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 June 30, 2006
OR
[ ] TRANSACTION 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)
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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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
At July 28, 2006, 39,136,394 shares of the registrant's Common Stock, $1.00 par value, were outstanding.
ANIXTER INTERNATIONAL INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
-------
Item 1. Financial Statements........................................................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. *
Item 4. Controls and Procedures..................................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... *
Item 1A. Risk Factors................................................................................ *
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......................................... 25
Item 5. Other Information........................................................................... 25
Item 6. Exhibits.................................................................................... 25
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*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," "intends," "anticipates," "completes," "estimates," "plans," "projects," "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 or customer relationships, technology changes, economic and currency risks, new or changed competitors, risks associated with inventory, commodity price fluctuations and risks associated with the integration of recently acquired companies.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED
--------------------------- -----------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005
----------- --------- ----------- -----------
NET SALES........................................... $ 1,239.8 $ 936.1 $ 2,310.3 $ 1,812.6
Cost of operations:
Cost of goods sold................................ 932.7 713.6 1,746.0 1,377.7
Operating expenses................................ 215.0 175.5 411.7 347.6
Amortization of intangibles....................... 1.1 0.8 2.0 1.5
----------- --------- ----------- -----------
Total costs and expenses....................... 1,148.8 889.9 2,159.7 1,726.8
----------- --------- ----------- -----------
OPERATING INCOME.................................... 91.0 46.2 150.6 85.8
Other expense:
Interest expense.................................. (9.0) (6.8) (17.5) (12.0)
Extinguishment of debt............................ -- (1.2) -- (1.2)
Other, net........................................ (1.5) (0.3) (1.6) (2.0)
----------- --------- ----------- -----------
Income before income taxes.......................... 80.5 37.9 131.5 70.6
Income tax expense.................................. 31.1 13.5 50.8 25.8
----------- --------- ----------- -----------
NET INCOME.......................................... $ 49.4 $ 24.4 $ 80.7 $ 44.8
=========== ========= =========== ===========
NET INCOME PER SHARE:
Basic............................................. $ 1.27 $ 0.64 $ 2.08 $ 1.19
Diluted........................................... $ 1.15 $ 0.61 $ 1.89 $ 1.12
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See accompanying notes to the condensed consolidated financial statements.
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 30,
2006 2005
---------- ----------
(IN MILLIONS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 20.9 $ 21.8
Accounts receivable (less allowances of $17.7 and $19.6
in 2006 and 2005, respectively)................................................ 919.6 772.3
Inventories...................................................................... 806.5 711.5
Deferred income taxes............................................................ 17.8 16.5
Other current assets............................................................. 14.9 14.6
---------- ----------
Total current assets........................................................ 1,779.7 1,536.7
Property and equipment, at cost.................................................... 200.5 194.7
Accumulated depreciation........................................................... (144.4) (141.6)
---------- ----------
Net property and equipment.................................................. 56.1 53.1
Goodwill........................................................................... 345.2 320.2
Other assets....................................................................... 111.5 102.1
---------- ----------
$ 2,292.5 $ 2,012.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................. $ 519.1 $ 436.0
Accrued expenses................................................................. 178.7 168.1
---------- ----------
Total current liabilities................................................... 697.8 604.1
Long-term debt..................................................................... 701.3 625.1
Other liabilities.................................................................. 72.7 76.5
---------- ----------
Total liabilities........................................................... 1,471.8 1,305.7
STOCKHOLDERS' EQUITY
Common stock -- $1.00 par value, 100,000,000 shares authorized, 39,070,346 and
38,378,182 shares issued and outstanding in 2006 and
2005, respectively............................................................. 39.1 38.4
Capital surplus.................................................................. 97.3 79.6
Retained earnings................................................................ 674.7 594.0
Accumulated other comprehensive income (loss):
Foreign currency translation................................................... 11.7 (1.5)
Minimum pension liability...................................................... (4.9) (4.9)
Unrealized gain on derivatives................................................. 2.8 0.8
---------- ----------
Total accumulated other comprehensive income (loss).......................... 9.6 (5.6)
---------- ----------
Total stockholders' equity.................................................. 820.7 706.4
---------- ----------
$ 2,292.5 $ 2,012.1
========== ==========
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See accompanying notes to the condensed consolidated financial statements.
ANIXTER INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
26 WEEKS ENDED
-----------------------
(IN MILLIONS) JUNE 30, JULY 1,
2006 2005
-------- --------
OPERATING ACTIVITIES
Net income ...................................................... $ 80.7 $ 44.8
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation ................................................... 9.6 8.1
Amortization of stock compensation ............................. 5.0 3.5
Accretion of zero coupon convertible notes ..................... 2.5 4.8
Amortization of intangible assets and deferred financing costs . 2.3 1.8
Deferred income taxes .......................................... 1.0 10.5
Loss on extinguishment of debt ................................. -- 1.2
Stock option income tax benefits ............................... -- 3.3
Excess income tax benefit from employee stock plans ............ (6.2) --
Changes in current assets and liabilities, net ................. (131.1) (97.7)
Other, net ..................................................... (3.4) 2.2
-------- --------
Net cash used in operating activities ....................... (39.6) (17.5)
INVESTING ACTIVITIES
Acquisition of businesses ...................................... (29.1) --
Capital expenditures ........................................... (11.5) (6.8)
Restricted cash in escrow ...................................... -- (76.6)
-------- --------
Net cash used in investing activities ....................... (40.6) (83.4)
FINANCING ACTIVITIES
Proceeds from long-term borrowings ............................. 323.9 104.6
Repayment of long-term borrowings .............................. (259.8) (166.6)
Proceeds from issuance of common stock ......................... 9.8 7.6
Excess income tax benefit from employee stock plans ............ 6.2 --
Payment of cash dividend ....................................... (0.8) (0.1)
Bond proceeds .................................................. -- 199.6
Retirement of 7% zero coupon convertible notes ................. -- (69.9)
Proceeds from interest rate hedges ............................. -- 1.8
Deferred financing costs ....................................... -- (2.1)
-------- --------
Net cash provided by financing activities ................... 79.3 74.9
DECREASE IN CASH AND CASH EQUIVALENTS FROM OPERATIONS ............. (0.9) (26.0)
Cash and cash equivalents at beginning of period ................ 21.8 53.4
-------- --------
Cash and cash equivalents at end of period ...................... $ 20.9 $ 27.4
======== ========
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See accompanying notes to the condensed consolidated financial statements.
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 30, 2005. 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.
STOCK BASED COMPENSATION: In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123(R)"), which
became effective for annual reporting periods beginning after June 15, 2005. The
Company adopted SFAS No. 123(R) in the first quarter of fiscal 2006 using the
modified version of prospective application. Under this transition method,
compensation cost is recognized on or after the required effective date for the
portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards previously
calculated under SFAS No. 123 for pro forma disclosure purposes. Also, in
accordance with the modified version of prospective application of adopting SFAS
123(R), the Company has classified the tax benefits received associated with
employee stock compensation as a financing cash flow item in its condensed
consolidated statement of cash flows for the 26 weeks ended June 30, 2006. The
financial statements for periods prior to the date of adoption have not been
restated in accordance with the modified prospective application.
In November 2005, FASB issued FSP 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards which describes an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). Applying the provisions of FSP 123(R)-3 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Prior to the adoption of SFAS 123(R), the Company elected 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 was charged to operations over the vesting period. In accordance with SFAS 123(R), the Company measures the cost of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method. Compensation costs for the plans have been determined based on the fair value at the grant date using the Black-Scholes option pricing model and amortized on a straight-line basis over the respective vesting period representing the requisite service period.
Based on the number of options outstanding at December 31, 2005, the adoption of SFAS No. 123(R) by the Company resulted in additional expense of approximately $0.1 million and $0.7 million in the 13 and 26 weeks ended June 30, 2006, respectively. The remaining stock options outstanding for which the remaining requisite service period had yet to be rendered at the beginning of the year is less than $0.1 million. The effect of adopting SFAS No. 123(R) did not have a material effect on the Company's income before taxes, net income, basic and diluted earnings per share for the 13 weeks ended June 30, 2006. As a result of adopting Statement 123(R) on December 31, 2005, the Company's income before income taxes and net income for the 26 weeks ended June 30, 2006, are $0.7 million and $0.4 million lower, respectively, than if it had continued to account for share-based compensation under APB Opinion No. 25. Both basic and diluted earnings per share for the 26 weeks ended June 30, 2006 are $0.01 lower than if the Company had continued to account for share-based compensation under APB Opinion No. 25. For further information, See Note 5. "Preferred Stock and Common Stock."
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to the adoption of SFAS 123(R), the Company applied the disclosure-only provisions of SFAS No. 123. Accordingly, since the exercise price of the Company's grants equaled the stock price on the date of grant, no compensation expense had been recognized in the condensed consolidated statements of operations for the stock option plans. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. However, pro forma net income and net income per share amounts are presented in the table below for the comparative 13 and 26 weeks ended July 1, 2005 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 stock incentive awards.
