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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER: 1-5989
ANIXTER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1658138
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2301 PATRIOT BLVD.
GLENVIEW, ILLINOIS 60025
(224) 521-8000
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
At November 3, 2003, 36,238,906 shares of the registrant's Common
Stock, $1.00 par value, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.......... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 21
Item 4. Controls and Procedures....................................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. *
Item 2. Changes in Securities and Use of Proceeds..................................................... *
Item 3. Defaults Upon Senior Securities............................................................... *
Item 4. Submission of Matters to a Vote of Security Holders........................................... *
..
Item 5. Other Information............................................................................. *
Item 6. Exhibits and Reports on Form 8-K.............................................................. 22
- --------------.
*No reportable information under this item.
This report may contain various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which can be identified by the use
of forward-looking terminology such as "believe", "expects", "prospects",
"estimated", "should", "may" or the negative thereof or other variations thereon
or comparable terminology indicating the Company's expectations or beliefs
concerning future events. The company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, a number of which are
identified in this report. Other factors could also cause actual results to
differ materially from expected results included in these statements. These
factors include general economic conditions, technology changes, changes in
supplier or customer relationships, exchange rate fluctuations and new or
changed competitors.
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- ---------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2003 2002
-------------------------- ---------------------------
NET SALES $ 653.4 $ 626.3 $ 1,960.4 $ 1,858.3
Cost of Operations:
Cost of goods sold 495.1 478.3 1,483.3 1,424.4
Operating expenses 134.6 124.9 408.8 367.8
Amortization of intangibles 0.4 -- 1.1 --
-------- -------- ---------- ----------
Total costs and expenses 630.1 603.2 1,893.2 1,792.2
-------- -------- ---------- ----------
OPERATING INCOME 23.3 23.1 67.2 66.1
Other (expense) income:
Interest expense (3.2) (3.1) (9.9) (11.9)
Extinguishment of debt -- 1.3 (6.2) (0.3)
Other, net -- (2.0) (0.7) 0.9
-------- -------- ---------- ----------
Income before income taxes 20.1 19.3 50.4 54.8
Income tax expense 8.8 7.7 21.6 21.9
-------- -------- ---------- ----------
NET INCOME $ 11.3 $ 11.6 $ 28.8 $ 32.9
======== ======== ========== ==========
BASIC INCOME PER SHARE $ 0.31 $ 0.31 $ 0.79 $ 0.89
DILUTED INCOME PER SHARE $ 0.31 $ 0.30 $ 0.77 $ 0.86
See accompanying notes to the condensed consolidated financial statements.
1
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 3, JANUARY 3,
2003 2003
------------ ----------
(IN MILLIONS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 38.9 $ 19.1
Accounts receivable (less allowances of
$15.9 and $15.4 in 2003 and 2002, respectively) 254.2 188.2
Note receivable - unconsolidated subsidiary 28.6 69.6
Inventories 481.5 498.8
Deferred income taxes 26.8 26.5
Other current assets 12.1 10.0
--------- ---------
Total current assets 842.1 812.2
Property and equipment, at cost 203.5 191.1
Accumulated depreciation (131.9) (132.0)
--------- ---------
Property and equipment, net 71.6 59.1
Goodwill (less accumulated amortization of
$97.5 and $96.0 in 2003 and 2002, respectively) 286.8 247.6
Other assets 116.4 107.1
--------- ---------
$ 1,316.9 $ 1,226.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 279.0 $ 257.3
Accrued expenses 77.4 83.5
Accrued restructuring 3.4 4.2
Income taxes payable 3.0 4.7
--------- ---------
Total current liabilities 362.8 349.7
Long-term debt 240.9 195.1
Other liabilities 52.2 46.4
--------- ---------
Total liabilities 655.9 591.2
STOCKHOLDERS' EQUITY
Common stock --- $1.00 par value, 100,000,000 shares authorized,
36,226,156 and 37,500,878 shares issued and outstanding
in 2003 and 2002, respectively 36.2 37.5
Capital surplus 19.0 45.2
Foreign currency translation (18.7) (43.9)
Minimum pension liability (0.3) (0.3)
Unrealized loss on foreign exchange contracts (0.3) --
Retained earnings 625.1 596.3
--------- ---------
Total stockholders' equity 661.0 634.8
--------- ---------
$ 1,316.9 $ 1,226.0
========= =========
See accompanying notes to the condensed consolidated financial statements.
2
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39 WEEKS ENDED
------------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
OPERATING ACTIVITIES
Net income $ 28.8 $ 32.9
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Loss on extinguishment of debt 6.2 0.3
Loss (gain) on sale or disposal of fixed assets and
securities 0.3 (3.1)
Depreciation and amortization 18.0 17.0
Accretion of zero-coupon convertible notes 6.6 9.6
Income tax savings from employee stock plans 0.5 2.4
Changes in current assets and liabilities, net 23.2 76.3
Restructuring charge (2.3) (9.2)
Other, net 2.1 8.8
---------- -------------
Net cash provided by continuing operating activities 83.4 135.0
INVESTING ACTIVITIES
Capital expenditures (23.5) (10.2)
Acquisition of business (42.0) (110.4)
Proceeds from the sale of fixed assets 1.6 2.9
Proceeds from the sale of investments 2.5 2.0
---------- -------------
Net cash used in continuing investing activities (61.4) (115.7)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 285.9 110.4
Repayment of long-term borrowings (319.3) (58.4)
Proceeds from issuance of notes payable 143.8 --
Retirement of notes payable (75.9) (99.3)
Purchases of common stock for treasury (35.6) --
Proceeds from issuance of common stock 4.8 7.1
Debt issuance costs (4.3) (0.6)
Other, net (0.6) --
---------- -------------
Net cash used in continuing financing activities (1.2) (40.8)
---------- -------------
INCREASE (DECREASE) IN CASH FROM CONTINUING OPERATIONS 20.8 (21.5)
Net cash used in discontinued operations (1.0) (0.7)
Cash at beginning of period 19.1 27.2
---------- -------------
Cash at end of period $ 38.9 $ 5.0
========== =============
See accompanying notes to the condensed consolidated financial statements.
3
ANIXTER INTERNATIONAL INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements included in
Anixter International Inc.'s ("the Company") Annual Report on Form 10-K for the
year ended January 3, 2003. 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 results of operations of any interim period are not necessarily
indicative of the results that may be expected for a full fiscal year. Certain
amounts for the prior year have been reclassified to conform to the 2003
presentation.
