367 |
) |
|
|
(3,186 |
) |
|
Other items, net
|
|
|
(1 |
) |
|
|
29 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
342 |
|
|
|
466 |
|
|
|
713 |
|
|
Income taxes
|
|
|
(49 |
) |
|
|
27 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from other nonsegment activities
|
|
$ |
391 |
|
|
$ |
439 |
|
|
$ |
555 |
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on Wescos investments have
fluctuated in amount from year to year, sometimes impacting net
income significantly, as in 2003 and 2000. However, the amounts
and timing of these realizations have no predictive or practical
analytical value. Wescos investments are carried at market
value, and unrealized gains or losses are reflected, net of
potential income tax effect, in the
25
unrealized appreciation component of its shareholders
equity. When gains or losses are realized, due to sale of
securities or other triggering event, they are credited or
charged to the consolidated statement of income; generally, in
Wescos case, there has been little effect on total
shareholders equity essentially only a
transfer from unrealized appreciation to retained earnings.
Wescos consolidated earnings contained net realized
investment gains, after income taxes, of $34.8 million in
2003 and $852.4 million in 2000; no gains or losses were
realized in 2004, 2002 or 2001. (See Note 2 to the
accompanying consolidated financial statements for information
as to a pre-tax gain of approximately $290 million expected
to be realized in 2005.)
Other nonsegment items include mainly (1) rental income
from owned commercial real estate and (2) dividend and
interest income from marketable securities and cash equivalents
owned outside the insurance subsidiaries, reduced by real estate
and general and administrative expenses plus or
minus income taxes related to such items. These taxes do not
correlate well with total pre-tax income, primarily because
dividend income is substantially tax-exempt.
* * * * *
Wescos 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 30.5%, 32.2% and 34.8%
in 2004, 2003 and 2002. (See Notes 1 and 7 to the
accompanying consolidated financial statements for further
information on income taxes.)
Managements principal goal is to maximize gain in
Wescos intrinsic business value per share over the long
term. Accounting consequences do not influence business
decisions. There is no particular strategy as to the timing of
sales of investments. Investments may be sold for a variety of
reasons, including (1) the belief that prospects for future
appreciation of a particular investment are less attractive than
the prospects for reinvestment of the after-tax proceeds from
its sale, or (2) the desire to generate funds for an
acquisition or repayment of debt.
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 investment gains and losses,
as well as other unusual nonoperating items such as a large
acquisition. In addition, consolidated revenues, expenses and
net income are subject to external conditions such as the
September 11, 2001 terrorist activity, which had an
immediate impact on Wes-FICs underwriting results, and
changes in the economy, which have adversely affected CORT and
Precision Steel in recent years.
As explained in Item 1, Business, in spite of relief
provided by enactment of the Terrorism Risk Insurance Act
(TRIA) in 2002, Wes-FIC is exposed to losses from
terrorist events covered by TRIA occurring after that date as
well as terrorism losses not covered by TRIA. Although
Wes-FICs and thus Wescos exposure to terrorism
losses cannot be predicted, Wes-FICs management does not
believe that, on a worst-case basis, Wes-FICs
shareholders equity would likely be severely impacted by
any terrorism-related insurance losses under reinsurance or
insurance contracts currently in effect.
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 earnings.
Wesco is not now suffering from inflation, but its business
operations have potential exposure, particularly in the
insurance and industrial segments. Large unanticipated changes
in the rate of inflation could adversely impact the insurance
business, because premium rates are established well in advance
of expenditures. Precision Steels businesses are
competitive and operate on tight gross profit margins, making
their earnings susceptible to inflationary and deflationary cost
changes; the
26
impact, though not material in relation to Wescos
consolidated net income, may be significant to that of the
industrial segment, due particularly to the segments use
of LIFO inventory accounting.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Neither Wesco nor any of its subsidiaries has off-balance sheet
arrangements other than the unrecorded contractual obligations
discussed below. Nor do they have any insurance obligations for
which estimated provisions have not been made in the
accompanying consolidated financial statements or notes thereto.
Wesco and its subsidiaries have contractual obligations
associated with ongoing business activities, which will result
in cash payments in future periods. Certain of those
obligations, such as notes payable, are reflected in the
accompanying consolidated financial statements. In addition,
Wesco and its subsidiaries have entered into long-term contracts
to acquire goods or services in the future, which are not
currently reflected in the consolidated financial statements and
will be reflected in future periods as the goods are delivered
or services provided. A summary of contractual obligations
follows. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due | |
|
|
|
|
| |
|
|
Total | |
|
2005 | |
|
2006-2007 | |
|
2008-2009 | |
|
Subsequently | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Notes payable, including interest
|
|
$ |
29,348 |
|
|
$ |
29,148 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
200 |
|
Operating lease obligations
|
|
|
110,830 |
|
|
|
27,136 |
|
|
|
40,399 |
|
|
|
23,948 |
|
|
|
19,347 |
|
Purchase obligations, other than for capital expenditures
|
|
|
15,223 |
|
|
|
13,450 |
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
Other, principally deferred compensation
|
|
|
4,137 |
|
|
|
142 |
|
|
|
152 |
|
|
|
|
|
|
|
3,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
159,538 |
|
|
$ |
69,876 |
|
|
$ |
42,324 |
|
|
$ |
23,948 |
|
|
$ |
23,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRITICAL ACCOUNTING POLICIES AND PRACTICES
Wescos consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the
United States (GAAP). The significant accounting
policies and practices followed by Wesco are set forth in
Note 1 to the accompanying consolidated financial
statements. Following are the accounting policies and practices
considered by Wescos management to be critical to its
determination of consolidated financial position and results of
operations.
In preparing the consolidated financial statements management is
required to make estimates and assumptions based on evaluation
of facts and circumstances using information currently
available. Although the amounts of assets, liabilities, revenues
and expenses included in the consolidated financial statements
may differ significantly from those that might result from use
of estimates and assumptions based on facts and circumstances
not yet available, Wescos management does not believe such
differences would have a material adverse effect on reported
shareholders equity.
Liabilities for insurance losses and loss adjustment expenses as
of any balance sheet date represent estimates of the ultimate
amounts payable under property and casualty reinsurance and
insurance contracts related to losses occurring on or before the
balance sheet date. As of that date, some incurred claims have
not yet been reported (and some of these may not be reported for
many years); the liability for unpaid losses includes
significant estimates for these claims. Additionally, reported
claims are in various stages of the settlement process. Each
claim is settled individually based upon its merits, and some
take years to settle, especially if legal action is involved.
Actual ultimate claims amounts are likely to differ from amounts
recorded at the balance sheet date. Changes in estimates are
recorded as a component of losses incurred in the period of
change. Provisions for losses and loss adjustment expenses are
reported in the consolidated statement of income after deducting
estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do
27
not relieve the ceding companies of their obligations to
indemnify policyholders with respect to the underlying insurance
contracts.
Goodwill of acquired businesses represents the difference
between purchase cost and the fair value of net assets of
acquisitions. At least annually, goodwill is reviewed for
impairment using a variety of methods, and impairments, if any,
are charged to operating earnings. Prior to 2002, GAAP required
the amortization of goodwill.
