Anixter International Inc. Financial Statement Analysis
ANIXTER INTERNATIONAL INC.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill for impairment annually in the third quarter and when events or changes in circumstances indicate
the carrying value of reporting units might exceed their current fair values. We assess goodwill for impairment by first
performing a qualitative assessment, which considers specific factors, based on the weight of evidence, and the significance of
all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If it is determined that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount using the qualitative assessment, we perform the two-step impairment test. From time to
time, we may also bypass the qualitative assessment and proceed directly to the two-step impairment test. The first step of the
impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount.
The estimates of fair value of a reporting unit are determined using the income approach and the market approach as described
below. If step one of the test indicates a carrying value above the estimated fair value, the second step of the goodwill
impairment test is performed by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of
that goodwill. The implied residual value of goodwill is determined in the same manner as the amount of goodwill recognized
in a business combination.
The income approach is a quantitative evaluation to determine the fair value of the reporting unit. Under the income
approach we determine the fair value based on estimated future cash flows discounted by an estimated weighted-average cost of
capital, which reflects the overall level of inherent risk of the reporting unit and the rate of return a market participant would
expect to earn. The inputs used for the income approach were significant unobservable inputs, or Level 3 inputs, as described in
the accounting fair value hierarchy. Estimated future cash flows were based on our internal projection models, industry
projections and other assumptions deemed reasonable by management.
The market approach measures the fair value of a reporting unit through the analysis of recent sales, offerings, and
financial multiples (sales or earnings before interest, tax, depreciation and amortization ("EBITDA")) of comparable businesses,
which would be considered Level 2 in the fair value hierarchy. Consideration is given to the financial conditions and operating
performance of the reporting unit being valued relative to those publicly-traded companies operating in the same or similar lines
of business.
In connection with our annual assessment of goodwill at the beginning of the third quarter of 2019, we bypassed the
qualitative assessment and performed a quantitative test for all reporting units and utilized a combination of the income and
market approaches. As a result of this assessment, we concluded that no impairment existed and the carrying amount of
goodwill to be fully recoverable.
A possible indicator of goodwill impairment is the relationship of a company's market capitalization to its book value.
During the third quarter, our market capitalization exceeded our book value and there were no impairment losses identified as a
result of our annual test. Fair value determinations require considerable judgment and are sensitive to changes in underlying
assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the
goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of future results.
Other than goodwill, our only indefinite-lived intangible assets are trade names. In 2017, we recorded an impairment
charge of $5.7 million related to certain indefinite-lived trade names in our NSS reporting unit. This impairment charge is
included in "Operating expenses" on our Consolidated Statement of Income. The impairment charge was recorded as we no
longer plan to use certain trade names on certain products. All remaining indefinite-lived trade names are expected to be used
on existing products for the foreseeable future.
Our long-lived assets consist of definite-lived intangible assets which are primarily related to customer relationships, as
well as property and equipment which consists of office furniture and equipment, buildings, computer software and hardware,
warehouse equipment and leasehold improvements. We evaluate the recoverability of the carrying amount of our long-lived
assets whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If
impairment indicators are present, we assess whether the future estimated undiscounted cash flows attributable to the assets in
question are greater than their carrying amounts. If these future estimated cash flows are less than carrying value, we then
measure an impairment loss for the amount that carrying value exceeds fair value of the assets.
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