NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
Anixter International Inc. and its subsidiaries (collectively referred to as "Anixter" or the "Company") are sometimes referred to in this Quarterly Report on Form 10-Q as "we", "our", "us", or "ourselves." These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Anixter's Annual Report on Form 10-K for the year ended January 1, 2016 ("2015 Form 10-K"). The condensed consolidated financial information furnished herein reflects all adjustments (consisting of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the Condensed Consolidated Financial Statements for the periods shown. Certain prior period amounts have been reclassified to conform to the current year presentation. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
Recently issued and adopted accounting pronouncements:
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-06,
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
, which clarifies that the assessment of whether an embedded contingent put or call option is clearly and closely related to the debt host only requires an analysis of the four-step decision sequence outlined in the guidance. An entity does not have to separately assess whether the contingency itself is indexed only to interest rates or the credit risk of the entity. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We adopted this guidance in the first quarter of fiscal year 2016. The adoption did not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements not yet adopted:
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides guidance for revenue recognition. The update’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. Examples of the use of judgments and estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The update also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The update provides for two transition methods to the new guidance: a retrospective approach and a modified retrospective approach. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date
, as a revision to ASU 2014-09, which revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU 2014-09). In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations
, which clarifies certain aspects of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. We are currently evaluating the transition methods and the impact of adoption of these ASUs on our consolidated financial statements.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements and also eliminates the current real estate-specific provisions. The guidance modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which revises an entity's accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The update also amends certain disclosure requirements associated with the fair value of financial instruments. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
Other, net:
The following represents the components of "Other, net" as reflected in the Condensed Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In millions)
|
|
April 1,
2016
|
|
April 3,
2015
|
Other, net:
|
|
|
|
|
Foreign exchange
|
|
$
|
(3.1
|
)
|
|
$
|
(3.6
|
)
|
Foreign exchange devaluations
|
|
—
|
|
|
(0.7
|
)
|
Cash surrender value of life insurance policies
|
|
0.6
|
|
|
0.6
|
|
Other
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Total other, net
|
|
$
|
(2.8
|
)
|
|
$
|
(4.0
|
)
|
In the first quarter of 2015, the Venezuelan government changed its policy regarding the bolivar, which required us to use the Sistema Marginal de Divisas or Marginal Exchange System ("SIMADI") a "completely free floating" rate. In the first quarter of 2015, the Venezuelan bolivar was devalued from approximately
52.0
bolivars to one USD to approximately
190.0
bolivars to one USD. As a result of this devaluation, we recorded a foreign exchange loss of
$0.7 million
in the first quarter of 2015. In the first quarter of 2016, the Venezuelan bolivar was devalued from approximately
200.0
bolivars to one USD to approximately
270.0
bolivars to one USD, which we believe will be the rate available to us in the event we repatriate cash from Venezuela. This devaluation did not have a material impact on our consolidated financial statements.
Several of our subsidiaries conduct business in a currency other than the legal entity’s functional currency. Transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. The increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that is included in "Other, net" in the Condensed Consolidated Statements of Comprehensive Income (Loss).
We purchase foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts on our reported income. The foreign currency forward contracts are not designated as hedges for accounting purposes. Our strategy is to negotiate terms for our derivatives and other financial instruments to be highly effective, such that the change in the value of the derivative perfectly offsets the impact of the underlying hedged item (e.g., various foreign currency-denominated accounts). Our counterparties to foreign currency forward contracts have investment-grade credit ratings. We expect the creditworthiness of our counterparties to remain intact through the term of the transactions. We regularly monitor the creditworthiness of our counterparties to ensure no issues exist which could affect the value of the derivatives.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We do not hedge
100%
of our foreign currency-denominated accounts. In addition, the results of hedging can vary significantly based on various factors, such as the timing of executing the foreign currency forward contracts versus the movement of the currencies as well as the fluctuations in the account balances throughout each reporting period. The fair value of the foreign currency forward contracts is based on the difference between the contract rate and the current exchange rate. The fair value of the foreign currency forward contracts is measured using observable market information. These inputs would be considered Level 2 in the fair value hierarchy. At
April 1, 2016
and
January 1, 2016
, foreign currency forward contracts were revalued at then-current foreign exchange rates with the changes in valuation reflected directly in "Other, net" in the Condensed Consolidated Statements of Comprehensive Income (Loss) offsetting the transaction gain/loss recorded on the foreign currency-denominated accounts. At
April 1, 2016
and
January 1, 2016
, the gross notional amount of the foreign currency forward contracts outstanding was approximately
$149.2 million
and
$196.1 million
, respectively. At
April 1, 2016
and
January 1, 2016
, the net notional amount of the foreign currency forward contracts outstanding was approximately
$119.0 million
and
$132.8 million
, respectively. While all of our foreign currency forward contracts are subject to master netting arrangements with our counterparties, we present our assets and liabilities related to derivative instruments on a gross basis within the Condensed Consolidated Balance Sheets. The gross fair value of our derivative assets and liabilities are immaterial.
