10-K 1 axe201810-kdocument.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-K
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2018
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-10212
Anixter International Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware
  
94-1658138
(State or other jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
2301 Patriot Blvd.
Glenview, IL 60026
(224) 521-8000
(Address and telephone number of principal executive offices in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class on Which Registered
  
Name of Each Exchange on Which Registered
Common stock, $1 par value
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨  
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
The aggregate market value of the shares of registrant’s Common Stock, $1 par value, held by nonaffiliates of the registrant was approximately $1,858,834,251 as of June 29, 2018.
At February 13, 2019, 33,481,846 shares of registrant’s Common Stock, $1 par value, were outstanding.
Documents Incorporated by Reference:
Certain portions of the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders of Anixter International Inc. are incorporated by reference into Part III.
 




TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
 
 
 
Item 15.


i


PART I

ITEM 1.  BUSINESS.
Company Overview
Anixter International Inc. and its subsidiaries (collectively referred to as "Anixter" or the "Company") and sometimes referred to in this Annual Report on Form 10-K as "we", "our", "us", or "ourselves", founded in 1957, is headquartered near Chicago, Illinois and trades on the New York Stock Exchange under the symbol AXE. The Company was formerly known as Itel Corporation which was incorporated under Delaware law in 1967. Through Anixter Inc. and its subsidiaries, we are a leading distributor of network and security solutions, electrical and electronic solutions, and utility power solutions.
Through our global presence, technical expertise and supply chain solutions, we help our customers reduce the risk, cost and complexity of their supply chains. We add value to the distribution process by providing approximately 130,000 customers access to innovative inventory management programs, nearly 600,000 products and over $1.0 billion in inventory, 316 warehouses/branch locations with over 9 million square feet of space, and locations in over 300 cities across approximately 50 countries. We are a leader in providing advanced inventory management services including procurement, just-in-time delivery, material management programs, turn-key yard layout and management, quality assurance testing, component kit production, storm/event kitting, small component assembly and e-commerce and electronic data interchange to a broad spectrum of customers.
Our customers are international, national, regional and local companies, covering a broad and diverse set of industry groups including manufacturing, resource extraction, telecommunications, internet service providers, finance, education, healthcare, retail, transportation, utilities (both public power and investor owned), defense and government; and include contractors, installers, system integrators, value-added resellers, architects, engineers and wholesale distributors. Our customer base is well-diversified with no single customer accounting for more than 2% of sales.
Our differentiated operating model is premised on our belief that our customers and suppliers value a partner with consistent global product offerings, technical expertise (including product and application knowledge and support) and customized supply chain solutions, all supported by common business practices that ensure the same "look, touch and feel" worldwide.
Our growth strategy is driven by constant refresh and expansion of our product and solution offerings to meet marketplace needs. This organic growth approach extends to a constantly evolving set of supply chain services that are designed to lower the customer’s total cost of procuring, owning and deploying the products we sell. We have identified security solutions, emerging markets, utilities, professional audio/visual, and wireless as growth opportunities we are pursuing. Organic growth will periodically be supplemented with acquisitions where the benefits associated with geographic expansion, market penetration or new product line additions are weighted in favor of "buying versus building."
Business Segments and Products
We have identified Network & Security Solutions ("NSS"), Electrical & Electronic Solutions ("EES") and Utility Power Solutions ("UPS") as reportable segments. The following is a brief description of each of our reportable segments and business activities.
Within our segments, we are also organized by geographies. Our geographies consist of North America, which includes the U.S. and Canada, EMEA, which includes Europe, the Middle East and Africa, and Emerging Markets, which includes Asia Pacific and Central and Latin America ("CALA").
Network & Security Solutions ("NSS")
The Network & Security Solutions segment, with sales in approximately 55 countries, supplies products and customized Supply Chain Solutions to customers in a diverse range of industries including technology, finance, telecommunications service providers, transportation, education, government, healthcare and retail. NSS sells these products directly to end users or through various channels including data communications contractors, security, network, professional audio/visual and systems integrators, and directly to end users. NSS has a broad product portfolio that includes copper and fiber optic cable and connectivity, access control, video surveillance, intrusion and fire/life safety, cabinets, power, cable management, wireless, professional audio/video, voice and networking switches and other ancillary products. The NSS segment includes over 2,200 technically trained salespeople, approximately 70 Supply Chain Solutions specialists and a global technical support organization that provides support across all three reportable segments to aid in design, product specification and complete bills of materials inclusive of all Anixter solutions.

1



Through a variety of value-added supply chain solutions, including inventory management, product packaging and enhancement, and customized supply chain services, NSS helps customers reduce the risk, complexity and cost associated with their IT infrastructure and physical security deployments. The NSS commitment to quality products and services and technical leadership is demonstrated by its participation in many global standards organizations. NSS technical expertise extends to performance and interoperability testing at our Infrastructure Solutions LabSM, which provides NSS the opportunity to demonstrate solutions and proof-of-concepts to customers. Anixter's Infrastructure as a Platform and ipAssuredSM programs help customers make intelligent buying decisions around network and security infrastructure and improve efficiency to meet their sustainability goals.
Electrical & Electronic Solutions ("EES")
The Electrical & Electronic Solutions segment, with sales in approximately 40 countries, supplies a broad range of wire and cable, control, power/gear, lighting and core electrical products and customized supply chain solutions to the Commercial and Industrial ("C&I") and Original Equipment Manufacturer ("OEM") markets. The C&I group supplies products for the transmission of power and signals in industrial applications to customers in key markets including oil, gas and petrochemical, alternative energy, utility, power generation and distribution, transportation, commercial, industrial, natural resource and water and wastewater treatment. It sells directly to end users or through channels including electrical contractors, security and automation integrators, and engineering, procurement and construction firms. The OEM group supplies products used in the manufacturing of automotive, industrial, medical, transportation, marine, military and communications equipment, selling to OEM and panel, cable and harness shops. The product portfolio in this global business includes electrical and electronic wire and cable, shipboard cable, support and supply products, low-voltage cable, instrumentation cable, industrial communication and control products, security cable, connectors, industrial Ethernet switches, and voice and data cable. Value-added services, including supply chain management services and technical support, are tailored to position us as a specialist in fast growing emerging markets, OEMs and industrial verticals. EES helps customers achieve their sustainability goals by using its value-added services to minimize scrap, reduce lead times and improve operational efficiency.
The EES team of nearly 1,200 technical experts includes sales personnel, supply chain specialists, industrial communication specialists and engineers. EES provides world-class technical assistance, products and support through code and standards interpretation, product selection assistance, on-site customer training and customer specification reviews. EES brings value to its customers through its global reach, ability to provide global infrastructure project coordination, technical and engineering support, financial strength, and sourcing and supplier relationships. These capabilities help customers reduce costs and risks and gain competitive advantage in their marketplace.
Utility Power Solutions ("UPS")
The Utility Power Solutions segment, with primary operations in the U.S. and Canada, supplies electrical transmission and distribution products, power plant maintenance, repair and operations supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation, power transmission and electricity distribution industries. The UPS segment serves the electric utility markets. Products include conductors such as wire and cable, transformers, overhead transmission and distribution hardware, switches, protective devices and underground distribution, connectors used in the construction or maintenance and repair of electricity transmission and substation distribution infrastructure and supplies, lighting and conduit used in non-residential and residential construction. UPS also provides materials management and procurement outsourcing services. Its capabilities allow us to integrate with our customers and perform part of our customers' sourcing and procurement function. The UPS segment includes nearly 300 technically trained salespeople and approximately 50 Supply Chain Solutions specialists.
For more information concerning our business segments, foreign and domestic operations and export sales, see Note 6. "Income Taxes" and Note 9. "Business Segments" in the Notes to the Consolidated Financial Statements.
Suppliers
We source products from thousands of suppliers, with approximately one-third of our annual dollar volume purchases sourced from our five largest suppliers. An important element of our overall business strategy is to develop and maintain close relationships with our key suppliers, which include the world’s leading manufacturers of communication cabling, connectivity, support and supply products, electrical wire and cable, and utility products. Such relationships emphasize joint product planning, inventory management, technical support, advertising and marketing. In support of this strategy, we generally do not compete with our suppliers in product design or manufacturing activities. We do sell a small amount of private label products that carry a brand name exclusive to us.

