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AXE > SEC Filings for AXE > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for ANIXTER INTERNATIONAL INC

Form 10-Q for ANIXTER INTERNATIONAL INC


29-Oct-2012

Quarterly Report


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 Anixter International Inc. (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 December 30, 2011.

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 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 changes in 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.

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, foreign exchange and copper price effects (non-GAAP). The Company believes that by reporting organic growth which excludes 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 trends and other aspects of its financial performance. From time to time, the Company may also exclude other items from reported financial results (e.g., impairment charges, inventory adjustments, restructuring charges, etc.) so that both management and financial statement users can use these non-GAAP financial measures to better understand and evaluate the Company's performance period over period and to analyze the underlying trends of the Company's business.

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 Condensed Consolidated Financial Statements, including the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein in this report. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.

Acquisition of Business

At the end of the second quarter, the Company acquired all of the outstanding shares of Jorvex, S.A. ("Jorvex"), an electrical wire and cable distributor based in Lima, Peru. The Company paid $55.8 million, net of cash acquired, and assumed approximately $12.7 million in debt. The acquisition resulted in the preliminary allocation of $18.3 million to goodwill. The allocation of the adjusted purchase price will be finalized when valuations of tangible and intangible assets acquired are completed. As a result of the acquisition of Jorvex, sales and operating income were favorably affected by $31.8 million and $2.9 million, respectively, during the third quarter of 2012.

The Jorvex acquisition was accounted for as a purchase and its respective results of operations are included in the Condensed Consolidated Financial Statements from the date of acquisition. Had this acquisition occurred at the beginning of the year, the Company's operating results would not have been significantly different.


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ANIXTER INTERNATIONAL INC.

Financial Liquidity and Capital Resources

Overview

As a distributor, the Company's use of capital is largely for working capital to support its revenue growth. 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 other than from net earnings will primarily be due to changes in working capital as a result of the rate of increases or decreases to sales.

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.

During 2012, the Company's primary operating subsidiary, Anixter Inc., completed the issuance of $350 million principal amount of Senior Notes due 2019 ("Notes due 2019"). The Notes due 2019 will pay interest semiannually at a rate of 5.625% per annum and will mature on May 1, 2019. The Company's Board of Directors also declared a special dividend of $4.50 per common share, or $153.1 million (including amounts of dividend equivalents payable to holders of stock units outstanding), as a return of excess capital to shareholders. The dividend declared was recorded as a reduction to retained earnings and $150.6 million was paid on May 31, 2012 to shareholders and directors for stock units held of record on May 16, 2012. The remaining amount of $2.5 million is accrued and will be paid to holders of employee stock units upon vesting of the units. In the third quarter of 2012, the Company repurchased and retired 956,000 of its outstanding shares for $56.6 million under a previously announced share repurchase program to repurchase up to 1,000,000 shares of the Company's common stock. The share repurchase program was completed in the fourth quarter of 2012. See Note 11. "Subsequent Event" for further information.

At the end of nine months ended September 28, 2012, the Company's debt-to-total capital ratio was 51.9%, up from 44.7% at the end of 2011 and slightly above the Company's targeted range of 45% to 50%. The Company has $290.9 million in available, committed, unused credit lines, no borrowings outstanding under its $300.0 million accounts receivable facility and $44.1 million of invested cash, resulting in $635.0 million in total liquidity at September 28, 2012, sufficient to meet liquidity requirements for the next twelve months.

With a quarter-end cash balance of $136.6 million and an expectation of continuing positive cash flow for the remainder of 2012, the Company will continue to evaluate the optimal use of these funds. The Company expects positive cash flow for the full fiscal year 2012. The Company will maintain flexibility to utilize future cash flows to invest in the growth of the business, capitalize on strategic acquisition opportunities as they arise, deleverage the balance sheet and selectively return capital to shareholders. The Company will continue to balance its focus on sales and earnings growth with continuing efforts in cost control and working capital management. Maintaining a strong and flexible financial position continues to be vital to funding investment in strategic long-term growth initiatives.

Cash Flow

Net cash provided by operations was $125.9 million for the nine months ended September 28, 2012 which compares to $31.5 million of cash provided by operations in the prior year period. The increase in cash provided by operations was due to effective management of working capital, along with the operating results which included a lower sales growth rate in 2012 year-over-year.


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ANIXTER INTERNATIONAL INC.

Consolidated net cash used in investing activities for the nine months ended September 28, 2012 was $82.3 million. This compares to net cash provided by investing activities of $119.4 million which included $137.6 million of net proceeds from the sale of the Company's Aerospace Hardware business ("Aerospace"). The Company spent $55.8 million at the end of the second quarter of 2012 to acquire Jorvex and capital expenditures increased $6.7 million to $26.5 million in the first nine months of 2012 from $19.8 million in the prior year period. Capital expenditures are expected to be approximately $36 million for the full twelve months of 2012 as the Company continues to invest in the consolidation of certain acquired facilities in North America and Europe, warehouse equipment, information system upgrades and new software to support its infrastructure.

