Anixter’s 1Q EPS and Revenue Miss Expectations

GLENVIEW, Ill. — Anixter International Inc. today announced its results for the first quarter of 2020.

CEO Commentary
“Through this challenging time, Anixter continues to serve its customer and supplier partners by operating as an essential business in markets such as utility, healthcare, public safety, government, telecommunications, and cloud computing services. The value of those relationships is now more important than ever as we navigate this period of economic uncertainty. While the business was consistent with our outlook through February, Anixter was not immune to the slowdown in March. In looking toward the future, our backlog remains near record levels and we look forward to continuing to provide our customers with the essential products and services they need,” commented Bill Galvin, President and Chief Executive Officer.

Financial Results

Reported (GAAP) Results
The following results are for the 13 weeks ended April 3, 2020, compared to the 13 weeks ended March 29, 2019. Unless otherwise noted, all comparisons are versus the prior year quarter. The current quarter had 65 billing days compared to 64 billing days in the prior year quarter.

• Sales decreased 1.7% to $2.1 billion. Current quarter sales include the unfavorable impacts of lower average copper prices and weaker foreign currencies. Adjusting for these impacts, organic sales decreased 1.3%, as detailed in the table on page 9 of this release.
• Gross profit decreased 0.6% to $416.4 million. Gross margin of 20.1% increased by 20 basis points for the sixth consecutive quarter of year over year margin improvement.
• Operating expense increased by 0.2% to $345.0 million. Operating expense ratio of 16.7% compares to 16.3%.
• Operating income decreased 4.3% to $71.4 million. Operating margin of 3.4% compares to 3.5%.
• Interest expense decreased 17.6% to $16.8 million which compares to $20.4 million.
• Other, net expense of $6.6 million compares to other, net income of $1.8 million.
• The effective tax rate decreased to 25.7% which compares to 30.3%.
• Net income of $35.7 million compares to $39.1 million.
• Earnings per diluted share of $1.03 compares to $1.14.
• Working capital as a percentage of sales of 21.3% compares to 20.1%.
• Cash flow improved by $63.3 million with cash used in operations of $50.9 million which compares to a usage of $114.2 million.
• Capital expenditures of $6.9 million compares to $5.9 million.

Adjusted (Non-GAAP) Measures
Please refer to the tables on pages 9 – 12 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 10 of this release.

• Adjusted operating expense of $333.5 million compares to $335.8 million, down 0.7%. Adjusted operating expense ratio of 16.1% compares to 15.9%.
• Adjusted operating income of $82.9 million decreased 0.2% compared to $83.1 million. Adjusted operating margin of 4.0% compares to 3.9%, increasing by 10 bps and reflecting the fifth consecutive quarter of margin improvement, especially notable considering the pandemic-driven weaker revenue combined with pandemic-driven incremental expenses.
• Adjusted EBITDA of $96.0 million compares to $96.5 million, down 0.5%. Adjusted EBITDA margin of 4.6% is the same as the prior quarter.
• Adjusted effective tax rate decreased to 25.5% which compares to 29.8%.
• Adjusted net income decreased 2.2% to $44.4 million.
• Adjusted diluted earnings per share decreased 3.8% to $1.28. The extreme volatility in the financial markets resulted in a $5 million unfavorable FX impact. Excluding this impact, adjusted EPS would have been $1.40, an improvement of 5%, to $1.33 in the prior year.

Segment Update
Network & Security Solutions (“NSS”) reported first quarter sales of $1.1 billion, a decrease of 2.9%, or a decrease of 2.3% on an organic basis. Adjusted EBITDA decreased 9.7% to $70.4 million. Adjusted EBITDA margin of 6.5% compares to 7.0%.

Electrical & Electronic Solutions (“EES”) reported first quarter sales of $542.2 million, a decrease of 4.2%, or a decrease of 3.5% on an organic basis. Adjusted EBITDA decreased 1.5% to $32.1 million. Adjusted EBITDA margin of 5.9% compares to 5.8%.

Utility Power Solutions (“UPS”) reported record first quarter sales of $448.9 million, an increase of 4.4%, or 4.4% on an organic basis. Adjusted EBITDA increased 17.2% to $26.6 million. Adjusted EBITDA margin of 5.9% compares to 5.3%.

Cash Flow and Credit Metrics
We used $50.9 million of cash flow from operations in the first quarter, which compares to $114.2 million used in the prior year period. Working capital as a percentage of sales was 21.3%, which compares to 20.1% in the prior year quarter. We invested $6.9 million in capital expenditures year-to-date, which compares to $5.9 million in the prior year period.

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

• Over $280 million in cash and over $500 million in borrowing availability under secured accounts receivable, inventory facilities and revolving lines of credit
• Debt-to-total capital ratio of 41.8%, compares to 36.3% at the end of 2019
• Debt-to-adjusted EBITDA ratio of 2.8 times compares to 2.2 times at the end of 2019
• Weighted average cost of borrowed capital was 5.5% which compares to 5.3% in the prior year quarter

Ted Dosch, EVP and Chief Financial Officer, commented, “Anixter proactively increased its cash levels to provide additional flexibility during the disruption in the financial markets in March. We believe that our cash on hand, covenant-light debt, and current borrowing availability provide sufficient resources and liquidity to manage the challenges caused by the current market conditions. In addition, we have scaled back our capital expenditure spending projections by approximately 40% and expect lower levels of working capital which will further improve cash flow in these uncertain times.”

Outlook
Despite a drop in shipments in the last three weeks of the first quarter, our order book continued to grow, reaching an all-time high at the end of the quarter, with our backlog up over the prior year’s quarter and above year end 2019 levels. We believe that the work from home environment has already and will continue to spur higher levels of data center and connectivity related spending which will be positive for our NSS segment later in the year. In addition, our utility and service provider businesses are expected to benefit from remote working. While we have seen a large number of capital projects across all segments delayed, we have not experienced any cancellations of major projects by our customers. Finally, in order to manage through this unpredictable demand environment, we are aggressively reducing our operating expenses while still supporting our customers and their specific needs. Due to the uncertainty caused by the COVID-19 pandemic, Anixter is withdrawing its previously communicated outlook for 2020. We believe that once current restrictions around the globe are lifted, we will see activity pick up once again based on our backlog levels mentioned above.

On January 10, 2020, Anixter entered into a merger agreement with WESCO International Inc. (“WESCO”). The transaction is currently subject to receipt of regulatory approval in Canada and Mexico, as well as other customary closing conditions. The transaction is expected to be completed in the second or third quarter of 2020. Anixter will not be hosting a conference call with investors to discuss these results due to the merger agreement.