2



Our typical distribution agreement generally includes the following significant terms:
 
a non-exclusive right to resell products to any customer in a geographical area (typically defined as a country, with the exception of our UPS business which is typically defined as a county or state);
cancelable upon 60 to 90 days notice by either party for any reason;
no minimum purchase requirements, although pricing may change with volume on a prospective basis; and
the right to pass through the manufacturer’s warranty to our customers.
Distribution and Service Platform
We cost-effectively serve our customers’ needs through our computer systems, which connect the majority of our warehouses and sales offices throughout the world. The systems are designed for sales support, order entry, inventory status, order tracking, credit review and material management. Customers may also conduct business through our e-commerce platform.
We operate a series of large, modern, regional distribution centers in key geographic locations in North America, EMEA and Emerging Markets that provide for cost-effective, reliable storage and delivery of products to our customers. We have designated 21 warehouses as regional distribution centers. Collectively, these facilities store approximately 30% of our inventory. In certain cities, some smaller warehouses are also maintained to maximize transportation efficiency and to provide for the local needs of customers. Our network of regional distribution centers, local distribution centers, service centers, branch locations and sales offices consists of 250 locations in the United States, 31 in Canada, 26 in the United Kingdom, 23 in Continental Europe and the Middle East, 32 in Latin America, 12 in Asia and 15 in Australia and New Zealand.
We have developed close relationships with certain freight, package delivery and courier services to minimize transit times between our facilities and customer locations, as well as a dedicated delivery fleet of over 500 vehicles in our UPS segment. The combination of our information systems, distribution network and delivery partnerships allows us to provide a high level of customer service while maintaining a reasonable level of investment in inventory and facilities.
Employees
At December 28, 2018, we employed over 9,300 people. Approximately 50% of the employees are engaged in sales or sales-related activities, approximately 35% are engaged in warehousing and distribution operations, and approximately 15% are engaged in support activities, including inventory management, information services, finance, human resources and general management. We do not have any significant concentrations of employees subject to collective bargaining agreements within any of our segments.
Competition
Given our role as an aggregator of many different types of products from many different sources and because these products are sold to many different industry groups, there is no well-defined industry group against which we compete. We view the competitive environment as highly fragmented with hundreds of distributors and manufacturers that sell products directly or through multiple distribution channels to end users or other resellers. There is significant competition within each end market and geography served that creates pricing pressure and the need for excellent service. Competition is based primarily on breadth of products, quality, services, relationships, price and geographic proximity. We believe that we have a significant competitive advantage due to our comprehensive product and service offerings, global distribution network, technically-trained sales team and customized supply chain solutions. We believe our global distribution platform provides a competitive advantage to serving multinational customers’ needs. Our operations and logistics platform gives us the ability to ship orders from inventory for delivery within 24 to 48 hours to all major global markets.
We enhance our value proposition to both key suppliers and customers through our technical expertise, global standards participation testing and demonstration facilities and numerous quality assurance certification programs such as ISO 9001:2015 and ISO/TS 16949:2009. Our NSS, EES and UPS segments leverage our certified Infrastructure Solutions Lab located at our suburban Chicago headquarters to support customers with technology needs related to enterprise networks, data centers, physical security, building technologies and industrial communications and control. At this lab, we evaluate performance and interoperability to help customers reduce risk through informed purchasing decisions. Our Solutions Briefing Centers, premier technology education and demonstration facilities located in various regions around the globe, focus on providing our customers with the necessary information to make informed decisions around complex, end-to-end technology solutions.

3



Contract Sales and Backlog
We have a number of customers who purchase products under long-term contractual arrangements. In such circumstances, the relationship with the customer typically involves a high degree of material requirements planning and information systems interfaces and, in some cases, may require the maintenance of a dedicated distribution facility or dedicated personnel and inventory at, or in close proximity to, the customer site to meet the needs of the customer. Such contracts do not generally require the customer to purchase any minimum amount of goods from us, but would require that materials acquired by us, as a result of joint material requirements planning between us and the customer, be purchased by the customer. Backlog orders represent approximately five to six weeks of sales and the majority of these orders ship to customers within 30 to 60 days from order date.
Seasonality
The operating results are not significantly affected by seasonal fluctuations except for the impact resulting from variations in the number of billing days from quarter to quarter. Our EES and UPS segments experience some seasonality as weather can restrict project work. Consecutive quarter sales from the third to fourth quarters are generally lower due to the holidays and lower number of billing days as compared to other consecutive quarter comparisons. There were 253 billing days in both 2018 and 2017 and 254 billing days in 2016.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports can be found at the Investor Relations section of our company website at http://www.anixter.com. These forms are available without charge as soon as reasonably practical following the time they are filed with or furnished to the Securities and Exchange Commission ("SEC"). Shareholders and other interested parties may request email notifications of the posting of these documents through the Investor Relations section of our website. In addition, copies of our reports will be made available, free of charge, upon written request.
Our website also contains corporate governance information including corporate governance guidelines; audit, compensation and nominating and governance committee charters; nomination process for directors; and our business ethics and conduct policy.


4



ITEM 1A.  RISK FACTORS.
The following factors could materially adversely affect our operating results and financial condition. Although we have tried to discuss key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial performance.
A change in sales strategy or financial viability of our suppliers could adversely affect our sales or earnings.
Most of our agreements with suppliers are terminable by either party on short notice for any reason. We currently source products from thousands of suppliers. However, approximately one-third of our annual dollar volume purchases are sourced from our five largest suppliers. If any of these suppliers changes its sales strategy to reduce its reliance on distribution channels, or decides to terminate its business relationship with us, our sales and earnings could be adversely affected until we are able to establish relationships with suppliers of comparable products. Although we believe our relationships with these key suppliers are good, they could change their strategies as a result of a change in control, expansion of their direct sales force, changes in the marketplace or other factors beyond our control, including a key supplier becoming financially distressed.
We have risks associated with the sale of nonconforming products and services.
Historically, we have experienced a small number of cases in which our vendors supplied us with products that did not conform to the agreed upon specifications without our knowledge. Additionally, we may inadvertently sell a product not suitable for a customer’s application. We address this risk through our quality control processes, by seeking to limit liability and our warranty in our customer contracts, by obtaining indemnification rights from vendors and by maintaining insurance responsive to these risks. However, there can be no assurance that we will be able to include protective provisions in all of our contracts, that vendors will have the financial capability to fulfill their indemnification obligations to us, or that insurance can be obtained with sufficiently broad coverage or in amounts sufficient to fully protect us.
Our foreign operations are subject to political, economic and currency risks.
We derive approximately one quarter of our revenues from sales outside of the U.S.. Economic and political conditions in some of these foreign markets may adversely affect our results of operations, cash flows and financial condition in these foreign markets. Our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates (as further discussed in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk") and different legal, tax, accounting and regulatory requirements. In addition, some of the products that we distribute are produced in foreign countries, which involve longer and more complex supply chains that are vulnerable to numerous risks that could cause significant interruptions or delays in delivery of such products. Many of these factors are beyond our control and include risks, such as as political instability, financial instability of suppliers, suppliers' noncompliance with applicable laws, trade restrictions, labor disputes, currency fluctuations, changes in tariff or import policies, severe weather, terrorist attacks and transport capacity and cost. A significant interruption in our supply chains caused by any of the above factors could result in increased costs or delivery delays and result in a decrease in our net sales and profitability.
We have risks associated with inventory.
We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders. Failure to do so could adversely affect our sales and earnings. However, if circumstances change (for example, an unexpected shift in market demand, pricing or customer defaults) there could be a material impact on the net realizable value of our inventory. To guard against inventory obsolescence, we have negotiated various return rights and price protection agreements with certain key suppliers. We also maintain an inventory valuation reserve account against declines in the value or salability of our inventory. However, there is no guaranty that these arrangements will be sufficient to avoid write-offs in excess of our reserves in all circumstances.
Our operating results are affected by copper prices.
Our operating results have been affected by changes in prices of copper, which is a major component in a portion of the electrical wire and cable products we sell. As our purchase costs with suppliers change to reflect the changing copper prices, our percent mark-up to customers remains relatively constant, resulting in higher or lower sales revenue and gross profit depending upon whether copper prices are increasing or decreasing.
The degree to which price changes in the copper commodity spot market correlate to product price changes, is a factor of market demand for products. When demand is strong, there is a high degree of correlation, but when demand is weak, there can be significant time lags between spot price changes and market price changes.