The combined effect of changes in both the equity and bond markets resulted in changes in the cash surrender value of our company owned life insurance policies associated with our sponsored deferred compensation program.
Accumulated other comprehensive income (loss):
We accumulate unrealized gains and losses in "Accumulated other comprehensive income (loss)" ("AOCI"). These changes are also reported in "Other comprehensive income (loss)" on the Condensed Consolidated Statements of Comprehensive Income (Loss). These include unrealized gains and losses related to our defined benefit obligations, certain immaterial derivative transactions that have been designated as cash flow hedges and foreign currency translation. See
Note 8. "Pension Plans"
for pension related amounts reclassified into net income.
Our investments in several subsidiaries are recorded in currencies other than the USD. As these foreign currency denominated investments are translated at the end of each period during consolidation using period-end exchange rates, fluctuations of exchange rates between the foreign currency and the USD increase or decrease the value of those investments. These fluctuations and the results of operations for foreign subsidiaries, where the functional currency is not the USD, are translated into USD using the average exchange rates during the periods reported, while the assets and liabilities are translated using period-end exchange rates. The assets and liabilities-related translation adjustments are recorded as a separate component of AOCI, "Foreign currency translation." In addition, as our subsidiaries maintain investments denominated in currencies other than local currencies, exchange rate fluctuations will occur. Borrowings are raised in certain foreign currencies to minimize the exchange rate translation adjustment risk.
NOTE 2.
DISCONTINUED OPERATIONS
On February 9, 2015, our Board of Directors approved the disposition of the OEM Supply - Fasteners ("Fasteners") business. On February 11, 2015, through our wholly-owned subsidiary Anixter Inc., we entered into a definitive asset purchase agreement with American Industrial Partners ("AIP") to sell the Fasteners business for
$380.0 million
in cash, subject to certain post-closing adjustments. We closed the sale of the Fasteners business to AIP, excluding certain foreign locations, on June 1, 2015 and settled all net working capital adjustments relating to these entities in the fourth quarter of 2015. We received cash of
$371.8 million
on the sale of the Fasteners business. Including transaction related costs of
$16.4 million
, the sale resulted in a pre-tax gain of
$40.6 million
(
$23.5 million
, net of tax).
The assets and liabilities and operating results of the Fasteners business are presented as "discontinued operations" in our Condensed Consolidated Financial Statements. Current assets of discontinued operations are presented within "Other current assets" in the Condensed Consolidated Balance Sheets. Current and long-term liabilities of discontinued operations are presented within "Accrued Expenses" and "Other liabilities," respectively, in the Condensed Consolidated Balance Sheets. The components of the results from discontinued operations reflected in our Condensed Consolidated Statements of Cash Flows were immaterial.