13 WEEKS ENDED 26 WEEKS ENDED
-------------- --------------
JULY 1, JULY 1,
2005 2005
-------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BASIC EARNINGS PER SHARE:
Net income as reported ............................................. $ 24.4 $ 44.8
Add: APB Opinion No. 25 Stock-based employee compensation
included in net income, net ...................................... 1.4 2.4
Deduct: SFAS No. 123 Stock-based employee compensation
expense, net ..................................................... (2.1) (4.0)
-------- --------
Pro forma net income ............................................ $ 23.7 $ 43.2
======== ========
BASIC EARNINGS PER SHARE:
As reported ...................................................... $ 0.64 $ 1.19
Pro forma ........................................................ $ 0.63 $ 1.15
DILUTED EARNINGS PER SHARE:
Net income as reported ............................................. $ 24.4 $ 44.8
Add: APB Opinion No. 25 Stock-based employee compensation
included in net income, net ...................................... 1.4 2.4
Add: Interest impact of assumed conversion of convertible notes.... -- 0.8
Deduct: SFAS No. 123 Stock-based employee compensation
expense, net ..................................................... (2.1) (4.0)
-------- --------
Pro forma net income ............................................... $ 23.7 $ 44.0
======== ========
DILUTED EARNINGS PER SHARE:
As reported ...................................................... $ 0.61 $ 1.12
Pro forma ........................................................ $ 0.59 $ 1.07
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The weighted-average fair value of the Company's 2001 and 2002 stock options was $14.74 and $14.92 per share, respectively, as estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions applicable to the grants: 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In May 2005, the FASB issued SFAS
No. 154, Accounting for Changes and Error Corrections -- A Replacement of APB
Opinion No. 20 and FASB Statement No. 3 ("SFAS No. 154"). SFAS 154 requires
retrospective application to prior period financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
In June 2006, the FASB issued FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109 ("FIN 48"), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48, if any, on the Company's financial statements.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. INCOME PER SHARE
The following table sets forth the computation of basic and diluted income per share:
13 WEEKS ENDED 26 WEEKS ENDED
---------------------- ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BASIC INCOME PER SHARE:
Net income ...................................... $ 49.4 $ 24.4 $ 80.7 $ 44.8
Weighted-average common shares outstanding ...... 39.0 37.8 38.8 37.7
Net income per share ............................ $ 1.27 $ 0.64 $ 2.08 $ 1.19
DILUTED INCOME PER SHARE:
Net income ...................................... $ 49.4 $ 24.4 $ 80.7 $ 44.8
Net interest impact of assumed conversion of
convertible notes .............................. -- -- -- 0.8
-------- -------- -------- --------
Adjusted net income ............................. $ 49.4 $ 24.4 $ 80.7 $ 45.6
======== ======== ======== ========
Weighted-average common shares outstanding ...... 39.0 37.8 38.8 37.7
Effect of dilutive securities:
Stock options and units ....................... 1.5 1.3 1.5 1.3
Convertible notes due 2033 .................... 2.4 1.0 2.3 0.9
Convertible notes due 2020 .................... -- -- -- 0.8
-------- -------- -------- --------
Weighted-average common shares outstanding ...... 42.9 40.1 42.6 40.7
======== ======== ======== ========
Net income per share ............................ $ 1.15 $ 0.61 $ 1.89 $ 1.12
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The Convertible Notes due 2033 are convertible into 15.067 shares 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. As a result of the conversion value exceeding the accreted principal, 2.4 million and 2.3 million additional shares related to the Convertible Notes due 2033 have been included in the diluted weighted average common shares outstanding for the 13 and 26 weeks ended June 30, 2006. In the corresponding periods in 2005, 1.0 million and 0.9 million additional shares related to the Convertible Notes due 2033 have been included in the dilutive weighted average common shares outstanding for the 13 and 26 weeks ended, respectively.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In the 26 weeks ended July 1, 2005, the Company included 0.8 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 26 weeks ended July 1, 2005. The impact of the Convertible Notes due 2020 was less than $0.01 per diluted share for the 26 weeks ended July 1, 2005. There was no dilutive effect for the 13 weeks ended July 1, 2005. The Convertible Notes due 2020 were retired on June 28, 2005.
In both the 13 weeks ended June 30, 2006 and July 1, 2005, the Company issued 0.2 million shares due to stock option exercises. In the 26 weeks ended June 30, 2006 and July 1, 2005, the Company issued 0.7 million and 0.6 million shares, respectively, due to stock option exercises and vesting of stock units.
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income, net of tax, consisted of the following:
13 WEEKS ENDED 26 WEEKS ENDED
-------------------- --------------------
(IN MILLIONS) JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005
------- ------- ------- -------
Net income ........................................... $ 49.4 $ 24.4 $ 80.7 $ 44.8
Change in cumulative translation adjustment........... 10.9 (11.5) 13.2 (18.8)
Change in fair market value of derivatives............ 1.3 (0.2) 2.0 1.6
------- ------- ------- -------
Comprehensive income ................................. $ 61.6 $ 12.7 $ 95.9 $ 27.6
======= ======= ======= =======
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NOTE 4. INCOME TAXES
The effective tax rate is 38.6% for both the 13 and 26 weeks ended June 30, 2006, compared to 35.7% and 36.6% for the corresponding periods in 2005, respectively. The increase in the effective tax rate is primarily due to the effect of a $1.4 million tax credit resulting from a favorable tax ruling in Europe during the second quarter of 2005. The change in tax rate (excluding the 2005 tax credit) increased net income by approximately $0.6 million, or $0.01 per diluted share, for the 13 weeks ended June 30, 2006 compared to the corresponding period in 2005. The change in the effective tax rate did not materially impact net income or earnings per share for the 26 weeks ended June 30, 2006 compared to the corresponding period in 2005.
NOTE 5. PREFERRED STOCK AND COMMON STOCK
Preferred Stock
The Company has the authority to issue 15.0 million shares of preferred stock, par value $1.00 per share, none of which was outstanding as of June 30, 2006 and December 30, 2005.
Common Stock
The Company has the authority to issue 100.0 million shares of common stock, par value $1.00 per share, of which 39.1 million shares and 38.4 million shares were outstanding as of June 30, 2006 and December 30, 2005, respectively.
No shares were repurchased in 2006 or 2005. However, the Company may purchase additional shares with the volume and timing dependent on market conditions.
Stock Units
Prior to 2003, the Company granted stock options to employees. Beginning in 2003, the Company granted stock units in lieu of employee stock options under the 2001 Stock Incentive Plan. The Company granted approximately
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
232,346 and 262,183 stock units to employees in the 26 weeks ended June 30, 2006 and July 1, 2005, respectively, with a grant-date fair value of $46.29 and $37.39 per share, respectively. The grant-date value of stock units is amortized and converted to an outstanding share of common stock over either a four-year or six-year vesting period from the date of grant based on the specific terms of the grant. During the 13 and 26 weeks ended June 30, 2006, total compensation expense associated with the stock units was $2.2 million and $4.1 million, respectively. During the 13 and 26 weeks ended July 1, 2005, the total compensation expense associated with the stock units was $1.8 million and $3.2 million, respectively.
In 1996, the Company adopted a Director Stock Unit Plan to pay its non-employee directors annual retainer fees in the form of stock units. Currently, these units are granted quarterly. These stock units convert to common stock outstanding of the Company at a pre-arranged time selected by each director. Stock units were granted to ten directors in the 13 and 26 weeks ended June 30, 2006 and July 1, 2005. The aggregate value at grant date was $0.3 million in the 13 weeks ended June 30, 2006 and July 1, 2005. The aggregate value at grant date was $0.7 million and $0.3 million in the 26 week period ending June 30, 2006 and July 1, 2005, respectively. Compensation expense associated with the director stock units was $0.3 million and $0.6 million for the 13 weeks ended June 30, 2006 and July 1, 2005, respectively. During the 26 weeks ended June 30, 2006, and July 1, 2005, total compensation expense associated with the director stock units was $0.7 million and $0.8 million, respectively.
The following table summarizes the activity under the director and employee stock unit plans:
WEIGHTED WEIGHTED
DIRECTOR AVERAGE EMPLOYEE AVERAGE
STOCK GRANT DATE STOCK GRANT DATE
UNITS VALUE UNITS VALUE
-------- ---------- -------- ----------
(UNITS IN THOUSANDS)
Balance at December 30, 2005 133.0 $ 25.77 649.6 $ 31.62
Granted ............................... 8.4 39.12 232.3 46.29
Converted ............................. -- -- (154.1) 27.04
Canceled .............................. -- -- (1.6) 30.62
-------- -------
Balance at March 31, 2006 ............. 141.4 26.57 726.2 37.29
-------- -------
Granted ............................... 6.9 47.78 -- --
Converted ............................. (31.2) 22.11 -- --
Canceled .............................. -- -- (10.1) 39.39
-------- -------
Balance at June 30, 2006 .............. 117.1 $ 29.01 716.1 $ 37.26
======== =======
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Stock Options
On May 18, 2006, the Company's stockholders approved the 2006 Stock Incentive Plan (the "Incentive Plan"). A total of 1.7 million shares of the Company's common stock may be issued pursuant to the Incentive Plan.