5



We have risks associated with the integration of acquired businesses.
In connection with recent and future acquisitions, it is necessary for us to continue to create an integrated business from the various acquired entities. This requires the establishment of a common management team to guide the acquired businesses, the conversion of numerous information systems to a common operating system, the establishment of a brand identity for the acquired businesses, the streamlining of the operating structure to optimize efficiency and customer service and a reassessment of the inventory and supplier base to ensure the availability of products at competitive prices. No assurance can be given that these various actions can be completed without disruption to the business, in a short period of time or that anticipated improvements in operating performance can be achieved. Any inability on our part to successfully implement strategic transactions could have an adverse impact on our reputation, business, financial condition, operating results and cash flows. There can be no assurance that any businesses acquired will meet performance expectations or that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove to be correct. In addition, any acquisition that we make may not deliver the synergies and other benefits that were anticipated when entering into such acquisition.
Our debt agreements could impose restrictions on our business.
Our debt agreements contain certain financial and operating covenants that limit our discretion with respect to certain business matters. These covenants restrict our ability to, among other things:
incur additional indebtedness;
create liens on assets;
make certain investments;
transfer, lease or dispose of assets; and
engage in certain mergers, acquisitions, consolidations or other fundamental changes.
These covenants also limit the amount of dividends or share repurchases we may make. As a result of these restrictions, we are limited in how we may conduct business and may be unable to compete effectively or take advantage of new business opportunities. Our ability to comply with the covenants and restrictions contained in our debt agreements may be affected by economic, financial and industry conditions or regulatory changes beyond our control. The breach of any of these covenants or restrictions could result in a default under either the Inventory Facility, the Receivables Facility or the indentures governing our outstanding notes that would permit the applicable lenders or noteholders, as the case may be, to declare all outstanding amounts to be due and payable, together with accrued and unpaid interest. If we are unable to repay indebtedness, lenders having secured obligations, such as the lenders under the Inventory Facility or the Receivables Facility, could proceed against the collateral securing these obligations. This could have a significant negative impact on our financial condition and operating results.
We have substantial debt which could adversely affect our profitability, limit our ability to obtain financing in the future and pursue certain business opportunities.
As of December 28, 2018, we had an aggregate principal amount of $1.26 billion of outstanding debt. As a result, a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes. This may also limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, and general corporate purposes in the future. Our indebtedness also reduces our flexibility to adjust to changing market conditions or may prevent us from making capital investments that are necessary or important to our operations and strategic growth.
If our cash flow and capital resources are not sufficient to fund our debt service obligations, we could face substantial liquidity problems and may be required to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or refinance our debt. We cannot make assurances that we will be able to refinance our debt on terms acceptable to us, or at all. Our debt agreements and the indentures governing our outstanding notes restrict our ability to dispose of assets and how we use the proceeds from any such dispositions. We cannot make assurances that we will be able to consummate those dispositions, or if we do, what the timing of the dispositions will be or whether the proceeds that we realize will be adequate to meet our debt service obligations when due.
We have risks associated with accounts receivable.
A significant portion of our working capital consists of accounts receivable. Although no single customer accounts for more than 2% of our sales, a payment default by one of our larger customers could have a negative short-term impact on earnings or liquidity. A financial or industry downturn could have an adverse effect on the collectability of our accounts receivable, which could result in longer payment cycles, increased collection costs and defaults.

6



A decline in project volume could adversely affect our sales and earnings.
While most of our sales and earnings are generated by comparatively smaller and more frequent orders, the fulfillment of large orders for capital projects generates significant sales and earnings. Slow macro-economic growth rates, difficult credit market conditions for our customers, weak demand for our customers’ products or other customer spending constraints can result in project delays or cancellations, potentially having a material adverse effect on our financial results.
The level of returns on pension plan assets and the actuarial assumptions used for valuation purposes could affect our earnings and cash flows in future periods. Changes in government regulations could also affect our pension plan expenses and funding requirements.
The funding obligations for our pension plans are impacted by the performance of the financial markets, particularly the equity markets, and interest rates. Funding obligations are determined under government regulations and are measured each year based on the value of assets and liabilities on a specific date. If the financial markets do not provide the long-term returns that are expected under the governmental funding calculations, we could be required to make larger contributions. The equity markets can be very volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time. Similarly, changes in interest rates and legislation enacted by governmental authorities can impact the timing and amounts of contribution requirements. An adverse change in the funded status of the plans could significantly increase our required contributions in the future and adversely impact our liquidity. At December 28, 2018, our projected benefit obligations exceeded the fair value of plan assets by $55.2 million.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension plans are determined by us in consultation with outside actuaries. In the event that we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return on assets, or mortality rates, our future pension benefit expenses could increase or decrease. Due to changing market conditions, the assumptions that we use may differ from actual results, which could have a significant impact on our pension liabilities and related costs and funding requirements.
Any significant disruption, interruption or failure of our information systems could disrupt our business, result in increased costs and decreased revenues, harm our reputation, and expose us to liability.
We rely on the proper functioning and availability of our information systems to successfully operate our business, including managing inventory, processing customer orders, shipping products and providing service to customers, and compiling financial results. Our information systems may be disrupted due to natural disasters, power or telecommunications outages, unauthorized access, or other causes. Any significant or prolonged unavailability or failure of our critical information systems could materially impair our ability to maintain proper levels of inventories, process orders, meet the demands of our customers in a timely manner, and other harmful effects. We seek to continually enhance our information systems, and such changes could potentially create a disruption or failure of our existing information technology. Additionally, efforts to align portions of our business on common platforms, systems and processes could result in unforeseen interruptions, increased costs or liability, and other negative effects.
We may experience a failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber attacks or information security breaches.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber attacks, mailicious intrusions or information security breaches could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or investigate and remediate any information security vulnerabilities. If our information systems are compromised, we may face regulatory sanctions or penalties under applicable laws, experience increases in operating expenses or an impairment in our ability to conduct our operations, incur expenses or lose revenues as a result of a data privacy breach, information technology outages or disruptions, or suffer other adverse consequences including lawsuits or other legal action and damage to our reputation.

7



Disruptions to our logistics capability or supply chain may have an adverse impact on our operations.
Our global logistics services are operated through distribution centers around the world. We also depend on transportation service providers for the delivery of products to our customers. Any significant interruption or disruption in service at one or more of our distribution centers due to severe weather, natural disasters, information technology upgrades, operating issues, disruptions to our transportation network, or other unanticipated events, could impair our ability to obtain or deliver inventory in a timely manner, cause cancellations or delays in shipments to customers or otherwise disrupt our normal business operations.
We are subject to various laws and regulations globally and any failure to comply could adversely affect our business.
We are subject to a broad range of laws and regulations in the jurisdictions where we operate globally, including, among others, those relating to data privacy and protection, cybersecurity, import and export requirements, anti-bribery and corruption, product compliance, supplier regulations regarding the sources of supplies or products, environmental protection, health and safety requirements, intellectual property, foreign exchange controls and cash repatriation restrictions, labor and employment, e-commerce, advertising and marketing, anti-competition and tax. Compliance with these domestic and foreign laws, regulations and requirements may be burdensome, increasing our cost of compliance and doing business. In addition, as a supplier to federal, state, and local government agencies, we must comply with certain laws and regulations relating specifically to our governmental contracts. Although we have implemented policies and procedures designed to facilitate compliance with these laws, we cannot assure you that our employees, contractors, or agents will not violate such laws and regulations, or our policies and procedures. Any such violations could result in the imposition of fines and penalties, damage to our reputation, and, in the case of laws and regulations relating to governmental contracts, the loss of those contracts.
We may be adversely affected by the U.K. determination to leave the European Union (Brexit).
On June 23, 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union (“Brexit”). Such withdrawal will occur after a process of negotiation regarding the future terms of the United Kingdom’s relationship with the European Union with respect to reciprocal market access and other matters. These negotiations on withdrawal and post-exit arrangements have been and will likely continue to be complex and protracted. 
We have significant operations in the United Kingdom and other member countries of the European Union. The proposed withdrawal by the United Kingdom could have an adverse effect on the tax, tax treaty, currency, operational, legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union and significantly disrupt trade between the United Kingdom and the European Union and other parties. The uncertainty concerning the timing and terms of the exit could also have a negative impact on the business activity, political stability and economic conditions in the United Kingdom, the European Union and the other economies in which we operate, which could result in customers reducing or delaying spending decisions on our products. Our U.K. business has deferred tax assets totaling $5.9 million. A downturn in our U.K. business caused by a material adverse effect could require us to record a valuation allowance against those deferred tax assets. Any of these developments could have a material adverse effect on our business, financial condition, operating results and cash flows.
We may be adversely affected by unanticipated changes in our tax provisions.
We are a U.S.-owned multinational company subject to income and other taxes in the U.S. and jurisdictions abroad. Tax laws are subject to change as new laws are passed and new interpretations of laws are issued or applied. Such changes in U.S. or foreign tax laws, regulations, other administrative guidance and common law interpretation could affect our tax expense and profitability as evidenced by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. Further, the final determination of tax audits or litigation could ultimately be materially different from our historical income tax provisions and accruals. Changes in our tax provision and tax liabilities, whether due to changes in law, the interpretation, or a final determination of audits or litigation, could have a material adverse impact on our financial condition, operating results and cash flows.