The appropriate classifications of investments in securities
with fixed maturities and marketable equity securities are
established at the time of purchase and reevaluated as of each
balance sheet date. There are three permissible classifications:
held-to-maturity, trading, and, when neither of those
classifications is applicable, available-for-sale. In recent
years Wescos management has classified all of its equity
and fixed-maturity investments as available-for-sale; they are
carried at fair value, with unrealized gains and losses, net of
income taxes, reported as a separate component of
shareholders equity.
Insurance premiums are recognized as earned revenues in
proportion to the insurance protection provided, which in most
cases is pro rata over the term of each contract. Unearned
insurance premiums are deferred in the liability section of the
consolidated balance sheet. Certain costs of acquiring premiums
are deferred in other assets on Wescos consolidated
balance sheet, and charged to income as the premiums are earned.
Furniture rentals are recognized as revenue proportionately over
the rental contract period; rentals received in advance are
deferred in the liability section of the consolidated balance
sheet. Related costs comprise the main element of cost of
products and services sold on the consolidated income statement
and include depreciation expense, repairs and maintenance and
inventory losses. Rental furniture consists principally of
residential and office furniture which is available for rental
or, if no longer up to rental standards or excessive, for sale.
It is carried on the consolidated balance sheet at cost, less
accumulated depreciation calculated primarily on a
declining-balance basis over 3 to 5 years using estimated
salvage values of 25 to 40 percent of original cost.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
Wescos consolidated balance sheet contains substantial
amounts of investments whose estimated fair
(carrying) values are subject to market risks. Values of
marketable equity securities are subject to fluctuations in
their stock market prices, and values of securities with fixed
maturities are subject to changes in interest rate levels. Apart
from investments, the consolidated balance sheet at
December 31, 2004 did not contain significant assets or
liabilities with values subject to these or other potential
market exposures such as those relating to changes in commodity
prices or foreign exchange rates. Wesco does not utilize
derivatives to manage market risks.
EQUITY PRICE RISK
Wescos consolidated balance sheet at December 31,
2004 contained $760 million of marketable equity securities
stated at market value, up from $755 million one year
earlier. The increase was due to an increase in market values;
no marketable equity securities were purchased or sold during
2004. The carrying values of Wescos equity securities are
exposed to market price fluctuations, which may be accentuated
by the concentration existing in the equity portfolio. (At
December 31, 2004, two investments comprised 77% of the
carrying value of the consolidated equity portfolio.) In
addition, the businesses represented by the equity investments
are exposed to risks related to other markets. The two largest
holdings of the consolidated group at December 31, 2004
($587 million, combined) were common stocks of The
Coca-Cola Company and The Gillette Company, both of which have
global operations and thus are subject to changes in foreign
currency exchange rates. These and other market risks to which
these investees are subject, such as commodity price
fluctuations, are required, where material, to be reported upon
in the filings these companies make with the SEC, which are
available to the public.
28
Strategically, Wesco strives to invest in businesses that
possess excellent economics, with able and honest management, at
sensible prices. Wescos management prefers to invest a
meaningful amount in each investee, resulting in concentration.
Most equity investments are expected to be held for long periods
of time; thus, Wescos management is not ordinarily
troubled by short-term price volatility with respect to its
investments provided that the underlying business, economic and
management characteristics of the investees remain favorable.
Wesco strives to maintain above- average levels of
shareholders equity to provide a margin of safety against
short-term equity price volatility.
The carrying values of investments subject to equity price risks
are based on quoted market prices. Market prices are subject to
fluctuation and, consequently, the amount realized upon the
subsequent sale of an investment may significantly differ from
the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying
economic characteristics of the investee, the relative prices of
alternative investments, or general market conditions.
Furthermore, amounts realized upon the sale of a particular
security may be adversely affected if a relatively large
quantity of the security is being sold.
The following table summarizes Wescos equity price risks
as of December 31, 2004 and 2003. It shows the effects of a
hypothetical 30% overall increase or decrease in market prices
of marketable equity securities owned by the Wesco group on
total recorded market value and, after tax effect, on
Wescos shareholders equity at each of those dates.
(Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
Increase | |
|
Decrease | |
|
Increase | |
|
Decrease | |
|
|
| |
|
| |
|
| |
|
| |
Market value of marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As recorded
|
|
$ |
759,658 |
|
|
$ |
759,658 |
|
|
$ |
754,634 |
|
|
$ |
754,634 |
|
|
Hypothetical
|
|
|
987,556 |
|
|
|
531,760 |
|
|
|
981,024 |
|
|
|
528,244 |
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As recorded
|
|
|
2,116,943 |
|
|
|
2,116,943 |
|
|
|
2,078,190 |
|
|
|
2,078,190 |
|
|
Hypothetical
|
|
|
2,265,076 |
|
|
|
1,968,810 |
|
|
|
2,225,344 |
|
|
|
1,931,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 30% hypothetical changes in market values assumed in
preparing the tables do not reflect what could be considered
best- or worst-case scenarios. Indeed, actual results could be
much worse or better due both to the nature of equity markets
and the aforementioned concentration existing in Wescos
equity investment portfolio.
INTEREST RATE RISK
Wescos consolidated balance sheet at December 31,
2004 contained $94 million of securities with fixed
maturities stated at fair value, down from $167 million one
year earlier. The decrease resulted from maturities and
redemptions of such securities during the year. Proceeds
received were mainly invested in U.S. Treasury Notes and
investments maturing within three months (cash equivalents); as
a result, cash and cash equivalents on the consolidated balance
sheet increased from $1.05 billion to $1.16 billion
during 2004. Consequently, market value risks with respect to
interest-rate movements or otherwise as of December 31,
2004 are considered insignificant.
The fair values of Wescos fixed-maturity investments
fluctuate in response to changes in market interest rates.
Increases and decreases in prevailing interest rates generally
translate into decreases and increases in fair values. Fair
values of Wescos investments may also be affected by the
creditworthiness of the issuer, prepayment options, relative
values of alternative investments, the liquidity of the
instrument and other general market conditions.
As noted in the preceding section on equity price risk, Wesco
prefers to acquire entire businesses or invest in equity
securities. When unable to do so, it may invest in
mortgage-backed securities,
29
government bonds or other interest-rate-sensitive investments.
Wescos strategy is to acquire securities that are
attractively priced in relation to perceived interest-rate and
credit risks. Although Wescos emphasis is conservative, it
recognizes and accepts that losses may occur.
FORWARD-LOOKING STATEMENTS
Certain written or oral representations of management stated in
this annual 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 Wescos 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 Wescos 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 Wescos 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 Wescos 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.
Item 8. Financial Statements and Supplementary
Data
Following is an index to financial statements and related
schedules of Wesco appearing in this report:
|
|
|
|
|
|
|
Page | |
Financial Statements |
|
Number(s) | |
|
|
| |
|
|
|
35 |
|
|
|
|
36 |
|
|
|
|
37 |
|
|
|
|
38 |
|
|
|
|
39 |
|
|
|
|
40 |
|
Listed below are financial statement schedules required by the
SEC to be included in this report. The data appearing therein
should be read in conjunction with the consolidated financial
statements and notes thereto of Wesco and the independent
auditors report referred to above. Schedules not included
with these financial statement schedules have been omitted
because they are not applicable or the required information is
shown in the consolidated financial statements or notes thereto.
|
|
|
|
|
|
|
|
|
|
|
Schedule | |
|
Page | |
Financial Statement Schedule |
|
Number | |
|
Number(s) | |
|
|
| |
|
| |
Condensed financial information of Wesco
December 31, 2004 and 2003, and years ended
December 31, 2004, 2003 and 2002
|
|
|
I |
|
|
|
49 |
|
30
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Not applicable, as there were no such changes or disagreements.
