GLENVIEW, Ill.–(BUSINESS WIRE)–Anixter International Inc. (NYSE: AXE) today reported quarterly sales of $1.49 billion for the quarter ended October 2, 2015, a 3.6 percent increase compared to the year-ago quarter. The current quarter and year-ago quarter each had 64 billing days. Adjusting for the favorable impact from the third quarter 2014 acquisition of Tri-Ed and the unfavorable impacts of the stronger US dollar and weaker average copper prices, organic sales increased 0.7 percent year-over-year. All commentary in this release reflects continuing operations unless otherwise noted. Please refer to the tables at the end of this release for the reconciliations to GAAP from the adjusted numbers as reported.
“Third Quarter 2015 Highlights and Operating Review”
Gross margin of 22.2 percent in the current quarter was the same as the prior quarter and compares to 22.4 percent in the prior year quarter, reflecting the impact of the Tri-Ed acquisition with its lower security product gross margin.
Operating income of $78.2 million compares to $82.5 million in the prior year quarter. Excluding $8.1 million of acquisition and integration costs in the current quarter and $5.7 million in the prior year quarter, adjusted operating profit of $86.3 million compares to $88.2 million in the prior year quarter. Adjusted operating income was negatively impacted by higher amortization expense resulting from the Tri-Ed acquisition. Enterprise Cabling & Security Solutions (“ECS”) adjusted operating profit of $61.8 million compares to $52.4 million in the prior year quarter driven by strong sales growth and effective expense control. Electrical and Electronic Wire & Cable (“W&C”) adjusted operating profit of $27.6 million compares to $38.7 million in the prior year quarter, caused by the unfavorable impacts of lower copper prices and currency headwinds combined with the overall weaker macro environment, all creating significant negative operating expense leverage.
Adjusted EBITDA of $99.8 million, or 6.7 percent of sales, compares to $98.6 million, or 6.9 percent of sales, in the prior year quarter.
Adjusted net income of $40.4 million compares to $48.5 million in the prior year quarter. Versus the prior year, currency and copper had a negative impact on operating profit of $5.2 million, net of tax, and foreign exchange added incremental losses of $1.4 million, net of tax, compared to the prior year.
Adjusted earnings per diluted share of $1.21 compares to $1.46 in the prior year quarter. Current year earnings were negatively impacted by $0.20 from the currency and copper impact.
“Our ECS segment achieved record quarterly sales exceeding $1 billion, a 15 percent increase from the prior year quarter, reflecting the Tri-Ed acquisition and an acceleration in our EMEA and emerging markets geographies. Strong volume growth combined with effective expense management led to increased margin in ECS,” commented Bob Eck, President and CEO. “Our W&C segment continued to experience weaker trends, reflecting lower copper prices as well as exposure to energy and weaker industrial projects.”
Income Statement Detail
Operating expense of $252.7 million compares to $240.2 million in the prior year quarter. The current quarter and prior year quarter include $8.1 million and $5.7 million, respectively, of acquisition and integration costs associated with the Power Solutions and Tri-Ed acquisitions. Excluding these costs as well as a favorable $10.3 million impact of foreign currency, and including $14.8 million of pro forma Tri-Ed expenses in the prior year, adjusted operating expense would have increased by 2.3 percent. In addition to a volume-related operating expense increase, current quarter operating expense includes the year-over-year incremental impact of approximately $3.6 million from the previously disclosed higher pension and other employee benefit costs. Further adjusting for this, adjusted operating expense would have increased 0.9 percent.
Interest expense of $15.8 million increased by $5.5 million compared to the prior year quarter. The increase in interest expense results from the issuance of the 5.5% Senior notes due 2023 in August 2015 to fund the Power Solutions acquisition, the Senior notes due 2021 issued in September 2014 to fund the Tri-Ed acquisition and incremental interest expense from the term loan received in August 2014, partially offset by the repayment of the 5.95% Senior notes in March 2015.
Foreign exchange and other expense of $5.5 million compares to $2.0 million in the prior year quarter, primarily due to $2.2 million additional foreign exchange losses resulting from significant strengthening of the US dollar.
Our third quarter adjusted effective tax rate is 37.8 percent, bringing our full year adjusted effective tax rate to 37.5 percent, which is up 20 basis points sequentially. The increase from the prior year quarter adjusted effective tax rate of 36.4 percent was due to the change in the country mix of earnings.
Enterprise Cabling & Security Solutions (“ECS”) sales of $1,035.4 million compares to $903.9 million in the prior year period, a 14.5 percent increase, driven by an increase in security sales resulting from the Tri-Ed acquisition and strength in our emerging markets and EMEA regions. ECS organic sales increased by a strong 4.0 percent, adjusting for the $39.0 million unfavorable impact from foreign exchange on current year sales and the $128.9 million favorable impact from the Tri-Ed acquisition.