Recently Issued Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical
Corrections", effective for fiscal years beginning after May 15, 2002. SFAS No.
145 rescinds FASB Statement No. 4, 44, 64 and amends SFAS No. 13, "Accounting
for Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Additionally, SFAS No. 145 requires gains and losses on
extinguishment of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. The Company adopted SFAS No.145 as required on January 4, 2003. As a
result, any gain or loss from the extinguishment of debt is recorded as other
income or expense before income taxes. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods has been
reclassified in accordance with this statement. The adoption of SFAS No. 145 did
not have a material effect on the Company's results of operations, financial
position or debt covenants.
In the first quarter 2003, the Company adopted Emerging Issues Task
Force ("EITF") Issue 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor. Under the new accounting guidance,
cash consideration for reimbursement of specific, identifiable and incremental
costs incurred by the Company to sell the vendor's products should be
characterized as a reduction of the associated cost when recognized in the
Company's income statement. Previously, all reimbursements from vendors were
classified as a reduction of costs of sales, while the associated costs were
classified as operating expenses. Accordingly, the Company reclassified the
prior corresponding period amount. This change in accounting increased cost of
sales and reduced operating expenses for the 13 weeks and 39 weeks ended October
3, 2003 and September 27, 2002, by $2.2 million and $6.1 million, and $1.9
million and $5.5 million, respectively. As a result, there was no impact on net
income.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have an effect on the Company's results of operations, financial position or
debt covenants.
4
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
standard improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The standard requires
that those instruments be classified as liabilities in statements of financial
position. This standard is effective for interim periods beginning after June
15, 2003. The adoption of SFAS No. 150 did not have an effect on the Company's
results of operations, financial position or debt covenants.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the company that has the
controlling financial interest. Interpretation No. 46 also provides guidance for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. The adoption of
Interpretation No. 46 did not impact the Company's condensed consolidated
financial statements.
Stock based compensation
Beginning in 2003, the Company granted restricted employee stock units
in lieu of employee stock options. The fair value of the restricted stock units
is amortized over the four year vesting period from the date of grant. During
the 13 and 39 weeks ended October 3, 2003, $0.5 million and $1.2 million was
recognized as expense, respectively. Total expense for fiscal 2003 is expected
to be approximately $1.7 million.
Under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No.148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of SFAS No.123, the
Company has elected to continue to apply the intrinsic value method of
Accounting Principles Board ("APB") Opinion No 25, "Accounting for Stock Issued
to Employees," and its related interpretations in accounting for its stock-based
compensation plans. In accordance with the APB Opinion 25, compensation cost of
stock options issued were measured as the excess, if any, of the quoted market
price of the company's stock at the date of the grant over the option exercise
price and is charged to operations over the vesting period. The Company applied
the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation
expense has been recognized in the Condensed Consolidated Statements of
Operations for the stock option plans.
The Black-Scholes option pricing model was developed for estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's stock options. Had compensation costs for the plans been
determined based on the fair value at the grant date using the Black-Scholes
option pricing model and amortized over the respective vesting period, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
5
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- ------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income as reported $ 11.3 $ 11.6 $ 28.8 $ 32.9
Add: Stock-based employee compensation
included in net income, net 0.6 0.5 1.8 1.6
Deduct: Stock-based employee
compensation, net (2.4) (2.6) (7.6) (7.7)
----------- ----------- ---------- ----------
Pro forma net income $ 9.5 $ 9.5 $ 23.0 $ 26.8
=========== =========== ========== ==========
BASIC EARNINGS PER SHARE:
as reported $ 0.31 $ 0.31 $ 0.79 $ 0.89
pro forma $ 0.26 $ 0.26 $ 0.63 $ 0.73
DILUTED EARNINGS PER SHARE:
as reported $ 0.31 $ 0.30 $ 0.77 $ 0.86
pro forma $ 0.26 $ 0.26 $ 0.63 $ 0.72
The weighted average fair value of the Company's stock options (which
was $11.36 and $14.79 per share for the 13 weeks and 39 weeks ended September
27, 2002, respectively) was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: expected
stock price volatility of 46%; expected dividend yield of zero; risk-free
interest rate of 4.7%; and an average expected life of 8 years.
NOTE 2. COMPREHENSIVE INCOME
Comprehensive income, net of tax, consisted of the following:
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------ -----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002 2003 2002
------------ ------------ ------------ -------------
Net income $ 11.3 $ 11.6 $ 28.8 $ 32.9
Change in cumulative translation adjustment 1.5 (3.0) 25.2 15.0
Change in fair market value of derivatives 0.3 (0.1) (0.3) (5.2)
------------ ------------ ------------ -------------
Comprehensive income $ 13.1 $ 8.5 $ 53.7 $ 42.7
============ ============ ============ =============
NOTE 3. ACQUISITION
In the third quarter of 2003, the Company purchased 100% of the stock
of Walters Hexagon Group Limited ("Walters Hexagon") for $42.7 million,
inclusive of legal and financial advisory fees. The stock purchase agreement
provides for additional purchase consideration of up to a maximum of $5.8
million based on the future operating performance of the company. Headquartered
in Worcester, England, Walters Hexagon is a leading distributor of fasteners and
other small parts to Original Equipment Manufacturers and provides inventory
management services to a range of markets and industries. Walters Hexagon
operates a network of nine regional customer service centers in the United
Kingdom and France and employs approximately 270 people which support
warehousing and distribution. The Company believes Walters Hexagon's business
model and position as a value-added distributor complements its current
business. Assets and liabilities have been recorded at estimated fair value
based on a preliminary allocation of the purchase price. Had this acquisition
occurred at the beginning of the year, the impact on the Company's operating
results would not have been significant. The purchase was funded with on-hand
excess cash balances along with the assumption of $0.7 million of Walters
Hexagon's debt.
6
On September 20, 2002, Company completed the purchase of the operations
and assets of Pentacon, Inc. ("Pentacon"), pursuant to Pentacon's plan of
reorganization filed under Chapter 11 of the United States Bankruptcy Code.
