Glenview, IL - Anixter International Inc. reported sales of $1.56 billion for the quarter ended September 27, 2013, a 3.2 percent decrease compared to the year ago quarter. The year-over-year reported sales decline would have been approximately 2.7 percent excluding the negative impact of the previously reported conclusion of a large security solutions contract in the fourth quarter of 2012. Organic sales, which excludes the impact of the following two items, declined by 2.2 percent year-over-year:
- $9.5 million from the unfavorable effect of copper pricing
- $6.6 million from the unfavorable effect of foreign exchange
The company's third quarter of 2013 results included a net $4.7 million after-tax benefit primarily related to closing prior tax years and related interest. Our third quarter of 2012 results included an impairment charge of $27.2 million and an inventory lower-of-cost-or-market adjustment of $1.2 million, resulting in a total non-cash pre-tax charge of $28.4 million (after-tax $27.4 million). Due to the change in the country mix of the full year forecast of earnings, both quarterly periods were negatively impacted by an increase in the annual tax rate. All of the results from continuing operations and year-over-year comparisons herein exclude the impact of these items and reconciliations have been provided in the supplemental information at the end of this release.
Adjusted earnings per diluted share from continuing operations of $1.52 compares to $1.43 in the year ago quarter. Current quarter adjusted earnings per diluted share of $1.52 also includes an unfavorable impact of the lower average price of copper of $0.04 per diluted share.
Operating income in the quarter of $92.4 million was adversely impacted by the slowdown in our Canadian markets and delays in previously awarded projects in both our Wire and Cable and Enterprise Cabling and Security Solutions segments. Partially offsetting the challenging demand environment was an improvement in gross margin. Adjusted operating income in the year ago quarter was $95.7 million. Operating margin of 5.9 percent increased from 5.4 percent in the previous quarter, including sequential improvement in all segments. Versus the prior year, operating margin was flat on an adjusted basis. Adjusted net income from continuing operations of $50.4 million compares to adjusted net income of $48.0 million in the year ago quarter.
“Overall the third quarter was challenging, as we experienced an uneven recovery in global markets. Nevertheless we are encouraged by the significant improvement in sales and profitability in our OEM Supply segment, sales growth in all three segments in Europe, and improving margin trends in all segments,” commented Bob Eck, President and CEO. “Even in a slow growth environment we have demonstrated the discipline to manage through short term challenges while continuing to invest for long term growth.”
Income Statement Detail
Gross margin of 22.9 percent for the third quarter of 2013 compares to 22.5 percent in the second quarter of 2013 and an adjusted 22.4 percent in the year ago quarter that excludes the $1.2 million inventory adjustment. The increase compared to the prior year reflects improved gross margin in all segments.
Operating expenses of $264.6 million for the third quarter of 2013 increased 0.1 percent over the prior year quarter. Excluding the impact of foreign exchange, operating expenses increased 0.3 percent year-over-year compared to an organic sales decrease of 2.2 percent. Interest expense of $11.3 million decreased by $5.3 million compared to the prior year quarter due to the redemption of the convertible notes in the first quarter of 2013. Foreign exchange and other expense of $1.7 million decreased $1.5 million from the prior year quarter primarily due to the interest income of $0.7 million as a result of closing prior tax years. Excluding the items identified in the supplemental information, our annual effective tax rate is 36 percent, which is the rate we expect for the full year based on our full year forecast and change in the country mix of earnings.
Enterprise Cabling and Security Solutions (“ECS”) sales of $804.3 million compares to $837.0 million in the prior year period. The 3.9 percent decline was caused by the slowing of our Canadian market, the impact of the previously disclosed Security Solutions contract and on-going macroeconomic weakness in the Emerging Markets regions. ECS sales would have declined 2.9 percent excluding the impact of the Security Solutions contract. We continue to experience a slow recovery in our US markets as many customers continue to delay investments. Organically, sales declined 3.6 percent.
Sequentially, global sales declined 1.2 percent from the second quarter of 2013, caused by weakness in the North America and Emerging Markets regions, partially offset by the improved performance of the segment’s Europe markets. Security sales increased by 2.7 percent over the prior year quarter, and would have increased by 7.3 percent excluding the same concluded contract.
ECS operating income of $42.5 million compares to adjusted operating income of $47.2 million in the year ago quarter. The year-over-year decrease was caused primarily by lower volume in the segment’s Emerging Markets and Canada geographies. Operating margin for ECS of 5.3 percent compares to 5.6 percent in the year ago quarter. Sequentially, operating margin improved 10 basis points versus the second quarter, reflecting reduced operating expenses.
