GLENVIEW, Ill. — Anixter International Inc. today reported sales of $2.0 billion for the quarter ended March 30, 2018, a 3.6% increase versus the prior year quarter. Organic sales increased 1.6%, excluding the impact of the following items:
- $10.3 million favorable impact from the higher average price of copper
- $28.3 million favorable impact from the fluctuation in foreign currencies
All commentary in this release reflects first 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 $32.1 million compares to $30.9 million. Current year net income includes amortization of intangible assets, acquisition and integration costs, and other expense, which combined had a $9.8 million pre-tax and a $7.6 million after-tax impact. Prior year net income includes amortization of intangible assets, which had a $9.0 million pre-tax and $6.1 million after-tax impact. Excluding these items, adjusted net income of $39.7 million compares to $37.0 million.
Adjusted EBITDA of $83.4 million, or 4.2% of sales, compares to $89.4 million, or 4.7% of sales.
“While organic growth in both EES and UPS was consistent with our expectations when we provided our outlook for the quarter, the sales performance of NSS was below our expectations. We have experienced a healthy pick up in NSS project activity in recent months, however the timing of major projects remains weighted to the second quarter and back half of the year,” commented Bob Eck, Chief Executive Officer. “Turning to our overall results, the quarter presented more challenges than we anticipated, caused by the combination of pricing pressure on our revenues and inflationary pressures on our operating expenses, most notably, higher freight costs. As a result, we have redoubled our actions to drive gross margin improvement and align cost structure with our expected sales growth.”
Income Statement Detail
Gross margin of 19.6% compares to 20.0%. The decline in margin was caused by customer and product mix, lower vendor rebates and competitive pressure.
Operating expense of $323.2 million compares to $310.8 million. Excluding operating expense items as detailed above, adjusted operating expense of $313.4 million increased 3.9% from $301.8 million, driven by inflationary pressures, primarily in freight expense and employee benefits. The corresponding adjusted operating expense ratio of 16.0% of sales compares to 15.9%.
Operating income of $61.6 million compares to $68.9 million. Excluding operating expense items as detailed above, adjusted operating income of $71.4 million compares to $77.9 million and the corresponding adjusted operating margin of 3.6% compares to 4.1%.
First quarter U.S. GAAP effective tax rate (“ETR”) of 29.7% compares to 38.1% and non-GAAP ETR of 28.5% compares to 37.2%, with the favorable rate change due primarily to the impact of the Tax Cuts and Jobs Act of 2017.
Diluted earnings per share of $0.94 compares to $0.91, and adjusted diluted earnings per share of $1.16 compares to $1.09, a 6.4% increase versus prior year.
Network & Security Solutions (“NSS”) sales increased 1.0% to $994.8 million. Adjusted for the $15.3 million favorable impact from foreign exchange, NSS organic sales were approximately flat. NSS security sales of $415.6 million, which represents approximately 42% of segment sales, increased 3.4%. Adjusted for the $6.0 million favorable currency impact, organic security sales increased 1.9%.
NSS operating income of $53.5 million compares to $61.8 million. Excluding amortization of intangible asset expense of $3.8 million in the current quarter and $3.6 million in the prior year quarter, NSS adjusted operating income of $57.3 million compares to $65.4 million. NSS adjusted EBITDA of $58.5 million, or 5.9% of sales, compares to $66.6 million, or 6.8% of sales. The change in margin is due to customer and product mix, deflationary pressure in security and copper cabling products, lower vendor rebates and increased freight expense.
Electrical & Electronic Solutions (“EES”) sales increased 7.8% to $568.4 million. Adjusted for the $11.2 million favorable impact from foreign exchange and the $10.0 million favorable impact from higher average copper prices, EES organic sales increased 3.7%. Growth was driven by improving North America industrial project activity, ongoing growth with OEM customers and synergistic growth from sales of low voltage products to legacy Anixter customers.
