NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The unaudited interim condensed consolidated financial statements of Anixter International Inc. and its subsidiaries (collectively referred to as "Anixter" or the "Company"), sometimes referred to in this Quarterly Report on Form 10-Q as "we", "our", "us", or "ourselves," have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Therefore, certain information and disclosures normally included in financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. Certain previously reported amounts have been reclassified to confirm to the current period presentation. The results as discussed in the financial statements reflect continuing operations only, unless otherwise noted.
These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Anixter's Annual Report on Form 10-K for the year ended January 1, 2016 ("2015 Form 10-K"). The condensed consolidated financial information furnished herein reflects all adjustments (consisting of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the Condensed Consolidated Financial Statements for the periods shown.
The Company maintains its financial records on the basis of a fiscal year ending on the Friday nearest December 31, with the fiscal quarters spanning thirteen weeks, with the first quarter ending on the Friday of the first thirteen-week period. The third quarter of fiscal year 2016 ended on September 30, 2016 and the third quarter of fiscal year 2015 ended on October 2, 2015.
Recently issued and adopted accounting pronouncements:
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which makes eight targeted changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update provides specific guidance on cash flow classification issues that are not currently addressed by GAAP and thereby reduces the current diversity in practice. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2016-15 as of September 30, 2016 on a retrospective basis for all cash flow statement periods presented. The adoption of this standard had no impact on the Company's previously reported cash flows.
Recently issued accounting pronouncements not yet adopted:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides guidance for revenue recognition. The update’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. Examples of the use of judgments and estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The update also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The update provides for two transition methods to the new guidance: a retrospective approach and a modified retrospective approach. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date
, as a revision to ASU 2014-09, which revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU 2014-09). In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations
, which clarifies certain aspects of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
, which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of sales and other similar taxes. The amendments also clarify how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard's contract criteria. We are currently evaluating the transition methods and the impact of adoption of these ASUs on our consolidated financial statements.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements and also eliminates the current real estate-specific provisions. The guidance modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
, which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
Other, net:
The following represents the components of "Other, net" as reflected in the Condensed Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
Other, net:
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
$
|
(3.5
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(8.0
|
)
|
|
$
|
(10.5
|
)
|
Foreign exchange devaluations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Cash surrender value of life insurance policies
|
|
0.5
|
|
|
(0.5
|
)
|
|
1.7
|
|
|
(0.5
|
)
|
Other
|
|
0.9
|
|
|
(0.5
|
)
|
|
0.6
|
|
|
(1.3
|
)
|
Total other, net
|
|
$
|
(2.1
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
(5.7
|
)
|
|
$
|
(13.0
|
)
|
In the first quarter of 2015, the Venezuelan government changed its policy regarding the bolivar, which required us to use the Sistema Marginal de Divisas or Marginal Exchange System ("SIMADI") a "completely free floating" rate. In the first nine months of 2015, the Venezuelan bolivar was devalued from approximately
52.0
bolivars to one US dollar ("USD") to approximately
200.0
bolivars to one USD. As a result of this devaluation, we recorded a foreign exchange loss of
$0.7 million
in the nine months ended October 2, 2015. During the first nine months of 2016, the Venezuelan bolivar was devalued from approximately
200.0
bolivars to one USD to approximately
655.0
bolivars to one USD, which we believe will be the rate available to us in the event we repatriate cash from Venezuela. This devaluation did not have a material impact on our consolidated financial statements as we have significantly less exposure in Venezuela in 2016.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Several of our subsidiaries conduct business in a currency other than the legal entity’s functional currency. Transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. The increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that is included in "Other, net" in the Condensed Consolidated Statements of Comprehensive Income (Loss).
We purchase foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts on our reported income. The foreign currency forward contracts are not designated as hedges for accounting purposes. Our strategy is to negotiate terms for our derivatives and other financial instruments to be highly effective, such that the change in the value of the derivative perfectly offsets the impact of the underlying hedged item (e.g., various foreign currency-denominated accounts). Our counterparties to foreign currency forward contracts have investment-grade credit ratings. We expect the creditworthiness of our counterparties to remain intact through the term of the transactions. We regularly monitor the creditworthiness of our counterparties to ensure no issues exist which could affect the value of the derivatives.
