Anixter International Inc. Financial Statement Analysis
ANIXTER INTERNATIONAL INC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of fluctuations in foreign currencies and interest rate changes, as well as changes in the
market value of our financial instruments. We periodically enter into derivatives in order to minimize these risks, but not for
trading 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 offsets the impact of the underlying hedged item (e.g., various foreign
currency denominated accounts). The counterparties to our derivative 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. Any resulting
gains or losses from hedge ineffectiveness are reflected directly in "Other, net" in our Consolidated Statements of Income.
During periods of volatility in foreign exchange rates, we can be subject to significant foreign exchange gains and losses since
there is a time lag between when we incur the foreign exchange exposure and when we have the information to properly hedge
the exposure.
Foreign Exchange Risk
Historically, our foreign currency-denominated sales have been approximately one quarter of consolidated sales. Our
exposure to currency rate fluctuations primarily relate to Europe (euro, British pound, Swedish krona and Swiss franc), Canada
(Canadian dollar) and Australia (dollar). We also have exposure to currency rate fluctuations related to more volatile markets
including Argentina (peso), Brazil (real), Chile (peso), Colombia (peso), Mexico (peso), and Turkey (lira).
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 year, 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
Stockholders' Equity, "Foreign currency translation," which is a component of "Accumulated other comprehensive loss" in our
Consolidated Balance Sheets. 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.
Certain subsidiaries of Anixter 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. That increase
or decrease in expected functional currency cash flows is a foreign exchange transaction gain or loss that is included in "Other,
net" in our Consolidated Statements of Income.
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.
At January 3, 2020 and December 28, 2018, the gross notional amount of the foreign currency forward contracts outstanding
was approximately $130.2 million and $96.3 million, respectively. All of our foreign currency forward contracts are subject to
master netting arrangements with our counterparties. As a result, at January 3, 2020 and December 28, 2018, the net notional
amount of the foreign currency forward contracts outstanding was approximately $95.4 million and $75.7 million, respectively.
We prepared a sensitivity analysis of our foreign currency forward contracts assuming a 10% adverse change in the value of
foreign currency contracts outstanding. The hypothetical adverse changes would have resulted in us recording a $12.0 million
and $23.8 million loss in fiscal 2019 and 2018, respectively. However, as these forward contracts are intended to be effective
economic hedges, we would record offsetting gains as a result of the remeasurement of the underlying foreign currency
denominated monetary accounts being hedged.
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