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UNITED STATES
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 April 1, 2005
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 60026
(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 May 2, 2005, 37,771,730 shares of the registrant's Common Stock, $1.00
par value, were outstanding.
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ANIXTER INTERNATIONAL INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18
Item 4. Controls and Procedures........................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. *
Item 2. Unregistered Sales of Equity 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....................................................... 19
*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. The statements 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 changes in supplier relationships, foreign political,
economic and currency risks, risks associated with inventory, commodity price
fluctuations and risks associated with the integration of recently acquired
companies.
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 WEEKS ENDED
-----------------------
APRIL 1, APRIL 2,
(IN MILLIONS, EXCEPT SHARE AMOUNTS) 2005 2004
--------- ---------
NET SALES ....................................... $ 876.5 $ 764.2
Cost of operations:
Cost of goods sold ........................... 664.1 581.5
Operating expenses ........................... 172.1 153.1
Amortization of intangibles .................. 0.7 0.6
--------- ---------
Total costs and expenses ................ 836.9 735.2
--------- ---------
OPERATING INCOME ................................ 39.6 29.0
Other expense:
Interest expense ............................. (5.2) (3.0)
Other, net ................................... (1.7) (3.1)
--------- ---------
Income before income taxes and extraordinary
gain ............................................ 32.7 22.9
Income tax expense .............................. 12.3 8.9
--------- ---------
Income before extraordinary gain ................ 20.4 14.0
Extraordinary gain, net of tax of $0.6 .......... -- 4.1
--------- ---------
NET INCOME ...................................... $ 20.4 $ 18.1
========= =========
BASIC INCOME PER SHARE:
Income before extraordinary gain ............. $ 0.54 $ 0.38
Extraordinary gain ........................... $ -- $ 0.11
Net income ................................... $ 0.54 $ 0.50
DILUTED INCOME PER SHARE:
Income before extraordinary gain ............. $ 0.51 $ 0.37
Extraordinary gain ........................... $ -- $ 0.11
Net income ................................... $ 0.51 $ 0.48
DIVIDEND PER COMMON SHARE ....................... $ -- $ 1.50
See accompanying notes to the condensed consolidated financial statements.
1
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 1, DECEMBER 31,
2005 2004
----------- ------------
(IN MILLIONS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 167.9 $ 53.4
Accounts receivable (less allowances of $15.8 and $18.0
in 2005 and 2004, respectively)................................... 625.6 620.4
Inventories.......................................................... 598.0 580.1
Deferred income taxes................................................ 11.8 16.3
Other current assets................................................. 12.5 11.7
----------- -----------
Total current assets....................................... 1,415.8 1,281.9
Property and equipment, at cost........................................ 182.2 183.8
Accumulated depreciation............................................... (141.0) (141.2)
----------- -----------
Net property and equipment................................. 41.2 42.6
Goodwill............................................................... 293.3 293.6
Other assets........................................................... 87.8 88.5
----------- -----------
$ 1,838.1 $ 1,706.6
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................... $ 350.2 $ 323.2
Accrued expenses..................................................... 112.7 143.4
Short-term debt...................................................... 68.8 --
----------- -----------
Total current liabilities.................................. 531.7 466.6
Long-term debt......................................................... 453.7 412.4
Other liabilities...................................................... 67.3 64.6
----------- -----------
Total liabilities.......................................... 1,052.7 943.6
STOCKHOLDERS' EQUITY
Common stock -- $1.00 par value, 100,000,000 shares authorized,
37,706,785 and 37,375,676 shares issued and outstanding in 2005
and 2004, respectively............................................. 37.7 37.4
Capital surplus...................................................... 57.9 50.7
Retained earnings.................................................... 680.5 660.1
Accumulated other comprehensive income (loss):
Foreign currency translation...................................... 9.3 16.6
Minimum pension liability......................................... (1.8) (1.8)
Unrealized gain on derivatives.................................... 1.8 --
----------- -----------
Total accumulated other comprehensive income.................... 9.3 14.8
----------- -----------
Total stockholders' equity................................. 785.4 763.0
----------- -----------
$ 1,838.1 $ 1,706.6
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
2
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
13 WEEKS ENDED
------------------------------
APRIL 1, APRIL 2,
(IN MILLIONS) 2005 2004
------------- -------------
OPERATING ACTIVITIES
Net income................................................................ $ 20.4 $ 18.1
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Extraordinary gain................................................... -- (4.1)
Depreciation......................................................... 4.1 4.1
Amortization of stock compensation................................... 1.7 1.3
Amortization of intangible assets and deferred financing costs....... 0.9 0.8
Accretion of zero coupon convertible notes........................... 2.4 2.3
Deferred income taxes................................................ 7.4 (0.1)
Income tax savings from employee stock plans......................... 1.8 --
Changes in current assets and liabilities, net....................... (33.8) (29.9)
Other, net........................................................... 2.2 (3.4)
------------- -------------
Net cash provided by (used in) operating activities............. 7.1 (10.9)
INVESTING ACTIVITIES
Capital expenditures...................................................... (3.0) (2.9)
FINANCING ACTIVITIES
Proceeds from long-term borrowings........................................ 40.8 20.8
Repayment of long-term borrowings......................................... (133.3) (20.8)
Bond proceeds............................................................. 199.6 --
Proceeds from issuance of common stock.................................... 3.6 6.1
Deferred financing costs.................................................. (2.0) (0.2)
Proceeds from interest rate hedges........................................ 1.8 --
Payment of cash dividend.................................................. (0.1) (55.1)
------------- -------------
Net cash provided by (used in) financing activities............. 110.4 (49.2)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM OPERATIONS............ 114.5 (63.0)
Cash and cash equivalents at beginning of period............................ 53.4 101.4
------------- -------------
Cash and cash equivalents at end of period.................................. $ 167.9 $ 38.4
============= =============
See accompanying notes to the condensed consolidated financial statements.
