e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x |
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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 March 31, 2006 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
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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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 x No o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
o Accelerated Filer x
Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
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 May 2, 2006
PART I. FINANCIAL INFORMATION
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Page(s) |
Item 1.
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Financial Statements (unaudited). |
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4 |
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5 |
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6 |
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7-10 |
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11-18 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
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Reference is made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk
appearing on pages 34 and 35 of the Form 10-K Annual Report for the year ended December 31, 2005,
filed by Wesco Financial Corporation (Wesco), for information on equity price risk and interest
rate risk at Wesco. There have been no material changes through March 31, 2006.
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 December 31, 2005. 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, and are effective to ensure
that information required to be disclosed by Wesco in the reports it files or submits under the
Exchange Act, 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 controls over financial reporting during the quarter
ended March 31, 2006 that have materially affected or are reasonably likely to materially affect
the internal controls 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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March 31, |
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Dec. 31, |
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2006 |
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2005 |
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ASSETS
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Cash and cash equivalents |
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$ |
1,203,547 |
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$ |
1,194,113 |
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Investments: |
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Securities with fixed maturities |
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71,226 |
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74,441 |
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Marketable equity securities |
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918,044 |
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884,673 |
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Rental furniture |
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189,521 |
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187,572 |
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Goodwill of acquired businesses |
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266,607 |
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266,607 |
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Other assets |
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136,312 |
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121,105 |
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$ |
2,785,257 |
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$ |
2,728,511 |
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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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$20,468 |
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$ |
19,697 |
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Unaffiliated business |
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46,996 |
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42,283 |
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Unearned insurance premiums
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Affiliated business |
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11,735 |
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12,301 |
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Unaffiliated business |
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21,695 |
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16,092 |
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Deferred furniture rental income and security deposits |
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24,026 |
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22,204 |
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Notes payable |
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41,800 |
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42,300 |
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Income taxes payable, principally deferred |
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307,911 |
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290,615 |
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Other liabilities |
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50,228 |
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52,587 |
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524,859 |
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498,079 |
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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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Unrealized appreciation of investments, net of taxes |
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265,860 |
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256,710 |
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Retained earnings |
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1,961,214 |
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1,940,398 |
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Total shareholders equity |
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2,260,398 |
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2,230,432 |
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$ |
2,785,257 |
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$ |
2,728,511 |
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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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March 31, |
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March 31, |
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2006 |
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2005 |
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Revenues: |
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Furniture rentals |
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$ |
80,038 |
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$ |
73,074 |
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Sales and service revenues |
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36,265 |
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35,611 |
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Insurance premiums earned
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Affiliated business |
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6,511 |
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7,037 |
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Unaffiliated business |
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8,698 |
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5,032 |
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Dividend and interest income |
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21,099 |
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11,949 |
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Other |
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939 |
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847 |
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153,550 |
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133,550 |
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Costs and expenses: |
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Cost of products and services sold |
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39,631 |
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37,572 |
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Insurance losses and loss adjustment expenses
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Affiliated business |
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2,018 |
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3,631 |
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Unaffiliated business |
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6,429 |
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459 |
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Insurance underwriting expenses
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Affiliated business |
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1,339 |
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1,200 |
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Unaffiliated business |
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2,620 |
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1,445 |
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Selling, general and administrative expenses |
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65,285 |
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64,990 |
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Interest expense |
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587 |
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217 |
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117,909 |
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109,514 |
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Income before income taxes |
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35,641 |
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24,036 |
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Income taxes |
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12,226 |
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5,609 |
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Net income |
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23,415 |
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18,427 |
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Retained earnings beginning of period |
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1,940,398 |
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1,655,929 |
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Cash dividends declared and paid |
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(2,599 |
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(2,528 |
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Retained earnings end of period |
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$ |
1,961,214 |
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$ |
1,671,828 |
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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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$ |
3.29 |
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$ |
2.59 |
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Cash dividends |
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$ |
.365 |
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$ |
.355 |
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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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Three Months Ended |
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March 31, |
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March 31, |
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2006 |
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2005 |
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Cash flows from operating activities, net |
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$ |
35,393 |
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$ |
19,664 |
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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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6,147 |
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12,771 |
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Purchases of equity securities |
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(18,856 |
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Purchases of securities with fixed maturities |
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(3,351 |
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Purchases of rental furniture |
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(23,005 |
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(23,450 |
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Sales of rental furniture |
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18,580 |
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17,956 |
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Other, net |
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(2,375 |
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(2,422 |
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Net cash flows from investing activities |
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(22,860 |
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4,855 |
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Cash flows from financing activities: |
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Net decrease in notes payable, principally line of credit |
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(500 |
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(4,025 |
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Payment of cash dividends |
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(2,599 |
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(2,528 |
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Net cash flows from financing activities |
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(3,099 |
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(6,553 |
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Increase in cash and cash equivalents |
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9,434 |
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17,966 |
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Cash and cash equivalents beginning of period |
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1,194,113 |
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1,161,163 |
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Cash and cash equivalents end of period |
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$ |
1,203,547 |
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$ |
1,179,129 |
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Supplementary information: |
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Interest paid during period |
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$ |
526 |
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$ |
166 |
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Income taxes paid (recovered), net, during period |
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(20 |
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8,988 |
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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.
