e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010 or
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o |
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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)
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DELAWARE
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95-2109453 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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301 East Colorado Boulevard, Suite 300, Pasadena, California
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91101-1901 |
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(Address of principal executives offices)
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(Zip Code) |
626/585-6700
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date. 7,119,807 as of August 6, 2010
Reference is made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
appearing on pages 35 37 of the Form 10-K Annual Report for the year ended December 31, 2009,
filed by Wesco Financial Corporation (Wesco), for information on equity price risk, interest rate
risk and foreign exchange risk at Wesco. There have been no material changes through June 30, 2010.
Item 4. Controls and Procedures.
An evaluation was performed under the supervision and with the participation of the management
of Wesco, including Charles T. Munger (Chief Executive Officer) and Jeffrey L. Jacobson (Chief
Financial Officer), of the effectiveness of the design and operation of Wescos disclosure controls
and procedures as of June 30, 2010. 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 and Exchange Commission, and are effective to ensure that
information required to be disclosed by Wesco in the reports it files or submits under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to Wescos management,
including Mr. Munger and Mr. Jacobson, as appropriate to allow timely decisions regarding required
disclosure. There have been no changes in Wescos internal control over financial reporting during
the quarter ended June 30, 2010 that have materially affected or are reasonably likely to
materially affect the internal control over financial reporting.
-2-
PART II. OTHER INFORMATION
Item 6. Exhibits
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31 (a) |
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Certification Pursuant to Rule 13a-14 under the Securities Exchange Act
of 1934, as amended (Chief Executive Officer) |
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31 (b) |
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Certification Pursuant to Rule 13a-14 under the Securities Exchange Act
of 1934, as amended (Chief Financial Officer) |
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32 (a) |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer) |
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32 (b) |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer) |
-3-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
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June 30, |
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Dec. 31, |
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2010 |
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2009 |
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ASSETS |
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Cash and cash equivalents |
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$ |
383,553 |
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$ |
273,671 |
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Investments |
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Securities with fixed maturities |
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230,091 |
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229,872 |
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Equity securities |
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1,936,171 |
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2,065,627 |
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Receivable from affiliates |
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197,453 |
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173,476 |
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Rental furniture |
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183,118 |
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177,793 |
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Goodwill of acquired businesses |
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277,478 |
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277,590 |
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Other assets |
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210,403 |
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203,397 |
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$ |
3,418,267 |
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$ |
3,401,426 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Insurance losses and loss adjustment expenses |
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Affiliated business |
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$ |
334,431 |
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$ |
290,375 |
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Unaffiliated business |
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50,245 |
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53,091 |
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Unearned insurance premiums |
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Affiliated business |
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144,491 |
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110,477 |
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Unaffiliated business |
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9,477 |
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11,516 |
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Deferred furniture rental income and security deposits |
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9,112 |
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11,846 |
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Notes payable |
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36,100 |
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28,200 |
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Income taxes payable, principally deferred |
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251,384 |
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290,667 |
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Other liabilities |
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72,173 |
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54,537 |
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907,413 |
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850,709 |
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Shareholders equity: |
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Capital stock and additional paid-in capital |
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33,324 |
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33,324 |
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Accumulated other comprehensive income |
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205,279 |
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282,900 |
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Retained earnings |
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2,272,251 |
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2,234,493 |
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Total shareholders equity |
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2,510,854 |
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2,550,717 |
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$ |
3,418,267 |
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$ |
3,401,426 |
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See notes beginning on page 7.
-4-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues: |
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Furniture rentals |
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$ |
80,048 |
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$ |
81,365 |
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$ |
151,913 |
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$ |
164,064 |
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Sales and service revenues |
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27,577 |
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26,546 |
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55,200 |
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55,051 |
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Insurance premiums earned |
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Affiliated business |
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65,833 |
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69,720 |
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131,946 |
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145,304 |
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Unaffiliated business |
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3,886 |
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7,582 |
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9,627 |
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11,295 |
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Dividend and interest income |
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18,708 |
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16,286 |
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38,389 |
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35,590 |
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Realized investment losses |
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(259 |
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Other |
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1,040 |
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1,016 |
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2,074 |
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2,013 |
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197,092 |
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202,515 |
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388,890 |
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413,317 |
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Costs and expenses: |
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Cost of products and services sold |
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31,661 |
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32,653 |
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63,654 |
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68,191 |
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Insurance losses and loss adjustment expenses |
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Affiliated business |
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42,803 |
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54,953 |
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94,373 |
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100,940 |
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Unaffiliated business |
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(6,793 |
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1,644 |
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(1,060 |
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3,967 |
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Insurance underwriting expenses |
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Affiliated business |
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17,228 |
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20,477 |
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38,172 |
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42,436 |
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Unaffiliated business |
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2,263 |
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3,212 |
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3,936 |
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4,472 |
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Selling, general and administrative expenses |
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69,438 |
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74,321 |
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135,477 |
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153,245 |
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Interest expense |
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92 |
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205 |
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179 |
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460 |
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156,692 |
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187,465 |
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334,731 |
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373,711 |
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Income before income taxes |
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40,400 |
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15,050 |
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54,159 |
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39,606 |
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Income taxes |
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9,130 |
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2,120 |
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10,562 |
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6,717 |
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Net income |
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31,270 |
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12,930 |
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43,597 |
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32,889 |
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Retained earnings beginning of period |
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2,243,901 |
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2,208,816 |
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2,234,493 |
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2,191,669 |
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Cash dividends declared and paid |
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(2,920 |
) |
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(2,812 |
) |
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(5,839 |
) |
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(5,624 |
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Retained earnings end of period |
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$ |
2,272,251 |
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$ |
2,218,934 |
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$ |
2,272,251 |
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$ |
2,218,934 |
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Amounts per capital share based on 7,119,807 shares
outstanding throughout each period: |
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Net income |
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$ |
4.39 |
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$ |
1.82 |
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$ |
6.12 |
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$ |
4.62 |
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Cash dividends |
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$ |
.410 |
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$ |
.395 |
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$ |
.820 |
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$ |
.790 |
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See notes beginning on page 7.