We allocated interest costs to discontinued operations as a result of the sale of the Fasteners business. There was
no
allocated interest cost in the first quarter of 2016. The allocated interest cost was
$0.5 million
in the first quarter of 2015. This represents the amount of interest costs not directly attributable to our other operations that would not have been incurred if we had the proceeds from the sale of the Fasteners business at the beginning of the period.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following represents the components of the results from discontinued operations as reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In millions)
|
|
April 1,
2016
|
|
April 3,
2015
|
Net sales
|
|
$
|
0.5
|
|
|
$
|
249.4
|
|
Operating income
|
|
$
|
—
|
|
|
$
|
11.9
|
|
(Loss) income from discontinued operations before income taxes
|
|
$
|
(0.7
|
)
|
|
$
|
11.2
|
|
Income tax (benefit) expense from discontinued operations
|
|
$
|
(0.3
|
)
|
|
$
|
18.6
|
|
Net loss from discontinued operations
|
|
$
|
(0.4
|
)
|
|
$
|
(7.4
|
)
|
As reflected on our Condensed Consolidated Balance Sheets as of
April 1, 2016
and
January 1, 2016
, the components of assets and liabilities of the Fasteners businesses classified as "discontinued operations" are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
April 1,
2016
|
|
January 1,
2016
|
Assets of discontinued operations:
|
|
|
|
Accounts receivable
|
$
|
0.3
|
|
|
$
|
2.6
|
|
Inventories
|
1.3
|
|
|
1.2
|
|
Total assets of discontinued operations
|
$
|
1.6
|
|
|
$
|
3.8
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
Accounts payable
|
$
|
1.4
|
|
|
$
|
1.3
|
|
Accrued expenses
|
4.6
|
|
|
4.0
|
|
Other liabilities
|
1.1
|
|
|
1.7
|
|
Total liabilities of discontinued operations
|
$
|
7.1
|
|
|
$
|
7.0
|
|
NOTE 3.
BUSINESS COMBINATION
On October 5, 2015, we completed the acquisition of the Power Solutions business ("Power Solutions") from HD Supply, Inc. in exchange for
$824.7 million
(net of cash and outstanding checks of
$11.7 million
and an unfavorable net working capital adjustment of
$3.8 million
based on preliminary calculations). The acquisition was financed using borrowings under new financing arrangements and cash on hand.
Power Solutions was a compelling strategic acquisition for us that significantly enhances our competitive position in the electrical wire and cable business and further strengthens our customer and supplier value proposition. In addition to transforming our existing utility business into a leading North American distributor to the utility sector, this acquisition enables us to provide a full line electrical solution to our existing customers and provides us with broader access to the mid-size electrical construction market. The high voltage business of Power Solutions forms the Utility Power Solutions ("UPS") segment within our realigned reportable segments. The low voltage business of Power Solutions was combined into our historical Electrical and Electronic Wire and Cable ("W&C") segment to form the Electrical & Electronic Solutions ("EES") segment.
The following table sets forth the preliminary purchase price allocation, as of the acquisition date, for Power Solutions. During the first quarter of 2016, we recorded a preliminary purchase price allocation adjustment for the Power Solutions acquisition. The purchase price allocation is pending finalization of the valuation of the acquired property, equipment, leases, intangible assets and related deferred tax liabilities, which is expected to be completed in 2016.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Cash
|
|
|
$
|
11.7
|
|
Current assets, net
|
|
|
564.1
|
|
Property, plant and equipment
|
|
|
30.7
|
|
Goodwill
|
|
|
187.6
|
|
Intangible assets
|
|
|
280.8
|
|
Non-current assets
|
|
|
5.4
|
|
Current liabilities
|
|
|
(231.6
|
)
|
Non-current liabilities
|
|
|
(8.5
|
)
|
Total purchase price
|
|
|
$
|
840.2
|
|
Power Solutions goodwill of
$31.6 million
and
$156.0 million
was recorded in the EES and UPS reportable segments, respectively. The goodwill resulting from the acquisition largely consists of our expected future product sales and synergies from combining Power Solutions products with our existing product offerings. Other than
$79.2 million
, the remaining goodwill is not deductible for tax purposes. The following table sets forth the components of preliminary identifiable intangible assets acquired and their estimated useful lives as of the date of the acquisition:
|
|
|
|
|
|
|
(In millions)
|
Average useful life (in years)
|
|
Fair value
|
Customer relationships
|
14-18
|
|
$
|
278.4
|
|
Non-compete agreements
|
1
|
|
2.4
|
|
Total intangible assets
|
|
|
$
|
280.8
|
|
For the
three months ended
April 1, 2016
, the Power Solutions acquisition added
$494.3 million
of revenue and
$14.9 million
in operating income to our consolidated results. Since the date of acquisition, the Power Solutions results are reflected in our Condensed Consolidated Financial Statements.