Record quarter ECS security sales of $402.4 million, which represents approximately 39 percent of total segment sales, increased 40 percent from the prior year quarter. Adjusted for the impact of Tri-Ed and the $13.8 million negative currency impact, organic security sales growth was flat.
ECS adjusted EBITDA of $71.0 million compares to $58.3 million in the prior year quarter. The corresponding margin of 6.9 percent compares to 6.5 percent in the prior year quarter, driven by strong sales growth and effective expense control.
Electrical and Electronic Wire & Cable (“W&C”) sales of $453.8 million compares to $534.1 million in the prior year period, a 15.0 percent decrease. Excluding the $24.3 million unfavorable impact from foreign exchange and the $24.9 million unfavorable impact from lower average copper prices, W&C organic sales decreased by 5.8 percent reflecting slower sales growth in all regions.
W&C adjusted EBITDA of $31.8 million compares to $43.2 million in the prior year quarter. The corresponding adjusted EBITDA margin of 7.0 percent compares to 8.1 percent in the prior year quarter. The decline in margin versus the prior quarter was caused by the unfavorable impacts of lower copper prices and currency headwinds combined with the overall weaker macro environment, all creating significant negative operating expense leverage.
As a result of the sale of Anixter’s Fasteners business in the second quarter of 2015, this business has been presented as Discontinued Operations beginning in the first quarter of 2015, and 2014 results have been restated to reflect this classification. A net loss of $2.9 million from discontinued operations was incurred in the quarter, resulting in diluted loss per share from discontinued operations of $0.09.
Cash Flow and Leverage
Net cash provided by operations was $93.7 million for the nine months ended October 2, 2015, which compares to $68.6 million in the prior year period. Year-to-date capital expenditures of $29.2 million compares to $30.5 million in the prior year period. For the full year we expect to invest approximately $40 million in capital investments while generating over $150 million in cash flow from operations.
“Strong growth in our ECS business, offset by the impacts of lower average copper prices and the stronger US dollar contributed to the third consecutive quarter in which we have delivered solid results in a challenging macro economic environment. In light of the ongoing headwinds, we continue to focus on opportunities to improve our long term cost structure and have implemented all the actions that constitute the restructuring we announced on our second quarter call which will result in $13 million of annualized cost savings,” commented Ted Dosch, Executive Vice President – Finance and CFO. “The ongoing integration of the Tri-Ed business delivered expected synergies to the combined security business in the first full year post-closing. With the closing of the Power Solutions acquisition, our focus will be on the successful integration of this business to maximize the significant synergy opportunities. With the strong free cash flow we expect to generate from our existing platform we plan to reduce our debt to our target range of 45 – 50% debt-to-capital in the next 12 – 18 months.”
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 51.8% compares to 51.6% at the end of 2014
- Weighted average cost of borrowed capital of 5.3% compares to 4.7% in the year-ago quarter
- $336.7 million available under revolving lines of credit and accounts receivable securitization facility
Strategy Update and Business Outlook
“In addition to solid execution in the business in a challenging macro environment, the current quarter was marked by significant progress on our strategic goals. Power Solutions represents the largest acquisition in Anixter’s history and transforms Anixter into one of the leading North American electrical distribution platforms, enhances our competitive position in the electrical wire and cable business and further strengthens our overall customer and supplier value proposition,” commented Bob Eck. “The strategic actions we have completed over the last 5 quarters, including the acquisition of Tri-Ed, the sale of Fasteners and the acquisition of Power Solutions, position Anixter as a leading global competitor in each of our businesses, provide a platform for substantial and sustainable long term growth, and will enable us to maximize shareholder value in both the near term and the long term.”
Eck concluded, “Based on current backlog trends we believe that momentum in our security and network infrastructure businesses will continue in the fourth quarter. While our Wire & Cable business continues to be impacted by macro-economic headwinds, including lower copper and oil prices, the acquisition of Power Solutions is a critical strategic step to increase the competitiveness and profitable growth of this business going forward. With year-to-date 2015 organic sales growth from continuing operations of 2.1 percent, we expect our full year organic sales growth to be in the 1.5 – 2.5 percent range.”
As previously announced, on October 5, 2015, Anixter completed the acquisition of the Power Solutions segment of HD Supply. Power Solutions reported fiscal 2014 revenue of $1.9 billion and adjusted EBITDA of $79 million. The acquisition is expected to be accretive to earnings by $0.50 – $0.60 in fiscal year 2016, exclusive of transaction and one-time integration expenses. We will hold an Investor Day on Monday, November 9, 2015, at which time we will discuss our growth strategies including integration plans for Power Solutions and a realignment of business segments.