e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007 or
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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 Executive
Offices)
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(Zip Code)
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(626) 585-6700
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to
section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Capital Stock, $1 par value
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American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the 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. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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
The aggregate market value of voting and non-voting stock of the
registrant held by non-affiliates of the registrant as of
June 30, 2007 was: $515,783,000.
The number of shares outstanding of the registrants
Capital Stock as of February 27, 2008 was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
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Parts of
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Title of Document
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Form 10-K
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Proxy Statement for 2008
Annual Meeting of Shareholders
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Part III. Items 10, 11, 12, 13 and 14
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9
TABLE OF CONTENTS
PART I
GENERAL
Wesco Financial Corporation (Wesco) was incorporated
in Delaware on March 19, 1959. Wesco engages in three
principal businesses through its direct or indirect wholly owned
subsidiaries:
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the insurance business, through Wesco-Financial Insurance
Company (Wes-FIC), which was incorporated in 1985
and engages in the property and casualty insurance business, and
The Kansas Bankers Surety Company (KBS), which was
incorporated in 1909, purchased by Wes-FIC in 1996 and provides
specialized insurance coverages for banks;
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the furniture rental business, through CORT Business Services
Corporation (CORT), which traces its national
presence to the combination of five regional furniture rental
companies in 1972 and was purchased by Wesco in 2000; and
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the steel service center business, through Precision Steel
Warehouse, Inc. (Precision Steel), which was begun
in 1940 and acquired by Wesco in 1979.
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Wescos operations also include, through another wholly
owned subsidiary, MS Property Company (MS Property),
management of owned commercial real estate in downtown Pasadena,
California. MS Property began its operations in late 1993, upon
transfer to it of real properties previously owned by Wesco and
by a former savings and loan subsidiary of Wesco.
Since 1973, Wesco has been 80.1%-owned by Blue Chip Stamps
(Blue Chip), a wholly owned subsidiary of Berkshire
Hathaway Inc. (Berkshire). Thus, Wesco and its
subsidiaries are controlled by Blue Chip and Berkshire. All of
these companies may also be deemed to be controlled by Warren E.
Buffett, who is Berkshires Chairman and Chief Executive
Officer and economic owner of 28.1% of its stock. Wescos
Chairman, President and Chief Executive Officer, Charles T.
Munger, is also Vice Chairman of Berkshire, and consults with
Mr. Buffett with respect to Wescos investment
decisions, major capital allocations, and the selection of the
chief executives to head each of its operating businesses,
subject to ultimate approval of Wescos Board of Directors.
Wescos activities fall into three business
segments insurance, furniture rental and industrial.
The insurance segment consists of the operations of Wes-FIC and
KBS. The furniture rental segment consists of the operations of
CORT. The industrial segment comprises Precision Steels
steel service center and industrial supply operations. Wesco is
also engaged in several activities not identified with the three
business segments, including investment activity unrelated to
the insurance segment, MS Propertys real estate
activities, and parent company activities.
INSURANCE SEGMENT
Wes-FIC was incorporated in 1985 to engage in the property and
casualty insurance and reinsurance business. Its insurance
operations are managed by National Indemnity Company
(NICO), which is headquartered in Omaha, Nebraska.
To simplify discussion, the term Berkshire Insurance
Group refers to NICO, General Reinsurance Corporation, and
certain other wholly owned insurance subsidiaries of Berkshire,
although Berkshire also includes in its insurance group the
insurance subsidiaries that are 80.1%-owned through
Berkshires ownership of Wesco.
Wes-FICs high statutory net worth (about $2.5 billion
at December 31, 2007) has enabled Berkshire to offer
Wes-FIC the opportunity to participate, from time to time, in
contracts in which Wes-FIC effectively has reinsured certain
property and casualty risks of unaffiliated property and
casualty insurers. These arrangements have included
excess-of-loss
contracts such as super-catastrophe reinsurance
contracts which subject the reinsurer to especially large
amounts of losses from mega-catastrophes such as hurricanes or
earthquakes. Super-catastrophe policies, which indemnify the
ceding companies for all or part of covered losses in excess of
large, specified retentions, have been subject to aggregate
limits. Wes-FIC has also been
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party to quota-share reinsurance, under which it
shares in premiums and losses proportionately with the ceding
company.
Wescos board of directors has authorized automatic
acceptance of retrocessions of super-catastrophe reinsurance
offered by the Berkshire Insurance Group provided the following
guidelines and limitations are complied with: (1) in order
not to delay the acceptance process, the retrocession is to be
accepted without delay in writing in Nebraska by agents of
Wes-FIC who are salaried employees of the Berkshire Insurance
Group; (2) any ceding commission received by the Berkshire
Insurance Group cannot exceed 3% of premiums, which is believed
to be less than the Berkshire Insurance Group could get in the
marketplace; (3) Wes-FIC is to assume 20% or less of the
total risk; (4) the Berkshire Insurance Group must retain
at least 80% of the identical risk; and (5) the aggregate
premiums from this type of business in any twelve-month period
cannot exceed 10% of Wes-FICs net worth. Occasionally, the
Berkshire Insurance Group will also have an upper-level
reinsurance interest with interests different from
Wes-FICs, particularly in the event of one or more large
losses. Although Wes-FIC has no active super-catastrophe
reinsurance contracts in force, Wes-FIC may have opportunities
to participate in such business from time to time in the future.
Following are some of the more significant reinsurance
arrangements in which Wes-FIC has participated in recent years:
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A multi-year, quota-share arrangement, entered into in 2000
through NICO, as intermediary without profit, for participation
in a pool of certain property and casualty risks written by a
large, unaffiliated insurer. For 2003 and through the
contracts commutation (termination) in the latter part of
2004, Wes-FIC participated to the extent of 6% in the pool. The
terms of this arrangement were identical to those accepted by a
member of the Berkshire Insurance Group, except as to the amount
of the participation. As a result of the commutation of the
contract, Wes-FIC is no longer liable for any claims or losses,
or for adjustments to losses previously recorded, under the
contract.
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Participation, since 2001, in several risk pools managed by a
subsidiary of General Reinsurance Corporation, a Berkshire
Insurance Group member, covering principally hull, liability and
workers compensation exposures, relating to the aviation
industry. In the more recent years, Wes-FICs participation
has been as follows: for 2005, to the extent of 10% in the hull
and liability pools and 5% of the workers compensation
pool; for 2006, 12.5% of the hull and liability pools and 5% of
the workers compensation pool; and for 2007, 16.67% in the
hull and liability pools and 5% of the workers
compensation pool. Another General Reinsurance Corporation
subsidiary provides a portion of the upper- level reinsurance
protection to these aviation risk pools, and therefore to
Wes-FIC, on terms that could cause some conflict of interest
under certain conditions, such as in settling a large loss.
Wes-FICs exposure to detrimental effects, however, is also
mitigated because a senior manager of NICO who represents the
membership interests of Wes-FIC and unrelated pool members
representing an additional 75% of the hull and liability pools
and 90% of the workers compensation pool who have the same
exposures to this potential conflict of interest, has access to
information regarding significant losses and thus is able to
address conflict issues that might arise.
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Effective January 1, 2008, Wes-FIC entered into a
retrocession agreement with National Indemnity Company
(NICO), a wholly owned indirect subsidiary of
Berkshire Hathaway Inc., to assume 10% of NICOs quota
share reinsurance of Swiss Reinsurance Company and its
property-casualty affiliates (Swiss Re). Under this
retrocession agreement, Wes-FIC will assume 2% part of
NICOs 20% quota share reinsurance of all Swiss Re
property-casualty
risks incepting over the next five years on the same terms as
NICOs agreement with Swiss Re. If recent years
volumes were to continue over the next five years, the annual
written premium assumed under this retrocession agreement would
be in the $300 million range, however actual premiums assumed
over the five year period could vary significantly depending on
market conditions and opportunities.
Wes-FIC is also licensed to write direct, or
primary insurance business (as distinguished from
reinsurance) in Nebraska, Utah and Iowa, and may write such
insurance in the non-admitted excess and surplus lines market in
several other states, but the volume written to date has been
minimal.
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In 1996, Wes-FIC purchased 100% of KBS. KBS, which writes
primary insurance, provides specialized insurance coverage to
more than 20% of the banks in the United States, mostly small
and medium-sized banks in the Midwest. It is licensed to write
business in 38 states. Its product line for financial
institutions includes policies for crime insurance, check kiting
fraud indemnification, Internet banking catastrophe theft
insurance, directors and officers liability, bank employment
practices, and bank insurance agents professional errors and
omissions indemnity, as well as deposit guaranty bonds which
insure deposits in excess of federal deposit insurance limits.
KBS purchases reinsurance for indemnification against large
losses. For several years, through 2005, 50% of a layer of loss
exposure was ceded to an unaffiliated reinsurer and the other
50% to the Berkshire Insurance Group, on identical terms. A
second layer was reinsured 70% with the same non-affiliate and
30% was retained by KBS. Since 2006, when the unaffiliated
reinsurer declined to renew its contract with KBS, the Berkshire
Insurance Group has reinsured the entire first layer of exposure
itself. Another layer is 35%-retained by KBS and the other 65%
is reinsured by the Berkshire Insurance Group, at market prices.
In 2007, premiums of $3.5 million were ceded to the
Berkshire Insurance Group, no losses were allocated to it, and
$125,000 of loss reserves, which had been allocated to it in
2005, were reversed. In recent years, KBS has retained a greater
proportion of the risks it has underwritten. By retaining a
larger amount of risk than in the past, Wesco seeks satisfactory
operating results over the long term in return for greater
short-term volatility.
KBS markets its products in some states through exclusive,
commissioned agents, and directly to insureds in other states.
Inasmuch as the number of small Midwestern banks is declining as
the banking industry consolidates, KBS relies for growth on an
extraordinary level of service provided by its employees and
agents, and on products such as deposit guaranty bonds, which
were introduced in 1993 and currently account for almost half of
premiums written.
A significant marketing advantage enjoyed by the Berkshire
Insurance Group, including Wescos insurance segment, is
the maintenance of exceptional capital strength. The combined
statutory surplus of Wescos insurance businesses totaled
approximately $2.5 billion at December 31, 2007. This
capital strength creates opportunities for Wes-FIC to
participate in reinsurance and insurance contracts not
necessarily available to many of its competitors.
Management of Wesco believes that an insurer in the reinsurance
business must maintain a large net worth in relation to annual
premiums in order to remain solvent when called upon to pay
claims when a loss occurs. In this respect, Wes-FIC and KBS are
competitively well positioned, inasmuch as their net premiums
written for calendar 2007 amounted to only 2% of their combined
statutory surplus, compared to an industry average of 90% based
on figures reported for 2006 by A.M. Best Company, a
nationally recognized statistical rating organization for the
insurance industry. Standard & Poors
Corporation, in recognition of Wes-FICs strong competitive
position as a member of the Berkshire Insurance Group and its
unusual capital strength, has assigned its highest rating, AAA,
to Wes-FICs claims-paying ability. This rating recognizes
the commitment of Wes-FICs management to a disciplined
approach to underwriting, conservative reserving, and
Wes-FICs extremely strong capital base.
Insurance companies are subject to regulation by the departments
of insurance of the various states in which they write policies
as well as the states in which they are domiciled and, in the
case of KBS, because of its business of insuring banks, by the
Department of the Treasury. Regulations relate to, among other
things, capital requirements, shareholder and policyholder
dividend restrictions, reporting requirements, annual audits by
independent accountants, periodic regulatory examinations and
limitations on the risk exposures that can be retained, as well
as the size and types of investments that can be made.
Because it is operated by NICO, Wes-FIC has no employees of its
own. KBS has 18 employees.
FURNITURE RENTAL
SEGMENT
CORT is the nations largest provider of rental furniture,
accessories and related services in the
rent-to-rent
(as opposed to
rent-to-own)
segment of the furniture industry. CORT rents high-quality
furniture to corporate and individual customers who desire
flexibility in meeting their temporary office, residential or
trade show furnishing needs, and who typically do not seek to
own such furniture. In addition,
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CORT sells previously rented furniture through company-owned
clearance centers, thereby enabling it to regularly renew its
inventory and update styles. CORTs network of facilities
(in 32 states and the District of Columbia) comprises 86
showrooms, 75 clearance centers and 74 warehouses, as well as
eight websites, including www.cort.com.
CORTs
rent-to-rent
business is differentiated from
rent-to-own
businesses primarily by the terms of the rental arrangements and
the type of customer served.
Rent-to-rent
customers generally desire high-quality furniture to meet
temporary needs, have established credit, and pay on a monthly
basis. Typically, these customers do not seek to acquire the
property on a permanent basis. In a typical
rent-to-rent
transaction, the customer agrees to rent furniture for a minimum
of three months, subject to extension by the customer on a
month-to-month
basis. By contrast,
rent-to-own
arrangements are generally made by customers lacking established
credit whose objective is the eventual ownership of the
property. These transactions are typically entered into on a
month-to-month
basis and may require weekly rental payments.
CORTs customer base includes primarily Fortune
500 companies, small businesses, professionals, and owners
and operators of apartment communities. CORTs management
believes its size, national presence, brand awareness,
consistently high level of customer service, product quality,
breadth of selection, depth and experience of management, and
efficient clearance centers have been key contributors to the
companys success. CORT offers a wide variety of office and
home furnishings, including commercial panel systems,
televisions, housewares and accessories. CORT emphasizes its
ability to furnish an apartment, home or entire suite of offices
with high-quality furniture, housewares and accessories in two
business days. CORTs objective is to build upon these core
competencies and competitive advantages to increase revenues and
market share. Key to CORTs growth strategies are:
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expanding its commercial customer base;
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enhancing its ability to capture an increasing number of
Internet customers through its on-line catalog and other web
services;
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making selective acquisitions; and
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continuing to develop various products and services.
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In order to capitalize on the significant profit potential
available from longer average rental periods and the higher
average monthly rent typically available for office products,
CORTs strategy is to place greater emphasis on growth in
rentals of office furniture while maintaining its premier
position in residential furniture rental. In order to promote
longer office lease terms, CORT offers lower rates on leases
when lease terms exceeds six months. A significant portion of
CORTs residential furniture rentals are derived from
corporate relocations and temporary assignments, as new and
transferred employees of CORTs corporate customers enter
into leases for residential furniture. Thus, CORT offers its
corporate rental customers a way to reduce the costs of
corporate relocation and travel while developing residential
business with new and transferred employees. CORT also provides
short-term rentals for trade shows and conventions. Its
www.corttradeshow.com website assists in providing information
to and gathering leads from prospects.
The furniture rental business is dependent on economic cycles,
and the recent softening of the housing sector could contribute
to a weakening of the furniture rental business. Because CORT
has made several selective acquisitions since it was purchased
by Wesco, it is believed that CORT is now well positioned to
benefit from domestic job growth and any corresponding economic
expansion.
CORT provides a nation-wide apartment locator service through
its websites (www.cort.com, www.relocationcentral.com and
www.apartmentsearch.com) customer call centers and walk-in
locations. The apartment locator service, which was begun in
2001 as CORTs Relocation Central Corporation subsidiary
and marketed to individuals, has not operated profitably since
inception. In order to trim operating costs, its operations were
reorganized and, by yearend 2004, absorbed into CORTs.
CORTs apartment locator service, which was originally
intended mainly to lead to increased furniture rentals, now
relies more on Internet traffic and less on walk-in locations.
In consideration of its national presence and expertise in
filling a need of the business community, late in 2006 CORT
began marketing its relocation service, designed
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specifically for renters, to Fortune 2000 companies as a
comprehensive, seamless solution to their employee-relocation
needs. In addition to providing rental furniture, CORT provides
assistance with all aspects of employee rental-related
relocations, services which include guided city tours, arranging
for movers, locating temporary or long-term housing, assisting
with settling in and other ancillary services. Through its
network of foreign contacts, CORT also provides such services
internationally. Although the relocation business is
competitive, it is believed that CORT is well positioned to
expand these services due not only to its national presence and
liquidity, but also because the business reputation of Berkshire
Hathaway gives it entrée to the offices of many prospective
customers, and thus a competitive advantage.
In January 2008, CORT expanded its operations to the United
Kingdom through the purchase of Roomservice Group, a small
regional provider of furniture rental and relocation services.
The
rent-to-rent
segment of the furniture rental industry is highly competitive.
There are several large regional competitors, as well as a
number of smaller regional and local
rent-to-rent
competitors. In addition, numerous retailers offer residential
and office furniture under
rent-to-own
arrangements. It is believed that the principal competitive
factors in the furniture rental industry are product value,
furniture condition, the extent of furniture selection, terms of
the rental agreement, speed of delivery, exchange privileges,
options to purchase, deposit requirements and customer service.
The majority of CORTs furniture sales revenue is from its
clearance center sales. The remaining furniture sales revenue is
derived principally from lease conversions and sales of new
furniture. The sale of previously leased furniture allows CORT
to control inventory quantities and to maintain inventory
quality at showroom level. On average, furniture is typically
sold through the clearance centers three years after its initial
purchase. With respect to sales of furniture through its
clearance centers, CORT competes with numerous new and used
furniture retailers, some of which are larger than CORT. Wesco
management believes that price and value are CORTs
principal competitive advantages in this activity.
CORT has approximately 2,450 full-time employees, including
62 union members. Management considers labor relations to be
good.
INDUSTRIAL SEGMENT
Precision Steel and one of its subsidiaries operate steel
service centers in the Chicago and Charlotte metropolitan areas.
