Anixter International (AXE) Q4 2018 Earnings Conference Call Transcript

Anixter International (AXE)
Q4 2018 Earnings Conference Call
Jan. 29, 2019 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Anixter International fourth-quarter 2018 financial results conference call. [Operator instructions] Thank you.

I'd now like to turn the call over to the Vice President of Investor Relations Lisa Gregory. Please go ahead.

Lisa Gregory -- Vice President of Investor Relations

Great. Thank you, James, and welcome to Anixter's fourth-quarter 2018 earnings call. With me today to review our financial results are Bill Galvin, president and CEO; Ted Dosch, executive vice president and CFO; and Kevin Burns, senior vice president, investor relations and treasurer. Following our prepared remarks, we will take your questions.

Today's presentation includes both GAAP and non-GAAP financial results, which are reconciled in our earnings release and accompanying slide presentation posted on our Investor Relations website. Before we begin, I want to remind everyone that we will be making forward-looking statements, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information. With that, I will turn the call over to Bill.

Bill Galvin -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining our fourth-quarter 2018 earnings call. This morning, I will begin with an overview of our fourth-quarter financial performance, including sales and gross margin trends, as well as discuss the investments we are making in innovation and business transformation. I will then turn the call to Ted to review our financial performance in more detail and provide additional thoughts on our outlook for 2019. During our comments, we will reference the Q4 slide presentation posted on our Investor Relations website.

As you saw from this morning's release, sales in the quarter increased 5.2% to $2.1 billion, which is the highest fourth-quarter sales in our history. Our strong sales performance included organic growth in all segments, as well as record fourth-quarter sales in both our NSS and UPS segments. Adjusting for the favorable impact of the security acquisitions in Australia and New Zealand completed in the second quarter of 2018 and the unfavorable impact of lower average copper prices and generally weaker foreign currencies, organic sales increased 5.1%. Sales growth was above the midpoint of our outlook range of 4.5% to 5.5%, driven by the UPS segment, complex and global accounts customers and our security business.

In addition to strong sales growth, we were pleased to deliver meaningful improvement in gross margin driven by actions we have implemented across the business. This reflected excellent sales execution and is evidence of getting paid for the value we continue to provide to our customers. Overall, fourth-quarter 2018 GAAP earnings per diluted share was $1.22 and adjusted earnings per diluted share increased 9% from previous year to $1.53. During the quarter, we accelerated investments in innovation and business transformation with a focus on customer-facing technologies that will continue to enhance our digital capabilities and enterprise efficiencies.

We are streamlining and standardizing our global business processes as we migrate to a more efficient operating model. We will continue to develop best-in-class digital tools that will make it easier and more efficient for our customers to engage with us anywhere in the world. This innovation journey will provide significant efficiencies and become an important part of our strategy to grow revenue above market and drive long-term operational leverage and EBITDA improvement. We expect to begin seeing efficiency benefits from our business transformation next year with long-term annual run rate savings of $40 million to $60 million.

With our margin actions and short-term efficiency efforts, we expect modest EBITDA margin improvement this year with accelerated benefits next year and beyond. Let me now review our sales results by segment, beginning with NSS. As shown on Slide 6, record NSS quarterly sales of $1.1 billion increased 6.4%. Current-quarter sales included $28 million favorable impact on the security acquisitions and a $12 million unfavorable impact from currency fluctuations.

On an organic basis, NSS sales increased 4.7%. Growth was broad-based, including in all geographies and key strategic initiatives driven by global accounts, complex integrated supply programs and our security, wireless and professional audio/video businesses. Regarding end markets, we continue to experience strong growth with financial services, technology, data center and healthcare customers. By region, NSS North American sales of $820 million increased just under 2% on an organic basis.