We do not hedge
100%
of our foreign currency-denominated accounts. In addition, the results of hedging can vary significantly based on various factors, such as the timing of executing the foreign currency forward contracts versus the movement of the currencies as well as the fluctuations in the account balances throughout each reporting period. The fair value of the foreign currency forward contracts is based on the difference between the contract rate and the current exchange rate. The fair value of the foreign currency forward contracts is measured using observable market information. These inputs would be considered Level 2 in the fair value hierarchy. At
September 30, 2016
and
January 1, 2016
, foreign currency forward contracts were revalued at then-current foreign exchange rates with the changes in valuation reflected directly in "Other, net" in the Condensed Consolidated Statements of Comprehensive Income (Loss) offsetting the transaction gain/loss recorded on the foreign currency-denominated accounts. At
September 30, 2016
and
January 1, 2016
, the gross notional amount of the foreign currency forward contracts outstanding was approximately
$122.1 million
and
$196.1 million
, respectively. At
September 30, 2016
and
January 1, 2016
, the net notional amount of the foreign currency forward contracts outstanding was approximately
$99.5 million
and
$132.8 million
, respectively. While all of our foreign currency forward contracts are subject to master netting arrangements with our counterparties, we present our assets and liabilities related to derivative instruments on a gross basis within the Condensed Consolidated Balance Sheets. The gross fair value of our derivative assets and liabilities are immaterial.
The combined effect of changes in both the equity and bond markets resulted in changes in the cash surrender value of our company owned life insurance policies associated with our sponsored deferred compensation program.
Accumulated other comprehensive income (loss):
We accumulate unrealized gains and losses in "Accumulated other comprehensive loss" ("AOCI"). These changes are also reported in "Other comprehensive income (loss)" on the Condensed Consolidated Statements of Comprehensive Income (Loss). These include unrealized gains and losses related to our defined benefit obligations, certain immaterial derivative transactions that have been designated as cash flow hedges and foreign currency translation. See
Note 8. "Pension Plans"
for pension related amounts reclassified into net income.
Our investments in several subsidiaries are recorded in currencies other than the USD. As these foreign currency denominated investments are translated at the end of each period during consolidation using period-end exchange rates, fluctuations of exchange rates between the foreign currency and the USD increase or decrease the value of those investments. These fluctuations and the results of operations for foreign subsidiaries, where the functional currency is not the USD, are translated into USD using the average exchange rates during the periods reported, while the assets and liabilities are translated using period-end exchange rates. The assets and liabilities-related translation adjustments are recorded as a separate component of AOCI, "Foreign currency translation." In addition, as our subsidiaries maintain investments denominated in currencies other than local currencies, exchange rate fluctuations will occur. Borrowings are raised in certain foreign currencies to minimize the exchange rate translation adjustment risk.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 2.
DISCONTINUED OPERATIONS
On February 9, 2015, our Board of Directors approved the disposition of the OEM Supply - Fasteners ("Fasteners") business. On February 11, 2015, through our wholly-owned subsidiary Anixter Inc., we entered into a definitive asset purchase agreement with American Industrial Partners ("AIP") to sell the Fasteners business for
$380.0 million
in cash, subject to certain post-closing adjustments. We closed the sale of the Fasteners business to AIP, excluding certain foreign locations, on June 1, 2015 and settled all net working capital adjustments relating to these entities in the fourth quarter of 2015. We received cash of
$371.8 million
on the sale of the Fasteners business. Including transaction related costs of
$16.4 million
, the sale resulted in a pre-tax gain of
$40.3 million
(
$23.3 million
, net of tax).
The assets and liabilities and operating results of the Fasteners business are presented as "discontinued operations" in our Condensed Consolidated Financial Statements. Current assets of discontinued operations are presented within "Other current assets" in the Condensed Consolidated Balance Sheets. Current and long-term liabilities of discontinued operations are presented within "Accrued Expenses" and "Other liabilities," respectively, in the Condensed Consolidated Balance Sheets. The components of the results from discontinued operations reflected in our Condensed Consolidated Statements of Cash Flows were immaterial.
We allocated interest costs to discontinued operations as a result of the sale of the Fasteners business. There was
no
allocated interest cost in 2016 or the three months ended October 2, 2015. The allocated interest cost was
$1.1 million
in the
nine months ended October 2, 2015
. This represents the amount of interest costs not directly attributable to our other operations that would not have been incurred if we had the proceeds from the sale of the Fasteners business at the beginning of the period.