The service centers buy stainless steel, low carbon sheet and
strip steel, coated metals, spring steel, brass, phosphor
bronze, aluminum and other metals, cut these metals to order,
and sell them to a wide variety of customers.
The service center business is highly competitive. Precision
Steels annual sales volume of approximately 20 thousand
tons of flat rolled products compares with the domestic steel
service industrys annual volume for all shapes of products
(flat rolled, bar, wire, structural, plate, tubular steel, etc.)
of approximately 60 million tons. Precision Steel competes
not only with other service centers but also with mills that
supply metal to service centers, original equipment
manufacturers and end-users. Sales competition exists in the
areas of price, quality, availability and speed of delivery.
Because it is willing to sell in relatively small quantities,
Precision Steel has been able to compete in geographic areas
distant from its service center facilities. Competitive pressure
has been intensified by economic cycles and a shift to
production abroad and an increasing tendency of domestic
manufacturers to use less costly materials in making parts.
Precision Brand Products, Inc. (Precision Brand), a
wholly owned subsidiary of Precision Steel that is also located
in the Chicago area, manufactures shim stock and other toolroom
specialty items, and distributes a line of hose clamps and
threaded rod. These products are sold under the Precision Brand
and DuPage names nationwide, generally through industrial
distributors. This business is highly competitive, and Precision
Brands sales represent a very small share of the market.
Steel service raw materials are obtained principally from major
domestic steel mills, and their availability had generally been
good until approximately four years ago, when the market drifted
into near chaos caused by shortages. Consolidation and
downsizing at the mill level has resulted in extended lead times
and has given the producing mills unprecedented authority in the
marketplace regarding pricing and the
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establishment of minimum order requirements and other
restrictions. Precision Steels service centers continue to
maintain extensive inventories in order to meet customer demand
for prompt deliveries; typically, processed metals are delivered
to the customer within one or two weeks. Precision Brand
normally maintains inventories adequate to allow for
off-the-shelf
service to customers within 24 hours.
The industrial segment businesses are subject to economic cycles
and other factors, but are not dependent on a few large
customers. The backlog of steel service orders increased to
$4.9 million at December 31, 2007 from
$4.1 million at December 31, 2006.
There are 197 full-time employees engaged in the industrial
segment businesses, 40% of whom are members of unions.
Management considers labor relations to be good.
ACTIVITIES NOT
IDENTIFIED WITH A BUSINESS SEGMENT
Certain of Wescos activities are not identified with any
business segment. These include investment activity unrelated to
the insurance segment, management of owned commercial real
property, a portion of which it is redeveloping, and parent
company activities.
Six full-time employees are engaged in the activities of Wesco
and MS Property.
AVAILABLE INFORMATION
Wescos
Forms 10-K,
10-Q and
8-K, and
amendments thereto, may be accessed soon after they are
electronically filed with the Securities and Exchange Commission
(SEC), through Wescos website,
www.wescofinancial.com, or the SECs website, www.sec.gov.
In addition to the factors affecting specific business
operations identified in connection with the description of
these operations and their financial results elsewhere in this
report, we invite your attention to the considerations and risk
factors described below. The risk factors could cause
Wescos actual results to differ materially from the
forward-looking and other statements contained in this report
and in the other periodic reports and other filings Wesco makes
with the SEC, as well as in news releases, annual reports and
other communications that Wesco makes from time to time.
An investment
in Wesco is not an investment in Berkshire
Hathaway.
From time to time there is an erroneous report by an analyst or
reporter that an investor wishing to purchase Berkshire Hathaway
common stock can simply purchase shares of Wesco stock at a
lower price. Berkshire Hathaway is the parent of Wesco.
Wescos operations differ significantly from those of
Berkshire Hathaway, and its shares may trade at a significantly
different price relative to its intrinsic value than do those of
Berkshire Hathaway. In addition to the risk factors affecting
Wescos operations, Berkshire Hathaway has risk factors of
its own. Investors wishing to have investment exposure to
Berkshire Hathaway cannot accomplish this by purchasing Wesco
shares. They should carefully read Berkshire Hathaways
published financial statements and filings with the SEC.
Wesco is
dependent for its investment and all other capital allocation
decisions on a few key people.
Investment decisions and all other capital allocation decisions
are made for Wescos businesses by Charles T. Munger,
Chairman of the Board of Directors, President and CEO of Wesco,
and Vice Chairman of the Board of Directors of Berkshire
Hathaway, age 84, in consultation with Warren E. Buffett,
Chairman of the Board of Directors and CEO of Berkshire
Hathaway, age 77. If for any reason the services of those
key personnel, particularly Mr. Buffett, were to become
unavailable to Wesco, there could be a materially adverse effect
on Wesco. However, Berkshires Board of Directors has
agreed on a replacement for Mr. Buffett should a
replacement be needed currently. Its Board continually monitors
this matter and could alter its current view in the future.
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Unless Wesco
can reinvest a large amount currently invested in cash
equivalents at attractive returns, future returns on
shareholders equity will probably be less than those of
the past.
Wescos consolidated balance sheet reflects total assets of
$3.1 billion as of yearend 2007. Of that amount, more than
$550 million has been invested in cash equivalents and
fixed-maturity investments since early in 2003. Although
Wescos consolidated investments in cash-equivalent and
fixed-maturity investments have declined significantly from the
$1.3 billion owned one year ago, due principally to
Wescos investment of $802 million, net, in marketable
equity securities during the latter part of 2007, unless
significant additional amounts can be attractively reinvested in
acquisitions, equity securities or other long-term instruments
of the type that have been principally responsible for the
long-term growth of Wescos shareholders equity,
future returns on shareholders equity will probably be
less than those of the past. Due to the current size of Wesco
and its parent, Berkshire Hathaway, Wescos opportunities
for growing shareholders equity are unlikely to be as
attractive as in the past.
Wescos
Wes-FIC subsidiary is dependent upon the Berkshire Insurance
Group for its management and personnel, and for opportunities to
participate with the Group in reinsurance contracts representing
essentially the entirety of its reinsurance business, as well as
a significant portion of its insurance business to
date.
Since the incorporation of Wes-FIC in 1985, Wescos
insurance and reinsurance business, other than that conducted by
its Kansas Bankers Surety subsidiary, has been limited
principally to participation with members of the Berkshire
Insurance Group in contracts for the reinsurance of risks of
unaffiliated property and casualty insurance companies.
Wes-FICs operations are managed by National Indemnity
Company, a member of the Berkshire Insurance Group; it has no
employees of its own. In the event the Berkshire Insurance Group
were to cease operating Wes-FICs business or to
significantly curtail Wes-FICs participation with it in
reinsurance contracts, Wes-FIC would be required to look
elsewhere for personnel who would conduct and manage its
operations,
and/or seek
to continue its insurance business in a different manner,
possibly by acquisition. Inasmuch as Wesco and its subsidiaries,
including Wes-FIC, are also subsidiaries of Berkshire Hathaway
through Berkshire Hathaways 80.1%-ownership of Wesco,
Wesco does not foresee a time when Berkshire Hathaway would not
continue operating its insurance business.
Wescos
tolerance for risk in its insurance businesses may result in a
high degree of volatility in periodic reported
earnings.
Wes-FIC participates with members of the Berkshire Insurance
Group in certain reinsurance contracts in which significant risk
is periodically assumed. The Berkshire Insurance Group has
indicated that it continues to be willing to assume more risk
than any other insurer has knowingly taken on. Although
Wes-FICs reinsurance currently in force does not subject
it to super-catastrophe risks, it has procedures in place for
the immediate acceptance of participations in catastrophic
excess of loss reinsurance, which could subject it to large
amounts of losses from mega-catastrophes such as hurricanes or
earthquakes, if offered to it by the Berkshire Insurance Group,
so long as the Berkshire Insurance Group participates in such
reinsurance activities to a greater degree. The tolerance for
significant risks may in certain future periods result in
significant losses. This policy may result in a high degree of
volatility in Wescos periodic reported earnings.
As described above in Item 1, Business, Wes-FIC recently
entered into a substantial quota-share arrangement whereby
Wes-FIC is reinsuring 2 per cent of essentially all of the
property and casualty insurance business of a large insurer not
affiliated with the Berkshire Insurance Group. This arrangement
will significantly increase Wes-FICs premium volume, and
thus, the potential for increased volatility and losses. In
addition, as with all reinsurance arrangements, Wes-FIC does not
control the underwriting of the primary insurer and relies on
the primary insurers reputation and judgment in deciding
what underlying risks to insure.
16
The degree of
estimation error inherent in the process of estimating property
and casualty insurance loss reserves may result in a high degree
of volatility in periodic reported earnings.
In the insurance business, premiums are charged today for
promises to pay covered losses in the future. The principal cost
associated with premium revenue is claims. However, it will
literally take decades before all losses that have occurred as
of the balance sheet date will be reported and settled. Although
Wesco believes that loss reserve balances are adequate to cover
losses, Wesco will not truly know whether the premiums charged
for the coverages provided are sufficient until well after the
balance sheet date. Wescos objective is to generate
underwriting profits over the long term. Estimating insurance
claim costs is inherently imprecise. Wescos reserve
estimates are subject to revision, so adjustments to reserve
estimates can have a material effect on periodic reported
earnings.
Wescos
insurance subsidiaries investments are unusually
concentrated.
Compared to other insurers, Wescos insurance subsidiaries
may keep an unusually high percentage of their assets in common
stocks and diversify their portfolios far less than is
conventional. A significant decline in the stock market or in
the price of major investees could produce a large decrease in
Wescos shareholders equity, and could precipitate
recognition of such losses in the statement of earnings.
Decreases in values of equity investments could have a
materially adverse effect on Wescos book value per share,
and could affect the price at which Wesco shares are traded.
Each of
Wescos operating businesses faces intense competitive
pressures.
Each of Wescos operating businesses faces intense
competitive pressures within its respective market. While
Wescos businesses are managed with the objective of
achieving sustainable growth over the long term through
developing and strengthening competitive advantages, many
factors, including market changes and technology, could erode or
impede those competitive advantages.
The property and casualty insurance industry is highly
competitive. Many insurers price their business more to provide
immediate cash flow than profitability. Competition occurs not
only with respect to price, but also to service, the ability to
adapt to meet needs of customers as changes occur, reputation,
and often, the need to satisfy customers expectations that
insurers have sufficient capital strength to ensure that they
will be viable when called upon to pay large losses in the
future. Because of the disciplined underwriting standards of the
Berkshire Insurance Group, Wes-FIC does not enter into insurance
or reinsurance activities that do not provide the expectation of
acceptable underwriting profitability. Thus, the volume of
written premiums will continue to vary significantly from period
to period.
CORT competes not only with regional and local furniture rental
businesses, but also with furniture businesses offering
lease purchase or
rent-to-own
programs, as well as with national, regional and local furniture
retailers. Competitive factors include price, furniture style
and condition, lease terms, speed of delivery and overall
customer service.
Precision Steels annual sales volume is a small fraction
of the domestic steel service industrys. Precision Steel
competes not only with other service centers, but also with
mills that supply metal to the service centers. Sales
competition exists in the areas of price, quality, availability,
speed of delivery, and customer service. Competitive pressure
has been intensified by imports, a shift to production abroad
and an increasing tendency of domestic manufacturers to use less
costly materials in making products. Precision Steels
subsidiarys toolroom specialty business also faces strong
competition, mainly based on price.
In addition to
the foregoing risk factors inherent in Wescos operations,
Wescos shareholders face a market liquidity risk because
the daily trading volume of Wescos shares on the American
Stock Exchange is relatively low.
In addition to the risks facing Wesco in its business
operations, investors wishing to purchase or sell shares of its
capital stock face market price risks because the daily AMEX
trading volume of Wescos shares is
17
relatively low. An order for the purchase or sale of a large
number of Wesco shares could significantly affect the price at
which the order is executed.
|
|
Item 1B.
|
Unresolved Staff
Comments
|
None.
CORT leases 16,212 square feet of office space in a
multistory office building in Fairfax, Virginia, which it uses
as its headquarters under a lease which will expire in 2012.
CORT carries out its rental, sales and warehouse operations in
metropolitan areas in 32 states and the District of
Columbia through 164 facilities, of which 17 were owned and the
balance leased as of December 31, 2007. The leased
facilities lease terms expire at dates ranging from 2008
to 2018. CORT has generally been able to extend expiration dates
of its leases or obtain suitable alternative facilities on
satisfactory terms. As leases expire, CORT has been eliminating
redundant locations and decreasing the size of its showrooms,
which as of yearend 2007 ranged in size from 1,200 to
10,388 square feet of floor space. Where locations are
desirable, its management has been attempting to combine rental,
clearance and warehouse operations rather than retain separate
showrooms, because business and residential customers have been
increasingly using the Internet. CORT regularly reviews the
presentation and appearance of its furniture showrooms and
clearance centers and periodically improves or refurbishes them
to enhance their attractiveness to customers.
MS Property owns a business block in Pasadena, California
situated between the city hall and a large shopping mall. The
blocks improvements include a nine-story office building
that was constructed in 1964 and has approximately
125,000 square feet of net rentable area, and a multistory
garage with space for 420 vehicles. Of the 125,000 square
feet of space in the office building, approximately
5,000 square feet are used by MS Property or leased to Blue
Chip or Wesco at market rental rates. The remaining space is
almost fully leased to outside parties, including Citibank (the
ground floor tenant), law firms and others, under agreements
expiring at dates extending to 2017. Adjacent to the building
and garage is a parcel on which MS Property is nearing
completion of a multi-story,
28-unit,
luxury condominium building. MS Property is seeking city
approval of its plans, at a later date, to build another
multi-story luxury condominium building on a vacant parcel of
land it owns in the next block.
MS Property also owns several buildings that are leased to
various small businesses in a small shopping center in Southern
California.
Wes-FICs place of business is the Omaha, Nebraska
headquarters office of NICO.
KBS leases 5,100 square feet of office space in a
multistory office building in Topeka, Kansas under a lease that
expires June 30, 2012.
Precision Steel and its subsidiaries own three buildings housing
their plant and office facilities, with usable area
approximately as follows: 138,000 square feet in Franklin
Park, Illinois; 63,000 square feet in Charlotte, North
Carolina; and 59,000 square feet in Downers Grove, Illinois.
|
|
Item 3.
|
Legal
Proceedings
|
Wesco and its subsidiaries are not involved in any legal
proceedings that are expected to result in detrimental financial
impact material to its shareholders equity. However, see
Note 9 to the accompanying consolidated financial
statements for an explanation of an environmental matter
involving Precision Steel and one of its subsidiaries that could
materially impact consolidated net income in a particular fiscal
period.
|
|
Item 4.
|
Submission of
Matters to a Vote of Security Holders
|
None.
18
PART II
|
|
Item 5.
|
Market for
Registrants Common Equity, Related Shareholder Matters and
Issuer Repurchases of Equity Securities
|
Throughout 2006, Wescos capital stock was listed on the
American Stock Exchange and on the NYSE Arca Exchange
(previously, the Pacific Exchange). Effective as of yearend
2006, in order to reduce duplicative administrative burdens and
costs, Wesco withdrew its shares from listing on the NYSE Arca
Exchange.
The following table sets forth quarterly ranges of composite
prices for American Stock Exchange trading of Wesco shares for
2007 and 2006, based on data reported by the American Stock
Exchange, as well as cash dividends paid by Wesco on each
outstanding share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Sales Price
|
|
Dividends
|
|
Sales Price
|
|
Dividends
|
Quarter Ended
|
|
High
|
|
Low
|
|
Paid
|
|
High
|
|
Low
|
|
Paid
|
|
March 31
|
|
$501
|
|
$433
|
|
$0.375
|
|
$411
|
|
$377
|
|
$0.365
|
June 30
|
|
466
|
|
385
|
|
0.375
|
|
408
|
|
361
|
|
0.365
|
September 30
|
|
409
|
|
375
|
|
0.375
|
|
437
|
|
367
|
|
0.365
|
December 31
|
|
432
|
|
388
|
|
0.375
|
|
505
|
|
429
|
|
0.365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.500
|
|
|
|
|
|
$1.460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were approximately 410 shareholders of record of
Wescos capital stock as of the close of business on
February 7, 2008. It is estimated that approximately 4,000
additional Wesco shareholders held shares of Wescos
capital stock in street name at that date.
Wesco did not purchase any of its own equity securities during
2007.
Wesco Stock
Performance Graph
The following graph compares the value at each subsequent
yearend of $100 invested in Wesco capital stock on
December 31, 2002 with identical investments in the
Standard and Poors (S&P) 500 Stock Index
and the S&P Property-Casualty Insurance Index, assuming
reinvestment of dividends.