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Companys management, including
Charles T. Munger, its Chief Executive Officer and Jeffrey L.
Jacobson, its Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures as of December 31, 2004. Based on
that evaluation, Messrs. Munger and Jacobson concluded that
the Companys disclosure controls and procedures are
effective in ensuring that information required to be disclosed
by the Company 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 Exchange Commission.
There has been no change in the Companys internal control
over financial reporting during the fiscal quarter ended
December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Wescos management is responsible for establishing and
maintaining adequate internal control over financial reporting
as such term is defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934 (the Exchange Act). The
internal control system of Wesco and its subsidiaries is
designed to provide reasonable assurance regarding the
preparation and fair presentation of Wescos published
consolidated financial statements. Under the supervision and
with the participation of our management, including our
principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2004 as required by the Exchange Act
Rule 13a-15(c). In making this assessment, we used the
criteria set forth in the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, our management concluded
that our internal control over financial reporting was effective
as of December 31, 2004.
Wescos independent registered public accounting firm has
audited our assessment of internal control over Wescos
consolidated financial reporting as of December 31, 2004.
Their report appears immediately below.
|
|
|
WESCO FINANCIAL CORPORATION |
Pasadena, California
March 9, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wesco Financial Corporation
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Wesco Financial Corporation and
subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment
31
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness
of the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2004 of the Company and our report dated
March 9, 2005 expressed an unqualified opinion on those
financial statements.
Omaha, NE
March 9, 2005
32
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information set forth in the sections entitled
Election of Directors, Executive
Officers, Director Independence, Committees and
Meetings and Code of Business Conduct and
Ethics appearing in the definitive combined notice of
annual meeting and proxy statement of Wesco for its annual
meeting of shareholders scheduled to be held May 4, 2005
(the 2005 Proxy Statement) is incorporated herein by
reference.
|
|
Item 11. |
Executive Compensation |
The information set forth in the section Compensation of
Directors and Executive Officers in the 2005 Proxy
Statement is incorporated herein by reference. All such
compensation is cash compensation; Wesco neither has, nor is
considering having, any stock option plan or other equity
compensation arrangement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The information set forth in the sections Voting
Securities and Principal Holders Thereof, Security
Ownership of Certain Beneficial Owners and Management and
Section 16(A) Beneficial Ownership Reporting
Compliance in the 2005 Proxy Statement is incorporated
herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Certain information set forth in the sections Election of
Directors, Voting Securities and Principal Holders
Thereof, Compensation of Directors and Executive
Officers, Board of Director Interlocks and Insider
Participation and Director Independence, Committees
and Meetings in the 2005 Proxy Statement is incorporated
herein by reference.
|
|
Item 14. |
Principal Accounting Fees and Services |
The information set forth in the section Independent
Registered Public Accounting Firm in the 2005 Proxy
Statement is incorporated herein by reference.
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
The following exhibits (listed by numbers corresponding to
Table 1 of Item 601 of Regulation S-K) are filed as
part of this Annual Report on Form 10-K or are incorporated
herein by reference:
3a Articles of incorporation and by-laws of Wesco
(filed as exhibit 3a to Wescos Form 10-K for the
year ended December 31, 1999)
21 List of subsidiaries (filed as exhibit 21 to
Wescos Form 10-K for the year ended December 31,
2001)
31(a) Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (chief executive officer)
31(b) Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (chief financial officer)
32(a) Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (chief executive officer)
32(b)Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (chief financial officer)
Instruments defining the rights of holders of long-term debt of
Wesco and its subsidiaries are not being filed since the total
amount of securities authorized by all such instruments does not
exceed
33
10% of the total assets of Wesco and its subsidiaries on a
consolidated basis as of December 31, 2004. Wesco hereby
agrees to furnish to the Commission upon request a copy of any
such debt instrument to which it is a party.
The index to financial statements and related schedules set
forth in Item 8 of this report is incorporated herein by
reference.
SIGNATURES
Pursuant to the requirements of Section 13 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
|
|
|
|
|
|
By: |
|
/s/ Charles T. Munger
|
|
|
|
|
Charles T. Munger
Chairman of the Board (principal executive officer) |
|
March 9, 2005 |
|
By:
|
|
/s/ Robert H. Bird
|
|
|
|
|
Robert H. Bird
President |
|
March 9, 2005 |
|
By:
|
|
/s/ Jeffrey L. Jacobson
|
|
|
|
|
Jeffrey L. Jacobson
Vice President and Chief Financial Officer
(principal financial and accounting officer) |
|
March 9, 2005 |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
/s/ Robert H. Bird
|
|
|
Robert H. Bird
Director |
|
March 9, 2005 |
|
/s/ Carolyn H.
Carlburg
|
|
|
Carolyn H. Carlburg
Director |
|
March 9, 2005 |
|
/s/ Robert E. Denham
|
|
|
Robert E. Denham
Director |
|
March 9, 2005 |
|
/s/ Robert T. Flaherty
|
|
|
Robert T. Flaherty
Director |
|
March 9, 2005 |
|
/s/ Peter D. Kaufman
|
|
|
Peter D. Kaufman
Director |
|
March 9, 2005 |
|
/s/ Charles T. Munger
|
|
|
Charles T. Munger
Director |
|
March 9, 2005 |
|
/s/ Elizabeth Caspers
Peters
|
|
|
Elizabeth Caspers Peters
Director |
|
March 9, 2005 |
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wesco Financial Corporation
We have audited the accompanying consolidated balance sheets of
Wesco Financial Corporation and subsidiaries (the
Company) as of December 31, 2004 and 2003, and
the related consolidated statements of income, changes in
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule listed in the
Index at Item 8. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Wesco Financial Corporation and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 9, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Omaha, NE
March 9, 2005
35
WESCO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Cash and cash equivalents
|
|
$ |
1,161,163 |
|
|
$ |
1,052,462 |
|
Investments:
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
94,299 |
|
|
|
167,390 |
|
|
Marketable equity securities
|
|
|
759,658 |
|
|
|
754,634 |
|
Accounts receivable
|
|
|
46,007 |
|
|
|
60,168 |
|
Rental furniture
|
|
|
171,983 |
|
|
|
163,699 |
|
Goodwill of acquired businesses
|
|
|
266,607 |
|
|
|
266,607 |
|
Other assets
|
|
|
71,818 |
|
|
|
73,435 |
|
|
|
|
|
|
|
|
|
|
$ |
2,571,535 |
|
|
$ |
2,538,395 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Insurance losses and loss adjustment expenses
|
|
$ |
56,162 |
|
|
$ |
102,526 |
|
Unearned insurance premiums
|
|
|
25,341 |
|
|
|
28,993 |
