2001 was a difficult year for the Country and for our Company. Every major market WESCO serves was adversely affected by the weak economy, and we experienced deteriorating demand as the year progressed. We were also challenged by decreased pricing in key, high volume commodities, a record level of bankruptcies and bad debts, and the need to take multiple cost-cutting actions in response to lower revenues.

Against this backdrop, the “extra effort” that characterizes WESCO’s employees has been extraordinary. Because of their dedication and resolve, WESCO has made significant progress during this problematic time. We’ve broadened our customer base, increased our market share, and set new records in negotiating major national accounts and alliance agreements that ensure our current and future status as a preferred supplier. We reduced expenses, contained capital expenditures, and paid down debt. Although our 2001 financial performance was disappointing, we were able to diminish the negative impact of reduced market demand, and we have significantly strengthened our Company for the long term. We have improved our capital structure, maintained our operating efficiency, and positioned WESCO for accelerated growth and increasing shareholder value as the economy stabilizes and recovers.

Operating Results
Total sales revenue in 2001 was $3.7 billion, a decrease of $223 million or 5.7% from the prior year. Excluding the effects of acquisitions completed in 2000 and 2001, the year-over-year sales decline was 8.6%. The gross margin rate for 2001 was unchanged. Net income was $20.2 million, compared with $33.4 mil-lion in 2000. Diluted earnings per share were $0.43 for the period, as compared to $0.70 for the prior year. Operating cash flow for 2001 was a record $161 million and was generated through profitable operations and reduced levels of accounts receivable and inventory. Debt was reduced by more than $80 million including a reduction in our receivables securitization facility.

Customer-based activity levels – as measured by order processing, delivery and invoicing transactions – declined less than 2% when compared with 2000. Although order volume and the workload associated with processing, picking, packing, and shipping remained nearly constant, the revenue value per transaction declined, as customers drove down inventories and conserved cash through reductions in capital spending. Lower operating costs and higher productivity became a major priority early in the year, and expenses were systematically decreased through multiple stages of staff reductions and discretionary cost elimination initiatives. Through a combination of attrition and workload rebalancing, we reduced our staffing level by 10% to reposition our cost structure relative to revenue generation. All costs associated with these adjustments are reflected in 2001 operations, and we expect to realize the benefit of a lower cost structure as we move into 2002.

Financial Structure
During 2001 and early 2002, we took a number of important steps to improve our capital structure and financing flexibility. In August we completed the issuance of $100 million of Senior Subordinated Notes and reduced our outstanding obligations under our revolving credit facility. The seven-year term on the new notes provided the company with stable, longer-term financing commitments at a competitive cost.

Capitalizing on the company’s favorable asset structure, we have replaced our revolving credit facility with a new asset-backed facility supported by inventory and certain accounts receivable. This new facility provides improved access and liquidity, increased operating flexibility and rates that are comparable to our prior facility. Additional flexibility is available for acquisition financing and for share or bond repurchase opportunities. WESCO’s overall rate on all interest-bearing obligations for 2001 was 6.7%, and this competitive market rate demonstrates the quality of our assets and our ability to access multiple forms of financing.

Strategies for Growth
The challenges of 2001 have served as a catalyst for sharpening our business strategy and improving our competitive position. We are building on our core strengths as a large, branch-based wholesaler and distributor of electrical products and related supplies and services, and as the industry leader in customer service and low-cost operations. We have developed a large, profitable, and highly diversified business base by supplying a wide range of critical components for all types of construction, facilities maintenance, and machinery power and control application. We have strong positions in multiple market and customer segments, and we believe that our number one position in integrated supply services, national accounts preferred supplier programs, and distribution services to power utility customers was enhanced in 2001. These leading positions provide a solid platform for future growth and profitability. Despite current economic conditions, the electrical and industrial supply industries in which we operate are fundamentally sound, and they offer significant opportunities for both internally-generated and acquisition-based growth in the years ahead.

Internal Growth
With electrical products as our core, WESCO has numerous opportunities for increasing the range of products we offer by building and/or adding new channels of product and service distribution. In 2001, we expanded our customer communications through the continued development of electronic and paper-based product/service catalogs, and enhanced our e-commerce and Internet-based customer service capabilities with tools and methodologies to support integration with our customers’ business systems.

A range of 2001 accomplishments included:

• Introduction of new e-Commerce sites for our automation/controls business and our Canadian operations;
• Development of numerous customized electronic catalogs for large-volume customers in a variety of industries;
• Further development of WESCOExpress, a new, centralized fulfillment unit that provides exceptional service for customers with many small or remote operating units, and those with occasional or unpredictable demand;
• Renewed emphasis on telesales, direct marketing, and targeted product sales promotion programs; and,
• Expanded programs of multi-site trade shows featuring new products and cost saving ideas.

