Anixter Reports Record Sales for Q4 2019

GLENVIEW, Ill. — Anixter International Inc. today announced its results for the fourth quarter of 2019.

“Anixter delivered another strong quarter, with organic sales growth of 6.5% for the quarter, and growth in all three segments and geographies. This organic growth was well above our outlook range of 2% to 4%, and was achieved against a strong 2018 fourth quarter. Our full year organic sales growth was 5.6%. These results demonstrate the continued focus of the Anixter team on delivering value to our customers,” commented Bill Galvin, President and Chief Executive Officer.

Financial Results

Reported (GAAP) Results

The following results are for the 14 weeks ended January 3, 2020, compared to the 13 weeks ended December 28, 2018. Unless otherwise noted, all comparisons are versus the prior year quarter. It is estimated that, due to the timing of holidays, there were 2 1/2 more effective selling days in the fourth quarter of 2019 compared to 2018.

• Sales increased 6.3% to $2.3 billion. Current quarter sales include the unfavorable impacts of lower average copper prices and generally weaker foreign currencies. Adjusting for these impacts, organic sales increased 6.5%, as detailed in the table on page 10 of this release.
• Gross profit increased 7.1% to $460.5 million. Gross margin of 20.4% increased by 15 basis points.
• Operating expense increased by 9.4% to $375.1 million. Operating expense ratio of 16.7% compares to 16.2%.
• Operating income decreased 2.2% to $85.4 million. Operating margin of 3.8% compares to 4.1%.
• Interest expense of $18.8 million compares to $19.8 million.
• Other, net income of $3.1 million compares to other, net expense of $7.6 million.
• The effective tax rate of (45.1)% compares to 30.2%. (The full year effective tax rate of 10.4% compares to 30.0%).
• Net income of $101.0 million compares to $41.8 million.
• Earnings per diluted share of $2.93 compares to $1.22.
• Working capital as a percentage of sales of 18.2% compares to 18.4%.

The following results are for the 53 weeks ended January 3, 2020, compared to the 52 weeks ended December 28, 2018.

• Cash flow generated from operations of $227.9 million compares to $137.7 million.
• Capital expenditures of $40.0 million compares to $42.4 million.

Adjusted (Non-GAAP) Measures

Please refer to the tables on pages 10 – 16 for the reconciliations of our reported results prepared in accordance with U.S. GAAP (“GAAP”) to the non-GAAP measures. Unless otherwise noted, all non-GAAP financial metrics that follow exclude the expense items detailed on page 12 of this release, with the majority of these expenses related to the Merger Agreement announced on January 13, 2020.

• Adjusted operating expense of $353.7 million compares to $333.8 million, up 6.0%. Adjusted operating expense ratio of 15.7% compares to 15.8%. The increase in adjusted operating expense is primarily due to $16 million of expenses related to an extra week of expenses in 2019 due to our fiscal calendar.
• Adjusted operating income of $106.8 million increased 11.0% compared to $96.2 million.
• Adjusted operating margin of 4.7% compares to 4.5%.
• Adjusted EBITDA of $120.8 million compares to $108.5 million, up 11.3%. Adjusted EBITDA margin of 5.4% compares to 5.1%.
• Adjusted effective tax rate of 17.4% compares to 28.6%. (The full year adjusted effective tax rate of 24.8% compares to 29.3%).
• Adjusted net income increased 43.7% to $75.1 million.
• Adjusted diluted earnings per share increased 42.5% to $2.18.

Effective Tax Rate

The fourth quarter 2019 GAAP effective tax rate was (45.1)% and the adjusted non-GAAP effective tax rate was 17.4%. This decrease was due to a change in country mix of earnings and associated tax benefits from our continued movement to a U.S.-center-led business model, with the major impact coming from a lower U.S. tax rate on foreign derived income and the ability to utilize foreign tax credits, previously fully reserved. The fourth quarter 2019 GAAP effective tax rate includes a $45 million reversal of valuation allowances, and both the GAAP and adjusted rates reflect an adjustment to account for the change in the full year effective tax rate. The full year GAAP effective tax rate was 10.4% and the full year adjusted effective tax rate was 24.8%.