Comparison of
Five Year Cumulative Return*
|
|
* |
It would be difficult to develop a peer group of companies
similar to Wesco. The Company owns subsidiaries engaged in a
number of diverse business activities of which the most
important is the property and casualty insurance business and,
accordingly, management has used the Standard and Poors
Property-Casualty Insurance Index for comparative purposes.
|
19
|
|
Item 6.
|
Selected
Financial Data
|
Set forth below and on the following page are selected
consolidated financial data for Wesco and its subsidiaries. For
additional financial information, attention is directed to
Wescos audited 2007 consolidated financial statements
appearing in Item 8 of this report. (Amounts are in
thousands except for amounts per share.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
526,722
|
|
$
|
1,257,351
|
|
$
|
1,194,113
|
|
$
|
1,161,163
|
|
$
|
1,052,462
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
38,600
|
|
|
81,861
|
|
|
74,441
|
|
|
94,299
|
|
|
167,390
|
Marketable equity securities
|
|
|
1,919,425
|
|
|
1,040,550
|
|
|
884,673
|
|
|
759,658
|
|
|
754,634
|
Accounts receivable
|
|
|
79,512
|
|
|
60,386
|
|
|
53,987
|
|
|
46,007
|
|
|
60,168
|
Rental furniture
|
|
|
178,297
|
|
|
182,846
|
|
|
187,572
|
|
|
171,983
|
|
|
163,699
|
Goodwill of acquired businesses
|
|
|
266,607
|
|
|
266,607
|
|
|
266,607
|
|
|
266,607
|
|
|
266,607
|
Other assets
|
|
|
103,846
|
|
|
80,704
|
|
|
67,118
|
|
|
71,818
|
|
|
73,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,113,009
|
|
$
|
2,970,305
|
|
$
|
2,728,511
|
|
$
|
2,571,535
|
|
$
|
2,538,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
$
|
39,687
|
|
$
|
29,761
|
|
$
|
19,697
|
|
$
|
14,910
|
|
$
|
67,416
|
Unaffiliated business
|
|
|
54,158
|
|
|
48,549
|
|
|
42,283
|
|
|
41,252
|
|
|
35,110
|
Unearned insurance premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
15,041
|
|
|
14,062
|
|
|
12,301
|
|
|
14,118
|
|
|
8,646
|
Unaffiliated business
|
|
|
15,225
|
|
|
15,298
|
|
|
16,092
|
|
|
11,223
|
|
|
20,347
|
Deferred furniture rental income and security deposits
|
|
|
19,947
|
|
|
20,440
|
|
|
22,204
|
|
|
20,358
|
|
|
19,835
|
Accounts payable and accrued expenses
|
|
|
49,476
|
|
|
48,258
|
|
|
52,587
|
|
|
51,501
|
|
|
48,931
|
Notes payable
|
|
|
37,200
|
|
|
38,200
|
|
|
42,300
|
|
|
29,225
|
|
|
12,679
|
Income taxes payable, principally deferred
|
|
|
347,416
|
|
|
355,399
|
|
|
290,615
|
|
|
272,005
|
|
|
247,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
578,150
|
|
$
|
569,967
|
|
$
|
498,079
|
|
$
|
454,592
|
|
$
|
460,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock and additional paid-in capital
|
|
$
|
33,324
|
|
$
|
33,324
|
|
$
|
33,324
|
|
$
|
33,324
|
|
$
|
33,324
|
Unrealized appreciation of investments, net of taxes
|
|
|
381,017
|
|
|
344,978
|
|
|
256,710
|
|
|
427,690
|
|
|
426,542
|
Retained earnings
|
|
|
2,120,518
|
|
|
2,022,036
|
|
|
1,940,398
|
|
|
1,655,929
|
|
|
1,618,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
2,534,859
|
|
$
|
2,400,338
|
|
$
|
2,230,432
|
|
$
|
2,116,943
|
|
$
|
2,078,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per capital share
|
|
$
|
356.03
|
|
$
|
337.14
|
|
$
|
313.27
|
|
$
|
297.33
|
|
$
|
291.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
2003
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals
|
|
$
|
327,671
|
|
$
|
324,300
|
|
$
|
303,485
|
|
$
|
275,378
|
|
|
$
|
275,949
|
|
Sales and service revenues
|
|
|
129,861
|
|
|
139,058
|
|
|
141,749
|
|
|
139,130
|
|
|
|
130,301
|
|
Insurance premiums earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
35,530
|
|
|
32,643
|
|
|
32,450
|
|
|
19,371
|
|
|
|
47,818
|
|
Unaffiliated business
|
|
|
18,881
|
|
|
21,506
|
|
|
17,032
|
|
|
35,218
|
|
|
|
58,833
|
|
Dividend and interest income
|
|
|
90,872
|
|
|
84,504
|
|
|
56,792
|
|
|
36,844
|
|
|
|
44,763
|
|
Realized net investment gains
|
|
|
24,240
|
|
|
|
|
|
333,241
|
|
|
|
|
|
|
53,466
|
|
Other
|
|
|
3,869
|
|
|
3,716
|
|
|
3,541
|
|
|
3,372
|
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630,924
|
|
|
605,727
|
|
|
888,290
|
|
|
509,313
|
|
|
|
614,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold
|
|
|
143,282
|
|
|
154,218
|
|
|
153,402
|
|
|
146,783
|
|
|
|
144,725
|
|
Insurance losses and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
24,008
|
|
|
21,401
|
|
|
11,990
|
|
|
(2,251
|
)
|
|
|
34,599
|
|
Unaffiliated business
|
|
|
4,269
|
|
|
9,944
|
|
|
9,482
|
|
|
22,209
|
|
|
|
27,703
|
|
Insurance underwriting expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
8,019
|
|
|
7,566
|
|
|
6,611
|
|
|
6,646
|
|
|
|
9,490
|
|
Unaffiliated business
|
|
|
7,284
|
|
|
7,294
|
|
|
6,832
|
|
|
5,458
|
|
|
|
10,705
|
|
Selling, general and administrative
|
|
|
280,728
|
|
|
265,327
|
|
|
262,594
|
|
|
261,434
|
|
|
|
278,090
|
|
Interest expense
|
|
|
2,408
|
|
|
2,711
|
|
|
1,575
|
|
|
799
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469,998
|
|
|
468,461
|
|
|
452,486
|
|
|
441,078
|
|
|
|
506,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
160,926
|
|
|
137,266
|
|
|
435,804
|
|
|
68,235
|
|
|
|
108,256
|
|
Income taxes
|
|
|
51,765
|
|
|
45,233
|
|
|
141,225
|
|
|
20,808
|
|
|
|
34,852
|
|
Minority interest in net loss of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
$
|
92,033
|
|
$
|
294,579
|
|
$
|
47,427
|
|
|
$
|
74,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per capital share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15.33
|
|
$
|
12.93
|
|
$
|
41.37
|
|
$
|
6.66
|
|
|
$
|
10.49
|
|
Cash dividends
|
|
|
1.50
|
|
|
1.46
|
|
|
1.42
|
|
|
1.38
|
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reinsurance activities of Wescos insurance segment are
managed by Berkshire Hathaways National Indemnity Company
(NICO) subsidiary and represent participations in
contracts in which NICO and other members of the Berkshire
Insurance Group also participate. Financial information
associated with these participations is identified in
Wescos consolidated financial statements, as well as in
Item 6, Selected Financial Data, as affiliated business.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
In reviewing this item, attention is directed to Item 6,
Selected Financial Data, and Item 1, Business.
OVERVIEW
The principal goal of Wescos management is to maximize
gain in Wescos intrinsic business value per share over the
long term. Accounting consequences do not influence business
decisions, nor do fluctuations in annual net income. To
accomplish desired growth, a high priority is placed on the
purchases of companies having excellent economic
characteristics, run by outstanding managers. Management strives
also to invest
21
in common stocks of outstanding publicly traded companies at
prices deemed reasonable. In the event that such investments are
not available, as has often been the case in recent years,
capital is preserved through investments principally in
high-quality cash equivalents and securities of the
U.S. Government and its agencies.
Wescos operating businesses are managed on a decentralized
basis. There are essentially no centralized or integrated
business functions (such as sales, marketing, purchasing, legal
or human resources) and there is minimal involvement by
Wescos management in the
day-to-day
business activities of the operating businesses. Wescos
Chairman, President and Chief Executive Officer, Charles T.
Munger, is also Vice Chairman of Berkshire Hathaway, and
consults with Warren E. Buffett, Chairman and Chief Executive
Officer of Berkshire Hathaway, with respect to Wescos
investment decisions, major capital allocations, and the
selection of the chief executives to head each of Wescos
operating units, subject to ultimate approval of Wescos
Board of Directors.
The operations of Wescos Wesco-Financial Insurance Company
(Wes-FIC) subsidiary are managed by Berkshire
Hathaways National Indemnity Company (NICO)
subsidiary. Wes-FIC participates principally in reinsurance
contracts in which NICO and other Berkshire Hathaway insurance
subsidiaries participate in the reinsurance of property and
casualty risks of unaffiliated insurance companies. Terms of
Wes-FICs participation are essentially identical to those
by which the other Berkshire Hathaway insurance subsidiaries
participate, except as to the percentages of participation (see
Item 1, Business, for further information). Financial
information relative to these participations appearing in
Item 6, Selected Financial Data, and in Wescos
consolidated financial statements, is identified as affiliated
business.
Financial
Condition
Wesco continues to have a strong consolidated balance sheet at
December 31, 2007, with relatively little debt. Liquidity,
which has traditionally been high, has been higher than usual
for the past several years due principally to sales, maturities
and redemptions of fixed-maturity and other investments, and
reinvestment of the proceeds, mainly in cash equivalents pending
redeployment for the long term. In the latter half of 2007,
$802 million, net, was invested in marketable equity
securities. Principally as a result, the Companys
consolidated balance sheet reflects marketable equity securities
with fair value of $1.919 billion as of yearend 2007,
versus $1.041 billion as of yearend 2006.
Wescos equity investments are in strong, well-known
companies. The practice of concentrating in a few issues, rather
than diversifying, follows the investment philosophy of the
chairmen-CEOs of Wesco and its parent, Berkshire Hathaway, who
consult with respect to Wescos investments and major
capital allocations. Wesco has no investments in subprime loans.
Results of
Operations
Wescos consolidated net income has fluctuated from year to
year, often significantly, as a result of the realization of
gains on investments. Realized gains amounted to
$24.2 million ($15.8 million, after taxes) for 2007
and $333.2 million ($216.6 million, after income
taxes) for 2005. No gains or losses were realized in 2006. The
investment gains realized in 2005 resulted principally from the
exchange of common shares of the Gillette Company
(Gillette) for common shares of The
Procter & Gamble Company (PG) in
connection with PGs acquisition of Gillette in the fourth
quarter of 2005. The amount, if any, of realized gain or loss in
any year has no predictive value and variations in amount from
year to year have no practical analytical value, particularly in
view of the existence of substantial unrealized price
appreciation in Wescos consolidated investment portfolio
at each balance sheet date.
Wescos consolidated 2007 after-tax income, excluding
realized investment gains, increased by $1.4 million for
the year, due mainly to increased investment and underwriting
income earned by the insurance businesses, significantly offset
by increased operating expenses of the furniture rental
business, as the Companys CORT Business Services
Corporation subsidiary expands and redirects the marketing of
its rental relocation services from targeting individuals to
targeting corporate clients.
22
FINANCIAL CONDITION
Wescos shareholders equity at December 31, 2007
was $2.53 billion ($356.03 per share), up
$134.5 million from the $2.40 billion ($337.14 per
share) at December 31, 2006. Shareholders equity
included $381.0 million at December 31, 2007, and
$345.0 million at December 31, 2006, 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. The unrealized gain
component amounted to 15.0% of shareholders equity at
December 31, 2007, versus 14.4% one year earlier.
Wescos consolidated borrowings totaled $37.2 million
at December 31, 2007 versus $38.2 million at
December 31, 2006. Except as to $0.2 million at each
yearend, these amounts related to a $100 million revolving
credit facility used in CORTs furniture rental business.
In addition to this recorded debt, Wesco and its subsidiaries
had $138.3 million of operating lease and other contractual
obligations at December 31, 2007, versus
$147.4 million one year earlier. (See the section on
off-balance sheet arrangements and contractual obligations
appearing below in this Item 7, as well as Note 7 to
the accompanying consolidated financial statements, for
additional information on debt.)
Wescos liability for unpaid losses and loss adjustment
expenses at December 31, 2007 totaled $93.8 million
versus $78.3 million at December 31, 2006. Wes-FIC
enjoys Standard & Poors Corporations
highest rating, AAA, with respect to its claims-paying ability.
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 consolidated data in the second table in Item 6 are set
forth essentially in the income statement format customary to
generally accepted accounting principles (GAAP).
Revenues, including realized net investment gains, are followed
by costs and expenses, and a provision for income taxes, to
arrive at net income. The following summary sets forth the
after-tax contribution to GAAP net income of each business
segment insurance, furniture rental and
industrial as well as activities not considered
related to such segments. Realized net investment gains are
excluded from segment activities, consistent with the way
Wescos management views the business operations. (Amounts
are in thousands, all after income tax effect.)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
Insurance segment:
|
|
|
|
|
|
|
|
|
|
|
Underwriting
|
|
$
|
7,040
|
|
|
$
|
5,164
|
|
$
|
11,798
|
Investment income
|
|
|
65,207
|
|
|
|
58,528
|
|
|
39,068
|
Furniture rental segment
|
|
|
20,316
|
|
|
|
26,884
|
|
|
20,676
|
Industrial segment
|
|
|
915
|
|
|
|
1,211
|
|
|
1,198
|
Nonsegment items other than investment gains
|
|
|
(73
|
)
|
|
|
246
|
|
|
5,233
|
Realized investment gains
|
|
|
15,756
|
|
|
|
|
|
|
216,606
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
109,161
|
|
|
$
|
92,033
|
|
$
|
294,579
|
|
|
|
|
|
|
|
|
|
|
|
In the following sections the data set forth in the foregoing
summary on an after-tax basis are broken down and
discussed.
23
Insurance
Segment
Wesco engages in both primary insurance and reinsurance of
property and casualty risks through 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,
Wescos ultimate parent company. In reinsurance activities,
defined portions of similar or dissimilar risks that other
insurers or reinsurers have subjected themselves to in their own
insuring activities are assumed. In primary insurance
activities, defined portions of the risks of loss from persons
or organizations that are directly subject to the risks are
assumed. For purposes of the following discussion, the results
have been disaggregated between reinsurance and primary
insurance activities. Following is a summary of the insurance
segments underwriting activities. (Amounts are in
thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Insurance premiums written
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$
|
35,346
|
|
$
|
35,710
|
|
$
|
29,054
|
Primary
|
|
|
19,493
|
|
|
19,800
|
|
|
21,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,839
|
|
$
|
55,510
|
|
$
|
50,253
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$
|
34,998
|
|
$
|
33,323
|
|
$
|
28,338
|
Primary
|
|
|
19,413
|
|
|
20,826
|
|
|
21,144
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
54,411
|
|
|
54,149
|
|
|
49,482
|
Insurance losses, loss adjustment expenses and underwriting
expenses
|
|
|
43,580
|
|
|
46,205
|
|
|
34,916
|
Underwriting gain, before income taxes
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
2,158
|
|
|
2,538
|
|
|
6,857
|
Primary
|
|
|
8,673
|
|
|
5,406
|
|
|
7,709
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,831
|
|
|
7,944
|
|
|
14,566
|
Income taxes
|
|
|
3,791
|
|
|
2,780
|
|
|
2,768
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain
|
|
$
|
7,040
|
|
$
|
5,164
|
|
$
|
11,798
|
|
|
|
|
|
|
|
|
|
|
The nature of Wes-FICs participation in the
aviation-related reinsurance contracts requires that estimates
be made not only as to losses and expenses incurred, but also as
to premiums written, due to a time lag in reporting by the
ceding pools. In addition, periodic underwriting results can be
affected significantly by changes in estimates for unpaid losses
and loss adjustment expenses, including amounts established for
occurrences in prior years. See the Critical Accounting Policies
section of this discussion for information concerning the loss
reserve estimation process.
Reinsurance premiums written for 2007 decreased by
$0.4 million (1.0%), and earned reinsurance premiums
increased by $1.7 million (5.0%), from the corresponding
2006 figures, despite the 33.3% increase in the level at which
Wes-FIC participated in the hull and liability pools in 2007. As
competition has intensified in the aviation market, the pools
have experienced greater pricing pressures and have continued to
exercise underwriting discipline by not writing policies where
pricing was deemed inadequate with respect to the risks assumed.
Written premiums for 2006 increased by 22.9%, and earned
reinsurance premiums increased by 17.6%, from those of 2005.
These increases were attributed principally to the 25%-higher
level of participation in the hull and liability pools in 2006,
as well as an increase in the volume of business written by the
workers compensation pool. Intensifying competitive
pressures, which negatively affected written premiums for 2006,
more significantly affected written premiums for 2007.
Reinsurance activities have fluctuated from year to year as
participations in reinsurance contracts have become available
both through insurance subsidiaries of Berkshire and otherwise.
See Item 1, Business, for information about Wes-FICs
participation in a an additional quota-share reinsurance
contract, expected to
24
significantly increase its premium volume over a five-year
period beginning in 2008. The level of business written by
Wes-FIC in future periods will also vary, perhaps materially,
based upon market conditions and managements assessment of
the adequacy of premium rates.
Written primary insurance premiums decreased by
$0.3 million in both 2007 and 2006, representing decreases
of 1.6% for 2007 and 6.6% for 2006. KBS has experienced
intensified price competition during the past approximately two
years, and has reacted through the exercise of underwriting
discipline.
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, 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. The
ratio is figured on a pre-tax basis. Underwriting results of
Wescos insurance segment have generally been favorable,
but have fluctuated from year to year for various reasons,
including competitiveness of pricing in terms of premiums
charged for risks assumed, and volatility of losses incurred.