ITEM 1B.  UNRESOLVED STAFF COMMENTS.
None.

ITEM 2.  PROPERTIES.
Our distribution network consists of 316 warehouses/branch locations in approximately 50 countries with over 9 million square feet of space. This includes 21 regional distribution centers (100,000 — 500,000 square feet), 43 local distribution centers (35,000 — 100,000 square feet), 194 service centers and 58 branch locations. Additionally, we have 73 sales offices throughout the world. All but five of these facilities are leased. No one facility is material to our overall operations, and we believe there is ample supply of alternative warehousing space available on similar terms and conditions in each of our markets.

8




ITEM 3.  LEGAL PROCEEDINGS.
Incorporated by reference to Note 5. "Commitments and Contingencies" in the notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

ITEM 4.  MINE SAFETY DISCLOSURES.
Not applicable.


9



EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the name, age as of February 21, 2019, position, offices and certain other information with respect to our executive officers. The term of office of each executive officer will expire upon the appointment of his successor by the Board of Directors.
 
William A. Galvin, 56
President and Chief Executive Officer since July 2018; President and Chief Operating Officer from July 2017 to June 2018; Executive Vice President - Network & Security Solutions of the Company from 2012 to June 2017; Executive Vice President - North America and EMEA Enterprise Cabling and Security Solutions from 2007 to 2012. Mr. Galvin has held several sales and marketing management roles over his 30 years of experience with the Company.    
Theodore A. Dosch, 59
Executive Vice President - Finance and Chief Financial Officer of the Company since July 2011; Senior Vice President - Global Finance of the Company from January 2009 to June 2011; CFO - North America and Vice President - Maytag Integration at Whirlpool Corporation from 2006 to 2008; Corporate Controller at Whirlpool Corporation from 2004 to 2006; CFO - North America at Whirlpool Corporation from 1999 to 2004.    Mr. Dosch has also been a Director of UGI Corporation since 2017.
Justin C. Choi, 53
Executive Vice President - General Counsel & Corporate Secretary of the Company since May 2013; Vice President - General Counsel & Corporate Secretary of the Company from June 2012 to May 2013; Executive Vice President, General Counsel and Secretary -Trustwave Holdings from January 2011 to June 2012; Senior Vice President, General Counsel & Secretary - Andrew Corporation from March 2006 to December 2007; Vice President of Law - Avaya Inc. from September 2000 to February 2006.     
William C. Geary II, 48
Executive Vice President - Network & Security Solutions of the Company since July 2017; Senior Vice President - Global Markets - Network & Security Solutions from January 2017 to June 2017. Before moving to Anixter, Mr. Geary served 22 years and held a variety of senior management roles at Accu-Tech.
Robert M. Graham, 51
Executive Vice President - Electrical & Electronic Solutions of the Company since July 2015; Senior Vice President - U.S. Electrical and Electronic Wire and Cable from 2011 to 2015. Mr. Graham came to Anixter with the acquisition of the Pentacon business in September 2002, and since then, he has held various senior leadership roles for Anixter’s former OEM Fastener business with his most recent position before joining the Wire & Cable division being Senior Vice President for the North American business.        
Scott Ramsbottom, 45
Executive Vice President - Chief Information Officer since February 2015; Senior Vice President Global Information Services from February 2014 to February 2015. Mr. Ramsbottom held various roles in the information services group since joining the Company in 1999.
Rodney A. Smith, 61
Executive Vice President - Human Resources of the Company since May 2013; Vice President - Human Resources from August 2006 to May 2013.        
Orlando McGee, 57
Executive Vice President - Operations of the Company since January 2018; Senior Vice President - Strategic and EMEA Operations from August 2017 to January 2018; Senior Vice President - Strategic Operations from June 2016 to August 2017. Prior to joining the Company, Mr. McGee served in a number of management positions at Cintas Corporation from 2012 to 2016, most recently as Vice President Distribution & Logistics.

10



PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Anixter International Inc.’s Common Stock is traded on the New York Stock Exchange under the symbol AXE. Dividend information and shareholders of record are set forth in Note 11. "Selected Quarterly Financial Data (Unaudited)" in the Notes to the Consolidated Financial Statements. There have been no sales of unregistered securities.

PERFORMANCE GRAPH
The following graphs set forth the annual changes for the five-year period indicated in a theoretical cumulative total shareholder return of an investment of $100 in our common stock and each comparison index, assuming reinvestment of dividends. These graphs reflect the comparison of shareholder return on our common stock with that of a broad market index and a peer group index. Our Peer Group Index for 2018 changed from 2017 and now consists of the following companies: Arrow Electronics Inc., Avnet Inc., Belden Inc., CommScope Inc., Fastenal Company, MRC Global, MSC Industrial Direct Co. Inc., Rexel, Scansource Inc., Watsco, Inc., WESCO International, Inc., and W.W. Grainger Inc. This peer group was selected based on a review of publicly available information about these companies and our determination that they are engaged in businesses similar to ours.

axe201610-k_chartx47168a05.jpg


11



The graph below reflects the 2017 peer group. Our Peer Group Index for 2017 consists of the following companies: Arrow Electronics Inc., Avnet Inc., Belden Inc., Fastenal Company, Houston Wire and Cable Company, MSC Industrial Direct Co. Inc., Rexel, Scansource Inc., Tech Data Corp, WESCO International, Inc., and W.W. Grainger Inc.

chart-7b2b599c4fca7afe5b3.jpg


12



ITEM 6.   SELECTED FINANCIAL DATA.
(In millions, except per share amounts)
 
Fiscal Year
 
 
2018
 
2017
 
2016
 
2015
 
2014
Selected Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
8,400.2

 
$
7,927.4

 
$
7,622.8

 
$
6,190.5

 
$
5,507.0

Operating income
 
309.7

 
312.9

 
295.5

 
267.1

 
304.0

Interest expense and other, net (a)
 
(86.5
)
 
(75.3
)
 
(98.0
)
 
(84.2
)
 
(54.4
)
Net income from continuing operations
 
156.3

 
109.0

 
121.1

 
96.9

 
163.4

Net (loss) income from discontinued operations
 

 

 
(0.6
)
 
30.7

 
31.4

Net income
 
$
156.3

 
$
109.0

 
$
120.5

 
$
127.6

 
$
194.8

Diluted Income (Loss) Per Share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
4.58

 
$
3.21

 
$
3.61

 
$
2.90

 
$
4.90

Discontinued operations
 
$

 
$

 
$
(0.02
)
 
$
0.91

 
$
0.94

Net income
 
$
4.58

 
$
3.21

 
$
3.59

 
$
3.81

 
$
5.84

Dividend declared per common share
 
$

 
$

 
$

 
$

 
$

Selected Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets (a)
 
$
4,653.1

 
$
4,252.2

 
$
4,093.6

 
$
4,142.0

 
$
3,580.8

Total long-term debt (a)
 
$
1,251.8

 
$
1,247.9

 
$
1,378.8

 
$
1,642.9

 
$
1,202.0

Stockholders’ equity
 
$
1,570.4

 
$
1,459.0

 
$
1,292.2

 
$
1,179.4

 
$
1,133.0

Book value per diluted share
 
$
46.05

 
$
42.95

 
$
38.51

 
$
35.26

 
$
33.99

Weighted-average diluted shares
 
34.1

 
34.0

 
33.6

 
33.4

 
33.3

Year-end outstanding shares
 
33.9

 
33.7

 
33.4

 
33.3

 
33.1

Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
1,543.0

 
$
1,483.0

 
$
1,424.6

 
$
1,571.6

 
$
1,559.3

Capital expenditures
 
$
42.4

 
$
41.1

 
$
32.6

 
$
26.7

 
$
34.2

Depreciation
 
$
31.7

 
$
28.2

 
$
27.9

 
$
22.2

 
$
20.0

Amortization of intangible assets (a)
 
$
37.3

 
$
36.1

 
$
37.6

 
$
24.9

 
$
10.6

(a) Year-over-year changes from fiscal 2014 to fiscal 2015 are primarily due to the acquisition of Power Solutions and related financing costs such as interest on borrowings. Interest expense and other, net in 2018 includes $4.6 million of loss on the extinguishment of debt on the retirement of our $350.0 million 5.625% Senior Notes due 2019.
Items Impacting Comparability of Results
Over the last five years, we have completed two material acquisitions and the respective sales and operating income have impacted the comparability of the results as reflected below. The acquisitions were accounted for as purchases and the results of operations of the acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition. The following represents the incremental impact of the results for the one year period following the acquisitions:
(In millions)
 
Years Ended
 
 
December 30,
2016
 
January 1,
2016
 
January 2,
2015
 
 
(a)
 
(a)(b)
 
(b)
Net sales
 
$
1,501.9

 
$
921.2

 
$
176.0

Operating income
 
43.3

 
29.3

 
6.4

(a)
October 2015 acquisition of Power Solutions for $829.4 million.
(b)
September 2014 acquisition of Tri-Ed for $418.4 million.

