ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the historical results of operations and
financial condition of the Company and factors affecting the Company's financial
resources. This discussion should be read in conjunction with the condensed
consolidated financial statements, including the notes thereto, set forth herein
under "Financial Statements" and the Company's Annual Report on Form 10-K for
the year ended January 2, 2009.
This report includes certain financial measures computed using non-Generally
Accepted Accounting Principles ("non-GAAP") components as defined by the
Securities and Exchange Commission ("SEC"). Specifically, net sales, comparisons
to the prior corresponding period, both worldwide and in relevant geographic
segments, are discussed in this report both on a Generally Accepted Accounting
Principle ("GAAP") basis and excluding acquisitions and foreign exchange and
copper price effects ("non-GAAP"). The Company believes that by reporting
organic growth excluding the impact of acquisitions, foreign exchange and copper
prices, both management and investors are provided with meaningful supplemental
information to understand and analyze the Company's underlying sales.
Non-GAAP financial measures provide insight into selected financial
information and should be evaluated in the context in which they are presented.
These non-GAAP financial measures have limitations as analytical tools, and
should not be considered in isolation from, or as a substitute for, financial
information presented in compliance with GAAP, and non-financial measures as
reported by the Company may not be comparable to similarly titled amounts
reported by other companies. The non-GAAP financial measures should be
considered in conjunction with the consolidated financial statements, including
the related notes, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this report.
Management does not use these non-GAAP financial measures for any purpose other
than the reasons stated above.
Acquisition of Businesses
In August of 2008, the Company acquired the assets and operations of QSN
Industries, Inc. ("QSN") and all of the outstanding shares of Quality Screw de
Mexico SA ("QSM"). QSN is based near Chicago, Illinois and QSM is based in
Aguascalientes, Mexico. In the fiscal month of September 2008, the Company
acquired all of the outstanding shares of Sofrasar SA ("Sofrasar") and
partnership interests and shares in Camille Gergen GmbH & Co, KG and Camille
Gergen Verwaltungs GmbH (collectively "Gergen") from the Gergen family and
management of the entities. Sofrasar is headquartered in Sarreguemines, France
and Gergen is based in Dillingen, Germany. In October of 2008, the Company
acquired all the assets and operations of World Class Wire & Cable Inc. ("World
Class"), a Waukesha, Wisconsin based distributor of electrical wire and cable.
The Company paid approximately $180.6 million in cash and assumed approximately
$17.4 million in debt for the five companies. As a result of these acquisitions,
sales were favorably affected in the 13 and 39 weeks ended October 2, 2009 by
$23.4 million and $109.8 million, respectively, while operating income was
negatively affected by $0.5 million and $2.4 million, respectively.
All of the acquisitions described herein were accounted for as purchases and
their respective results of operations are included in the condensed
consolidated financial statements from the dates of acquisition. Had these
acquisitions occurred at the beginning of the year of each acquisition, the
Company's operating results would not have been significantly different.
Financial Liquidity and Capital Resources
Overview
As a distributor, the Company's use of capital is largely for working capital
to support its revenue base. Capital commitments for property, plant and
equipment are limited to information technology assets, warehouse equipment,
office furniture and fixtures and leasehold improvements, since the Company
operates almost entirely from leased facilities. Therefore, in any given
reporting period, the amount of cash consumed or generated by operations will
primarily be due to changes in working capital as a result of the rate of sales
increase or decrease.
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ANIXTER INTERNATIONAL INC.
In periods when sales are increasing, the expanded working capital needs will
be funded first by cash from operations, secondly from additional borrowings and
lastly from additional equity offerings. In periods when sales are decreasing,
the Company will have improved cash flows due to reduced working capital
requirements. During such periods, the Company will use the expanded cash flow
to reduce the amount of leverage in its capital structure until such time as the
outlook for improved economic conditions and growth are clear. Also, the Company
will, from time to time, issue or retire borrowings or equity in an effort to
maintain a cost-effective capital structure consistent with its anticipated
capital requirements.
Liquidity continues to be an area of intense focus throughout the investment
community and the Company believes it has a strong liquidity position,
sufficient to meet its liquidity requirements for the ensuing twelve months.