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
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.
Reference is made to the notes to Wescos consolidated financial statements appearing on pages
46 through 57 of its 2005 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 48.
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
March 31, 2006 are likely to have a material effect on reported shareholders equity.
Note 2.
Following is a summary of securities with fixed maturities:
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March 31, 2006 |
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December 31, 2005 |
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Amortized |
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Fair |
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Amortized |
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Fair |
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Cost |
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Value |
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Cost |
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Value |
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Mortgage-backed securities |
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$ |
66,261 |
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$ |
67,477 |
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$ |
45,569 |
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$ |
47,174 |
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Other, principally U.S. government obligations |
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3,772 |
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3,749 |
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27,272 |
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27,267 |
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$ |
70,033 |
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$ |
71,226 |
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$ |
72,841 |
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$ |
74,441 |
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At March 31, 2006, the estimated fair values of securities with fixed maturities contained
unrealized losses of $27, compared with $6 of unrealized losses at December 31, 2005.
Following is a summary of marketable equity securities (all common stocks):
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March 31, 2006 |
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December 31, 2005 |
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Fair |
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Fair |
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Cost |
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Value |
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Cost |
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Value |
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The Procter & Gamble Company |
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$ |
424,367 |
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$ |
412,314 |
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$ |
424,367 |
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$ |
414,103 |
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The Coca-Cola Company |
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40,761 |
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301,698 |
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40,761 |
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290,458 |
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American Express Company |
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18,108 |
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102,110 |
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18,108 |
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99,992 |
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Wells Fargo & Company |
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25,189 |
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84,411 |
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6,333 |
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64,187 |
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Ameriprise Financial Inc |
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2,579 |
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17,511 |
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2,579 |
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15,933 |
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$ |
511,004 |
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$ |
918,044 |
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$ |
492,148 |
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$ |
884,673 |
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-7-
Total unrealized losses of equity securities were $12,053 at March 31, 2006, versus $10,264 at
December 31, 2005, all of which related to securities in an unrealized loss position for less than
twelve months.
Note 3.
The following table sets forth Wescos consolidated comprehensive income for the three-month
periods ended March 31, 2006 and 2005:
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Three Months Ended |
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March 31, |
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March 31, |
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2006 |
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2005 |
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Net income |
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$ |
23,415 |
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$ |
18,427 |
|
Increase in unrealized appreciation of investments,
net of income tax effect of $4,944 and $8,191 |
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9,150 |
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15,269 |
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Comprehensive income |
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$ |
32,565 |
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$ |
33,696 |
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Note 4.
Effective as of yearend 2005, proceeds from the sales of rental furniture are now classified
on the consolidated statement of cash flows in the category of investing activities, consistent
with the classification of cash used for the purchases of rental furniture. In prior periods,
proceeds from sales of rental furniture had been included in operating cash flows in Wescos
consolidated statements of cash flows. Reference is made to the Note 9 to Wescos consolidated
financial statements appearing on page 54 of its 2005 Form 10-K Annual Report for a more complete
explanation of the reclassification.