-5-
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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Cash flows from operating activities, net |
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$ |
99,951 |
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$ |
94,141 |
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Cash flows from investing activities: |
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Maturities and redemptions of securities
with fixed maturities |
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6,679 |
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2,513 |
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Proceeds from sales of equity securities |
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11,394 |
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Purchases of securities with fixed maturities |
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(7,738 |
) |
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(4,238 |
) |
Purchases of rental furniture |
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(43,078 |
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(22,922 |
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Sales of rental furniture |
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26,880 |
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32,559 |
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Change in condominium construction in process |
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16,706 |
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(3,157 |
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Other, net |
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(2,958 |
) |
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(2,638 |
) |
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Net cash flows from investing activities |
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7,885 |
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2,117 |
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Cash flows from financing activities: |
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Net increase (decrease) in notes payable, principally line of credit |
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7,900 |
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(6,200 |
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Payment of cash dividends |
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(5,839 |
) |
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(5,624 |
) |
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Net cash flows from financing activities |
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2,061 |
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(11,824 |
) |
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Effect of foreign currency exchange rate changes |
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(15 |
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121 |
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Increase in cash and cash equivalents |
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109,882 |
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|
84,555 |
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Cash and cash equivalents beginning of period |
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273,671 |
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|
297,643 |
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Cash and cash equivalents end of period |
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$ |
383,553 |
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$ |
382,198 |
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Supplementary information: |
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Interest paid during period |
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$ |
122 |
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$ |
520 |
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Income taxes paid, net, during period |
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|
8,388 |
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|
6,108 |
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|
|
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|
See notes beginning on page 7.
-6-
WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
Note 1. General
The unaudited condensed consolidated financial statements of which these notes are an integral
part include the accounts of Wesco Financial Corporation (Wesco) and its subsidiaries. In
preparing these financial statements, management has evaluated events and transactions that have
occurred subsequent to June 30, 2010. In managements opinion, such statements reflect all
adjustments (all of them of a normal recurring nature) necessary to a fair statement of interim
results in accordance with accounting principles generally accepted in the United States of
America.
Reference is made to the notes to Wescos consolidated financial statements appearing on pages
46 through 58 of its 2009 Form 10-K Annual Report for other information deemed generally applicable
to the condensed consolidated financial statements. In particular, Wescos significant accounting
policies and practices are set forth in Note 1 on pages 46 through 51.
Consolidated U.S. federal income tax return liabilities have been substantially settled with
the Internal Revenue Service (the IRS) through 2001. The IRS has completed its examination of the
consolidated U.S. federal income tax returns for the years 2002 through 2006. The returns for the
years 2002 through 2006 are currently being reviewed in the IRS appeals process. The IRS has
recently begun its examination of returns for the 2007 through 2009 tax years. Wescos management
believes that the ultimate outcome of the Federal income tax examinations will not materially
affect Wescos consolidated financial statements.
Wescos management does not believe that any accounting pronouncements issued by the Financial
Accounting Standards Board or other applicable authorities that are required to be adopted after
June 30, 2010 are likely to have a material effect on reported shareholders equity.
Note 2. Investments
Following is a summary of investments in securities with fixed maturities:
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June 30, 2010 |
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Amortized |
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Unrealized |
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Fair |
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Carrying |
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Cost |
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Gains (Losses) |
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Value |
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Value |
|
Mortgage-backed securities |
|
$ |
16,426 |
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$ |
1,989 |
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$ |
18,415 |
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$ |
18,415 |
|
Corporate bonds |
|
|
200,000 |
|
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|
3,400 |
|
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|
203,400 |
|
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|
200,000 |
|
Other |
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|
11,747 |
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|
(71 |
) |
|
|
11,676 |
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|
11,676 |
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|
|
|
|
|
|
|
$ |
228,173 |
|
|
$ |
5,318 |
|
|
$ |
233,491 |
|
|
$ |
230,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-7-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
Carrying |
|
|
|
Cost |
|
|
Gains |
|
|
Value |
|
|
Value |
|
Mortgage-backed securities |
|
$ |
18,865 |
|
|
$ |
1,837 |
|
|
$ |
20,702 |
|
|
$ |
20,702 |
|
Corporate bonds |
|
|
200,000 |
|
|
|
|
|
|
|
200,000 |
|
|
|
200,000 |
|
Other |
|
|
8,265 |
|
|
|
905 |
|
|
|
9,170 |
|
|
|
9,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
227,130 |
|
|
$ |
2,742 |
|
|
$ |
229,872 |
|
|
$ |
229,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fixed maturity securities included gross unrealized losses of $91 at June 30,
2010 relating to one security in an unrealized loss position for less than twelve months. There
were no fixed-maturity securities in an unrealized loss position at December 31, 2009.