During the 39 weeks ended October 2, 2009, the Company generated $393.6 million
of cash flow from operations which, along with $180.4 million of net proceeds
from the issuance of $200 million principal amount of 10% Senior Notes due 2014
("Notes due 2014"), was used to fund capital expenditures of $17.8 million,
reduce borrowings by $227.2 million and repurchase 1.0 million shares of common
stock for $34.9 million. As of October 2, 2009, the Company's debt-to-total
capital ratio was 46.2%, within our target range of 45% to 50%. Certain debt
agreements entered into by the Company's operating subsidiaries contain various
restrictions, including restrictions on payments to the Company. These
restrictions have not had, nor are expected to have, an adverse impact on the
Company's ability to meet its cash obligations. During the third quarter of
2009, the Company's primary operating subsidiary, Anixter Inc., amended its
revolving credit agreement and renewed its accounts receivable securitization
program.
Based on the recently amended credit agreement, the Company has approximately
$312.7 million in available, committed, unused credit lines and has drawn only
$5 million of borrowings under our $200 million accounts receivable facility.
The Company also has invested cash balances of $98.0 million at the end of the
third quarter of 2009. The Company continues to regard its strong financial
position and significant liquidity as important differentiators from many
companies in today's still difficult market, as they provide the Company with
financial flexibility to adjust quickly to new market realities, fund investment
in crucial long-term growth initiatives and allow it to capitalize quickly on
the eventual market rebound when that occurs.
While the Company's ongoing strategy remains consistent and focused on the
long term, the current weak global macroeconomic environment continues to
necessitate that the Company focus on cost and working capital management as
opposed to concentrating primarily on sales and earnings growth. This emphasis
recognizes that with appropriate working capital management to address the soft
economic environment, the Company's business can be a strong generator of cash
which cushions the Company against liquidity concerns. The Company expects that
global recession conditions will persist for the near term and, as a result, the
Company expects continued strong cash flow which, combined with current cash
balances and available credit facilities, will provide more than ample liquidity
to support the business through 2009 and beyond and positions it to capitalize
on an eventual economic recovery.
Cash Flow
Net cash provided by operating activities was $393.6 million in the 39 weeks
ended October 2, 2009 compared to $90.6 million in the corresponding period in
2008. The increase in cash provided by operating activities reflects
$285.8 million of working capital reductions associated with a decline in sales
and lower copper prices in 2009.
Consolidated net cash used in investing activities decreased to $17.8 million
in the 39 weeks ended October 2, 2009 from $144.0 million in the 39 weeks ended
September 26, 2008 when the Company spent approximately $118.7 million on
acquisitions. The remaining decline in cash used in investing activities is a
result of a decline in capital expenditures. Capital expenditures are expected
to be approximately $23.8 million in 2009 as the Company continues to invest in
the consolidation of certain acquired facilities in North America and Europe and
in system upgrades and new software to support its infrastructure and warehouse
equipment.
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ANIXTER INTERNATIONAL INC.
Net cash used for financing activities was $273.5 million in the 39 weeks
ended October 2, 2009 compared to net cash provided by financing activities of
$66.2 million in the corresponding period in 2008. In the 39 weeks ended
October 2, 2009 the Company received net proceeds of $180.4 million from the
issuance of the Notes due 2014 (net of deferred financing costs of $4.8 million
associated with the offering). Using the proceeds from the note offering
together with $393.6 million of cash generated from operations during the first
nine months of 2009, the Company reduced borrowings by $227.2 million (primarily
short term borrowings) and repurchased 1.0 million shares of common stock for
$34.9 million. In the corresponding period in the prior year, the Company
increased borrowings, primarily bank revolving lines of credit and borrowings
under the accounts receivable securitization facility by $152.1 million and
repurchased approximately 1.7 million shares of common stock for $104.6 million.
The 39 weeks ended September 26, 2008 include $10.2 million of cash from the
excess income tax benefit associated with employee stock plans. Proceeds from
the issuance of common stock relating to the exercise of stock options were
$1.2 million in the 39 weeks ended October 2, 2009 compared to $9.7 million in
the corresponding period in 2008.
