Financial Results
2004 was a record year for WESCO. Sales increased
14%, to $3.74 billion, and all of the improvement
came from organic growth. Net income increased to
$64.9 million, more than doubling 2003 net income
of $30.0 million, and earnings per share increased
by 125% to $1.47 per share, compared to $0.65
per share in 2003.
Our balance sheet was also strengthened.
Even though the total amount of working capital
increased in support of strong sales growth, we
set new records for total working capital turnover,
while also improving the overall quality of accounts
receivable and inventory. Our capital structure ratios
and financial liquidity were improved as a result of
applying positive cash flow to debt reduction.
Through an equity offering in the fourth quarter, the
company issued 4 million shares of common stock,
raising approximately $100 million, which was used
in the first quarter of 2005 to reduce higher-cost
subordinated debt. From a financial perspective,
WESCO is stronger than at any time since we
became a public company.
Improving Economy
Despite a slow start to the year, the overall
economic recovery had a positive effect on our
business. Industrial and utility markets were
generally favorable, and the construction business
demonstrated slow but consistent quarter-overquarter
improvements, particularly during the
second half. Market conditions continue to be
favorable, and we expect to see increases in
industrial and commercial capital spending during
2005 and a rising demand for the products and
services we provide.
Sales Growth
I am especially gratified that our unprecedented
sales growth in 2004 was obtained organically,
supported by sales effectiveness and not influenced
by acquisitions. Our 14% sales gain resulted from
the addition of new customers and substantially
increased sales in our existing base. It is particularly
significant that sales growth was not driven by
a few major customers or large one-time projects,
but by incremental gains with thousands of
customers in many differentmarket segments
across our entire organization.
Productivity
Record levels of net income and earnings per
share were achieved by broad-based improvement
in operational productivity and organizational
efficiency. In 2004, WESCO’s sales and service
personnel set new record levels of sales and
operating profit per employee, the broadest
overall measures of operating productivity for a
business such as WESCO. On a company-wide
basis, sales per employee increased to $696,000,
a 15% increase over 2003 results, and operating
profit increased 74% to $28,000 per employee.
These improvements were accomplished
through a variety of initiatives that enhanced our
effectiveness in implementing marketing programs,
improving sales force training and sales targeting
activities, streamlining order processing and
logistics activities, and managing pricing and
product acquisition costs. Our work in most of
these initiatives was aided by our application of
a performance improvement methodology known
as LEAN. LEAN is used extensively by industrial
firms to reduce delays and bottlenecks, eliminate
multiple forms of operational waste, and simplify
processes and procedures. We began applying
LEAN to our business activities during 2003 and
the approaches and techniques are now being
applied throughout our organization. The work
completed over the past 18 months produced
excellent operating results and has laid the
groundwork for further gains in performance
and productivity.
Opportunity
The wholesaler/distributor industry hasmultiple
positive attributes. The industrial, contractor, and
commercialmarkets are very large, with millions of
potential customers. Although some customers
expand and others contract, our primarymarkets
have a history of long-term growth that is greater
than total economic growth.
This long-running growth dynamic is due to a
continuing flow of new and more advanced products
and a well-established trend for distributors to
benefit from outsourcing by both customers and
productmanufacturers. In ever-larger numbers,
customers are concentrating on their core
capabilities and seeking assistance from distributors
in our core capabilities of product application,
sourcing, procurement, inventory management,
and logistics. Similarly, manufacturers are seeking
to capitalize on distributors’ core capabilities of
customer and segment-oriented marketing, local
sales and technical support, and supply chain
efficiencies. These marketplace changes provide
numerous opportunities to further develop potential
sources of stable and recurring revenue.
During 2004, we significantly expanded our marketing
department with personnel and capabilities to
target specific industry sub-segments, geographical
territories, and product applications. Our high-quality
product catalogs and sales promotion initiatives
are integrated with an effective program of targeted
personal selling and telesales activities with our
key supplier partners. New information systems tools
are adding more precision to sales planning, direct
mail targeting, and continuous progress tracking,
resulting in a steady stream of new customer
relationships and significant sales momentum.
Internal Controls
One of the most demanding and costly programs
of the recently enacted corporate governance
regulations involves the comprehensive design,
documentation, and testing of internal controls as
required by the Sarbanes-Oxley Act. We have
attempted to make the wide-ranging business
process analysis and auditing activities a part of
our overall improvement activities. We made a
conscious effort to link internal control methodologies
with our LEAN process improvement programs to
gain maximum benefit.We looked for ways to reduce
risks, avoid errors, and streamline processes, while
at the same time assuring reliability and accuracy.
Our intent is to make WESCO a better organization,
not just a compliant company.
This year’s Annual Report includes, for the first time,
a special report by management on its evaluation of
WESCO’s internal control environment. Additionally,
our independent registered public accounting firm
also provides a new report containing their assessment
and conclusion that WESCO’s internal control
system was effective as of December 31, 2004.
Management Team
I am pleased to have John Engel on the WESCO
management team as Senior Vice President and
Chief Operating Officer. He assumed this new
position in July and is focused on operational
improvements and management development
throughout the company. John has a strong
operations and marketing background and brings
great leadership value to WESCO. Together with
Steve Van Oss, Senior Vice President and Chief
Financial and Administrative Officer, we are
implementing a variety of programs to assure that
our management team is aligned with our long-term
objectives and committed to the achievement of
outstanding results. To give you more insight into
our management perspective, we have added to this
year’s Annual Report a list of questions asked by our
shareholders and employees, followed by answers
from John and Steve.
Looking Ahead
2004 was a remarkable year, and the records we
achieved are setting new standards of performance
throughout our entire organization. We will continue
to stay focused on the fundamentals, because that
has been the strength of our basic business model
and the key to our success.
2005 presents us with the opportunities to deliver
above-average sales growth and further gains in
productivity and operating efficiency. Our employees
have been energized by their ability to achieve
record-level performance and have demonstrated
that their “extra effort” attitude is a proven
differentiator and an advantage for our customers,
supplier partners, and shareholders.
Thank you for your continued support and interest
in WESCO.
Roy W. Haley
Chairman and Chief Executive Officer