For 2007, 2006 and 2005, reinsurance generated underwriting
gains of $2.2 million, $2.5 million and
$6.9 million, representing combined ratios of 93.9%, 94.0%
and 75.9%, all of which management considers to have been
favorable. The figures for the two most recent years reflect the
detrimental effects of increasingly competitive pressures which
have resulted in the ongoing softening of prices in terms of
premiums charged throughout those years. The 2006 figure also
reflects less favorable claims experience in the latter half of
the year, with respect to the hull and liability contracts,
where Wes-FICs participation increased by 25 percent
for that year. Had it not been for net favorable reserve
development of $3.2 million in 2007, essentially all of
which related to the aviation-related contracts, reinsurance
activities for 2007 would have generated an underwriting loss of
$1.3 million ($0.8 million, after taxes). The
underwriting results for 2006 and 2005 also include net
favorable (unfavorable) reserve development of
($0.4 million) for 2006, comprised of unfavorable
development of $1.7 million attributable to the
aviation-related contracts, partially offset by
$1.3 million of favorable development for a contract whose
coverage period ended in 1989, and $0.7 million for 2005,
attributable to the aviation-related contracts. The 2005 figure
also reflects estimated losses of $0.7 million, before
taxes, related to Hurricane Katrina, which struck the Gulf Coast
of the United States in the third quarter.
Combined ratios from primary insurance were 55.1%, 73.8% and
58.8% for 2007, 2006 and 2005, which management considers to
have been favorable. In 2007, pre-tax underwriting results
improved by $3.3 million (60.4%) and included net favorable
reserve development of $3.6 million associated with
estimates of losses recorded in several previous years, most
notably, the reversal of a $1.9 million estimated loss
recorded in 2005, following a recent court decision. In 2006,
pre-tax underwriting results from primary insurance declined by
$2.3 million (29.9%) from those of 2005. Underwriting
results from primary insurance included net unfavorable loss
development of $0.2 million and $0.6 million, before
taxes, for 2006 and 2005, amounts not considered significant.
It should be noted that the profitability of a reinsurance or
insurance arrangement is better assessed after all losses and
expenses have been realized, perhaps many years after the
coverage period, rather than for any given reporting period. No
trends have been identified which directly relate to losses,
other than the effects from the current trend of increasing
competition, causing declining premium rates. Losses incurred by
Wescos insurance segment, by their very nature, occur
unexpectedly and fluctuate from period to period in both
frequency and magnitude. Wescos insurers cede minimal
amounts of their direct business, and as a result underwriting
results may be volatile.
The income tax provision associated with the insurance
segments underwriting activities for 2005 benefited by
$2.3 million relating to the resolution of an issue raised
in an examination of prior year income tax returns by the
Internal Revenue Service.
Since September 11, 2001, the insurance industry has been
particularly concerned about its exposure to claims resulting
from acts of terrorism. In spite of partial relief provided to
the insurance industry by the Terrorism Risk Insurance Act,
enacted in 2002 and amended by the Terrorism Risk Extension Act
of 2005, and
25
the Terrorism Risk Insurance Program Reauthorization Act of
2007, Wes-FIC is exposed to insurance losses from terrorist
events. Wes-FICs (and thus Wescos) exposure to such
losses from an insurance standpoint cannot be predicted.
Management, however, does not believe it likely that, on a
worst-case basis, Wescos shareholders equity would
be severely impacted by future terrorism-related insurance
losses under reinsurance or insurance contracts currently in
effect. Losses from terrorism could, however, significantly
impact Wescos periodic reported earnings.
Other industry concerns in recent years have included exposures
to losses relating to environmental contamination and asbestos.
Management currently believes such exposures to be minimal.
Following is a summary of investment income produced by
Wescos insurance segment (in thousands of dollars).
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Investment income, before taxes
|
|
$89,716
|
|
$83,441
|
|
$55,889
|
Income taxes
|
|
24,509
|
|
24,913
|
|
16,821
|
|
|
|
|
|
|
|
Investment income, after taxes
|
|
$65,207
|
|
$58,528
|
|
$39,068
|
|
|
|
|
|
|
|
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). The $6.3 million (7.5%) increase in
pre-tax investment income for 2007 reflected a
$11.7 million increase in dividend income, attributable
principally to the investment of $801.7 million, net, in
equity securities in the latter part of 2007, partially offset
by a decline in interest income resulting mainly from the use of
interest-bearing cash equivalents and fixed-maturity investments
for the purchase of the equity securities. The increase of
$27.6 million (49.3%) in investment income for 2006 was due
principally to higher interest rates earned on short-term
investments. Dividend income improved slightly.
Wesco continues to seek to invest cash balances in the purchase
of businesses and in long-term equity holdings.
Wescos insurance subsidiaries, as a matter of practice,
maintain liquidity in amounts which exceed by wide margins
expected near-term requirements for payment of claims and
expenses. As a result, it would be unlikely that any
unanticipated payment of claims or expenses would require the
liquidation of investments at a loss. Wesco does not attempt to
match long-term investment maturities to estimated durations of
claim liabilities.
Reference is made to the table of contractual obligations
appearing on page 30.
26
Furniture Rental
Segment
Following is a summary of the results of operations of CORT
Business Services Corporation (CORT), Wescos
furniture rental segment. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Furniture rentals
|
|
$
|
327,671
|
|
$
|
324,300
|
|
$
|
303,485
|
Furniture sales
|
|
|
61,704
|
|
|
69,551
|
|
|
72,394
|
Service fees
|
|
|
6,795
|
|
|
6,454
|
|
|
8,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,170
|
|
|
400,305
|
|
|
383,900
|
|
|
|
|
|
|
|
|
|
|
Cost of rentals, sales and fees
|
|
|
91,407
|
|
|
101,605
|
|
|
102,032
|
Selling, general and administrative expenses
|
|
|
268,469
|
|
|
252,657
|
|
|
250,542
|
Interest expense
|
|
|
2,408
|
|
|
2,711
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362,284
|
|
|
356,973
|
|
|
354,149
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
33,886
|
|
|
43,332
|
|
|
29,751
|
Income taxes
|
|
|
13,570
|
|
|
16,448
|
|
|
9,075
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$
|
20,316
|
|
$
|
26,884
|
|
$
|
20,676
|
|
|
|
|
|
|
|
|
|
|
Furniture rental revenues for 2007 increased $3.4 million
(1.0%) from those of 2006, after increasing $20.8 million
(6.9%) for 2006 from those of 2005. Excluding rental revenues
from trade shows and locations not in operation throughout each
year, rental revenues for 2007 decreased 0.6% from those of
2006, following an increase of approximately 4.9% in the
preceding year. The number of furniture leases outstanding at
yearend 2007 was 5.7% lower than at yearend 2006, following a
decline of 5.1% in the preceding year. The decrease in the
number of outstanding leases continues a trend that developed
late in 2006, believed to be due principally to non-renewals of
leases generated in the aftermath of hurricanes Katrina and
Rita, increased energy prices, and customer uncertainty as to
future economic conditions. Despite the continued decline in the
number of furniture leases outstanding, furniture rental
revenues have grown due mainly to increased demand for events
and tradeshows and improved pricing.
Furniture sales revenues for 2007 decreased $7.8 million
(11.3%) from those of 2006, following a decrease in 2006 of
$2.8 million (3.9%) from those of 2005. The decreases are
believed to be attributed principally to the continued softening
of the housing market and higher energy prices that have
contributed to an industry-wide decline in retail furniture
sales.
Service fees for 2007 increased $0.3 million (5.3%) after a
decreasing $1.6 million (19.5%) in 2006 from those reported
for 2005. Traditionally, the furniture segment has concentrated
the marketing efforts of its relocation services towards
individual residential customers. Late in 2006, CORT began a new
initiative to expand the variety of its relocation services, and
it redirected the thrust of this activity toward providing these
services to corporate relocation departments for their
relocating employees in need of temporary or longer-term
housing. Although initial traction has been slow, management is
hopeful that the expansion of facilities and personnel devoted
to rental relocation services, as well as the change in focus of
its relocation activities, will result in profitable long-term
revenue growth.
Cost of rentals, sales and fees amounted to 23.1% of revenues
for 2007, versus 25.4% for 2006, and 26.6% for 2005. The
decrease in costs as percentages of revenues have been due
principally to improvement in revenue mix, with a larger
percentage of each successive years revenue attributable
to furniture rentals, which has a higher margin than furniture
sales.
Selling, general, administrative and interest expenses
(operating expenses) for the segment were
$270.8 million for 2007, up 6.0% from the
$255.4 million incurred for 2006, following an increase of
1.3% from the $252.1 million incurred for 2005. The
increase in operating expenses in 2007 was due principally to
27
an increase in advertising and personnel-related costs
associated with the rental relocation service as CORT continues
to redirect and expand its marketing efforts to target corporate
clients.
Income before income taxes for the furniture rental segment
amounted to $33.9 million in 2007, versus
$43.3 million in 2006, and $29.8 million in 2005. The
21.7% decrease in pre-tax operating results for 2007 was
principally attributable to the significant increase in
operating expenses, offset somewhat by increased gross profits
resulting from changes in revenue mix. The improvement in 2006
resulted significantly from increasing revenues, change in
revenue mix, and the continued focus on controlling operating
expenses.
Industrial
Segment
Following is a summary of the results of operations of the
industrial segment, consisting of the businesses of Precision
Steel and its subsidiaries. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues, principally sales and services
|
|
$
|
61,361
|
|
$
|
63,053
|
|
$
|
61,334
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,518
|
|
$
|
1,918
|
|
$
|
2,056
|
Income taxes
|
|
|
603
|
|
|
707
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$
|
915
|
|
$
|
1,211
|
|
$
|
1,198
|
|
|
|
|
|
|
|
|
|
|
The operations of the industrial segment have suffered a variety
of ongoing difficulties for a number of years, including
periodic economic downturns, a shift of production by many
customers from domestic to overseas facilities, intensifying
competitive pressures among service centers for remaining
domestic business, unprecedented ability of the major steel
producers in recent years to raise prices and establish minimum
order quantities, following consolidation in the industry, and
intensified competitive pressures for product from suppliers and
for sales.
In addition to a decline in the number of orders placed in
recent years, there has also been a trend towards smaller-sized
orders. The severity of the impact of the foregoing factors on
Wescos industrial segment is demonstrated by the
significant decline in sales volume, in terms of pounds sold,
from an average of 68 million pounds annually, over the
three-year period of 1998 through 2000, to an average of
44 million pounds annually, over the most recent three-year
period. Average industrial segment revenues have not declined as
significantly, principally because many customers have generally
accepted higher prices as Wescos industrial segment has
struggled to maintain its margins.
In 2005 competition for sales intensified and prices softened,
but remained substantially higher than in the early 2000s.
The year 2006 started out well. Volume, in terms of pounds sold
for the first quarter, increased by 9.9% over the comparable
figure for the first quarter for 2005; however, as the year
progressed, increasing competitive pressures and a slowdown in
domestic manufacturing activity caused volume to decline and, by
yearend, volume for the year was 0.4% lower than in 2005.
Segment revenues for the year, however, increased by
$1.7 million (2.8%). Approximately half of the increase in
revenues was attributable to a large sale of toolroom supplies
to a single customer. Excluding that transaction, segment
revenues for 2006 increased by $0.8 million (1.3%) over
those of 2005.
As 2007 progressed, demand slowed, and customers became more
resistant to higher prices, primarily specialty stainless steel
products, which in one year period increased on average by
approximately 40%, based principally on mill surcharges for
chromium and nickel, as global demand for these basic
commodities remained high. Revenues for the year decreased by
$1.7 million (2.7%) from those of 2006. Excluding from 2006
revenues the extraordinarily large sale of toolroom supplies to
the single customer, revenues for 2007 decreased by
$0.8 million (1.3%) as compared with those of 2006. Sales
volume, in terms or pounds sold, decreased by approximately 14%.
As a result of the decline in volume somewhat offset by higher
steel prices, income from operations declined by
$0.4 million for 2007.
28
As explained in Note 9 to the consolidated financial
statements, Precision Steel and a subsidiary are involved in
environmental litigation. Management anticipates that additional
provisions and legal fees with respect to environmental
remediation may be required in the future. However, as of
December 31, 2007, it was not possible to reasonably
estimate the amount, if any, of additional costs or a range of
costs, that may be required in connection with the matter.
Although management does not anticipate that the ultimate impact
of such provisions and costs, net of future insurance
recoveries, if any, 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.
Unrelated to
Business Segment Operations
Wescos consolidated earnings included net realized
investment gains of $24.2 million ($15.8 million,
after taxes) for 2007, and $332.5 million
($216.1 million, after taxes) for 2005. Of the latter
amount, $216.1 million, after taxes, resulted from
Wescos non-cash exchange of common shares of The Gillette
Company (Gillette) for common shares of The
Procter & Gamble Company (PG) in
connection with the purchase of Gillette by PG in the fourth
quarter. The $332.5 million excess of fair value of the
shares exchanged over Wescos original cost basis was
recorded by Wesco as a realized investment gain on
October 1, the date of the transaction, as required under
generally accepted accounting principles. Although the gain had
a material impact on Wescos reported earnings for the
fourth quarter of 2005, there was no effect on
shareholders equity. Wesco carried its investment in
Gillette at market value with unrealized gains reflected, net of
potential income tax effect, in the net unrealized appreciation
component of its shareholders equity, as of
September 30, 2005. Federal income taxes are not currently
payable as a result of the exchange. No investment gains or
losses were realized in 2006.
Managements principal goal is to maximize gain in
Wescos intrinsic business value per share over the long
term. Accounting consequences do not influence business
decisions. There is no particular strategy as to the timing of
sales of investments. Investments may be sold for a variety of
reasons, including (1) the belief that prospects for future
appreciation of a particular investment are less attractive than
the prospects for reinvestment of the after-tax proceeds from
its sale, or (2) the desire to generate funds for an
acquisition or repayment of debt. Investment gains may also
derive from non-cash exchanges of securities for other
investment securities as a result of merger activity involving
the investees.
Other nonsegment items include mainly (1) rental income
from owned commercial real estate and (2) dividend and
interest income from marketable securities and cash equivalents
owned outside the insurance subsidiaries, reduced by real estate
and general and administrative expenses. In the fourth quarter
of 2005, Wesco and its MS Property Company subsidiary reduced
their liabilities for deferred income taxes by an aggregate of
$4.9 million. That amount is reflected as a reduction of
income tax expense of activities unrelated to business segments.
* * * *
Consolidated revenues, expenses and net income reported for any
period are not necessarily indicative of future results in that
they are subject to significant variations in amount and timing
of (1) participations in reinsurance contracts with members
of the Berkshire Insurance Group, such as the quota-share
arrangement described in Item 1, Business, which is
expected to significantly increase the business of the insurance
segment for a five-year period beginning in 2008,
(2) investment gains and losses, or (3) unusual
nonoperating items. In addition, consolidated revenues, expenses
and net income are subject to external conditions, such as
terrorist activity, and changes in the economy.
Wesco is not presently suffering from inflation, but its
business operations have potential exposure, particularly in the
insurance and industrial segments. Large unanticipated changes
in the rate of inflation could adversely impact the insurance
business, because premium rates are established well in advance
of expenditures. Precision Steels businesses are
competitive and operate on tight gross profit margins, making
their earnings susceptible to inflationary and deflationary cost
changes; the impact, though not material in relation to
Wescos consolidated net income, may be significant to that
of the industrial segment, due particularly to the
segments use of LIFO inventory accounting.
29
OFF-BALANCE SHEET
ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Neither Wesco nor any of its subsidiaries has off-balance sheet
arrangements other than the unrecorded contractual obligations
discussed below. Nor do they have any insurance obligations for
which estimated provisions have not been made in the
accompanying consolidated financial statements or notes thereto.
Wesco and its subsidiaries have contractual obligations
associated with ongoing business activities, which will result
in cash payments in future periods. Certain obligations, such as
notes payable, accrued interest, and unpaid insurance losses and
loss adjustment expenses, are reflected in the accompanying
consolidated financial statements. In addition, Wesco and its
subsidiaries have entered into long-term contracts to acquire
goods or services in the future, which are not currently
reflected in the consolidated financial statements and will be
reflected in future periods as the goods are delivered or
services provided. A summary of contractual obligations as of
December 31, 2007 follows. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
Total
|
|
2008
|
|
2009-2010
|
|
2011-2012
|
|
Thereafter
|
|
Notes payable, including interest
|
|
$
|
37,540
|
|
$
|
37,340
|
|
$
|
|
|
$
|
|
|
$
|
200
|
Operating lease obligations
|
|
|
103,852
|
|
|
25,925
|
|
|
40,709
|
|
|
23,006
|
|
|
14,212
|
Payment of insurance losses and loss adjustment expenses*
|
|
|
93,845
|
|
|
22,341
|
|
|
29,447
|
|
|
18,899
|
|
|
23,158
|
Purchase obligations, other than for capital expenditures
|
|
|
12,030
|
|
|
11,108
|
|
|
922
|
|
|
|
|
|
|
Purchase obligations for capital expenditures**
|
|
|
17,310
|
|
|
17,310
|
|
|
|
|
|
|
|
|
|
Other, principally deferred compensation
|
|
|
5,069
|
|
|
61
|
|
|
52
|
|
|
52
|
|
|
4,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
269,646
|
|
$
|
114,085
|
|
$
|
71,130
|
|
$
|
41,957
|
|
$
|
42,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Amounts and timing of payments are significantly dependent on
estimates. See Critical Accounting Policies and Practices below.
|
|
**
|
Principally, construction costs of MS Propertys luxury
condominium development.
|
CRITICAL ACCOUNTING
POLICIES AND PRACTICES
Wescos consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the
United States (GAAP). The significant accounting
policies and practices followed by Wesco are set forth in
Note 1 to the accompanying consolidated financial
statements. Following are the accounting policies and practices
considered by Wescos management to be critical to the
determination of consolidated financial position and results of
operations.