The most significant product/service channel we’ve added over the past four years is integrated supply – a supply chain solution that helps customers simplify their procurement and replenishment of electrical and non-electrical spare parts, maintenance items, and operating supplies.

Our integrated supply capabilities and supporting technology represent one of the very few fully functional, fully operational, electronic commerce and Internet-based trade exchanges operating in industry today. Each day we support thousands of product inquiries and requests from authorized requisitioners in our large customer accounts who access products and services from thousands of suppliers. In 2001, we greatly increased our capabilities through major advances in our Internet-accessible procurement and storeroom management systems. These new systems were instrumental in this year’s expansion of integrated supply programs into Europe, and they will play a key role in achieving a faster ramp-up to full potential as we add new integrated supply customers.

Another growth engine for WESCO is our National Accounts Program. In 2001, we added more than 30 new, high-profile customers to our client roster and are now supplying approximately 800 of their operating locations and affiliates in the United States, Canada, Mexico, and Puerto Rico. Potential future electrical product sales at targeted levels of implementation for these new customers are estimated to be in excess of $100 million annually. In addition, we successfully expanded our National Accounts programs in the healthcare market with a contract award from one of the largest healthcare group purchasing organizations in the United States. While we have had a long-standing service presence with local and regional hospitals and health systems, this purchasing group represents approximately 30% of the nation’s community hospitals and health systems, and offers a new avenue for future growth.

Low-cost Operations
WESCO holds a low-cost position in the electrical and industrial products distribution business due to our streamlined operating structure and focus on productivity. Industry data, independently compiled by the National Association of Electrical Distributors (NAED) and other commodity-oriented industry associations, has consistently positioned WESCO as a low-cost firm with high levels of personnel productivity. In 2001, for example, our sales per employee were $648,000, equaling an output per person significantly greater than the most recently reported industry average of $363,000 sales per employee.

To further improve productivity, we have developed a variety of additional measurements and new monitoring and control systems. We are continually working to reduce transaction and overall handling costs and to reduce general operating expenses at each location. In addition, we expect to continue to invest the majority of our annual capital expenditures in information technology projects that provide sales leverage, operating efficiencies, and increased operating controls.

Acquisitions
Since 1995, WESCO has had a continuing program of selective acquisitions, and has acquired 25 companies that have contributed approximately $1.4 billion in sales as estimated at the time of acquisition. Our recent acquisitions were executed for the purposes of expanding our geographical presence and product/ service capability in supporting electric and gas utility companies as well as contractors who specialize in these market segments. In 2000, we completed acquisitions of a utility-focused distributor serving the Alabama, Georgia, and Tennessee market areas, and a specialty distributor primarily serving utilities and specialty contractors in the Western United States. In March 2001, we completed the acquisition of Herning Enterprises, Inc., whose ten branch locations serve utility and telecommunications contractors in Arizona, California, Utah, Washington, and other West Coast states. Even though the pace has slowed, acquisitions will continue to be part of WESCO’s long-term growth strategy. We anticipate improved opportunities to increase penetration in key geographical markets and selectively add to our product and service capabilities as a result of current market conditions.

Outlook
It is encouraging that recent economic reports and forecasts indicate the economy is stabilizing and recovery is on the way. This is definitely good news, but the reported improvements are coming after 18 consecutive months of decline affecting our major markets, and meaningful increases in customer demand in industrial and construction markets won’t happen as quickly as we’d like. We expect market conditions to remain challenging throughout 2002, with continued pressure on sales volume, pricing, and margins. We will continue to adjust our operations and work to protect our low-cost position, making systematic incremental cost reductions as necessary.

The actions we’ve taken in 2001 have made WESCO a stronger and more flexible company. We are well positioned to serve our growing customer base and to achieve improved profitability and increased value for shareholders as economic conditions improve. We believe that the industries we serve are sound, resilient, and poised to rebound, and we are confident in the strength of our business model to create long-term customer relationships and substantial growth opportunities.

For 2002, our priorities and action plans focus on the basics. We are a sales driven organization, and we will continue to invest in initiatives that result in new or expanded customer relationships. We will find new and more effective ways to enhance productivity and improve our low operating cost position. And, we intend to generate positive cash flow and use the proceeds to reduce debt.

With the continued support of our employees, our customers and suppliers, and our shareholders, we look forward to significant improvements in 2002, and to a bright future ahead.


Roy W. Haley
Chairman and Chief Executive Officer