|
Deferred furniture rental income and security deposits
|
|
|
20,358 |
|
|
|
19,835 |
|
Accounts payable and accrued expenses
|
|
|
51,501 |
|
|
|
48,931 |
|
Notes payable
|
|
|
29,225 |
|
|
|
12,679 |
|
Income taxes payable, principally deferred
|
|
|
272,005 |
|
|
|
247,241 |
|
|
|
|
|
|
|
|
|
|
|
454,592 |
|
|
|
460,205 |
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Capital stock, $1 par value authorized,
7,500,000 shares; issued and outstanding,
7,119,807 shares
|
|
|
7,120 |
|
|
|
7,120 |
|
|
Additional paid-in capital
|
|
|
26,204 |
|
|
|
26,204 |
|
|
Unrealized appreciation of investments, net of taxes
|
|
|
427,690 |
|
|
|
426,542 |
|
|
Retained earnings
|
|
|
1,655,929 |
|
|
|
1,618,324 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,116,943 |
|
|
|
2,078,190 |
|
|
|
|
|
|
|
|
|
|
$ |
2,571,535 |
|
|
$ |
2,538,395 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
36
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands except for amounts per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and service revenues
|
|
$ |
414,508 |
|
|
$ |
406,250 |
|
|
$ |
437,099 |
|
|
Insurance premiums earned
|
|
|
54,589 |
|
|
|
106,651 |
|
|
|
64,627 |
|
|
Dividend and interest income
|
|
|
36,844 |
|
|
|
44,763 |
|
|
|
70,652 |
|
|
Realized investment gains
|
|
|
|
|
|
|
53,466 |
|
|
|
|
|
|
Other
|
|
|
3,372 |
|
|
|
3,187 |
|
|
|
3,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,313 |
|
|
|
614,317 |
|
|
|
575,677 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold
|
|
|
146,783 |
|
|
|
144,725 |
|
|
|
145,677 |
|
|
Insurance losses, loss adjustment and underwriting expenses
|
|
|
32,062 |
|
|
|
82,497 |
|
|
|
58,736 |
|
|
Selling, general and administrative expenses
|
|
|
261,434 |
|
|
|
278,090 |
|
|
|
288,353 |
|
|
Interest expense
|
|
|
799 |
|
|
|
749 |
|
|
|
1,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441,078 |
|
|
|
506,061 |
|
|
|
494,760 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
68,235 |
|
|
|
108,256 |
|
|
|
80,917 |
|
Income taxes
|
|
|
20,808 |
|
|
|
34,852 |
|
|
|
28,199 |
|
Minority interest in net loss of subsidiary
|
|
|
|
|
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
|
|
|
|
|
|
|
|
|
Amounts per capital share based on 7,119,807 shares
outstanding throughout each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
6.66 |
|
|
$ |
10.49 |
|
|
$ |
7.40 |
|
|
Cash dividends
|
|
|
1.38 |
|
|
|
1.34 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
37
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity | |
|
|
|
|
| |
|
Total | |
|
|
|
|
Additional | |
|
Unrealized | |
|
|
|
Compre- | |
|
|
Capital | |
|
Paid In | |
|
Appreciation | |
|
Retained | |
|
|
|
hensive | |
|
|
Stock | |
|
Capital | |
|
of Investments | |
|
Earnings | |
|
Total | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2001
|
|
$ |
7,120 |
|
|
$ |
23,319 |
|
|
$ |
372,267 |
|
|
$ |
1,509,691 |
|
|
$ |
1,912,397 |
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,718 |
|
|
|
52,718 |
|
|
|
|
|
Increase in unrealized appreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of investments, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effect of $1,342
|
|
|
|
|
|
|
|
|
|
|
2,304 |
|
|
|
|
|
|
|
2,304 |
|
|
|
|
|
Cash dividends declared and paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,257 |
) |
|
|
(9,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
7,120 |
|
|
|
23,319 |
|
|
|
374,571 |
|
|
|
1,553,152 |
|
|
|
1,958,162 |
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,711 |
|
|
|
74,711 |
|
|
|
|
|
Increase in unrealized appreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of investments, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
126,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effect of $28,334
|
|
|
|
|
|
|
|
|
|
|
51,971 |
|
|
|
|
|
|
|
51,971 |
|
|
|
|
|
Increase in additional paid-in capital due to subsidiary stock
transactions
|
|
|
|
|
|
|
2,885 |
|
|
|
|
|
|
|
|
|
|
|
2,885 |
|
|
|
|
|
Cash dividends declared and paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,539 |
) |
|
|
(9,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
7,120 |
|
|
|
26,204 |
|
|
|
426,542 |
|
|
|
1,618,324 |
|
|
|
2,078,190 |
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,427 |
|
|
|
47,427 |
|
|
|
|
|
Increase in unrealized appreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of investments, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effect of $714
|
|
|
|
|
|
|
|
|
|
|
1,148 |
|
|
|
|
|
|
|
1,148 |
|
|
|
|
|
Cash dividends declared and paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,822 |
) |
|
|
(9,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
7,120 |
|
|
$ |
26,204 |
|
|
$ |
427,690 |
|
|
$ |
1,655,929 |
|
|
$ |
2,116,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
38
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
Adjustments to reconcile net income with net cash flows from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net securities gains
|
|
|
|
|
|
|
(53,466 |
) |
|
|
|
|
|
|
Provision for depreciation and amortization, net
|
|
|
36,473 |
|
|
|
44,114 |
|
|
|
51,914 |
|
|
|
Increase (decrease) in liabilities for insurance losses and loss
adjustment expenses
|
|
|
(46,364 |
) |
|
|
29,461 |
|
|
|
11,186 |
|
|
|
Increase (decrease) in unearned insurance premiums
|
|
|
(3,652 |
) |
|
|
(19,688 |
) |
|
|
23,784 |
|
|
|
Increase (decrease) in income taxes payable
|
|
|
24,050 |
|
|
|
(8,995 |
) |
|
|
893 |
|
|
|
Proceeds from sales of rental furniture, less gross profit
included in net income
|
|
|
41,816 |
|
|
|
40,742 |
|
|
|
48,173 |
|
|
|
Other, net
|
|
|
23,715 |
|
|
|
16,182 |
|
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
123,465 |
|
|
|
123,061 |
|
|
|
188,429 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and redemptions of securities with fixed maturities
|
|
|
72,592 |
|
|
|
314,556 |
|
|
|
427,387 |
|
|
Purchases of securities with fixed maturities
|
|
|
(2,907 |
) |
|
|
(2,562 |
) |
|
|
(289,117 |
) |
|
Sales of securities with fixed maturities
|
|
|
|
|
|
|
351,180 |
|
|
|
|
|
|
Acquisitions of businesses, net of cash and cash equivalents
acquired
|
|
|
(12,704 |
) |
|
|
(9,825 |
) |
|
|
(37,082 |
) |
|
Purchases of rental furniture
|
|
|
(76,532 |
) |
|
|
(50,960 |
) |
|
|
(44,550 |
) |
|
Other, net
|
|
|
(1,937 |
) |
|
|
(3,267 |
) |
|
|
(5,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(21,488 |
) |
|
|
599,122 |
|
|
|
50,664 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) under line of credit, net
|
|
|
16,900 |
|
|
|
(9,900 |
) |
|
|
1,700 |
|
|
Decrease in other notes payable, net
|
|
|
(354 |
) |
|
|
(94 |
) |
|
|
(2,508 |
) |
|
Payment of cash dividends
|
|
|
(9,822 |
) |
|
|
(9,539 |
) |
|
|
(9,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
6,724 |
|
|
|
(19,533 |
) |
|
|
(10,065 |
) |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
108,701 |
|
|
|
702,650 |
|
|
|
229,028 |
|
Cash and cash equivalents beginning of year
|
|
|
1,052,462 |
|
|
|
349,812 |
|
|
|
120,784 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$ |
1,161,163 |
|
|
$ |
1,052,462 |
|
|
$ |
349,812 |
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during year
|
|
$ |
375 |
|
|
$ |
642 |
|
|
$ |
1,241 |
|
|
Income taxes paid (recovered) during year, net
|
|
|
(7,142 |
) |
|
|
43,847 |
|
|
|
27,306 |
|
|
Noncash activities conversion of debt to equity in
subsidiary
|
|
|
|
|
|
|
9,808 |
|
|
|
|
|
|
Increase in additional paid-in capital due to subsidiary stock
transactions
|
|
|
|
|
|
|
2,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
39
WESCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
Note 1. Significant Accounting Policies and
Practices
Nature of operations and basis of consolidation
Wesco Financial Corporation (Wesco) is, indirectly,
an 80.1%-owned subsidiary of Berkshire Hathaway Inc.