The following table shows the effects of the reclassification on data presented in the
condensed consolidated statement of cash flows for the quarter ended March 31, 2005.
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Net cash flows from operating activities as previously reported |
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$ |
37,620 |
|
Reclassification |
|
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(17,956 |
) |
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Revised net cash flows from operating activities |
|
$ |
19,664 |
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Net cash flows from investing activities as previously reported |
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$ |
(13,101 |
) |
Reclassification |
|
|
17,956 |
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Revised net cash flows from investing activities |
|
$ |
4,855 |
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Note 5.
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 an industrial park in Downers Grove, Illinois. PBP, along with the other businesses,
has been negotiating remedial actions with various governmental entities.
In 2003, PBP recorded a provision of $1,044 ($628, after income tax benefit), representing a
preliminary
Dollar amounts in thousands, except for amounts per share
-8-
estimate of its share of costs of remediation agreed to with governmental entities and other
parties to date and related expenses. PBP increased that estimate by $139 ($84, after income tax
benefit) in 2004, and $110 ($66, after taxes) in the first quarter of 2005. So far, several of
PBPs and Precision Steels insurers have agreed to undertake the cost of their defense and to
indemnify them within the policy limits in connection with certain of the matters, but have
reserved their rights retroactively to decline coverage and receive reimbursement of amounts paid.
To date, PBP has recovered $522 ($313, after taxes) from its insurers, including $188 ($113, after
taxes) in the first quarter of 2005. Additional recoveries are expected, but in amounts that
management is unable to estimate. Accordingly, future recoveries, if any, are not reflected in the
accompanying condensed consolidated financial statements.
PBP, Precision Steel, and other parties have been named in several civil lawsuits brought by
and on behalf of area residents relating to this alleged contamination. Muniz v. Precision
Brand Products, Inc., et al., filed in April 2004 in the U.S. District Court for the Northern
District of Illinois, is a class action alleging that PBP and the other defendants caused
diminution in property values of nearby homes and put the residents at an increased risk of
contracting cancer. Plaintiffs seek unspecified compensatory damages. The Court has granted the
plaintiffs motion to certify the class on liability issues, but not on damages, and discovery is
ongoing. In Bendik v. Precision Brand Products, Inc. and Precision Steel Warehouse, Inc.,
filed in May 2003 in the Circuit Court of Cook County, Illinois, the plaintiff claims that her
exposure to contaminants released by PBP and Precision caused her to contract cancer. Plaintiff
seeks unspecified compensatory and punitive damages. PBP and Precision have filed third party
actions against a number of other companies who were or are located in the industrial park.
Discovery relating to causation is largely completed and the matter has been assigned to a
pre-trial judge for potential settlement discussions. Pote vs. Precision Brand Products, Inc.
and Precision Steel Warehouse, Inc., filed in December 2004 in the same court as the
Bendik matter, is a wrongful death action brought by the Estate of Ralph Pote pending
against PBP and Precision Steel and other companies who were or are located in the industrial park,
alleging that the defendants released contaminants into the soil and groundwater and that exposure
to such contaminants was ultimately responsible for the death of Mr. Pote. This matter has been
consolidated with the Bendik matter for purposes of discovery. The plaintiff seeks unspecified
compensatory damages, but has preserved the ability to request punitive damages in the future. A
third party defendant recently named Wesco as a cross-defendant in the Bendik and Muniz lawsuits.
Wesco has not yet been served in connection with the Bendik matter. It is expected that Precision
Steels insurers will undertake Wescos defense on the same basis as they have Precision Steels in
connection with these matters.
Management anticipates that additional provisions with respect to such remediation and related
legal matters, including these lawsuits, may be required in the future, and is hopeful that the
insurers will continue to provide certain defenses and reimburse certain costs previously recorded.
However, as of March 31, 2006, it was not possible to reasonably estimate the amount, if any, of
additional loss or a range of losses that may be required in connection with these matters, or any
related benefit from insurance indemnification. Although management does not anticipate that the
ultimate impact of such future costs 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.