In 2015, we sold our Fasteners business for $371.8 million in cash, resulting in a pre-tax gain of $40.3 million ($23.3 million, net of tax). As a result of this divestiture, results of this business is reflected as "Discontinued operations" and all prior periods have been revised to reflect this classification.

13



The following reflects various items that impact the comparability of the results for the last five fiscal years:
 
Items Impacting Comparability of Results from Continuing Operations:
 
 
 
 
 
 
(In millions, except per share amounts)
 
Years Ended
 
 
December 28,
2018
 
December 29,
2017
 
December 30,
2016
 
January 1,
2016
 
January 2,
2015
Items impacting operating expense and operating income:
 
Favorable / (Unfavorable)
Amortization of intangible assets
 
$
(37.3
)
 
$
(36.1
)
 
$
(37.6
)
 
$
(24.9
)
 
$
(10.6
)
Restructuring charge
 
(9.4
)
 

 
(5.4
)
 
(8.2
)
 

Acquisition and integration costs
 
(2.9
)
 
(2.3
)
 
(5.1
)
 
(13.2
)
 
(7.2
)
CEO retirement agreement expense
 
(2.6
)
 

 

 

 

U.K. facility relocation costs
 
(1.0
)
 

 

 

 

Impairment of intangible assets
 

 
(5.7
)
 

 

 

UK pension settlement
 

 

 
(9.6
)
 
(0.4
)
 

Latin America bad debt provision
 

 

 
(7.6
)
 
(11.7
)
 

Write-off of capitalized software
 

 

 

 
(3.1
)
 

Dilapidation provision
 

 

 

 
(1.7
)
 

Total of items impacting operating expense and operating income
 
$
(53.2
)
 
$
(44.1
)
 
$
(65.3
)
 
$
(63.2
)
 
$
(17.8
)
Items impacting interest expense:
 
 
 
 
 
 
 
 
 
 
Write-off of deferred financing costs
 

 

 

 
(0.3
)
 

Total of items impacting interest expense
 
$

 
$

 
$

 
$
(0.3
)
 
$

Items impacting other expenses:
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt
 
(4.6
)
 

 

 
(0.9
)
 

Foreign exchange loss
 

 

 

 
(3.6
)
 
(8.0
)
Acquisition financing costs
 

 

 

 

 
(0.3
)
Total of items impacting other expenses
 
$
(4.6
)
 
$

 
$

 
$
(4.5
)
 
$
(8.3
)
Total of items impacting pre-tax income
 
$
(57.8
)
 
$
(44.1
)
 
$
(65.3
)
 
$
(68.0
)
 
$
(26.1
)
Items impacting income taxes:
 
 
 
 
 
 
 
 
 
 
Tax impact of items above impacting pre-tax income
 
12.6

 
14.8

 
18.8

 
27.4

 
8.2

Transition tax on deferred foreign income
 
2.8

 
(50.0
)
 

 

 

Rate change impact of net deferred tax liability
 
(0.7
)
 
14.4

 

 

 

Reversal/(establishment) of deferred income tax valuation allowances
 
1.4

 

 
(1.1
)
 
(11.3
)
 
6.9

Tax expense related to domestic permanent tax differences
 
(0.7
)
 

 

 

 

Tax (expense) benefit related to prior year tax positions
 
(0.1
)
 
(1.3
)
 
3.2

 

 
1.9

Other tax items
 

 

 

 
(0.5
)
 

Total of items impacting income taxes
 
$
15.3

 
$
(22.1
)
 
$
20.9

 
$
15.6

 
$
17.0

Net income impact of these items
 
$
(42.5
)
 
$
(66.2
)
 
$
(44.4
)
 
$
(52.4
)
 
$
(9.1
)
Diluted EPS impact of these items
 
$
(1.25
)
 
$
(1.95
)
 
$
(1.32
)
 
$
(1.56
)
 
$
(0.27
)


14



The following table presents a reconciliation from net income from continuing operations to EBITDA and Adjusted EBITDA:
 
 
Fiscal Year
(In millions)
 
2018
 
2017
 
2016
 
2015
 
2014
Net income from continuing operations
 
$
156.3

 
$
109.0

 
$
121.1

 
$
96.9

 
$
163.4

Interest expense
 
76.3

 
74.7

 
78.7

 
63.8

 
44.5

Income taxes
 
66.9

 
128.6

 
76.4

 
86.0

 
86.2

Depreciation
 
31.7

 
28.2

 
27.9

 
22.2

 
20.0

Amortization of intangible assets
 
37.3

 
36.1

 
37.6

 
24.9

 
10.6

EBITDA
 
$
368.5

 
$
376.6

 
$
341.7

 
$
293.8

 
$
324.7

Total of items impacting operating income*
 
13.3

 
8.0

 
27.7

 
38.3

 
7.2

Foreign exchange and other non-operating expense
 
10.2

 
0.6

 
19.3

 
20.4

 
9.9

Stock-based compensation
 
18.9

 
18.1

 
16.5

 
13.9

 
12.6

Adjusted EBITDA
 
$
410.9

 
$
403.3

 
$
405.2

 
$
366.4

 
$
354.4

* Items impacting operating income excludes amortization of intangible assets and CEO retirement agreement expense in the calculation of adjusted EBITDA as amortization is already added back in the EBITDA calculation and CEO retirement agreement expense is added back as part of stock-based compensation.


15


ANIXTER INTERNATIONAL INC.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Executive Overview
Total company sales increased 6.0% to $8,400.2 million in 2018. Excluding the favorable impacts from acquisitions, foreign exchange and copper, we delivered organic sales growth of 4.8%, as summarized in the table below. We achieved growth in all segments and geographies. Additional highlights of the year included:

$137.7 million of cash flow from operations;
Earnings per diluted share from continuing operations of $4.58; and
Adjusted earnings per diluted share from continuing operations of $5.83.
Organic sales growth from 2017 to 2018 excludes the impact of the following items and is summarized by segment and geography below:

$70.8 million favorable impact from acquisitions;
$5.0 million favorable impact from the fluctuation in foreign exchange; and
$11.2 million favorable impact from the higher average price of copper.
 
Sales Growth Trends
 
 
 
Twelve Months Ended December 28, 2018
 
Twelve Months Ended December 29, 2017
 
 
 
($ millions)
 
As Reported
 
Foreign Exchange Impact
 
Copper Impact
 
As Adjusted
 
As Reported
 
Acquisitions Impact
 
Adjusted for Acquisitions
 
Organic Growth / (Decline)
 
 
 
Network & Security Solutions (NSS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 North America
 
$
3,295.4

 
$
0.6

 
$

 
$
3,296.0

 
$
3,212.6

 
$

 
$
3,212.6

 
2.6
 %
 
 EMEA
 
403.3

 
(9.0
)
 

 
394.3

 
361.6

 
1.9

 
363.5

 
8.5
 %
 
 Emerging Markets
 
648.3

 
9.9

 

 
658.2

 
540.2

 
68.9

 
609.1

 
8.1
 %
 
NSS
 
$
4,347.0

 
$
1.5

 
$

 
$
4,348.5

 
$
4,114.4

 
$
70.8

 
$
4,185.2

 
3.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electrical & Electronic Solutions (EES)
 
 
 
 
 
 
 
 
 
 
 
 
 
 North America
 
$
1,836.2

 
$
0.4

 
$
(9.1
)
 
$
1,827.5

 
$
1,743.9

 
$

 
$
1,743.9

 
4.8
 %
 
 EMEA
 
257.0

 
(8.4
)
 
(1.0
)
 
247.6

 
264.7

 

 
264.7

 
(6.5
)%
 
 Emerging Markets
 
249.5

 
1.2

 
(0.8
)
 
249.9

 
216.9

 

 
216.9

 
15.2
 %
 
EES
 
$
2,342.7

 
$
(6.8
)
 
$
(10.9
)
 
$
2,325.0

 
$
2,225.5

 
$

 
$
2,225.5

 
4.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility Power Solutions (UPS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 North America
 