Financing
As of October 2, 2009 and January 2, 2009, the Company's short-term debt
outstanding was $9.7 million and $249.5 million, respectively, and the Company's
long-term debt outstanding was $885.9 million and $852.5 million, respectively.
During the third quarter of 2009, the Company's primary operating subsidiary,
Anixter Inc., amended its revolving credit agreement and renewed its accounts
receivable securitization program. Based on the recently amended credit
agreement, the Company has approximately $312.7 million in available, committed,
unused credit lines and only $5 million borrowed under the recently renewed
$200 million accounts receivable facility as of October 2, 2009 as compared to
$195 million outstanding at the end of fiscal 2008.
On March 11, 2009, the Company's primary operating subsidiary, Anixter Inc.,
completed the issuance of the Notes due 2014 which were priced at a discount to
par that resulted in a yield to maturity of 12%. The Notes due 2014 will pay
interest semiannually at a rate of 10% per annum and will mature on March 15,
2014. In addition, before March 15, 2012, Anixter Inc. may redeem up to 35% of
the Notes due 2014 at the redemption price of 110% of their principal amount
plus accrued interest, using the net cash proceeds from public sales of the
Company's stock. Net proceeds from this offering were approximately
$180.4 million after deducting discounts, commissions and expenses of
$4.8 million which are being amortized through March 2014. The Company fully and
unconditionally guarantees the Notes due 2014, which are unsecured obligations
of Anixter Inc.
In May 2008, the Financial Accounting Standards Board ("FASB") issued new
accounting rules that require the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) be separately accounted for in a manner that reflects an
issuer's nonconvertible debt borrowing rate. The new accounting rules require
bifurcation of a component of the debt, classification of that component in
equity and the accretion of the resulting discount on the debt to be recognized
as part of interest expense in the Company's condensed consolidated statement of
operations. These provisions impacted the accounting associated with the
Company's Notes due 2013 which pay interest semiannually at a rate of 1.00% per
annum and the Company's Notes due 2033 which have a remaining aggregate
principal amount at maturity of $337.7 million. The recognition and disclosure
provisions of the new accounting rules were effective for the Company for the
first fiscal quarter of 2009.
The effect of adopting the new accounting rules has been included in the
accompanying condensed consolidated financial statements. The new accounting
rules require retrospective application to all periods presented. Accordingly,
the Company recognized the cumulative effect of the change in accounting
principle on periods prior to those presented herein as adjustments to assets,
liabilities and equity with an offsetting adjustment to the opening balance of
retained earnings. The condensed consolidated statements of operations and the
condensed consolidated statement of cash flows for the 13 and 39 weeks ending
September 26, 2008 were adjusted from amounts previously reported to reflect the
period specific effect of applying the new provisions. The retrospective
adoption of the new accounting rules will result in a $12.6 million increase to
annual interest expense from previously reported amounts for fiscal 2008.
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ANIXTER INTERNATIONAL INC.
As a result of the adoption of the new accounting rules, interest expense
increased for the 13 and 39 weeks ended September 26, 2008 by $3.1 million and
$9.3 million, respectively, and the carrying amount of long-term debt decreased
by $65.0 million at January 2, 2009 from amounts previously reported. For
further information, see Note 1. "Summary of Significant Accounting Policies" in
the notes to the condensed consolidated financial statements.
As adjusted for the adoption of the new accounting rules related to
convertible debt instruments, consolidated interest expense was $17.4 million
and $49.2 million in the 13 and 39 weeks ended October 2, 2009, respectively, as
compared to $15.1 million and $43.9 million in the corresponding periods in
2008. While interest rates on approximately 99.1% of the Company's borrowings
were fixed (either by their terms or through hedging contracts) at the end of
the third quarter of 2009, the Company's weighted-average cost of borrowings
increased to 7.7% in the 13 weeks ended October 2, 2009 from 5.3% in the
corresponding period in the prior year. The Company's debt-to-total
capitalization decreased to 46.2% at October 2, 2009 from 50.7% at January 2,
2009.
