GLENVIEW, Ill. — Anixter International Inc. today reported results for the 2018 third quarter ended September 28, 2018. Sales increased 8.1% to $2.2 billion versus $2.0 billion in the third quarter of 2017. Operating income increased 10.8% to $89.5 million, net income increased 26.5% to $47.6 million, and diluted earnings per share increased 26.1% to $1.40, all versus the prior year quarter, respectively. Both the current and prior year quarters had 63 billing days. Unless otherwise noted, all comparisons are versus the prior year quarter.
Current quarter sales included the favorable impact of the security acquisitions completed in the second quarter of 2018 and unfavorable impacts due to the lower average price of copper and fluctuation in foreign currencies. Adjusting for these impacts, organic sales increased 7.4% as detailed in the table on page 9 of this release.
Gross profit increased 6.8% to $424.1 million. Gross margin of 19.5% decreased by 10 basis points sequentially and 20 basis points year-over-year.
Operating expense of $334.6 million compares to $316.4 million. Operating expense was 15.4% of sales, a 30 basis point improvement versus 15.7% in the prior year.
Please refer to the tables on pages 9 – 14 for the reconciliations of our reported results prepared in accordance with U.S. GAAP to the non-GAAP measures. Unless otherwise noted, all non-GAAP financial metrics that follow exclude the expense items detailed on page 11 of this release.
Adjusted operating expense of $324.3 million compares to $306.5 million, a 5.8% increase. This increase was driven by approximately $8 million of incremental expense from the acquisitions, higher volume, inflationary impacts mostly from freight and medical costs, and growth investments, including ongoing investment in technology. The corresponding adjusted operating expense ratio of 14.9% of sales improved 30 basis points compared to 15.2% in the prior year, reflecting strong expense discipline.
Adjusted operating income increased 10.1% to $99.8 million. The corresponding adjusted operating margin improved 10 basis points to 4.6%. Adjusted EBITDA increased 8.4% to $111.2 million. The corresponding adjusted EBITDA margin of 5.1% is flat compared to prior year. Adjusted net income increased 23.8% to $54.8 million and adjusted diluted earnings per share increased 23.8% to $1.61.
“Our strong sales performance was broad-based, with record third quarter sales in all segments and organic growth in all segments and geographies. Growth was driven by an acceleration in our complex services and global project businesses, our security acquisitions, and strategic initiatives including security, wireless and professional audio video,” commented Bill Galvin, President and Chief Executive Officer. “Despite challenging macro economic factors including tariffs, wage increases and broader inflationary pressures, our top priority remains improving profitability through gross margin initiatives combined with our focus on cost structure, as we balance expense discipline with growth investments in the business. Turning to overall results, we were pleased to deliver strong growth of 23.8% in adjusted diluted earnings per share.”
Network & Security Solutions (“NSS”) reported record third quarter sales of $1,138.0 million, an increase of 8.5%, or 6.4% on an organic basis. NSS security sales of $489.8 million, which represents approximately 43% of segment sales, increased 12.3%.
NSS operating income of $75.0 million compares to $67.5 million and NSS adjusted operating income increased 12.8% to $80.3 million.
NSS adjusted EBITDA increased 12.9% to $81.6 million. The corresponding adjusted EBITDA margin increased 30 basis points to 7.2%, resulting in adjusted EBITDA leverage of 1.5 times.
Electrical & Electronic Solutions (“EES”) reported record third quarter sales of $597.4 million, an increase of 7.6%, or 9.0% on an organic basis. EES operating income increased 27.1% to $34.1 million and EES adjusted operating income increased 23.1% to $35.6 million. EES adjusted EBITDA increased 22.9% to $36.5 million. The corresponding adjusted EBITDA margin increased 70 basis points to 6.1%, driven by strong expense leverage and resulting in adjusted EBITDA leverage of 3.0 times.
Utility Power Solutions (“UPS”) reported record third quarter sales of $443.6 million, an increase of 7.6%, or 8.1% on an organic basis.
UPS operating income of $19.9 million compares to $19.8 million and UPS adjusted operating income of $23.1 million was flat with prior year. UPS adjusted EBITDA of $24.1 million, or 5.4% of sales, compares to $24.8 million, or 6.0% of sales in the prior year. The change in margin was caused primarily by customer mix combined with inflationary pressures on product costs and freight expense.
Cash Flow and Capital Allocation
We have generated $102.8 million of cash flow from operations year-to-date, compared to $110.1 million in the prior year-to-date period reflecting increased working capital investment to support growth in the business. Excluding the current portion of our long-term debt, working capital was 17.4% of sales, which compares to 18.2% in the prior year quarter. We invested $32.0 million in capital expenditures year-to-date 2018, which compares to $30.9 million in the comparable year-ago period, reflecting higher capital investment in facilities and technology.
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 44.7%, compared to 46.1% at the end of 2017
- Debt-to-adjusted EBITDA ratio of 3.1 times, flat with year-end 2017
- Weighted average cost of borrowed capital of 5.4%, compared to 5.6% at the end of 2017
- $701.2 million available under secured accounts receivable, inventory facilities and revolving lines of credit
“As we look ahead to the fourth quarter, we are optimistic that solid sales growth will continue, reflecting momentum across the business and a solid demand environment, tempered by uncertainty caused by economic policies. Based on current conditions, we estimate fourth quarter 2018 organic sales growth in the 4.5 – 5.5% range, against a strong fourth quarter of 2017. For the full year, we are increasing the low end of our range by 100 basis points, and now estimate full year 2018 sales growth of 4.5 – 5.0%. As a result of our stronger sales outlook and the working capital required to support that growth, we now estimate cash flow from operations of $160 – $180 million and capital investment of $45 – $50 million,” commented Ted Dosch, EVP and Chief Financial Officer.”
Dosch continued, “As we move into the fourth quarter and 2019, we are focused on the significant opportunity to leverage our unique set of products and innovative solutions across our global network. Through our customer access strategy, combined with our comprehensive services offerings, we are positioned for sustainable revenue growth. We have strategies in place to enhance gross margin and improve our expense structure, with the goal of improving the profitability of the business, generating significant cash flow and creating value for all of our stakeholders.”Tagged with Anixter, Biggest News, financial