$
1,710.5

 
$
0.3

 
$
(0.3
)
 
$
1,710.5

 
$
1,587.5

 
$

 
$
1,587.5

 
7.8
 %
 
UPS
 
$
1,710.5

 
$
0.3

 
$
(0.3
)
 
$
1,710.5

 
$
1,587.5

 
$

 
$
1,587.5

 
7.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
8,400.2

 
$
(5.0
)
 
$
(11.2
)
 
$
8,384.0

 
$
7,927.4

 
$
70.8

 
$
7,998.2

 
4.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Geographic Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 North America
 
$
6,842.1

 
$
1.3

 
$
(9.4
)
 
$
6,834.0

 
$
6,544.0

 
$

 
$
6,544.0

 
4.4
 %
 
 EMEA
 
660.3

 
(17.4
)
 
(1.0
)
 
641.9

 
626.3

 
1.9

 
628.2

 
2.2
 %
 
 Emerging Markets
 
897.8

 
11.1

 
(0.8
)
 
908.1

 
757.1

 
68.9

 
826.0

 
9.9
 %
 
Total
 
$
8,400.2

 
$
(5.0
)
 
$
(11.2
)
 
$
8,384.0

 
$
7,927.4

 
$
70.8

 
$
7,998.2

 
4.8
 %

16


ANIXTER INTERNATIONAL INC.

As we enter 2019, we are focused on the significant opportunity to leverage our unique set of products and innovative solutions across our global network. Through our customer access strategy, comprehensive and unique global services offerings, and initiatives in high growth markets, we are positioned for top line growth and market share gains. We are beginning to benefit from actions we are taking to improve gross margin, which will fund investment in innovation and still deliver operating margin expansion. Long-term, we expect our investment in technology and innovation to deliver significant benefits, with the ultimate goal of improving profitability, generating significant cash flow from operations and creating value for all of our stakeholders.
We are optimistic that favorable sales trends will continue, based on our record backlog, strong pipeline trends, and ongoing discussions with our customers and suppliers. The demand environment remains solid, tempered by uncertainty caused by economic policies and geopolitical issues. Overall we expect full year 2019 organic sales growth in the 3 - 6% range.

Acquisition of Businesses
 
During the second quarter of 2018, we completed the acquisition of security businesses in Australia and New Zealand. We expect these acquisitions to be accretive to earnings in the first full year of operation, exclusive of transaction and integration costs.
Consolidated Results of Operations
(In millions, except per share amounts)
 
Twelve Months Ended
 
 
December 28,
2018
 
December 29,
2017
 
December 30,
2016
Net sales
 
$
8,400.2

 
$
7,927.4

 
$
7,622.8

Gross profit
 
1,658.0

 
1,571.0

 
1,548.0

Operating expenses
 
1,348.3

 
1,258.1

 
1,252.5

Operating income
 
309.7

 
312.9

 
295.5

Other expense:
 
 
 
 
 
 
Interest expense
 
(76.3
)
 
(74.7
)
 
(78.7
)
Other, net
 
(10.2
)
 
(0.6
)
 
(19.3
)
Income from continuing operations before income taxes
 
223.2

 
237.6

 
197.5

Income tax expense from continuing operations
 
66.9

 
128.6

 
76.4

Net income from continuing operations
 
156.3

 
109.0

 
121.1

Net loss from discontinued operations
 

 

 
(0.6
)
Net income
 
$
156.3

 
$
109.0

 
$
120.5

Diluted income (loss) per share:
 
 
 
 
 
 
Continuing operations
 
$
4.58

 
$
3.21

 
$
3.61

Discontinued operations
 

 

 
(0.02
)
Net income
 
$
4.58

 
$
3.21

 
$
3.59


17


ANIXTER INTERNATIONAL INC.

Items Impacting Comparability of Results
In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") above, this report includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Specifically, net sales comparisons to the prior corresponding period, both worldwide and in relevant segments, are discussed in this report both on a U.S. GAAP and non-GAAP basis. We believe that by providing non-GAAP organic growth, which adjusts for the impact of acquisitions (when applicable), foreign exchange fluctuations, copper prices and the number of billing days, both management and investors are provided with meaningful supplemental sales information to understand and analyze our underlying trends and other aspects of our financial performance. We calculate the year-over-year organic sales growth impact related to acquisitions by including their comparable period results prior to the acquisitions with our results, as we believe this represents the most accurate representation of organic growth, considering the nature of the companies we acquired and the synergistic revenues that have been or will be achieved. Historically, and from time to time, we may also exclude other items from reported financial results (e.g., impairment charges, inventory adjustments, restructuring charges, tax items, currency devaluations, pension settlements, etc.) in presenting adjusted operating expense, adjusted operating income, adjusted income taxes and adjusted net income so that both management and financial statement users can use these non-GAAP financial measures to better understand and evaluate our performance period over period and to analyze the underlying trends of our business. We have also excluded amortization of intangible assets associated with purchase accounting from acquisitions from the adjusted amounts for comparison of the non-GAAP financial measures period over period.
EBITDA is defined as net income from continuing operations before interest, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before foreign exchange and other non-operating expense and non-cash stock-based compensation, excluding the other items from reported financial results, as defined above. We believe that adjusted operating income, EBITDA and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management in assessing both consolidated and business segment performance. Adjusted operating income provides an understanding of the results from the primary operations of our business by excluding the effects of certain items that do not reflect the ordinary earnings of our operations. We use adjusted operating income to evaluate our period over period operating performance because we believe this provides a more comparable measure of our continuing business excluding certain items that are not reflective of expected ongoing operations. This measure may be useful to an investor in evaluating the underlying performance of our business. EBITDA provides us with an understanding of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA further excludes the effects of foreign exchange and other non-cash stock-based compensation, and certain items that do not reflect the ordinary earnings of our operations and that are also excluded for purposes of calculating adjusted net income, adjusted earnings per share and adjusted operating income. EBITDA and Adjusted EBITDA are used by our management for various purposes including as measures of performance of our operating entities and as a basis for strategic planning and forecasting. Adjusted EBITDA may be useful to an investor because this measure is widely used to evaluate a company’s operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending on the accounting methods, book value of assets, capital structure and the method by which the assets were acquired, among other factors. They are not, however, intended as an alternative measure of operating results or cash flow from operations as determined in accordance with U.S. GAAP.
Non-GAAP financial measures provide insight into selected financial information and should be evaluated in the context in which they are presented. These non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP, and non-GAAP financial measures as reported by us may not be comparable to similarly titled amounts reported by other companies. The non-GAAP financial measures should be considered in conjunction with the Consolidated Financial Statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated above.
Our operating results can be affected by changes in prices of commodities, primarily copper, which are components in some of the electrical wire and cable products sold. Generally, as the costs of inventory purchases increase due to higher commodity prices, our mark-up percentage 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 may result 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 financial results. The degree to which spot market copper prices change affects product prices and the amount of gross profit earned will be affected by end market demand and overall economic conditions. Importantly, however, there is no exact measure of the impact of changes in copper prices, as there are thousands of transactions in any given year, each of which has various factors involved in the individual pricing decisions. Therefore, all references to the effect of copper prices are estimates.

18


ANIXTER INTERNATIONAL INC.

We recorded the following items that impacted the comparability of the results for the last three fiscal years:
Items Impacting Comparability of Results from Continuing Operations:
 
 
 
 
(In millions, except per share amounts)
 
Years Ended
 
 
December 28,
2018
 
December 29,
2017
 
December 30,
2016
Items impacting operating expense and operating income:
 
Favorable / (Unfavorable)
Amortization of intangible assets
 
$
(37.3
)
 
$
(36.1
)
 
$
(37.6
)
Restructuring charge
 
(9.4
)
 

 
(5.4
)
Acquisition and integration costs
 
(2.9
)
 
(2.3
)
 
(5.1
)
CEO retirement agreement expense
 
(2.6
)
 

 

U.K. facility relocation costs
 
(1.0
)
 

 

Impairment of intangible assets
 

 
(5.7
)
 

UK pension settlement
 

 

 
(9.6
)
Latin America bad debt provision
 

 

 
(7.6
)
Total of items impacting operating expense and operating income
 
$
(53.2
)
 
$
(44.1
)
 
$
(65.3
)
Items impacting other expenses:
 
 
 
 
 
 
Loss on extinguishment of debt
 
(4.6
)
 

 

Total of items impacting other expenses
 
$
(4.6
)
 
$

 
$

Total of items impacting pre-tax income
 
$
(57.8
)
 
$
(44.1
)
 