The following unaudited pro forma information shows our results of operations as if the acquisition of Power Solutions had been completed as of the beginning of fiscal 2015. Adjustments have been made for the pro forma effects of interest expense and deferred financing costs related to the financing for the acquisition, depreciation and amortization of tangible and intangible assets recognized as part of the business combinations, related income taxes and various other costs which would not have been incurred had we and Power Solutions operated as a combined entity.
|
|
|
|
|
|
|
|
Three Months Ended
|
(In millions, except per share amounts)
|
|
April 3, 2015
|
Net sales
|
|
$
|
1,867.7
|
|
Net income from continuing operations
|
|
$
|
29.6
|
|
Income per share from continuing operations:
|
|
|
Basic
|
|
$
|
0.89
|
|
Diluted
|
|
$
|
0.89
|
|
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 4.
RESTRUCTURING AND OTHER CHARGES
We consider restructuring activities to be programs whereby we fundamentally change our operations, such as closing and consolidating facilities, reducing headcount and realigning operations in response to changing market conditions. The following table summarizes activity related to liabilities associated with our restructuring activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Activity
|
|
Q4 2015 Plan
|
|
Q2 2015 Plan
|
|
Q4 2012 Plan
|
|
Total
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
|
Employee-Related Costs (a)
|
|
Facility Exit and Other Costs (b)
|
Balance at January 1, 2016
|
$
|
3.0
|
|
|
$
|
0.2
|
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
4.0
|
|
|
$
|
0.6
|
|
Payments and other
|
(1.0
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
—
|
|
Balance at April 1, 2016
|
$
|
2.0
|
|
|
$
|
0.2
|
|
|
$
|
0.9
|
|
|
$
|
0.4
|
|
|
$
|
2.9
|
|
|
$
|
0.6
|
|
|
|
(a)
|
Employee-related costs primarily consist of termination benefits provided to employees who have been involuntarily terminated.
|
|
|
(b)
|
Facility exit and other costs primarily consist of lease termination costs.
|
Q4 2015 Restructuring Plan
In the fourth quarter of 2015, we recorded a pre-tax charge of
$1.0 million
,
$2.3 million
and
$0.1 million
in our Network & Security Solutions ("NSS"), EES and UPS segments, respectively, primarily for severance-related expenses associated with a reduction of approximately
80
positions. The
$3.4 million
charge primarily reflects actions we are taking to improve efficiencies in conjunction with the acquisition of Power Solutions. This charge was included in "Operating expenses" in our Consolidated Statement of Comprehensive Income (Loss) for fiscal year 2015. The majority of the remaining charge included in accrued expenses of
$2.2 million
as of
April 1, 2016
is expected to be paid by the fourth quarter of 2016.
Q2 2015 Restructuring Plan
In the second quarter of 2015, we recorded a pre-tax charge of
$3.0 million
and
$2.2 million
in our NSS and EES segments, respectively, and an additional
$0.1 million
at our corporate headquarters for severance-related expenses associated with a reduction of approximately
100
positions. The
$5.3 million
charge reflects actions we took to improve efficiencies and eliminate the stranded costs in conjunction with the sale of the Fasteners business. In the fourth quarter of 2015, we reduced the charge by
$0.5 million
, primarily in our EES segment, due to a reduction in estimated future obligations under the plan. This charge was included in "Operating expenses" in our Consolidated Statement of Comprehensive Income (Loss) for fiscal year 2015. The majority of the remaining charge included in accrued expenses of
$0.9 million
as of
April 1, 2016
is expected to be paid by the second quarter of 2016.
Q4 2012 Restructuring Plan
In the fourth quarter of 2012, recognizing the ongoing challenging global economic conditions, we took aggressive actions to restructure our costs across all segments and geographies, resulting in a pre-tax charge of
$4.1 million
and
$2.8 million
in our NSS and EES segments, respectively. The
$6.9 million
restructuring charge primarily consisted of severance-related expenses associated with a reduction of over
200
positions. This charge was included in "Operating expenses" in our Consolidated Statement of Income for fiscal year 2012. At
April 1, 2016
, the majority of the remaining charge included in accrued expenses of
$0.4 million
is expected to be paid in 2016.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 5.
