Summary of ANIXTER INTERNATIONAL INC

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 26 weeks ended July 3, 2009 by $41.1 million and $86.4 million, respectively, while operating income was negatively affected by $1.4 million and $1.9 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 26 weeks ended July 3, 2009, the Company generated $259.6 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 $12.2 million and reduce bank revolver and accounts receivable securitization borrowings by $380.5 million. In the 26 weeks ended July 3, 2009, the Company's debt-to-total capital ratio was 46.9%, 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. Subsequent to the second 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 $309 million in available, committed, unused credit lines and only $5 million of borrowings under the recently renewed $200 million accounts receivable facility was outstanding as of July 3, 2009 as compared to $195 million outstanding at the end of fiscal 2008.
While the Company's ongoing strategy remains consistent and focused on the long term, the evolving 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 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. The Company expects that global recession conditions will persist for some portion or all of 2009 and anticipates that 2009 sales will be less than those reported for 2008. 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.
Cash Flow
Net cash provided by operating activities was $259.6 million in the 26 weeks ended July 3, 2009 compared to $98.9 million in the corresponding period in 2008. The increase in cash provided by operating activities reflects $188.9 million of working capital reductions in the first half of 2009 associated with a decline in sales and lower copper prices.
Consolidated net cash used in investing activities decreased to $12.2 million in the 26 weeks ended July 3, 2009 from $17.1 million in the 26 weeks ended June 27, 2008 primarily as a result of a decline in capital expenditures. Capital expenditures are expected to be approximately $25.0 million in 2009 as the Company continues to invest in the consolidation of certain acquired facilities in North America and Europe and invests in system upgrades and new software to support its infrastructure and warehouse equipment.
Net cash used for financing activities was $199.9 million in the 26 weeks ended July 3, 2009 compared to $75.1 million in the corresponding period in 2008. In the 26 weeks ended July 3, 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 cash generated from operations, the Company reduced other borrowings by $380.5 million during the first half of 2009 (primarily short term borrowings). In the corresponding period in the prior year, the Company increased borrowings by $20.0 million and repurchased approximately 1.7 million of its outstanding common shares at a total cost of $104.6 million. The first half of 2008 includes $5.8 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 $0.5 million in the 26 weeks ended July 3, 2009 compared to $4.4 million in the corresponding period in 2008.

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ANIXTER INTERNATIONAL INC. Financing
As of July 3, 2009 and January 2, 2009, the Company's short-term debt outstanding was $23.6 million and $249.5 million, respectively, and the Company's long-term debt outstanding was $897.3 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 $180.4 million after deducting discounts, commissions and expenses. The discount associated with the issuance is being amortized through March 2014. Issuance costs of approximately $4.8 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 second fiscal quarter of 2009.
The effect of adopting FSP APB 14-1 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. The condensed consolidated statements of operations and the condensed consolidated statement of cash flows for the 13 and 26 weeks ending June 27, 2008 were adjusted from amounts previously reported 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 $12.5 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 and 26 weeks ended June 27, 2008 by $3.2 million and $6.2 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.
Consolidated interest expense was $17.3 million and $31.8 million in the 13 and 26 weeks ended July 3, 2009, respectively, as compared to $14.3 million and $28.8 million in the corresponding periods in 2008. While interest rates on approximately 97.2% of the Company's borrowings were fixed (either by their terms or through hedging contracts) at the end of the first half of 2009, the Company's weighted-average cost of borrowings increased to 6.8% in the 13 weeks ended July 3, 2009 from 5.5% in the corresponding period in the prior year. The Company's debt-to-total capitalization decreased to 46.9% at July 3, 2009 from 50.7% at January 2, 2009.