Use of Estimates
in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported revenues and
expenses during the period reported upon. In particular,
estimates of unpaid losses and loss adjustment expenses for
property and casualty insurance are subject to considerable
estimation error due to the inherent uncertainty in projecting
ultimate claim amounts that will be reported and settled over a
period of many years. The estimates and assumptions are based on
managements evaluation of the relevant facts and
circumstances using information available at the time such
estimates and assumptions are made. The amounts of such assets,
liabilities, revenues and expenses included in the consolidated
financial statements may differ significantly from those that
might result from use of estimates and assumptions based on
facts and circumstances not yet available. Although Wescos
management does not believe such changes in estimates would have
a materially adverse effect on shareholders equity, they
could produce a material effect on results of operations in a
reporting period.
30
Investments
The appropriate classifications of investments in securities
with fixed maturities and marketable equity securities are
established at the time of purchase and reevaluated as of each
balance sheet date. There are three permissible classifications:
held-to-maturity,
trading and
available-for-sale.
In recent years, all equity and fixed-maturity investments have
been classified as
available-for-sale
and carried at fair value, with unrealized gains and losses, net
of applicable deferred income taxes, reported as a separate
component of shareholders equity.
Rental
Furniture
Rental furniture consists principally of residential and office
furniture which is available for rental or, if no longer up to
rental standards or excessive in quantity, for sale. Rental
furniture is carried at cost, less accumulated depreciation
calculated primarily on a declining-balance basis over 3 to
5 years using estimated salvage values of 25 to
40 percent of original cost.
Revenue
Recognition
Insurance premiums are stated net of amounts ceded to reinsurers
and are recognized as earned revenues in proportion to the
insurance protection provided, which in most cases is pro rata
over the term of each contract. Premiums are estimated with
respect to certain reinsurance contracts written during the
period where reports from ceding companies for the period are
not contractually due until after the balance sheet date.
Unearned insurance premiums are deferred in the liability
section of the consolidated balance sheet. Certain costs of
acquiring insurance premiums commissions, premium
taxes, and other are deferred and charged to income
as the premiums are earned.
Furniture rentals are recognized as revenue proportionately over
the rental contract period; rentals received in advance are
deferred in the liability section of the consolidated balance
sheet. Related costs comprise the main element of cost of
products and services sold on the consolidated income statement
and include depreciation expense, repairs and maintenance and
inventory losses.
Losses and Loss
Adjustment Expenses
Liabilities for unpaid insurance losses and loss adjustment
expenses represent estimates of the ultimate amounts payable
under property and casualty reinsurance and insurance contracts
related to losses occurring on or before the balance sheet date.
Liabilities for insurance losses are comprised of estimates for
reported claims (case reserves); and reserve
development on reported claims and estimates for claims that
have not yet been reported (some of which may not be reported
for many years), which together are also referred to as
incurred-but-not-reported reserves (IBNR
reserves). The liability for unpaid losses includes significant
estimates for these claims and include estimates reported by
ceding insurers. Loss reserve estimates reflect past loss
experience, adjusted as appropriate when losses are reasonably
expected to deviate from experience.
Provisions for losses and loss adjustment expenses are reported
in the consolidated statement of income after deducting
estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do not relieve the ceding
companies of their obligations to indemnify policyholders with
respect to the underlying insurance contracts. Ceded reinsurance
losses recoverable (ceded reserves) are reflected in
the accompanying Consolidated Balance Sheets as a component of
accounts receivable.
Depending on the type of loss being estimated, the timing and
amount of loss payments are subject to a great degree of
variability and are contingent, among other factors, upon the
timing of the claim reporting by cedants and insureds, and the
determination and payment of the ultimate loss amounts through
the loss adjustment process. Judgments and assumptions are
necessary in projecting the ultimate amounts payable in the
future with respect to loss events that have occurred.
The time period between the claim occurrence date and payment
date of the loss is referred to as the claim tail.
Property claims usually have fairly short claim tails, and,
absent litigation, are reported and
31
settled within a few months or years after occurrence. Casualty
losses usually have very long claim tails. Casualty claims can
be more susceptible to litigation and can be more significantly
affected by changing contract interpretations and the legal
environment, which contributes to extended claim tails. Claim
tails for reinsurers may be further extended due to delayed
reporting by ceding insurers or reinsurers due to contractual
provisions or reporting practices. Actual ultimate loss
settlement amounts are likely to differ from amounts recorded at
the balance sheet date. Changes in estimates, referred to as
loss development, are recorded as a component of
losses incurred in the period of change. Wes-FIC and KBS do not
use consultants to assist in reserving activities.
Following is a summary of Wescos consolidated liabilities
for insurance losses and loss adjustment expenses and related
reinsurance recoverables (in thousands of dollars).
|
|
|
|
|
|
|
|
|
|
|
December, 31
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Case reserves
|
|
|
$58,160
|
|
|
|
$49,834
|
|
IBNR reserves
|
|
|
35,685
|
|
|
|
28,476
|
|
|
|
|
|
|
|
|
|
|
Gross liability before ceded reinsurance
|
|
|
93,845
|
|
|
|
78,310
|
|
Ceded reserves
|
|
|
(23,502
|
)*
|
|
|
(11,628
|
)*
|
|
|
|
|
|
|
|
|
|
Net reserves
|
|
|
$70,343
|
|
|
|
$66,682
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents principally, Wes-FICs proportionate share of
reinsurance purchased by the aviation pools.
|
The techniques and processes employed in estimating loss
reserves are differentiated between reinsurance and primary
insurance.
Reinsurance Historically,
Wes-FICs property and casualty loss reserves derive from
individual risk, multi-line and catastrophe reinsurance
policies. However, Wes-FICs reinsurance activity in recent
years has consisted almost exclusively of participations in
aviation-related pools that are underwritten and managed by a
wholly owned indirect subsidiary of Wescos parent company,
Berkshire Hathaway Inc.
Non-aviation reinsurance reserve amounts were less than 10% of
Wescos gross consolidated reserves as of December 31,
2007 and December 31, 2006 (mostly in IBNR reserves) and
primarily related to a quota-share contract that has been in
runoff for more than 10 years, under which Wes-FIC
continues to make loss payments. Such amounts reflected loss
estimates reported by the ceding companies and additional IBNR
reserves estimates by Wes-FIC management, which were mainly a
function of reported losses from ceding companies, anticipated
loss ratios for the contract period, and managements
judgment as to the loss reserving adequacy of the ceding
companies.
Gross aviation loss reserves were approximately $67 million
at December 31, 2007 and $50 million at
December 31, 2006 ($44 million and $39 million,
net of reinsurance, at those dates), of which gross IBNR
reserves were approximately $23 million and
$18 million, respectively. Losses from aviation coverages
generally have reasonably short tails with respect to the
property components. The claim tail for the liability coverage
can be somewhat longer, especially when litigation results. The
case reserving process for aviation risks is believed to involve
less uncertainty than for many other types of insurance, because
loss events tend to become known and reported relatively soon
after the events occur. The material judgments underlying the
loss reserving by the aviation pools manager assume that
future loss patterns (incurred and paid) will be similar to
those of the past. The aviation pools manager establishes
case and IBNR reserves and manages the claims settlement
process, including payment of the related claims. Wes-FIC is
allocated its share of these amounts, monthly. The pools
manager has considerable experience with aviation insurance and
claims. Wes-FIC management reviews reported claim amounts for
reasonableness and has historically accepted the amounts without
further adjustment, except for adjustments made for minor
reporting delays.
32
Wes-FIC management is represented at regular meetings and
presentations held by the pools manager, and Wesco
believes that Wes-FIC is able to closely monitor and assess the
pools managers judgments concerning reserves.
Considerable judgment is required to evaluate claims and
estimate claims liabilities in connection with reinsurance
contracts. As further data become available, the liabilities are
reevaluated and adjusted as appropriate. Additionally, reported
claims are in various stages of the settlement process. Each
claim is settled individually based upon its merits, and some
take years to settle, especially if legal action is involved.
Actual ultimate claims amounts are likely to differ from amounts
recorded at the balance sheet date.
Primary insurance Loss reserves from
Wescos primary insurance activities derive from individual
risk policies written by KBS, which primarily provides specialty
coverages for financial institutions. Reserve amounts are
comprised of case estimates and estimates of IBNR reserves,
which approximated $7 million at both yearends of 2007 and
2006. Because of the relatively low number (or frequency) of
losses and potential for higher severity (or amount per claim),
KBS management is familiar with and closely monitors each claim.
Losses generally are expected to have a relatively short
reporting and claim tail due to the nature of the claims. KBS
provides deposit guaranty bonds, which insure deposits in excess
of federal deposit insurance limits, crime insurance, check
kiting fraud indemnification, Internet banking catastrophe theft
insurance, directors and officers liability, bank employment
practices, as well as bank insurance agents professional errors
and omissions indemnity. As a result, reserves are primarily
developed from case estimates, reducing the need for extended
actuarial studies and broad estimates of IBNR of the nature
typically performed by large primary insurers whose business
volume requires such procedures for the development of their
loss data. A range of reserve amounts as a result of changes in
underlying assumptions is not prepared.
Goodwill
Goodwill of acquired businesses represents the excess of the
cost of acquired entities (principally CORT) over the fair
values assigned to assets acquired and liabilities assumed. The
Company accounts for goodwill in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, which requires
the Company to test goodwill for impairment annually or whenever
events or changes in circumstances indicate that the carrying
values may not be recoverable. Annual impairment tests are
performed in the fourth quarter of each year using a variety of
methods that require that certain assumptions and estimates be
made regarding economic factors and future profitability.
Impairments, if any, are charged to earnings.
Realized
investment gains and losses
Realized investment gains and losses, determined on a
specific-identification basis, are included in the consolidated
statement of income, as are provisions for
other-than-temporary
declines in market or estimated fair value, when applicable.
Factors considered in judging whether an impairment is other
than temporary include: the financial condition, business
prospects and creditworthiness of the issuer, the length of time
that fair value has been less than cost, the relative amount of
the decline, and Wescos ability and intent to hold the
investment until the fair value recovers.
|
|
Item 7A.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
Wescos consolidated balance sheet contains substantial
liquidity as well as substantial amounts of investments whose
estimated fair (carrying) values are subject to market risks.
Its fixed-maturity investments are backed by the
U.S. Government and its agencies. Values of marketable
equity securities are subject to fluctuations in their stock
market prices, and values of securities with fixed maturities
are subject to changes in interest rate levels. Apart from
investments, the consolidated balance sheet at December 31,
2007 did not contain significant assets or liabilities with
values subject to these or other potential market exposures such
as
33
changes in commodity prices or foreign exchange rates. Wesco
does not utilize derivatives to manage market risks.
EQUITY PRICE RISK
Wescos consolidated balance sheet at December 31,
2007 contained $1.92 billion of marketable equity
securities stated at market value, up from $1.04 billion
one year earlier. The increase was due principally to the
purchase of $802 million, net, of marketable equity
securities in the latter part of 2007. Net unrealized
appreciation increased $55 million during 2007. The
carrying values of Wescos equity securities are exposed to
market price fluctuations, which may be accentuated by the
concentration existing in the equity portfolio. (At
December 31, 2007, four investments comprised 87% of the
carrying value of the consolidated equity securities portfolio.)
The four largest holdings of the consolidated group at
December 31, 2007 ($1.68 billion, combined) were
common stocks of The Procter & Gamble Company, The
Coca-Cola
Company, Kraft Foods Inc. and Wells Fargo & Company,
of which the first three have significant global operations and
thus are subject to changes in foreign currency exchange rates,
and the latter has significant mortgage-lending operations and
is exposed to the weakening domestic credit market caused mainly
by accelerating weakness in the domestic housing market.
Strategically, Wesco strives to invest in businesses that
possess excellent economics, with able and honest management, at
sensible prices. Wescos management prefers to invest a
meaningful amount in each investee, resulting in concentration.
Most equity investments are expected to be held for long periods
of time; thus, Wescos management is not ordinarily
troubled by short-term price volatility with respect to its
investments provided that the underlying business, economic and
management characteristics of the investees remain favorable.
Wesco strives to maintain above-average levels of
shareholders equity as well as much liquidity to provide a
margin of safety against short-term equity price volatility.
The carrying values of investments subject to equity price risks
are based on quoted market prices. Market prices are subject to
fluctuation and, consequently, the amount realized upon the
subsequent sale of an investment may significantly differ from
the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying
economic characteristics of the investee, the relative prices of
alternative investments, or general market conditions.
Furthermore, amounts realized upon the sale of a particular
security may be adversely affected if a relatively large
quantity of the security is being sold.
The following table summarizes Wescos equity price risks
as of December 31, 2007 and 2006. It shows the effects of a
hypothetical 30% overall increase or decrease in market prices
of marketable equity securities owned by the Wesco group on
total recorded market value and, after tax effect, on
Wescos shareholders equity at each of those dates.
(Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Increase
|
|
Decrease
|
|
Increase
|
|
Decrease
|
|
Market value of marketable equity securities
|
|
|
|
|
|
|
|
|
As recorded
|
|
$1,919,425
|
|
$1,919,425
|
|
$1,040,550
|
|
$1,040,550
|
Hypothetical
|
|
2,495,252
|
|
1,343,597
|
|
1,352,716
|
|
728,385
|
Shareholders equity
|
|
|
|
|
|
|
|
|
As recorded
|
|
2,534,859
|
|
2,534,859
|
|
2,400,338
|
|
2,400,338
|
Hypothetical
|
|
2,909,147
|
|
2,160,571
|
|
2,603,245
|
|
2,197,430
|
|
|
|
|
|
|
|
|
|
The 30% hypothetical changes in market values assumed in
preparing the tables do not reflect what could be considered
best- or worst-case scenarios. Actual results could be much
worse or better due both to the nature of equity markets and the
aforementioned concentration existing in Wescos equity
investment portfolio.
34
INTEREST RATE RISK
Wescos consolidated balance sheet at December 31,
2007 contained $527 million of cash and cash equivalents
and $39 million of securities with fixed maturities stated
at fair value, versus $1.26 billion of cash and cash
equivalents and $82 million of securities with fixed
maturities one year earlier. Consequently, market value risks
with respect to interest-rate movements or other factors as of
December 31, 2007 are considered insignificant.
The fair values of Wescos fixed-maturity investments
fluctuate in response to changes in market interest rates.
Increases and decreases in prevailing interest rates generally
translate into decreases and increases in fair values. Fair
values of Wescos investments may also be affected by the
creditworthiness of the issuer, prepayment options, relative
values of alternative investments, the liquidity of the
instrument and other general market conditions. Wesco, as a
matter of practice, invests only in fixed-maturity securities of
the highest quality. As of yearend 2007, its fixed-maturity
investments consisted of securities of the U.S. Treasury
and of agencies of the U.S. Government.
FORWARD-LOOKING
STATEMENTS
Certain written or oral representations of management stated in
this annual report or elsewhere constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as contrasted
with statements of historical fact. Forward-looking statements
include statements which are predictive in nature, or which
depend upon or refer to future events or conditions, or which
include words such as expects, anticipates, intends, plans,
believes, estimates, may, or could, or which involve
hypothetical events. Forward-looking statements are based on
information currently available and are subject to various risks
and uncertainties that could cause actual events or results to
differ materially from those characterized as being likely or
possible to occur. Such statements should be considered
judgments only, not guarantees, and Wescos management
assumes no duty, nor has it any specific intention, to update
them.
Actual events and results may differ materially from those
expressed or forecasted in forward-looking statements due to a
number of factors. The principal important risk factors that
could cause Wescos actual performance and future events
and actions to differ materially from those expressed in or
implied by such forward-looking statements include, but are not
limited to those risks reported in Item 1A, Risk Factors,
but also to the occurrence of one or more catastrophic events
such as acts of terrorism, hurricanes, or other events that
cause losses insured by Wescos insurance subsidiaries,
changes in insurance laws or regulations, changes in income tax
laws or regulations, and changes in general economic and market
factors that affect the prices of investment securities or the
industries in which Wesco and its affiliates do business.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Following is an index to financial statements and related
schedules of Wesco appearing in this report:
|
|
|
Financial Statements
|
|
Page Number(s)
|
|
Report of independent registered public accounting firm
|
|
39-40
|
Consolidated balance sheet December 31, 2007
and 2006
|
|
41
|
Consolidated statement of income years ended
December 31, 2007, 2006 and 2005
|
|
42
|
Consolidated statement of cash flows years ended
December 31, 2007, 2006 and 2005
|
|
43
|
Consolidated statement of changes in shareholders equity
and comprehensive income years ended
December 31, 2007, 2006 and 2005
|
|
44
|
Notes to consolidated financial statements
|
|
45-56
|
Listed below are financial statement schedules required by the
SEC to be included in this report. The data appearing therein
should be read in conjunction with the consolidated financial
statements and notes thereto of Wesco and report of independent
registered public accounting firm referred to above. Schedules
not
35
included with these financial statement schedules have been
omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
notes thereto.
|
|
|
|
|
Financial Statement Schedule
|
|
Schedule Number
|
|
Page Number(s)
|
|
Condensed financial information of Wesco
|
|
|
|
|
December 31, 2007 and 2006, and years ended
December 31, 2007, 2006 and 2005
|
|
I
|
|
57-58
|
|
|
Item 9.
|
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not applicable, as there were no such changes or disagreements.
|
|
Item 9A.
|
Controls and
Procedures
|
An evaluation was performed under the supervision and with the
participation of the Companys management, including
Charles T. Munger, its Chief Executive Officer and Jeffrey L.