Pentacon is a leading distributor of fasteners and other small parts to original
equipment manufacturers and provider of inventory management services and has 21
distribution and sales facilities in the United States, along with sales offices
and agents in Europe, Canada, Mexico and Australia. The Company paid a total of
$111.4 million, including transaction-related costs, for tangible assets with a
fair value of approximately $74.7 million. The tangible net assets primarily
consist of accounts receivable, inventory, office and warehouse equipment and
furnishings, accounts payable and select operating liabilities. Based upon a
third party valuation, intangible assets have also been recorded at an estimated
fair value as follows: $13.8 million of intangible assets with finite lives
(customer relationships) and a $1.8 million intangible asset with an indefinite
life (trade name). Goodwill resulting from the transaction totaled $21.1
million. Customer relationships are being amortized on a straight-line basis
over approximately 9 years. The acquisition was accounted for as a purchase and
the results of operations of the acquired business are included in the condensed
consolidated financial statements from the date of acquisition. In the 13 and 39
weeks ended October 3, 2003, Pentacon contributed sales of $47.0 million and
$142.1 million, respectively, and operating income of $1.4 million and $3.9
million, respectively. The results for the third quarter 2002 did not
significantly impact the Company's operating results.
NOTE 4. INCOME PER SHARE
The following table sets forth the computation of basic and diluted
income per common share:
13 WEEKS ENDED 39 WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2003 2002
---------- ------------- ---------- -----------
NET INCOME $ 11.3 $ 11.6 $ 28.8 $ 32.9
BASIC INCOME PER SHARE:
Weighted average common shares outstanding 35.9 37.1 36.4 36.9
Net income per share $ 0.31 $ 0.31 $ 0.79 $ 0.89
DILUTED INCOME PER SHARE:
Weighted-average common shares outstanding 35.9 37.1 36.4 36.9
Effect of dilutive securities:
Stock options and units 0.8 0.9 0.9 1.1
---------- ------------ ----------- -----------
Weighted-average common shares outstanding 36.7 38.0 37.3 38.0
========== ============ ========== ===========
Net income per share $ 0.31 $ 0.30 $ 0.77 $ 0.86
Common stock equivalents relating to the 7% zero coupon convertible
notes were excluded from the calculation of diluted income per share because the
effect would have been antidilutive. The 3.25% zero coupon convertible notes
were excluded from the calculation of diluted income per share as they cannot be
converted until after October 3, 2003, contingent on certain conditions. See
Note 6.
7
NOTE 5. SUMMARIZED FINANCIAL INFORMATION OF ANIXTER INC.
The Company guarantees, fully and unconditionally, substantially all of
the debt of its subsidiaries which includes Anixter Inc. Certain debt agreements
entered into by Anixter Inc. contain various restrictions including restrictions
on payments to the Company. Such restrictions have not had nor are expected to
have an adverse impact on the Company's ability to meet its cash obligations.
The following summarizes the financial information for Anixter Inc.:
ANIXTER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 3, JANUARY 3,
(IN MILLIONS) 2003 2003
------------ -----------
(UNAUDITED)
ASSETS:
Current assets $ 825.2 $ 813.4
Property, net 71.6 59.1
Goodwill, net 286.8 247.6
Other assets 119.1 104.1
------------- -----------
$ 1,302.7 $ 1,224.2
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 371.2 $ 347.3
Subordinated notes payable to parent 189.6 210.2
Long-term debt 30.0 71.1
Other liabilities 52.2 46.2
Stockholders' equity 659.7 549.4
------------- -----------
$ 1,302.7 $ 1,224.2
============= ===========
ANIXTER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- ----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002 2003 2002
------------- ------------- ---------- -------------
Net sales $ 653.4 $ 626.3 $ 1,960.4 $ 1,858.3
Operating income $ 23.7 $ 23.2 $ 68.7 $ 66.1
Income before income taxes $ 20.3 $ 17.2 $ 56.3 $ 53.5
Net income $ 11.4 $ 10.2 $ 32.2 $ 31.7
8
NOTE 6. CONVERTIBLE NOTES DUE 2033
On July 1, 2003, the Company issued $328.8 million of 3.25% zero coupon
convertible senior notes (together with the overallotment, the "Convertible
Notes") due 2033. Each Convertible Note has a principal value at maturity of
$1,000. The net proceeds from the issue were $121.4 million and were initially
used to (i) fund repurchases of $63.5 million of accreted value of the Company's
outstanding 7% zero coupon convertible senior notes from a limited number of
holders, (ii) to fund repurchases of approximately $17.2 million of the
Company's common stock, and (iii) for general corporate purposes, including the
repayment of working capital borrowings under a floating rate bank line of
credit. The Company expects to reborrow such amounts under the line of credit
from time to time for general corporate purposes. The discount associated with
the issuance is being amortized through June 2033, using the effective interest
rate method. Issuance costs of approximately $3.6 million are being amortized
through June 2033 using the straight-line method.
In connection with the issuance of the Convertible Notes on July 1,
2003, the Company granted the initial purchasers an option to purchase up to an
additional $49.3 million of Convertible Notes to cover overallotments. On July
9, 2003, the initial purchaser exercised its option in full. Net proceeds from
the additional issuance on July 9, 2003 were $18.3 million and were used for
general corporate purposes. Additional issuance costs of $0.3 million related to
the exercise of the overallotment are being amortized through June 2033 using
the straight-line method.
Holders of the Convertible Notes may convert each of them into 12.8773
shares of the Company's common stock in any calendar quarter commencing after
October 3, 2003 if:
- - the sales price of our common stock reaches specified thresholds;
- - during any period in which the credit rating assigned to the
Convertible Notes is below a specified level;
- - the Convertible Notes are called for redemption; or
- - specified corporate transactions have occurred.
Upon conversion, the Company has the right to deliver, in lieu of its common
stock, cash or a combination of cash and stock, of which the Company has
reserved 4.9 million shares.
The Company may redeem the Convertible Notes, at any time in whole or
in part, on July 7, 2011 for cash at the accreted value. Additionally, holders
may require the Company to purchase all or a portion of their Convertible Notes
on:
- - July 7, 2007 at a price equal to $432.48 per Convertible Note;
- - July 7, 2009 at a price equal to $461.29 per Convertible Note;
- - July 7, 2011 at a price equal to $492.01 per Convertible Note;
- - July 7, 2013 at a price equal to $524.78 per Convertible Note;
- - July 7, 2018 at a price equal to $616.57 per Convertible Note;
- - July 7, 2023 at a price equal to $724.42 per Convertible Note; and
- - July 7, 2028 at a price equal to $851.13 per Convertible Note.
The Company may choose to pay the purchase price in cash or common stock or a
combination of both.