DEBT
Debt is summarized below:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
April 1,
2016
|
|
January 1,
2016
|
Long-term debt:
|
|
|
|
|
5.50% Senior notes due 2023
|
|
$
|
345.9
|
|
|
$
|
345.8
|
|
5.125% Senior notes due 2021
|
|
395.1
|
|
|
394.9
|
|
5.625% Senior notes due 2019
|
|
347.0
|
|
|
346.8
|
|
Canadian term loan
|
|
184.3
|
|
|
172.9
|
|
Revolving lines of credit
|
|
298.6
|
|
|
390.1
|
|
Other
|
|
2.2
|
|
|
2.6
|
|
Unamortized debt issuance costs
|
|
(9.5
|
)
|
|
(10.2
|
)
|
Total long-term debt
|
|
$
|
1,563.6
|
|
|
$
|
1,642.9
|
|
Retirement of Debt
In the first quarter of 2015, we retired our
5.95%
Senior notes due 2015 upon maturity for
$200.0 million
. Available borrowings under existing long-term financing agreements were used to settle the maturity value.
Fair Value of Debt
The fair value of our debt instruments is measured using observable market information which would be considered Level 2 in the fair value hierarchy described in accounting guidance on fair value measurements. Our fixed-rate debt consists of the Senior notes due 2023, Senior notes due 2021 and Senior notes due 2019.
At
April 1, 2016
, our total carrying value and estimated fair value of debt outstanding was
$1,563.6 million
and
$1,599.7 million
, respectively. This compares to a carrying value and estimated fair value of debt outstanding at
January 1, 2016
of
$1,642.9 million
and
$1,669.5 million
, respectively. The decrease in the carrying value and estimated fair value is primarily due to lower outstanding borrowings under our revolving lines of credit.
NOTE 6.
LEGAL CONTINGENCIES
From time to time, we are party to legal proceedings and matters that arise in the ordinary course of business. As of
April 1, 2016
, we do not believe there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, our financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
NOTE 7.
INCOME TAXES
Our effective tax rate from continuing operations for the first quarter of 2016 was
37.9%
compared to
35.6%
in the prior year period. The increase was due to the change in the country mix of earnings.
As of January 2, 2015, we asserted permanent reinvestment of all non-U.S. earnings, including the non-U.S. earnings of the Fasteners business. As a result of our Board of Directors’ approval of the disposition of the Fasteners business, we were no longer permanently reinvested with respect to the non-U.S. earnings of the Fasteners business, because, following the disposition, we intended to repatriate to the U.S. most of the net proceeds attributable to the sale of the non-U.S. Fasteners business via intercompany debt repayment, dividend or other means. Our first quarter 2015 results included, as a component of discontinued operations,
$15.2 million
of expense for U.S. federal and state, and foreign income taxes and withholding taxes related to this change in our reinvestment assertion. We consider the remaining undistributed earnings of our foreign subsidiaries, along with future earnings, to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes or any withholding taxes has been recorded.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8.
PENSION PLANS
Our defined benefit pension plans are the plans in the United States, which consist of the Anixter Inc. Pension Plan, the Executive Benefit Plan and the Supplemental Executive Retirement Plan ("SERP") (together the "Domestic Plans") and various defined benefit pension plans covering employees of foreign subsidiaries in Canada and Europe (together the "Foreign Plans"). The majority of our defined benefit pension plans are non-contributory and cover substantially all full-time domestic employees and certain employees in other countries. Retirement benefits are provided based on compensation as defined in both the Domestic Plans and the Foreign Plans. Our policy is to fund all Domestic Plans as required by the Employee Retirement Income Security Act of 1974 ("ERISA") and the IRS and all Foreign Plans as required by applicable foreign laws. The Executive Benefit Plan and SERP are the only two plans that are unfunded. Assets in the various plans consist primarily of equity securities and fixed income investments.