(Berkshire). Berkshire, through subsidiaries, is
engaged in a number of diverse business activities, the most
important of which are property and casualty insurance
businesses conducted on both a primary and reinsurance basis.
Wesco, like Berkshire, is a holding company. Its consolidated
financial statements include the accounts of Wesco and its
subsidiaries, all wholly owned. The principal subsidiaries are
Wesco-Financial Insurance Company (Wes-FIC), The
Kansas Bankers Surety Company (KBS), CORT Business
Services Corporation (CORT) and Precision Steel
Warehouse, Inc. (Precision Steel). Further
information regarding these businesses is contained in
Note 9. Intercompany balances and transactions are
eliminated in the preparation of consolidated statements.
Accounting pronouncements not yet in effect
Wescos management does not believe that any accounting
pronouncements issued to date by the Financial Accounting
Standards Board or other applicable authorities and required to
be adopted after yearend 2004 are likely to have a material
effect on shareholders equity.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The estimates and
assumptions are based on managements evaluation of the
relevant facts and circumstances using information available at
the time such estimates and assumptions are made. Although the
amounts of such assets, liabilities, revenues and expenses
included in the consolidated financial statements may differ
significantly from those that might result from use of estimates
and assumptions based on facts and circumstances not yet
available, Wescos management does not believe such
differences would have a material adverse effect on
shareholders equity.
Cash equivalents
Cash equivalents consist of investments in U.S. Treasury
Bills and investments maturing less than three months from date
acquired.
Investments
The appropriate classifications of investments in securities
with fixed maturities and marketable equity securities are
established at the time of purchase and reevaluated as of each
balance sheet date. There are three permissible classifications:
held-to-maturity, trading, and, when neither of those
classifications is applicable, available-for-sale. In recent
years, Wescos management has classified all of the Wesco
groups equity and fixed-maturity investments as
available-for-sale; they are carried at fair value, with
unrealized gains and losses, net of applicable deferred income
taxes, reported as a separate component of shareholders
equity.
40
Realized gains and losses on sales of investments, determined on
a specific-identification basis, are included in the
consolidated statement of income, as are provisions for
other-than-temporary declines in market or estimated fair value,
when applicable.
Goodwill of acquired businesses
Goodwill of acquired businesses represents the difference
between purchase cost and the fair value of net assets of
acquisitions. At least annually, goodwill is reviewed for
impairment using a variety of methods, and impairments, if any,
are charged to operating earnings.
Insurance business
Insurance premiums are recognized as earned revenues in
proportion to the insurance protection provided, which in most
cases is pro rata over the term of each contract. Unearned
insurance premiums are deferred in the liability section of the
consolidated balance sheet. Certain costs of acquiring insurance
premiums commissions, premium taxes, and
other are deferred and charged to income as the
premiums are earned.
Liabilities for insurance losses and loss adjustment expenses as
of any balance sheet date represent estimates of the ultimate
amounts payable under property and casualty reinsurance and
insurance contracts related to losses occurring on or before the
balance sheet date. As of that date, some incurred claims have
not yet been reported (and some of these may not be reported for
many years); the liability for unpaid losses includes
significant estimates for these claims. Liabilities for
insurance losses are determined from (1) individual case
amounts, (2) reports from ceding insurers, and
(3) past experience. Considerable judgment is required to
evaluate claims and estimate claim liabilities in connection
with reinsurance contracts because of the inherent delays in
receiving loss information from ceding companies. As further
data become available, the liabilities are reevaluated and
adjusted as appropriate. Additionally, reported claims are in
various stages of the settlement process. Each claim is settled
individually based upon its merits, and some take years to
settle, especially if legal action is involved. Actual ultimate
claims amounts are likely to differ from amounts recorded at the
balance sheet date. Changes in estimates are recorded as a
component of losses incurred in the period of change.
Provisions for losses and loss adjustment expenses are reported
in the consolidated statement of income after deducting
estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do not relieve the ceding
companies of their obligations to indemnify policyholders with
respect to the underlying insurance contracts.
Furniture rental business
Rental furniture consists principally of residential and office
furniture which is available for rental or, if no longer up to
rental standards or excessive in quantity, for sale. Rental
furniture is carried at cost, less accumulated depreciation
calculated primarily on a declining-balance basis over 3 to
5 years using estimated salvage values of 25 to
40 percent of original cost.
Furniture rentals are recognized as revenue proportionately over
the rental contact period; rentals received in advance are
deferred in the liability section of the consolidated balance
sheet. Costs related to furniture rentals comprise the main
element of cost of products and services sold on the
consolidated income statement and include depreciation expense,
repairs and maintenance and inventory losses.
Dollars amounts in thousands except for amounts per share
41
Industrial business
Inventories of the industrial business, included in other assets
on the accompanying consolidated balance sheet, are carried at
the lower of last-in, first-out (LIFO) cost or
market; under this method, the most recent costs are reflected
in cost of products sold.
Income taxes
Income taxes are accounted for using the asset and liability
method. Under this method, temporary differences between
financial statement and tax return bases of assets and
liabilities at each balance sheet date are multiplied by the tax
rates in effect at that date, with the results reported on the
balance sheet as net deferred tax liabilities or assets. The
effect of a change in tax rate on such deferred items is
required, under GAAP, to be reflected when enacted in the
consolidated statement of income even though the original charge
or credit for income taxes has been charged or credited to
shareholders equity, as in the case of unrealized
appreciation of investments. As the temporary differences
reverse in future periods, the taxes become currently payable or
recoverable.
Note 2. Investments
Following is a summary of securities with fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
|
|
Estimated Fair | |
|
|
|
Estimated Fair | |
|
|
Amortized | |
|
(Carrying) | |
|
Amortized | |
|
(Carrying) | |
|
|
Cost | |
|
Value | |
|
Cost | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Mortgage-backed securities
|
|
$ |
76,212 |
|
|
$ |
80,531 |
|
|
$ |
146,793 |
|
|
$ |
154,623 |
|
U.S. government obligations
|
|
|
12,812 |
|
|
|
13,768 |
|
|
|
12,160 |
|
|
|
12,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,024 |
|
|
$ |
94,299 |
|
|
$ |
158,953 |
|
|
$ |
167,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At yearend 2004 and 2003, the estimated fair values of
securities with fixed maturities contained unrealized gains of
$5,306 and $8,437. Unrealized losses at yearend 2004 and 2003
totaled $31 and $0.
All fixed-maturity investments other than mortgage-backed
securities at 2004 yearend mature in January 2006.