Jacobson, its Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures as of December 31, 2007. 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 (the Exchange
Act), 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
Messrs. Munger and Jacobson, as appropriate, to allow
timely decisions regarding required disclosure.
There has been no change in the Companys internal control
over financial reporting during the fiscal quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
In Part I, Item 4 (Controls and
Procedures) of each of Wescos
Forms 10-Q
filed for the quarters ended March 31, 2007, June 30,
2007 and September 30, 2007, we mistakenly referred to an
evaluation of Wescos disclosure controls and procedures as
of December 31, 2006, when separate evaluations were
actually conducted as of the end of each quarter under report.
Based on those three separate evaluations, Wescos Chief
Executive Officer and Chief Financial Officer concluded that
Wescos disclosure controls and procedures were effective
as of March 31, 2007, June 30, 2007 and
September 30, 2007.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Wescos management is responsible for establishing and
maintaining adequate internal control over financial reporting
as such term is defined in
Rule 13a-15(f)
under the Exchange Act. The internal control system of Wesco and
its subsidiaries is designed to provide reasonable assurance
regarding the preparation and fair presentation of Wescos
published consolidated financial statements. Under the
supervision and with the participation of our management,
including Charles T. Munger, our principal executive officer,
and Jeffrey L. Jacobson, our principal financial officer, we
conducted an evaluation of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2007 as required by
Rule 13a-15(c)
under the Exchange Act. In making this assessment, we used the
criteria set forth in the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, we concluded that
Wescos internal control over financial reporting was
effective as of December 31, 2007.
36
Wescos independent registered public accounting firm has
audited our internal control over financial reporting as of
December 31, 2007. Their report begins on Page 39.
WESCO FINANCIAL CORPORATION
Pasadena, California
February 27, 2008
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information set forth in the sections Election of
Directors, Executive Officers, Corporate
Governance and Code of Business Conduct and
Ethics appearing in the definitive combined notice of
annual meeting and proxy statement of Wesco for its annual
meeting of shareholders scheduled to be held May 7, 2008
(the 2008 Proxy Statement) is incorporated herein by
reference.
|
|
Item 11.
|
Executive
Compensation
|
The information set forth in the sections Compensation of
Executive Officers, Compensation Discussion and
Analysis and Director Compensation in the 2008
Proxy Statement is incorporated herein by reference. All such
compensation is cash compensation; Wesco neither has, nor is
considering having, any stock option plan or other equity
compensation arrangement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
|
The information set forth in the sections Voting
Securities and Principal Holders Thereof, Security
Ownership of Certain Beneficial Owners and Management and
Section 16(A) Beneficial Ownership Reporting
Compliance in the 2008 Proxy Statement is incorporated
herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Certain information set forth in the sections Election of
Directors, Voting Securities and Principal Holders
Thereof, Compensation of Executive Officers,
Director Compensation, Corporate
Governance and Compensation Discussion and
Analysis in the 2008 Proxy Statement is incorporated
herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information set forth in the section Independent
Registered Public Accounting Firm in the 2008 Proxy
Statement is incorporated herein by reference.
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
The following exhibits (listed by numbers corresponding to Table
1 of Item 601 of
Regulation S-K)
are filed as part of this Annual Report on
Form 10-K
or are incorporated herein by reference:
3a Articles of incorporation of Wesco (filed as
exhibit 3a to Wescos
Form 10-K
for the year
ended
December 31, 1999) and Bylaws of Wesco (filed as
exhibit 3.2 to Wescos
Form 8-K
dated December 5, 2007 Commission File
No. 1-4720)
37
14 Code of Ethics (may be accessed through
Wescos website, www.wescofinancial.com.)
21 List of subsidiaries
31(a) Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (chief executive officer)
31(b) Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (chief financial officer)
32(a) Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (chief executive officer)
32(b) Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (chief financial officer)
Instruments defining the rights of holders of long-term debt of
Wesco and its subsidiaries are not being filed since the total
amount of securities authorized by all such instruments does not
exceed 10% of the total assets of Wesco and its subsidiaries on
a consolidated basis as of December 31, 2007. Wesco hereby
agrees to furnish to the Commission upon request a copy of any
such debt instrument to which it is a party.
The index to financial statements and related schedules set
forth in Item 8 of this report is incorporated herein by
reference.
38
SIGNATURES
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WESCO FINANCIAL
CORPORATION
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Charles T. Munger
|
|
|
|
|
Charles T. Munger
Chairman of the Board and President (principal executive officer)
|
|
February 27, 2008
|
|
|
|
|
|
By:
|
|
/s/ Jeffrey L. Jacobson
|
|
|
|
|
Jeffrey L. Jacobson
Vice President and Chief Financial Officer
(principal financial and accounting officer)
|
|
February 27, 2008
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
/s/ Carolyn H. Carlburg
|
|
|
Carolyn H. Carlburg
Director
|
|
February 27, 2008
|
|
|
|
/s/ Robert E. Denham
|
|
|
Robert E. Denham
Director
|
|
February 27, 2008
|
|
|
|
/s/ Robert T. Flaherty
|
|
|
Robert T. Flaherty
Director
|
|
February 27, 2008
|
|
|
|
/s/ Peter D. Kaufman
|
|
|
Peter D. Kaufman
Director
|
|
February 27, 2008
|
|
|
|
/s/ Charles T. Munger
|
|
|
Charles T. Munger
Director
|
|
February 27, 2008
|
|
|
|
/s/ Elizabeth Caspers
Peters
|
|
|
Elizabeth Caspers Peters
Director
|
|
February 27, 2008
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wesco Financial Corporation
Pasadena, California
We have audited the accompanying consolidated balance sheets of
Wesco Financial Corporation and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 8. We also have audited the Companys
internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting,
and for
39
its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and financial statement schedule and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Wesco Financial Corporation and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. Also, in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Omaha, Nebraska
February 27, 2008
40
WESCO FINANCIAL
CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in
thousands)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
526,722
|
|
$
|
1,257,351
|
Investments:
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
38,600
|
|
|
81,861
|
Marketable equity securities
|
|
|
1,919,425
|
|
|
1,040,550
|
Accounts receivable
|
|
|
79,512
|
|
|
60,386
|
Rental furniture
|
|
|
178,297
|
|
|
182,846
|
Goodwill of acquired businesses
|
|
|
266,607
|
|
|
266,607
|
Other assets
|
|
|
103,846
|
|
|
80,704
|
|
|
|
|
|
|
|
|
|
$
|
3,113,009
|
|
$
|
2,970,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Insurance losses and loss adjustment expenses
|
|
|
|
|
|
|
Affiliated business
|
|
$
|
39,687
|
|
$
|
29,761
|
Unaffiliated business
|
|
|
54,158
|
|
|
48,549
|
Unearned insurance premiums
|
|
|
|
|
|
|
Affiliated business
|
|
|
15,041
|
|
|
14,062
|
Unaffiliated business
|
|
|
15,225
|
|
|
15,298
|
Deferred furniture rental income and security deposits
|
|
|
19,947
|
|
|
20,440
|
Accounts payable and accrued expenses
|
|
|
49,476
|
|
|
48,258
|
Notes payable
|
|
|
37,200
|
|
|
38,200
|
Income taxes payable, principally deferred
|
|
|
347,416
|
|
|
355,399
|
|
|
|
|
|
|
|
|
|
|
578,150
|
|
|
569,967
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
Capital stock, $1 par value authorized,
7,500,000 shares; issued and outstanding,
7,119,807 shares
|
|
|
7,120
|
|
|
7,120
|
Additional paid-in capital
|
|
|
26,204
|
|
|
26,204
|
Accumulated other comprehensive income
|
|
|
381,017
|
|
|
344,978
|
Retained earnings
|
|
|
2,120,518
|
|
|
2,022,036
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,534,859
|
|
|
2,400,338
|
|
|
|
|
|
|
|
|
|
$
|
3,113,009
|
|
$
|
2,970,305
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
41
WESCO FINANCIAL
CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands
except for amounts per share)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Furniture rentals
|
|
$
|
327,671
|
|
$
|
324,300
|
|
$
|
303,485
|
Sales and service revenues
|
|
|
129,861
|
|
|
139,058
|
|
|
141,749
|
Insurance premiums earned
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
35,530
|
|
|
32,643
|
|
|
32,450
|
Unaffiliated business
|
|
|
18,881
|
|
|
21,506
|
|
|
17,032
|
Dividend and interest income
|
|
|
90,872
|
|
|
84,504
|
|
|
56,792
|
Realized investment gains
|
|
|
24,240
|
|
|
|
|
|
333,241
|
Other
|
|
|
3,869
|
|
|
3,716
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630,924
|
|
|
605,727
|
|
|
888,290
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold
|
|
|
143,282
|
|
|
154,218
|
|
|
153,402
|
Insurance losses and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
24,008
|
|
|
21,401
|
|
|
11,990
|
Unaffiliated business
|
|
|
4,269
|
|
|
9,944
|
|
|
9,482
|
Insurance underwriting expenses
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
8,019
|
|
|
7,566
|
|
|
6,611
|
Unaffiliated business
|
|
|
7,284
|
|
|
7,294
|
|
|
6,832
|
Selling, general and administrative expenses
|
|
|
280,728
|
|
|
265,327
|
|
|
262,594
|
Interest expense
|
|
|
2,408
|
|
|
2,711
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469,998
|
|
|
468,461
|
|
|
452,486
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
160,926
|
|
|
137,266
|
|
|
435,804
|
Income taxes
|
|
|
51,765
|
|
|
45,233
|
|
|
141,225
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
$
|
92,033
|
|
$
|
294,579
|
|
|
|
|
|
|
|
|
|
|
Amounts per capital share based on 7,119,807 shares
outstanding throughout each year:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15.33
|
|
$
|
12.93
|
|
$
|
41.37
|
Cash dividends
|
|
|
1.50
|
|
|
1.46
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
42
WESCO FINANCIAL
CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
|
$
|
92,033
|
|
|
$
|
294,579
|
|
Adjustments to reconcile net income with net cash flows from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sale of rental furniture
|
|
|
(22,678
|
)
|
|
|
(25,468
|
)
|
|
|
(24,955
|
)
|
Investment gains
|
|
|
(24,240
|
)
|
|
|
|
|
|
|
(333,241
|
)
|
Depreciation and amortization
|
|
|
41,515
|
|
|
|
41,732
|
|
|
|
38,887
|
|
Change in liabilities for insurance losses and loss adjustment
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
9,926
|
|
|
|
10,064
|
|
|
|
4,787
|
|
Unaffiliated business
|
|
|
5,609
|
|
|
|
6,266
|
|
|
|
1,031
|
|
Change in unearned insurance premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business
|
|
|
979
|
|
|
|
1,761
|
|
|
|
(1,817
|
)
|
Unaffiliated business
|
|
|
(73
|
)
|
|
|
(794
|
)
|
|
|
4,869
|
|
Change in income taxes payable
|
|
|
(27,075
|
)
|
|
|
17,014
|
|
|
|
110,656
|
|
Other, net
|
|
|
(10,765
|
)
|
|
|
(10,141
|
)
|
|
|
6,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
82,359
|
|
|
|
132,467
|
|
|
|
101,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities with fixed maturities
|
|
|
(29,106
|
)
|
|
|
(42,804
|
)
|
|
|
(24,368
|
)
|
Purchases of equity securities
|
|
|
(826,826
|
)
|
|
|
(18,856
|
)
|
|
|
(51,886
|
)
|
Purchases of rental furniture
|
|
|
(73,809
|
)
|
|
|
(80,151
|
)
|
|
|
(97,297
|
)
|
Proceeds from redemptions and maturities of securities with
fixed maturities
|
|
|
74,195
|
|
|
|
34,465
|
|
|
|
29,676
|
|
Proceeds from sales of securities with fixed maturities
|
|
|
|
|
|
|
|
|
|
|
11,577
|
|
Proceeds from sales of rental furniture
|
|
|
61,704
|
|
|
|
70,189
|
|
|
|
72,000
|
|
Proceeds from sales of equity securities
|
|
|
25,126
|
|
|
|
|
|
|
|
|
|
Additions to condominium construction in process
|
|
|
(26,059
|
)
|
|
|
(14,905
|
)
|
|
|
(9,029
|
)
|
Other, net
|
|
|
(6,534
|
)
|
|
|
(2,672
|
)
|
|
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(801,309
|
)
|
|
|
(54,734
|
)
|
|
|
(71,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments), net, under revolving credit facility
|
|
|
(1,000
|
)
|
|
|
(4,100
|
)
|
|
|
13,100
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Payment of cash dividends
|
|
|
(10,679
|
)
|
|
|
(10,395
|
)
|
|
|
(10,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
(11,679
|
)
|
|
|
(14,495
|
)
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(730,629
|
)
|
|
|
63,238
|
|
|
|
32,950
|
|
Cash and cash equivalents beginning of year
|
|
|
1,257,351
|
|
|
|
1,194,113
|
|
|
|
1,161,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
526,722
|
|
|
$
|
1,257,351
|
|
|
$
|
1,194,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during year
|
|
$
|
2,309
|
|
|
$
|
2,589
|
|
|
$
|
481
|
|
Income taxes paid, net, during year
|
|
|
79,011
|
|
|
|
28,484
|
|
|
|
34,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
43
WESCO FINANCIAL
CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollar amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Capital Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year
|
|
$
|
7,120
|
|
|
$
|
7,120
|
|
|
$
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year
|
|
$
|
26,204
|
|
|
$
|
26,204
|
|
|
$
|
26,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,022,036
|
|
|
$
|
1,940,398
|
|
|
$
|
1,655,929
|
|
Net income
|
|
|
109,161
|
|
|
|
92,033
|
|
|
|
294,579
|
|
Cash dividends declared and paid
|
|
|
(10,679
|
)
|
|
|
(10,395
|
)
|
|
|
(10,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,120,518
|
|
|
$
|
2,022,036
|
|
|
$
|
1,940,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of investments
|
|
$
|
55,132
|
|
|
$
|
136,038
|
|
|
$
|
(263,026
|
)
|
Applicable income taxes
|
|
|
(19,093
|
)
|
|
|
(47,770
|
)
|
|
|
92,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
36,039
|
|
|
|
88,268
|
|
|
|
(170,980
|
)
|
Accumulated other comprehensive income at beginning of year
|
|
|
344,978
|
|
|
|
256,710
|
|
|
|
427,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at end of year
|
|
$
|
381,017
|
|
|
$
|
344,978
|
|
|
$
|
256,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
|
$
|
92,033
|
|
|
$
|
294,579
|
|
Other comprehensive income
|
|
|
36,039
|
|
|
|
88,268
|
|
|
|
(170,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
145,200
|
|
|
$
|
180,301
|
|
|
$
|
123,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
44
WESCO FINANCIAL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
|
|
Note 1.
|
Significant
Accounting Policies and Practices
|
Nature of
operations, basis of consolidation, and presentation
Wesco Financial Corporation (Wesco) is, indirectly,
an 80.1%-owned subsidiary of Berkshire Hathaway Inc.
(Berkshire). Wesco is a holding company. Its
consolidated financial statements include the accounts of Wesco
and its subsidiaries, all wholly owned. Its principal
subsidiaries are Wesco-Financial Insurance Company
(Wes-FIC), The Kansas Bankers Surety Company
(KBS), CORT Business Services Corporation
(CORT) and Precision Steel Warehouse, Inc.
(Precision Steel). Further information regarding
these businesses is contained in Note 11. Intercompany
balances and transactions are eliminated in the preparation of
the consolidated financial statements.
The operations of Wes-FIC are managed by Berkshire
Hathaways National Indemnity Company (NICO)
subsidiary. Historically, a significant part of Wes-FICs
insurance business has derived from contracts with NICO and
other wholly owned insurance subsidiaries of Berkshire. To
simplify discussion, the term Berkshire Insurance
Group, as used herein, refers to those companies,
individually or collectively, although Berkshire also includes
in its insurance group the insurance subsidiaries that are
80.1%-owned through Berkshires ownership of Wesco. Terms
of Wes-FICs participation in the insurance contracts are
essentially identical to those by which the other Berkshire
Insurance Group members participate, except as to the relative
percentages of their participation in the various contracts.
Financial data appearing in the accompanying consolidated
financial statements relative to business with the Berkshire
Insurance Group is designated as affiliated business.
Accounting
pronouncements not yet in effect
Wescos management does not believe than any accounting
pronouncements issued to date by the Financial Accounting
Standards Board or other applicable authorities and required to
be adopted after yearend 2007 are likely to have a material
effect on shareholders equity.
Use of estimates
in preparation of financial statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported revenues and expenses during the period reported upon.
In particular, estimates of unpaid losses and loss adjustment
expenses for property and casualty insurance are subject to
considerable estimation error due to the inherent uncertainty in
projecting ultimate claim amounts that will be reported and
settled over a period of many years. The estimates and
assumptions are based on managements evaluation of the
relevant facts and circumstances using information available at
the time such estimates and assumptions are made. The amounts of
such assets, liabilities, revenues and expenses included in the
consolidated financial statements may differ significantly from
those that might result from use of estimates and assumptions
based on facts and circumstances not yet available. Although
Wescos management does not believe such changes in
estimates would have a materially adverse effect on
shareholders equity, they could produce a material effect
on results of operations in a reporting period.