On December 17, 2009 Wesco acquired $200 million par amount of 5.0% senior notes due 2014 of
Wm. Wrigley Jr. Company (Wrigley). Wesco has classified the Wrigley Notes as held-to-maturity,
and accordingly, they are carried at cost.
Following is a summary of investments in equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
The Procter & Gamble Company |
|
$ |
372,480 |
|
|
$ |
374,275 |
|
|
$ |
372,480 |
|
|
$ |
378,331 |
|
The Coca-Cola Company |
|
|
40,761 |
|
|
|
361,145 |
|
|
|
40,761 |
|
|
|
410,719 |
|
Wells Fargo & Company |
|
|
382,779 |
|
|
|
323,666 |
|
|
|
382,779 |
|
|
|
341,240 |
|
Kraft Foods Incorporated |
|
|
325,816 |
|
|
|
280,000 |
|
|
|
325,816 |
|
|
|
271,800 |
|
US Bancorp |
|
|
266,940 |
|
|
|
223,500 |
|
|
|
266,940 |
|
|
|
225,100 |
|
Other |
|
|
232,007 |
|
|
|
373,585 |
|
|
|
243,661 |
|
|
|
438,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,620,783 |
|
|
$ |
1,936,171 |
|
|
$ |
1,632,437 |
|
|
$ |
2,065,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values of equity securities included gross unrealized losses of $194,778 at June 30, 2010
and $157,205 at December 31, 2009. As of June 30, 2010, three marketable equity securities had been
in an unrealized loss position for more than twelve months with unrealized losses of 14%, 16%, and
27% of their respective costs. In managements judgment, the financial condition and near term
prospects of these issuers are favorable and Wesco possesses the intent and ability to retain these
investments for a period of time sufficient to allow for the prices to recover.
Changing market conditions and other facts and circumstances may
change the business prospects of these issuers as well as our ability
and intent to hold these securities until their prices recover.
Other equity securities includes an investment of $205,000, at cost, in shares of 10%
cumulative perpetual preferred stock of The Goldman Sachs Group, Inc. (GS) and warrants to
acquire up to approximately 1.78 million shares of GS common stock, at any time until they expire
on October 1, 2013, at a price of $115 per share. GS has the right to call the preferred shares
for redemption at any time at a premium of 10%.
Wescos realized investment losses for 2010 were $259, before taxes. There were no realized
investment losses in 2009 or realized investment gains the first six months of either 2009 or 2010.
Dollar amounts in thousands, except for amounts per share
-8-
Note 3. Comprehensive income
The following table sets forth Wescos consolidated comprehensive income for the three- and
six-month periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
31,270 |
|
|
$ |
12,930 |
|
|
$ |
43,597 |
|
|
$ |
32,889 |
|
Foreign currency translation adjustment, net of tax* |
|
|
19 |
|
|
|
1,125 |
|
|
|
(567 |
) |
|
|
951 |
|
Change in unrealized appreciation of investments,
net of income tax effect of ($82,866), $111,604,
($41,572) and ($35,118) |
|
|
(153,296 |
) |
|
|
210,331 |
|
|
|
(77,054 |
) |
|
|
(66,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(122,007 |
) |
|
$ |
224,386 |
|
|
$ |
(34,024 |
) |
|
$ |
(32,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents gains and losses from translating the financial statements of the furniture rental
segments foreign-based operations, acquired in January of 2009, from the local currency to U.S.
dollars. |
Note 4. Fair value measurements
Following is a summary of Wescos financial assets and liabilities measured and carried at
fair value on a recurring basis by the type of inputs applicable to fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|
Fair Value Measurements Using |
|
|
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed-maturity securities |
|
$ |
27,617 |
|
|
$ |
|
|
|
$ |
27,617 |
|
|
$ |
|
|
Investments in equity securities |
|
|
1,936,171 |
|
|
|
1,648,253 |
|
|
|
|
|
|
|
287,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed-maturity securities |
|
$ |
29,872 |
|
|
$ |
|
|
|
$ |
29,872 |
|
|
$ |
|
|
Investments in equity securities |
|
|
2,065,627 |
|
|
|
1,726,878 |
|
|
|
|
|
|
|
338,749 |
|
Dollar amounts in thousands, except for amounts per share
-9-
Following is a summary of Wescos assets and liabilities measured at fair value, with the
use of significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
Investments |
|
|
|
in Equity |
|
|
|
Securities |
|
Balance as of December 31, 2009 |
|
$ |
338,749 |
|
Change in unrealized gains on level 3 investments,
included in other comprehensive income |
|
|
(50,831 |
) |
Purchases |
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 |
|
$ |
287,918 |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
in Equity |
|
|
|
Securities |
|
Balance as of December 31, 2008 |
|
$ |
209,510 |
|
Change in unrealized gains on level 3 investments,
included in other comprehensive income |
|
|
86,777 |
|
Purchases |
|
|
|
|
|
|
|
|
Balance as of June 30, 2009 |
|
$ |
296,287 |
|
|
|
|
|
Note 5. Goodwill
The Company performed its annual impairment tests in the fourth quarter of 2009 and concluded
that there was no impairment for any of its reporting units because the fair values exceeded the
book carrying values. In connection with the preparation of its consolidated financial statements
for the three- and six- month periods ended June 30, 2010, the Company reviewed the conclusions
reached in connection with its impairment testing as of yearend 2009 and noted that no events had
occurred, nor had circumstances changed significantly subsequent to yearend, that would more likely
than not reduce the fair values of its reporting units below their carrying amounts.