9
The Company must pay contingent cash interest to the holders of the
convertible notes during any six-month period commencing July 7, 2011 if the
average market price of a Convertible Note for a five trading day measurement
period preceding the applicable six-month period equals 120% or more of the sum
of the original issuance price and accrued original issue discount for such
Convertible Note as of the day immediately preceding the relevant six-month
period. The contingent interest payable per Convertible Note in respect of any
six-month period will equal an annual rate of 0.25% of the average market price
of a Convertible Note for the five day trading measurement period and will be
payable on the last day of the relevant six-month period. Except for the
contingent interest described above, the Company will not pay cash interest on
the Convertible Notes prior to maturity. The original issue discount will
continue to accrue at the yield to maturity whether or not contingent interest
is paid.
NOTE 7. SHARE REPURCHASE
In the 39 weeks ended October 3, 2003, the Company repurchased
1,567,650 shares at an average cost of $22.74. Purchases were made in the open
market and were financed from cash generated by operations and the net proceeds
($121.4 million) from the issuance of $328.8 million of 3.25% zero coupon
convertible senior notes. No shares were repurchased in 2002. The Company may
purchase additional shares, with volume and timing to depend on market
conditions.
NOTE 8. EXTINGUISHMENT OF DEBT
During the 39 weeks ended October 3, 2003 and September 27, 2002, the
Company repurchased a portion of its 7% zero coupon notes and its 8% senior
notes and subsequently wrote-off debt issuance costs associated with the
convertible notes. Additionally, during the 39 weeks ended October 3, 2003, the
Company wrote off debt issuance costs associated with the cancellation of a
$115.0 million revolving credit facility. The following table reflects the
repurchase activity during the 13 and 39 weeks ended October 3, 2003 and
September 27, 2002:
13 WEEKS ENDED 39 WEEKS ended
--------------------------------------------- ------------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002 2003 2002
-------------------- ----------------------- ---------------- ---------------
FACE FACE FACE FACE
AMOUNT COST AMOUNT COST AMOUNT COST AMOUNT COST
---------- ------- ------------- ------ ------ ------ ------ ------
8% senior notes $ 6.0 $ 6.0 $ 3.6 $ 3.7 $ 8.0 $ 8.0 $ 10.6 $ 11.1
7% zero coupon
notes $ - $ - $ 50.3 $ 47.8 $ 63.5 $ 67.9 $ 90.7 $ 88.2
Debt issuance costs
written off $ - $ - $ 1.3 $ - $ 1.8 $ - $ 2.3 $ -
During the 13 week ended October 3, 2003, the remaining principle
balance of $6.0 million related to the 8% senior notes became due and was repaid
at book value. During the 13 weeks ended September 27, 2002, the Company
recorded a gain on the early extinguishment of debt in its condensed
consolidated statements of operations of $1.3 million. For the 39 weeks ended
October 3, 2003 and September 27, 2002, the Company recorded a loss on the early
extinguishment of debt of $6.2 million and $0.3 million, respectively. The
Company may continue to repurchase outstanding debt securities, with the volume
and timing to depend on market conditions.
10
NOTE 9. BUSINESS SEGMENTS
The Company is engaged in the distribution of communications and
specialty wire and cable products, fasteners and small parts from top suppliers
to contractors and installers, and also to end users including manufacturers,
natural resources companies, utilities and original equipment manufacturers. The
Company is organized by geographic regions, and accordingly, has identified
North America (United States and Canada), Europe, and Asia Pacific and Latin
America as reportable segments. The Company obtains and coordinates financing,
tax, information technology, legal and other related services, certain of which
are rebilled to subsidiaries. Interest expense and other non-operating items are
not allocated to the segments or reviewed on a segment basis. Segment
information for the 13 and 39 weeks ended October 3, 2003 and September 27, 2002
was as follows:
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- -----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002 2003 2002
------------ ------------- ---------- -------------
NET SALES:
United States $ 453.6 $ 441.4 $ 1,361.1 $ 1,309.8
Canada 64.8 55.1 187.2 167.1
------------ ------------- ---------- -------------
North America 518.4 496.5 1,548.3 1,476.9
Europe 88.2 86.2 276.0 255.4
Asia Pacific and Latin America 46.8 43.6 136.1 126.0
------------ ------------- ---------- -------------
$ 653.4 $ 626.3 $ 1,960.4 $ 1,858.3
============ ============= ========== =============
OPERATING INCOME (LOSS):
United States $ 16.4 $ 21.5 $ 47.8 $ 53.9
Canada 3.8 2.3 9.7 8.9
------------ ------------- ---------- -------------
North America 20.2 23.8 57.5 62.8
Europe 2.6 (0.3) 8.5 4.6
Asia Pacific and Latin America 0.5 (0.4) 1.2 (1.3)
------------ ------------- ----------- -------------
$ 23.3 $ 23.1 $ 67.2 $ 66.1
============ ============= =========== =============
OCTOBER 3, JANUARY 3,
2003 2003
------------ -------------
TOTAL ASSETS:
United States $ 861.3 $ 842.7
Canada 111.1 96.8
------------ -------------
North America 972.4 939.5
Europe 232.8 171.2
Asia Pacific and Latin America 111.7 115.3
------------ -------------
$ 1,316.9 $ 1,226.0
============ =============
11
NOTE 10. RESTRUCTURING COSTS
Due to general economic softness and deteriorating market in the
communications products market, during the third quarter of 2001 the Board of
Directors approved a restructuring plan and the Company incurred unusual
restructuring and other charges of $31.7 million. The Company's remaining
liability at October 3, 2003, was $4.6 million, of which $2.9 million was
classified as short-term. As of September 27, 2002, the Company had implemented
all of the restructuring initiatives.
Activity related to the accrued costs during 2003 is identified below:
STAFF FACILITY KOREA
(IN MILLIONS) REDUCTIONS RESTRUCTURING CLOSURE OTHER TOTAL
------------- ------------- ---------------- -------------- ----------
Balance at January 3, 2003 $ 0.2 $ 5.0 $ 1.4 $ 0.3 $ 6.9
Cash payments (0.1) (1.0) - - (1.1)
------------- ------------- ---------------- -------------- ----------
Balance at April 4, 2003 0.1 4.0 1.4 0.3 5.8
Cash payments - (0.6) - - (0.6)
Foreign exchange and other - 0.1 - - 0.1
------------- ------------- ---------------- -------------- ----------
Balance at July 4, 2003 0.1 3.5 1.4 0.3 5.3
Cash payments - (0.6) - - (0.6)
Foreign exchange and other 0.1 - (0.1) (0.1) (0.1)
------------- ------------- ---------------- -------------- ----------
Balance at October 3, 2003 $ 0.2 $ 2.9 $ 1.3 $ 0.2 $ 4.6
============= ============ ================ ============== ==========
Cash payments during 2003 consisted of $0.1 million for severance and
$2.2 million for committed lease payments, net of sublet income.