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ANIXTER INTERNATIONAL INC. Subsequent to the second quarter of 2009, 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 $309 million in available, committed, unused credit lines and only $5 million of borrowings under the recently renewed $200 million accounts receivable facility was outstanding as of July 3, 2009 as compared to $195 million outstanding at the end of fiscal 2008. See Note 13. "Subsequent Events" in the notes to the condensed consolidated financial statements for further information. Second 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 $1,220.6 million in the second quarter of 2009 decreased $396.2 million, or 24.5%, from $1,616.8 million in the same period in 2008. After adjusting for $76.2 million of negative foreign exchange effects, an estimated $50.7 million of negative copper prices effects and eliminating the sales of $41.1 million associated with acquisitions, the Company had an organic sales decline of approximately 19.2%. 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 three fiscal quarters. The Company experienced a very flat daily sales trend through the first and second quarters of 2009. The resulting effect was that the Company did not experience the normal sequential growth pattern from the first to the second quarter. In fact, because of those very flat daily sales patterns, on a sequential basis, sales were actually down from the first quarter of 2009 due to the number of holidays in the second quarter as compared to the holiday-free first quarter.
When the second quarter of 2009 sequential drop in sales is evaluated against the second quarter of 2008, when the Company experienced a more traditional pattern of sequential growth from the first to the second quarter, the result was the largest negative sales comparison experienced since the current economic downturn began. Further, and as expected, year-on-year sales comparisons for the second quarter of 2009 were negatively affected by the strengthening of the U.S. dollar and the substantial decline in spot market copper prices that has occurred since the second 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 6 percentage points of the reported 25 percentage point year-on-year decline in sales.
The Company generated strong cash flow in the second quarter. As expected in a period of economic softness, this was achieved through a combination of the lower working capital requirements associated with further declines in sales, both organic as well as the deflationary effects of lower copper prices, and aggressive working capital management. The Company anticipates that it will continue to generate solid cash flow through the balance of the year.
In response to the fact the Company did not experience a traditional quarterly pattern of sales growth from the first to second quarter of 2009, the Company undertook additional expense reduction actions that resulted in $5.7 million of severance costs in the second quarter which are expected to yield annualized savings of approximately $28.0 million. The savings associated with these actions will be realized beginning in the second half of 2009 pending the actual timing of departure of the affected employees. 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. The Company recorded a $100.0 million non-cash goodwill impairment charge related to its European operations. The impairment charge is due to continued operating losses during the quarter and a reduction in the projected future cash flows from this operating segment based on the Company's forecast of a weaker European economy. Primarily as a result of the impairment charge, an organic sales decline, lower gross profit dollars as a result of lower copper prices, as well as a 110 basis point decline in gross margins (due to an unfavorable sales
mix) offset by a 10.3% reduction in operating expenses, operating income decreased from $121.8 million in the year ago quarter to an operating loss of $58.7 million in the second quarter of 2009. As a result of lower sales and gross margins as well as the impairment charge of $100.0 million in Europe, operating margins were negative 4.8% in the second quarter of 2009 compared to 7.5% in the second quarter of 2008. The impairment charge reduced operating margins by 8.2% in the second quarter. The Company's net loss in the second quarter of 2009 was $89.8 million, or $2.53 per diluted share, compared to net income of $65.0 million, or $1.66 per diluted share, in the prior year period. The impairment charge of $100.0 represented a loss per share of $2.82 in the second quarter of 2009. The current quarter's fully diluted net loss per share benefited from an approximately 9 percent drop in the fully diluted share count, as the net loss results in common stock equivalents and convertible bonds being anti-dilutive. 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. Therefore, all references to the effect of copper prices are estimates. From 2005 through the third quarter of 2008, the Company's financial performance has benefited from historically high copper prices. However, during the fourth quarter of 2008 and continuing through the second quarter of 2009, copper prices have declined from the historically high prices over the past three years. Market-based copper prices averaged approximately $2.15 per pound during the second quarter of 2009 compared to $3.80 per pound in the second quarter of 2008. As a result, sales and operating income were unfavorably affected by $50.7 million and $10.8 million, respectively.