Certain of the Companys reporting units have been negatively impacted by the recent economic
recession from which their businesses have not yet fully recovered, but the extent of the impact
over the long term cannot be reasonably predicted. There can be no assurance that the Companys
estimates and assumptions regarding future operating results made for purposes of the goodwill
impairment testing will prove to be accurate predictions of the future. If the recession has an
adverse impact on the long-term economic value of the reporting units, the Company may be required
to record goodwill impairment losses in future periods. Currently, it is not possible to determine
if any such future impairment losses would result or if such losses would be material.
Note 6. Environmental matters
Wescos Precision Steel subsidiary and one of its subsidiaries are parties to an environmental
matter in the state of Illinois, the ultimate outcome of which is not expected to be material.
Dollar amounts in thousands, except for amounts per share
-10-
Note 7. Business segment data
Following is condensed consolidated financial information for Wesco, by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
88,387 |
|
|
$ |
93,545 |
|
|
$ |
179,878 |
|
|
$ |
191,866 |
|
Net income |
|
|
24,650 |
|
|
|
11,882 |
|
|
|
35,467 |
|
|
|
33,147 |
|
Goodwill of acquired businesses |
|
|
26,991 |
|
|
|
26,991 |
|
|
|
26,991 |
|
|
|
26,991 |
|
Assets at end of period |
|
|
2,801,800 |
|
|
|
2,413,965 |
|
|
|
2,801,800 |
|
|
|
2,413,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
94,575 |
|
|
$ |
98,777 |
|
|
$ |
181,971 |
|
|
$ |
199,971 |
|
Net income |
|
|
6,663 |
|
|
|
1,530 |
|
|
|
8,403 |
|
|
|
574 |
|
Goodwill of acquired businesses |
|
|
250,487 |
|
|
|
251,026 |
|
|
|
250,487 |
|
|
|
251,026 |
|
Assets at end of period |
|
|
514,378 |
|
|
|
533,630 |
|
|
|
514,378 |
|
|
|
533,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
13,050 |
|
|
$ |
9,134 |
|
|
$ |
25,142 |
|
|
$ |
19,144 |
|
Net income (loss) |
|
|
183 |
|
|
|
(285 |
) |
|
|
237 |
|
|
|
(673 |
) |
Assets at end of period |
|
|
21,252 |
|
|
|
20,669 |
|
|
|
21,252 |
|
|
|
20,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(259 |
) |
|
$ |
|
|
After taxes (included in net income) |
|
|
|
|
|
|
|
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items unrelated to business segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,080 |
|
|
$ |
1,059 |
|
|
$ |
2,158 |
|
|
$ |
2,336 |
|
Net loss |
|
|
(226 |
) |
|
|
(197 |
) |
|
|
(342 |
) |
|
|
(159 |
) |
Assets at end of period |
|
|
80,837 |
|
|
|
102,189 |
|
|
|
80,837 |
|
|
|
102,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
197,092 |
|
|
$ |
202,515 |
|
|
$ |
388,890 |
|
|
$ |
413,317 |
|
Net income |
|
|
31,270 |
|
|
|
12,930 |
|
|
|
43,597 |
|
|
|
32,889 |
|
Goodwill of acquired businesses |
|
|
277,478 |
|
|
|
278,017 |
|
|
|
277,478 |
|
|
|
278,017 |
|
Assets at end of period |
|
|
3,418,267 |
|
|
|
3,070,453 |
|
|
|
3,418,267 |
|
|
|
3,070,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands, except for amounts per share
-11-
WESCO FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 20 through 37 of the Form 10-K Annual Report filed by
Wesco Financial Corporation (Wesco) for the year 2009 (Wescos 2009 10-K) for information
deemed generally appropriate to an understanding of the accompanying condensed consolidated
financial statements. The information set forth in the following paragraphs updates such
discussion. Further, in reviewing the following paragraphs, attention is directed to the
accompanying unaudited condensed consolidated financial statements.
OVERVIEW
Financial Condition
Wescos consolidated balance sheet reflects significant liquidity and a strong capital base,
with relatively little debt. A large amount of liquidity and capital is maintained in the insurance
subsidiaries for strategic purposes and in support of reserves for unpaid losses.
Results of Operations
Consolidated net income increased to $31.3 million for the second quarter of 2010 from $12.9
million for the second quarter of 2009 and to $43.6 million for the first six months of 2010 from
$32.9 million for the first six months of 2009. The increases in consolidated earnings for the
current periods reflect mainly a reduction in operating expenses of Wescos CORT furniture rental
business as well as improved underwriting results of the insurance businesses. The operations of
CORT and Precision Steel, although improved, continue to reflect the effects of weak economic
conditions.
FINANCIAL CONDITION
Wesco continues to have a strong consolidated balance sheet, with high liquidity and
relatively little debt. Consolidated cash and cash equivalents, held principally by Wescos
insurance businesses, amounted to $383.6 million at June 30, 2010, and $273.7 million at December
31, 2009.
Wescos liability for unpaid losses and loss adjustment expenses at June 30, 2010 totaled
$384.7 million, compared to $343.5 million at December 31, 2009. The increase related mainly to the
retrocession agreement with Berkshire Hathaways National Indemnity Company (NICO) subsidiary, to
assume 10% of NICOs quota share reinsurance of Swiss Reinsurance Company and its major
property-casualty affiliates (Swiss Re) described in Item 1, Business, appearing on page 11 of
Wescos 2009 10-K.
