GLENVIEW, Ill. — Anixter International Inc. today reported sales of $2.1 billion for the quarter ended June 29, 2018, a 6.8% increase versus the prior year quarter and the highest quarterly sales in the company’s history. Excluding the impact of the following items, organic sales increased 4.9% versus the prior year quarter:
- $11.9 million favorable impact from the higher average price of copper
- $13.7 million favorable impact from the fluctuation in foreign currencies
- $11.5 million favorable impact from acquisitions
All commentary in this release reflects second quarter 2018 results, and all comparisons are versus the prior year quarter, unless otherwise noted. Both the current and prior year quarters had 64 billing days. Please refer to the tables at the end of this release for the reconciliations to our reported results prepared in accordance with U.S. GAAP to the non-GAAP measures.
Net income of $34.8 million compares to $40.1 million. Adjusted net income increased 12.6% to $51.9 million compared to $46.2 million. Adjusted EBITDA of $107.8 million, or 5.0% of sales, compares to $103.1 million, or 5.1% of sales.
Current year net income includes operating expense of $24.2 million pre-tax and $17.1 million after-tax, comprised primarily of $9.7 million of amortization of intangible assets and a $9.2 million restructuring charge. Prior year net income includes operating expense of $9.0 million pre-tax and $6.1 million after-tax comprised of amortization of intangible assets.
“Second quarter sales growth was broad-based, and included a return to growth in the Network & Security Solutions segment as expected project activity recovers. We remain focused on key growth initiatives which include security, wireless and professional audio video, as well as in global and complex supply chain opportunities,” commented Bill Galvin, President and Chief Executive Officer. “Turning to overall results, we were pleased to deliver strong growth in diluted earnings per share. Similar to the first quarter, inflationary pressures, including increased freight expense, impacted profitability. We have implemented actions to drive gross margin improvement, including a restructuring initiative which will result in a more competitive cost structure.”
Income Statement Detail
Gross margin of 19.6% was flat sequentially and down 20 basis points from prior year. The decline in margin was caused by customer and product mix, and cost inflation, primarily in the UPS segment.
Operating expense of $347.8 million compares to $313.1 million. Adjusted operating expense of $323.6 million, which excludes the operating expense items detailed above, compares to $304.1 million. The increase was driven by increases in freight expense and employee benefits, primarily higher medical expense. The corresponding adjusted operating expense ratio of 15.1% of sales compares to 15.2%.
Operating income of $71.3 million compares to $82.6 million. Excluding operating expense items detailed above, adjusted operating income of $95.5 million compares to $91.6 million. The corresponding adjusted operating margin of 4.5% compares to 4.6%.
The year-to-date effective tax rate (“ETR”) is 29.4%, which includes a $1.2 million net tax benefit primarily related to the reversal of valuation allowances. Excluding the net tax benefit, the projected full year ETR is 30.7% which compares to the 2017 full year ETR of 54.1%. The projected full year non-GAAP ETR of 28.8% compares to the 2017 full year non-GAAP ETR of 37.8%. The favorable rate changes are due primarily to the impact of the Tax Cuts and Jobs Act of 2017.
Diluted earnings per share of $1.02 compares to $1.18, and adjusted diluted earnings per share of $1.53 compares to $1.36, a 12.5% increase versus prior year.
Segment Update
Network & Security Solutions (“NSS”) sales increased 6.5% to $1,096.3 million. Adjusted for the $11.5 million favorable impact from the acquisition of the security businesses and the $6.3 million favorable impact from foreign exchange, NSS sales increased 4.7% on an organic basis. NSS security sales of $460.9 million, which represents approximately 42% of segment sales, increased 8.4%. Adjusted for the $11.5 million and $1.6 million favorable acquisition and currency impacts, respectively, security sales increased 5.2% on an organic basis.
NSS operating income of $66.1 million compares to $64.9 million. NSS adjusted operating income of $74.8 million compares to $68.5 million, a 9.1% increase. Adjusted operating income excludes operating expense of $8.7 million and $3.6 million in the current and prior year quarters, respectively, as detailed in the financial tables on pages 13 and 14 of this release.
NSS adjusted EBITDA increased 8.8% to $76.1 million. The corresponding adjusted EBITDA margin of 6.9% compares to 6.8%.
Electrical & Electronic Solutions (“EES”) sales increased 7.9% to $605.6 million. Adjusted for the $6.0 million favorable impact from foreign exchange and the $11.6 million favorable impact from higher average copper prices, EES organic sales increased 4.7%.
EES operating income increased 20.3% to $35.6 million. EES adjusted operating income increased 24.3% to $39.3 million. Adjusted operating income excludes operating expense of $3.7 million and $2.1 million in the current and prior year quarters, respectively, as detailed in the financial tables on pages 13 and 14 of this release.
EES adjusted EBITDA increased 23.4% to $40.4 million. The corresponding adjusted EBITDA margin of 6.7% compares to 5.8%, driven by expense leverage.
Utility Power Solutions (“UPS”) sales increased 6.2% to $436.0 million. Adjusted for the $1.4 million favorable impact from foreign exchange and the $0.3 million favorable impact from higher average copper prices, UPS organic sales increased 5.8%.
UPS operating income of $17.9 million compares to $21.3 million. UPS adjusted operating income of $22.0 million compares to $24.5 million. Adjusted operating income excludes operating expense of $4.1 million and $3.2 million in the current and prior year quarters, respectively, as detailed in the financial tables on pages 13 and 14 of this release.
UPS adjusted EBITDA of $23.1 million, or 5.3% of sales, compares to $25.9 million, or 6.3% of sales. The change in margin is due to customer mix combined with the unfavorable impact of inflation on operating expense.
Acquisition of Security Businesses
During the second quarter, we completed the acquisition of security businesses in Australia and New Zealand for $149.9 million, as previously disclosed.
Cash Flow and Capital Allocation
Year-to-date we have generated $69.3 million of cash flow in operations, compared to $137.1 million in the prior year-to-date period. The majority of the change is due to increased working capital investment to support growth in the business. Excluding the current portion of our long-term debt, working capital was 17.8% of sales, which compares to 18.5% in the prior year quarter. We invested $24.5 million in capital expenditures in the first half of 2018, which compares to $20.8 million, reflecting higher capital investment in facilities and information technology.
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 47.0%, compared to 46.1% at the end of 2017
- Debt-to-adjusted EBITDA ratio of 3.3 times, compared to 3.1 times at the end of 2017
- Weighted average cost of borrowed capital of 5.1%, compared to 5.6% at the end of 2017
- $630.6 million available under revolving lines of credit and secured accounts receivable and inventory facilities
Outlook
“As we look ahead to the third quarter and full year, we are optimistic that sales growth will continue, reflecting momentum across the business and indications that our large project business is in the early stages of a recovery. Based on current trends, we estimate third quarter 2018 organic sales growth in the 4.0 – 5.0% range. For the full year, we are increasing the low end of our range by 150 basis points, and now estimate full year 2018 sales growth of 3.5 – 5.0%. However, this could be tempered by project timing and uncertainty caused by economic policies. We continue to estimate cash flow from operations of $180 – $200 million and now expect capital investment of $50 – $60 million,” commented Ted Dosch, EVP and Chief Financial Officer. “Our business is well positioned in the current competitive environment, providing significant opportunity to leverage our unique set of products and specialized solutions across our global network. We have strategies in place to combine revenue growth with enhanced gross margin, while improving our expense structure, with the goal of generating significant cash flow and creating value for all of our stakeholders.”
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