Ted Dosch, EVP and Chief Financial Officer, commented, “Our strong organic growth, continued gross margin improvement, and strong expense discipline enabled us to drive an increase in adjusted EBITDA margin of 30 basis points over the fourth quarter of 2018 and operating leverage of 1.8 times.”

Segment Update

Network & Security Solutions (“NSS”) reported record fourth quarter sales of $1.2 billion, an increase of 7.7%, or 8.0% on an organic basis. NSS security sales of $527.2 million, which represents approximately 44% of segment sales, increased 7.7%. Adjusted EBITDA increased 8.3% to $90.4 million. Adjusted EBITDA margin of 7.5% is the same as prior quarter.

Electrical & Electronic Solutions (“EES”) reported record fourth quarter sales of $598.9 million, an increase of 4.8%, or increase of 5.0% on an organic basis. Adjusted EBITDA increased 20.8% to $40.6 million. Adjusted EBITDA margin of 6.8% compares to 5.9%.

Utility Power Solutions (“UPS”) reported record fourth quarter sales of $448.9 million, an increase of 4.4% on a reported and on an organic basis. Adjusted EBITDA decreased 11.0% to $22.7 million. Adjusted EBITDA margin of 5.0% compares to 5.9%.

Cash Flow and Credit Metrics

We generated $227.9 million of cash flow from operations year-to-date, which compares to $137.7 million generated in the prior year period, driven by both stronger earnings and working capital performance. Working capital as a percentage of sales was 18.2%, which compares to 18.4% in the prior year quarter. We invested $40.0 million in capital expenditures year-to-date, reflecting investment in information technology and facilities, which compares to $42.4 million in the prior year period.

Key capital structure and credit-related statistics for the quarter:

• Debt-to-total capital ratio of 36.3%, compares to 44.4% at the end of 2018
• Debt-to-adjusted EBITDA ratio of 2.2 times compares to 3.0 times at the end of 2018
• Weighted average cost of borrowed capital of 5.5% is flat to the prior year quarter
• Over $780 million available under secured accounts receivable, inventory facilities and revolving lines of credit

Outlook

Galvin commented, “We continue to see generally positive sales trends in the business, based on our solid backlog and pipeline, and discussions with our customers and suppliers.”

First Quarter Outlook

Our outlook for the first quarter sales growth is 2% – 5%, and also organic growth of 2% – 5%. This outlook is being compared to a strong 2019 first quarter, which had an 8% organic growth rate. The cumulative two year growth rate would be 12% at the mid point of the outlook range.

Full Year 2020 Outlook

We are establishing our full year 2020 sales outlook of 1% – 5%. After adjusting for copper and foreign exchange, the organic sales growth outlook is 1% – 5%.

Based on our outlook for mid single digit sales growth and the related investment in working capital to support that growth, combined with our ongoing investment in innovation and business transformation, we estimate full year cash flow from operations of $175 – $225 million and capital expenditures of $45 – $50 million, which will result in free cash flow of $125 – $180 million.

Subsequent Event

On January 13, 2020, Anixter and WESCO International, Inc. (WESCO) announced that their boards of directors have unanimously approved a definitive merger agreement under which WESCO will acquire Anixter in a transaction valued at approximately $4.5 billion. Under the terms of the agreement, each share of Anixter common stock will be converted into the right to receive $70.00 in cash (subject to increase), 0.2397 shares of WESCO common stock and preferred stock consideration valued at $15.89, based on the value of its liquidation preference. Based on the closing price of WESCO’s common stock on January 10, 2020 and the liquidation preference of the WESCO preferred stock consideration, the total consideration represents approximately $100 per Anixter share, giving effect to the downside protection. Based on the transaction structure and the number of shares of WESCO and Anixter common stock currently outstanding, it is anticipated that WESCO stockholders will own 84% and Anixter stockholders will own 16% of the combined company.

For more information regarding the details of this transaction, please refer to our public filings on Anixter’s website at http://investors.anixter.com/financials/sec-filings.

Anixter will not be hosting a conference call with investors to discuss these results due to the merger agreement with WESCO.