Dollar amounts in thousands, except for amounts per share
-9-
Note 6.
Following is condensed consolidated financial information for Wesco, by business segment:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
36,062 |
|
|
$ |
23,805 |
|
Net income |
|
|
16,480 |
|
|
|
13,749 |
|
Assets at end of period |
|
|
2,196,368 |
|
|
|
2,047,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental segment: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
98,618 |
|
|
$ |
92,826 |
|
Net income |
|
|
6,051 |
|
|
|
4,266 |
|
Assets at end of period |
|
|
256,477 |
|
|
|
241,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
17,721 |
|
|
$ |
15,859 |
|
Net income |
|
|
895 |
|
|
|
412 |
|
Assets at end of period |
|
|
18,939 |
|
|
|
20,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill of acquired businesses (included in assets) |
|
$ |
266,607 |
|
|
$ |
266,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items unrelated to business segments: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,149 |
|
|
$ |
1,060 |
|
Net income (loss) |
|
|
(11 |
) |
|
|
|
|
Assets at end of period |
|
|
46,866 |
|
|
|
36,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
153,550 |
|
|
$ |
133,550 |
|
Net income |
|
|
23,415 |
|
|
|
18,427 |
|
Assets at end of period |
|
|
2,785,257 |
|
|
|
2,613,699 |
|
|
|
|
|
|
|
|
Dollar amounts in thousands, except for amounts per share
-10-
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 22 through 34 of the Form 10-K Annual Report filed by
Wesco Financial Corporation (Wesco) for the year 2005 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
Wesco continues to have a strong balance sheet at March 31, 2006, with relatively little debt
and no hedging. Liquidity, which has traditionally been high, has been even higher than usual for
the past several years due principally to sales, maturities and redemptions of fixed-maturity
investments, and reinvestment of the proceeds in cash equivalents pending redeployment.
Results of Operations
After-tax earnings improved in the first quarter of 2006 from the corresponding 2005 amount
mainly due to increased investment income earned by the insurance segment resulting mainly from
increased interest rates on short-term investments and improved results of the furniture rental
segment, partially offset by decreased underwriting income of the insurance businesses, explained
below.
FINANCIAL CONDITION
Wescos shareholders equity at March 31, 2006 was approximately $2.26 billion ($317 per
share), up from $2.23 billion ($313 per share) at December 31, 2005. Shareholders equity included
$265.9 million at March 31, 2006, and $256.7 million at December 31, 2005, 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.
Wescos consolidated cash and cash equivalents, held principally by its insurance businesses,
increased slightly, from $1.19 billion at December 31, 2005, to $1.20 billion at March 31, 2006.
Wescos consolidated borrowings totaled $41.8 million at March 31, 2006 versus $42.3 million
at December 31, 2005. The decrease in borrowings related to a revolving line of credit used in the
furniture rental business. In addition to the recorded debt, Wescos liability for unpaid losses
and loss adjustment expenses totaled $67.5 million at March 31, 2006, versus $62.0 million at
December 31, 2005. In addition to this recorded debt, Wesco and its subsidiaries have operating
lease and other contractual obligations which, at
-11-
March 31, 2006, were
essentially unchanged from the $145.5 million included in the table of off-balance sheet
arrangements and contractual obligations appearing on page 32 of its Form 10-K Annual Report for
the year ended December 31, 2005.