The following represents the components of the results from discontinued operations as reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
Net sales
|
|
$
|
—
|
|
|
$
|
7.6
|
|
|
$
|
1.8
|
|
|
$
|
405.4
|
|
Operating income
|
|
$
|
—
|
|
|
$
|
(1.6
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
15.5
|
|
Income (loss) from discontinued operations before income taxes
|
|
$
|
0.2
|
|
|
$
|
(3.1
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
54.6
|
|
Income tax expense (benefit) from discontinued operations
|
|
$
|
0.1
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
23.0
|
|
Net income (loss) from discontinued operations
|
|
$
|
0.1
|
|
|
$
|
(2.9
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
31.6
|
|
As reflected on our Condensed Consolidated Balance Sheets as of
September 30, 2016
and
January 1, 2016
, the components of assets and liabilities of the Fasteners businesses classified as "discontinued operations" are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30,
2016
|
|
January 1,
2016
|
Assets of discontinued operations:
|
|
|
|
Accounts receivable
|
$
|
0.4
|
|
|
$
|
2.6
|
|
Inventories
|
0.1
|
|
|
1.2
|
|
Total assets of discontinued operations
|
$
|
0.5
|
|
|
$
|
3.8
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
Accounts payable
|
$
|
0.9
|
|
|
$
|
1.3
|
|
Accrued expenses
|
4.0
|
|
|
4.0
|
|
Other liabilities
|
—
|
|
|
1.7
|
|
Total liabilities of discontinued operations
|
$
|
4.9
|
|
|
$
|
7.0
|
|
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 3.
BUSINESS COMBINATION
On October 5, 2015, we completed the acquisition of the Power Solutions business ("Power Solutions") from HD Supply, Inc. in exchange for
$829.4 million
(net of cash and outstanding checks of
$11.7 million
). The acquisition was financed using borrowings under new financing arrangements and cash on hand.
Power Solutions was a compelling strategic acquisition for us that significantly enhances our competitive position in the electrical wire and cable business and further strengthens our customer and supplier value proposition. In addition to transforming our existing utility business into a leading North American distributor to the utility sector, this acquisition enables us to provide a full line electrical solution to our existing customers and provides us with broader access to the mid-size electrical construction market. The high voltage business of Power Solutions forms the Utility Power Solutions ("UPS") segment within our realigned reportable segments. The low voltage business of Power Solutions was combined into our historical Electrical and Electronic Wire and Cable ("W&C") segment to form the Electrical & Electronic Solutions ("EES") segment.
The following table sets forth the purchase price allocation, as of the acquisition date, for Power Solutions. The purchase price allocation, including the valuation of the acquired leases, intangible assets and related deferred tax liabilities was completed in the third quarter of 2016.
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Cash
|
|
|
$
|
11.7
|
|
Current assets, net
|
|
|
560.1
|
|
Property and equipment, net
|
|
|
30.6
|
|
Goodwill
|
|
|
195.0
|
|
Intangible assets
|
|
|
280.9
|
|
Non-current assets
|
|
|
5.4
|
|
Current liabilities
|
|
|
(234.1
|
)
|
Non-current liabilities
|
|
|
(8.5
|
)
|
Total purchase price
|
|
|
$
|
841.1
|
|
Power Solutions goodwill of
$35.4 million
and
$159.6 million
was recorded in the EES and UPS reportable segments, respectively. The goodwill resulting from the acquisition largely consists of our expected future product sales and synergies from combining Power Solutions products with our existing product offerings. Other than
$81.1 million
, the remaining goodwill is not deductible for tax purposes. The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of the acquisition:
|
|
|
|
|
|
|
(In millions)
|
Average useful life (in years)
|
|
Fair value
|
Customer relationships
|
14-18
|
|
$
|
278.5
|
|
Non-compete agreements
|
1
|
|
2.4
|
|
Total intangible assets
|
|
|
$
|
280.9
|
|
For the three months ended
September 30, 2016
, the Power Solutions acquisition added
$497.0 million
of revenue and
$15.7 million
in operating income to our consolidated results. For the
nine months ended
September 30, 2016
, the Power Solutions acquisition added
$1,501.9 million
of revenue and
$43.3 million
in operating income to our consolidated results. Since the date of acquisition, the Power Solutions results are reflected in our Condensed Consolidated Financial Statements.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following unaudited pro forma information shows our results of operations as if the acquisition of Power Solutions had been completed as of the beginning of fiscal 2015. Adjustments have been made for the pro forma effects of interest expense and deferred financing costs related to the financing for the acquisition, depreciation and amortization of tangible and intangible assets recognized as part of the business combinations, related income taxes and various other costs which would not have been incurred had we and Power Solutions operated as a combined entity.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions, except per share amounts)
|
|
October 2, 2015
|
|
October 2, 2015
|
Net sales
|
|
$
|
2,022.7
|
|
|
$
|
5,897.6
|
|
Net income from continuing operations
|
|
$
|
37.5
|
|
|
$
|
101.6
|
|
Income per share from continuing operations:
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
3.06
|
|
Diluted
|
|
$
|
1.12
|
|
|
$
|
3.04
|
|
NOTE 4.