Net cash used in financing activities were $13.1 million and $173.0 million in the nine months ended September 28, 2012 and September 30, 2011, respectively. In the first nine months of 2012, the Company issued $350 million principal amount of Notes due 2019 and repaid $155.4 million of borrowings under revolving credit facilities. This compares to proceeds from borrowings of $13.9 million in the prior corresponding period in 2011. Using available borrowings under the Company's long-term revolving credit facility, the Company retired the remainder of its 3.25% zero coupon convertible Notes due 2033 ("Notes due 2033") for $93.8 million in 2011. In 2012, the Company also paid $150.6 million of the special dividend that was declared during the second quarter of 2012. The remaining dividend of $2.5 million is accrued and will be paid to holders of employee stock units upon vesting of the units. In the first nine months of 2012, the Company repurchased 956,000 shares of common stock for $56.6 million. In the first nine months of 2011, using a portion of the proceeds from the sale of Aerospace, the Company repurchased 2.0 million shares of common stock for $107.5 million. During the first nine months of 2012 and 2011, the Company recorded deferred financing costs of $7.6 million and $4.1 million, respectively.

Financing

On April 30, 2012, the Company's primary operating subsidiary, Anixter Inc., completed the issuance of $350 million principal amount of Notes due 2019 (defined on page 17). The Notes due 2019 will pay interest semiannually at a rate of 5.625% per annum and will mature on May 1, 2019. In addition, Anixter Inc. may at any time redeem some or all of the Notes due 2019 at a price equal to 100% of the principal amount plus a "make whole" premium. If Anixter Inc. and/or the Company experience certain kinds of changes of control, it must offer to repurchase all of the Notes due 2019 outstanding at 101% of the aggregate principal amount repurchased, plus accrued and unpaid interest. Net proceeds from this offering were approximately $342.9 million after deducting fees and expenses. The proceeds were used by Anixter Inc. to repay amounts outstanding under the accounts receivable credit facility, to repay certain borrowings under the revolving credit facility, to provide additional liquidity for maturing indebtedness of the Company and for general corporate purposes. Issuance costs of approximately $7.1 million are being amortized through maturity using the straight-line method. The Company fully and unconditionally guarantees the Notes due 2019, which are unsecured obligations of Anixter Inc.

On May 31, 2012, the Company's primary operating subsidiary, Anixter Inc., amended the agreements governing its accounts receivable securitization program. The following key changes have been made to the program:

The size of the program increased from $275 million to $300 million.

The liquidity termination date of the program is now May 2015 (formerly May 2013).

The renewed program carries an all-in drawn funding cost of LIBOR plus 95 basis points (previously Commercial Paper plus 90 basis points).

Unused capacity fees increased from 45 to 55 basis points to 47.5 to 57.5 basis points depending on utilization.

All other material terms and conditions remain unchanged.


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ANIXTER INTERNATIONAL INC.

At September 28, 2012, the Company's total carrying value and estimated fair value of debt outstanding, including convertible debt, was $1,034.0 million and $1,102.1 million, respectively. This compares to a carrying value and estimated fair value at December 30, 2011 of $809.8 million and $881.6 million, respectively. The estimated fair value of the Company's debt instruments is measured using observable market information which would be considered Level 2 inputs as described in the fair value accounting guidance on fair value measurements. The Company's weighted-average cost of borrowings was 6.3% and 4.9% for the three months ended September 28, 2012 and September 30, 2011, respectively, and 6.0% and 5.0% for the nine months then ended, respectively. The Company's 1% convertible senior notes due in February 2013 are classified as long-term as the Company has the intent and ability to refinance such convertible notes under existing long-term financing agreements.

Under Anixter Inc.'s accounts receivable securitization program, the Company sells, on an ongoing basis without recourse, a portion of the accounts receivable originating in the United States to the Anixter Receivables Corporation ("ARC"), which is considered a wholly-owned, bankruptcy-remote variable interest entity ("VIE"). The Company has the authority to direct the activities of the VIE and, as a result, the Company has concluded that it maintains control of the VIE and is the primary beneficiary as defined by accounting guidance and, therefore, consolidates the account balances of ARC. As of September 28, 2012 and December 30, 2011, $545.7 million and $524.6 million of the Company's receivables were sold to ARC, respectively. ARC in turn sells an interest in these receivables to a financial institution for proceeds up to $300.0 million. The assets of ARC are not available to Anixter Inc. until all obligations of ARC are satisfied in the event of bankruptcy or insolvency proceedings.

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 they expected to have, an adverse impact on the Company's ability to meet its cash obligations.