NOTE 11. SUBSEQUENT EVENT
Subsequent to October 3, 2003, the Company has repurchased an
additional $3.9 million of its 7% zero coupon convertible notes that mature June
2020 for $4.2 million. The Company will write-off $0.1 million of deferred debt
issuance costs associated with the convertible notes. As a result, the Company
will record a $0.3 million loss on the early extinguishment of debt in its
fourth quarter of 2003 consolidated statements of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the historical results of operations
and financial condition of Anixter International Inc. (the "Company") and
factors affecting the Company's financial resources. This discussion should be
read in conjunction with the 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 3, 2003.
ACQUISITION
In the third quarter of 2003, the Company purchased 100% of the stock
of Walters Hexagon Group Limited ("Walters Hexagon") for $42.7 million,
inclusive of legal and financial advisory fees. The stock purchase agreement
provides for additional purchase consideration of up to a maximum of $5.8
million based on the future operating performance of the company. Headquartered
in Worcester, England, Walters Hexagon is a leading distributor of fasteners and
other small parts to Original Equipment Manufacturers and provides inventory
management services to a range of markets and industries. Walters Hexagon
operates a network of nine regional customer service centers in the United
Kingdom and France and employs approximately 270 people which support
warehousing and distribution. The Company believes Walters Hexagon's business
model and position as a value-added distributor complements its current
business. Assets and liabilities have been recorded at estimated fair value
based on a preliminary allocation of the purchase price. Had this acquisition
occurred at the beginning of the year, the impact on the Company's operating
results would not have been significant. The purchase was funded with on-hand
excess cash balances along with the assumption of $0.7 million of Walters
Hexagon's debt.
On September 20, 2002, the Company completed the purchase of the
operations and assets of Pentacon, Inc. ("Pentacon") pursuant to Pentacon's plan
of reorganization filed under Chapter 11 of the United States Bankruptcy Code.
Pentacon is a leading distributor of fasteners and other small parts to original
equipment manufacturers and provider of inventory management services and has 21
distribution and sales facilities in the United States, along with sales offices
and agents in Europe, Canada, Mexico and Australia. The Company paid a total of
$111.4 million, including transaction-related costs, for tangible assets with a
fair value of approximately $74.7 million. The tangible net assets primarily
consist of accounts receivable, inventory, office and warehouse equipment and
furnishings, accounts payable and select operating liabilities. Based upon a
third party valuation, intangible assets have also been recorded at an estimated
fair value as follows: $13.8 million of intangible assets with finite lives
(customer relationships) and a $1.8 million intangible asset with an indefinite
life (trade name). Goodwill resulting from the transaction totaled $21.1
million. The acquisition was accounted for as a purchase and the results of
operations of the acquired business are included in the condensed consolidated
financial statements from the date of acquisition. In the 13 and 39 weeks ended
October 3, 2003, Pentacon contributed sales of $47.0 million and $142.1 million,
respectively, and operating income of $1.4 million and $3.9 million,
respectively. The results for the third quarter 2002 did not significantly
impact the Company's operating results.
13
ACCOUNTS RECEIVABLE SECURITIZATION
On October 6, 2000, the Company entered into an account receivable
securitization program. The program is conducted through Anixter Receivables
Corporation ("ARC"), which is a wholly-owned unconsolidated subsidiary of the
Company. The investment is accounted for using the equity method. The program
allows the Company to sell, on an ongoing basis without recourse, a majority of
the accounts receivable originating in the United States to ARC at a discount of
2.12% and consists of a series of 364-day facilities. At October 3, 2003 and
January 3, 2003, the outstanding balance of accounts receivable sold to ARC
totaled $229.8 million and $248.6 million, respectively. Accordingly, these
accounts receivable were removed from the balance sheet.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Consolidated net cash provided by continuing operating activities was
$83.4 million for the 39 weeks ended October 3, 2003, compared to $135.0 million
for the same period in 2002. Due to the decline in sales in 2002, working
capital reductions provided $76.3 million compared to only $23.2 million in
2003. The significant reduction in the 2002 working capital was primarily driven
by a $69.6 million reduction in inventory. During the 39 weeks ended October 3,
2003, inventory decreased only $31.2 million. The Company paid $2.3 million in
the current period for leases, severance and outplacements costs associated with
the 2001 restructuring, compared to $9.2 million for the corresponding period in
2002.
Consolidated net cash used in investing activities decreased to $61.4
million for the 39 weeks ended October 3, 2003 versus $115.7 million for the
same period in 2002. During the 39 weeks ended October 3, 2003, the Company
spent $42.0 million to acquire Walters Hexagon as compared to $110.4 million
used to acquire Pentacon in the same period of 2002. Capital expenditures
increased $13.3 million during the 39 weeks ended October 3, 2003 as compared to
the corresponding period in 2002. The increase is primarily the result of the
Company spending $18.4 million for the continued construction of the new
corporate headquarters building. The Company anticipates recovering
approximately $27.0 million of capital invested in this project in the fourth
quarter of 2003 through a sale and leaseback transaction. Capital expenditures
are expected to be approximately $26.0 million in 2003, $18.8 million of which
is for the new corporate headquarters.
Consolidated net cash used in financing activities was $1.2 million for
the 39 weeks ended October 3, 2003 compared to $40.8 million in the
corresponding 2002 period. In the 39 weeks ended October 3, 2003, the Company
paid $35.6 million for the purchase of treasury stock and $75.9 million for the
purchase of its 7% zero coupon convertible notes and 8% senior notes. In the
same period of 2002, the Company paid $99.3 million for the repurchase of its 7%
zero coupon convertible notes and 8% senior notes. Net cash used to repay
borrowings under the revolving credit agreements were $33.4 million during 2003
as compared to net proceeds from borrowing under the revolving credit agreements
of $52.0 million in 2002. In 2003, the Company received $4.8 million for the
exercise of employee stock options as compared to $7.1 million in 2002.
Financings
Certain debt agreements entered into by the Company's subsidiaries
contain various restrictions including restrictions on payments to the Company.