RESTRUCTURING CHARGES
We consider restructuring activities to be programs whereby we fundamentally change our operations, such as closing and consolidating facilities, reducing headcount and realigning operations in response to changing market conditions. The following table summarizes activity related to liabilities associated with our restructuring activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Activity
|
|
Q2 2016
Plan
|
|
Q4 2015
Plan
|
|
Q2 2015
Plan
|
|
Q4 2012
Plan
|
|
Total
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
Balance at January 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
0.2
|
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
4.0
|
|
|
$
|
0.6
|
|
Charges
|
4.3
|
|
|
1.5
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.9
|
|
|
1.5
|
|
Payments and other
|
(1.2
|
)
|
|
(0.2
|
)
|
|
(1.3
|
)
|
|
(0.2
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(3.1
|
)
|
|
(0.5
|
)
|
Balance at September 30, 2016
|
$
|
3.1
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
4.8
|
|
|
$
|
1.6
|
|
|
|
(a)
|
Employee-related costs primarily consist of severance benefits provided to employees who have been involuntarily terminated.
|
|
|
(b)
|
Facility exit and other costs primarily consist of lease termination costs.
|
Q2 2016 Restructuring Plan
In the second quarter of 2016, we recorded a pre-tax charge of
$2.1 million
,
$1.4 million
, and
$2.2 million
in our NSS, EES, and UPS segments, respectively, and an additional
$0.1 million
at our corporate headquarters, primarily for severance-related expenses associated with a reduction of approximately
150
positions. The
$5.8 million
charge primarily reflects actions we are taking to improve efficiencies in our Canada and Latin America regions. This charge was included in "Operating expenses" in our Consolidated Statement of Comprehensive Income (Loss) in the second quarter of 2016. The majority of the remaining charge included in accrued expenses of
$4.4 million
as of
September 30, 2016
is expected to be paid by the second quarter of 2017.
Q4 2015 Restructuring Plan
In the fourth quarter of 2015, we recorded a pre-tax charge of
$1.0 million
,
$2.3 million
and
$0.1 million
in our NSS, EES, and UPS segments, respectively, primarily for severance-related expenses associated with a reduction of approximately
80
positions. The
$3.4 million
charge primarily reflects actions we are taking to improve efficiencies in conjunction with the acquisition of Power Solutions. This charge was included in "Operating expenses" in our Consolidated Statement of Comprehensive Income (Loss) for fiscal year 2015. The majority of the remaining charge included in accrued expenses of
$1.3 million
as of
September 30, 2016
is expected to be paid by the second quarter of 2017.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Q2 2015 Restructuring Plan
In the second quarter of 2015, we recorded a pre-tax charge of
$3.0 million
and
$2.2 million
in our NSS and EES segments, respectively, and an additional
$0.1 million
at our corporate headquarters for severance-related expenses associated with a reduction of approximately
100
positions. The
$5.3 million
charge reflects actions we took to improve efficiencies and eliminate the stranded costs in conjunction with the sale of the Fasteners business. In the fourth quarter of 2015, we reduced the charge by
$0.5 million
, primarily in our EES segment, due to a reduction in estimated future obligations under the plan. This charge was included in "Operating expenses" in our Consolidated Statement of Comprehensive Income (Loss) for fiscal year 2015. The majority of the remaining charge included in accrued expenses of
$0.4 million
as of
September 30, 2016
is expected to be paid by the fourth quarter of 2016.
Q4 2012 Restructuring Plan
In the fourth quarter of 2012, recognizing the ongoing challenging global economic conditions, we took aggressive actions to restructure our costs across all segments and geographies, resulting in a pre-tax charge of
$4.1 million
and
$2.8 million
in our NSS and EES segments, respectively. The
$6.9 million
restructuring charge primarily consisted of severance-related expenses associated with a reduction of over
200
positions. This charge was included in "Operating expenses" in our Consolidated Statement of Income for fiscal year 2012. At
September 30, 2016
, the majority of the remaining charge included in accrued expenses of
$0.3 million
is expected to be paid by the fourth quarter of 2016.
NOTE 5.