Electrical and Electronic Wire and Cable (“W&C”) achieved third quarter sales of $528.6 million, a 6.7 percent decrease from the prior year period, caused by the slowing of our Canadian and Latin American markets, which resulted from a decrease in the number of large projects, primarily in the mining and renewable energy customer verticals, and the negative impact of a decline in copper pricing. Excluding the $9.5 million unfavorable impact from a $0.29 decline in the average price of copper, and the $5.2 million unfavorable impact from foreign exchange, organic sales decreased by 4.1 percent. Sequentially, global sales were flat versus the second quarter of 2013, reflecting the slowdown in Canada and the delay of several large projects.
Year-to-date, Industrial Communications and Control sales of $179 million continue to reflect strong growth, up 16 percent over the prior year period, primarily driven by growth in North America.
Operating income of $41.5 million compares to adjusted operating income of $48.2 million in the year ago quarter. The year-over-year decrease was caused primarily by lower volume in the segment’s North America and Latin America geographies and the impact of lower average copper prices. Operating margin of 7.9 percent compares to 7.2 percent in the second quarter of 2013 and an adjusted operating margin of 8.5 percent in the year ago quarter. The increase in sequential margin reflects both improved gross margin and improved expense management while the decline in year-over-year margin was caused by weaker geographic and product mix combined with negative cost leverage due to lower copper pricing.
OEM Supply (“OEM”) sales of $224.7 million increased by 9.3 percent from the prior year quarter, reflecting the ramp up of a contract in Europe and an improvement in North America heavy truck production levels versus the downturn in the prior year quarter. Excluding the $1.6 million favorable impact from foreign exchange, organic sales increased by 8.5 percent. On a sequential basis, sales declined 4.4 percent driven by the typical seasonality in OEM manufacturing activity.
Operating income of $8.4 million compares to adjusted operating income of $0.3 million in the year ago quarter and compares to $5.7 million in the previous quarter. Operating margin of 3.7 percent compares to adjusted operating margin of 0.2 percent in the prior year quarter and 2.4 percent in the second quarter of 2013.
Cash Flow and Leverage
In the quarter, the company generated $79.9 million of cash from operations bringing the year-to-date cash flow from operations to $191.6 million. This compares to $125.9 million of cash from operations through the third quarter of 2012.
“Our disciplined working capital and cash management processes are even more critical in the current uncertain economic environment. With our focus on capital management and our expectation of a continued slow growth environment, we expect continued positive cash flow in the fourth quarter,” commented Ted Dosch, Executive Vice President and CFO. “Our financial position continues to be very strong; we constantly evaluate the optimal use of our funds, and we remain committed to investing in our growth initiatives and returning excess capital to our shareholders, as we have done consistently over the past five years.”
Key capital structure and credit-related statistics for the quarter:
- Debt-to-total capital ratio of 42.8 percent compares to 50.3 percent at the end of 2012
- Weighted average cost of borrowed capital of 5.1 percent compares to 6.3 percent in the year ago quarter
- $417.5 million of availability under bank revolving lines of credit at quarter end
- $215 million of outstanding borrowings under the $300 million accounts receivable securitization facility at quarter end
“While the pace of the recovery was slower than we had expected at the beginning of the quarter, we believe market conditions across our businesses are gradually improving. We experienced some delays in shipments across all of our businesses, resulting in some revenue that we expected to realize in the third quarter shifted into the fourth quarter and early 2014. As a result, we now expect to deliver fourth quarter organic sales growth in the low single digit range, which will result in relatively flat sales performance for the full year.” Eck concluded, “We have taken aggressive measures to ensure our cost structure is aligned with the current slow growth environment, while continuing to invest in our strategic growth initiatives, including security, industrial communication and control, in-building wireless and e-commerce. As companies continue their relentless focus to reduce costs, our business model, which is based on helping our customers lower their supply chain costs and reduce execution risk, is of even greater value. We are well positioned financially, operationally and strategically to capitalize on opportunities in our markets.”
Financial Results From Continuing Operations
(In millions, except per share amounts)
|Three Months Ended||Nine Months Ended|
|Sep 27,||Sep 28,||Sep 27,||Sep 28,|
|2013||2012||Percent Change||2013||2012||Percent Change|
|Diluted Earnings Per Share||$||1.62||$||0.59||175||%||$||4.28||$||3.51||22||%|
|Diluted Weighted Shares||33.1||33.5||-1||%||33.2||34.0||-2||%|