GLENVIEW, Ill. — Anixter International Inc. reported quarterly sales of $2.0 billion for the quarter ended July 1, 2016, a 32.1 percent increase compared to the year-ago quarter. Excluding the impact of the following items, organic sales decreased 0.6 percent year-over-year:
- $526.8 million favorable impact from the acquisition of Power Solutions
- $22.2 million unfavorable impact from the lower average price of copper
- $16.5 million unfavorable impact from the fluctuation in foreign currencies
The current quarter had 64 billing days, compared to 63 billing days in the year-ago quarter. Further excluding the favorable impact from one additional billing day, organic sales per day decreased 2.2 percent year-over-year.
Theodore (Ted) Dosch, Chief Financial Officer & Executive VP–Finance stated: “We are excited and energized about [the] transformation of our business and the resulting platform that we believe is well positioned for substantial and sustainable long-term growth. We are now intensely focused on the successful integration of the acquired businesses and maximizing the synergistic value, which we expect to result in significant free cash flow generation that will support our balanced capital allocation strategy.”
The full report can be viewed here.
Net income of $20.8 million compares to $29.5 million in the prior year quarter. Current quarter results include a UK pension settlement, amortization of intangible assets, Latin America bad debt provision, restructuring charge and acquisition and integration costs. Excluding the above operating expense items, which had a $33.7 million pre-tax and$23.4 million after-tax impact, adjusted net income of $44.2 million compares to adjusted net income of $41.6 million in the prior year quarter, an increase of 6.3 percent. Diluted earnings per share of $0.62 compares to $0.88 and adjusted diluted earnings per share of $1.32 compares to $1.24, both versus prior year quarter.
|Earnings Impact of Adjustments to Operating Income|
|Three months ended|
|(In millions, except per share amounts)||July 1, 2016|
|UK pension settlement||$9.6|
|Amortization of intangible assets||9.5|
|Latin America bad debt provision||7.6|
|Acquisition and integration costs||1.4|
|Total pre-tax impact||$33.7|
|Total after-tax impact||$23.4|
|Adjusted Diluted EPS impact||$0.70|
Adjusted EBITDA of $101.8 million, or 5.2 percent of sales, compares to $92.7 million, or 6.3 percent of sales, in the prior year quarter, an increase of 9.8 percent.
On a year-over-year basis, currency fluctuations and lower average copper prices negatively impacted earnings by $4.3 million pre-tax and $2.5 million net of tax. Excluding the $0.07 negative impact of currency and copper, our adjusted earnings per diluted share would have been $1.39, a 12.1 percent increase from the prior year quarter.
“Reflecting the underlying strength in our North America network infrastructure business, we delivered our 11th consecutive quarter of growth in our Network and Security Solutions segment,” commented Bob Eck, President and CEO. “We were pleased with the significant improvement in our EES segment, exiting the quarter with strong momentum as we integrate the low voltage portion of the Power Solutions acquisition into the segment. Finally, the combined effects of the weaker industrial economy and lower commodity prices on a year-over-year basis continue to be headwinds for both the industrial portion of our EES segment and our UPS segment. In light of a persistent slow global growth environment, we will continue to focus on margin improvement, ongoing expense discipline and working capital efficiencies.”
Income Statement Detail
Gross margin of 20.1 percent compares to 20.4 percent sequentially, with the decline primarily caused by segment and product mix. The decrease versus prior year gross margin of 22.2 percent is due primarily to the Power Solutions acquisition.
Operating expense of $336.7 million, or 17.2 percent of sales, compares to prior year operating expense of $264.4 million, or 17.9 percent of sales, reflecting the impact of the Power Solutions acquisition. The $5.6 million of restructuring costs included in operating expense will deliver approximately $10 million of annualized savings. Excluding the $33.7 million of expense outlined above, adjusted operating expense of $303.0 million, or 15.5 percent of sales, compares to prior year adjusted operating expense of $245.1 million, or 16.6 percent of sales.
Operating income of $56.7 million, or 2.9 percent of sales compares to $64.5 million or 4.4 percent in the prior year quarter. Excluding current quarter operating expense items outlined above, adjusted operating income increased 8.0 percent to $90.4 million or 4.6 percent of sales compared to $83.8 million or 5.7 percent in the prior year quarter.
Interest expense of $19.8 million compares to $12.7 million in the prior year quarter, reflecting the issuance of incremental debt to finance the Power Solutions acquisition. Foreign exchange and other expense of $0.8 million compares to $3.5 million in the prior year quarter.
Our second quarter effective tax rate was 42.4 percent. A large portion of the 360 basis point increase from the prior year effective tax rate of 38.8 percent was due to the change in the country mix of earnings since many of the current year operating expense charges of $33.7 million were incurred in countries with low income tax rates or have valuation allowances recorded against deferred tax assets. Our projected full year GAAP effective tax rate is 40.1 percent and our adjusted effective full year rate for non-GAAP operating results is 37.2 percent.