Following is a summary of marketable equity securities (all
common stocks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
Quoted | |
|
|
|
Quoted | |
|
|
|
|
|
|
Market | |
|
|
|
Market | |
|
|
Number of | |
|
|
|
(Carrying) | |
|
|
|
(Carrying) | |
|
|
Shares | |
|
Cost | |
|
Value | |
|
Cost | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
The Coca-Cola Company
|
|
|
7,205,600 |
|
|
$ |
40,761 |
|
|
$ |
300,041 |
|
|
$ |
40,761 |
|
|
$ |
365,684 |
|
The Gillette Company
|
|
|
6,400,000 |
|
|
|
40,000 |
|
|
|
286,592 |
|
|
|
40,000 |
|
|
|
235,072 |
|
American Express Company
|
|
|
1,943,100 |
|
|
|
20,687 |
|
|
|
109,533 |
|
|
|
20,687 |
|
|
|
93,716 |
|
Wells Fargo & Company
|
|
|
1,021,600 |
|
|
|
6,333 |
|
|
|
63,492 |
|
|
|
6,333 |
|
|
|
60,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,781 |
|
|
$ |
759,658 |
|
|
$ |
107,781 |
|
|
$ |
754,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 28, 2005, The Procter and Gamble
Company (PG) announced it had signed an
agreement to acquire 100% of The Gillette Company
(Gillette). Under the terms of the agreement, PG has
agreed to issue 0.975 shares of its common stock for each
outstanding share of Gillette common stock. Based upon recent
trading prices of PG common stock and the number of Gillette
shares owned at December 31, 2004, Wesco anticipates that
it will recognize a pre-tax gain of approximately $290,000 when
the transaction closes.
Dollars amounts in thousands except for amounts per share
42
Realized investment gains for 2003 resulted from sales of
securities with fixed maturities and cash equivalents. There
were no realized losses. No gains or losses were realized in
2004 or 2002.
Although the investments of Wesco and its subsidiaries are
subject to market risks, derivatives are not utilized to manage
risks.
Note 3. Insurance Business
Following is a summary of liabilities for unpaid losses and loss
adjustment expenses for each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Balance at beginning of year
|
|
$ |
102,526 |
|
|
$ |
73,065 |
|
|
$ |
61,879 |
|
Less ceded liabilities
|
|
|
(500 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at beginning of year
|
|
|
102,026 |
|
|
|
73,015 |
|
|
|
61,879 |
|
|
|
|
|
|
|
|
|
|
|
Incurred losses recorded during year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For current year
|
|
|
25,247 |
|
|
|
57,805 |
|
|
|
39,641 |
|
|
For all prior years
|
|
|
(5,291 |
) |
|
|
4,497 |
|
|
|
(818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses
|
|
|
19,956 |
|
|
|
62,302 |
|
|
|
38,823 |
|
|
|
|
|
|
|
|
|
|
|
Payments made during year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For current year
|
|
|
6,236 |
|
|
|
15,584 |
|
|
|
12,607 |
|
|
For all prior years
|
|
|
61,464 |
|
|
|
17,707 |
|
|
|
15,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
67,700 |
|
|
|
33,291 |
|
|
|
27,687 |
|
|
|
|
|
|
|
|
|
|
|
Net liabilities at end of year
|
|
|
54,282 |
|
|
|
102,026 |
|
|
|
73,015 |
|
Plus ceded liabilities
|
|
|
1,880 |
|
|
|
500 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Gross liabilities at end of year
|
|
$ |
56,162 |
|
|
$ |
102,526 |
|
|
$ |
73,065 |
|
|
|
|
|
|
|
|
|
|
|
Incurred losses for all prior years represent the
net amount of estimation error charged (credited) to earnings
with respect to the liabilities established as of the beginning
of the year, and relate principally to reinsurance-assumed
business.
In 2004 the Company commuted its participation in a multi-year
contract covering certain multi-line property and casualty risks
of a large, unaffiliated insurer under a contract entered into
in 2000. Payments made during 2004 for losses incurred in prior
years included $37,585 resulting from commutation of the
contract. As a result, the Company has no further loss exposure
under the contract, including exposures related to the terrorist
activity of September 11, 2001. Accordingly, no loss
reserves remain on the accompanying consolidated balance sheet
for this contract.
The unamortized balances of deferred policy acquisition costs,
included in other assets on the consolidated balance sheet, were
$3,687 and $5,072 at yearend 2004 and 2003.
Note 4. Furniture Rental Business
Following is a breakdown of rental furniture:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Cost of rental furniture
|
|
$ |
260,109 |
|
|
$ |
250,658 |
|
Less accumulated depreciation
|
|
|
(88,126 |
) |
|
|
(86,959 |
) |
|
|
|
|
|
|
|
|
|
$ |
171,983 |
|
|
$ |
163,699 |
|
|
|
|
|
|
|
|
Dollars amounts in thousands except for amounts per share
43
At yearend 2004 and 2003, accounts receivable on the
accompanying consolidated balance sheet amounting to $46,007 and
$60,168 were stated net of allowances for doubtful accounts of
$3,270 and $3,368 relating to CORT.
At yearend 2004 and 2003, the unamortized balance of goodwill
carried as an asset on Wescos consolidated balance sheet
was $266,607, of which $239,616 related to CORT.
During 2003, convertible notes issued by a former subsidiary of
CORT were converted into equity of the subsidiary, after which
the resulting minority interest was bought out at a discount
from an agreed option price. These transactions resulted in
additional paid-in capital of $2,885 on CORTs books as
well as Wescos. The minority interest in net loss
sustained by the subsidiary prior to the buyout, $1,307, was set
out separately on the consolidated statement of income.
Note 5. Industrial Business
LIFO inventory accounting adjustments decreased income before
income taxes by $2,918 ($1,755 after income taxes) for 2004; for
2003 and 2002, LIFO inventory accounting adjustments increased
pretax income by $19 and $297 ($12 and $179 after income taxes).
Federal and state environmental agencies have made claims
relating to alleged contamination of soil and groundwater
against Precision Brand Products (PBP), whose
results, like those of its parent, Precision Steel, are included
in Wescos industrial segment, and various other businesses
situated in a business park in Downers Grove, Illinois. PBP,
along with the other businesses, has been negotiating remedial
actions with various governmental entities. In addition, PBP,
Precision Steel, and other parties have been named in several
civil lawsuits, including lawsuits by and on behalf of area
residents, relating to this matter. Several of PBPs
insurers have agreed to undertake their defenses and to
indemnify them to the policy limits in connection with certain
of the matters. Inasmuch as the claims and lawsuits are in early
stages of development, the ultimate cost of the claims,
including defense costs, net of anticipated insurance
reimbursement, is difficult to estimate at this time. In 2003,
PBP recorded a provision of $1,044 ($628 after income tax
benefit), representing a preliminary estimate of its share of
costs of remediation agreed to with governmental entities and
other parties to date and related expenses. In 2004, PBP
increased that estimate by $139 ($84 after income tax benefit).
Management anticipates that additional provisions with respect
to such remediation and other legal matters may be required in
the future. Although management does not anticipate that the
ultimate impact of such provisions will be material in relation
to Wescos shareholders equity, it believes that the
effect on industrial segment and consolidated net income in any
given period could be material.
