GLENVIEW, Ill. — Anixter International Inc. reported quarterly sales of $2.0 billion for the quarter ended September 30, 2016, a 31.4 percent increase compared to the year-ago quarter. Excluding the impact of the following items, organic sales decreased 2.3 percent year-over-year:
- $533.5 million favorable impact from the acquisition of Power Solutions
- $7.7 million unfavorable impact from the lower average price of copper
- $12.6 million unfavorable impact from the fluctuation in foreign currencies
The current quarter had 63 billing days, compared to 64 billing days in the year-ago quarter. Further excluding the unfavorable impact from one fewer billing day, organic sales per day decreased 0.7 percent versus prior year, improving from a decrease of 2.2 percent versus prior year in the second quarter of the year.
All commentary in this release reflects results from continuing operations unless otherwise noted. Please refer to the tables at the end of this release for the reconciliations from our reported results prepared in accordance with U.S. GAAP to the adjusted amounts.
Net income of $40.3 million compares to $35.4 million in the prior year quarter. Excluding amortization of intangible assets, acquisition and integration costs, and a favorable tax benefit, which combined had a $9.9 million pre-tax and $6.0 million after-tax impact in the current year quarter and had a $13.1 million pre-tax and $8.2 million after-tax impact in the prior year quarter, adjusted net income of $46.3 million compares to adjusted net income of $43.6 million in the prior year quarter, a 6.3 percent increase. Diluted earnings per share increased 13.2 percent to $1.20 and adjusted diluted earnings per share increased 6.2 percent to $1.38, both versus prior year quarter.
Adjusted EBITDA of $108.2 million, or 5.5 percent of sales, reflects an increase of 8.4 percent versus prior year adjusted EBITDA of $99.8 million, or 6.7 percent of sales.
On a year-over-year basis, currency fluctuations and lower average copper prices negatively impacted earnings by $2.4 million pre-tax and $1.6 million net of tax. Excluding the negative earnings impact of $0.05 per diluted share, our adjusted earnings per diluted share would have been $1.43, a 10.0 percent increase from the prior year quarter.
“We are extremely pleased that we were awarded a $750 million, five-year contract serving one of the largest investor owned utilities in the nation, a testament to the powerful combination of Anixter with the Power Solutions acquisition,” commented Bob Eck, President and CEO. “In addition to achieving significant progress with the integration of our acquired businesses, we delivered solid third quarter financial results, driven by continued strength in our Network and Security Solutions segment which delivered its 12th consecutive quarter of sales growth. We continue to experience improved sales trends in our Electrical and Electronic Solutions segment, partially driven by strong synergies from the acquired business, against the backdrop of ongoing weakness in the industrial economy.”
Income Statement Detail
Gross margin of 20.3 percent compares to 20.1 percent sequentially, with the increase driven by segment and product mix. As expected, the decrease versus prior year gross margin of 22.2 percent is due primarily to the Power Solutions acquisition.
Operating expense of $309.4 million, or 15.8 percent of sales, compares to prior year operating expense of $252.7 million, or 17.0 percent of sales, reflecting the impact of the Power Solutions acquisition. Excluding the $9.9 million of expense outlined above, adjusted operating expense of $299.5 million, or 15.3 percent of sales, compares to prior year adjusted operating expense of $239.6 million, or 16.1 percent of sales. In addition to the impact of the Power Solutions acquisition, the 80 basis point improvement in adjusted operating expense as a percent of sales was also driven by ongoing focus on cost management and includes approximately $3.5 million in combined savings resulting from the previously announced restructuring actions.
Operating income of $87.3 million, or 4.5 percent of sales, compares to $78.2 million or 5.3 percent in the prior year quarter. Excluding current quarter operating expense items outlined above, adjusted operating income of $97.2 million, or 5.0 percent of sales, reflects an increase of 6.5 percent compared to $91.3 million or 6.1 percent of sales in the prior year quarter.
Interest expense of $19.8 million compares to $15.8 million in the prior year quarter, reflecting the issuance of incremental debt to finance the Power Solutions acquisition. Foreign exchange and other expense of $2.1 million compares to $5.5 million in the prior year quarter.
Our third quarter effective tax rate was 38.4 percent which includes a $2.1 million net tax benefit related to prior year tax positions versus 37.8 percent in the prior year quarter. The increase is due to the country mix of earnings. Our projected full year GAAP effective tax rate is 39.3 percent. Excluding the net tax benefit, our projected full year effective tax rate is 40.8 percent. Our adjusted full year effective tax rate for non-GAAP operating results is 37.7 percent.
Network & Security Solutions (“NSS”) sales of $1.0 billion increased by 0.3% over the prior year period, driven by strong growth in North America. Adjusting for the $4.4 million unfavorable impact from foreign exchange, NSS organic sales increased 0.7 percent, which was a 2.3 percent increase on a days-adjusted basis over the prior year period.