Third Quarter 2012 Results of Continuing Operations

As a result of the continued downturn in global economic conditions, the Company's Europe operating segment experienced a decline in sales, margin and profitability as compared to both the prior year and internal projections. Due to market and economic conditions, the Company recognized that the indicated fair value of this reporting unit was less than its carrying amount and, therefore, required a more detailed evaluation of Europe's goodwill and long-lived assets. The analysis indicated that there would no longer be an implied value attributable to goodwill and accordingly, in the third quarter of 2012, the Company recorded a non-cash impairment charge to write-off of the remaining goodwill of $10.8 million associated with this reporting unit ("Goodwill Impairment"). The analysis of long-lived assets indicated that the carrying values were not recoverable for a portion of the Company's intangible assets and other fixed assets in Europe. Accordingly, in the third quarter of 2012, the Company recorded a non-cash impairment charge related to the write-down of long-lived assets of $16.4 million ("Long-Lived Asset Impairment," together with the Goodwill Impairment, the "Europe Impairment Charge"). In addition to the Europe Impairment Charge, the Company recorded an inventory lower-of-cost-or-market adjustment of $1.2 million in Europe ("Europe Inventory Charge," together with the Europe Impairment Charge, the "Europe Charge"). For further information, see Note 7. "Impairment of Goodwill and Long-Lived Assets" in the notes to the Company's Condensed Consolidated Financial Statements.

Executive Overview

The Company reported sales of $1,609.0 million in the three months ended September 28, 2012, a decrease of $2.8 million, or 0.2% from sales of $1,611.8 million in the corresponding prior year period. After adjusting for $23.1 million of unfavorable foreign exchange effects, an estimated $17.7 million of unfavorable copper price effects and $31.8 million of sales associated with the recent acquisition of Jorvex, the Company had an organic sales growth of 0.4% year-over-year. While the quarter was challenging from a macro economic perspective, which is reflected in lower sales in the Europe geographic segment and OEM Supply end market, the Company's strategic growth initiatives, combined with strong day-to-day execution, enabled it to improve its competitive position across all end markets in spite of the macro economic conditions.


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ANIXTER INTERNATIONAL INC.

The Company delivered record quarterly sales in its North America segment. Compared to the prior year third quarter, the Company's North America and Emerging Markets segments each reported organic growth of over 2%, which was offset by a 7.5% decline in the Europe segment. The Company's worldwide Electrical and Electronic Wire and Cable sales were $566.4 million in the third quarter of 2012, which represent an increase of $51.0 million over sales of $515.4 million in the year ago quarter. Excluding Jorvex sales of $31.8 million as well as unfavorable effects of foreign exchange rates and copper prices of $6.0 million and $17.7 million, respectively, organic sales were $558.3 million in the third quarter of 2012. This 8.3% organic sales performance reflects the Company's strength of the global natural resource development and power generation markets. The Company's strength in this end market was global, including North America (where the Canadian business turned in a record quarter of sales) Latin America, the Middle East and Australia. Consistent with the Company's strategic initiatives to expand the Electrical and Electronic Wire and Cable growth in the Emerging Markets segment, sales of $56.6 million (including Jorvex) increased over the prior year sales of $19.9 million. Excluding the acquisition as well as unfavorable foreign exchange of $0.7 million, organic sales were $25.5 million which represents an increase of 28.9% over the prior year ago quarter. Offsetting the strength in these businesses, the Company's Enterprise Cabling and Security Solutions end market overall continues to be impacted by project delays, although within that end market the Company continues to benefit from strong secular trends in its security business. The Company's OEM Supply business continued to face reductions by its customers in production that impacted its sales in the quarter.

Operating income of $67.3 million in the third quarter of 2012 compares to $101.7 million in the prior year third quarter. Excluding the Europe Charge, adjusted operating income was $95.7 million resulting in adjusted operating margin 5.9% which was the highest quarterly margin to date for 2012. Further excluding $2.9 million of operating profit for Jorvex, $3.8 million of unfavorable copper pricing and $0.2 million of favorable foreign exchange effects, adjusted operating profit in the third quarter of 2012 was $96.4 million, which reflects a 5.2% decline versus the year ago quarter.

The Company delivered strong expense management in the third quarter, with operating expense growth of 1.5% versus the prior year quarter. Through effective management of working capital, along with the operating results, the Company generated $66.7 million in cash flow from operations in the third quarter of 2012 which brings year-to-date cash from operations to $125.9 million. Consistent with the Company's long-standing practice of returning excess capital to shareholders, the Company repurchased 956,000 of its common shares under a previously announced share repurchase program to repurchase up to 1,000,000 shares of the Company's common stock. Subsequent to the end of the third quarter, this program was completed.