3
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF 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 December 31, 2004. 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 2005 presentation.
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company carried its
accounts receivable at their face amounts less an allowance for doubtful
accounts. On a regular basis, the Company evaluates its accounts receivable and
establishes the allowance for doubtful accounts based on a combination of
specific customer circumstances, as well as credit conditions and history of
write-offs and collections. A receivable is considered past due if payments have
not been received within the agreed upon invoice terms. The provision for
doubtful accounts was $0.8 million and $2.7 million for the thirteen weeks ended
April 1, 2005 and April 2, 2004, respectively.
STOCK BASED COMPENSATION: Beginning in 2003, the Company granted employee
stock units in lieu of employee stock options. The fair value of the stock units
is amortized over the four-year vesting period from the date of grant. In the
first quarter of 2005 and 2004, total stock compensation of $1.7 million and
$1.3 million was recognized as expense, respectively. Total expense for fiscal
2005 is expected to be approximately $7.8 million as compared to $5.8 million in
fiscal 2004.
Under the provisions of Statement of Financial Accounting Standard
("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 No. 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:
4
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
13 WEEKS ENDED
----------------------------
APRIL 1, APRIL 2,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2005 2004
------------- ------------
BASIC EARNINGS PER SHARE:
Net income as reported................................................. $ 20.4 $ 18.1
Add: APB Opinion No. 25 Stock-based employee compensation
included in net income, net.......................................... 1.0 0.8
Deduct: SFAS No. 123 Stock-based employee compensation expense, net.... (1.9) (2.3)
------------- ------------
Pro forma net income................................................... $ 19.5 $ 16.6
============= ============
BASIC EARNINGS PER SHARE:
As reported.......................................................... $ 0.54 $ 0.50
Pro forma............................................................ $ 0.52 $ 0.45
DILUTED EARNINGS PER SHARE
Net income as reported................................................. $ 20.4 $ 18.1
Add: APB Opinion No. 25 Stock-based employee compensation
included in net income, net.......................................... 0.9 0.8
Add: Net interest impact of assumed conversion of convertible notes.... 0.8 --
Deduct: SFAS No. 123 Stock-based employee compensation expense, net.... (1.9) (2.3)
------------- ------------
Pro forma net income................................................... $ 20.2 $ 16.6
============= ============
DILUTED EARNINGS PER SHARE:
As reported.......................................................... $ 0.51 $ 0.48
Pro forma............................................................ $ 0.49 $ 0.44
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In September of 2004, the
Emerging Issues Tasks Force ("EITF") reached a final conclusion on EITF Issue
No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per
Share, that contingently convertible debt instruments will be subject to the
if-converted method under SFAS No. 128, Earnings Per Share, regardless of the
contingent features included in the instrument. Under prior practice, issuers of
contingently convertible debt instruments exclude potential common shares
underlying the debt instruments from the calculation of diluted earnings per
share until the market price or other contingency is met. The effective date for
Issue 04-8 is for reporting periods ending after December 15, 2004. The effect
of adopting EITF 04-08 required the Company to retroactively restate earnings
per share to reflect the impact of adoption based on the form of the debt as of
the year ended December 31, 2004. In December 2004, the Company modified its
Convertible Notes due 2033 whereby the conversion of the Convertible Notes due
2033 will be settled in cash up to the accreted principal amount of the
convertible note. If the conversion value of the convertible note exceeds the
accreted principal amount of the convertible note at the time of conversion, the
amount in excess of the accreted value will be settled in stock. The restatement
of earnings per share had a minimal impact in the first quarter of 2004. See
Note 4 "Income Per Share" for further information.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123(R)"). The
accounting provisions of SFAS No. 123(R) were originally effective for interim
reporting periods beginning after June 15, 2005. On April 14, 2005, the
Securities and Exchange Commission ("SEC") postponed the effective date. SFAS
No. 123(R) will be effective for annual (rather than interim) reporting periods
beginning after June 15, 2005. The Company is required to adopt SFAS No. 123(R)
in the first quarter of fiscal 2006. The Company will be required to measure the
cost of all employee share-based payments to employees, including grants of
employee stock options, using a fair-value-based method. The cost of share-based
payments will be recognized over the period during which an employee is required
to provide service in exchange for the award. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to
financial statement recognition. See "Stock based compensation" above for the
pro forma net income and net income per share amounts for the 13 weeks ended
April 1, 2005 and April 2, 2004 as if the Company had used a fair-value-based
method similar to the methods required under SFAS No. 123(R) to measure
compensation expense for employee
5
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
stock incentive awards. The adoption of SFAS No. 123(R) by the Company is
expected to result in an additional expense of approximately $0.8 million to be
recognized in 2006.
In December 2004, the FASB issued Staff Position No. 109-1 ("FAS 109-1"),
Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction
on Qualified Production Activities Provided by the American Jobs Creation Act of
2004. The American Jobs Creation Act of 2004 ("AJCA") introduces a special 9%
tax deduction on qualified production activities. FAS 109-1 clarifies that this
tax deduction should be accounted for as a special tax deduction in accordance
with SFAS No. 109. Pursuant to the AJCA and the guidance that has been
forthcoming to date, the Company will likely not be viewed as conducting
"qualified production activities" and, thus, not be able to claim this tax
benefit. Accordingly, the Company does not expect the adoption of these new tax
provisions to have a material impact on its consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued Staff Position No. 109-2 ("FAS 109-2"),
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004. The AJCA introduces a
limited time 85% dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer (repatriation provision), provided certain
criteria are met. FAS 109-2 provides accounting and disclosure guidance for the
repatriation provision. Although FAS 109-2 was effective immediately, the
Company was not able to complete its evaluation of the repatriation provision
until after Congress or the Treasury Department provided additional clarifying
language on key elements of the provision. In January 2005, the Treasury
Department began to issue the first of a series of clarifying guidance documents
related to this provision. The Company expects to complete its evaluation of the
effects of the repatriation provision within the second quarter of 2005. The
range of possible amounts that may be available for repatriation under this
provision is between zero and $217.7 million. The Company estimates that the
related potential range of additional U.S. federal income tax is between zero
and $11.0 million. The Company estimates that the related potential range of
additional foreign withholding tax is between zero and $7.7 million.
