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, operating
expenses and operating income comparisons to the prior corresponding period,
both worldwide, in relevant geographic segments as well as various end markets,
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 and ongoing operating
performance between periods.
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 weeks ended April 3, 2009 by
$45.3 million while operating income was negatively affected by $0.5 million.
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. 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. 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.
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 first quarter of 2009, the Company generated $88.0 million of cash
flow from operations which, along with $180.5 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 $6.2 million and reduce
short term borrowings by $204.1 million. At the end of the first quarter of
2009, the Company's debt-to-total capital ratio was 49.1%, 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.
At the end of the first quarter of 2009, the Company had $299.4 million of
available borrowing capacity under its existing committed bank agreements as
well as only $5.0 million of outstanding borrowings under the $255.0 million
accounts receivable securitization facility.
While the Company's ongoing strategy remains consistent and focused on the
long term, the evolving macro 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 continued shift in emphasis
recognizes that with appropriate working capital management to address the
slower economic environment, the Company's business can be a strong generator of
cash.
With an expectation that global recession conditions will persist for some
portion or all of 2009, the Company continues to anticipate that 2009 sales will
be less than those reported for 2008. As a result, the improved cash flow that
will be derived from a combination of earnings and lower working capital
requirements will be used to reduce borrowings and provide improved liquidity.
The Company believes that 1) this improved cash flow, 2) approximately
$299 million in available, committed, unused credit lines and 3) $45 million of
invested cash balances, will be sufficient to fund operations through the
recession. In addition, the Company believes its liquidity position is
sufficient to allow it to fund a potential put in July 2009 of its Notes due
2033 for $170.3 million and a potential non-renewal of its accounts receivable
securitization facility in September 2009. At the end of the first quarter of
2009, the Company had $5 million of borrowings under this receivable
securitization facility as compared to $195 million at the end of fiscal 2008.
To the extent one or more of these contingencies do not occur, then excess
liquidity will be used to reduce financial leverage for the near term. The
Company does not anticipate that it will pursue acquisitions or any significant
return of capital to shareholders until such time as the current economic
conditions show clear signs of improvement and the capital markets return to a
more normalized state of operation.
Cash Flow
Net cash provided by operating activities was $88.0 million in the 13 weeks
ended April 3, 2009 compared to $55.4 million in the corresponding period in
2008. The increase in cash provided by operating activities reflects
$48.6 million of working capital reductions in the first quarter of 2009
associated with a decline in sales and lower copper prices.
Consolidated net cash used in investing activities decreased to $6.5 million
in the 13 weeks ended April 3, 2009 from $8.7 million in the 13 weeks ended
March 28, 2008 primarily as a result of a decline in capital expenditures.
Capital expenditures are expected to be approximately $28.0 million in 2009 as
the Company continues to invest in the consolidation of certain acquired
facilities in North America and Europe, invests in system upgrades and new
software to support its infrastructure and warehouse equipment to meet the
growth of the business.
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ANIXTER INTERNATIONAL INC.
Net cash used for financing activities was $46.7 million in the 13 weeks
ended April 3, 2009 compared to $29.6 million in the corresponding period in
2008. In the 13 weeks ended April 3, 2009 the Company received net proceeds of
$180.5 million from the issuance of the Notes due 2014 (net of deferred
financing costs associated with the offering of $4.7 million). Using the
proceeds from the bond offering together with cash generated from operations,
the Company reduced other borrowings by $227.4 million during the first quarter
of 2009 (primarily short term borrowings). In the corresponding period in the
prior year, the Company increased borrowings by $7.5 million and repurchased
approximately 0.7 million of its outstanding common shares at a total cost of
$41.7 million. The first quarter of 2008 includes $3.6 million of cash from the
excess income tax benefit from employee stock incentive plans. Proceeds from the
issuance of common stock relating to the exercise of stock options were
$0.2 million in the 13 weeks ended April 3, 2009 compared to $1.7 million in the
corresponding period in 2008.
Financing
As of April 3, 2009 and January 2, 2009, the Company's short-term debt
outstanding was $45.4 million and $249.5 million, respectively, and the
Company's long-term debt outstanding was $1,010.8 million and $852.5 million,
respectively.
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
$180.5 million after deducting discounts, commissions and estimated expenses.
The discount associated with the issuance is being amortized through March 2014.
Issuance costs of approximately $4.7 million are being amortized through
March 2014 using the straight-line method. The Company fully and unconditionally
guarantees the Notes due 2014, which are unsecured obligations of Anixter Inc.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for
Convertible Debt Instruments that May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires that
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 FSP APB 14-1 requires 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 an aggregate principal amount at maturity of $369.1 million. The
recognition and disclosure provisions of FSP APB 14-1 were effective for the
Company for the first fiscal quarter of 2009.