Growth in security, wireless and professional A/V partially offset a decline in our network infrastructure business. Growth in Canada was strong as well, driven by our security business. In EMEA, NSS sales of $100 million increased 8.5% on an organic basis, driven by global technology and financial services customers. Emerging market sales of $198 million increased 16% on an organic basis with strong growth in both CALA and APAC.

We experienced strong growth in Mexico, driven by a new complex services program with a large cable operator. In Latin America, we continued to build our business with complex integrated supply programs. Finally, strength in APAC was driven by projects in Australia and Japan. Turning to the security side of the NSS business, sales of $500 million or approximately 45% of segment sales increased almost 19%, driven by recent acquisitions and strong organic growth of 12.5%.

Moving to electrical and electronics solutions on Slide 7, fourth-quarter sales of $571 million decreased by 1.8%. Adjusting for unfavorable impacts of lower average copper prices and generally weaker foreign currencies, organic sales increased to half a percent. Given a challenging comparison with Q4 2017, we highlight that on a two-year stack basis, organic sales growth was over 10%. Looking at EES by region, North American sales of $443 million were flat on an organic basis as growth with OEM customers was offset by a decline in our commercial and industrial business.

In EMEA, EES sales of $59 million declined 14% on an organic basis with modest growth in our OEM business, partially offsetting lower sales in our industrial business. As we discussed in the third-quarter call, we faced a difficult comparison due to several large projects in the Middle East in the year-ago quarter. In emerging markets, EES sales of $69 million increased 23% on an organic basis, driven by both OEM and industrial projects strength in Latin America. Our EES growth strategy remains focused on our customer access strategy, complex and global supply chain services and organic initiatives in fast-growing and strategic areas of the business.

We were pleased to be awarded a data center project in the EES business with a global technology customer estimated at $50 million in incremental revenue over the next two years. Finally, our utility power solutions segment achieved a record fourth-quarter sales of $430 million, resulting in 13% growth on an organic basis shown on Slide 8. This represents the eighth consecutive quarter of growth for this segment. Growth was broad-based with strong sales results across all geographic regions in the U.S.

and Canada. The IOU business achieved strong growth with existing customers, while the public power business had strong project activity in revenues from hurricane rebuild activities in the Gulf Coast. The fundamentals of this business and backlog and bookings continue to look good in both the U.S. and Canada.

We are focused on working with our partners and customers to deliver best-in-class service solutions and improved efficiencies. We continue to grow and gain share in this business, and believe we are well-positioned for future growth with the existing and new utility customers. Let me now turn to gross margin on Slide 9 of our presentation. Fourth-quarter gross profit increased 8% to $430 million, resulting in a gross margin of 20.3%, an increase of 50 basis points year over year and 80 basis points sequentially.

As we discussed on our third-quarter call, our gross margin in the first half of the year was impacted by increasing product costs from suppliers due to inflationary pressures included from increases in freight, employee benefits and impact on tariffs. To combat these headwinds, we have implemented actions across the business to improve gross margin. As you can see from this quarter's results, we are beginning to benefit from the actions we are taking. We believe gross margin expansion represents a significant opportunity and plan to invest the gross margin improvement in our innovation initiative, while still delivering operating margin expansion.

For 2019, our goal is to improve gross margin by approximately 20 to 40 basis points from full-year 2018 levels. We expect this improvement to continue, allowing us to invest in the innovation we discussed and position our company for the future. To summarize, our strong fourth-quarter and full-year sales performance reflected good execution by the team and benefited from a relatively stable economic backdrop. For the full year, we've delivered organic growth of 4.8%, our highest organic growth rate in seven years.

We achieved organic growth in all segments and all geographies, and believe we maintained or gained market share in all of our major businesses. As we look to 2019, the demand backdrop remains favorable in most of our geographies, as our backlog continues to increase and our pipeline is healthy. The indicators most relevant to Anixter's, such as U.S. PMI, remain in expansion territory and CAPEX spending remains solid, although growth trends have decelerated in recent months.