Final determination of the amounts, which the Company may repatriate under
the regulations, will be limited by, among other consideration, the qualifying
investment requirements of the AJCA and foreign jurisdiction borrowing capacity.
Based on the rules promulgated to-date, and anticipated borrowing capacity in
relevant geographies, the Company believes the actual amounts it will repatriate
will be substantially less than the high-end noted above.
NOTE 2. COMPREHENSIVE INCOME
Comprehensive income, net of tax, consisted of the following:
13 WEEKS ENDED
--------------------
APRIL 1, APRIL 2,
(IN MILLIONS) 2005 2004
-------- --------
Net income .................................... $ 20.4 $ 18.1
Change in cumulative translation adjustment ... (7.3) (1.0)
Change in fair market value of derivatives .... 1.8 (0.1)
------- -------
Comprehensive income .......................... $ 14.9 $ 17.0
======= =======
NOTE 3. EXTRAORDINARY GAIN
In December 2003, the Company received $4.7 million from an escrow account
established in connection with the 1983 bankruptcy of Itel Corporation, the
predecessor of the Company. As of January 2, 2004, the Company was unable to
determine the appropriate beneficiary of this receipt and was in the process of
an investigation to determine its proper disposition. As of January 2, 2004, the
Company had not recorded income associated with this receipt because of the
uncertainty of the beneficiary. During the first quarter of 2004, the Company
completed the investigation and concluded that the funds are the property of the
Company. Accordingly, in the first quarter of 2004, the Company recorded a $4.1
million extraordinary after-tax gain as a result of the receipt.
6
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
NOTE 4. INCOME PER SHARE
The following table sets forth the computation of basic and diluted income
per share:
13 WEEKS ENDED
--------------------
APRIL 1, APRIL 2,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2005 2004
-------- --------
BASIC INCOME PER SHARE:
Income before extraordinary gain ................................. $ 20.4 $ 14.0
Extraordinary gain, net .......................................... -- 4.1
-------- --------
Net income ....................................................... $ 20.4 $ 18.1
======== ========
Weighted-average common shares outstanding ....................... 37.6 36.5
Income per share before extraordinary gain ....................... $ 0.54 $ 0.38
Extraordinary gain per share ..................................... $ -- $ 0.11
Net income per share ............................................. $ 0.54 $ 0.50
DILUTED INCOME PER SHARE:
Income before extraordinary gain ................................. $ 20.4 $ 14.0
Net interest impact of assumed conversion of convertible notes ... 0.8 --
-------- --------
Adjusted income before extraordinary gain ........................ 21.2 14.0
Extraordinary gain, net .......................................... -- 4.1
-------- --------
Adjusted net income .............................................. $ 21.2 $ 18.1
======== ========
Weighted-average common shares outstanding ....................... 37.6 36.5
Effect of dilutive securities:
Stock options and units ....................................... 1.3 1.1
Convertible notes due 2020 and 2033 ........................... 2.3 --
-------- --------
Weighted-average common shares outstanding ....................... 41.2 37.6
======== ========
Income per share before extraordinary gain ....................... $ 0.51 $ 0.37
Extraordinary gain per share ..................................... $ -- $ 0.11
Net income per share ............................................. $ 0.51 $ 0.48
The Convertible Notes due 2033 are convertible into 13.5584 of the
Company's common stock in any calendar quarter if:
- the sales price of our common stock reaches specified thresholds;
- during any period in which the credit rating assigned to the
Convertible Notes due 2033 is below a specified level;
- the Convertible Notes due 2033 are called for redemption; or
- specified corporate transactions have occurred.
Upon conversion, the Company is required to deliver an amount of cash
equal to the accreted principal amount and a number of common stock shares with
a value equal to the amount, if any, by which the conversion value exceeds the
accreted principal amount at the time of the conversion. In accordance with the
provisions of EITF 04-8, 0.9 million additional shares related to the
Convertible Notes due 2033 have been included in the diluted weighted average
common
7
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
shares outstanding for 2005. The inclusion in diluted earnings per share of all
contingently issuable stock is required regardless of whether or not the
above-mentioned triggers have been met. In the corresponding period in 2004,
common stock shares attributable to the conversion value above the accreted
principal were minimal.
In the 13 weeks ended April 1, 2005, the Company included 1.4 million of
common stock equivalents, relating to its 7% zero coupon convertible notes due
2020 ("Convertible Notes due 2020"), in its calculation of diluted income per
share because the effect was dilutive. Because the Convertible Notes due 2020
were included in the diluted shares outstanding, the related $0.8 million net
interest expense was excluded from the determination of net income in the
calculation of diluted income per share for the 13 weeks ended April 1, 2005.
The impact of the Convertible Notes due 2020 was less than $0.01 per diluted
share for the first quarter of 2005.
In the 13 weeks ended April 2, 2004, the Company excluded from its
calculation of diluted income per share 1.4 million of common stock equivalents
relating to the Convertible Notes due 2020 because the effect would have been
antidilutive. Because the convertible notes were not included in the diluted
shares outstanding, the related $0.7 million of net interest expense was not
excluded from the determination of income in the calculation of diluted income
per share for the 13 weeks ended April 2, 2004.
In the 13 weeks ended April 1, 2005 and April 2, 2004, the Company added
0.2 million and 0.3 million shares, respectively, in the respective period to
the number of outstanding shares due to stock option exercises.