The Company's outlook for 2012 includes 1-2% organic sales growth for the fourth quarter of fiscal 2012 despite a softer environment than originally anticipated. The Company continues to be well positioned to leverage its global supply chain platform through the economic cycles. While global markets are difficult to predict, the Company's strategic growth initiatives position it well to expand its leadership position within its end markets. In this more uncertain environment, the Company continues to manage expenses and working capital carefully, while pursuing strategic investments to expand its business. Finally, the Company believes that it is in more challenging economic environments that the Company's business model, which is based on helping the Company's customers lower their supply chain costs and reduce execution risk, delivers the greatest value to its customers. The Company expects to grow through a combination of adding new products to its portfolio, developing an end market presence in Electrical and Electronic Wire and Cable and OEM Supply in countries where the Company's current presence is large but limited primarily to the Enterprise Cabling and Security Solutions end market and selectively expanding the Company's geographic presence.

Consolidated Results



                                                                  Three Months Ended
                                                  September 28,         September 30,        Percent
(In millions)                                         2012                  2011              Change
Net sales                                        $       1,609.0       $       1,611.8           (0.2 )%
Gross profit                                     $         358.7       $         362.0           (0.9 )%
Operating expenses                               $         264.2       $         260.3            1.5 %
Impairment of goodwill and long-lived assets     $          27.2       $            -              nm
Operating income                                 $          67.3       $         101.7          (33.8 )%


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ANIXTER INTERNATIONAL INC.

Net Sales: The Company's net sales during the third quarter of 2012 decreased $2.8 million, or 0.2%, compared with the prior year quarter. Unfavorable effects of foreign exchange rates and a decrease in copper prices decreased sales by $23.1 million and $17.7 million, respectively, while the acquisition of Jorvex increased sales in the third quarter by $31.8 million as compared to the year ago period. Excluding the unfavorable effects of foreign exchange rates and copper prices and the impact of the Jorvex acquisition, the Company's net sales increased $6.2 million, or approximately 0.4%, in the third quarter of 2012 as compared to the prior year quarter.

North America sales of $1,147.6 million were up 0.4%, or $4.2 million. Europe sales of $252.5 million declined by $39.2 million, or 13.4%, as it experienced significant pressure from the weak economy in that region. Emerging Markets sales of $208.9 million were up by 18.2% versus the prior year, including $31.8 million resulting from the Jorvex acquisition.

The worldwide Enterprise Cabling and Security Solutions end market experienced a year-over-year decline of 1.1% organically as the Company continues to see subdued trends in data center spending, partially offset by higher growth in the security business. The worldwide Electrical and Electronic Wire and Cable end market continued strong organic growth across all geographies, with 28.9% year-over-year organic growth in the Emerging Markets. The worldwide OEM Supply end market declined by 11.5% organically year-over-year, reflecting third quarter production cuts by several large OEM Supply customers in North America and Europe. In the OEM Supply end market, the Company experienced declines in each geographic segment.

Gross Margin: Gross margin decreased in the third quarter of 2012 to 22.3% as compared to 22.5% in the prior year quarter. The lower gross margin is a function of less favorable product and project mix. In addition, the pricing pressure in Europe has negatively impacted margin. The effects of lower copper prices did not impact gross margin percentages significantly; however, the effects of copper prices did decrease gross profit dollars by $3.8 million in the third quarter of 2012 as compared to the prior year. Excluding the Europe Inventory Charge, the Company's gross margin was 22.4%.

Operating Expenses: Operating expenses increased $3.9 million from $260.3 million in the year ago period to $264.2 million in the third quarter of 2012. The third quarter of 2012 operating expenses included an incremental $3.7 million of expenses related to the addition of the Jorvex business while changes in foreign exchange rates decreased operating expenses by $5.1 million as compared to the corresponding period in 2011. Excluding foreign exchange rate changes and the impact of the acquisition, operating expenses increased $5.3 million, or 2.0%. The current quarter increase in operating expenses included higher pension benefit costs of $2.5 million.

Operating Income: Operating income decreased by $34.4 million, or 33.8%, to $67.3 million in the third quarter of 2012 as compared to $101.7 million in the third quarter of 2011. As a result of the lower sales and gross margin as well as the Europe Charge, operating margin was 4.2% in the third quarter of 2012 compared to 6.3% in the third quarter of 2011. Copper prices decreased operating income by $3.8 million while favorable foreign exchange rate changes (due to the mix of countries) and the impact of the Jorvex acquisition increased operating income by $0.2 million and $2.9 million, respectively. Excluding the Europe Charge, the impact of copper prices, the favorable effects of foreign exchange rates and the Jorvex acquisition, adjusted operating income decreased by 5.2%.

Interest Expense: The Company's consolidated interest expense in the current quarter of $16.6 million increased by $4.1 million compared to the prior year quarter, driven by $4.9 million of incremental expense associated with the . . .

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