Anixter reported third-quarter revenue and net income that imply 2013 results will be below street expectations, primarily because of emerging-market customer (13% of quarterly sales) project delays into the fourth quarter and early 2014. Additionally, heavy-truck manufacturing customers have delayed their anticipated business improvement into 2014, relative to prior expectations for strong sales in late 2013. We have modestly reduced our 2013 operating income and earnings per share forecast by 4%, but the revenue shift into 2014 coupled with slightly improved operating margins and free cash flow generation leave our fair value estimate relatively unchanged.
Anixter’s consolidated sales and adjusted operating income both declined 3% year-over-year (operating income rose 37%, when including the prior year’s $27 million impairment charge). The company’s emphasis on pricing and expense management allowed gross margins to expand 60 basis points year over year to 22.9%.
Operating margins were flat year over year at 5.9% as selling, general, and administrative spending was unchanged relative to the prior year’s quarter. The company’s focus on better working capital management has increased year-to-date operating cash flow by 52% to $192 million and has allowed the debt-capital ratio to fall to 42% relative to Anixter’s 45% target.
Based on management’s comments, we expect 2013 sales to be flat with 2012. Similarly, operating income should be unchanged year over year. Anixter continues to have positive exposure to secular increases in demand for telecom data and bandwidth growth, but low business confidence in North America (69% of quarterly sales) has slowed the company’s near-term sales growth outlook.
Despite 2013’s challenges, we expect revenue, operating income and EPS to improve in 2014 when Anixter will capitalize on an improved year-over-year backlog with emerging-market customers and the continuation of gradually improving heavy-truck demand.