NOTE 5. INCOME TAXES
The 2005 effective tax rate is 37.6% compared to 39.0% in 2004. The
decrease in the effective tax rate is primarily due to a change in the mix of
foreign income and losses by country as compared to country level net operating
loss positions, along with a higher level of pre-tax earnings, which dilutes the
effect of nondeductible expenses. The change in tax rate increased income before
extraordinary gain and net income by $0.5 million, or $0.01 per diluted share.
NOTE 6. DEBT
On February 24, 2004, the Company's primary operating subsidiary, Anixter
Inc., issued $200.0 million of Senior Notes, which are fully and unconditionally
guaranteed by the Company. Interest of 5.95% on the Senior Notes is payable
semi-annually on March 1 and September 1 of each year, commencing September 1,
2005. Issuance costs related to the offering were approximately $2.0 million
offset by proceeds of $1.8 million, resulting from entering into an interest
rate hedge prior to the offering. Accordingly, net issuance costs of
approximately $0.2 million associated with the notes are being amortized through
February of 2015 using the straight-line method. The proceeds from the sale of
the Senior Notes were approximately $199.6 million and will be used to redeem on
June 28, 2005 the $68.8 million outstanding 7% convertible notes due 2020.
Accordingly, the 7% convertible notes due 2020 is classified in current
liabilities at April 1, 2005. In March, a portion of the proceeds were used to
pay down our bank revolving lines of credit and also allowed us to reduce our
borrowings under the accounts receivable securitization facility. The remaining
proceeds from the Senior Notes will be used for general corporate purposes. As a
result of the increase in borrowings, the Company's cash increased from $53.4
million at December 31, 2004 to $167.9 million at April 1, 2005, while its debt
to total capitalization increased from 35.1% to 40.0% during the same period.
NOTE 7. SPECIAL DIVIDEND
On February 11, 2004, the Company's Board of Directors declared a special
dividend of $1.50 per common share, or $55.8 million, as a return of excess
capital to shareholders. On March 31, 2004, the Company paid $55.1 million of
the dividend to shareholders of record as of March 16, 2004. In addition, as
required by the plan documents, the remaining dividend of $0.6 million was
accrued at April 1, 2005 for payments to be made on the vesting date to holders
of employee stock units and restricted stock.
8
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
NOTE 8. ACQUISITION OF BUSINESS
On June 22, 2004, the Company purchased substantially all of the assets
and operations of Distribution Dynamics, Inc. ("DDI"). DDI was a privately held
value-added distributor of fasteners, hardware and related products specializing
in inventory logistics management programs directed at supporting the production
lines of original equipment manufacturers across a broad spectrum of industries.
Headquartered in Eden Prairie, Minnesota, DDI employs approximately 200
associates located in sixteen locations in the United States. The Company
believes DDI's business model complements its strategy of building a global
original equipment manufacturer supply business. Included in the results of the
Company for the 13 weeks ended April 1, 2005, are $18.7 million of sales and
$0.4 million of operating income. The purchase was funded with on-hand excess
cash balances and cash available under the Company's revolving credit facility.
The Company purchased DDI for $32.9 million inclusive of legal and advisory
fees, acquiring tangible assets with a fair value of $19.5 million. The tangible
net assets primarily consist of accounts receivable, inventory, fixed assets and
prepaid expenses. Based upon a third party valuation, the fair value of customer
relationships has been recorded in the company's condensed consolidated balance
sheet as of April 1, 2005. The Company continues to evaluate the fair value of
the remaining assets. Intangible assets have been recorded as follows:
- $2.8 million of intangible assets with a finite life of 8.5 years
(customer relationships); and
- $10.6 million of goodwill.
The acquisition was accounted for as a purchase and the results of
operations of DDI are included in the consolidated financial statements from the
date of acquisition. Had this acquisition occurred at the beginning of the year
of acquisition, the impact on the Company's operating results would not have
been significant.
NOTE 9. SUMMARIZED FINANCIAL INFORMATION OF ANIXTER INC.
The parent company of Anixter Inc. guarantees, fully and unconditionally,
substantially all of the debt of its subsidiaries, which includes Anixter Inc.
The parent company has no independent assets or operations and all other
subsidiaries other than Anixter Inc. are minor. 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
APRIL 1, DECEMBER 31,
2005 2004
----------- ------------
(IN MILLIONS) (UNAUDITED)
ASSETS:
Current assets ........................ $ 1,376.4 $ 1,280.6
Property, net ......................... 40.9 42.2
Goodwill and other intangibles ........ 318.0 319.3
Other assets .......................... 77.6 77.7
---------- ----------
$ 1,812.9 $ 1,719.8
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities ................... $ 514.2 $ 445.7
Subordinated notes payable to parent .. 103.0 205.3
Long-term debt ........................ 301.5 194.0
Other liabilities ..................... 89.1 86.2
Stockholder's equity .................. 805.1 788.6
---------- ----------
$ 1,812.9 $ 1,719.8
========== ==========
9
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
ANIXTER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13 WEEKS ENDED
--------------------
APRIL 1, APRIL 2,
(IN MILLIONS) 2005 2004
-------- --------
Net sales .................... $ 876.5 $ 764.2
Operating income ............. $ 40.6 $ 30.1
Income before income taxes ... $ 32.8 $ 23.3
Net income ................... $ 20.3 $ 14.5
NOTE 10. PENSION PLANS, POST-RETIREMENT BENEFITS AND OTHER BENEFITS
The Company has various defined benefit and defined contributory pension
plans. The defined benefit plans of the Company are the Anixter Inc. Pension
Plan, Executive Benefit Plan and Supplemental Executive Retirement Plan
(together the "Domestic Plans") and various pension plans covering employees of
foreign subsidiaries ("Foreign Plans"). The majority of the Company's 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 and Foreign
Plans. The Company's policy is to fund all plans as required by the Employee
Retirement Income Security Act of 1974 ("ERISA"), the Internal Revenue Service
and applicable foreign laws. Assets in the various plans consisted primarily of
equity securities and fixed income fund investments.