RESULTS OF OPERATIONS
Wescos reportable business segments are organized in a manner that reflects how Wescos top
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 (GAAP). Revenues, including realized
net investment gains, 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, if any, are
excluded from segment activities, consistent with the way Wescos management views the business
operations. (Amounts are in thousands, all after income tax effect.)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
Underwriting |
|
$ |
1,822 |
|
|
$ |
5,477 |
|
Investment income |
|
|
14,658 |
|
|
|
8,272 |
|
Furniture rental segment |
|
|
6,051 |
|
|
|
4,266 |
|
Industrial segment |
|
|
895 |
|
|
|
412 |
|
Nonsegment items |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
23,415 |
|
|
$ |
18,427 |
|
|
|
|
|
|
|
|
-12-
Insurance Segment
The insurance segment is comprised of 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 represent essentially the combination of
underwriting results with dividend and interest income. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance premiums written |
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
13,560 |
|
|
$ |
6,504 |
|
Primary |
|
|
5,748 |
|
|
|
5,927 |
|
|
|
|
|
|
|
|
Total |
|
$ |
19,308 |
|
|
$ |
12,431 |
|
|
|
|
|
|
|
|
Insurance premiums earned |
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
9,842 |
|
|
$ |
6,924 |
|
Primary |
|
|
5,367 |
|
|
|
5,145 |
|
|
|
|
|
|
|
|
Total |
|
|
15,209 |
|
|
|
12,069 |
|
Insurance losses, loss adjustment expenses and underwriting
expenses |
|
|
12,406 |
|
|
|
6,735 |
|
Underwriting gain (loss), before income taxes
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
(452 |
) |
|
|
2,146 |
|
Primary |
|
|
3,255 |
|
|
|
3,188 |
|
|
|
|
|
|
|
|
Total |
|
|
2,803 |
|
|
|
5,334 |
|
Income taxes |
|
|
981 |
|
|
|
(143 |
) |
|
|
|
|
|
|
|
Underwriting gain |
|
$ |
1,822 |
|
|
$ |
5,477 |
|
|
|
|
|
|
|
|
At March 31, 2006, in-force reinsurance business consisted of the participation in three pools
of aviation-related risks: hull and liability pools, each to the extent of 12.5%, and a workers
compensation pool to the extent of 5%. In 2005, in-force reinsurance consisted of participation in
the same pools of aviation-related risks, with the participation in the hull and liability pools at
the 10% level. Wes-FICs reinsurance activities have fluctuated from period to period as
participations in reinsurance contracts have become available both through insurance subsidiaries
of Berkshire, and otherwise.
Reinsurance premiums written in the first quarter of 2006 increased $7.1 million (108%) from
those of the comparable 2005 quarter. The increase is attributed principally to growth in volume of
insurance written by the underlying pools, and the 25% increase in the percentage by which Wes-FIC
currently participates in the hull and liability pools.
Earned reinsurance premiums increased $2.9 million (42%) for the first quarter of 2006 over
reinsurance premiums earned for the first quarter last year. The increase is attributable
principally to the 25% increase in the percentage by which Wes-FIC participates in the hull and
liability aviation pools, and growth in volume of business written by the pools.
Primary insurance premiums written and earned were relatively unchanged for the first quarters
of 2006 and 2005.
-13-
Management believes that underwriting gain or loss, is an important measure of financial
performance of insurance companies. When stated as a percentage, the sum of insurance losses and
loss adjustment expenses, and underwriting expenses, divided by premiums, gives the combined ratio.
A combined ratio of less than 100% connotes an underwriting profit and a combined ratio of greater
than 100% connotes an underwriting loss.
Reinsurance activities resulted in an underwriting loss of $0.5 million, before income taxes,
for the first quarter of 2006, versus a pre-tax underwriting gain of $2.1 million for the first
quarter of 2005. The decrease in pre-tax profitability from reinsurance underwriting was
attributable to an increase in aviation-related incurred-but-not-reported losses and expenses
(IBNR) of $4.9 million recorded in the first quarter of 2006, including $0.8 million of reserve
development relating to 2005. Combined ratios from reinsurance activities amounted to 104.6% for
the first quarter of 2006, versus 69.0% for the first quarter of 2005.
It should be noted that the profitability of a reinsurance arrangement is better assessed
after all losses and expenses have been realized, perhaps many years after the coverage period,
rather than for any given quarterly reporting period.
Underwriting results from primary insurance have been favorable but have fluctuated from
period to period due to timing and volatility of losses incurred. Combined ratios from primary
insurance were 39.3% and 38.0 % for the first quarters of 2006 and 2005.