Wescos consolidated borrowings totaled $36.1 million at June 30, 2010, compared to $28.2
million at December 31, 2009. The borrowings relate principally to a revolving credit facility used
in the furniture rental business. In addition to the notes payable and the liabilities for unpaid
losses and loss adjustment expenses of Wescos insurance businesses, Wesco and its subsidiaries
have operating lease and other contractual obligations which, at June 30, 2010, were essentially
unchanged from the $125.8 million included in the table of off-balance sheet arrangements and
contractual obligations appearing on page 29 of Wescos 2009 10-K.
Wescos shareholders equity at June 30, 2010 was $2.51 billion ($352.66 per share), a
decrease of $39.9 million from the $2.55 billion ($358.26 per share) reported at December 31, 2009.
Wesco carries its available-for-sale investments at fair value on its consolidated balance sheet,
with net unrealized appreciation or depreciation included as a component of shareholders equity,
net of deferred taxes, without being reflected in
-12-
earnings. The decrease in shareholders equity for the six-month period reflected the net
decrease in fair values of Wescos investments. Because unrealized appreciation or depreciation is
recorded based upon market quotations and, in some cases, upon other inputs that are affected by
economic and market conditions as of the balance sheet date, gains or losses ultimately realized
upon sale of investments could differ substantially from unrealized appreciation or depreciation
recorded on the balance sheet at any given time.
As reported in Wescos 2009 10-K, the operations of Wescos subsidiaries have been impacted by
weak economic conditions. Although the earnings of Wescos furniture rental and industrial segments
have improved for the first half of 2010 over those of the corresponding year-ago period, Wescos
subsidiaries will continue to focus on cost reduction actions, pending further economic recovery.
Wesco has historically attempted to manage its financial condition so that it can weather cyclical
economic conditions.
RESULTS OF OPERATIONS
Wescos reportable business segments are organized in a manner that reflects how Wescos
senior management views those business activities. Wescos management views insurance businesses as
possessing two distinct operations underwriting and investing and believes that underwriting
gain or loss is an important measure of their financial performance. Underwriting gain or loss
represents the simple arithmetic difference between the following line items appearing on the
consolidated statement of income: (1) insurance premiums earned, less (2) insurance losses and loss
adjustment expenses, and insurance underwriting expenses. Managements goal is to generate
underwriting gains over the long term. Underwriting results are evaluated without allocation of
investment income.
The condensed consolidated income statement appearing on page 5 has been prepared in
accordance with generally accepted accounting principles in the United States of America (GAAP).
Revenues, including realized net investment gains or losses, if any, 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 investment gains or losses, if any, are excluded from segment activities, consistent
with the way Wescos management views the business operations. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss) |
|
$ |
9,242 |
|
|
$ |
(1,940 |
) |
|
$ |
3,999 |
|
|
$ |
3,109 |
|
Investment income |
|
|
15,408 |
|
|
|
13,822 |
|
|
|
31,468 |
|
|
|
30,038 |
|
Furniture rental segment |
|
|
6,663 |
|
|
|
1,530 |
|
|
|
8,403 |
|
|
|
574 |
|
Industrial segment |
|
|
183 |
|
|
|
(285 |
) |
|
|
237 |
|
|
|
(673 |
) |
Other |
|
|
(226 |
) |
|
|
(197 |
) |
|
|
(342 |
) |
|
|
(159 |
) |
Realized investment losses |
|
|
|
|
|
|
|
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
31,270 |
|
|
$ |
12,930 |
|
|
$ |
43,597 |
|
|
$ |
32,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per capital share based on 7,119,807
shares outstanding throughout each period |
|
$ |
4.39 |
|
|
$ |
1.82 |
|
|
$ |
6.12 |
|
|
$ |
4.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-13-
Insurance Segment
The insurance segment comprises Wesco-Financial Insurance Company (Wes-FIC) and The
Kansas Bankers Surety Company (KBS). Their operations are conducted or supervised by wholly owned
subsidiaries of Berkshire Hathaway Inc. (Berkshire), Wescos ultimate parent company. Following
is a summary of the results of segment operations, which represents the combination of underwriting
results with dividend and interest income. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Insurance premiums written: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
69,237 |
|
|
$ |
67,212 |
|
|
$ |
167,987 |
|
|
$ |
192,162 |
|
Primary |
|
|
2,147 |
|
|
|
2,250 |
|
|
|
5,031 |
|
|
|
5,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,384 |
|
|
$ |
69,462 |
|
|
$ |
173,018 |
|
|
$ |
197,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
67,216 |
|
|
$ |
74,286 |
|
|
$ |
136,550 |
|
|
$ |
149,870 |
|
Primary |
|
|
2,503 |
|
|
|
3,016 |
|
|
|
5,023 |
|
|
|
6,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
69,719 |
|
|
|
77,302 |
|
|
|
141,573 |
|
|
|
156,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses, loss adjustment expenses and
underwriting expenses |
|
|
55,501 |
|
|
|
80,286 |
|
|
|
135,421 |
|
|
|
151,815 |
|
Underwriting gain (loss), before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
12,867 |
|
|
|
( 192 |
) |
|
|
4,221 |
|
|
|
7,446 |
|
Primary |
|
|
1,351 |
|
|
|
(2,792 |
) |
|
|
1,931 |
|
|
|
(2,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,218 |
|
|
|
(2,984 |
) |
|
|
6,152 |
|
|
|
4,784 |
|
Income taxes |
|
|
4,976 |
|
|
|
(1,044 |
) |
|
|
2,153 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss), after taxes |
|
$ |
9,242 |
|
|
$ |
(1,940 |
) |
|
$ |
3,999 |
|
|
$ |
3,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, in-force reinsurance business consisted principally of the participation in
two distinctive arrangements with wholly owned subsidiaries of Berkshire. The first is a
quota-share retrocession agreement with National Indemnity Company (NICO), which became effective
at the beginning of 2008, for the assumption of a 10% share of NICOs 20% quota share reinsurance
of Swiss Re property casualty risks incepting over the five-year period ending December 31, 2012,
on the same terms as NICOs agreement with Swiss Re (the Swiss Re contract). The second is
Wes-FICs participation, since 2001, in aviation-related risks (hull, liability and workers
compensation) through aviation insurance pools, whose underwriting and claims are managed by United
States Aviation Underwriters, Inc.