At June 30, 2006, the Company had stock incentive plans that reserve 1.9 million shares for additional stock option awards or stock grants. Options previously granted under these plans have been granted with exercise prices at, or higher than, the fair market value of the common stock on the date of grant. All options expire ten years after the date of grant. The Company generally issues new shares to satisfy stock option exercises as opposed to adjusting treasury shares. In accordance with SFAS 123(R), the fair value of stock option grants is amortized over the respective vesting period representing the requisite service period.
On March 1, 2006, the Company granted an additional 168,000 stock options to employees and began amortizing the grant-date fair market value of approximately $3.5 million over the six-year vesting period representing the requisite service period. The weighted-average fair value of the 2006 stock option grant was $21.07 per share which was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: expected stock price volatility of 34%; expected dividend yield of zero; risk-free interest rate of 4.6%; and an average expected
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
life of 7 years. Compensation expense associated with the 2006 option grant was $0.2 million for both the 13 and 26 week period ended June 30, 2006.
The following table summarizes the activity under the employee stock option plan:
WEIGHTED WEIGHTED
AVERAGE AVERAGE AGGREGATE
EMPLOYEE EXERCISE REMAINING INTRINSIC
OPTIONS PRICE LIFE VALUE
-------- -------- ---------- ----------
(OPTIONS IN THOUSANDS) (IN THOUSANDS)
Balance at December 30, 2005 ........ 3,369.6 $ 18.55
Granted ............................. 168.0 46.29
Exercised ........................... (400.3) 17.65
Canceled ............................ (0.7) 22.39
--------
Balance at March 31, 2006 ........... 3,136.6 20.15 4.5 years $ 86,663.2
Granted ............................. -- --
Exercised ........................... (153.1) 17.83
Canceled ............................ -- --
--------
Balance at June 30, 2006 ............ 2,983.5 $ 20.27 4.5 years $ 81,112.0
========
Options exercisable at June 30, 2006:
2006 ................................ 2,800.0 $ 18.72 4.4 years $ 80,467.6
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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day each fiscal quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006 and June 30, 2006, respectively. This amount changes based on the fair market value of the Company's stock. The total intrinsic value of options exercised for the 13 weeks ended June 30, 2006 and July 1, 2005 was $5.2 million and $3.8 million, respectively. The total intrinsic value of options exercised for the 26 weeks ended June 30, 2006 and July 1, 2005 was $16.0 million and $8.4 million, respectively.
Summary of Non-Vested Shares
The following table summarizes the activity of unvested employee stock units and options:
WEIGHTED
NON-VESTED AVERAGE GRANT
SHARES DATE FAIR VALUE
---------------- ----------------
(IN THOUSANDS)
Non-vested shares at December 30, 2005..................... 956.7 $ 28.67
Granted.................................................... 400.3 46.29
Vested..................................................... (441.5) 24.01
Forfeited.................................................. (2.3) 28.08
---------------
Non-vested shares at March 31, 2006........................ 913.2 38.58
---------------
Granted.................................................... -- --
Vested..................................................... (3.5) 25.50
Forfeited.................................................. (10.1) 39.39
---------------
Non-vested shares at June 30, 2006......................... 899.6 $ 38.63
===============
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As of June 30, 2006, there was $19.9 million of total unrecognized compensation cost related to unvested stock units and options granted.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. ACQUISITION OF BUSINESSES
On July 8, 2005, the Company acquired Infast, a UK-based distributor of fasteners and other "C" class inventory components to original equipment manufacturers. Based on the offer price of 34 pence per Infast share, the Company paid approximately $71.8 million for all of the outstanding shares of Infast, including transaction-related costs. As a result of the acquisition, Anixter assumed the outstanding debt obligations of Infast, which, at July 8, 2005, totaled approximately $26.5 million. The purchase of the shares was funded from on-hand cash balances derived from the $200.0 million issuance of 5.95% senior notes due 2015 ("Senior Notes"). Infast is a value-added distributor of fasteners 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. Infast employs approximately 900 people located in 30 locations in the United Kingdom and the United States. The Company believes Infast'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 and 26 weeks ended June 30, 2006 are Infast sales of $70.1 million and $140.2 million, respectively, and operating income of $1.2 million and $1.6 million, respectively.
In connection with the acquisition of Infast and in accordance with the requirements of Emerging Issues Task Force Pronouncement (EITF) 95-03, the Company completed a restructuring plan that primarily includes facility closings, severance and other changes in the fair value of fixed assets. The cost associated with implementing this plan was $2.7 million and was accounted for as part of purchase accounting. The tangible net assets acquired of $31.8 million 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 balance sheet at June 30, 2006. Intangible assets have been recorded as follows:
- $8.1 million of intangible assets with a finite life of 8.0 years
(customer relationships); and
- $31.9 million of goodwill.
During the second quarter of 2006, the Company acquired IMS, Inc. ("IMS"), a wire and cable distributor in Connecticut. During the second quarter of 2006, the Company paid $25.3 million for IMS and held back $3.0 million to cover various representations and warranties. In addition, a net asset adjustment and a potential earn-out payment will be made during the next ten months that is expected to increase the purchase price by less than $2.0 million. IMS complements the Company's existing electrical wire and cable business in North America while employing approximately 100 people. Included in the results of the Company for both the 13 and 26 weeks ended June 30, 2006 are a total of $4.7 million of sales and $0.4 million of operating income for IMS. On a preliminary basis, the Company has estimated the fair value of the tangible net assets acquired at $6.8 million. The Company expects to make adjustments to this preliminary valuation once it completes its review of the following major areas for each business: accounts receivable, inventory and fixed assets. The third party valuation of the intangibles has not been completed; however, the Company has estimated the intangible assets as follows:
- $7.0 million of intangible assets with a finite life of 8.0 years
(customer relationships); and
- $14.5 million of goodwill.
In addition to the above, the Company paid $3.8 million for a small acquisition in Eastern Europe.
The three acquisitions discussed above were accounted for as purchases and their respective results of operations are included in the condensed consolidated financial statements from the dates of acquisition. Had these acquisitions occurred at the beginning of the year of each acquisition, the impact on the Company's operating results would not have been significant.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
As a result of the acquisition of Infast, the Company assumed a guarantee related to a lease obligation of a previously owned operating division of Infast. During the first quarter of 2006, the former Infast affiliate defaulted on its lease obligation and the Company received $3.0 million that was held in escrow in the event of such default. After taking into account the receipt of the escrow funds and the additional fair value liability established at acquisition date, the Company has estimated the future sublease revenue that it expects to realize during the lease term to be less than the amount due under the guarantee. Therefore, during the first quarter of 2006, the Company recorded a $1.1 million provision related to this lease guarantee.
NOTE 8. 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, and are not 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
JUNE 30, DECEMBER 30,
(IN MILLIONS) 2006 2005
---------- ----------
(UNAUDITED)
ASSETS:
Current assets ........................ $ 1,791.7 $ 1,541.5
Property, net ......................... 55.8 52.7
Goodwill and other intangibles ........ 382.5 350.4
Other assets .......................... 81.5 79.9
---------- ----------
$ 2,311.5 $ 2,024.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities ................... $ 682.2 $ 582.5
Subordinated notes payable to parent... 33.0 30.5
Long-term debt ........................ 542.9 469.3
Other liabilities ..................... 86.9 89.8
Stockholders' equity .................. 966.5 852.4
---------- ----------
$ 2,311.5 $ 2,024.5
========== ==========
|
ANIXTER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13 WEEKS ENDED 26 WEEKS ENDED
-------------------- --------------------
(IN MILLIONS) JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005
--------- -------- --------- ---------
Net sales ............................... $ 1,239.8 $ 936.1 $ 2,310.3 $ 1,812.6
Operating income ........................ $ 92.2 $ 47.6 $ 153.1 $ 88.2
Income before income taxes............... $ 81.7 $ 39.4 $ 134.4 $ 72.2
Net income .............................. $ 49.8 $ 25.2 $ 82.0 $ 45.5
|
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. PENSION PLANS
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:
13 WEEKS ENDED
-------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------- ----------------- -----------------
JUNE 30, JULY 1, JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005 2006 2005
-------- ------- -------- ------- -------- -------
(IN MILLIONS)
Service cost .......................................... $ 1.6 $ 1.5 $ 1.5 $ 1.2 $ 3.1 $ 2.7
Interest cost ......................................... 2.0 2.0 3.2 1.3 5.2 3.3
Expected return on plan assets......................... (2.2) (1.8) (3.2) (1.2) (5.4) (3.0)
Net amortization ...................................... 0.4 0.3 0.1 0.1 0.5 0.4
----- ----- ----- ----- ----- -----
Net periodic cost ..................................... $ 1.8 $ 2.0 $ 1.6 $ 1.4 $ 3.4 $ 3.4
===== ===== ===== ===== ===== =====
26 WEEKS ENDED
-------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------- ----------------- -----------------
JUNE 30, JULY 1, JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005 2006 2005
-------- ------- -------- ------- -------- -------
(IN MILLIONS)
Service cost .......................................... $ 3.2 $ 3.0 $ 2.8 $ 2.5 $ 6.0 $ 5.5
Interest cost ......................................... 4.1 4.0 5.0 2.5 9.1 6.5
Expected return on plan assets......................... (4.4) (3.6) (5.0) (2.2) (9.4) (5.8)
Net amortization ...................................... 0.8 0.6 0.4 0.2 1.2 0.8
----- ----- ----- ----- ----- -----
Net periodic cost ..................................... $ 3.7 $ 4.0 $ 3.2 $ 3.0 $ 6.9 $ 7.0
===== ===== ===== ===== ===== =====
|
In the 26 weeks ended June 30, 2006, the Company made contributions of approximately $3.0 million to the Anixter Inc. Pension Plan and approximately $6.6 million to its Foreign Plans. Currently, the Company estimates that it will make additional contributions in 2006 of approximately $8.3 million to the Anixter Inc. Pension Plan and approximately $1.9 million to its Foreign Plans.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. BUSINESS SEGMENTS
The Company is engaged in the distribution of communications products, electrical and electronic 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. Certain corporate expenses are allocated to the segments based primarily on specific identification, projected sales and estimated use of time. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis. Intercompany transactions are not significant.