Components of net periodic pension cost is as follows:
PENSION BENEFITS
--------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
-------------------- -------------------- --------------------
APRIL 1, APRIL 2, APRIL 1, APRIL 2, APRIL 1, APRIL 2,
2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
Service cost ..................... $ 1.5 $ 1.5 $ 1.3 $ 1.1 $ 2.8 $ 2.6
Interest cost .................... 2.0 1.8 1.2 0.8 3.2 2.6
Expected return on plan assets ... (1.8) (1.6) (1.0) (0.7) (2.8) (2.3)
Net amortization ................. 0.3 0.2 $ 0.1 $ 0.1 0.4 0.3
------- ------- ------- ------- ------- -------
Net periodic cost ................ $ 2.0 $ 1.9 $ 1.6 $ 1.3 $ 3.6 $ 3.2
======= ======= ======= ======= ======= =======
The Company estimates that it will make contributions in 2005 of
approximately $6.0 million to the Anixter Inc. Pension Plan and approximately
$4.0 million to its Foreign Plans.
10
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
CONTINUED
NOTE 11. BUSINESS SEGMENTS
The Company is engaged in the distribution of communications and specialty
wire and cable products and "C" class inventory components 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 Emerging Markets (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.
In the first quarter of 2004, the Company recorded an extraordinary gain
of $4.1 million in its North America segment. For more information, see Note 3
"Extraordinary Gain." Segment information for the 13 weeks ended April 1, 2005
and April 2, 2004 was as follows:
13 WEEKS ENDED
----------------------
APRIL 1, APRIL 2,
(IN MILLIONS) 2005 2004
--------- ---------
NET SALES:
United States ......... $ 570.5 $ 495.1
Canada ................ 80.4 76.0
--------- ---------
North America ... 650.9 571.1
Europe ................ 168.3 140.2
Emerging Markets ...... 57.3 52.9
--------- ---------
$ 876.5 $ 764.2
========= =========
OPERATING INCOME:
United States ......... $ 26.6 $ 19.1
Canada ................ 5.5 3.9
--------- ---------
North America ... 32.1 23.0
Europe ................ 6.1 4.5
Emerging Markets ...... 1.4 1.5
--------- ---------
$ 39.6 $ 29.0
========= =========
APRIL 1, DECEMBER 31,
2005 2004
--------- ------------
TOTAL ASSETS:
United States ......... $ 1,285.4 $ 1,163.7
Canada ................ 145.2 145.4
--------- ---------
North America ... 1,430.6 1,309.1
Europe ................ 288.4 271.8
Emerging Markets ...... 119.1 125.7
--------- ---------
$ 1,838.1 $ 1,706.6
========= =========
11
ANIXTER INTERNATIONAL INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the historical results of operations and
financial condition of Anixter International Inc. (the "Company") and factors
affecting the Company's financial resources. This discussion should be read in
conjunction with the condensed consolidated financial statements, including the
notes thereto, set forth herein under "Financial Statements" and the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
ACQUISITION OF DISTRIBUTION DYNAMICS
On June 22, 2004, the Company purchased substantially all of the assets
and operations of Distribution Dynamics, Inc. ("DDI"). DDI was a privately held
value-added distributor of fasteners, hardware and related products specializing
in inventory logistics management programs directed at supporting the production
lines of original equipment manufacturers across a broad spectrum of industries.
Headquartered in Eden Prairie, Minnesota, DDI employs approximately 200
associates located in sixteen locations in the United States. The Company
believes DDI's business model complements its strategy of building a global
original equipment manufacturer supply business. The Company purchased DDI for
$32.9 million inclusive of legal and advisory fees, acquiring tangible assets
with a fair value of $19.5 million. Included in the results of the Company for
the 13 weeks ended April 1, 2005, are $18.7 million of sales and $0.4 million of
operating income.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Overview
As a distributor, the Company's use of capital is largely for working
capital to support its revenue base. Capital commitments for property, plant and
equipment are limited to information technology assets, warehouse equipment,
office furniture and fixtures and leasehold improvements, since the Company
operates from leased facilities. Therefore, in any given reporting period, the
amount of cash consumed or generated by operations will primarily be a factor of
the rate of sales increase or decline, due to the corresponding change in
working capital.
In periods when sales are increasing, the expanded working capital needs
will be funded first by cash from operations, secondly from additional
borrowings and lastly from additional equity offerings. At the current level of
operating margin and working capital turns, the Company estimates that in 2005
it will have positive cash flow from operating activities and after capital
expenditures. The Company may continue to issue or retire borrowings or equity
in an effort to maintain a cost-effective capital structure consistent with its
anticipated capital requirements. Assuming the current level of operating
margins and working capital turns, if the organic sales growth rate in 2005 were
to exceed approximately 15% to 17%, then the incremental working capital
required to support the increase in sales may result in the Company having
negative cash flows from operations. In addition to on-hand cash balances, the
Company has adequate facilities to fund its expected growth in operations.
Cash Flow
Consolidated net cash provided by operations was $7.1 million in the first
quarter of 2005, compared to cash used for operating activities of $10.9 million
in the same period in 2004. Income before extraordinary gain was $20.4 million
in the first quarter of 2005 compared to $14.0 million in the corresponding
period in 2004. Working capital, deferred taxes and income tax savings from
employee stock plans, together increased $24.6 million in 2005 compared to an
increase of $30.0 million in 2004. In addition, the net change in the cash
surrender value of life insurance policies, deferred compensation liability and
accrued pension, increased cash from operations by $2.5 million as compared to a
decrease of $3.4 million in the corresponding period in 2004.