Contractual delays in reporting, and limitations in details reported, by the ceding companies
necessitate that estimates be made of reinsurance premiums written and earned, as well as
reinsurance losses and expenses. Under the Swiss Re contract, estimates of premiums, claims and
expenses are generally reported to NICO and Wes-FIC 45 days after the end of each quarterly period.
The relative importance of the Swiss Re contract to Wescos results of operations causes those
results to be particularly sensitive to this estimation process. However, increases or decreases in
premiums earned as a result of the estimation process related to the reporting lag are typically
substantially offset by related increases or decreases in claim and expense estimates. Periodic
underwriting results can also be affected significantly by changes in estimates for unpaid losses
and loss adjustment expenses, including amounts established for occurrences in prior periods.
Written reinsurance premiums included $60.6 million relating to the Swiss Re contract for the
second
-14-
quarter and $152.9 million for the first six months of 2010, up 6.9% from the $56.7 million
written for the second quarter, but down 11.9% from the $173.6 million written for the first six
months of 2009. Earned premiums under the contract were $59.2 million for the second quarter and
$119.0 million for the first six months of 2010, down 9.2% for the quarter and 9.6% for the first
six months from the $65.2 million and $131.7 million earned under the contract for the
corresponding 2009 periods. Written aviation-related reinsurance premiums were $8.6 million for the
second quarter and $15.1 million for the first six months of 2010, down 17.9% and 18.9% from the
respective 2009 figures. Earned aviation-related premiums declined by 17.0% for the second quarter
and 25.4% for the first six months of 2010 from the corresponding 2009 figures. Both Swiss Re and
the aviation pool manager have reported that they will not underwrite business when they deem
pricing to be inadequate with respect to risks assumed.
Written primary insurance premiums were relatively unchanged for the second quarter and first
six months of 2010 from those of the corresponding 2009 periods. Earned primary premiums declined
by 17.0% for the second quarter and 25.4% for the six-month period of 2010, reflecting principally
the rapid winding down of KBSs deposit guarantee bond line of insurance, announced late in 2008
and discussed at length in Wescos 2009 10-K. The aggregate face amount of outstanding deposit
guarantee bonds has been reduced, from $9.7 billion at September 30, 2008, when deposits in 1,671
separate institutions were insured, to $4.0 million, insuring deposits in two institutions,
currently. KBS anticipates that outstanding deposit guarantee bonds will decline to $2.9 million of
deposits in one institution by September 30, 2010, and to zero in July 2011. KBS management
believes that neither of the institutions for which deposit guarantee bonds are currently
outstanding is facing a significant risk of failure. Neither of these institutions deposit
guarantee bonds exposes KBS to an after-tax loss in excess of $1.9 million.
Management believes that underwriting gain or loss is an important measure of the financial
performance of an insurance company. Underwriting results of Wescos insurance segment fluctuate
from period to period, but historically have been generally favorable. Pre-tax underwriting gain
(loss) under the Swiss Re contract amounted to $9.4 million for the second quarter and $3.1 million
for the first six months of 2010, versus ($1.5 million) and $4.4 million for the corresponding
periods of 2009. The underwriting results under the contract for the first six months of 2010
included (i) estimated losses in the aggregate amount of $23.3 million, before taxes, from the
Chilean earthquake and European Windstorm Xynthia, which occurred in the first quarter, and the
destruction in the second quarter of the Deepwater Horizon oil rig in the Gulf of Mexico,
significantly offset by (ii) $20.5 million, before taxes, of favorable reserve development, of
which $17.3 million related to calendar year 2009 and $3.2 million to calendar year 2008.
Underwriting results under the contract for the 2009 periods reflected favorable 2008 reserve
development of $6.0 million, before taxes, recorded in the first quarter, and the detrimental
effect on loss and loss expense reserves previously established, of the declining value of the U.S.
Dollar relative to other currencies in which Swiss Re conducts its business. Wesco does not view
currency fluctuations as material to its arrangement under the contract and does not hedge against
such fluctuations. Underwriting results from the aviation pools reflect pre-tax underwriting gains
of $3.5 million for the second quarter and $1.1 million for the first six months of 2010, and $1.4
million and $3.1 million for the corresponding periods of 2009. The frequency and severity of
aviation-related losses tend to be volatile.