Components of net periodic pension cost are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
(In millions)
|
|
April 1,
2016
|
|
April 3,
2015
|
|
April 1,
2016
|
|
April 3,
2015
|
|
April 1,
2016
|
|
April 3,
2015
|
Service cost
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
|
$
|
2.7
|
|
|
$
|
3.0
|
|
Interest cost
|
|
2.9
|
|
|
2.6
|
|
|
2.1
|
|
|
2.3
|
|
|
5.0
|
|
|
4.9
|
|
Expected return on plan assets
|
|
(3.6
|
)
|
|
(3.5
|
)
|
|
(2.5
|
)
|
|
(2.6
|
)
|
|
(6.1
|
)
|
|
(6.1
|
)
|
Net amortization
(a)
|
|
0.5
|
|
|
0.4
|
|
|
0.6
|
|
|
0.7
|
|
|
1.1
|
|
|
1.1
|
|
Net periodic pension cost
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
2.1
|
|
|
$
|
2.7
|
|
|
$
|
2.9
|
|
(a) Reclassified into operating expenses from AOCI.
NOTE 9.
STOCKHOLDERS' EQUITY
At the end of the first quarter of 2016, there were
1.2 million
shares reserved for issuance under all incentive plans. Under the current stock incentive plans, we pay non-employee directors annual retainer fees and, at their election, meeting fees in the form of stock units. Employee and director stock units are included in common stock outstanding on the date of vesting, and stock options are included in common stock outstanding upon exercise by the participant. The fair value of employee stock options and units is amortized over the respective vesting period representing the requisite service period, generally
three
,
four
or
six
years for stock units and
four
years for stock options. Director stock units are expensed in the period in which they are granted, as these vest immediately.
During the three months ended
April 1, 2016
, we initiated a performance-based restricted stock unit ("performance units") program that will vest in one-third tranches to be evaluated on the anniversary of the first, second and third performance cycles. Each evaluation period will be based on the achievement of our total shareholder return ("TSR") relative to the TSR of the S&P Mid Cap 400 index. The issuance of the vested shares will be on the final vesting date of year three. The granted units will be adjusted based on the specific payout percentage of the grant agreement. The fair value of each tranche related to the performance units were estimated at the grant date using the Monte Carlo Simulation pricing model.
During the three months ended
April 1, 2016
, we granted
395,602
stock units to employees, with a weighted-average grant-date fair value of
$17.2 million
. During the
three months ended
April 1, 2016
, we granted
85,839
performance units to employees, with a weighted-average grant-date fair value of
$1.8 million
. During the three months ended
April 1, 2016
, we granted directors
10,168
stock units, with a weighted-average grant-date fair value of
$0.5 million
. We exclude antidilutive stock options and units from the calculation of weighted-average shares for diluted earnings per share. For the first quarter of 2016 and 2015, the antidilutive stock options and units were immaterial.
NOTE 10.
BUSINESS SEGMENTS
We are a leading distributor of enterprise cabling and security solutions, electrical and electronic wire and cable products and utility power solutions. We have identified Network & Security Solutions ("NSS"), Electrical and Electronic Solutions ("EES") and Utility Power Solutions ("UPS") as reportable segments.
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We incur corporate expenses to obtain and coordinate financing, tax, information technology, legal and other related services, certain of which were rebilled to subsidiaries. These corporate expenses were historically allocated to our business segments based primarily on projected sales and estimated use of time. A portion of these corporate expenses were reported in corporate as they historically had been allocated to the Fasteners segment but were not considered directly related to the discontinued operations. Beginning in the first quarter of 2016, we no longer allocate these corporate expenses to our business segments. We also have various corporate assets which are reported in corporate. Segment assets may not include jointly used assets, but segment results include depreciation expense or other allocations related to those assets as such allocation is made for internal reporting. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis, except as previously discussed in Note 2. "Discontinued Operations."