Segment information for the 13 and 26 weeks ended June 30, 2006 and July 1, 2005 was as follows:
(IN MILLIONS) 13 WEEKS ENDED 26 WEEKS ENDED
---------------------------- ----------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2006 2005 2006 2005
---------- ---------- ---------- ----------
NET SALES:
United States ............................ $ 776.9 $ 612.8 $ 1,445.2 $ 1,183.3
Canada ................................... 145.8 91.0 256.3 171.4
---------- ---------- ---------- ----------
North America .......................... 922.7 703.8 1,701.5 1,354.7
Europe ................................... 240.7 164.7 460.1 333.0
Emerging Markets.......................... 76.4 67.6 148.7 124.9
---------- ---------- ---------- ----------
$ 1,239.8 $ 936.1 $ 2,310.3 $ 1,812.6
========== ========== ========== ==========
OPERATING INCOME:
United States ............................ $ 57.6 $ 31.2 $ 95.5 $ 57.8
Canada ................................... 18.7 6.6 27.7 12.1
---------- ---------- ---------- ----------
North America .......................... 76.3 37.8 123.2 69.9
Europe ................................... 10.5 5.5 17.9 11.6
Emerging Markets.......................... 4.2 2.9 9.5 4.3
---------- ---------- ---------- ----------
$ 91.0 $ 46.2 $ 150.6 $ 85.8
========== ========== ========== ==========
JUNE 30, DECEMBER 30,
2006 2005
---------- ----------
TOTAL ASSETS:
United States............................ $ 1,410.8 $ 1,272.5
Canada................................... 222.5 169.2
---------- ----------
North America.......................... 1,633.3 1,441.7
Europe................................... 508.1 422.2
Emerging Markets......................... 151.1 148.2
---------- ----------
$ 2,292.5 $ 2,012.1
========== ==========
|
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 30, 2005.
ACQUISITION OF BUSINESSES
On July 8, 2005, the Company acquired Infast, a UK-based distributor of fasteners and other "C" class inventory components to original equipment manufacturers. Based on the offer price of 34 pence per Infast share, the Company paid approximately $71.8 million for all of the outstanding shares of Infast, including transaction-related costs. As a result of the acquisition, Anixter assumed the outstanding debt obligations of Infast, which, at July 8, 2005, totaled approximately $26.5 million. The purchase of the shares was funded from on-hand cash balances derived from the $200.0 million issuance of 5.95% senior notes due 2015 ("Senior Notes"). Infast is a value-added distributor of fasteners 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. Infast employs approximately 900 people located in 30 locations in the United Kingdom and the United States. The Company believes Infast'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 and 26 weeks ended June 30, 2006 are Infast sales of $70.1 million and $140.2 million, respectively, and operating income of $1.2 million and $1.6 million, respectively.
In connection with the acquisition of Infast and in accordance with the requirements of Emerging Issues Task Force Pronouncement (EITF) 95-03, the Company completed a restructuring plan that primarily includes facility closings, severance and other changes in the fair value of fixed assets. The cost associated with implementing this plan was $2.7 million and was accounted for as part of purchase accounting. The tangible net assets acquired of $31.8 million 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 balance sheet at June 30, 2006. Intangible assets have been recorded as follows:
- $8.1 million of intangible assets with a finite life of 8.0 years
(customer relationships); and
- $31.9 million of goodwill.
During the second quarter of 2006, the Company acquired IMS, Inc. ("IMS"), a wire and cable distributor in Connecticut. During the second quarter of 2006, the Company paid $25.3 million for IMS and held back $3.0 million to cover various representations and warranties. In addition, a net asset adjustment and a potential earn-out payment will be made during the next ten months that is expected to increase the purchase price by less than $2.0 million. IMS complements the Company's existing electrical wire and cable business in North America while employing approximately 100 people. Included in the results of the Company for both the 13 and 26 weeks ended June 30, 2006 are a total of $4.7 million of sales and $0.4 million of operating income for IMS. On a preliminary basis, the Company has estimated the fair value of the tangible net assets acquired at $6.8 million. The Company expects to make adjustments to this preliminary valuation once it completes its review of the following major areas for each business: accounts receivable, inventory and fixed assets. The third party valuation of the intangibles has not been completed; however, the Company has estimated the intangible assets as follows:
- $7.0 million of intangible assets with a finite life of 8.0 years
(customer relationships); and
- $14.5 million of goodwill.
In addition to the above, the Company paid $3.8 million for a small acquisition in Eastern Europe.
ANIXTER INTERNATIONAL INC.
The three acquisitions discussed above were accounted for as purchases and their respective results of operations are included in the condensed consolidated financial statements from the dates of acquisition. Had these acquisitions occurred at the beginning of the year of each acquisition, the impact on the Company's operating results would not have been significant.
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. Also, the Company will, from time to time, issue or retire borrowings or equity in an effort to maintain a cost-effective capital structure consistent with its anticipated capital requirements.
Cash Flow
Consolidated net cash used in operating activities was $39.6 million in the 26 weeks ended June 30, 2006 compared to $17.5 million in the same period in 2005. The increase in cash flow used in operations is primarily due to the increase in working capital (accounts receivable, inventory, accounts payable and other current assets and liabilities) needed to support the 27.5% increase in sales.
Consolidated net cash used in investing activities was $40.6 million in the 26 weeks ended June 30, 2006 compared to $83.4 million in the corresponding period in 2005. In the second quarter of 2006, the Company spent $29.1 million to acquire IMS and a small business in Eastern Europe. Capital expenditures increased $4.7 million in the 26 weeks ended June 30, 2006 as compared to the year ago period. Capital expenditures are expected to be approximately $28 million in 2006 as the Company invests in the consolidation of certain facilities in North America and Europe and invests in system upgrades and new software to support its infrastructure. In the second quarter of 2005, the Company was required to transfer $76.6 million of cash to an escrow account to pay for the acquisition of the shares of Infast and related transaction costs.
Consolidated net cash provided by financing activities was $79.3 million in the 26 weeks ended June 30, 2006 compared to $74.9 million in the corresponding period in 2005. Proceeds from the issuance of common stock relating to the exercise of stock options were $9.8 million in the 26 weeks ended June 30, 2006 compared to $7.6 million in the corresponding period in 2005. The first half of 2006 includes $6.2 million of cash provided from the income tax benefit associated with employee stock plans as a result of the Company's adoption of Statement of SFAS 123(R). In 2005, the tax benefit was classified in operating activities. In the 26 weeks ended June 30, 2006, the Company increased borrowings under its bank revolving lines of credit and accounts receivable securitization facility by $64.1 million compared to a decrease of $62.0 million in the corresponding period in 2005. In the 26 weeks ended July 1, 2005, the Company issued $200.0 million of 5.95% unsecured senior notes due 2015 ("Senior Notes"). The proceeds of $199.6 million were used to reduce borrowings under revolving lines of credit, redeem the Convertible Notes due 2020 for $69.9 million and acquire the shares of Infast. Issuance costs related to the offering were $2.1 million, which were partially offset by proceeds of $1.8 million resulting from entering into an interest rate hedge prior to the offering.
ANIXTER INTERNATIONAL INC.
