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These excerpts taken from the WSC 10-K filed Feb 29, 2008. Results of
Operations
Wesco’s 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 PG’s 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 Wesco’s consolidated investment portfolio
at each balance sheet date.
Wesco’s 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 Company’s CORT Business Services
Corporation subsidiary expands and redirects the marketing of
its rental relocation services from targeting individuals to
targeting corporate clients.
Table of Contents
FINANCIAL CONDITION
Wesco’s 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.
Wesco’s 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 CORT’s 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.)
Wesco’s 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 & Poor’s Corporation’s
highest rating, AAA, with respect to its claims-paying ability.
RESULTS OF OPERATIONS
Wesco’s reportable business segments are organized in a
manner that reflects how Wesco’s top management views those
business activities. Wesco’s 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.
Management’s 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
Wesco’s management views the business operations. (Amounts
are in thousands, all after income tax effect.)
In the following sections the data set forth in the foregoing
summary on an after-tax basis are broken down and
discussed.
Table of Contents
Results of Operations Wesco’s 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 PG’s 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 Wesco’s consolidated investment portfolio at each balance sheet date. Wesco’s 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 Company’s CORT Business Services Corporation subsidiary expands and redirects the marketing of its rental relocation services from targeting individuals to targeting corporate clients.
Table of ContentsFINANCIAL CONDITION Wesco’s 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. Wesco’s 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 CORT’s 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.) Wesco’s 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 & Poor’s Corporation’s highest rating, AAA, with respect to its claims-paying ability. RESULTS OF OPERATIONS Wesco’s reportable business segments are organized in a manner that reflects how Wesco’s top management views those business activities. Wesco’s 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. Management’s 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 Wesco’s management views the business operations. (Amounts are in thousands, all after income tax effect.)
In the following sections the data set forth in the foregoing summary on an after-tax basis are broken down and discussed.
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