Note 6. Notes Payable and Other Contractual
Obligations
Following is a summary of notes payable, at year end:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Revolving line of credit
|
|
$ |
29,000 |
|
|
$ |
12,100 |
|
Other
|
|
|
225 |
|
|
|
579 |
|
|
|
|
|
|
|
|
|
|
$ |
29,225 |
|
|
$ |
12,679 |
|
|
|
|
|
|
|
|
The line of credit, used in the furniture rental business,
totals $100,000 and is unsecured. In addition to the $29,000 of
loans outstanding, the business is contingently liable with
respect to letters of credit totaling $12,414. The weighted
average annual rate of interest on amounts outstanding under the
line of credit at yearend 2004 was 2.62% in addition to an
annual commitment fee of .10% of the
Dollars amounts in thousands except for amounts per share
44
total credit line. The underlying agreement does not contain any
materially restrictive covenants. The credit line expires in
June 2006.
Estimated fair values of the notes payable at yearend 2004 and
2003 approximated carrying values of $29,225 and $12,679.
In addition to recorded liabilities, Wesco at yearend 2004 had
operating lease obligations aggregating $110,830 (payable in
2005, $27,136; in 2006, $23,149; in 2007, $17,250; in 2008,
$13,990; in 2009, $9,958; and thereafter, $19,347) and other
contractual obligations aggregating $19,360. Rent expense
amounted to $29,800, $31,886 and $32,366 for 2004, 2003 and 2002.
Note 7. Income Taxes
Following is a breakdown of income taxes payable at 2004 and
2003 yearends:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax liabilities, relating to
|
|
|
|
|
|
|
|
|
|
Appreciation of investments
|
|
$ |
229,462 |
|
|
$ |
228,748 |
|
|
Other items
|
|
|
56,677 |
|
|
|
52,824 |
|
|
|
|
|
|
|
|
|
|
|
286,139 |
|
|
|
281,572 |
|
Deferred tax assets
|
|
|
(27,041 |
) |
|
|
(27,790 |
) |
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
259,098 |
|
|
|
253,782 |
|
Taxes currently payable (recoverable)
|
|
|
12,907 |
|
|
|
(6,541 |
) |
|
|
|
|
|
|
|
Income taxes payable
|
|
$ |
272,005 |
|
|
$ |
247,241 |
|
|
|
|
|
|
|
|
The consolidated statement of income contains a provision
(benefit) for income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Federal
|
|
$ |
19,894 |
|
|
$ |
37,362 |
|
|
$ |
29,046 |
|
State
|
|
|
914 |
|
|
|
(2,510 |
) |
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
20,808 |
|
|
$ |
34,852 |
|
|
$ |
28,199 |
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
16,984 |
|
|
$ |
39,965 |
|
|
$ |
24,750 |
|
Deferred
|
|
|
3,824 |
|
|
|
(5,113 |
) |
|
|
3,449 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
20,808 |
|
|
$ |
34,852 |
|
|
$ |
28,199 |
|
|
|
|
|
|
|
|
|
|
|
Following is a reconciliation of the statutory federal income
tax rate with the effective income tax rate resulting in the
provision for income taxes appearing on the consolidated
statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Statutory federal income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received deduction
|
|
|
(3.3 |
) |
|
|
(2.9 |
) |
|
|
(3.1 |
) |
|
State income taxes, less federal tax benefit
|
|
|
(0.9 |
) |
|
|
(1.7 |
) |
|
|
(1.0 |
) |
|
Other differences, net
|
|
|
(0.3 |
) |
|
|
1.8 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax provision rate
|
|
|
30.5 |
% |
|
|
32.2 |
% |
|
|
34.8 |
% |
|
|
|
|
|
|
|
|
|
|
Wesco and its subsidiaries join with other Berkshire entities in
the filing of consolidated federal income tax returns for the
Berkshire group. The consolidated federal tax liability is
apportioned among group members pursuant to methods that result
in each member of the group paying or receiving an
Dollars amounts in thousands except for amounts per share
45
amount that approximates the increase or decrease in
consolidated taxes attributable to that member. Returns have
been examined by and settled with the Internal Revenue Service
through 1996.
Note 8. Quarterly Financial Information
Unaudited quarterly consolidated financial information for 2004
and 2003 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
|
|
| |
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
Total For Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
128,243 |
|
|
$ |
128,311 |
|
|
$ |
126,490 |
|
|
$ |
126,269 |
|
|
$ |
509,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
12,198 |
|
|
$ |
10,561 |
|
|
$ |
9,044 |
|
|
$ |
15,624 |
|
|
$ |
47,427 |
|
|
Per capital share
|
|
|
1.71 |
|
|
|
1.49 |
|
|
|
1.27 |
|
|
|
2.19 |
|
|
|
6.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
155,839 |
|
|
$ |
192,125 |
|
|
$ |
145,111 |
|
|
$ |
121,292 |
|
|
$ |
614,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
12,504 |
|
|
$ |
45,981 |
|
|
$ |
7,137 |
|
|
$ |
9,089 |
|
|
$ |
74,711 |
|
|
Per capital share
|
|
|
1.76 |
|
|
|
6.45 |
|
|
|
1.00 |
|
|
|
1.28 |
|
|
|
10.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues)
|
|
$ |
811 |
|
|
$ |
52,208 |
|
|
$ |
447 |
|
|
$ |
|
|
|
$ |
53,466 |
|
|
After taxes (included in net income)
|
|
|
527 |
|
|
|
33,935 |
|
|
|
291 |
|
|
|
|
|
|
|
34,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Business Segment Data
Consolidated financial information for each of the past three
years is presented in the table on the next page. It is broken
down as to Wescos three business segments.
The insurance segment includes the accounts of Wes-FIC and its
subsidiary, KBS. Wes-FIC is engaged in the property and casualty
insurance and reinsurance business. Its business has included
retrocessions from wholly owned insurance subsidiaries of
Berkshire and reinsurance with unaffiliated insurance companies.
KBS provides specialized insurance coverage to more than 20% of
the banks in the United States, mostly small and medium-sized
banks in the Midwest. In addition to generating insurance
premiums, Wescos insurance segment derives dividend and
interest income from the investment of float (premiums received
before payment of related claims and expenses) as well as
earnings retained and reinvested.
Dollars amounts in thousands except for amounts per share
46
The furniture rental segment includes the operating accounts of
CORT. CORT is the largest, and only national, provider of rental
furniture, accessories and related services in the
rent-to-rent segment of the furniture industry. It
rents high-quality furniture to corporate and individual
customers who desire flexibility in meeting their temporary
office, residential or trade show furnishing needs and who
typically do not seek to own such furniture. In addition, CORT
sells previously rented furniture through company-owned
clearance centers.
The industrial segment includes the operating accounts of
Precision Steel and its subsidiaries. The Precision Steel group
operates two service centers, which buy steel and other metals
in the form of sheets or strips, cut these to order and sell
them directly to a wide variety of industrial customers
throughout the United States. The Precision Steel group also
manufactures shim stock and other toolroom specialty items and
sells them, along with hose clamps and threaded rod, nationwide,
generally through distributors.
Wescos consolidated realized net securities gains, most of
which have resulted from sales of investments held by its
insurance subsidiaries, and goodwill of acquired businesses, are
shown separately as nonsegment items, consistent with the way
Wescos management evaluates the performance of its
operating segments. Other items considered unrelated to
Wescos three business segments include principally
(1) investments other than those held by Wes-FIC and KBS,
together with related dividend and interest income,
(2) commercial real estate, together with related revenues
and expenses, and (3) the assets, revenues and expenses of
the parent company.
