Anixter International Inc. Financial Statement Analysis
ANIXTER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operating lease assets and liabilities are recognized at the commencement date, based on the present value of the future
minimum lease payments. A certain number of these leases contain rent escalation clauses either fixed or adjusted periodically
for inflation or market rates that are factored into the Company's determination of lease payments. Anixter also has variable
lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate
taxes, which are recorded as variable expense when incurred. The operating lease asset includes advance payments and
excludes incentives and initial direct costs incurred. As most of Anixter's leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available at the lease commencement date to discount payments to
the present value. Most operating leases contain renewal options, some of which also include options to early terminate the
leases. The exercise of these options is at the Company's discretion. Lease terms include these options to extend or terminate the
lease when it is reasonably certain that the Company will exercise that option.
Goodwill: The Company evaluates goodwill for impairment annually at the beginning of the third quarter and when
events or changes in circumstances indicate the carrying value of reporting units might exceed their current fair values. The
Company assesses 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, Anixter
performs the two-step impairment test. The Company 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 fair value is determined 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 are significant unobservable inputs, or Level 3 inputs, as described in
the accounting fair value hierarchy. Estimated future cash flows are based on 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 (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 the annual assessment of goodwill at the beginning of the third quarter of 2019, the Company 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, the Company concluded that no impairment existed and the carrying amount
of goodwill to be fully recoverable.
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