These results will reflect a slower market for large projects in the U.S. in the current quarter.
Ongoing business in last year’s second quarter excludes the effects of $63 million of non-recurring, low gross margin, fulfillment sales. These contributed approximately $1.9 million to net income, or 5 cents per diluted share. Despite the moderately lower level of profits, a combination of continued solid operating margins and lower working capital needs is resulting in strong cash flow, which can be used to invest in the business, reduce debt, or repurchase shares.
Diluted earnings per share for the second quarter now are expected to range between 48 to 52 cents, before losses associated with the early extinguishment of debt and the cancellation of interest rate hedge agreements. This compares with the company’s earlier guidance of diluted earnings per share of 55 to 60 cents. In the year-ago quarter including the 5 cents per share earned from the non-recurring fulfillment sales Anixter reported 60 cents per share on 14 percent fewer outstanding shares.
Commenting on the revised quarterly outlook, President and Chief Executive Officer Robert W. Grubbs said, Earnings for the second quarter will be affected by softer than expected sales, particularly in North America. During the quarter, day-to-day sales activity remained at reasonably good levels, and we expect it to stay this way. However, customers have become very cautious on larger projects. Project timetables have been pushed into the future, as customers continue to postpone big expenditures pending a more certain economic outlook. As a result, we anticipate that sales for the second quarter will be approximately $825 to $835 million. In the year-ago quarter we had sales of $920.9 million, including the non-recurring sales mentioned earlier. Excluding those sales from the prior year, the current quarter would reflect a 3 to 4 percent decrease in comparable sales.
During the current quarter we aggressively managed operating expenses and expect that they will be at or below the level seen a year ago. At the same time, gross margins should show some year-over-year improvement from eliminating the low gross margin fulfillment business. However, operating profits are expected to drop by approximately 12 to 15 percent from the reported level in the year-ago period. On the ongoing business, the decrease is expected to be approximately 5 to 8 percent, said Grubbs.
Strong Cash Flow Reduces Borrowings
A lower level of sales means we do not require additional cash investments in working capital to support growth, so we can reduce working capital requirements, Grubbs explained. When combined with operating results that are below expectations but still very healthy, we have been able to generate significant positive cash flow. This means we plan to report debt-to-total book capital levels of approximately 50 percent, including the off balance sheet receivable financing. This would compare with a ratio of 55 percent at the end of the first quarter.
In an effort to lower the overall cost on the reduced level of borrowed funds, we retired $26 million of our 8 percent Senior Notes that mature in September 2003. At the same time, we canceled a series of interest rate hedge agreements for which we had no corresponding borrowings at this time, said Grubbs. These actions will result in a total after-tax charge of $1.9 million in the quarter, but should save us about $2.3 million, after-tax, over the term of the retired obligations.