The effect of adopting FSP APB 14-1 on the Company's balance sheet, statement
of operations and statement of cash flows has been included in the accompanying
condensed consolidated financial statements. FSP APB 14-1 requires 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 as of
January 3, 2009 (the beginning of fiscal 2009 for the Company). The condensed
consolidated statements of operations and the condensed consolidated statement
of cash flows for the 13 weeks ending March 28, 2008 were adjusted to reflect
the period specific effect of applying the provisions of the FSP APB 14-1. The
retrospective adoption of FSP APB 14-1 will result in a $12.6 million increase
to annual interest expense from previously reported amounts for fiscal 2008.
As a result of the adoption of FSP APB 14-1, interest expense increased for
the 13 weeks ended March 28, 2008 by $3.0 million and the carrying amount of
long-term debt decreased by $65.0 million at January 2, 2009. For further
information, see Note 1. "Summary of Significant Accounting Policies" in the
notes to the condensed consolidated financial statements.
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ANIXTER INTERNATIONAL INC.
Consolidated interest expense was $14.5 million in both the 13 weeks ended
April 3, 2009, and March 28, 2008. While interest rates on approximately 87% of
the Company's borrowings were fixed (either by their terms or through hedging
contracts) at the end of the first quarter of 2009, the Company's
weighted-average cost of borrowings declined to 5.0% in the 13 weeks ended
April 3, 2009 from 5.7% in the corresponding period in the prior year. The
Company's debt-to-total capitalization decreased to 49.1% at April 3, 2009 from
50.7% at January 2, 2009.
First 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.
The recessionary economic conditions that produced decelerating sales growth
rates throughout 2008 deepened to the point the Company reported a year-on-year
decline in sales in the first quarter of 2009. As expected, year-on-year sales
comparisons for the first quarter of 2009 were also negatively affected by the
strengthening of the U.S. dollar that occurred early in the fourth quarter of
2008 and the substantial decline in spot market copper prices that occurred
during the fourth quarter of 2008. While these negatives were partially offset
by sales from businesses acquired in the second half of 2008, collectively these
three factors combined to account, on a net basis, for about half of the 13.6%
year-on-year decline in reported sales. Also, as expected, the Company generated
good cash flow in the first quarter and anticipates that this will be sustained
as the Company continues to adjust its inventory levels to correspond to the
current customer demand environment.
Sales of $1,271.2 million in the first quarter of 2009 decreased
$200.4 million, or 13.6%, from $1,471.6 million in the same period in 2008.
During the first few days of the quarter, the overall business climate reflected
the same levels of extreme customer demand softness the Company experienced in
the latter weeks of 2008. As the Company moved further into the first quarter
the business rebounded, although not to the same levels experienced in the early
weeks of the fourth quarter, and then stabilized throughout the last 10 weeks of
the quarter. After adjusting for $99.9 million of negative foreign exchange
effects, an estimated $37.7 million of negative copper prices effects and
eliminating the sales of $45.3 million associated with acquisitions, the Company
had an organic sales decline of approximately 7.4%. It is important to note that
while the current recession, according to official government measures, started
in the fourth quarter of 2007, this is the first quarter, in this recession
cycle, in which the Company has reported a company-wide organic decline in
sales.
In addition to the end markets where the Company experienced organic sales
declines in late 2008, this quarter's organic sales decline reflects, for the
first time in this recession cycle, negative organic sales comparisons in the
Company's North American electrical wire and cable market. In addition, while
the Company still reported positive organic growth rates in its North American
OEM supply and Emerging Markets businesses, those growth rates were lower than
in recent periods.
In response to the substantially lower sales levels during the fourth quarter
of 2008, the Company undertook a series of actions at that time that resulted in
the recognition of $8.1 million of expense related to severance costs and
facility lease write-offs which are expected to yield annualized savings of
approximately $14.7 million. Only a portion of this savings was realized in the
first quarter of 2009 pending the actual departure of the affected employees. At
the same time, the Company has continued to trim staffing and expenses in
response to the changing business conditions. 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.
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ANIXTER INTERNATIONAL INC.
Primarily as a result of an organic sales decline as well as a 60 basis point
decline in gross margins (due to an unfavorable sales mix) offset by a 2%
reduction in organic operating expenses, operating income in the first quarter
of 2009 decreased 43.9% to $56.9 million as compared to $101.5 million in the
year ago quarter. Operating margins were 4.5% during the first quarter of 2009
compared to 6.9% in the first quarter of 2008. Net income in the first quarter
of 2009 was $25.7 million, or $0.72 per diluted share, compared to
$55.8 million, or $1.40 per diluted share, in the prior year period. Primarily
due to less dilution associated with the Company's convertible bonds, the
diluted weighted-average common shares declined by 10.0% during the first
quarter of 2009 versus the corresponding prior year period which produced a
favorable impact on net income per diluted share.
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 results 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. 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. Over the past three years, the Company's
financial performance has benefited from historically high copper prices.
However, during the fourth quarter of 2008 and continuing during the first
quarter of 2009, copper prices have declined from these historically high prices
over the past three years. Market-based copper prices averaged approximately
$1.57 per pound during the first quarter of 2009 compared to $3.53 per pound in
the first quarter of 2008. As a result, sales and operating income were
unfavorably affected by $37.7 million and $8.2 million, respectively.
Consolidated Results of Operations
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