Anixter International reported quarterly sales of US$1.48 billion for the quarter ended July 3, 2015, a 10.2 percent increase compared to the year-ago quarter. The current quarter and year-ago quarter each had 63 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 3.4 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.
Anixter International reported quarterly sales of US$1.48 billion for the quarter ended July 3, 2015, a 10.2 percent increase compared to the year-ago quarter.
The current quarter and year-ago quarter each had 63 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 3.4 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.
"Our Enterprise Cabling & Security Solutions ("ECS") segment achieved quarterly sales of $1 billion for the first time in our history, reflecting strength in both our security solutions and network infrastructure businesses," commented Bob Eck, President and CEO. "Sequentially, sales improved in our Electrical and Electronic Wire & Cable ("W&C") segment, while on a year-over-year basis, the business was negatively affected by copper and slower industrial growth, especially related to the oil and gas sector in Canada. From a geographic perspective, we delivered strong organic growth in the U.S. while overall North America growth was adversely impacted by the weaker Canadian macro environment."
Operating income of $64.5 million compares to $77.2 million in the prior year quarter. Excluding $14.1 million of expense, which includes restructuring costs, an asset write-off and related business realignment expenses, adjusted operating profit of $78.6 million compares to $77.2 million in the prior year quarter. Adjusted operating income was negatively impacted by higher amortization expense resulting from the Tri-Ed acquisition. ECS adjusted operating profit of $50.9 million compares to $45.5 million in the prior year quarter and W&C adjusted operating profit of $30.0 million compares to $34.7 million in the prior year quarter.
Adjusted EBITDA of $92.7 million, or 6.3 percent of sales, compares to $86.6 million, or 6.5 percent of sales, in the prior year quarter. The decline in margin reflects the impact of mix from the strong growth in our security business, foreign exchange, lower average copper prices and competitive pricing pressure in the market.
Adjusted net income of $38.4 million compares to $43.0 million in the prior year quarter. Versus prior year, currency and copper had a $2.5 million negative impact, higher depreciation and amortization resulting from the Tri-Ed acquisition had a $2.4 million negative impact, and stranded costs associated with the sale of the Fasteners business had a $1.7 million negative impact, respectively.
Adjusted earnings per diluted share of $1.15 compared to $1.29 in the prior year quarter. Current year earnings were negatively impacted by $0.20 from the above-mentioned items.
Income Statement Detail
Gross margin of 22.2 percent in the current quarter compares to 22.3 percent in the prior quarter and 22.6 percent in the prior year quarter. The acquisition of Tri-Ed accounts for 20 basis points of the year-over-year margin decrease, with the remaining year-over-year margin decrease caused by a lower margin in ECS reflecting the faster growth of legacy security sales, in addition to currency headwinds and competitive pressures. Versus the prior quarter, the decrease in margin reflects project and product mix in the W&C segment.
Operating expense of $264.4 million compares to $226.1 million in the prior year quarter. Included in the current quarter is $14.1 million in expense of which $5.3 million is a restructuring charge which will result in annualized savings of approximately $13 million when fully realized, reflecting actions we are taking to improve efficiencies and eliminate stranded costs in the business. Further excluding the $24.0 million pro forma impact of Tri-Ed and favorable foreign currency of $9.7 million, adjusted operating expense would have increased by 4.0 percent. In addition to a volume-related operating expense increase, current quarter operating expense includes the year-over-year incremental impact of approximately $3.3 million from the previously disclosed higher pension and other employee benefit costs. Further adjusting for this, adjusted operating expense would have increased 2.7 percent.
Interest expense of $12.7 million increased by $3.7 million compared to the prior year quarter. The increase in interest expense results from 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 notes that matured in the first quarter of 2015 and lower balances in our revolving credit facilities.
Foreign exchange and other expense of $3.5 million compares to $1.9 million in the year ago period, primarily due to $1.4 million additional foreign exchange losses.
Our second quarter effective tax rate of 38.8 percent includes $0.7 million ($0.02 per diluted share) of additional expense due to the change in the full year forecasted effective tax rate. Other differences in the comparable tax rate relate to our worldwide country mix of income. Excluding the additional expense, the effective tax rate would have been 37.3 percent, as compared to the prior full year adjusted tax rate of 37.5 percent.