Such restrictions have not had nor are expected to have an adverse impact on the
Company's ability to meet its cash obligations. At October 3, 2003, $264.4
million was available under the bank revolving lines of credit, under which
$30.9 million may be used to pay dividends to the Company. Also, Anixter Inc.
may use cash available under the bank revolving lines of credit to pay the
Company for inter-company liabilities, which were $66.0 million as of October 3,
2003.
14
On July 1, 2003, the Company issued $328.8 million of 3.25% zero coupon
convertible senior notes (together with the overallotment, the "Convertible
Notes") due 2033. Each Convertible Note has a principal value at maturity of
$1,000. The net proceeds from the issue were $121.4 million and were initially
used to (i) fund repurchases of $63.5 million of accreted value of the Company's
outstanding 7% zero coupon convertible senior notes from a limited number of
holders, (ii) to fund repurchases of approximately $17.2 million of the
Company's common stock, and (iii) for general corporate purposes, including the
repayment of working capital borrowings under a floating rate bank line of
credit. The Company expects to reborrow such amounts under the line of credit
from time to time for general corporate purposes. The discount associated with
the issuance is being amortized through June 2033, using the effective interest
rate method. Issuance costs of approximately $3.6 million are being amortized
through June 2033 using the straight-line method.
In connection with the issuance of the Convertible Notes on July 1,
2003, the Company granted the initial purchasers an option to purchase up to an
additional $49.3 million of Convertible Notes to cover overallotments. On July
9, 2003, the initial purchaser exercised its option in full. Net proceeds from
the additional issuance on July 9, 2003 were $18.3 million and were used for
general corporate purposes. Additional issuance costs of $0.3 million related to
the exercise of the overallotment is being amortized through June 2033 using the
straight-line method.
Holders of the Convertible Notes may convert each of them into 12.8773
shares of the Company's common stock in any calendar quarter commencing after
October 3, 2003 if:
- - the sales price of our common stock reaches specified thresholds;
- - during any period in which the credit rating assigned to the
Convertible Notes is below a specified level;
- - the Convertible Notes are called for redemption; or
- - specified corporate transactions have occurred.
Upon conversion, the Company has the right to deliver, in lieu of its
common stock, cash or a combination of cash and stock, of which the Company has
reserved 4.9 million shares.
The Company may redeem the Convertible Notes, at any time in whole or
in part, on July 7, 2011 for cash at the accreted value. Additionally, holders
may require the Company to purchase all or a portion of their Convertible Notes
on:
- - July 7, 2007 at a price equal to $432.48 per Convertible Note;
- - July 7, 2009 at a price equal to $461.29 per Convertible Note;
- - July 7, 2011 at a price equal to $492.01 per Convertible Note;
- - July 7, 2013 at a price equal to $524.78 per Convertible Note;
- - July 7, 2018 at a price equal to $616.57 per Convertible Note;
- - July 7, 2023 at a price equal to $724.42 per Convertible Note; and
- - July 7, 2028 at a price equal to $851.13 per Convertible Note.
The company may choose to pay the purchase price in cash or in common stock or a
combination of both.
15
The Company must pay contingent cash interest to the holders of the
convertible notes during any six-month period commencing July 7, 2011 if the
average market price of a Convertible Note for a five trading day measurement
period preceding the applicable six-month period equals 120% or more of the sum
of the original issuance price and accrued original issue discount for such
Convertible Note as of the day immediately preceding the relevant six-month
period. The contingent interest payable per Convertible Note in respect of any
six-month period will equal an annual rate of 0.25% of the average market price
of a Convertible Note for the five day trading measurement period and will be
payable on the last day of the relevant six-month period. Except for the
contingent interest described above, the Company will not pay cash interest on
the Convertible Notes prior to maturity. The original issue discount will
continue to accrue at the yield to maturity whether or not contingent interest
is paid.
During the 39 weeks ended October 3, 2003, the Company recorded a loss
of $6.2 million for the early extinguishment of $63.5 million of its 7% zero
coupon notes, and debt issuance costs associated with the cancellation of $115.0
million of its available revolving credit facility. In the corresponding period
of 2002, the Company recorded a loss of $0.3 million for the early
extinquishment of $90.7 million of its 7% zero coupon notes and $10.6 million of
its 8% senior notes. The Company may continue to repurchase outstanding debt
securities, with the volume and timing to depend on market conditions.
Consolidated interest expense was $9.9 million and $11.9 million for
the 39 weeks ended October 3, 2003 and September 27, 2002, respectively. The
decrease is due to a reduction in interest rates. The average outstanding
long-term debt balance for the 39 weeks ended October 3, 2003 was $226.1 million
compared to $208.4 million in 2002. The effective interest rate for the 39 weeks
ended October 3, 2003 and September 27, 2002 was 5.8% and 7.6%, respectively.
Included in the Condensed Consolidated Statements of Operations "Other, net"
classification, are net expenses/income incurred by ARC of $1.7 million and $1.5
million of expense for the 39 weeks ended October 3, 2003 and September 27,
2002, respectively. Included in the ARC net expense /income amount was interest
expense incurred by ARC of $2.1 million and $2.5 million for the 39 weeks ended
October 3, 2003 and September 27, 2002, respectively. Generally accepted
accounting principles require that the interest expense be classified as other
expense as it is recorded as part of the Company's investment adjustment related
to its 100% ownership of ARC. However, it is considered to be part of the
Company's financing strategy and therefore is viewed as interest expense by the
Company. The average outstanding debt incurred by ARC for 39 weeks ended October
3, 2003 and September 27, 2002 was $127.3 million and $127.1 million,
respectively. The effective interest rate on the ARC debt was 2.2% and 2.5% for
the 39 weeks ended October 3, 2003 and September 27, 2002, respectively.
In the 39 weeks ended October 3, 2003, the Company repurchased
1,567,650 shares of its common stock at an average cost of $22.74. Purchases
were made in the open market and were financed from cash generated by operations
and the issuance of the Convertible Notes. No shares were repurchased in 2002.
The Company may purchase additional shares, with volume and timing to depend on
market conditions.
RESULTS OF OPERATIONS
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. In
addition to competitive factors, future performance could be subject to economic
downturns, possible rapid changes in applicable technologies, or regulatory
changes. Although relationships with its 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.
16
Quarter ended October 3, 2003: Net income for the third quarter of 2003
was $11.3 million compared with $11.6 million for the third quarter of 2002.
During the third quarter of 2002, the Company recorded a pretax gain of $1.3
million for the early extinguishment of $53.9 million of its 7% zero coupon
convertible notes and 8% senior notes.