Financings
On February 24, 2005, the Company's primary operating subsidiary, Anixter Inc., issued the Senior Notes, which are fully and unconditionally guaranteed by the Company. Interest on the Senior Notes is payable semi-annually on March 1 and September 1 of each year, commencing September 1, 2005. Net issuance costs of approximately $0.3 million associated with the Senior Notes are being amortized through March 1, 2015 using the straight-line method.
At June 30, 2006, the primary liquidity source for Anixter is the $275.0 million, five-year bank revolving credit agreement, of which $112.0 million was outstanding. Facility fees of 27.5 basis points payable on the five-year revolving credit agreement totaled $0.4 million in the first half of 2006 and 2005 and were included in interest expense in the condensed consolidated statements of operations.
In November of 2005, Anixter Canada Inc. entered into a $40.0 million (Canadian dollar) unsecured revolving credit facility maturing on June 18, 2009 for general corporate purposes and to finance, in part, the payment of a dividend to Anixter Inc. The Canadian dollar borrowing rate under the agreement is the BA/CDOR rate plus the applicable bankers' acceptance fee (currently 125 basis points) or the prime rate plus the applicable margin (currently 27.5 basis points). The borrowing rate for U.S. dollar advances is the base rate plus the applicable margin. In addition, there are standby fees on the unadvanced balance currently equal to 27.5 basis points. At June 30, 2006 and December 30, 2005, $30.5 million and $25.8 million (U.S. dollar) was borrowed under the facility, respectively.
Excluding the primary $275.0 million revolving credit facility and the $40.0 million (Canadian dollar) facility at June 30, 2006 and December 30, 2005, certain foreign subsidiaries had approximately $34.6 million and $30.5 million, respectively, available under bank revolving lines of credit, $34.4 million and $2.9 million of which was borrowed and included in long-term debt outstanding at June 30, 2006 and December 30, 2005, respectively.
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. ARC is consolidated for accounting purposes only in the financial statements of the Company. The average outstanding funding extended to ARC during the first half of 2006 and 2005 was approximately $156.5 million and $121.1 million, respectively. The effective rate on the ARC funding was 5.4% and 3.5% in the first half of 2006 and 2005, respectively.
The Company's revolving credit agreements require 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 requirement of the primary bank revolving credit agreement, as of June 30, 2006, the total availability of all revolving lines of credit at Anixter was permitted to be borrowed, of which $115.9 million may be used to pay dividends to the Company. The Company's debt-to-total capitalization decreased from 47.0% at December 30, 2005 to 46.2% at June 30, 2006.
Consolidated interest expense was $9.0 million and $6.8 million in the second quarter of 2006 and 2005, respectively, and $17.5 million and $12.0 million for the first half of 2006 and 2005, respectively. The increase in interest expense is primarily due to a combination of higher debt levels and modestly higher interest rates on the percentage of our borrowings that are based on variable rates. While interest rates on approximately two thirds of our borrowings were fixed at the end of the second quarter in 2006, our weighted average cost of borrowings increased to 5.3% from 5.1% in the second quarter of 2005.
ANIXTER INTERNATIONAL INC.
SECOND QUARTER 2006 RESULTS OF OPERATIONS
OVERVIEW
The Company competes with distributors and manufacturers who sell products directly or through existing distribution channels to end users or other resellers. The Company's relationship with the manufacturers for which it distributes products could be affected by decisions made by these manufacturers as the result of changes in management or ownership as well as other factors. Although relationships with 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. For further information, see Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 30, 2005.
During the second quarter of 2006, the Company experienced very solid, broad-based sales growth in nearly all of the end markets it serves and made continued progress on initiatives to grow its security business and supply chain service offerings. Second quarter growth was particularly strong in the electrical wire and cable market due to strong end-market customer demand, global expansion of the markets served and higher copper prices. Our success in these areas during the second quarter contributed to record quarterly sales and operating performance for the Company.
The Company's recent operating results, however, have been favorably affected by the rise in commodity prices, primarily copper, which are components in some of the products sold. As current inventory purchase costs 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.
CONSOLIDATED RESULTS OF OPERATIONS
13 WEEKS ENDED
--------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
---------- ------------ ----------
(IN MILLIONS)
Net sales.............................. $ 1,239.8 $ 936.1 32.4%
Gross profit........................... $ 307.1 $ 222.5 38.0%
Operating expenses..................... $ 216.1 $ 176.3 22.7%
Operating income....................... $ 91.0 $ 46.2 96.6%
|
Net Sales: The Company's net sales during the second quarter of 2006 increased 32.4% to $1,239.8 million from $936.1 million in the same period in 2005. The acquisitions of Infast in July of 2005 and IMS in May of 2006 accounted for $74.8 million of the increase while favorable foreign exchange rate contributed $14.0 million to second quarter sales as compared to the year ago period. Excluding the acquisitions of Infast and IMS and the effects from changes in exchange rates, the Company's net sales increased approximately 23.0% during the 13 weeks ended June 30, 2006 from the same period in 2005. The factors driving our strong organic growth were consistent with those the Company has seen the past few quarters, although at a significantly accelerated pace. In the most recent quarter, the Company experienced very strong growth in larger project business particularly as it relates to data center builds in the enterprise cabling market and with natural resources customers within our electrical wire and cable market. At the same time, the Company continues to experience strong growth in security product sales. Lastly, rising copper prices contributed to our organic growth in the most recent quarter. During the quarter, higher copper prices accounted for an estimated $48 million of our year-on-year increase in sales within the electrical wire and cable market.
Gross Margins: Gross margins increased in the second quarter of 2006 to 24.8% compared to 23.8% in the corresponding period in 2005. The improvement in margins primarily reflects the effects of sharply higher copper prices in the quarter from the sell-through of lower cost inventory in the electrical wire and cable market.
ANIXTER INTERNATIONAL INC.
Operating Income: As a result of the significant sales growth, higher copper prices and tight expense control, operating margins were 7.3% in the second quarter of 2006 as compared to 4.9% in the second quarter of 2005. The Company has estimated that the combined effects of higher copper prices on sales and gross margins in the electrical wire and cable market had the effect of increasing operating income by $16 million versus the year ago quarter. Included in the $16 million increase in operating income is approximately $6 million due to the sell-through of lower cost inventory due to the significant run up in copper prices during the second quarter. Assuming copper prices remain at the second quarter levels, this component of the copper price impact ($6 million) is not expected to repeat in future quarters. Excluding the effects of higher copper prices, operating margins would have been approximately 6.3%. Operating expenses increased $39.8 million, or 22.7%, in the second quarter of 2006 from the corresponding period in 2005. The Infast and IMS acquisitions increased operating expenses by $18.6 million, while changes in exchange rates increased operating expenses by $1.7 million. Excluding the acquisitions of Infast and IMS and the effects from changes in exchange rates, operating expenses increased approximately $19.5 million, or 11.1%, primarily due to variable costs associated with higher sales volumes. Operating expenses remain under control and, as expected with growing revenues, the Company's expense structure was further leveraged in the second quarter of 2006.
Interest Expense: Consolidated interest expense increased to $9.0 million in the second quarter of 2006 from $6.8 million in 2005. Interest expense increased due to the issuance of the Senior Notes and additional borrowings to fund both the acquisition of Infast in July of 2005 and the special dividend in October of 2005. The average long-term debt balance in the second quarter of 2006 was $679.2 million as compared to $561.0 million in the corresponding period in 2005. The average interest rate for the second quarter of 2006 and 2005 was 5.3% and 5.1%, respectively.
Other, net income (expense):
13 WEEKS ENDED
---------------------
JUNE 30, JULY 1,
2006 2005
------- ------
(IN MILLIONS)
Foreign exchange ....................................... $ (1.1) $ (1.2)
Cash surrender value of life insurance policies......... (0.2) 0.5
Interest income ........................................ 0.1 1.1
Other .................................................. (0.3) (0.7)
------ ------
$ (1.5) $ (0.3)
====== ======
|
Due to lower cash balances, interest income declined $1.0 million in the second quarter of 2006 from the prior corresponding period.
Income Taxes: The consolidated tax provision increased to $31.1 million in the second quarter of 2006 from $13.5 million in the second quarter of 2005, primarily due to an increase in income before taxes and a $1.4 million tax credit resulting from a favorable tax ruling in Europe in the second quarter of 2005. The second quarter of 2006 effective tax rate is 38.6% compared to 39.3% (excluding the $1.4 million tax credit) in the year ago period. The change in tax rate increased net income by $0.6 million, or $0.01 per diluted share, in the second quarter of 2006 as compared to the corresponding period in 2005.
NORTH AMERICA RESULTS OF OPERATIONS
13 WEEKS ENDED
-------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
--------- ------------- --------
(IN MILLIONS)
Net sales.............................. $ 922.7 $ 703.8 31.1%
Gross profit........................... $ 228.5 $ 167.7 36.3%
Operating expenses..................... $ 152.2 $ 129.9 17.2%
Operating income....................... $ 76.3 $ 37.8 101.9%
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ANIXTER INTERNATIONAL INC.