Pre-tax underwriting results from primary insurance improved by $4.1 million for the second
quarter and $4.6 million for the first six months of 2010, from those of the corresponding 2009
periods. The frequency and severity of primary insurance losses tend to be volatile. Loss
experience was more favorable in the more recent periods than in the 2009 periods, when
underwriting results for the first six months reflected losses of $4.2 million from two bank
failures, including $3.2 million, less $0.5 million received from the FDIC, in the second quarter,
the latter figure relating to a bank failure that occurred in the third quarter of 2008. There were
no
-15-
losses from bank failures during the first half of 2010.
The profitability of any reinsurance or insurance arrangement is best assessed after all
losses and expenses have been realized, perhaps many years after the coverage period, rather than
for any given reporting period.
Following is a summary of investment income produced by Wescos insurance segment. (Amounts
are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Investment income, before taxes |
|
$ |
18,668 |
|
|
$ |
16,243 |
|
|
$ |
38,305 |
|
|
$ |
35,267 |
|
Income taxes |
|
|
3,260 |
|
|
|
2,421 |
|
|
|
6,837 |
|
|
|
5,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, after taxes |
|
$ |
15,408 |
|
|
$ |
13,822 |
|
|
$ |
31,468 |
|
|
$ |
30,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income of the insurance segment comprises dividends and interest earned principally
from the investment of shareholder capital (including reinvested earnings) as well as float
(principally premiums received before payment of related claims and expenses). Pre-tax dividend
income was relatively unchanged for the second quarter, but decreased by $2.7 million for the first
six months of 2010, from the corresponding 2009 figures. Pre-tax interest income increased by $2.4
million for the second quarter, and by $5.7 million for the first six months of 2010, from the
corresponding 2009 figures, due principally to an investment of $200 million in 5% notes in the
fourth quarter of 2009.
The income tax provisions, expressed as percentages of pre-tax investment income, shown in the
foregoing table, amounted to 17.5% and 14.9% for the quarters, and 17.8% and 16.1% for the
six-month periods ended June 30, 2010 and 2009, reflecting the relation of dividend income, which
is substantially exempt from income taxes, to interest income, which is fully taxable.
Management continues to seek to invest in the purchase of businesses and in long-term equity
holdings.
-16-
Furniture Rental Segment
The furniture rental segment consists of CORT Business Services Corporation (CORT).
Following is a summary of segment operating results. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals |
|
$ |
80,048 |
|
|
$ |
81,365 |
|
|
$ |
151,913 |
|
|
$ |
164,064 |
|
Furniture sales |
|
|
12,676 |
|
|
|
15,364 |
|
|
|
26,880 |
|
|
|
32,510 |
|
Service fees |
|
|
1,851 |
|
|
|
2,048 |
|
|
|
3,178 |
|
|
|
3,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
94,575 |
|
|
|
98,777 |
|
|
|
181,971 |
|
|
|
199,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rentals, sales and fees |
|
|
21,168 |
|
|
|
24,872 |
|
|
|
43,006 |
|
|
|
51,631 |
|
Selling, general and administrative expenses |
|
|
65,614 |
|
|
|
71,268 |
|
|
|
128,348 |
|
|
|
147,149 |
|
Interest expense |
|
|
92 |
|
|
|
205 |
|
|
|
179 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,874 |
|
|
|
96,345 |
|
|
|
171,533 |
|
|
|
199,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,701 |
|
|
|
2,432 |
|
|
|
10,438 |
|
|
|
731 |
|
Income taxes |
|
|
1,038 |
|
|
|
902 |
|
|
|
2,035 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income |
|
$ |
6,663 |
|
|
$ |
1,530 |
|
|
$ |
8,403 |
|
|
$ |
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental revenues for the second quarter of 2010 decreased $1.3 million (1.6%) from
those of the second quarter of 2009, and for the first six months of 2010, by $12.2 million (7.4%)
from those of the first six months of 2009. Management believes that core rental revenues, a
measurement that excludes revenues from trade shows and locations not in operation throughout each
period, is an important statistic in analyzing comparable revenue levels from different periods.
Core rental revenues increased $5.4 million (9.4%) in the second quarter of 2010 from those of the
first quarter of 2010, following an increase of $1.7 million (3.1%) in the first quarter of 2010
from those of the fourth quarter 2009. The number of furniture leases outstanding at the end of the
second quarter of 2010 increased 13.8% from the number outstanding at the end of the first quarter
of 2010 after an increase of 5.4% from those outstanding as of yearend 2009. Customer demand for
rental furniture decreased significantly during the recent economic recession; however, the
improvements in core rental revenues and furniture leases outstanding indicate that customer demand
has increased from the depressed levels reached late in 2009, and management is hopeful that the
recent recovery will be sustained.
Furniture sales revenues decreased 17.5% and 17.3% for the second quarter and first six months
of 2010 from those reported for the respective year-ago periods; however furniture sales margins
increased to 36.0% and 35.5% for the second quarter and first six months of 2010, from 34.4% and
34.0% for the second quarter and first six months of 2009. Management controls rental furniture
inventory levels by adjusting selling prices. In light of the recent improvement in furniture
rental customer demand, management has become more comfortable with the inventory level than
previously.
Service fees revenues for the second quarter and first six months of 2010 were relatively
unchanged from those of the similar periods of 2009.