Cash
equivalents
Cash equivalents consist of funds invested in U.S. Treasury
Bills, money market accounts, and in other investments with a
maturity of three months or less when purchased.
45
Investments
The appropriate classifications of investments in securities
with fixed maturities and marketable equity securities are
established at the time of purchase and reevaluated as of each
balance sheet date. There are three permissible classifications:
held-to-maturity,
trading, and, when neither of those classifications is
applicable,
available-for-sale.
In recent years, all equity and fixed-maturity investments have
been classified as
available-for-sale
and carried at fair value, with unrealized gains and losses, net
of applicable deferred income taxes, reported as a separate
component of shareholders equity.
Realized investment gains and losses, determined on a
specific-identification basis, are included in the consolidated
statement of income, as are provisions for
other-than-temporary
declines in market or estimated fair value, when applicable.
Factors considered in judging whether an impairment is other
than temporary include: the financial condition, business
prospects and creditworthiness of the issurer, the length of
time that fair value has been less than cost, the relative
amount of the decline, and Wescos ability and intent to
hold the investment until the fair value recovers.
Accounts
receivable
Substantially all accounts receivable are due from customers
located within the United States. Accounts receivable are
recorded net of an allowance for doubtful accounts, based on a
review of specifically identified accounts in addition to an
overall collectibility analysis. Judgments are made with respect
to the collectibility of accounts receivable based on historical
experience and current economic trends. Actual losses could
differ from those estimates.
Rental
furniture
Rental furniture consists principally of residential and office
furniture which is available for rental or, if no longer up to
rental standards, for sale. Rental furniture is carried at cost,
less accumulated depreciation calculated primarily on a
declining-balance basis over 3 to 5 years using estimated
salvage values of 25 to 40 percent of original cost.
Goodwill of
acquired businesses
Goodwill of acquired businesses represents the excess of the
cost of acquired entities over the fair values assigned to
assets acquired and liabilities assumed. The Company accounts
for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, which requires
the Company to test goodwill for impairment annually or whenever
events or changes in circumstances indicate that the carrying
values may not be recoverable. Annual impairment tests are
performed in the fourth quarter of each year using a variety of
methods that require that certain assumptions and estimates be
made regarding economic factors and future profitability.
Impairments, if any, are charged to earnings.
Inventories
Inventories of $8,473 and $7,942, included in other assets on
the accompanying consolidated balance sheet at December 31,
2007 and 2006, are stated at the lower of
last-in,
first-out (LIFO) cost or market; under this method,
the most recent costs are reflected in cost of products sold.
The aggregate differences in values between LIFO cost and cost
determined under the
first-in,
first-out (FIFO) methods were $10,915 and $9,169 as
of December 31, 2007 and December 31, 2006,
respectively. LIFO inventory accounting adjustments decreased
income before income taxes by $1,695, $994 and $347 ($1,020,
$598 and $208, after income taxes) for 2007, 2006 and 2005.
Dollar amounts in thousands
except for amounts per share
46
Capitalized
Construction Costs
Capitalized construction costs are included in other assets on
the accompanying consolidated balance sheet at December 31,
2007 and 2006. Theses costs are associated with the acquisition,
development and construction of a real estate project managed by
MS Property Company, a Wesco subsidiary.
Revenue
recognition
Insurance premiums are stated net of amounts ceded to reinsurers
and are recognized as earned revenues in proportion to the
insurance protection provided, which in most cases is pro rata
over the term of each contract. Premiums are estimated with
respect to certain reinsurance contracts written during the
period where reports from ceding companies for the period are
not contractually due until after the balance sheet date.
Unearned insurance premiums are deferred and reflected in the
liability section of the consolidated balance sheet. Certain
costs of acquiring insurance premiums commissions,
premium taxes, and other are deferred and charged to
income as the premiums are earned.
Furniture rentals are recognized as revenue proportionately over
the rental contract period; rentals received in advance are
deferred in the liability section of the consolidated balance
sheet. Costs related to furniture rentals comprise the main
element of cost of products and services sold on the
consolidated income statement and include depreciation expense,
repairs and maintenance, and inventory losses.
Revenues from product sales are recognized upon passage of title
to the customer, which coincides with customer pickup, product
shipment, delivery or acceptance, depending on the sales
arrangement. Revenues from services performed are recognized at
the completion of the elements specified in the contract, which
typically coincides with their being billed.
Interest income from investments in bonds and mortgage-backed
securities is earned under the constant yield method and
includes accrual of interest due as well as amortization of
acquisition premiums and accruable discounts. In determining the
constant yield for mortgage-backed securities, anticipated
counterparty prepayments are estimated and evaluated
periodically. Dividends from equity securities are earned on the
ex-dividend date.
Losses and loss
adjustment expenses
Liabilities for unpaid insurance losses and loss adjustment
expenses represent estimates of the ultimate amounts payable
under property and casualty reinsurance and insurance contracts
related to losses occurring on or before the balance sheet date.
Liabilities for insurance losses are comprised of estimates for
reported claims (Case reserves); and reserve
development on reported claims and estimates for claims that
have not yet been reported (some of which may not be reported
for many years), which together are also referred to as
incurred-but-not-reported reserves (IBNR
reserves). The liability for unpaid losses includes significant
estimates for these claims and include estimates reported by
ceding insurers. Loss reserve estimates reflect past loss
experience, adjusted as appropriate when losses are reasonably
expected to deviate from experience.
Considerable judgment is required to evaluate claims and
estimate claims liabilities in connection with reinsurance
contracts. As further data become available, the liabilities are
reevaluated and adjusted as appropriate. Additionally, reported
claims are in various stages of the settlement process. Each
claim is settled individually based upon its merits, and some
take years to settle, especially if legal action is involved.
Actual ultimate claims amounts are likely to differ from amounts
recorded at the balance sheet date.
Depending on the type of loss being estimated, the timing and
amount of loss payments are subject to a great degree of
variability and are contingent, among other factors, upon the
timing of the claim reporting by cedants and insureds, and the
determination and payment of the ultimate loss amounts through
the loss adjustment process. Judgments and assumptions are
necessary in projecting the ultimate amounts payable in the
future with respect to loss events that have occurred.
Dollar amounts in thousands
except for amounts per share
47
The time period between the claim occurrence date and payment
date of the loss is referred to as the claim tail.
Property claims usually have fairly short claim tails, and,
absent litigation, are reported and settled within a few months
or years after occurrence. Casualty losses usually have very
long claim tails. Casualty claims can be more susceptible to
litigation and can be more significantly affected by changing
contract interpretations and the legal environment, which
contributes to extended claim tails. Claim tails for reinsurers
may be further extended due to delayed reporting by ceding
insurers or reinsurers due to contractual provisions or
reporting practices. Actual ultimate loss settlement amounts are
likely to differ from amounts recorded at the balance sheet
date. Changes in estimates, referred to as loss
development, are recorded as a component of losses
incurred in the period of change.
Provisions for losses and loss adjustment expenses are reported
in the consolidated statement of income after deducting
estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do not relieve the ceding
companies of their obligations to indemnify policyholders with
respect to the underlying insurance contracts. Ceded reinsurance
losses recoverable (ceded reserves) are reflected in
the accompanying consolidated balance sheet as a component of
accounts receivable.
Income
taxes
Wesco and its subsidiaries join in the filing of consolidated
Federal income tax returns of Berkshire Hathaway Inc. The
consolidated Federal tax liability is apportioned among group
members pursuant to methods that result in each member of the
group paying or receiving an amount that approximates the
increase or decrease in consolidated taxes attributable to that
member. In addition, Wesco and its subsidiaries also file income
tax returns in state and local jurisdictions as applicable.
Provisions for current income tax liabilities are calculated and
accrued on income and expense amounts expected to be included in
the income tax returns for the current year. Deferred income
taxes are calculated under the liability method. Deferred income
tax assets and liabilities are based on differences between the
financial statement and tax bases of assets and liabilities at
the current enacted tax rates.
Changes in deferred income tax assets and liabilities that are
associated with components of other comprehensive income
(essentially, unrealized investment gains and losses) are
charged or credited directly to other comprehensive income.
Otherwise, changes in deferred income tax assets and liabilities
are included as a component of income tax expense. Changes in
deferred income taxes and liabilities attributable to changes in
enacted tax rates are charged or credited to income tax expense
in the period of enactment. Valuation allowances are established
for deferred tax assets where realization is not likely.
Assets and liabilities are established for uncertain tax
positions taken or positions expected to be taken in income tax
returns when such positions are judged to not meet the
more-likely-than-not threshold based on the
technical merits of the positions. Estimated interest and
penalties related to uncertain tax positions are included as a
component of income tax expense.
Following is a summary of investments in securities with fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
Estimated Fair
|
|
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
(Carrying) Value
|
|
Amortized Cost
|
|
(Carrying) Value
|
|
Mortgage-backed securities
|
|
$
|
33,564
|
|
$
|
34,573
|
|
$
|
39,173
|
|
$
|
39,799
|
Other, principally U.S. government obligations
|
|
|
3,914
|
|
|
4,027
|
|
|
42,070
|
|
|
42,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,478
|
|
$
|
38,600
|
|
$
|
81,243
|
|
$
|
81,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At yearend 2007 and 2006, the estimated fair values of
securities with fixed maturities contained unrealized gains of
$1,267 and $633. Unrealized losses at yearend 2007 and 2006
totaled $145 and $15.
Dollar amounts in thousands
except for amounts per share
48
Shown below are the amortized cost and estimated fair values of
securities with fixed maturities at December 31, 2007, by
contractual maturity dates.
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
(Carrying) Value
|
|
Due in 2008
|
|
$
|
3,914
|
|
$
|
4,027
|
Mortgage-backed securities
|
|
|
33,564
|
|
|
34,573
|
|
|
|
|
|
|
|
|
|
$
|
37,478
|
|
$
|
38,600
|
|
|
|
|
|
|
|
Following is a summary of investments in marketable equity
securities (all common stocks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
Fair (Carrying)
|
|
|
|
Fair (Carrying)
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
The Procter & Gamble Company
|
|
$
|
424,367
|
|
$
|
525,283
|
|
$
|
424,367
|
|
$
|
459,820
|
The
Coca-Cola
Company
|
|
|
40,761
|
|
|
442,208
|
|
|
40,761
|
|
|
347,670
|
Wells Fargo & Company
|
|
|
382,779
|
|
|
381,698
|
|
|
25,189
|
|
|
93,992
|
Kraft Foods Incorporated
|
|
|
325,816
|
|
|
326,300
|
|
|
|
|
|
|
Other
|
|
|
161,528
|
|
|
243,936
|
|
|
20,687
|
|
|
139,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,335,251
|
|
$
|
1,919,425
|
|
$
|
511,004
|
|
$
|
1,040,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized losses of equity securities at
December 31, 2007 were $61,916, all of which related to
securities in an unrealized loss position for less than twelve
months as of that date. There were no unrealized losses at
December 31, 2006.
Realized investment gains are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Realized investment gains
|
|
$
|
24,240
|
|
$
|
|
|
$
|
333,255
|
|
Realized investment losses
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,240
|
|
$
|
|
|
$
|
333,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the investments of Wesco and its subsidiaries are
subject to market risks, derivatives are not utilized to manage
risks.
|
|
Note 3.
|
Accounts
Receivable
|
Accounts receivable are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Trade accounts receivable
|
|
$
|
81,442
|
|
|
$
|
62,971
|
|
Allowance for uncollectible accounts
|
|
|
(1,930
|
)
|
|
|
(2,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,512
|
|
|
$
|
60,386
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands
except for amounts per share
49
Following is a breakdown of rental furniture:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of rental furniture
|
|
$
|
277,672
|
|
|
$
|
278,177
|
|
Less accumulated depreciation
|
|
|
(99,375
|
)
|
|
|
(95,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178,297
|
|
|
$
|
182,846
|
|
|
|
|
|
|
|
|
|
|
At yearends 2007 and 2006, the balance of goodwill carried as an
asset on Wescos consolidated balance sheet amounted to
$266,607, of which $239,616 related to Wescos acquisition
of CORT, with the balance pertaining to the KBS acquisition.
SFAS No. 142 requires that a two-step impairment test
be performed annually or whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. The first step of the test for impairment
compares the book value of the Companys reporting unit to
its estimated fair value. The second step of the goodwill
impairment test, which is only required when the net book value
of the reporting unit exceeds the fair value, compares the
implied fair value of goodwill to its book value to determine if
an impairment is required.
Because fair value is believed to exceed book value, step two
was not required. Fair value is estimated using a variety of
techniques and considerable judgment is required. Under the
income approach, the Company estimates the fair value of the
reporting unit based on the present value of future cash flows.
This approach is dependent on a number of factors including
projections of future earnings and discount rates. Although
management believes the determination was based on reasonably
conservative estimates, results of future operations are
uncertain and potential revisions to the projections of future
earnings or discount rates, caused by adverse changes to the
underlying long-term economics of the business, could lead to an
impairment of all or a portion of goodwill in future periods.
|
|
Note 6.
|
Insurance Losses
and Loss Adjustment Expenses Payable
|
The balances of unpaid losses and loss adjustment expenses are
based upon estimates of the ultimate claim costs associated with
property and casualty claim occurrences as of the balance sheet
dates including estimates for IBNR claims. Considerable judgment
is required to evaluate claims and establish estimated claim
liabilities, particularly with respect to certain casualty or
liability claims, which are typically reported over long periods
of time and subject to changing judicial notions. The delay in
claim reporting is exacerbated in reinsurance of liability or
casualty claims as claim reporting by ceding companies is also
delayed by contract terms.
Dollar amounts in thousands
except for amounts per share
50
Following is a summary of liabilities for unpaid losses and loss
adjustment expenses for each of the past three years:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Gross liabilities at beginning of year
|
|
$78,310
|
|
$61,980
|
|
$56,162
|
Less ceded liabilities*
|
|
(11,628)
|
|
(6,142)
|
|
(1,880)
|
|
|
|
|
|
|
|
Net balance at beginning of year
|
|
66,682
|
|
55,838
|
|
54,282
|
|
|
|
|
|
|
|
Incurred losses recorded during year
|
|
|
|
|
|
|
For current year
|
|
35,392
|
|
30,923
|
|
21,507
|
For all prior years
|
|
(7,115)
|
|
422
|
|
(35)
|
|
|
|
|
|
|
|
Total incurred losses
|
|
28,277
|
|
31,345
|
|
21,472
|
|
|
|
|
|
|
|
Payments made during year
|
|
|
|
|
|
|
For current year
|
|
9,255
|
|
7,925
|
|
7,234
|
For all prior years
|
|
15,362
|
|
12,576
|
|
12,682
|
|
|
|
|
|
|
|
Total payments
|
|
24,617
|
|
20,501
|
|
19,916
|
|
|
|
|
|
|
|
Net liabilities at end of year
|
|
70,343
|
|
66,682
|
|
55,838
|
Plus ceded liabilities*
|
|
23,502
|
|
11,628
|
|
6,142
|
|
|
|
|
|
|
|
Gross liabilities at end of year
|
|
$93,845
|
|
$78,310
|
|
$61,980
|
|
|
|
|
|
|
|
|
|
* |
Represents principally, Wes-FICs proportionate share of
reinsurance purchased by the aviation pools.
|
Incurred losses for all prior years, commonly known
as reserve development, represents the net amount of
estimation error charged (credited) to earnings with respect to
the liabilities established as of the beginning of the year.
Reference is made to Note 11, Business Segment Data, for a
summary of the principal insurance activities in which
Wescos insurance segment has engaged in the past three
years. During 2007, $7.1 million of net favorable reserve
development was recorded, and included $3.6 million
attributable to primary insurance and reflected, most notably,
the reversal, following a favorable court decision, of a
$1.9 million loss recorded in 2005. The 2007 favorable
reserve development also included $3.2 million attributable
to aviation-related reinsurance. During 2006, net adverse
reserve development of $422 was attributed principally to $1,703
of unfavorable loss development of aviation-related reinsurance,
partially offset by favorable development of $1,284 for a
contract whose coverage period ended in 1989. During 2005, net
favorable reserve development of $35 was credited to income and
was attributed to $683 of favorable loss development of
aviation-related reinsurance, less unfavorable development of
$648 relating to primary insurance.
|
|
Note 7.
|
Notes Payable and
Other Contractual Obligations
|
Following is a summary of notes payable, at year end:
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Revolving credit facility
|
|
$37,000
|
|
$38,000
|
Other
|
|
200
|
|
200
|
|
|
|
|
|
|
|
$37,200
|
|
$38,200
|
|
|
|
|
|
The credit facility, used in the furniture rental business,
totals $100,000 and is unsecured. The weighted average annual
interest rate on amounts outstanding under the revolving credit
facility at yearend 2007 was 5.35% in addition to an annual
commitment fee of .075% of the total credit facility. The
underlying agreement does not contain any materially restrictive
covenants, and is guaranteed by Berkshire. The credit
Dollar amounts in thousands
except for amounts per share
51
facility expires in June 2011. In addition to the $37,000 of
loans outstanding at December 31, 2007, the business was
contingently liable with respect to letters of credit totaling
$8,875.
Estimated fair values of the notes payable at yearend 2007 and
2006 approximated carrying values of $37,200 and $38,200.