Net Sales: When compared to the corresponding period in 2005, North America net sales for the 13 weeks ended June 30, 2006 increased 31.1% to $922.7 million, including $9.4 million due to the acquisitions of Infast and IMS and a $14.7 million favorable effect of Canadian exchange rates. Enterprise cabling and security solutions sales in North America increased $83.5 million in the second quarter of 2006, or 22.6%, compared to the corresponding period in the prior year, $4.3 million of which was due to the stronger Canadian dollar. The remainder of the increase represents improved demand from both new and existing customers, continued strong growth in the security market, an expanded supply chain services offering and product line expansion. North America electrical wire and cable sales increased $114.1 million, or 60.5%, due to a combination of increased demand from existing customers, the addition of new customers, the effects of higher copper prices (which added approximately $43 million to sales), the stronger Canadian dollar (which added approximately $10.0 million to second quarter sales) and the acquisition of IMS (which added approximately $4.7 million to sales). Excluding the effects of copper, foreign exchange and IMS, the electrical wire and cable sales were up approximately 30.0% in the second quarter of 2006 as compared to the corresponding period in 2005. In the OEM supply market, sales increased 26.0%, or $21.9 million, to $106.2 million. Excluding Infast sales of $4.7 million and $0.1 million of favorable foreign exchange, North America OEM supply sales increased approximately $17.1 million, or 20.3%, as a result of the expansion of existing contracts and new contract additions. The Company continues to experience variability in sales to telecom original equipment manufacturers related to the capital spending patterns of their customers. Sales to this end market were essentially flat as compared to the second quarter of 2005.
Gross Margins: Gross margins increased to 24.8% in the second quarter of 2006 from 23.8% for the same period in 2005. The increase is primarily due to the increase in copper prices in the quarter from the sell-through of lower cost inventory in the electrical wire and cable market.
Operating Income: Operating expenses increased $22.3 million in the second quarter of 2006 from the corresponding period in 2005. The increase is primarily due to variable costs associated with the increase in sales volume, the addition of Infast and IMS expenses and exchange rate changes. Due to the growing sales, higher copper prices and associated leveraging of the expense structure, operating margins were 8.3% in the second quarter of 2006 as compared to 5.4% in the second quarter of 2005. The Company has estimated that the combined effects of higher copper prices on sales and gross margins in the electrical wire and cable market had the effect of increasing operating income by $15 million versus the year ago quarter. Excluding the effects of higher copper prices, operating margins would have been approximately 7.0%. Canadian exchange rate changes had a $2.0 million favorable impact on operating income.
EUROPE RESULTS OF OPERATIONS
13 WEEKS ENDED
---------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
-------- -------- -------
(IN MILLIONS)
Net sales .......................... $ 240.7 $ 164.7 46.1%
Gross profit ....................... $ 61.8 $ 41.1 50.4%
Operating expenses.................. $ 51.3 $ 35.6 44.4%
Operating income ................... $ 10.5 $ 5.5 89.0%
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Net Sales: Europe net sales increased 46.1% in the second quarter of 2006 to $240.7 million from $164.7 million in the second quarter of 2005, including $65.5 million due to the July of 2005 acquisition of Infast. Unfavorable foreign exchange reduced net sales by $0.9 million in the second quarter of 2006. Excluding the acquisition of Infast and exchange rate effects, net sales increased by approximately 6.9% due to market share gains and higher copper prices, which added approximately $5 million to sales in the electrical wire and cable business. European sales growth also reflects good progress on building our presence in the Mideast and somewhat better economic conditions. Sales in the OEM supply market grew $67.0 million in the second quarter of 2006 as compared to the corresponding period in 2005. Excluding the acquisition of Infast, sales in the OEM supply market increased approximately $1.5 million, or 4.6%.
Gross Margins: Europe's gross margins increased to 25.7% in the second quarter of 2006 from 24.9% in the same period in 2005. Europe's gross margin improvement reflects both organic and acquired growth in the higher margin OEM supply market. Gross margin in the communications market in Europe continues to be challenged by general economic conditions but we are encouraged by our sales growth in the current quarter.
ANIXTER INTERNATIONAL INC.
Operating Income: Compared to the second quarter of 2005, Europe's operating expenses increased 44.4%, or $15.7 million, to $51.3 million in the second quarter of 2006. Included in the increase is $16.7 million as a result of the acquisition of Infast. Excluding the acquisition of Infast, operating expenses were approximately 2.6%, or $1.0 million, favorable as compared to the second quarter of 2005. Europe operating margins increased from 3.4% in the second quarter of 2005 to 4.3% in 2006. Our European OEM supply business continues to generate solid operating margins. Exchange rate changes had a minimal impact on operating income. The Company estimates that the higher copper prices increased operating income by $1 million.
EMERGING MARKETS RESULTS OF OPERATIONS
13 WEEKS ENDED
--------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
---------- ---------- --------
(IN MILLIONS)
Net sales............................. $ 76.4 $ 67.6 13.0%
Gross profit.......................... $ 16.8 $ 13.7 22.6%
Operating expenses.................... $ 12.6 $ 10.8 17.1%
Operating income...................... $ 4.2 $ 2.9 42.7%
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Net Sales: Emerging Markets' (Asia Pacific and Latin America) net sales were up 13.0%, to $76.4 million in the second quarter of 2006, from $67.6 million in the second quarter of 2005. Latin America sales grew 7.7%, while Asia Pacific sales were up 29.4% during the second quarter of 2006 compared to the corresponding period in 2005. The increase in Asia Pacific is due to strong sales in Australia and India. The sales growth in Latin America was throughout the region. Exchange rate changes had a minimal impact on sales.
Gross Margins: During the second quarter of 2006, Emerging Markets' gross margins increased to 22.0% from 20.3% in the corresponding period in 2005. The increase primarily resulted from the strong performance in Mexico and Brazil.
Operating Income: Operating expenses increased $1.8 million, or 17.1%, in the second quarter of 2006 as compared to the corresponding period in 2005. Emerging Markets' operating margins increased to 5.5% in the second quarter of 2006 from 4.4% in 2005 primarily as a result of the sales growth and resulting leveraging of the expense structure. Exchange rate changes had a minimal impact on operating income.
YEAR-TO-DATE 2006 RESULTS OF OPERATIONS
OVERVIEW
In the 26 weeks ended June 30, 2006, net income increased 80.1% to $80.7 million on a 27.5% increase in sales from the corresponding period. Sales, gross profits, operating expense and operating profits, all showed year-on-year increases from a combination of the acquisitions of Infast in July of 2005 and IMS in May of 2006, combined unit growth, commodity driven price increases (primarily copper) and exchange rate changes related to the weaker U.S. dollar. Gross margins increased 40 basis points in the first half of 2006 as compared to the corresponding period in 2005, primarily due to an improved sales mix, higher prices and an increase in OEM supply sales at higher margins. As a result of tight expense controls combined with higher gross margins, operating margins increased 180 basis points to 6.5% in the first half of 2006 as compared to 4.7% in the corresponding period in 2005.
Other expense was $1.6 million in the 26 weeks ended June 30, 2006 as compared to $2.0 million in the corresponding period in 2005. The primary driver of the decline was an increase in the value of company-owned life insurance policies. The 26 weeks ended July 1, 2005 includes a pre-tax loss of $1.2 million related to the write-off of deferred financing costs associated with early termination of the Company's Convertible Notes due 2020. The Company's effective tax rate increased to 38.6% in 2006 from 36.6% in 2005 primarily as a result of a $1.4 million favorable tax ruling in the 2005 period that did not recur.
ANIXTER INTERNATIONAL INC.
CONSOLIDATED RESULTS OF OPERATIONS
26 WEEKS ENDED
---------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
----------- ------------ --------
(IN MILLIONS)
Net sales............................ $ 2,310.3 $ 1,812.6 27.5%
Gross profit......................... $ 564.3 $ 434.9 29.8%
Operating expenses................... $ 413.7 $ 349.1 18.5%
Operating income..................... $ 150.6 $ 85.8 75.4%
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Net Sales: The Company's net sales during the first half of 2006 increased 27.5% to $2,310.3 million from $1,812.6 million in the same period in 2005. The acquisitions of Infast and IMS accounted for $144.9 million of the increase while the favorable impact of exchange rates added $8.8 million. Excluding the acquisitions of Infast and IMS and the effects from changes in exchange rates, the Company's net sales increased approximately 19.0% during the 26 weeks ended June 30, 2006 from the same period in 2005. The increase in net sales was due to a combination of significantly increased customer spending, market share gains from the addition of new customers and expanded supply chain services offering, continued growth from our initiative to expand our security products distribution business and higher copper prices. The Company estimates that higher copper prices during 2006 have increased electrical wire and cable sales by $72 million versus the same period in 2005.
Gross Margins: Gross margins increased to 24.4% in the first half of 2006 from 24.0% in the corresponding period in 2005. The increase is attributable to higher copper prices, a higher growth rate in the OEM supply market compared to Company-wide sales growth rates and strong margins in Latin America.