DEBT
Debt is summarized below:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 30,
2016
|
|
January 1,
2016
|
Long-term debt:
|
|
|
|
|
5.50% Senior notes due 2023
|
|
$
|
346.2
|
|
|
$
|
345.8
|
|
5.125% Senior notes due 2021
|
|
395.5
|
|
|
394.9
|
|
5.625% Senior notes due 2019
|
|
347.4
|
|
|
346.8
|
|
Canadian term loan
|
|
123.8
|
|
|
172.9
|
|
Revolving lines of credit
|
|
221.0
|
|
|
390.1
|
|
Other
|
|
2.1
|
|
|
2.6
|
|
Unamortized debt issuance costs
|
|
(7.5
|
)
|
|
(10.2
|
)
|
Total long-term debt
|
|
$
|
1,428.5
|
|
|
$
|
1,642.9
|
|
Retirement of Debt
In the first quarter of 2015, we retired our
5.95%
Senior notes due 2015 upon maturity for
$200.0 million
. Available borrowings under existing long-term financing agreements were used to settle the maturity value.
Fair Value of Debt
The fair value of our debt instruments is measured using observable market information which would be considered Level 2 in the fair value hierarchy described in accounting guidance on fair value measurements. Our fixed-rate debt consists of the Senior notes due 2023, Senior notes due 2021 and Senior notes due 2019.
At
September 30, 2016
, our total carrying value and estimated fair value of debt outstanding was
$1,428.5 million
and
$1,496.4 million
, respectively. This compares to a carrying value and estimated fair value of debt outstanding at
January 1, 2016
of
$1,642.9 million
and
$1,669.5 million
, respectively. The decrease in the carrying value and estimated fair value is primarily due to lower outstanding borrowings under our revolving lines of credit and partial repayment of our Canadian term loan.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6.
LEGAL CONTINGENCIES
From time to time, we are party to legal proceedings and matters that arise in the ordinary course of business. As of
September 30, 2016
, we do not believe there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, our financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
NOTE 7.
INCOME TAXES
Our effective tax rate from continuing operations for the
third
quarter of 2016 was
38.4%
, which included a
$2.1 million
net tax benefit related to prior year tax positions, compared to
37.8%
in the prior year quarter. Our effective tax rate from continuing operations for the
nine months ended September 30, 2016
was
39.3%
compared to
37.5%
in the prior year period. Year over year, the increase was attributable to a change in the country mix of earnings, offset by a
$2.1 million
net tax benefit from prior year tax positions.
As of January 2, 2015, we asserted permanent reinvestment of all non-U.S. earnings, including the non-U.S. earnings of the Fasteners business. As a result of our Board of Directors’ approval of the disposition of the Fasteners business during February 2015, we were no longer permanently reinvested with respect to the non-U.S. earnings of the Fasteners business, because, following the disposition, we intended to repatriate to the U.S. most of the net proceeds attributable to the sale of the non-U.S. Fasteners business via intercompany debt repayment, dividend or other means. During the second quarter of 2015, we refined the anticipated repatriation amount and the estimated tax impact of the change in the reinvestment assertion, and we reduced the first quarter estimate by
$4.9 million
. Therefore, our nine months ended October 2, 2015 results included, as a component of discontinued operations,
$10.3 million
of expense for U.S. federal and state, and foreign income taxes and withholding taxes related to this change in our reinvestment assertion. We consider the remaining undistributed earnings of our foreign subsidiaries, along with future earnings, to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes or any withholding taxes has been recorded.
NOTE 8.
PENSION PLANS
Our defined benefit pension plans are the plans in the United States, which consist of the Anixter Inc. Pension Plan, the Executive Benefit Plan and the Supplemental Executive Retirement Plan ("SERP") (together the "Domestic Plans") and various defined benefit pension plans covering employees of foreign subsidiaries in Canada and Europe (together the "Foreign Plans"). The majority of our defined benefit pension plans are non-contributory and cover substantially all full-time domestic employees and certain employees in other countries. Retirement benefits are provided based on compensation as defined in both the Domestic Plans and the Foreign Plans. Our policy is to fund all Domestic Plans as required by the Employee Retirement Income Security Act of 1974 ("ERISA") and the IRS and all Foreign Plans as required by applicable foreign laws. The Executive Benefit Plan and SERP are the only two plans that are unfunded. Assets in the various plans consist primarily of equity securities and fixed income investments.
In the fourth quarter of 2015, we commenced settlement of the liabilities of one of our Europe pension plans. At that time, we entered into a buy-in policy with an insurance carrier for that plan. In the second quarter of 2016, we terminated the buy-in policy and entered into an agreement for issuance of a buy-out policy and settled the pension obligation. Accumulated other comprehensive losses of approximately
$9.6 million
(£
6.9 million
) were realized as a result of the settlement and are reflected in our Condensed Consolidated Statement of Comprehensive Income (Loss).