Third Quarter 2009 Results of Operations
Executive Overview
The Company competes with distributors and manufacturers who sell products
directly or through existing distribution channels to end users or other
resellers. The Company's relationship with the manufacturers for which it
distributes products could be affected by decisions made by these manufacturers
as the result of changes in management or ownership as well as other factors.
Although relationships with suppliers are good, the loss of a major supplier
could have a temporary adverse effect on the Company's business, but would not
have a lasting impact since comparable products are available from alternate
sources. For further information, see Item 1A "Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended January 2, 2009.
Sales of $1,273.0 million in the third quarter of 2009 decreased
$316.6 million, or 19.9%, from $1,589.6 million in the same period in 2008.
After adjusting for $42.6 million of negative foreign exchange effects, an
estimated $42.0 million of negative copper prices effects and eliminating the
sales of $23.4 million associated with acquisitions, the Company had an organic
sales decline of approximately 16.1%. All geographic segments, as well as all
end markets (enterprise cabling and security, electrical wire and cable and OEM
supply) reported year-on-year sales declines.
The recessionary economic conditions produced decelerating sales growth rates
through the third quarter of 2008 and negative growth in the last four fiscal
quarters. The Company continued to experience a flat daily sales trend through
the second and third quarters of 2009. However, due to the decrease in the
number of holidays between the second and third quarters as well as more
consistent copper pricing and foreign exchange rates between quarters, the
Company experienced sequential growth from the second to the third quarter of
2009.
The Company generated strong cash flow in the third quarter. As expected in a
period of economic softness, this was achieved through a combination of the
lower working capital requirements as well as both the deflationary effects of
lower copper prices and the Company's aggressive working capital management. The
Company anticipates that it will continue to generate solid cash flow through
the balance of the year.
Operating expense control remains a high priority, and as the year
progresses, the Company will continue to evaluate activity levels and
productivity to ensure its expense structure is sized to meet the near-term
realities of the economy while at the same time balancing the Company's short
term objectives with its longer term strategies and programs. In the third
quarter of 2009, the Company realized savings from the expense reduction actions
taken in the fourth quarter of 2008 and second quarter of 2009.
Primarily as a result of the organic sales decline, lower gross profit
dollars as a result of lower copper prices, as well as an 80 basis point decline
in gross margins (due to an unfavorable sales mix), offset by a 9.8% reduction
in operating expenses, operating income decreased from $117.9 million in the
year ago quarter to $58.4 million in the third quarter of 2009. As a result of
lower sales and gross margins, operating margins were 4.6% in the third quarter
of 2009 compared to 7.4% in the third quarter of 2008.
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ANIXTER INTERNATIONAL INC.
The Company's net income in the third quarter of 2009 was $22.1 million, or
$0.61 per diluted share, compared to net income of $59.7 million, or $1.53 per
diluted share, in the prior year period. The current quarter's fully diluted net
income per share benefited from an approximately 7 percent drop in the fully
diluted share count.
The Company's operating results can be affected by changes in prices of
commodities, primarily copper, which are components in some of the products
sold. Generally, as the costs of current inventory purchases increase due to
higher commodity prices, the Company's mark-up percentage to customers remains
relatively constant, resulting in higher sales revenue and gross profit. In
addition, existing inventory purchased at previously lower prices and sold as
prices increase may result in a higher gross profit margin. Conversely, a
decrease in commodity prices in a short period of time would have the opposite
effect, negatively affecting financial results. The degree to which spot market
copper prices change affects product prices and the amount of gross profit
earned will be affected by end market demand and overall economic conditions.
Importantly, however, there is no exact measure of the effect of higher copper
prices, as there are thousands of transactions in any given quarter, each of
which has various factors involved in the individual pricing decisions.
Therefore, all references to the effect of copper prices are estimates. From
2005 through the third quarter of 2008, the Company's financial performance
benefited from historically high copper prices. However, during the fourth
quarter of 2008 and continuing through the third quarter of 2009, copper prices
have declined from the historically high prices over the past three years.
Market-based copper prices averaged approximately $2.67 per pound during the
third quarter of 2009 compared to $3.45 per pound in the third quarter of 2008.
As a result, sales and operating income were unfavorably affected by
$42.0 million and $8.2 million, respectively.
Consolidated Results of Operations
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