Operating Income: Operating margins were 6.5% for the first half of 2006 as compared to 4.7% in the corresponding period in 2005. The Company has estimated that the combined effects of higher copper prices on sales and gross margins in the electrical wire and cable market had the effect of increasing operating income by $21 million versus the year ago period. Included in the $21 million increase in operating income is approximately $6 million due to the sell-through of lower cost inventory due to the significant run up in copper prices during the second quarter. Assuming copper prices remain at the second quarter levels, this component of the copper price impact ($6 million) is not expected to repeat in future quarters. Excluding the effects of higher copper prices, operating margins would have been approximately 5.8%. Operating expenses increased $64.6 million in the first half of 2006 from the corresponding period in 2005. The Infast and IMS acquisitions increased operating expenses by $36.6 million, while changes in exchange rates increased operating expenses by $0.4 million. Excluding the acquisitions of Infast and IMS and the effects from changes in exchange rates, operating expenses increased approximately $27.6 million, or 7.9%, primarily due to variable costs associated with higher sales volumes, along with increases in healthcare costs, pension costs and costs associated with additional restricted stock grants.
Interest Expense: Consolidated interest expense increased to $17.5 million in the 26 weeks ended June 30, 2006 from $12.0 million in 2005. Interest expense increased due to the issuance of the Senior Notes in 2005 and additional borrowings resulting from the Infast acquisition in July 2005 and the special dividend in October of 2005. The average debt balance was $669.9 million and $492.6 million for the first half of 2006 and 2005, respectively. The average interest rate for the first half of 2006 and 2005 was 5.2% and 4.9%, respectively.
ANIXTER INTERNATIONAL INC.
Other, net expense:
26 WEEKS ENDED
-------------------------
JUNE 30, JULY 1,
2006 2005
----------- ----------
(IN MILLIONS)
Foreign exchange................................... $ (1.7) $ (2.3)
Cash surrender value of life insurance policies.... 0.6 (0.1)
Interest income.................................... 0.2 1.5
Other.............................................. (0.7) (1.1)
----------- ----------
$ (1.6) $ (2.0)
=========== ==========
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Foreign exchange losses were $1.7 million in the 26 weeks ended June 30, 2006 as compared to a loss of $2.3 million in the corresponding period of 2005. Due to lower cash balances, interest income declined $1.3 million in the 26 weeks ended June 30, 2006 or compared to the corresponding period in 2005.
Income Taxes: The consolidated tax provision increased to $50.8 million in the 26 weeks ended June 30, 2006 from $25.8 million in the corresponding period in 2005, due to an increase in income before taxes. The 2006 effective tax rate is 38.6% compared to 36.6% in 2005 primarily as a result of a $1.4 million tax credit resulting from a favorable tax ruling in Europe. Excluding the favorable tax credit, the Company's effective tax rate was 38.5% in the 26 weeks ended July 1, 2005.
NORTH AMERICA RESULTS OF OPERATIONS
26 WEEKS ENDED
-------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
---------- ------------ --------
(IN MILLIONS)
Net sales................................. $ 1,701.5 $ 1,354.7 25.6%
Gross profit.............................. $ 414.5 $ 326.5 27.0%
Operating expenses........................ $ 291.3 $ 256.6 13.5%
Operating income.......................... $ 123.2 $ 69.9 76.2%
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Net Sales: When compared to the corresponding period in 2005, North America net sales for the 26 weeks ended June 30, 2006 increased 25.6% to $1,701.5 million. The combined electrical wire and cable and enterprise cabling sales increased $316.8 million in the first half of 2006 as compared to the first half of 2005, due to improved economic conditions, price increases, an expanded product offering and the acquisition of IMS. In the OEM supply market, sales increased 23.7% on a combination of improved customer demand, new contract additions and the acquisition of Infast. Excluding Infast sales of $9.8 million, sales to the OEM supply market increased approximately 17.9%. Sales to telecom-related OEMs decreased 6.8% in the 26 weeks ended June 30, 2006 as compared to the corresponding period in 2005. The Company estimates that higher copper prices during 2006 have increased electrical wire and cable sales by $66 million versus the same period in 2005.
Gross Margins: Gross margins increased to 24.4% in the first half of 2006 from 24.1% for the same period in 2005. The increase is attributable to an improved sales mix, higher prices and a higher growth rate in the OEM supply market.
Operating Income: Operating expenses increased $34.7 million in the first half of 2006 from the corresponding period in 2005. The increase is primarily due to variable costs associated with the increase in sales volume, along with higher pension, healthcare and costs related to additional restricted stock grants. Primarily as a result of higher gross margins on an improved sales mix, copper price increases and continued tight expense controls, North America operating margins increased to 7.2% in the first half of 2006 from 5.2% in the same period in 2005. The Company has estimated that the combined effects of higher copper prices on sales and gross margins in the electrical wire and cable market had the effect of increasing operating income by $20 million versus the year ago period. Excluding the effects of higher copper prices, operating margins would have been approximately 6.3%.
ANIXTER INTERNATIONAL INC.
EUROPE RESULTS OF OPERATIONS
26 WEEKS ENDED
-------------------------------------
JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
---------- ------------- ---------
(IN MILLIONS)
Net sales................................ $ 460.1 $ 333.0 38.2%
Gross profit............................. $ 117.7 $ 83.1 41.7%
Operating expenses....................... $ 99.8 $ 71.5 39.7%
Operating income......................... $ 17.9 $ 11.6 54.0%
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Net Sales: Europe net sales increased 38.2% in the first half of 2006 to $460.1 million from $333.0 million in the first half of 2005, which includes $130.4 million due to the acquisition of Infast which was offset by $13.5 million unfavorable changes in exchange rates. Sales in the OEM supply market were $201.7 million in the 26 weeks ended June 30, 2006 as compared to sales in the corresponding period in 2005 of $68.7 million. The increase was due to the acquisition of Infast in July of 2005. The Company has estimated that higher copper prices during 2006 have increased the electrical wire and cable sales by $6 million versus the same period in 2005.
Gross Margins: Europe's gross margins increased to 25.6% in the first half of 2006 from 24.9% in the same period in 2005. The increase is primarily due to an increase in OEM supply sales at higher margins.
Operating Income: Compared to the first half of 2005, Europe operating expenses increased 39.7%, or $28.3 million, to $99.8 million in the first half of 2006. Included in the increase is $33.5 million due to the acquisition of Infast offset by a favorable impact of changes in exchange rates of $2.8 million. Excluding the acquisition of Infast and exchange rate impact, operating expenses were approximately $2.4 million, or 3.2%, lower than 2005. Higher gross margins, tight expense controls and substantial improvement in operating performance in the OEM supply business resulted in operating margins increasing 40 basis points to 3.9% in 2006 as compared to 3.5% in 2005. Exchange rate changes had a $0.5 million unfavorable impact on operating income. The Company estimates that the higher copper prices increased operating income by $1 million.
EMERGING MARKETS RESULTS OF OPERATIONS
26 WEEKS ENDED
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JUNE 30, JULY 1, PERCENT
2006 2005 CHANGE
---------- ------------- ---------
(IN MILLIONS)
Net sales............................... $ 148.7 $ 124.9 19.1%
Gross profit............................ $ 32.1 $ 25.3 26.7%
Operating expenses...................... $ 22.6 $ 21.0 7.6%
Operating income........................ $ 9.5 $ 4.3 119.7%
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Net Sales: Emerging Markets (Asia Pacific and Latin America) net sales were up 19.1%, to $148.7 million in the first half of 2006, from $124.9 million in the first half of 2005, including a $1.0 million favorable impact from changes in exchange rates. Latin America sales grew 17.5%, while Asia Pacific sales increased 23.7% in the first half of 2006 compared to the corresponding period in 2005. The sales growth in Latin America was throughout the region. The increase in Asia Pacific is due to strong sales in Australia and India.
Gross Margins: During the first half of 2006, Emerging Markets' gross margins increased to 21.6% from 20.3% in the corresponding period in 2005. The increase is primarily due to the strong performance in Latin America.
Operating Income: Emerging Markets operating income increased $5.2 million from $4.3 million in the first half of 2005 to $9.5 million in the first half of 2006, or 119.7%. Operating expenses increased only 7.6% as compared to the corresponding period in 2005. Primarily as a result of the sales growth and resulting leveraging of the expense structure, operating margins increased to 6.4% in the first half of 2006 from 3.5% in 2005. Exchange rate changes had a minimal impact on operating income.