$
(65.3
)
Items impacting income taxes:
 
 
 
 
 
 
Tax impact of items impacting pre-tax income above
 
12.6

 
14.8

 
18.8

Transition tax on deferred foreign income
 
2.8

 
(50.0
)
 

Rate change impact of net deferred tax liability
 
(0.7
)
 
14.4

 

Reversal/(establishment) of deferred income tax valuation allowances
 
1.4

 

 
(1.1
)
Tax expense related to domestic permanent tax differences
 
(0.7
)
 

 

Tax (expense) benefit related to prior year tax positions
 
(0.1
)
 
(1.3
)
 
3.2

Total of items impacting income taxes
 
$
15.3

 
$
(22.1
)
 
$
20.9

Net income impact of these items
 
$
(42.5
)
 
$
(66.2
)
 
$
(44.4
)
Diluted EPS impact of these items
 
$
(1.25
)
 
$
(1.95
)
 
$
(1.32
)
The items impacting operating income by segment are reflected in the tables below.
Items Impacting Comparability of Operating Expense and Operating Income by Segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 28, 2018
(In millions)
 
NSS
 
EES
 
UPS
 
Corporate
 
Total
Amortization of intangible assets
 
$
(17.0
)
 
$
(7.0
)
 
$
(13.3
)
 
$

 
$
(37.3
)
Restructuring charge
 
(2.1
)
 
(1.3
)
 
(0.7
)
 
(5.3
)
 
(9.4
)
Acquisition and integration costs
 
(2.6
)
 

 

 
(0.3
)
 
(2.9
)
CEO retirement agreement expense
 

 

 

 
(2.6
)
 
(2.6
)
U.K. facility relocation costs
 
(0.2
)
 
(0.8
)
 

 

 
(1.0
)
Total of items impacting operating expense and operating income
 
$
(21.9
)
 
$
(9.1
)
 
$
(14.0
)
 
$
(8.2
)
 
$
(53.2
)

19


ANIXTER INTERNATIONAL INC.

 
 
Year Ended December 29, 2017
(In millions)
 
NSS
 
EES
 
UPS
 
Corporate
 
Total
Amortization of intangible assets
 
$
(14.4
)
 
$
(8.4
)
 
$
(13.3
)
 
$

 
$
(36.1
)
Restructuring charge
 

 
0.5

 
(0.1
)
 
(0.4
)
 

Acquisition and integration costs
 

 

 

 
(2.3
)
 
(2.3
)
Impairment of intangible assets
 
(5.7
)
 

 

 

 
(5.7
)
Total of items impacting operating expense and operating income
 
$
(20.1
)
 
$
(7.9
)
 
$
(13.4
)
 
$
(2.7
)
 
$
(44.1
)
 
 
Year Ended December 30, 2016
(In millions)
 
NSS
 
EES
 
UPS
 
Corporate
 
Total
Amortization of intangible assets
 
$
(14.1
)
 
$
(8.5
)
 
$
(15.0
)
 
$

 
$
(37.6
)
Restructuring charge
 
(1.7
)
 
(1.3
)
 
(2.1
)
 
(0.3
)
 
(5.4
)
Acquisition and integration costs
 

 

 
(0.3
)
 
(4.8
)
 
(5.1
)
UK pension settlement
 

 

 

 
(9.6
)
 
(9.6
)
Latin America bad debt provision
 
(3.9
)
 
(3.7
)
 

 

 
(7.6
)
Total of items impacting operating expense and operating income
 
$
(19.7
)
 
$
(13.5
)
 
$
(17.4
)
 
$
(14.7
)
 
$
(65.3
)
U.S. GAAP to Non-GAAP Net Income and EPS Reconciliation:
 
 
 
 
 
(In millions, except per share amounts)
Years Ended
 
December 28,
2018
 
December 29,
2017
 
December 30,
2016
Reconciliation to most directly comparable U.S. GAAP financial measure:
 
 
 
 
 
Net income from continuing operations - U.S. GAAP
$
156.3

 
$
109.0

 
$
121.1

Items impacting net income from continuing operations
42.5

 
66.2

 
44.4

Net income from continuing operations - Non-GAAP
$
198.8

 
$
175.2

 
$
165.5

 
 
 
 
 
 
Diluted EPS from continuing operations – U.S. GAAP
$
4.58

 
$
3.21

 
$
3.61

Diluted EPS impact of these items from continuing operations
1.25

 
1.95

 
1.32

Diluted EPS from continuing operations – Non-GAAP
$
5.83

 
$
5.16

 
$
4.93


20


ANIXTER INTERNATIONAL INC.

Net Sales
2018 vs. 2017
(In millions)
 
NSS
 
EES
 
UPS
 
Total
Net sales, 2018
 
$
4,347.0

 
$
2,342.7

 
$
1,710.5

 
$
8,400.2

Net sales, 2017
 
4,114.4

 
2,225.5

 
1,587.5

 
7,927.4

$ Change
 
$
232.6

 
$
117.2

 
$
123.0

 
$
472.8

% Change
 
5.7
%
 
5.3
 %
 
7.8
 %
 
6.0
 %
 
 
 
 
 
 
 
 
 
Impact of Acquisitions
 
$
70.8

 
$

 
$

 
$
70.8

Net sales, 2017 (Adjusted for Acquisitions)
 
$
4,185.2

 
$
2,225.5

 
$
1,587.5

 
$
7,998.2

 
 
 
 
 
 
 
 
 
Adjusted % Change (Adjusted for Acquisitions)
 
3.9
%

5.3
 %

7.8
 %

5.0
 %
Plus the % impact of:
 
 
 
 
 
 
 
 
Foreign exchange
 
%
 
(0.3
)%
 
 %
 
(0.1
)%
Copper pricing
 
%
 
(0.5
)%
 
 %
 
(0.1
)%
Organic (Non-GAAP)
 
3.9
%
 
4.5
 %
 
7.8
 %
 
4.8
 %
There were 253 billing days in both 2018 and 2017.
NSS – Sales of $4,347.0 million increased 5.7% from $4,114.4 million in the prior year period. NSS organic sales increased 3.9%, adjusting for the unfavorable impact from foreign exchange and favorable impact from acquisitions, reflecting growth in both the network infrastructure and security portions of the business and in all geographies. NSS security sales in the twelve months ended December 28, 2018 of $1,882.0 million, which represents 43.3% of total segment sales, increased 12.0% from the prior year period. Adjusted for the $69.1 million favorable impact from acquisitions and $8.2 million unfavorable currency impact, organic security sales growth was 8.0% compared to the twelve months ended December 29, 2017.
EES – Sales of $2,342.7 million increased 5.3% from $2,225.5 million in the prior year, strengthened by the favorable impact from copper and foreign exchange. EES organic sales increased by 4.5%, with growth driven by ongoing strength in industrial business and strong growth with OEM customers.
UPS Sales of $1,710.5 million increased 7.8% from $1,587.5 million in the prior year period, reflecting broad-based growth with both investor-owned utility and public power customers. UPS organic sales increased 7.8%, with the unfavorable impact from foreign exchange offset by the favorable impact from copper.
2017 vs. 2016
(In millions)
 
NSS
 
EES
 
UPS
 
Total
Net sales, 2017
 
$
4,114.4

 
$
2,225.5

 
$
1,587.5

 
$
7,927.4

Net sales, 2016
 
4,083.8

 
2,103.2

 
1,435.8

 
7,622.8

$ Change
 
$
30.6

 
$
122.3

 
$
151.7

 
$
304.6

% Change
 
0.8
 %
 
5.8
 %
 
10.6
 %
 
4.0
 %
 
 
 
 
 
 
 
 
 
Plus the % impact of:
 
 
 
 
 
 
 
 
Foreign exchange
 
(0.2
)%
 
0.1
 %
 
(0.2
)%
 
(0.1
)%
Copper pricing
 
 %
 
(3.0
)%
 
(0.1
)%
 
(0.9
)%
Organic (Non-GAAP)
 
0.6
 %
 
2.9
 %
 
10.3
 %
 
3.0
 %
There were 253 billing days in 2017 compared to 254 billing days in 2016.

21


ANIXTER INTERNATIONAL INC.