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Components of net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
(In millions)
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
Service cost
|
|
$
|
1.5
|
|
|
$
|
1.1
|
|
|
$
|
1.4
|
|
|
$
|
1.7
|
|
|
$
|
2.9
|
|
|
$
|
2.8
|
|
Interest cost
|
|
3.5
|
|
|
2.4
|
|
|
1.8
|
|
|
2.3
|
|
|
5.3
|
|
|
4.7
|
|
Expected return on plan assets
|
|
(4.4
|
)
|
|
(3.1
|
)
|
|
(2.2
|
)
|
|
(2.6
|
)
|
|
(6.6
|
)
|
|
(5.7
|
)
|
Net amortization
(a)
|
|
0.7
|
|
|
0.2
|
|
|
0.6
|
|
|
0.7
|
|
|
1.3
|
|
|
0.9
|
|
Net periodic pension cost
|
|
$
|
1.3
|
|
|
$
|
0.6
|
|
|
$
|
1.6
|
|
|
$
|
2.1
|
|
|
$
|
2.9
|
|
|
$
|
2.7
|
|
(a) Reclassified into operating expenses from AOCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
(In millions)
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
Service cost
|
|
$
|
3.9
|
|
|
$
|
4.1
|
|
|
$
|
4.4
|
|
|
$
|
5.0
|
|
|
$
|
8.3
|
|
|
$
|
9.1
|
|
Interest cost
|
|
9.2
|
|
|
9.1
|
|
|
6.2
|
|
|
6.9
|
|
|
15.4
|
|
|
16.0
|
|
Expected return on plan assets
|
|
(11.5
|
)
|
|
(11.9
|
)
|
|
(7.3
|
)
|
|
(7.9
|
)
|
|
(18.8
|
)
|
|
(19.8
|
)
|
Net amortization
(a)
|
|
1.7
|
|
|
1.1
|
|
|
1.9
|
|
|
2.2
|
|
|
3.6
|
|
|
3.3
|
|
Settlement charge
|
|
—
|
|
|
—
|
|
|
9.6
|
|
|
—
|
|
|
9.6
|
|
|
—
|
|
Net periodic pension cost
|
|
$
|
3.3
|
|
|
$
|
2.4
|
|
|
$
|
14.8
|
|
|
$
|
6.2
|
|
|
$
|
18.1
|
|
|
$
|
8.6
|
|
(a) Reclassified into operating expenses from AOCI.
NOTE 9.
STOCKHOLDERS' EQUITY
At the end of the
third
quarter of 2016, there were
1.2 million
shares reserved for issuance under all incentive plans. Under the current stock incentive plans, we pay non-employee directors annual retainer fees, a portion of which are in the form of stock units. Employee and director stock units are included in common stock outstanding on the date of vesting, and stock options are included in common stock outstanding upon exercise by the participant. The fair value of employee stock options and units is amortized over the respective vesting period representing the requisite service period, generally
three
,
four
or
six
years for stock units and
four
years for stock options. Director stock units are expensed in the period in which they are granted, as these vest immediately.
During the first quarter of 2016, we initiated a performance-based restricted stock unit ("performance units") program that will vest in one-third tranches to be evaluated on the anniversary of the first, second and third performance cycles. Each evaluation period will be based on the achievement of our total shareholder return ("TSR") relative to the TSR of the S&P Mid Cap 400 index. The issuance of the vested shares will be on the final vesting date of year three. The granted units will be adjusted based on the specific payout percentage of the grant agreement. The fair value of each tranche related to the performance units were estimated at the grant date using the Monte Carlo Simulation pricing model.
During the
three months ended September 30, 2016
, we did not grant stock units or performance units to employees. During the
nine months ended
September 30, 2016
, we granted
405,628
stock units to employees with a weighted-average grant-date fair value of
$17.8 million
. During the
nine months ended
September 30, 2016
, we granted
85,839
performance units to employees with a weighted-average grant-date fair value of
$1.8 million
. During the
three months ended September 30, 2016
, we did not grant stock units to our directors. During the
nine months ended
September 30, 2016
, we granted directors
23,167
stock units, with a weighted-average grant-date fair value of
$1.2 million
. We exclude antidilutive stock options and units from the calculation of weighted-average shares for diluted earnings per share. For the
third
quarter of 2016 and 2015, the antidilutive stock options and units were immaterial.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 10.