In addition to recorded liabilities, Wesco at yearend 2007 had
operating lease obligations aggregating $103,852 (payable in
2008, $25,925; in 2009, $22,105; in 2010, $18,604; in 2011,
$13,772; in 2012, $9,234; and thereafter, $14,212) and other
contractual obligations aggregating $34,409. Rent expense
amounted to $29,075, $29,570, and $28,503 for 2007, 2006, and
2005.
Following is a breakdown of income taxes payable at 2007 and
2006 yearends:
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Deferred tax liabilities, relating to
|
|
|
|
|
Appreciation of investments
|
|
$205,911
|
|
$186,553
|
Cost basis differences in investments
|
|
116,368
|
|
116,368
|
Other items
|
|
43,150
|
|
40,004
|
|
|
|
|
|
|
|
365,429
|
|
342,925
|
Deferred tax assets
|
|
(21,483)
|
|
(20,353)
|
|
|
|
|
|
Net deferred tax liabilities
|
|
343,946
|
|
322,572
|
Taxes currently payable
|
|
3,470
|
|
32,827
|
|
|
|
|
|
Income taxes payable
|
|
$347,416
|
|
$355,399
|
|
|
|
|
|
The consolidated statement of income contains a provision
(benefit) for income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
Federal
|
|
$
|
50,165
|
|
$
|
43,251
|
|
|
$
|
141,406
|
|
State
|
|
|
1,600
|
|
|
1,982
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
51,765
|
|
$
|
45,233
|
|
|
$
|
141,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
50,272
|
|
$
|
46,871
|
|
|
$
|
38,816
|
|
Deferred
|
|
|
1,493
|
|
|
(1,638
|
)
|
|
|
102,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
51,765
|
|
$
|
45,233
|
|
|
$
|
141,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a reconciliation of the statutory federal income
tax rate with the effective income tax rate resulting in the
provision for income taxes appearing on the consolidated
statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Decrease resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received deduction
|
|
|
(4.2
|
)
|
|
|
(1.1
|
)
|
|
|
(0.9
|
)
|
State income taxes, less Federal tax benefit
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Other differences, net
|
|
|
1.5
|
|
|
|
(0.7
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax provision rate
|
|
|
32.2
|
%
|
|
|
33.0
|
%
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the Financial Accounting Standards Board (the
FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48),
Dollar amounts in thousands
except for amounts per share
52
which clarifies the accounting for uncertainty of income tax
positions taken or expected to be taken in income tax returns
when it is more likely than not that an examination of a
companys tax returns will result in the assessment of
additional taxes. FIN 48 requires the recognition in the
financial statements of the impact of the tax position based on
the technical merits of the position, as well as expanded
disclosure, if applicable, in the notes to the companys
financial statements, beginning in 2007. In connection with the
implementation of FIN 48, a company is also required to
adjust its opening retained earnings balance for the aggregate
impact of the uncertain tax positions that existed as of that
date. Wescos implementation of the provisions of
FIN 48 had no material impact on the accompanying
consolidated financial statements, and there were no matters of
significance to report.
Consolidated Federal income tax return liabilities have been
settled with the Internal Revenue Service (the IRS)
through 1998. The IRS has completed its audit of the tax returns
for the years 1999 through 2004 and has proposed adjustments to
increase the tax liabilities related to Wesco for the years
1999-2001. The examination is in the IRS appeals process.
Wesco management believes that the ultimate outcome of the
Federal income tax audits for the years 1999 through 2001 will
not materially affect Wescos consolidated financial
statements. Included in the 2007 income tax provision is a
credit of $179 representing interest received from the IRS
during the year.
|
|
Note 9.
|
Environmental
Matters and Litigation
|
Federal and state environmental agencies have made claims
relating to alleged contamination of soil and groundwater with
trichloroethylene and perchloroethylene 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, have been negotiating remedial actions with various
governmental entities.
PBP, Precision Steel, and other parties were also named in
several civil lawsuits relating to the foregoing matter. Each of
these civil lawsuits was settled with the plaintiffs in 2007 for
amounts that are not material to Wesco.
Muniz v. Precision Brand Products, Inc., et. al.,
was a class action lawsuit in the U.S. District Court for
the Northern District of Illinois alleging diminution of
property values. It was settled in the first quarter of 2007 for
a total of $15,750. PBPs share of that amount was $1,812.
Bendik v. Precision Brand Products, Inc. and Precision
Steel Warehouse, Inc. was a state court claim in the Circuit
Court of Cook County, Illinois in which the plaintiff alleged
that exposure to contaminants allegedly released by PBP and
Precision Steel caused her to contract cancer. The case was
settled in the third quarter of 2007 for $2,662. PBPs and
Precision Steels share of that amount was $600.
Pote v. Precision Brand Products, Inc. and Precision
Steel Warehouse, Inc. was a wrongful death action brought in
the same court as the Bendik matter alleging that soil and
groundwater contaminants from the industrial park were
responsible for Mr. Potes death. The case was settled
in the second quarter of 2007 for $1,250. PBPs and
Precision Steels share of that amount was $77.
PBP and Precision Steel are in various stages of negotiations
with their insurers, who undertook the cost of their defenses
and agreed to indemnify them within the policy limits in
connection with these matters, but have reserved their rights
retroactively to decline coverage and receive reimbursement of
amounts paid.
Included in other liabilities on the accompanying consolidated
balance sheet is $935 as of December 31, 2007, representing
the remaining unpaid balance as of that date, resulting from
provisions previously recorded, representing PBPs
estimated share of costs of ongoing remediation in connection
with the actions referred to above. Management anticipates that
additional provisions with respect to such remediation and
related legal matters may be required in the future, and expects
that the insurers will continue to provide defenses and
reimbursement of some of the costs previously recorded. However,
as of December 31, 2007, 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 it
Dollar amounts in thousands
except for amounts per share
53
is not expected that the ultimate impact of such future costs
will be material in relation to Wescos shareholders
equity, the effect on industrial segment and consolidated net
income in any given period could be material.
|
|
Note 10.
|
Quarterly
Financial Information
|
Unaudited quarterly consolidated financial information for 2007
and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Total For Year
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
150,681
|
|
$
|
156,256
|
|
$
|
156,664
|
|
$
|
167,323
|
|
$
|
630,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,583
|
|
$
|
27,761
|
|
$
|
24,397
|
|
$
|
34,420
|
|
$
|
109,161
|
Per capital share
|
|
|
3.17
|
|
|
3.90
|
|
|
3.43
|
|
|
4.83
|
|
|
15.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
153,550
|
|
$
|
151,248
|
|
$
|
157,953
|
|
$
|
142,976
|
|
$
|
605,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
23,415
|
|
|
23,747
|
|
|
23,513
|
|
|
21,358
|
|
|
92,033
|
Per capital share
|
|
|
3.29
|
|
|
3.33
|
|
|
3.31
|
|
|
3.00
|
|
|
12.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
24,240
|
|
$
|
24,240
|
After taxes (included in net income)
|
|
|
|
|
|
|
|
|
|
|
|
15,756
|
|
|
15,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Business Segment
Data
|
Wescos reportable business segments are organized in a
manner that reflects how management views those business
activities. The financial information that follows shows data of
reportable segments reconciled as needed to amounts reflected in
the Consolidated Financial Statements.
The insurance segment includes the accounts of Wes-FIC and its
subsidiary, KBS. Wes-FIC is engaged in the property and casualty
insurance and reinsurance business. For the past three years its
reinsurance business has consisted of participation with the
Berkshire Insurance Group in several pools of aviation-related
risks. The figures relating to these reinsurance transactions,
as well as to liabilities and reserve development in connection
with these and other transactions with the Berkshire Insurance
Group, are shown on the accompanying consolidated financial
statements as affiliated business.
Wes-FIC has also participated through the Berkshire Insurance
Group in several contracts for super-catastrophe reinsurance
covering hurricane risks in Florida and catastrophic
excess-of-loss
risks of a major international reinsurer, in prior years.
Because Wescos board of directors desires that Wesco
participate in insurance and reinsurance activities in which the
Berkshire Insurance Group also participates, it has approved
Wes-FICs automatic acceptance of retrocessions of
super-catastrophe reinsurance provided that the following
guidelines are met: (1) in order not to delay the
acceptance process, the retrocession is to be accepted without
delay in writing in Nebraska by agents of Wes-FIC who are
salaried employees of the Berkshire Insurance Group;
(2) any ceding commission received by the Berkshire
Insurance Group cannot exceed 3% of premiums; (3) Wes-FIC
is to assume 20% or less of the total risk; (4) the
Berkshire Insurance
Dollar amounts in thousands
except for amounts per share
54
Group must retain at least 80% of the identical risk; and
(5) the aggregate premiums from this type of business in
any twelve-month period cannot exceed 10% of Wes-FICs net
worth.
KBS provides specialized insurance coverage mainly to small- and
medium-sized banks in the Midwestern United States. In addition
to generating insurance premiums, Wescos insurance segment
derives dividend and interest income from the investment of
float (premiums received before payment of related claims and
expenses) as well as earnings retained and reinvested.
Payments of dividends by insurance subsidiaries are restricted
by insurance statutes and regulations. Without prior regulatory
approval, Wescos insurance subsidiaries may pay up to
approximately $261,924 as ordinary dividends during 2007.
Combined shareholders equity of Wes-FIC and KBS determined
pursuant to statutory accounting rules (statutory
surplus) was approximately $2,512,000 at December 31,
2007 and $2,344,000 at December 31, 2006. Statutory surplus
differs from the corresponding amount determined on the basis of
GAAP. The major differences between statutory basis accounting
and GAAP are that deferred policy acquisition costs, unrealized
gains and losses on investments in securities with fixed
maturities and related deferred income taxes are recognized
under GAAP but not for statutory reporting purposes. In
addition, statutory accounting for goodwill of acquired
businesses requires amortization of goodwill over 10 years,
whereas under GAAP, goodwill is subject to periodic tests for
impairment.
The furniture rental segment includes the operating accounts of
CORT. CORT is a nation-wide provider of rental furniture,
accessories and related services in the
rent-to-rent
segment of the furniture industry. It rents high-quality
furniture to corporate and individual customers who desire
flexibility in meeting their temporary office, residential or
trade show furnishing needs and who typically do not seek to own
such furniture. In addition, CORT sells previously rented
furniture through company-owned clearance centers.
The industrial segment includes the operating accounts of
Precision Steel and its subsidiaries. The Precision Steel group
operates two service centers, which buy steel and other metals
in the form of sheets or strips, cut these to order and sell
them directly to a wide variety of industrial customers
throughout the United States. The Precision Steel group also
manufactures shim stock and other toolroom specialty items and
sells them, along with hose clamps and threaded rod, nationwide,
generally through distributors.
Wescos consolidated realized net investment gains, most of
which have resulted from sales of investments held by its
insurance subsidiaries, and goodwill of acquired businesses, are
shown separately as nonsegment items, consistent with the way
Wescos management evaluates the performance of its
operating segments. Other items considered unrelated to
Wescos three business segments include principally
(1) investments other than those held by Wes-FIC and KBS,
together with related dividend and interest income,
(2) commercial real estate, together with related revenues
and expenses, (3) residential real estate development, and
(4) the assets, revenues and expenses of the parent company.
Dollar amounts in thousands
except for amounts per share
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
Insurance segment:
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
54,411
|
|
|
$
|
54,149
|
|
$
|
49,482
|
|
Dividend and interest income
|
|
|
89,716
|
|
|
|
83,441
|
|
|
55,889
|
|
Income taxes
|
|
|
28,300
|
|
|
|
27,693
|
|
|
19,590
|
|
Net income
|
|
|
72,247
|
|
|
|
63,692
|
|
|
50,866
|
|
Depreciation and amortization other than of discounts and
premiums of investments
|
|
|
45
|
|
|
|
36
|
|
|
61
|
|
Advertising expense
|
|
|
181
|
|
|
|
153
|
|
|
89
|
|
Capital expenditures
|
|
|
32
|
|
|
|
51
|
|
|
45
|
|
Assets at yearend
|
|
|
2,497,794
|
|
|
|
2,375,564
|
|
|
2,142,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental segment:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
396,170
|
|
|
$
|
400,305
|
|
$
|
383,900
|
|
Income taxes
|
|
|
13,570
|
|
|
|
16,448
|
|
|
9,075
|
|
Net income
|
|
|
20,316
|
|
|
|
26,884
|
|
|
20,676
|
|
Depreciation and amortization other than of discounts and
premiums of investments
|
|
|
39,891
|
|
|
|
40,923
|
|
|
37,912
|
|
Advertising expense
|
|
|
18,002
|
|
|
|
15,392
|
|
|
13,177
|
|
Interest expense
|
|
|
2,408
|
|
|
|
2,711
|
|
|
1,575
|
|
Capital expenditures
|
|
|
3,971
|
|
|
|
1,988
|
|
|
3,972
|
|
Assets at yearend
|
|
|
245,817
|
|
|
|
247,484
|
|
|
255,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment:
|
|
|
|
|
|
|
|
|
|
|
|
Sales, service and other revenues
|
|
$
|
61,361
|
|
|
$
|
63,053
|
|
$
|
61,334
|
|
Income taxes
|
|
|
603
|
|
|
|
707
|
|
|
858
|
|
Net income
|
|
|
915
|
|
|
|
1,211
|
|
|
1,198
|
|
Depreciation and amortization
|
|
|
433
|
|
|
|
448
|
|
|
448
|
|
Advertising expense
|
|
|
258
|
|
|
|
195
|
|
|
249
|
|
Capital expenditures
|
|
|
357
|
|
|
|
583
|
|
|
409
|
|
Assets at yearend
|
|
|
19,263
|
|
|
|
17,100
|
|
|
16,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill of acquired businesses (included in assets)
|
|
$
|
266,607
|
|
|
$
|
266,607
|
|
$
|
266,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues)
|
|
$
|
24,240
|
|
|
$
|
|
|
$
|
333,241
|
|
After taxes (included in net income)
|
|
|
15,756
|
|
|
|
|
|
|
216,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items unrelated to business segments:
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and interest income
|
|
$
|
1,156
|
|
|
$
|
1,063
|
|
$
|
903
|
|
Other revenues
|
|
|
3,870
|
|
|
|
3,716
|
|
|
3,541
|
|
Income taxes
|
|
|
808
|
|
|
|
385
|
|
|
(4,933
|
)
|
Net income (loss)
|
|
|
(73
|
)
|
|
|
246
|
|
|
5,233
|
|
Depreciation and amortization
|
|
|
388
|
|
|
|
291
|
|
|
466
|
|
Capital expenditures
|
|
|
419
|
|
|
|
83
|
|
|
606
|
|
Assets at yearend
|
|
|
83,528
|
|
|
|
63,550
|
|
|
47,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues (total of those set forth above)
|
|
$
|
630,924
|
|
|
$
|
605,727
|
|
$
|
888,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated assets (total of those set forth above)
|
|
$
|
3,113,009
|
|
|
$
|
2,970,305
|
|
$
|
2,728,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands
except for amounts per share
56
WESCO FINANCIAL
CORPORATION
SCHEDULE I
CONDENSED FINANCIAL
INFORMATION OF
REGISTRANT
BALANCE
SHEET
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
$
|
19
|
|
Investment in subsidiaries, at cost plus equity in
subsidiaries undistributed earnings and unrealized
appreciation
|
|
|
2,705,316
|
|
|
2,554,713
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,705,333
|
|
$
|
2,554,732
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
|
Advances from subsidiaries
|
|
$
|
169,873
|
|
$
|
154,821
|
|
Income taxes payable (recoverable)
|
|
|
479
|
|
|
(547
|
)
|
Other liabilities
|
|
|
122
|
|
|
120
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
170,474
|
|
|
154,394
|
|
Shareholders equity (see consolidated balance sheet and
statement of changes in shareholders equity)
|
|
|
2,534,859
|
|
|
2,400,338
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,705,333
|
|
$
|
2,554,732
|
|
|
|
|
|
|
|
|
|
STATEMENT OF
INCOME
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest
|
|
|
7,251
|
|
|
|
6,006
|
|
|
|
3,779
|
|
General and administrative
|
|
|
1,059
|
|
|
|
950
|
|
|
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,310
|
|
|
|
6,956
|
|
|
|
4,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before items shown below
|
|
|
(8,310
|
)
|
|
|
(6,956
|
)
|
|
|
(4,794
|
)
|
Income taxes
|
|
|
(2,908
|
)
|
|
|
(2,434
|
)
|
|
|
(5,277
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
|
114,563
|
|
|
|
96,555
|
|
|
|
294,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
|
$
|
92,033
|
|
|
$
|
294,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
57
WESCO FINANCIAL
CORPORATION
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Continued)
STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,161
|
|
|
$
|
92,033
|
|
|
$
|
294,579
|
|
Adjustments to reconcile net income with cash flows from
operating activities Change in income taxes payable
currently
|
|
|
1,026
|
|
|
|
(6
|
)
|
|
|
(583
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
|
(114,563
|
)
|
|
|
(96,555
|
)
|
|
|
(294,096
|
)
|
Other, net
|
|
|
1
|
|
|
|
80
|
|
|
|
(2,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(4,375
|
)
|
|
|
(4,448
|
)
|
|
|
(2,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from subsidiaries, net
|
|
|
15,052
|
|
|
|
14,834
|
|
|
|
12,764
|
|
Payment of cash dividends
|
|
|
(10,679
|
)
|
|
|
(10,395
|
)
|
|
|
(10,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
4,373
|
|
|
|
4,439
|
|
|
|
2,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
3
|
|
Cash and cash equivalents beginning of year
|
|
|
19
|
|
|
|
28
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58