Consolidated net cash used in investing activities, primarily related to
capital expenditures spent to support warehouse operations, were $3.0 million in
the first quarter of 2005 and $2.9 million in 2004. Capital expenditures are
expected to be approximately $15.0 million in 2005.
12
ANIXTER INTERNATIONAL INC.
Consolidated net cash provided by financing activities was $110.4 million
in the first quarter of 2005 compared to cash used in financing activities of
$49.2 million in the first quarter of 2004. In the first quarter of 2005, the
Company issued $200.0 million of 5.95% unsecured senior notes due 2015 ("Senior
Notes"). The proceeds were $199.6 million. Issuance costs related to the
offering were approximately $2.0 million, which were partially offset by
proceeds of $1.8 million resulting from entering into an interest rate hedge
prior to the offering. In 2005, the Company reduced borrowings under its bank
revolving lines of credit and accounts receivable securitization facility by
$92.5 million, utilizing the proceeds from the issuance of the Senior Notes. As
a result of significant cash holdings at the end of 2003, there was no net
change in 2004 from proceeds and repayment of long-term borrowings. During the
13 weeks ended April 2, 2004, the Company used $55.1 million to fund the special
dividend of $1.50 per common share. Proceeds from the issuance of common stock
relating to the exercise of stock options and stock units were $3.6 million in
the first quarter of 2005 compared to $6.1 million in the first quarter of 2004.
Financings
On February 24, 2004, the Company's primary operating subsidiary, Anixter
Inc., issued $200.0 million of Senior Notes, which are fully and unconditionally
guaranteed by the Company. Interest of 5.95% on the Senior Notes is payable
semi-annually on March 1 and September 1 of each year, commencing September 1,
2005. Issuance costs related to the offering were approximately $2.0 million
offset by proceeds of $1.8 million, resulting from entering into an interest
rate hedge prior to the offering. Accordingly, net issuance costs of
approximately $0.2 million associated with the notes are being amortized through
February of 2015 using the straight-line method. The proceeds from the sale of
the Senior Notes were approximately $199.6 million and will be used to redeem on
June 28, 2005 the $68.8 million outstanding 7% convertible notes due 2020.
Accordingly, the 7% convertible notes due 2020 are classified in current
liabilities at April 1, 2005. In March, a portion of the proceeds were used to
pay down our bank revolving lines of credit and also allowed us to reduce our
borrowings under the accounts receivable securitization facility. The remaining
proceeds from the Senior Notes will be used for general corporate purposes. As a
result of the increase in borrowings, the Company's cash increased from $53.4
million at December 31, 2004 to $167.9 million at April 1, 2005, while its debt
to total capitalization increased from 35.1% to 40.0% during the same period.
In October 2000, the Company entered into an accounts receivable
securitization program. 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 Anixter Receivables Corporation ("ARC"), a wholly owned,
bankruptcy remote special purpose entity. The assets of ARC are not available to
creditors of Anixter in the event of bankruptcy or insolvency proceedings. ARC
may in turn sell an interest in these receivables to a financial institution for
proceeds of up to $225.0 million. Effective October 1, 2004, ARC, which was
previously unconsolidated, is consolidated for accounting purposes only in the
financial statements of the Company. The average outstanding funding extended to
ARC during the 13 weeks ended April 1, 2005 and April 2, 2004 was approximately
$138.1 million and $131.5 million, respectively. The effective funding rate on
the ARC funding was 3.2% and 1.7% in the first quarter of 2005 and 2004,
respectively.
At April 1, 2005, the primary liquidity source for Anixter is the $275.0
million, five-year revolving credit agreement, all of which was available to be
borrowed. Facility fees of 27.5 basis points payable on the five-year revolving
credit agreement totaled $0.2 million in the first quarter of 2005 and 2004, and
were included in interest expense in the consolidated statements of operations.
This revolving credit agreement requires certain covenant ratios to be
maintained. The Company is in compliance with all of these covenant ratios and
believes that there is adequate margin between the covenant ratios and the
actual ratios given the current trends of the business. Under the leverage
ratio, as of April 1, 2005, $223.2 million of the $275.0 million available under
bank revolving lines of credit at Anixter would be permitted to be borrowed, of
which $200.9 million may be used to pay dividends to the Company.
At April 1, 2005 and December 31, 2004, certain foreign subsidiaries had
approximately $22.3 million and $24.0 million, respectively, available under
bank revolving lines of credit, $0.5 million and $2.1 million of which was
outstanding at April 1, 2005 and December 31, 2004, respectively.
Consolidated interest expense was $5.2 million and $3.0 million for the
first quarter of 2005 and 2004, respectively. The increase in interest expense
is due to higher debt levels, including funding associated with the accounting
consolidation of the securitization facility.
13
ANIXTER INTERNATIONAL INC.
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.
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. In addition to competitive factors, future performance could be subject
to economic downturns and possible rapid changes in applicable technologies.
The Company's recent operating results have been favorably affected by the
rise in commodity prices, primarily petrochemicals and copper, which are
components in some of the products we sell. As current purchase costs with
suppliers increase due to higher commodity prices, the Company's percentage
mark-up to customers remains relatively constant, resulting in higher sales
revenue and gross profit. In addition, existing inventory purchased at
previously lower prices and sold as prices increase, results in a higher gross
profit margin. Conversely, a decrease in commodity prices in a short period of
time would have the opposite effect, negatively affecting results.
