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It is a pleasure to report on WESCO’s performance in
2005. Record results were achieved in multiple areas,
and the Company continued to develop and implement
improvement initiatives that will make WESCO even
stronger in the year ahead.
EXTRA-EFFORT EMPLOYEES
For more than a dozen years, our motto has been
“WESCO – the extra effort people.” This motto has been
a constant reminder of our obligations to do our very
best for our customers and for the organization. WESCO’s
extra-effort culture and productivity bias are clearly evident
today, and they are reflected in the outstanding operating
and financial results that have been achieved. Our
shareholders and our customers set high standards. They
always seem to expect more, and more is being delivered
by WESCO’s 6,000-plus “extra-effort” employees.
In the days and weeks following 2005’s devastating
hurricane season, I was especially gratified to see firsthand
how our motto comes to life and reveals individual
value systems and the deep-seated commitments to
customer service. At a time when our personnel in
15 branches along the Gulf Coast and in Florida were
overwhelmed with the needs of family and friends,
we had employees on duty during the storms and
throughout the rescue and recovery period. Many of
these service-driven individuals literally lived in our
facilities for several weeks in order to respond to our
customers’ emergency needs. I will never forget my
personal interactions with our WESCO personnel and
certain of our suppliers and customers affected by
Hurricanes Katrina, Rita, and Wilma. I have a vivid
and long-lasting mental picture of the importance of
being the “extra-effort people.”
RECORD PERFORMANCE
In our 2004 Annual Report, we were pleased to report
that new, record-best performance levels had been set
in virtually all major financial categories. The WESCO
organization responded to the continuous improvement
challenge and delivered an encore performance.
In 2005, sales revenues increased 18.2% to $4,421
million. Operating income of $209 million and 4.7% of
sales, and net income of $103.5 million and 2.3% of
sales, reflected new record levels of performance.
Working capital productivity also set record levels, and
our overall balance sheet was strengthened through new
financing arrangements that extended the term and
reduced our overall interest expense in a rising–interest
rate environment.
Shareholder confidence in WESCO was rewarded with
another year of increasing share price performance that
significantly exceeded market and industry averages.
Market capitalization increased to over $2 billion at yearend,
and at the time of this letter, market capitalization
has increased to over $3 billion.
BASE BUSINESS STRENGTH
WESCO’s business model and operating strategy are
well established. Our business delivers a broad range of
electrical and industrial materials and supplies to a large
and well-diversified customer base. Our infrastructure of
customer service locations, branches, and distribution
centers gives us great geographical access to most major
markets in North America and selected global markets.
As evidenced by our high level of sales productivity, we
have an organization attuned to meeting our customers’
production, maintenance, and project needs.
We are particularly proud of our sales and service
personnel and their continued ability to generate and
service sales requirements that are growing organically
at double-digit rates. The combination of experienced
personnel, training initiatives, effective marketing and
sales support, and sales-oriented information systems tools all
contribute to our sales productivity and market
share gains. We expect that the positive momentum
that has been developed will continue to generate
above-average, profitable sales growth.
TWO VALUE-ENHANCING ACQUISITIONS
In July, we completed the acquisition of Fastec Industrial
Corp., a company serving the manufacturers of factorybuilt
homes and recreational vehicles with a wide range
of fastening and hardware solutions. This acquisition
augments WESCO’s very strong position as a supplier
to the manufactured housing industry. It also provides
us with low-cost Asian sourcing capabilities for a
broad range of products.
In September, we completed the acquisition of the
Carlton-Bates Company, a multi-regional distributor
with particular strengths in providing electro-mechanical
and electronic components and assemblies to industrial
firms. This acquisition adds focus to and significantly
strengthens WESCO’s service capabilities to OEM
manufacturers.
CONTINUOUS IMPROVEMENT
In setting new record levels of performance, we continue
to raise the bar and set even higher expectations for
future performance. Our experience in developing and
implementing productivity programs based on LEAN
improvement methodologies gives us confidence that
higher levels of performance can and will be achieved.
LEAN programs applied to our large base of established
business have resulted in increased sales productivity,
operating expense efficiencies, and higher levels of
working capital turnover. In addition, LEAN programs
have helped us identify and better understand areas
where further improvements are possible. In 2006, for
example, we will conduct our third annual large-scale
training and development initiative for sales order
management and transaction-processing improvements.
This effort has been instrumental in improving sales
per employee, a key, aggregate productivity measure,
by approximately 15% each of the past two years.
2006 will also mark the first large scale application
of LEAN principles in our information systems as we
launch a new order entry system which will significantly
improve speed and accuracy in responding to customer
inquiries and orders.
CAPITAL STRUCTURE
A major change occurred in WESCO’s ownership during
the last 15 months. WESCO began operations in 1994
in a leveraged buyout transaction, and, in 1998, WESCO
was recapitalized in a financing transaction led by The
Cypress Group, a private equity investment firm. In a
series of three transactions beginning in late 2004 and
continuing into mid-year 2005, The Cypress Group sold
its entire equity position in public market transactions.
During the course of 2005, the breadth of institutional
ownership of WESCO expanded significantly with more
than 90 investors now owning more than 100,000 shares.
WESCO made further adjustments to its capital structure
in 2005 by redeeming the remaining $324 million of
higher-cost senior subordinated debt put in place in
1998 and 2001 with a combination of $300 million of
lower-cost senior subordinated notes and convertible
debentures. We also enhanced our accounts receivables
securitization program and revolving credit facility with
additional capacity, longer term, and enhanced operating
and reporting flexibility. Even though interest rates have
been rising, WESCO’s all-in interest rate was at a record
level low rate for the Company.
BOARD OF DIRECTORS
Steven A. Raymund and Lynn M. Utter were appointed
as new members of WESCO’s Board of Directors effective
January 1, 2006. Steve is Chairman and CEO of Tech
Data Corporation, a $20 billion globally recognized
distributor of information and telecommunications
hardware, components, software solutions, and services.
Lynn is Chief Strategy Officer for Coors Brewing and
has held key positions in operations, logistics, and
planning with Coors and the Frito-Lay Division of PepsiCo.
Each of these new directors will stand for a confirming
election at our shareholders meeting in May.
We also have two directors, Michael J. Cheshire and
James A. Stern, who will be retiring from WESCO’s
Board of Directors when their terms expire in May.
Both Mike and Jim joined the Company’s Board in 1998.
Mike previously served as Chairman and CEO of Gerber
Scientific and as President of the Electrical Products
Division of General Signal Corporation. We have valued
Mike’s industry knowledge and insights and will miss
his operational know-how and electrical manufacturing
and distribution background. Jim is Chairman and Chief
Executive Officer of The Cypress Group, and he has
been an immensely valuable resource to the Company
as we have made the transition from a private company
to a public company with broad-based institutional
ownership. We sincerely thank Mike and Jim for their
Board service and outstanding counsel.
2006 OUTLOOK
We are optimistic that economic conditions will continue
to be favorable and that WESCO will be able to sustain
above-average industry growth rates. Our organization
is strong, and our initiatives that provide training and
development, marketing and sales support, information
systems tools, and continuous improvement methodologies
are expected to help our management and sales and
service personnel again achieve recognition for outstanding
customer service and record levels of operating and
financial performance. 2005 was an extraordinary year,
and we are confident that 2006 will be even better.
Thank you and best regards,
Roy W. Haley
Chairman of the Board and Chief Executive Officer
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