The Company's net sales during the third quarter of 2003 increased 4.3%
to $653.4 million from $626.3 million in the same period in 2002. Net sales by
major geographic market are presented in the following table:
13 WEEKS ENDED
---------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
North America $ 518.4 $ 496.5
Europe 88.2 86.2
Asia Pacific and Latin America 46.8 43.6
---------- -------------
$ 653.4 $ 626.3
========== =============
North America net sales for the third quarter of 2003 increased $21.9
million to $518.4 million from the corresponding period of 2002. Pentacon
represents $40.0 million of the increase as they were purchased on September 20,
2002. The sales decline in the remaining business is primarily attributable to
lower sales on integrated supply contracts reflecting a continued soft market
for telecommunication products.
Europe net sales increased $2.0 million in the third quarter 2003 to
$88.2 million from $86.2 million in 2002. Changes in exchange rates increased
Europe's reported net sales by approximately $8.1 million. The decrease in local
currency sales reflects the continued weak economic conditions in many of the
major countries.
Asia Pacific and Latin America net sales increased $3.2 million, or
7.3%, from the third quarter of 2002, reflecting an overall improvement in
average daily volume from new customer acquisitions. The overall net impact of
the changes in exchange rates on Asia Pacific and Latin America was minimal.
Operating income increased to $23.3 million in 2003 from $23.1 million
in the third quarter of 2002. Operating income by major geographic market is
presented in the following table:
13 WEEKS ENDED
----------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
North America $ 20.2 $ 23.8
Europe 2.6 (0.3)
Asia Pacific and Latin America 0.5 (0.4)
---------- -------------
$ 23.3 $ 23.1
========== =============
17
North America operating income for the third quarter of 2003 declined
15.1% from the corresponding period in 2002. The third quarter of 2003 includes
$1.4 million of operating income of Pentacon. The net decrease is due to a
decline in sales to telecom-related original equipment manufacturers. Gross
margins increased to 24.2% in the third quarter of 2003 from 23.8% from the same
period in 2002. The increase is primarily due to the lower percentage of
contract sales to telecom original equipment manufacturers in 2003, which have
lower gross margins. Such sales represented 9.6% of North America sales in 2003
as compared to 14.4% for the third quarter of 2002. In addition, Pentacon added
40 basis points to the gross margin in 2003. Operating expenses increased $11.1
million from the third quarter of 2002. Pentacon added $10.5 million in
operating expenses in 2003. As a result, operating expenses increased $0.6
million from the third quarter of 2002, excluding the impact of the acquisition
of Pentacon. The slight increase in expenses reflects higher pension, healthcare
and insurance costs, partially offset by a reduction in variable costs
associated with the decline in sales. Despite higher gross margins, operating
income margin decreased to 3.9% from 4.8% in 2002, primarily as a result of
lower sales and higher fixed costs noted above. The addition of Pentacon reduced
the operating income margin in 2003 by 10 basis points.
Europe operating income increased $2.9 million to $2.6 million in the
third quarter of 2003 from a $0.3 million loss in 2002. Europe's gross margins
increased from 24.6% in 2002 to 27.2% in 2003. The improvement is primarily due
to the weaker U.S. dollar making U.S. sourced inventory more price competitive
and a reduction in the provision for inventory obsolescence. Operating income
margin for the third quarter of 2003 was 2.8% compared to an operating loss
margin of 0.4% in 2002. The operating income margin increase is a result of
higher sales and gross margin percentage. Exchange rate changes had minimal
impact on operating income.
Asia Pacific and Latin America operating income increased to $0.5
million in the third quarter of 2003, from a $0.4 million loss in 2002. The
improvement reflects tight expense controls and improvement in the
collectibility of accounts receivable. Exchange rate changes had a minimal
impact on operating income.
Other, net (expense) includes the following:
13 WEEKS ENDED
--------------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
----------- -------------
Accounts receivable securitization $ (0.6) $ (0.6)
Foreign exchange 0.4 (0.2)
Gain (loss) on the cash surrender value
of life insurance policies 0.3 (1.0)
Loss on sale of fixed assets (0.1) -
Other - (0.2)
---------- -------------
$ - $ (2.0)
========== =============
The consolidated tax provision increased to $8.8 million in 2003 from
$7.7 million in the third quarter of 2002, due to higher pre-tax earnings and an
increase in the Company's effective tax rate. The third quarter of 2003
effective tax rate is 43.8% compared to 40.0% in 2002. The increase in the
effective tax rate is primarily a result of an increase in losses in certain
foreign entities of which an income tax benefit cannot be recorded.
18
39 weeks ended October 3, 2003: Net income for the 39 weeks ended
October 3, 2003 was $28.8 million compared with $32.9 million for the 39 weeks
ended September 27, 2002. The company recorded a pretax loss of $6.2 million in
2003 for the early extinguishment of $63.5 million of its 7% zero coupon notes
and debt issuance costs associated with the cancellation of $115.0 million of
its available revolving credit facility. In 2002, the Company recorded a pretax
loss of $0.3 million for the early extinguishment of $90.7 million of its 7%
zero coupon notes and $10.6 million of its 8% senior notes.
The Company's net sales during the 39 weeks ended October 3, 2003
increased 5.5% to $1,960.4 million from $1,858.3 million in the same period in
2002. Net sales by major geographic market are presented in the following table:
39 WEEKS ENDED
----------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
North America $ 1,548.3 $ 1,476.9
Europe 276.0 255.4
Asia Pacific and Latin America 136.1 126.0
---------- -------------
$ 1,960.4 $ 1,858.3
========== =============
When compared to the corresponding period in 2002, North America net
sales for the 39 weeks ended October 3, 2003 increased $71.4 million, or 4.8%,
to $1,548.3 million. The acquisition of Pentacon on September 20, 2002
represents $135.1 million of the increase. The sales decline in the remaining
business is primarily due to a decrease of $68.3 million in sales to telecom
related original equipment manufacturers. Daily sales levels for the remainder
of the business have remained steady.
Europe net sales increased 8.1% to $276.0 million from $255.4 million,
including a $38.1 million favorable effect from changes in exchange rates. The
decrease in local currency sales reflects the continued weak economic conditions
in many of the major countries.
Asia Pacific and Latin America net sales were up 8.0%, or $10.1
million, from the 39 weeks ended September 27, 2002, including a $1.9 million
unfavorable impact from changes in exchange rates. The increase reflects an
overall improvement in average daily volume from new customers and sales to
telecom related original equipment manufacturers in Asia Pacific.