Segment Update
Enterprise Cabling & Security Solutions (“ECS”) sales of $1,001.6 million compares to $834.0 million in the prior year period, a 20.1 percent increase, driven by an increase in security sales, both from Tri-Ed and our legacy business. Adjusting for the $32.3 million unfavorable impact from foreign exchange on current year sales and the $149.0 million favorable impact from the Tri-Ed acquisition, ECS organic sales increased by 5.2 percent.
Record quarter ECS security sales of $393.2 million, which represents approximately 40 percent of total segment sales, increased from $226.3 million in the prior year quarter. Adjusted for the acquisition impact of Tri-Ed and the $11.5 million negative currency impact, organic security sales growth was 8 percent. The strength we have experienced for the last 3 quarters continued, reflecting the success of actions we took in 2014 to significantly strengthen our legacy security business and drive synergies with the Tri-Ed acquisition.
ECS adjusted EBITDA of $60.6 million compares to $50.5 million in the prior year quarter. The corresponding margin of 6.0 percent compares to 6.1 percent in the prior year quarter. Currency headwinds, product mix and competitive pricing pressures caused the decline in margin from the prior year.
Electrical and Electronic Wire & Cable (“W&C”) sales of $478.8 million compares to $508.9 million in the prior year period, a 5.9 percent decrease. Excluding the $21.5 million unfavorable impact from foreign exchange and the $8.9 million unfavorable impact from lower average copper prices, W&C organic sales increased by 0.1 percent.
W&C adjusted EBITDA of $34.2 million compares to $39.1 million in the prior year quarter. The corresponding adjusted EBITDA margin of 7.2 percent compares to 7.7 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.
Discontinued Operations
As a result of the sale of Anixter's Fasteners business, 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. The business delivered net income of $9.6 million in the quarter and a gain from the sale of the Fasteners business of $32.3 million, net of tax, resulting in diluted income per share from discontinued operations of $1.26.
Cash Flow and Leverage
Net cash provided by operations was $39.3 million for the six months ended July 3, 2015, which compares to $86.7 million in the prior year period. The lower cash provided by operations reflects payments related to discontinued operations. Year-to-date capital expenditures of $22.1 million compares to $17.1 million in the prior year period. For the full year we expect to invest approximately $50 million in capital investments while generating over $140 million in cash flow from operations.
“While we experienced strong growth in certain of our markets, we were impacted on a year-over-year basis by currency, copper and pricing effects consistent with the first quarter of 2015. In light of the ongoing macro economic headwinds, we are relentlessly focused on opportunities to drive cost reduction to improve our long term cost structure and profitability, as evidenced by the $13 million of future cost savings we announced today," commented Ted Dosch, Executive Vice President - Finance and CFO. "We are pleased with the progress of the ongoing integration of the Tri-Ed business, which delivered expected synergies to the combined security business in the first half of 2015. Finally, with the pending acquisition of Power Solutions, the repositioning of our portfolio will be complete at this time. Our attention will be focused on the successful integration of our recent acquisition and maximizing the synergy opportunities of our new platform. Our plans are to take a concerted effort to reduce our debt from the generation of significant free cash flow."
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 44.0% compares to 51.6% at the end of 2014
- Weighted average cost of borrowed capital of 4.7% compares to 4.6% in the year-ago quarter
- $458.7 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, the current quarter was marked by significant progress on our strategic goals. Power Solutions represents the largest acquisition in Anixter's history and will transform our business into a leading North American electrical distribution platform, enhance our competitive position in the electrical wire and cable business and further strengthen our overall customer and supplier value proposition," commented Bob Eck. "The strategic steps we have taken over the past 12 months, including the acquisition of Tri-Ed, the sale of Fasteners and the announced 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, “Looking ahead, we are optimistic that the positive trends in our security and network infrastructure businesses will continue through the second half of the year. While our Wire & Cable business has been impacted by macro-economic headwinds, including lower copper and oil prices, we believe that the acquisition of Power Solutions is a critical strategic step to increase the competitiveness and profitable growth of this business going forward. With first half 2015 organic sales growth from continuing operations of 2.8 percent, and solid sequential gains in the second quarter, we narrowed and improved our outlook for full year organic sales growth to the 2 - 4 percent range."