OVERVIEW
In the first quarter of 2005, the Company's income before extraordinary
gain increased by $6.4 million, or 46.1%, on a 14.7% increase in sales from the
first quarter of the prior year. Sales, gross profits, operating expense and
operating income, all showed year-on-year increases from combined unit growth
and commodity price driven price increases, the acquisition of DDI in June of
2004 and exchange rate differences related to the weaker U.S. dollar. In the
first quarter of 2005, DDI contributed $18.7 million of sales, while foreign
exchange increased sales and operating income $12.9 million and $0.6 million,
respectively. Excluding the acquisition of DDI and the foreign currency effects
of the weaker U.S. dollar, sales and operating income grew 10.6% and 33.0% in
the first quarter of 2005 as compared to the corresponding period in 2004.
The first quarter sales and operating income growth resulted from an
increase in market penetration in the Enterprise Cabling and Industrial Wire and
Cable markets, strong growth in the OEM Supply business, continued expansion of
the security products distribution business and commodity-driven price
increases.
Other expenses decreased in the current year due to lower foreign exchange
losses, which in large part were the result of the February 2004 devaluation of
the Venezuelan Bolivar. The Company's effective tax rate dropped to 37.6% from
39.0% in the year ago quarter. The extraordinary gain in 2004 was the result of
monies received from an escrow account in connection with the 1983 bankruptcy of
Itel Corporation, the predecessor to the Company.
CONSOLIDATED RESULTS OF OPERATIONS
13 WEEKS ENDED
-------------------------------
APRIL 1, APRIL 2, PERCENT
2005 2004 CHANGE
-------- -------- -------
(IN MILLIONS)
Net sales ............ $ 876.5 $ 764.2 14.7%
Gross profit ......... $ 212.4 $ 182.7 16.3%
Operating expenses ... $ 172.8 $ 153.7 12.5%
Operating income ..... $ 39.6 $ 29.0 36.5%
Net Sales: The Company's net sales during the first quarter of 2005
increased 14.7% to $876.5 million from $764.2 million in the same period in
2004. The acquisition of DDI in June of 2004, along with favorable effects from
changes in exchange rates, accounted for $31.6 million of the increase.
Excluding the acquisition of DDI and the effects from changes in exchange rates,
the Company's net sales increased 10.6% during the 13 weeks ended April 1, 2005
from the same period in 2004. The increase in net sales was due to the addition
of new customers and additional spending by existing customers, strong growth in
the OEM Supply business, continued growth from the Company's initiative to
expand its security products distribution business and commodity-driven price
increases in several major product lines.
14
ANIXTER INTERNATIONAL INC.
Gross Margins: Gross margins increased to 24.2% in the first quarter of
2005 from 23.9% in the corresponding period in 2004. The increase is
attributable to North America where an improved sales mix, higher prices and a
higher growth rate in the OEM Supply market, compared to Company-wide sales
growth rates, in the higher gross margin OEM Supply market improved gross
margins.
Operating Income: As a result of higher sales and gross margins coupled
with tight expense control, operating margins were 4.5% for the first quarter of
2005 as compared to 3.8% in the first quarter of 2004. Operating expenses
increased $19.2 million, or 12.5%, in the first quarter of 2005 from the
corresponding period in 2004. The DDI acquisition increased operating expenses
by $4.9 million, while changes in exchange rates increased operating expenses by
$2.5 million. Excluding the above, operating expenses increased $11.8 million,
or 7.7%, primarily due to variable costs associated with higher sales volumes.
Interest Expense: Consolidated interest expense increased to $5.2 million
in the first quarter of 2005 from $3.0 million in 2004. Interest expense
increased due to the issuance of the $200.0 million Senior Notes in the first
quarter of 2005, along with the accounting consolidation of the Company's
securitization facility in the fourth quarter of 2004. The average debt balance
in the first quarter was $451.8 million in 2005 and $241.1 million in 2004. The
average interest rate for the first quarter of 2005 and 2004, was 4.6% and 5.0%,
respectively.
Other, net income (expense):
13 WEEKS ENDED
-------------------
APRIL 1, APRIL 2,
2005 2004
-------- --------
(IN MILLIONS)
Foreign exchange ................................. $ (1.1) $ (3.1)
Cash surrender value of life insurance policies .. (0.5) 0.1
Other ............................................ (0.1) (0.1)
------ ------
$ (1.7) $ (3.1)
====== ======
Foreign exchange produced a net loss of $1.1 million in 2005 as compared
to a loss of $3.1 million corresponding period of 2004. A significant portion of
the net loss in 2004 resulted from the February 2004 devaluation of the
Venezuelan Bolivar.
15
ANIXTER INTERNATIONAL INC.
Income Taxes: The consolidated tax provision increased to $12.3 million in
first quarter of 2005 from $8.9 million in the first quarter of 2004, primarily
due to an increase in income before taxes and extraordinary gain. The 2005
effective tax rate is 37.6% compared to 39.0% in 2004. The decrease in the
effective tax rate is primarily due to a change in the mix of foreign income and
losses by country as compared to country level net operating loss positions,
along with a higher level of pre-tax earnings, which dilutes the effect of
nondeductible expenses. The change in tax rate increased income before
extraordinary gain and net income by $0.5 million, or $0.01 per diluted share.
NORTH AMERICA RESULTS OF OPERATIONS
13 WEEKS ENDED
--------------------------------
APRIL 1, APRIL 2, PERCENT
2005 2004 CHANGE
--------- --------- -------
(IN MILLIONS)
Net sales ............ $ 650.9 $ 571.1 14.0%
Gross profit ......... $ 158.8 $ 134.3 18.2%
Operating expenses ... $ 126.7 $ 111.3 13.8%
Operating income ..... $ 32.1 $ 23.0 39.4%
Net Sales: When compared to the corresponding period in 2004, North
America net sales for the 13 weeks ended April 1, 2005 increased 14.0% to $650.9
million, including a $5.7 million favorable effect on exchange rates and an
increase of $18.7 million as a result of the acquisition of DDI. The combined
Industrial Wire and Cable and Enterprise Cabling sales increased $41.9 million
in the first quarter of 2005 as compared to the first quarter of 2004. The
increase resulted from a combination of increased demand from both new and
existing customers, continued progress in the security market and price
increases driven by higher copper and data cabling prices. In the OEM Supply
market, sales increased 56.4% to $84.4 million, including the acquisition of
DDI. The growth in these customers reflects the expansion of existing contracts,
new contract additions and an increase in pricing. Sales to telecom original
equipment manufacturers increased 8.2% as compared to 2004.
