Anixter reported quarterly sales of $1.84 billion for the quarter ended January 1, 2016, a 26.4 percent increase compared to the year-ago quarter. Gross margin of 20.2 percent compares to 22.1 percent in the prior year quarter and 22.2 percent in the third quarter of 2015.
Fourth Quarter Highlights:
• Repositioned and strengthened business through 3 strategic actions in last 18 months
• Record quarterly sales of US$1.8 billion, up 26 percent, driven by Power Solutions acquisition
• Record fourth quarter NSS sales of $972 million, up 4 percent on an organic basis
Anixter International reported quarterly sales of $1.84 billion for the quarter ended January 1, 2016, a 26.4 percent increase compared to the year-ago quarter. The current quarter and year-ago quarter each had 61 billing days. Excluding the impact of the following items, organic sales decreased by 0.5 percent year-over-year:
• $479.6 million favorable impact from the acquisition of Power Solutions
• $27.8 million unfavorable impact from the lower average price of copper
• $57.6 million unfavorable impact from the fluctuation in foreign currencies
In the fourth quarter of 2015, in connection with the acquisition of Power Solutions, our legacy Enterprise Cabling & Security Solutions ("ECS") segment was renamed Network & Security Solutions ("NSS"). The low voltage business of Power Solutions was combined with our historical Electrical and Electronic Wire & Cable ("W&C") segment and renamed Electrical & Electronic Solutions ("EES"). The high voltage business of Power Solutions forms the Utility Power Solutions ("UPS") segment.
Adjusted net income of $29.3 million compares to $36.7 million in the prior year quarter and adjusted earnings per diluted share of $0.88 compares to $1.10 in the prior year quarter. On a year-over-year basis, our earnings were negatively impacted by currency and copper by $8.8 million pre tax and $5.3 million net of tax ($0.16 diluted earnings per share). Excluding the $0.15 diluted earnings per share impact of the higher tax rate related to the first nine months of 2015 and the negative impact of currency and copper, our core adjusted diluted earnings per share would have been $1.19, an 8.2 percent increase from the prior year quarter.
"In spite of significant macro economic headwinds that affected the global economy, we delivered solid growth in our network and security businesses, driven by acceleration in our North America geography," commented Bob Eck, President and CEO. "In our EES and UPS segments, the soft industrial economy combined with even weaker commodity prices caused results to be lower than we had expected at the beginning of the quarter. Given our cautious outlook for any near term improvement in market conditions, we have taken further restructuring actions across our business and will continue to focus on margin improvement, ongoing expense discipline and working capital efficiencies."
Income Statement Detail
Gross margin of 20.2 percent compares to 22.1 percent in the prior year quarter and 22.2 percent in the third quarter of 2015. Compared to both periods, the fourth quarter decline is primarily due to the Power Solutions acquisition, with the remainder due to segment mix reflecting EES becoming a smaller percentage of consolidated results.
Operating expense of $305.6 million compares to $241.1 million in the prior year quarter. Adjusted operating expense excludes $16.1 million of expense relating to acquisition and integration-related costs of $4.1 million, a restructuring charge of $2.9 million and Latin America asset write-offs of $9.1 million, resulting in a negative impact to diluted earnings per share of $0.29.
Excluding $16.1 million and $1.5 million of expenses impacting the comparability of results in the current and prior year, respectively and $9.6 million of favorable foreign currency impact in the current quarter, and adjusting for $59.8 million of pro forma Power Solutions expense in the prior year quarter, adjusted operating expense would have been flat versus prior year. As in the first three quarters of 2015, the current quarter operating expense includes the year-over-year incremental impact of approximately $3.0 million from the previously disclosed higher pension and other employee benefit costs. Further adjusting for this expense, adjusted operating expense would have decreased 1.2 percent.
Adjusted operating income of $81.9 million, or 4.5 percent of sales, compares to $81.9 million, or 5.6 percent of sales in the prior year quarter. The reduction in operating profit margin is primarily due to the change in mix of the business arising from the Power Solutions acquisition. Including the $16.1 million of expense detailed above and $1.5 million of acquisition and integration-related costs in the prior year quarter, operating income of $65.8 million compares to $80.4 million in the prior year quarter.