NSS – Sales of $4,114.4 million increased 0.8% from $4,083.8 million in the prior year period. NSS organic sales increased 0.6%, adjusting for the favorable impact from foreign exchange, driven by growth across our EMEA and Emerging Markets geographies and partially offset by weakness in North America. NSS security sales in the twelve months ended December 29, 2017 of $1,677.4 million, which represents 40.8% of total segment sales, increased 2.2% from the prior year period. Adjusted for the $0.6 million negative currency impact, organic security sales growth was 2.2% compared to the twelve months ended December 30, 2016.
EES – Sales of $2,225.5 million increased 5.8% from $2,103.2 million in the prior year, strengthened by the favorable impact from copper but partially offset by the unfavorable impact from foreign exchange. EES organic sales increased by 2.9%, with growth across our EMEA and Emerging Markets geographies.
UPS Sales were $1,587.5 million increased 10.6% from $1,435.8 million in the prior year period, driven by synergistic sales to support a new investor-owned utility customer and strong growth with existing investor-owned utility and public power customers. UPS organic sales increased 10.3%, adjusting for the favorable impacts from foreign exchange and copper.
Gross Margin
Gross margin of 19.7% in 2018 decreased from 19.8% in 2017 and 20.3% in 2016. The year-over-year lower gross margin in 2018 was caused by competitive pressure, customer and product mix and cost inflation. The lower gross margin in 2017 compared to 2016 was caused by customer and product mix, combined with the impact of lower vendor rebates and competitive pressure. The effects of changing copper prices did not impact gross margin percentages significantly in any year.
Operating Expenses
Operating expenses were $1,348.3 million, $1,258.1 million and $1,252.5 million in 2018, 2017 and 2016, respectively. Operating expense in 2018 includes $37.3 million of intangible asset amortization, a restructuring charge of $9.4 million, $2.9 million of acquisition and integration costs, $2.6 million of CEO retirement agreement expense and $1.0 million of U.K. facility relocation costs. The CEO retirement agreement expense relates to additional stock compensation for a retirement agreement with the recently retired CEO, which extended the terms of his non-competition and non-solicitation restrictions in exchange for extended vesting and termination provisions of previously granted equity awards. The U.K. facility relocation costs relate to expenses we incurred to move our largest warehouse in EMEA. We were forced to move this location due to a government-backed rail line that will run through our legacy facility. Operating expense in 2017 includes $36.1 million of intangible asset amortization, $2.3 million of acquisition and integration costs and an intangible asset impairment charge of $5.7 million. Excluding these items from their related periods, adjusted operating expenses in 2018 increased 6.7% to $1,295.1 million, or 15.4% of sales, which compares to prior year adjusted operating expense of $1,214.0 million, or 15.3% of sales. Further adjusting operating expenses for an unfavorable $1.4 million impact of foreign currency in the twelve months ended 2018, adjusted operating expenses would have increased by 6.6%.

22


ANIXTER INTERNATIONAL INC.


Operating Income

2018 vs. 2017
(In millions)
 
NSS
 
EES
 
UPS
 
Corporate
 
Total
Operating income, 2018
 
$
272.2

 
$
132.3

 
$
75.4

 
$
(170.2
)
 
$
309.7

Operating income, 2017
 
262.6

 
114.3

 
73.1

 
(137.1
)
 
312.9

$ Change
 
$
9.6

 
$
18.0

 
$
2.3

 
$
(33.1
)
 
$
(3.2
)
% Change
 
3.6
%
 
15.8
 %
 
3.2
 %
 
(24.1
)%
 
(1.0
)%
 
 
 
 
 
 
 
 
 
 
 
Items impacting operating income in 2018
 
$
21.9

 
$
9.1

 
$
14.0

 
$
8.2

 
$
53.2

Adjusted operating income, 2018 (Non-GAAP)
 
$
294.1

 
$
141.4

 
$
89.4

 
$
(162.0
)
 
$
362.9

 
 
 
 
 
 
 
 
 
 
 
Items impacting operating income in 2017
 
$
20.1

 
$
7.9

 
$
13.4

 
$
2.7

 
$
44.1

Adjusted operating income, 2017 (Non-GAAP)
 
$
282.7

 
$
122.2

 
$
86.5

 
$
(134.4
)
 
$
357.0

 
 
 
 
 
 
 
 
 
 
 
Adjusted % Change (Non-GAAP)
 
4.0
%
 
15.7
 %
 
3.4
 %
 
(20.5
)%
 
1.7
 %
 
 
 
 
 
 
 
 
 
 
 
Plus the % impact of:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
0.3
%
 
(0.2
)%
 
0.1
 %
 
0.3
 %
 
0.4
 %
Copper pricing
 
%
 
(2.0
)%
 
 %
 
 %
 
(0.7
)%
Organic (Non-GAAP)
 
3.9
%
 
13.6
 %
 
3.3
 %
 
(23.8
)%
 
(1.3
)%

2017 vs. 2016
(In millions)
 
NSS
 
EES
 
UPS
 
Corporate
 
Total
Operating income, 2017
 
$
262.6

 
$
114.3

 
$
73.1

 
$
(137.1
)
 
$
312.9

Operating income, 2016
 
275.8

 
97.5

 
56.7

 
(134.5
)
 
295.5

$ Change
 
$
(13.2
)
 
$
16.8

 
$
16.4

 
$
(2.6
)
 
$
17.4

% Change
 
(4.8
)%
 
17.2
 %
 
28.9
 %
 
(1.9
)%
 
5.9
 %
 
 
 
 
 
 
 
 
 
 
 
Items impacting operating income in 2017
 
$
20.1

 
$
7.9

 
$
13.4

 
$
2.7

 
$
44.1

Adjusted operating income, 2017 (Non-GAAP)
 
$
282.7

 
$
122.2

 
$
86.5

 
$
(134.4
)
 
$
357.0

 
 
 
 
 
 
 
 
 
 
 
Items impacting operating income in 2016
 
$
19.7

 
$
13.5

 
$
17.4

 
$
14.7

 
$
65.3

Adjusted operating income, 2016 (Non-GAAP)
 
$
295.5

 
$
111.0

 
$
74.1

 
$
(119.8
)
 
$
360.8

 
 
 
 
 
 
 
 
 
 
 
Adjusted % Change (Non-GAAP)
 
(4.3
)%
 
10.1
 %
 
16.7
 %
 
(12.2
)%
 
(1.1
)%
 
 
 
 
 
 
 
 
 
 
 
Plus the % impact of:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
(0.1
)%
 
0.2
 %
 
(0.4
)%
 
(0.3
)%
 
(0.3
)%
Copper pricing
 
 %
 
(13.7
)%
 
(0.2
)%
 
 %
 
(4.6
)%
Organic (Non-GAAP)
 
(4.9
)%
 
3.7
 %
 
28.3
 %
 
(2.2
)%
 
1.0
 %

NSS – Operating income was $272.2 million, or 6.3% of sales, in 2018, compared to $262.6 million, or 6.4% of sales, in 2017 and $275.8 million, or 6.8% of sales, in 2016. The increase in operating income in 2018 was due to sales growth in both the network infrastructure and security portions of the business and gross margin improvement. The decrease in operating income in 2017 compared to 2016 was primarily due to a lower level of large project activity in North America. NSS delivered adjusted operating income of $294.1 million, $282.7 million, and $295.5 million in 2018, 2017 and 2016, respectively, resulting in adjusted operating margin of 6.8%, 6.9% and 7.2% in 2018, 2017 and 2016.


23


ANIXTER INTERNATIONAL INC.

EES – Operating income was $132.3 million, or 5.6% of sales, in 2018, compared to $114.3 million, or 5.1% of sales, in 2017 and $97.5 million, or 4.6% of sales, in 2016. The increase in operating income in 2018 was driven by the favorable impacts of higher copper prices combined with sales growth and gross margin improvement. The increase in operating income in 2017 compared to 2016 was driven by the favorable impacts of higher copper prices combined with ongoing growth with OEM customers, synergistic growth from sales of low voltage products to legacy Anixter customers, and a recovery in our industrial project business. EES adjusted operating income of $141.4 million in 2018 compares to adjusted operating income of $122.2 million in 2017 and $111.0 million in 2016, resulting in adjusted operating margin of 6.0%, 5.5% and 5.3% in 2018, 2017 and 2016, respectively.

UPS Operating income was $75.4 million, or 4.4% of sales in 2018, compared to $73.1 million, or 4.6%, in 2017 and $56.7 million, or 3.9% of sales, in 2016. The increase in operating income in 2018 was driven by sales growth and expense discipline. The increase in operating income in 2017 compared to 2016 was driven by strong sales growth combined with ongoing expense discipline. UPS adjusted operating income of $89.4 million in 2018 compares to adjusted operating income of $86.5 million in 2017 and $74.1 million in 2016, resulting in adjusted operating margin of 5.2%, 5.4% and 5.2% in 2018, 2017 and 2016, respectively.
Interest Expense and Other
Interest expense was $76.3 million, $74.7 million and $78.7 million in 2018