Wescos insurers cede minimal amounts of business, and as a result underwriting results may be
volatile. Instead of paying reinsurers to minimize risks associated with significant losses,
management accepts volatility in underwriting results provided the prospects of long-term
underwriting profitability remain favorable.
The income tax provision associated with the insurance segments underwriting activities for
the first quarter of 2005 benefited by $2.0 million relating to the resolution of an issue raised
in an examination of prior year income tax returns by the Internal Revenue Service.
Following is a summary of investment income produced by Wescos insurance segment (in
thousands of dollars).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance premiums written
|
|
|
|
|
|
|
|
|
Investment income, before taxes |
|
$ |
21,005 |
|
|
$ |
11,726 |
|
Income taxes |
|
|
6,347 |
|
|
|
3,454 |
|
|
|
|
|
|
|
|
Investment income, after taxes |
|
$ |
14,658 |
|
|
$ |
8,272 |
|
|
|
|
|
|
|
|
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 investment
income for the first quarter of 2006 increased $9.3 million, or 79.1%, from the corresponding 2005
figure principally due to higher interest rates earned on short-term investments in 2006.
-14-
The increases in short-term interest rates in the United States since mid- 2004 should result
in increased
earnings from such investments in 2006 periods when compared to 2005 periods. Management continues
to seek to invest cash balances in the purchase of businesses and in long-term equity holdings.
However, absent such opportunities, investment income may remain relatively low.
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 |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Furniture rentals |
|
$ |
78,704 |
|
|
$ |
73,074 |
|
Furniture sales |
|
|
18,580 |
|
|
|
17,956 |
|
Apartment locator fees |
|
|
1,334 |
|
|
|
1,796 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
98,618 |
|
|
|
92,826 |
|
|
|
|
|
|
|
|
Cost of rentals, sales and fees |
|
|
25,326 |
|
|
|
24,406 |
|
Selling, general and administrative expenses |
|
|
62,216 |
|
|
|
61,846 |
|
Interest expense |
|
|
587 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
88,129 |
|
|
|
86,469 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,489 |
|
|
|
6,357 |
|
Income taxes |
|
|
4,438 |
|
|
|
2,091 |
|
|
|
|
|
|
|
|
Segment net income |
|
$ |
6,051 |
|
|
$ |
4,266 |
|
|
|
|
|
|
|
|
Furniture rental revenues for the first quarter of 2006 increased $5.6 million, or 7.7%, over
those of the first quarter of 2005. Excluding $9.5 million and $8.0 million of rental revenues from
trade shows, rental revenues for the first quarter of 2006 increased approximately 6.4% from those
of the 2005 quarter. The number of furniture leases at the end of the first quarter of 2006 was
3.7% lower than at the end of the first quarter of 2005. Despite the net decrease in furniture
leases, attributed mainly to non-renewals by customers of a competitor acquired in the latter half
of 2004, the average rental revenue received per unit leased increased 8.4%.
Furniture sales revenues increased 3.5% in the first quarter of 2006 from those reported in
the comparable period of 2005. The increase is attributed principally to continued efforts to
reduce idle inventory.
Apartment locator fees decreased by $0.5 million, or 25.7%, from those of the first quarter
2005, which in turn were down $1.0 million, or 35%, from those of the first quarter 2004. Since
late 2003, the apartment locator operation has been undergoing reorganization. Some of its walk-in
facilities have been merged into furniture rental or sale facilities, and others have been closed,
resulting in significant cost and expense reductions. The reduction in apartment locator revenues
has been offset by a reduction in related costs and expenses.
Cost of rentals, sales and fees amounted to 25.7% of revenues for the first quarter of 2006
versus 26.3% for the comparable 2005 period. The decrease in costs as a percentage of revenues is
principally due to revenue
-15-
growth and an improvement in revenue mix, with a larger percentage of
revenue coming from commercial
furniture rental, versus individual rental and retail sales. Costs of generating apartment locator
fees were $1.4 million in the first quarter of 2006, down from $1.8 million in the comparable
period of 2005 due principally to the reorganization efforts mentioned above. Excluding
apartment-locator costs, segment costs for furniture rentals and sales were 24.6% of sales revenues
in the first quarter of 2006 and 24.3% in the 2005 period.