Network & Security Solutions (“NSS”) sales of $1.0 billion increased by 3.3%. On an organic basis NSS sales increased 4.0 percent, adjusting for the $8.0 million unfavorable impact from foreign exchange, driven by solid trends in North America, EMEA and Asia Pacific.
Second quarter NSS security sales of $410.6 million, which represents approximately 40 percent of total segment sales, increased 3.7 percent from the prior year quarter. Adjusted for the $2.9 million negative currency impact, organic security sales growth was 4.5 percent.
NSS operating income of $64.9 million compares to $66.6 million in the prior year quarter and $58.8 million in the first quarter of 2016. NSS adjusted EBITDA of $75.7 million compares to $76.2 million in the prior year quarter and $63.8 million in the first quarter of 2016. The corresponding adjusted EBITDA margin of 7.2 percent compares to 7.5 percent in the prior year quarter and 6.7 percent in the first quarter of 2016.
Electrical & Electronic Solutions (“EES”) sales of $555.1 million compares to $449.5 million in the prior year period, an increase of 23.5 percent. EES organic sales decreased 1.9 percent, adjusting for the $6.7 million unfavorable impact from foreign exchange, $21.8 million impact from lower average copper prices and $145.1 million from the low voltage business of the Power Solutions acquisition.
EES operating income of $23.9 million compares to $33.6 million in the prior year quarter and $22.5 million in the first quarter of 2016. The majority of the decline in operating income versus prior year was caused by lower copper pricing and weakness in the industrial sector.
EES adjusted EBITDA of $32.3 million compares to $37.6 million in the prior year period and $25.4 million in the first quarter of 2016. The corresponding adjusted EBITDA margin of 5.8 percent compares to 8.3 percent in the prior year period and 5.0 percent in the first quarter of 2016. Approximately two-thirds of the decline in adjusted EBITDA margin versus prior year was caused by lower copper pricing and weakness in the industrial sector, with the balance due to the low voltage business of the Power Solutions acquisition.
Utility Power Solutions (“UPS”) sales of $355.9 million compares to $361.1 in the first quarter of 2016. As indicated in the prior two quarters, sales in this segment continue to be negatively impacted by lower sales in Canada due to weakness in oil and gas regions along with the timing of utility customers’ major project spend.
UPS operating income of $12.0 million compares to $14.3 million in the first quarter of 2016. UPS adjusted EBITDA was $19.3 million, or 5.4 percent of sales, which compares to $20.1 million, or 5.6 percent of sales, in the first quarter of 2016.
Cash Flow and Leverage
Year-to-date we generated $149.4 million in cash flow from operations which compares to $39.3 million in the prior year period, driven primarily by working capital efficiencies. Year-to-date we have invested $16.4 million in capital expenditures which compares to $22.1 million in the prior year period. We expect to invest approximately $40 – 45 million in capital investments, lower than our original plans, to adjust for the current business environment. We now expect to generate $180 – $200 million in cash flow from operations for the full year.
“While our leading market positions and exposure to attractive end markets resulted in solid growth in our NSS segment, our EES and UPS segments face challenging headwinds. As a result, we continue to have a strong focus on improving our margin, cost structure and working capital efficiency,” commented Ted Dosch, Executive Vice President – Finance and CFO. “Reflecting our relentless focus on working capital, we were pleased to achieve working capital as a percent of sales of 19.2 percent for the quarter compared to 21.4 percent at year end 2015. Turning to our capital structure, our capital allocation priorities include achieving our debt-to-capital target range of 45 – 50% by the second half of 2017, funded by the strong free cash flow we expect to generate from our repositioned platform.”
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio improved to 54.8% from 58.2% at the end of 2015
- Weighted average cost of borrowed capital of 4.7% was the same as the year-ago quarter
- $522.9 million available under revolving lines of credit and secured accounts receivable and inventory facilities
“As we enter the second half of the year, our NSS segment continues to experience positive momentum in all regions except CALA, driven by strength in projects with global customers,” commented Bob Eck. “While our EES segment continues to experience weakness related to industrial and manufacturing end market exposure, sales trends are improving in all regions except CALA. Our UPS segment continues to experience soft trends related to its exposure to oil and gas end markets in the US and Canada, combined with the timing impact of major capital projects. Reflecting diverging trends across our business and across the broad economy, as well as the uncertainty created by Brexit, we remain cautious regarding prospects for a recovery in the second half of 2016. Combining our more positive outlook in NSS with an improving outlook in our EES and UPS segments, we now expect full year 2016 sales growth between 20 to 24 percent. The acquisition will increase sales by 24 percent, while currency and copper will each have a negative impact of 1 percent. The net result is an organic sales growth rate in the negative 2 percent to positive 2 percent range.”
Financial Results from Continuing Operations
|Three Months Ended||Six Months Ended|
|Jul 1,||Jul 3,||Percent||Jul 1,||Jul 3,||Percent|
|(In millions, except per share amounts)||2016||2015||Change||2016||2015||Change|
|Diluted Earnings Per Share||$||0.62||$||0.88||(30||)%||$||1.32||$||1.68||(21||)%|
|Diluted Weighted Shares||33.5||33.4||—||%||33.4||33.4||—||%|