The categorization of net sales by end market is determined using a variety of data points including the technical characteristic of the product, the "sold to" customer information, the "ship to" customer information and the end customer product or application into which our product will be incorporated. We also have largely specialized our sales organization by segment. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify net sales by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
Segment Financial Information
Segment information for the three months ended
April 1, 2016
and
April 3, 2015
are as follows:
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|
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|
|
|
|
|
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|
|
|
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(In millions)
|
|
|
|
|
|
|
|
|
|
|
First Quarter of 2016
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
949.1
|
|
|
$
|
506.0
|
|
|
$
|
361.1
|
|
|
$
|
—
|
|
|
$
|
1,816.2
|
|
Operating income
|
|
58.8
|
|
|
22.5
|
|
|
14.3
|
|
|
(35.3
|
)
|
|
60.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter of 2015 (As revised)
|
|
NSS
|
|
EES
|
|
UPS
|
|
Corporate
|
|
Total
|
Net Sales
|
|
$
|
928.0
|
|
|
$
|
440.8
|
|
|
$
|
16.3
|
|
|
$
|
—
|
|
|
$
|
1,385.1
|
|
Operating income
|
|
55.7
|
|
|
35.8
|
|
|
2.0
|
|
|
(34.2
|
)
|
|
59.3
|
|
Net sales and operating income in our UPS segment for the first quarter of 2015 were previously reported in our EES segment.
Goodwill Assigned to Segments
The following table presents the changes in goodwill allocated to our reporting units during the three months ended
April 1, 2016
:
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|
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|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
NSS
|
|
EES
|
|
UPS
|
|
Total
|
Balance as of January 1, 2016
|
|
$
|
393.3
|
|
|
$
|
211.9
|
|
|
$
|
151.3
|
|
|
$
|
756.5
|
|
Acquisition related
(a)
|
|
—
|
|
|
(3.1
|
)
|
|
0.7
|
|
|
(2.4
|
)
|
Foreign currency translation
|
|
3.1
|
|
|
0.7
|
|
|
7.0
|
|
|
10.8
|
|
Balance as of April 1, 2016
|
|
$
|
396.4
|
|
|
$
|
209.5
|
|
|
$
|
159.0
|
|
|
$
|
764.9
|
|
|
|
(a)
|
In the first quarter of 2016, we recorded an immaterial decrease in goodwill primarily related to a preliminary valuation of Power Solutions value of fixed assets.
|
ANIXTER INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11.
SUMMARIZED FINANCIAL INFORMATION OF ANIXTER INC.
Anixter International Inc. guarantees, fully and unconditionally, substantially all of the debt of our subsidiaries, which include Anixter Inc., our 100% owned primary operating subsidiary. We have no independent assets or operations and all subsidiaries other than Anixter Inc. are minor. The following summarizes the financial information for Anixter Inc.:
ANIXTER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
April 1,
2016
|
|
January 1,
2016
|
Assets:
|
|
|
|
|
Current assets
|
|
$
|
2,644.2
|
|
|
$
|
2,723.4
|
|
Property, equipment and capital leases, net
|
|
146.8
|
|
|
141.1
|
|
Goodwill
|
|
764.9
|
|
|
756.5
|
|
Intangible assets, net
|
|
446.2
|
|
|
453.8
|
|
Other assets
|
|
76.0
|
|
|
75.9
|
|
|
|
$
|
4,078.1
|
|
|
$
|
4,150.7
|
|
Liabilities and Stockholder’s Equity:
|
|
|
|
|
Current liabilities
|
|
$
|
1,124.7
|
|
|
$
|
1,156.8
|
|
Long-term debt
|
|
1,576.0
|
|
|
1,655.6
|
|
Other liabilities
|
|
157.1
|
|
|
161.1
|
|
Stockholder’s equity
|
|
1,220.3
|
|
|
1,177.2
|
|
|
|
$
|
4,078.1
|
|
|
$
|
4,150.7
|
|
ANIXTER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In millions)
|
|
April 1,
2016
|
|
April 3,
2015
|
Net sales
|
|
$
|
1,816.2
|
|
|
$
|
1,385.1
|
|
Operating income
|
|
$
|
61.9
|
|
|
$
|
60.8
|
|
Income from continuing operations before income taxes
|
|
$
|
38.7
|
|
|
$
|
42.4
|
|
Net loss from discontinued operations
|
|
$
|
(0.4
|
)
|
|
$
|
(7.4
|
)
|
Net income
|
|
$
|
23.6
|
|
|
$
|
20.0
|
|
Comprehensive income (loss)
|
|
$
|
42.9
|
|
|
$
|
(20.2
|
)
|
ANIXTER INTERNATIONAL INC.