Selling, general, administrative and interest expenses (operating expenses) for the segment
were $62.7 million for the first quarter of 2006, up slightly from the $62.0 million incurred in
the first quarter of 2005. Total operating expenses remained relatively stable, even with the
growth of revenues, due to aggressive restructuring of the apartment locator related expenses,
employee headcount management, and substantial improvements in occupancy expenses, offset by an
increase in advertising-related expenses. Included in operating expenses are apartment
locator-related expenses of $1.6 million for the first quarter of 2006, down from $2.0 million in
the first quarter of 2005. Operating expenses as a percentage of revenues decreased from 66.9% for
the first quarter of 2005 to 63.5% for the 2006 period.
Income before income taxes for the furniture rental segment amounted to $10.5 million for the
first quarter of 2006 and $6.4 million for the first quarter of 2005. The 64% improvement is
principally associated with the increase in revenues and the continued focus on managing operating
expenses.
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 |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
17,721 |
|
|
$ |
15,859 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,350 |
|
|
$ |
685 |
|
Income taxes |
|
|
455 |
|
|
|
273 |
|
|
|
|
|
|
|
|
Segment net income |
|
$ |
895 |
|
|
$ |
412 |
|
|
|
|
|
|
|
|
Reference is made to pages 29 and 30 of Wescos 2005 Annual Report on Form 10-K for
information as to difficulties affecting the domestic steel service industry, as well as Wescos
industrial segment, for approximately the past decade.
Industrial segment revenues for the first quarter of 2006 increased $1.9 million, or 11.7%,
over those of the first quarter of 2005. Of that increase, $0.9 million was attributable to an
extraordinarily large sale of toolroom supplies by Precision Steels Precision Brand Products
subsidiary to a single customer. Excluding that transaction, segment revenues increased by $1.0
million for the current quarter, or 6.3%, over those of the corresponding quarter of 2005. Pounds
of steel products sold increased by 9.9%. Changes in the mix of products sold and decreased selling
prices were principally responsible for the variation between these percentages.
As explained in Note 5 to the accompanying condensed consolidated financial statements,
Precision Steel and a subsidiary are involved in an environmental matter the ultimate cost of which
is difficult to estimate.
-16-
Costs incurred in connection with the matter, net of insurance
recoveries, were insignificant in the quarters ended
March 31, 2006 and 2005.
Income before income taxes and net income of the industrial segment for the first quarter of
2006 were approximately double the corresponding 2005 amounts. Pre-tax and net income of the
industrial segment are dependent not only on revenues, but also on operating expenses and the cost
of products sold. The latter, as a percentage of revenues, amounted to 80.9% for the first quarter
of 2006 versus 83.0% for the corresponding 2005 period. The cost percentage typically fluctuates
slightly from period to period principally as a result of changes in product mix and price
competition at all levels. The cost percentage for the current quarter was unusually low,
reflecting mainly customers acceptance of pricing in view of metal shortages and other factors
referred to above, as well as a less costly LIFO inventory accounting adjustment, by $0.2 million
($0.1 million, after taxes) in the 2006 quarter, than in the first quarter of 2005. Though
conditions may have become more stable than in the recent past, management is concerned that the
business of the industrial segment may revert to the difficult times that prevailed prior to 2004.
* * * * *
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Reference is made to page 32 of Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for the year
ended December 31, 2005, 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 2005. At March 31, 2006, 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, 2005.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
Reference is made to pages 32 to 34 of Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of the Form 10-K Annual Report filed by Wesco for
the year ended December 31, 2005 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 48 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 March 31, 2006.
FORWARD-LOOKING STATEMENTS
Certain representations of management stated in this report or elsewhere constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, as contrasted with statements of historical fact. Forward-looking statements include
statements which are predictive in nature, or which depend upon or refer to future events or
conditions, or which include words such as expects, anticipates, intends, plans, believes,
estimates, may, or could, or which involve hypothetical events. Forward-looking statements are
based on information currently available and are subject to various risks and uncertainties that
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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.
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: May 6, 2006 |
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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