Gross Margins: Gross margins increased to 24.4% in the first quarter of
2005 from 23.5% for the same period in 2004. The increase is attributable to
improved sales mix, higher prices and a higher growth rate in the higher gross
margin OEM Supply market compared to the growth rate in the North America
Enterprise Cabling and Industrial Wire and Cable markets.
Operating Income: Operating expenses increased $15.4 million in the first
quarter of 2005 from the corresponding period in 2004. The increase is primarily
due to variable costs associated with the increase in sales volume. The
acquisition of DDI added $4.9 million of operating expenses. Primarily as a
result of higher gross margins and continued tight expense controls, North
America operating margins increased to 4.9% in the first quarter of 2005 from
4.0% in the same period in 2004.
EUROPE RESULTS OF OPERATIONS
13 WEEKS ENDED
-------------------------------
APRIL 1, APRIL 2, PERCENT
2005 2004 CHANGE
-------- -------- -------
(IN MILLIONS)
Net sales ............ $ 168.3 $ 140.2 20.0%
Gross profit ......... $ 42.0 $ 36.6 14.7%
Operating expenses ... $ 35.9 $ 32.1 11.8%
Operating income ..... $ 6.1 $ 4.5 35.8%
Net Sales: Europe net sales increased 20.0% in the first quarter of 2005
to $168.3 million from $140.2 million in the first quarter of 2004, including a
$7.1 million favorable effect from changes in exchange rates. The increase in
local currency sales of 15.0% reflects an increase in economic activity in
Europe, particularly the OEM Supply market where sales grew $9.5 million, or
40.0%, in the first quarter of 2005 as compared to the corresponding period in
2004.
16
ANIXTER INTERNATIONAL INC.
Gross Margins: Europe's gross margins decreased to 25.0% in the first
quarter of 2005 from 26.1% in the same period in 2004. The decline is a result
of larger projects in 2005 at reduced margins, along with an increase in sales
to integrated supply customers which have lower margins.
Operating Income: Compared to the first quarter of 2004, Europe's
operating expenses increased 11.8%, or $3.8 million, to $35.9 million in the
first quarter of 2005. Included in the increase are $1.5 million for changes in
exchange rates. Excluding the exchange rate impact, operating expenses were $2.3
million, or 7.2% higher than 2004. Tight expense controls and substantial
improvement in operating performance in the OEM Supply business resulted in the
operating margin increasing from 3.2% in 2004 to 3.6% in 2005. Exchange rate
changes had a $0.2 million favorable impact on operating income.
EMERGING MARKETS RESULTS OF OPERATIONS
13 WEEKS ENDED
-------------------------------
APRIL 1, APRIL 2, PERCENT
2005 2004 CHANGE
-------- -------- -------
(IN MILLIONS)
Net sales ............ $ 57.3 $ 52.9 8.3%
Gross profit ......... $ 11.6 $ 11.8 (1.0)%
Operating expenses ... $ 10.2 $ 10.3 -%
Operating income ..... $ 1.4 $ 1.5 (7.5)%
Net Sales: Emerging Markets' (Asia Pacific and Latin America) net sales
were up 8.3%, to $57.3 million in the first quarter of 2005, from $52.9 million
in the first quarter of 2004. Latin America sales grew 18.7%, while Asia Pacific
sales declined 13.0% during the first quarter of 2005 compared to the
corresponding period in 2004. The decline in Asia Pacific was the result of some
major projects in 2004, which were not expected to repeat in 2005. Exchange rate
changes had a minimal impact on sales.
Gross Margins: During the first quarter of 2005, Emerging Markets' gross
margins decreased to 20.3% from 22.2% in the corresponding period in 2004. The
decline resulted from large fulfillment sales at reduced margins in Latin
America.
Operating Income: Operating expenses in the first quarter of 2005 remained
flat to the corresponding period in 2004. Primarily a result of the decline in
gross margins and reduced project business in Asia Pacific, operating margins
declined to 2.4% in the first quarter of 2005 from 2.8% in 2004.
17
ANIXTER INTERNATIONAL INC.
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 April 1, 2005, was $465.2 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 4.0% and 4.2%, respectively.
Changes in the market value of the Company's debt do 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
Under the supervision and the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation as of April 1, 2005 of the effectiveness of the design and operation
of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based on this evaluation, our principal executive officer and
our principal financial officer concluded that our disclosure controls and
procedures were effective as of April 1, 2005. There was no change in the
Company's internal control over financial reporting that occurred during the 13
weeks ended April 1, 2005 that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
18
ANIXTER INTERNATIONAL INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(31) Rule 13a - 14(a) / 15d - 14(a) Certifications.
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 J. Letham, Senior Vice President-Finance and
Chief Financial Officer, Certification Pursuant to
Section 302, of the Sarbanes-Oxley Act of 2002.
(32) Section 1350 Certifications.
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 of the Sarbanes-Oxley
Act of 2002.
32.2 Dennis J. 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 Act of 2002.
19
ANIXTER INTERNATIONAL INC.
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.
May 10, 2005
By: /s/ Robert W. Grubbs
----------------------------------
Robert W. Grubbs
President and Chief Executive Officer
May 10, 2005
By: /s/ Dennis J. Letham
-----------------------------------
Dennis J. Letham
Senior Vice President - Finance
and Chief Financial Officer
20