EES operating income increased 12.7% to $31.4 million. Excluding $2.4 million and $1.6 million of expense, primarily amortization of intangible asset expense, from current and prior year respectively, EES adjusted operating income increased 14.3% to $33.8 million and EES adjusted EBITDA increased 14.0% to $34.7 million. The corresponding adjusted EBITDA margin of 6.1% compares to 5.8%, driven by strong expense leverage associated with the volume increase.
Utility Power Solutions (“UPS”) sales increased 4.6% to $401.0 million. Adjusted for the $1.8 million favorable impact from foreign exchange and the $0.3 million favorable impact from higher average copper prices, UPS organic sales increased 4.0%.
UPS operating income increased 0.8% to $16.4 million. Excluding $3.3 million and $3.5 million of expense, primarily amortization of intangible assets, from current and prior year respectively, UPS adjusted operating income of $19.7 million was flat. UPS adjusted EBITDA of $20.9 million, or 5.2% of sales, compares to $20.9 million, or 5.5% of sales.
Acquisition of Security Businesses
Today we announced that we have entered into definitive agreements to acquire security businesses in Australia and New Zealand for ~$151 million, dependent on the foreign exchange rate of USD versus the AUD and NZ dollar at closing, and subject to customary post-closing working capital and other adjustments. Combined, these businesses had trailing 12-month sales of USD ~$114 million and adjusted EBITDA of approximately USD ~$20 million.
Subject to certain customary closing conditions, these acquisitions are expected to close before the end of the second quarter of 2018 and will be financed using available cash and borrowing capacity. We expect these acquisitions to be accretive to earnings in the first full year of operation, exclusive of transaction, integration expenses and incremental amortization of intangible assets.
Cash Flow and Capital Allocation
In the first quarter we invested $71.2 million of cash flow in operations, compared to generating $51.5 million of cash flow from operations in the prior year quarter, driven primarily by an increase in working capital investment to support growth in the business. Working capital was 20.0% of sales, which compares to 18.9% in the prior-year quarter. We invested $10.9 million in capital expenditures in the first quarter of 2018, which compares to $8.6 million, reflecting higher capital investment in facilities and information technology.
“Consistent with our capital allocation priority to pursue acquisitions that support specific product or geographic initiatives, today we announced agreements to acquire security businesses in Australia and New Zealand. These businesses represent a compelling opportunity to enhance our competitive position in these markets, bringing new, innovative products and solutions to Anixter that we believe will be valued by both existing and new customers,” commented Ted Dosch, Executive Vice President – Finance and CFO. “Turning to our capital structure, we exited the first quarter with our debt-to-capital ratio of 46.3%, within our target range of 45-to-50%, and our debt-to-adjusted EBITDA of 3.2 times, slightly above our target range of 2.5 – 3.0 times.”
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 46.3%, compared to 46.1% at the end of 2017
- Debt-to-adjusted EBITDA ratio of 3.2 times, compared to 3.1 times at the end of 2017
- Weighted average cost of borrowed capital of 5.3%, compared to 5.6% at the end of 2017
- $627.4 million available under revolving lines of credit and secured accounts receivable and inventory facilities
“As we look ahead to the second quarter and full year, we remain cautiously optimistic regarding sales growth even with the difficulty in predicting the timing of major projects. Momentum in our day-to-day business remains steady, we are in the early stages of a recovery in our large project business in NSS, and growth trends in our EES and UPS businesses remain solid. Based on current trends, we estimate second quarter 2018 organic sales growth in the 2.0 – 3.0% range. For the full year 2018, we continue to estimate organic sales growth of 2.0 – 5.0%, cash flow from operations of $180 – $200 million and capital expenditures of $60 – $70 million,” commented Bill Galvin, President and Chief Operating Officer. “In summary, following a challenging quarter, we have a relentless focus on the profitable growth of our business through gross margin initiatives and expense actions. We believe we have a significant opportunity to leverage our unique set of products and specialized solutions across our global network, generating significant cash flow and creating value for all of our stakeholders.”Tagged with Anixter, financial