Operating income for the 39 weeks ended October 3, 2003 increased 1.6%,
or $1.1 million, from $66.1 million in the 39 weeks ended September 27, 2002.
Operating income (loss) by major geographic market is presented in the following
table:
39 WEEKS ended
---------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
North America $ 57.5 $ 62.8
Europe 8.5 4.6
Asia Pacific and Latin America 1.2 (1.3)
---------- -------------
$ 67.2 $ 66.1
========== =============
19
North America operating income decreased 8.5% for the 39 weeks ended
October 3, 2003 compared to the corresponding period in 2002. The 39 weeks ended
October 3, 2003 includes the operating income of Pentacon of $3.9 million. The
39 weeks ended September 27, 2002 includes the reversal of $0.9 million of
excess restructuring accruals. The decrease from the corresponding period in
2002 is due to a decline in sales to telecom related original equipment
manufacturers. Gross margins increased to 24.2% in 2003 from 23.2% for the same
period in 2002. The increase is primarily due to a lower percentage of contract
sales to telecom related original equipment manufacturers in 2003, which have
lower gross margins, and the addition of higher gross margin Pentacon sales.
Pentacon added 50 basis points to North America gross margins in 2003. Sales to
telecom related original equipment manufacturers represented 10.1% of North
America sales in 2003 as compared to 15.3% in 2002. Operating expenses increased
$37.6 million for the 39 weeks ended October 3, 2003 from the corresponding
period in 2002, which are attributable to Pentacon. In addition, the 2002
operating expense includes the reversal of $0.9 million of excess restructuring
accruals. Excluding Pentacon and the reversal of excess restructuring accruals,
operating expenses decreased slightly from 2002. The reduction in variable costs
associated with the reduced sales levels more than offset higher pension,
healthcare and insurance costs. Primarily as a result of lower sales, North
America operating margins declined to 3.7% in the 39 weeks ended October 3, 2003
from 4.3% in the same period in 2002.
Europe operating income increased 83.6% to $8.5 million for the 39
weeks ended October 3, 2003 from $4.6 million in 2002. Operating income in 2002
includes a $1.4 million restructuring charge. Europe's gross margins increased
to 27.0% from 25.9% in 2002. The improvement is primarily due to the weaker U.S.
dollar making U.S. sourced inventory more price competitive. Operating income
margin for the 39 weeks ended October 3, 2003 was 3.1% compared to 1.8% in 2002.
The operating margin increase is a result of the increase in gross margin and a
$1.4 million restructuring charge incurred in 2002, slightly offset by higher
operating expenses primarily due to an increase in compensation related costs.
Operating income increased $0.5 million in 2003 due to changes in exchange
rates.
Asia Pacific and Latin America operating income increased $2.5 million
from a $1.3 million loss in the 39 weeks ended September 27, 2002 to $1.2
million of income in 2003. The operating loss in 2002 includes the benefit of
the reversal of excess restructuring accruals of $0.5 million. The $2.5 million
improvement reflects the higher sales levels combined with tight expense
controls. Exchange rate changes had a minimal impact on operating income.
Other, net income (expense) includes the following:
39 WEEKS ENDED
---------------------------
OCTOBER 3, SEPTEMBER 27,
(IN MILLIONS) 2003 2002
---------- -------------
Accounts receivable securitization $ (1.7) $ (1.5)
Foreign exchange (1.0) 0.2
(Loss) gain on sale of fixed assets and securities (0.3) 3.3
Gain (loss) on the cash surrender value
of life insurance policies 1.6 (1.1)
Other 0.7 -
---------- ------------
$ (0.7) $ 0.9
========== ============
The consolidated tax provision decreased to $21.6 million in 2003 from
$21.9 million in 2002 due to lower pre-tax earnings. The 2003 effective tax rate
is 43.0% compared to 40.0% in 2002. The increase in the effective tax rate is
primarily a result of an increase in losses in certain foreign entities of which
an income tax benefit cannot be recorded.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and
fluctuations in foreign currencies, as well as changes in the market value of
its financial instruments. The estimated fair market value of the Company's
outstanding fixed rate debt at October 3, 2003, was $215.6 million. If the
interest rates were to increase or decrease by 1%, the fair market value of the
fixed rate debt would decrease or increase by 3.1%. Changes in the market value
of the Company's debt does not affect the reported results of operations unless
the Company is retiring such obligations prior to their maturity. This analysis
did not consider the effects of a changed level of economic activity that could
exist in such an environment and certain other factors. Further, in the event of
a change of this magnitude, management would likely take actions to further
mitigate its exposure to possible changes. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, this
sensitivity analysis assume no changes in the Company's financial structure.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of October 3, 2003, pursuant
to paragraph (b) of Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in ensuring
that material information required to be filed in this quarterly report has been
made known to them in a timely fashion. There was no change in the Company's
internal control over financial reporting that occurred during the 13 weeks
ended October 3, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Robert W. Grubbs, President and Chief Executive
Officer, Certification Pursuant to Section 302, of
the Sarbanes-Oxley Act of 2002.
31.2 Dennis Letham, Senior Vice President-Finance and
Chief Financial Officer, Certification Pursuant to
Section 302, of the Sarbanes-Oxley Act of 2002.
32.1 Robert W. Grubbs, President and Chief Executive
Officer, Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.2 Dennis Letham, Senior Vice President-Finance and
Chief Financial Officer, Certification Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley of Act of 2002.
b) Reports on Form 8-K
On July 8, 2003, the Company filed a Current Report on Form
8-K under Item 5 "Other Events" and Item 7 "Financial Statements, Pro
Forma Financial Information and Exhibits" announcing that it had
received $125.0 million (gross proceeds exclusive of the initial
purchase's over allotment option) from the placement under Rule 144a of
30-year zero coupon senior notes convertible into shares of the
Company's common stock.
On July 30, 2003, the Company filed a Current Report on Form
8-K under Item 7 "Financial Statements, Pro Forma Financial Information
and Exhibits" and Item 12 "Results of Operation and Financial
Condition" reporting its results for the fiscal quarter ended July 4,
2003.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ANIXTER INTERNATIONAL INC.
November 12, 2003
By: /s/ Robert W. Grubbs
------------------------
Robert W. Grubbs
President and Chief Executive Officer
November 12, 2003 By: /s/ Dennis J. Letham
----------------------
Dennis J. Letham
Senior Vice President - Finance
and Chief Financial Officer
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