Cost of rentals, sales and fees amounted to 22.4% and 23.6% of revenues for the second quarter
and first six
-17-
months of 2010 compared with 25.2% and 25.8% for the second quarter and first six months of
2009. The decreases in the cost percentages for the 2010 periods were due principally to a relative
decrease in depreciation expense attributable mainly to lower average furniture inventory levels
and an increase in profit margin on furniture sold.
Selling, general, administrative and interest expenses (operating expenses) for the segment
were $65.7 million for the second quarter of 2010, down $5.8 million (8.1%) from $71.5 million
incurred in the second quarter of 2009, and $128.5 million for the first six months of 2010, down
$19.1 million (12.9%) from the $147.6 million reported for the first six months of 2009. The
decrease in operating expenses principally reflects lower occupancy- and employee-related expenses
as a result of managements cost-cutting initiatives. Management intends to continue its focus on
containing operating expenses.
Income before income taxes of the furniture rental segment amounted to $7.7 million and $10.4
million in the second quarter and first six months of 2010 versus $2.4 million and $0.7 million in
the second quarter and first six months of 2009. The improvement in profitability is due
principally to the significant reduction in fixed operating expenses, as explained above.
Industrial Segment
Following is a summary of the results of operations of the industrial segment, which consists
of the businesses of Precision Steel Warehouse, Inc. and its subsidiaries. (Amounts are in
thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
$ |
13,050 |
|
|
$ |
9,134 |
|
|
$ |
25,142 |
|
|
$ |
19,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and services |
|
$ |
10,494 |
|
|
$ |
7,780 |
|
|
$ |
20,648 |
|
|
$ |
16,559 |
|
Selling, general and administrative expenses |
|
|
2,099 |
|
|
|
1,827 |
|
|
|
3,950 |
|
|
|
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
457 |
|
|
$ |
(473 |
) |
|
$ |
544 |
|
|
$ |
(1,115 |
) |
Income taxes |
|
|
274 |
|
|
|
(188 |
) |
|
|
307 |
|
|
|
(442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income (loss) |
|
$ |
183 |
|
|
$ |
(285 |
) |
|
$ |
237 |
|
|
$ |
(673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference is made to pages 27 and 28 of Wescos 2009 10-K for information about Wescos
industrial segment, including the challenges affecting the domestic steel service industry for a
number of years, which were exacerbated by recessionary conditions which began in the latter half
of 2008.
Industrial segment revenues increased by $3.9 million (42.9%) for the second quarter and $6.0
million (31.3%) for the first six months of 2010 from those of the corresponding 2009 periods.
Sales, in terms of pounds sold, increased by 39.9% for the second quarter and 39.3% for the first
six months, to 8.3 million pounds for the current quarter and 16.4 million pounds for the first six
months of 2010, from 5.9 million pounds sold during the second quarter and 11.8 million pounds sold
during the first six months of 2009. We do not know to what degree the recent improvement in sales
volume might be an indication of sustainable growth in domestic industrial activity, or to what
degree it might indicate that customers of the industrial segment may be restocking their
inventories. In any event, the volume of pounds sold for the first six months of 2010 compares
unfavorably with the 21.4 million pounds sold by the industrial segment as recently as in the first
six months of 2008.
The industrial segment operates on a low gross profit margin (revenues, less cost of products
and services).
-18-
The segments business activities also require a base of operations supported by significant
fixed operating costs. The increases in pre-tax and net income of the industrial segment for the
second quarter and first six months of 2010 were attributable principally to the increase in sales
and service revenues. Segment operating results for the first six months of 2010 include
litigation-related expenses of $0.2 million incurred in the second quarter in connection with the
environmental matter discussed in Note 6 to the accompanying condensed consolidated financial
statements.
* * * * *
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Reference is made to page 29, in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, of Wescos 2009 10-K, for a table summarizing the contractual
obligations associated with ongoing business activities of Wesco and its subsidiaries, some of
which are off-balance sheet, and involve cash payments in periods after yearend 2009. At June 30,
2010, there have been no material changes in contractual obligations, including off-balance sheet
arrangements, of Wesco or its subsidiaries from those reported as of December 31, 2009.
* * * * *
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, large individual or catastrophe
losses incurred under property and casualty insurance and reinsurance contracts, and changes in the
general U.S. economy.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
Reference is made to pages 30 to 35, in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of Wescos 2009 10-K for the accounting policies and
practices considered by Wescos management to be critical to its determination of consolidated
financial position and results of operations, as well as to Note 1 to Wescos consolidated
financial statements appearing on pages 46 through 51 thereof for a description of the significant
policies and practices followed by Wesco (including those deemed critical) in preparing its
consolidated financial statements. There have been no changes in significant policies and practices
through June 30, 2010.
In applying certain accounting policies, Wescos management is required to make estimates and
judgments regarding transactions that have occurred and ultimately will be settled several years in
the future. Amounts recognized in the consolidated financial statements from such estimates are
necessarily based on assumptions about numerous factors involving varying, and possibly
significant, degrees of judgment and uncertainty. Accordingly, the amounts currently recorded in
the financial statements may prove, with the benefit of hindsight, to be inaccurate.
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
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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
those risks reported in Item 1A, Risk Factors, in Wescos 2009 10-K, but also to the occurrence of
one or more catastrophic events such as acts of terrorism, hurricanes, earthquakes, 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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WESCO FINANCIAL CORPORATION
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Date: August 6, 2010 |
By: |
/s/ Jeffrey L. Jacobson
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Jeffrey L. Jacobson |
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Vice President and Chief Financial Officer
(principal financial officer) |
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