Dollars amounts in thousands except for amounts per share
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Insurance segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$ |
54,589 |
|
|
$ |
106,651 |
|
|
$ |
64,627 |
|
|
Dividend and interest income
|
|
|
36,058 |
|
|
|
44,118 |
|
|
|
70,007 |
|
|
Income taxes
|
|
|
17,605 |
|
|
|
21,653 |
|
|
|
26,427 |
|
|
Net income
|
|
|
40,920 |
|
|
|
46,636 |
|
|
|
49,471 |
|
|
Depreciation and amortization other than of discounts and
premiums of investments
|
|
|
53 |
|
|
|
27 |
|
|
|
26 |
|
|
Capital expenditures
|
|
|
76 |
|
|
|
4 |
|
|
|
3 |
|
|
Assets at yearend
|
|
|
2,004,417 |
|
|
|
1,985,846 |
|
|
|
1,818,788 |
|
|
|
|
|
|
|
|
|
|
|
Furniture rental segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
353,994 |
|
|
$ |
360,112 |
|
|
$ |
388,583 |
|
|
Income taxes
|
|
|
2,588 |
|
|
|
(4,870 |
) |
|
|
1,201 |
|
|
Net income (loss)
|
|
|
5,022 |
|
|
|
(6,257 |
) |
|
|
2,442 |
|
|
Depreciation and amortization other than of discounts and
premiums of investments
|
|
|
35,643 |
|
|
|
41,472 |
|
|
|
47,998 |
|
|
Advertising expense
|
|
|
18,245 |
|
|
|
19,712 |
|
|
|
12,970 |
|
|
Interest expense
|
|
|
799 |
|
|
|
749 |
|
|
|
1,793 |
|
|
Capital expenditures
|
|
|
4,091 |
|
|
|
3,209 |
|
|
|
3,497 |
|
|
Assets at yearend
|
|
|
245,777 |
|
|
|
235,455 |
|
|
|
277,308 |
|
|
|
|
|
|
|
|
|
|
|
Industrial segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, service and other revenues
|
|
$ |
60,514 |
|
|
$ |
46,138 |
|
|
$ |
48,567 |
|
|
Income taxes
|
|
|
664 |
|
|
|
(671 |
) |
|
|
413 |
|
|
Net income (loss)
|
|
|
1,094 |
|
|
|
(860 |
) |
|
|
250 |
|
|
Depreciation and amortization
|
|
|
426 |
|
|
|
505 |
|
|
|
592 |
|
|
Advertising expense
|
|
|
188 |
|
|
|
198 |
|
|
|
209 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
Capital expenditures
|
|
|
314 |
|
|
|
106 |
|
|
|
137 |
|
|
Assets at yearend
|
|
|
16,949 |
|
|
|
16,826 |
|
|
|
17,905 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill of acquired businesses (included in assets)
|
|
|
266,607 |
|
|
|
266,607 |
|
|
|
266,203 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues)
|
|
$ |
|
|
|
$ |
53,466 |
|
|
$ |
|
|
|
After taxes (included in net income)
|
|
|
|
|
|
|
34,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items unrelated to business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and interest income
|
|
$ |
786 |
|
|
$ |
617 |
|
|
$ |
616 |
|
|
Other revenues
|
|
|
3,372 |
|
|
|
3,215 |
|
|
|
3,277 |
|
|
Income taxes
|
|
|
(49 |
) |
|
|
27 |
|
|
|
158 |
|
|
Net income
|
|
|
391 |
|
|
|
439 |
|
|
|
555 |
|
|
Depreciation and amortization
|
|
|
350 |
|
|
|
354 |
|
|
|
360 |
|
|
Capital expenditures
|
|
|
288 |
|
|
|
366 |
|
|
|
302 |
|
|
Assets at yearend
|
|
|
37,785 |
|
|
|
33,661 |
|
|
|
26,771 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues (total of those set forth above)
|
|
$ |
509,313 |
|
|
$ |
614,317 |
|
|
$ |
575,677 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated assets (total of those set forth above)
|
|
$ |
2,571,535 |
|
|
$ |
2,538,395 |
|
|
$ |
2,406,975 |
|
|
|
|
|
|
|
|
|
|
|
Dollars amounts in thousands except for amounts per share
48
WESCO FINANCIAL CORPORATION
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
BALANCE SHEET
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
25 |
|
|
$ |
27 |
|
|
Investment in subsidiaries, at cost plus equity in
subsidiaries undistributed earnings and unrealized
appreciation
|
|
|
2,246,775 |
|
|
|
2,196,376 |
|
|
|
|
|
|
|
|
|
|
$ |
2,246,800 |
|
|
$ |
2,196,403 |
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
|
|
|
Advances from subsidiaries
|
|
$ |
127,223 |
|
|
$ |
115,420 |
|
|
Income taxes payable, principally deferred
|
|
|
42 |
|
|
|
268 |
|
|
Other liabilities
|
|
|
2,592 |
|
|
|
2,525 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
129,857 |
|
|
|
118,213 |
|
|
Shareholders equity (see consolidated balance sheet and
statement of changes in shareholders equity)
|
|
|
2,116,943 |
|
|
|
2,078,190 |
|
|
|
|
|
|
|
|
|
|
$ |
2,246,800 |
|
|
$ |
2,196,403 |
|
|
|
|
|
|
|
|
STATEMENT OF INCOME
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, principally intercompany
|
|
|
1,953 |
|
|
|
1,487 |
|
|
|
1,512 |
|
|
General and administrative
|
|
|
862 |
|
|
|
706 |
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,815 |
|
|
|
2,193 |
|
|
|
2,043 |
|
|
|
|
|
|
|
|
|
|
|
Loss before items shown below
|
|
|
(2,815 |
) |
|
|
(2,193 |
) |
|
|
(2,043 |
) |
Income taxes
|
|
|
(985 |
) |
|
|
(767 |
) |
|
|
(714 |
) |
Equity in undistributed earnings of subsidiaries
|
|
|
49,257 |
|
|
|
76,137 |
|
|
|
54,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
WESCO FINANCIAL CORPORATION
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Continued)
STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
47,427 |
|
|
$ |
74,711 |
|
|
$ |
52,718 |
|
|
Adjustments to reconcile net income with cash flows from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income taxes payable currently
|
|
|
(226 |
) |
|
|
342 |
|
|
|
(693 |
) |
|
|
Equity in undistributed earnings of subsidiaries
|
|
|
(49,257 |
) |
|
|
(76,137 |
) |
|
|
(54,047 |
) |
|
|
Other, net
|
|
|
73 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(1,983 |
) |
|
|
(1,082 |
) |
|
|
(2,021 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from subsidiaries, net
|
|
|
11,803 |
|
|
|
10,628 |
|
|
|
12,305 |
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(1,035 |
) |
|
Payment of cash dividends
|
|
|
(9,822 |
) |
|
|
(9,539 |
) |
|
|
(9,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
1,981 |
|
|
|
1,089 |
|
|
|
2,013 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(2 |
) |
|
|
7 |
|
|
|
(8 |
) |
Cash and cash equivalents beginning of year
|
|
|
27 |
|
|
|
20 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$ |
25 |
|
|
$ |
27 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50