Interest expense of $21.1 million increased by $6.0 million compared to the prior year quarter. The increase in interest expense results from the issuance of incremental debt used to finance the Power Solutions acquisition, partially offset by the repayment of the 5.95% Senior notes in March 2015.
Other, net expense of $8.1 million compares to $2.4 million in the prior year quarter. The current year quarter included a loss of $2.9million related to the currency devaluation of the Argentina peso and $0.9 million of costs associated with the extinguishment of debt. These items resulted in a negative impact to diluted earnings per share of $0.07.
Our fourth quarter adjusted effective tax rate was 48.3 percent, bringing our full year adjusted effective tax rate to 40.5 percent. The increase from the prior year adjusted effective tax rate of 37.5 percent was due to the change in the country mix of earnings. This 300 basis point increase in the rate resulted in a negative impact to diluted earnings per share of $0.15 related to the first nine months of 2015. The current quarter adjusted effective tax rate of 48.3 percent excludes the establishment of valuation allowances primarily in Latin America and other tax related items of $11.8 million in the current quarter which resulted in a negative impact to diluted earnings per share of $0.35.
Adjusted EBITDA of $101.8 million, or 5.5 percent of sales, compares to $95.9 million, or 6.6 percent of sales in the prior year period. The decline in adjusted EBITDA margin reflects the lower gross margin as a result of the Power Solutions acquisition and the slowdown in sales growth caused by weakness in industrial and manufacturing markets.
Segment Update
Network & Security Solutions ("NSS") sales of $971.6 million compares to $966.5 million in the prior year period, an increase of 0.5 percent. NSS organic sales increased by 3.8 percent, adjusting for the $32.0 million unfavorable impact from foreign exchange on current year sales, driven by strength in our North America and EMEA geographies.
Record fourth quarter NSS security sales of $385.5 million, which represents approximately 43 percent of total segment sales, increased 1 percent from the prior year quarter. Adjusted for the $15.1 million negative currency impact, organic security sales growth was 4.5 percent. 3 Network & Security Solutions adjusted EBITDA of $67.5 million compares to $63.5 million in the prior year quarter. The corresponding adjusted EBITDA margin of 6.9 percent compares to 6.6 percent in the prior year quarter, driven by strong sales growth and effective expense control.
Cash Flow and Leverage
We generated $91.9 million in cash flow from operations in fiscal 2015 as compared to $104.2 million in fiscal 2014. Full year capital expenditures of $28.6 million compares to $40.3 million in the prior year period. We expect to invest approximately $45 - $50 million in capital investments and generate $125 - $150 million in cash flow from operations in 2016.
"The fourth quarter and full year 2015 reflected a difficult global economic environment, which weakened as the year progressed. As a result, we announced actions in the second quarter and announced additional actions in the fourth quarter, both focused on improving our cost structure," commented Ted Dosch, Executive Vice President - Finance and CFO. "Turning to our capital structure, our capital allocation priorities include achieving our debt-to-capital target range of 45 - 50 percent by mid-2017, funded out of the strong free cash flow we expect to generate from our repositioned platform."
Key capital structure and credit-related statistics for the quarter:
• Debt-to-total capital ratio of 58.4% compares to 51.6% at the end of 2014
• Weighted average cost of borrowed capital of 4.8% compares to 4.7% in the year-ago quarter
• $346.2 million available under revolving lines of credit and secured accounts receivable and inventory facilities
Business Outlook
"As we look at the current year, we are optimistic that the positive momentum and growth trends in our Network & Security Solutions segment will continue, driven by growth in the US and Europe. The ongoing integration of the Tri-Ed business exceeded our goal of $5 million in EBITDA synergies to the combined security business in 2015, and we are applying the same discipline to the Power Solutions integration to ensure our ability to deliver on our synergy opportunities," commented Bob Eck. "Reflecting diverging trends across our business, we continue to experience softer trends in our EES and UPS segments related to their exposure to industrial and manufacturing end markets, resulting in a more cautious outlook on this portion of the business. Combining our more positive outlook in NSS with our more conservative outlook in our EES and UPS segments, we expect full year 2016 organic sales growth from continuing operations in the negative 2 percent to positive 2 percent range."