BUSINESS SEGMENTS
We are a leading distributor of enterprise cabling and security solutions, electrical and electronic wire and cable products and utility power solutions. We have identified Network & Security Solutions ("NSS"), Electrical and Electronic Solutions ("EES") and Utility Power Solutions ("UPS") as reportable segments.
We incur corporate expenses to obtain and coordinate financing, tax, information technology, legal and other related services, certain of which were rebilled to subsidiaries. These corporate expenses were historically allocated to our business segments based primarily on projected sales and estimated use of time. A portion of these corporate expenses were reported in corporate as they historically had been allocated to the Fasteners segment but were not considered directly related to the discontinued operations. Beginning in the first quarter of 2016, we no longer allocate corporate expenses to our business segments. We also have various corporate assets which are reported in corporate. Segment assets may not include jointly used assets, but segment results include depreciation expense or other allocations related to those assets as such allocation is made for internal reporting. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis, except as previously discussed in Note 2. "Discontinued Operations."
The categorization of net sales by end market is determined using a variety of data points including the technical characteristic of the product, the "sold to" customer information, the "ship to" customer information and the end customer product or application into which our product will be incorporated. We also have largely specialized our sales organization by segment. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify net sales by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
Segment Financial Information
Segment information for the three and
nine months ended
September 30, 2016
and
October 2, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Third Quarter of 2016
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
1,049.9
|
|
|
$
|
535.1
|
|
|
$
|
371.3
|
|
|
$
|
—
|
|
|
$
|
1,956.3
|
|
Operating income
|
|
74.9
|
|
|
28.7
|
|
|
15.8
|
|
|
(32.1
|
)
|
|
87.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter of 2015 (As revised)
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
1,046.9
|
|
|
$
|
423.6
|
|
|
$
|
18.7
|
|
|
$
|
—
|
|
|
$
|
1,489.2
|
|
Operating income
|
|
74.1
|
|
|
32.5
|
|
|
2.7
|
|
|
(31.1
|
)
|
|
78.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months of 2016
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
3,043.7
|
|
|
$
|
1,596.2
|
|
|
$
|
1,088.3
|
|
|
$
|
—
|
|
|
$
|
5,728.2
|
|
Operating income
|
|
198.6
|
|
|
75.1
|
|
|
42.1
|
|
|
(111.5
|
)
|
|
204.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months of 2015 (As revised)
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
2,986.6
|
|
|
$
|
1,313.9
|
|
|
$
|
54.2
|
|
|
$
|
—
|
|
|
$
|
4,354.7
|
|
Operating income
|
|
196.4
|
|
|
101.9
|
|
|
7.1
|
|
|
(103.4
|
)
|
|
202.0
|
|
Net sales and operating income in our UPS segment for the nine months ended October 2, 2015 were previously reported in our EES segment.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Goodwill Assigned to Segments
The following table presents the changes in goodwill allocated to our reporting units during the nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
NSS
|
|
EES
|
|
UPS
|
|
Total
|
Balance as of January 1, 2016
|
|
$
|
393.3
|
|
|
$
|
211.9
|
|
|
$
|
151.3
|
|
|
$
|
756.5
|
|
Acquisition related
(a)
|
|
(0.5
|
)
|
|
0.7
|
|
|
4.3
|
|
|
4.5
|
|
Reassignment of goodwill
|
|
11.2
|
|
|
(31.8
|
)
|
|
20.6
|
|
|
—
|
|
Foreign currency translation
|
|
2.5
|
|
|
0.5
|
|
|
5.6
|
|
|
8.6
|
|
Balance as of September 30, 2016
|
|
$
|
406.5
|
|
|
$
|
181.3
|
|
|
$
|
181.8
|
|
|
$
|
769.6
|
|
|
|
(a)
|
In the first, second and third quarters of 2016, we recorded an immaterial increase in goodwill primarily related to determining the fair value of inventory and fixed assets relating to the Power Solutions acquisition.
|
We evaluate goodwill for impairment annually at the beginning of the third quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. We assess goodwill for impairment by first performing a qualitative assessment, which considers specific factors, based on the weight of evidence, and the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount using the qualitative assessment, we perform the two-step impairment test. From time to time, we may also bypass the qualitative assessment and proceed directly to the two-step impairment test. The first step of the impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. The estimates of fair value of a reporting unit are determined using the income approach and/or the market approach as described below. If step one of the test indicates a carrying value above the estimated fair value, the second step of the goodwill impairment test is performed by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied residual value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
As a result of the reclassification of net sales of various product categories between our segments during the first half of 2016, we reassigned the carrying amount of goodwill based on the relative fair value of our reporting units. We then performed the quantitative two-step impairment test of goodwill for all reporting units before and after the change in composition of our segments utilizing a combination of the income and market approaches, both of which are broadly defined below. We concluded that no impairment of goodwill existed and the carrying amount of goodwill to be fully recoverable.