Third quarter NSS security sales of $417.7 million, which represents approximately 39.8 percent of total segment sales, increased 2.6 percent from the prior year quarter. Adjusted for the $1.9 million negative currency impact, organic security sales growth was 3.1 percent.
NSS operating income of $74.9 million compares to $74.1 million in the prior year quarter and $64.9 million in the second quarter of 2016. NSS adjusted EBITDA of $79.1 million was flat with the prior year quarter and increased $3.4 million from $75.7 million in the second quarter of 2016. The corresponding adjusted EBITDA margin of 7.5 percent compares to 7.6 percent in the prior year quarter and 7.2 percent in the second quarter of 2016.
Electrical & Electronic Solutions (“EES”) sales of $535.1 million compares to $423.6 million in the prior year period, an increase of 26.3 percent. Adjusting for the $8.2 million unfavorable impact from foreign exchange, $7.6 million impact from lower average copper prices and $145.1 million favorable impact from the low voltage business of the Power Solutions acquisition, EES organic sales decreased 3.1 percent, which was a 1.6 percent decrease on a days-adjusted basis.
EES operating income of $28.7 million compares to $32.5 million in the prior year quarter and $23.9 million in the second 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 $31.4 million compares to $34.3 million in the prior year period and $32.3 million in the second quarter of 2016. The corresponding adjusted EBITDA margin of 5.9 percent compares to 8.1 percent in the prior year period and 5.8 percent in the second 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 addition of the low voltage business of the Power Solutions acquisition.
Utility Power Solutions (“UPS”) sales of $371.3 million compares to $355.9 in the second quarter of 2016. As indicated in the prior three 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 $15.8 million compares to $12.0 million in the second quarter of 2016. UPS adjusted EBITDA was $21.1 million, or 5.7 percent of sales, which compares to $19.3 million, or 5.4 percent of sales, in the second quarter of 2016, driven by a sequential improvement in sales and cost discipline.
As highlighted above, in the third quarter of 2016 Anixter won a $750 million, 5-year contract to be the distributor of utility products and services serving a large investor-owned electric utility company. This win is estimated to generate $150 million per year in revenue, of which over $100 million would be incremental to our current business with the utility. Incremental shipments will begin in the fourth quarter of 2016, and are anticipated to build to full run rate levels in the first quarter of 2017.
Cash Flow and Leverage
Year-to-date we generated $238.4 million in cash flow from operations which compares to $93.7 million in the prior year period, driven primarily by working capital efficiencies. Year-to-date we have invested $24.9 million in capital expenditures which compares to $29.2 million in the prior year period. We now expect to invest approximately $35 – 40 million in capital investments, lower than our original plans, to adjust for the current business environment. As a result of strong cash flow trends from working capital initiatives we now expect to generate $280 – $300 million in cash flow from operations for the full year, an increase of $100 million to our previous free cash flow outlook.
“While our leading market positions and exposure to attractive end markets resulted in solid results in our NSS segment, our EES and UPS segments face headwinds from slow growth in industrial markets. As a result, we continue to have a relentless focus on improving our margin, cost structure and working capital efficiency,” commented Ted Dosch, Executive Vice President – Finance and CFO. “Reflecting these efforts we delivered strong cash flow from operations in the quarter, resulting in year-to-date cash from operations of $238 million. 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 are generating from our repositioned platform and working capital initiatives.”
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio improved to 52.7% from 58.2% at the end of 2015
- Weighted average cost of borrowed capital of 4.7% compares to 5.3% in the prior year quarter
- $580.0 million available under revolving lines of credit and secured accounts receivable and inventory facilities
“As we enter the fourth quarter of 2016, we expect the positive momentum in our NSS segment, driven by strength in projects with global customers, to continue,” commented Bob Eck. “While our EES segment continues to experience weakness related to industrial and manufacturing end market exposure, we are cautiously optimistic that this segment will return to growth in the fourth quarter based on recent sales trends. Finally, we expect the momentum we experienced at the end of the quarter in our UPS segment to continue based on customer trends as we exited the quarter, new customer wins and a robust pipeline. Combining our favorable outlook for our NSS segment with recently improved trends in our EES and UPS segments, we now expect full year 2016 sales growth between 21 and 22 percent, including a 24 percent favorable impact from the acquisition, a 1 percent unfavorable impact from currency fluctuations and a 1 percent unfavorable impact from lower average copper prices. The net result is a full year organic sales growth rate in the negative 1.0 percent to flat range.”
Financial Results from Continuing Operations
|Three Months Ended||Nine Months Ended|
|Sep 30,||Oct 2,||Percent||Sep 30,||Oct 2,||Percent|
|(In millions, except per share amounts)||2016||2015||Change||2016||2015||Change|
|Diluted Earnings Per Share||$||1.20||$||1.06||13||%||$||2.52||$||2.73||(8||)%|
|Diluted Weighted Shares||33.6||33.4||1||%||33.5||33.4||—||%|
The full report can be viewed here.
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