ANIXTER INTERNATIONAL INC.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of June 30, 2006 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 June 30, 2006. There was no change in the Company's internal control over financial reporting that occurred during the 13 weeks ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ANIXTER INTERNATIONAL INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 18, 2006, the Directors of the Company were elected as follows:
VOTES
------------------------------------
FOR WITHHELD
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Lord James Blyth 35,532,234 1,220,647
Linda Walker Bynoe 35,493,065 1,259,816
Robert L. Crandall 35,879,864 873,017
Robert W. Grubbs, Jr. 36,358,534 394,347
F. Philip Handy 35,534,281 1,218,600
Melvyn N. Klein 35,532,713 1,220,168
George Munoz 35,858,838 894,043
Stuart M. Sloan 35,533,581 1,219,300
Thomas C. Theobald 34,835,833 1,917,048
Matthew Zell 36,675,934 76,947
Samuel Zell 34,591,225 2,161,656
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At this Annual Meeting, the Company's ratification of Ernst & Young LLP as the Company's independent auditors for the fiscal year 2006 was approved by a vote of 36,290,244 shares "for" and 452,503 shares "against" with 10,134 shares abstaining. The Company's 2006 Stock Incentive Plan was approved by a vote of 32,111,753 shares "for" and 2,655,201 shares "against" with 126,422 shares abstaining.
ITEM 5. OTHER INFORMATION
At the Annual Meeting of Stockholders on May 18, 2006, the Company's shareholders approved the 2006 Stock Incentive Plan ("Incentive Plan"). A total of 1.7 million shares of the Company's common stock may be issued pursuant to the Incentive Plan. The purpose of the Incentive Plan is to facilitate the hiring, retention and continued motivation of key employees, consultants and directors while aligning more closely the interests of the plan participants with those of the Company and its stockholders by granting awards relating to the Company's Common Stock. Awards under the Incentive Plan may be in the form of incentive stock options, non-qualified stock options, stock grants, stock units, restricted stock, restricted stock units, stock appreciation rights, performance shares and units, and dividend equivalent rights. For further details of the Incentive Plan, see Exhibit 10.1.
ITEM 6. EXHIBITS
(10) Material Contracts.
10.1 Anixter International 2006 Stock Incentive Plan.
(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.
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.
August 4, 2006 By: /s/ Robert W. Grubbs
------------------------------------------
Robert W. Grubbs
President and Chief Executive Officer
August 4, 2006 By: /s/ Dennis J. Letham
------------------------------------------
Dennis J. Letham
Senior Vice President -- Finance
and Chief Financial Officer
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EXHIBIT 10.1
ANIXTER INTERNATIONAL INC.
2006 STOCK INCENTIVE PLAN
1. PURPOSE AND EFFECTIVE DATE. The Compensation Committee of the Board of Directors of Anixter International Inc. (the "Company") has established this 2006 Stock Incentive Plan (the "Plan") to facilitate the retention and continued motivation of key employees, consultants and directors and to align more closely their interests with those of the Company and its stockholders. The effective date of the Plan shall be the date it is approved by the Company's stockholders at the 2006 Annual Meeting of Stockholders.
2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Company's Board of Directors, such other Board committee as the Board may designate, or by the Board itself (the "Committee"). The Committee shall be comprised of at least two members of the Board who satisfy the "non-employee director" definition set forth in Rule 16b-3 under the Securities Exchange Act of 1934 and the "outside director" definition under Section 162(m) of the Internal Revenue Code and the regulations thereunder. The Committee has the authority and responsibility for the interpretation, administration and application of the provisions of the Plan, and the Committee's interpretations of the Plan, and all actions taken by it and determinations made by it shall be binding on all persons. The Committee may, subject to the provisions of the Plan, establish such rules and regulations as it deems necessary or advisable for the proper administration of the Plan. No Board or Committee member shall be liable for any determination, decision or action made in good faith with respect to the Plan.
3. SHARES SUBJECT TO PLAN.
(a) A total of 1,700,000 shares of Common Stock of the Company ("Shares") may be issued pursuant to the Plan. The Shares may be authorized but unissued Shares or Shares reacquired by the Company and held in its treasury. If all or any portion of the Shares otherwise subject to any award under the Plan are not delivered for any reason, including but not limited to, the cancellation, expiration, forfeiture or termination of any award, the settlement of any award in cash, the withholding of any portion of an award or of any Shares to fulfill the Company's tax withholding obligations when income is recognized by participants in the Plan with respect to an award or the repurchase of any Shares by the Company from a participant for the cost of the participant's investment in the Shares, such number of Shares shall be available again for issuance under the Plan.
(b) The maximum number of Shares as to which a key employee can receive stock options in any calendar year is 400,000. No person may be granted, in any period of two consecutive years, awards covering more than an aggregate of 750,000 Shares. No more than 1,000,000 Shares may be issued pursuant to awards other than stock options or stock appreciation rights. The maximum number of Shares that may be subject to incentive stock options is 1,700,000.
(c) In the event of any reorganization, recapitalization, stock split, stock distribution, merger, consolidation, split-up, spin-off, combination, subdivision, consolidation or exchange of shares, any change in the capital structure of the Company, any payment of an extraordinary dividend or any similar corporate transaction, the Committee shall make such adjustments as it deems appropriate, in its sole discretion, to preserve the benefits or intended benefits of the Plan and awards granted under the Plan. Such adjustments may include: (i) adjustment in the number and kind of Shares reserved for issuance under the Plan; (ii) adjustment in the number and kind of Shares covered by outstanding awards; (iii) adjustment in the exercise price of outstanding stock options or stock appreciation rights, or the price of other awards under the Plan; (iv) adjustments to any of the Share limitations set forth above; and (v) any other changes that the Committee determines to be equitable under the circumstances.
4. ELIGIBILITY. All key employees, consultants and directors of the Company and its subsidiaries are eligible to be selected to receive a grant under the Plan by the Committee. The Committee may condition eligibility under the Plan or participation under the Plan, and any grant or exercise of an award under the Plan on such conditions, limitations or restrictions as the Committee determines to be appropriate for any reason.
5. AWARDS. The Committee may grant awards under the Plan to eligible persons in the form of stock options (including incentive stock options within the meaning of Section 422 of the Code), stock grants, stock units, restricted stock, restricted stock units, stock appreciation rights, performance shares and units and dividend equivalent rights, and shall establish the number of Shares subject to each such award and the terms thereof, subject to the following:
(a) All awards granted under the Plan shall be evidenced by agreements in such form and containing such terms and conditions not inconsistent with the Plan as the Committee shall prescribe.
(b) The exercise price of any option or stock appreciation right shall not be less than the fair market value of a corresponding number of Shares as of the date of grant.
(c) The Committee may, in its discretion, provide that any award granted under the Plan shall be subject to the attainment of performance goals. Performance goals may be based on one or more business criteria, including but not limited to: operating income; return on equity; earnings or earnings per share; Share price; return on assets; return on investment; cash flow; net income; expense management; or revenue growth. Performance goals may be absolute in their terms or measured against or in relationship to the performance of other companies or indices selected by the Committee. In addition, performance goals may be adjusted for any events or occurrences (including acquisition expenses, extraordinary charges, losses from discontinued operations, restatements and accounting charges and restructuring expenses), as may be determined by the Committee. With respect to each performance period established by the Committee, the Committee shall establish such performance goals relating to one or more of the selected business criteria and targets for participants for achievement of performance goals. The performance goals and performance targets established by the Committee may be identical for all participants for a given performance period or, at the discretion of the Committee, may differ among participants. Following the completion of each performance period, the Committee shall determine the extent to which performance goals for that performance period have been achieved
and shall authorize the award of Shares or cash, as applicable, to the participant for whom the targets were established, in accordance with the terms of the applicable award agreements.
(d) No option may be repriced by amendment, substitution or cancellation and regrant. Adjustments pursuant to Section 3(c) above shall not be considered repricing.
6. AMENDMENT OF THE PLAN. The Board of Directors or the Committee may from time to time suspend, terminate, revise or amend the Plan or the terms of any grant in any respect whatsoever without the approval of the stockholders of the Company, unless such approval is required by applicable law, regulation or rule of any stock exchange on which the shares are listed.
7. APPLICABLE LAW. The Plan shall be governed by the laws of the State of Delaware, without regard to the conflict of law provisions of any state, and in the case of incentive stock options, Section 422 of the Internal Revenue Code.
8. TERM OF PLAN. No awards shall be granted under the Plan on or after the 10th anniversary of the Plan's effective date.
EXHIBIT 31.1
PRESIDENT AND CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Robert W. Grubbs, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Anixter International Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 4, 2006 /s/ Robert W. Grubbs
-----------------------------------------
Robert W. Grubbs
President and Chief Executive Officer
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EXHIBIT 31.2
SENIOR VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Dennis J. Letham, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Anixter International Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 4, 2006 /s/ Dennis J. Letham
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Dennis J. Letham
Senior Vice President-Finance and
Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Anixter International Inc. (the "Company") on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report") I, Robert W. Grubbs, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert W. Grubbs
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Robert W. Grubbs
President and Chief Executive Officer
August 4, 2006
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Anixter International Inc. (the "Company") on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date here of ("the Report") I, Dennis J. Letham, Senior Vice President-Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Dennis J. Letham
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Dennis J. Letham
Senior Vice President-Finance and Chief Financial Officer
August 4, 2006
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