In connection with our annual assessment of goodwill at the beginning of the third quarter of 2016, we bypassed the qualitative assessment and performed a quantitative test for all reporting units and utilized a combination of the income and market approaches, both of which are broadly defined below. As a result of this assessment, we concluded that no impairment existed and the carrying amount of goodwill to be fully recoverable.
The income approach is a quantitative evaluation to determine the fair value of the reporting unit. Under the income approach we determine the fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital plus a forecast risk, which reflects the overall level of inherent risk of the reporting unit and the rate of return a market participant would expect to earn. The inputs used for the income approach were significant unobservable inputs, or Level 3 inputs, as described in the accounting fair value hierarchy. Estimated future cash flows were based on our internal projection models, industry projections and other assumptions deemed reasonable by management.
The market approach measures the fair value of a reporting unit through the analysis of recent sales, offerings, and financial multiples (sales or earnings before interest, tax, depreciation and amortization ("EBITDA")) of comparable businesses. Consideration is given to the financial conditions and operating performance of the reporting unit being valued relative to those publicly-traded companies operating in the same or similar lines of business.
Although all of our reporting units have fair values that currently exceed the underlying carrying values, the margin of fair value over carrying value of our NSS and UPS reporting units were greater than
10%
, while the fair value of our EES reporting unit was approximately
1%
greater than its carrying value due to the combined effects of the weaker industrial economy and lower commodity prices on a year over year basis. As a result, this unit is more susceptible to impairment risk from further adverse macroeconomic conditions. Any such adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges relating to the EES reporting unit.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11.
SUMMARIZED FINANCIAL INFORMATION OF ANIXTER INC.
Anixter International Inc. guarantees, fully and unconditionally, substantially all of the debt of our subsidiaries, which include Anixter Inc., our 100% owned primary operating subsidiary. We have no independent assets or operations and all subsidiaries other than Anixter Inc. are minor. The following summarizes the financial information for Anixter Inc.:
ANIXTER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 30,
2016
|
|
January 1,
2016
|
Assets:
|
|
|
|
|
Current assets
|
|
$
|
2,751.0
|
|
|
$
|
2,727.2
|
|
Property, equipment and capital leases, net
|
|
149.2
|
|
|
141.1
|
|
Goodwill
|
|
769.7
|
|
|
756.5
|
|
Intangible assets, net
|
|
426.3
|
|
|
453.8
|
|
Other assets
|
|
73.2
|
|
|
72.1
|
|
|
|
$
|
4,169.4
|
|
|
$
|
4,150.7
|
|
Liabilities and Stockholder’s Equity:
|
|
|
|
|
Current liabilities
|
|
$
|
1,299.1
|
|
|
$
|
1,156.8
|
|
Long-term debt
|
|
1,440.2
|
|
|
1,655.6
|
|
Other liabilities
|
|
149.1
|
|
|
161.1
|
|
Stockholder’s equity
|
|
1,281.0
|
|
|
1,177.2
|
|
|
|
$
|
4,169.4
|
|
|
$
|
4,150.7
|
|
ANIXTER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
|
September 30,
2016
|
|
October 2,
2015
|
|
September 30,
2016
|
|
October 2,
2015
|
Net sales
|
|
$
|
1,956.3
|
|
|
$
|
1,489.2
|
|
|
$
|
5,728.2
|
|
|
$
|
4,354.7
|
|
Operating income
|
|
$
|
88.9
|
|
|
$
|
79.7
|
|
|
$
|
209.0
|
|
|
$
|
206.4
|
|
Income from continuing operations before income taxes
|
|
$
|
66.6
|
|
|
$
|
58.2
|
|
|
$
|
142.7
|
|
|
$
|
149.9
|
|
Net income (loss) from discontinued operations
|
|
$
|
0.1
|
|
|
$
|
(2.9
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
31.6
|
|
Net income
|
|
$
|
41.2
|
|
|
$
|
33.1
|
|
|
$
|
86.0
|
|
|
$
|
125.3
|
|
Comprehensive income (loss)
|
|
$
|
32.8
|
|
|
$
|
(1.4
|
)
|
|
$
|
98.7
|
|
|
$
|
57.2
|
|
ANIXTER INTERNATIONAL INC.