As we look across our regional businesses, our European business is experiencing the most uncertain economic environment, and we expect those challenges to continue for the foreseeable future. While we are concerned about some of the broader political and macroeconomic uncertainty, including ongoing trade tensions and Brexit, we've remained cautiously optimistic that the overall growth trends will continue in 2019. Based on the generally solid trends we are experiencing and the success of our focused sales initiatives, tempered by ongoing uncertainties in the external environment, our initial outlook for 2019 organic growth is in the 3% to 6% range. With that, let me turn the call over to Ted for a more detailed analysis of our results and our outlook for the first quarter of 2019.

Ted Dosch -- Executive Vice President and Chief Financial Officer

Thanks, Bill, and good morning, everyone. As a reminder, today's earnings release includes non-GAAP measures, which are reconciled to the GAAP measures in the financial tables that accompany our release and are in the appendix of our accompanying slide presentation. We believe the non-GAAP measures we disclose provide the best representation of our ongoing operational performance. Bill covered our strong sales and gross margin performance, so I will begin with operating expense.

Looking at Slide 10, fourth-quarter operating expense of $342.7 million compares to prior-year operating expense of $317.8 million. Excluding the non-GAAP operating expense items detailed on Page 11 of our release, adjusted operating expense increased 10.7% or $32.2 million to $333.8 million. As a percentage of sales, current quarter adjusted operating expense of 15.8% compares to 15%. In addition to higher volume, the primary drivers of the increase in adjusted operating expense were $7.4 million related to the acquired companies, $7.2 million related to our innovation and business transformation initiatives and inflationary impacts, including higher freight and employee expenses.

While we have taken actions to help mitigate the impact, freight expense remains a year-over-year headwind. Adjusted EBITDA was flat at $109 million. Adjusted EBITDA increased in all three business segments, offset by investment in innovation and business transformation expenses at corporate. Adjusted EBITDA margin of 5.1% compares to 5.4% in the prior year.

Let me now review the adjusted EBITDA trends by segment. Beginning with NSS, as shown on Slide 13, adjusted EBITDA increased 5.2% to $84 million. The resulting adjusted EBITDA margin of 7.5% compares to 7.6%. The change reflects gross margin improvement, offset by higher operating expense, including freight increases and incentive compensation.

On a sequential basis, NSS adjusted EBITDA increased by 30 basis points, driven by gross margin improvement. EES adjusted EBITDA increased 1.8% to $34 million, resulting in a 20-basis-point improvement in adjusted EBITDA margin to 5.9%. The increase was driven by gross margin improvement, partially offset by higher employee costs, including incentive compensation. On a sequential basis, adjusted EBITDA of $34 million compares to $37 million.

Finally, UPS adjusted EBITDA of $26 million compares to $21 million. The corresponding adjusted EBITDA margin of 5.9% compares to 5.4%. Strong performance was driven by volume growth combined with strong operating expense leverage resulting in an adjusted EBITDA leverage of 1.9 times. On a sequential basis, UPS adjusted EBITDA margin improved 50 basis points, driven by both gross margin improvement and strong operating expense leverage.

Moving down the income statement, interest expense of $19.8 million compares to $19 million. The increase was driven by higher average borrowings under the revolving lines of credit due to the recent acquisitions and to support volume-driven higher working capital requirements. We expect interest expense to increase slightly in the first quarter of 2019 from our Q4 level. During the fourth quarter, we refinanced $350 million of 5 5/8% senior notes due 2019, with $250 million of 6% senior notes due 2025, and the borrowings under the revolving lines of credit.

And we also amended and extended our revolving credit facilities to 2023. We were extremely pleased with these successful transactions in light of the volatile market conditions in the fourth quarter, and believe we have ensured adequate capital liquidity for the next several years. As a result of the refinancing, we have pushed out our debt maturities and increased our financial flexibility. Our next note maturity is 2021, and our capital structure is in line with our long-term strategic targets.Looking at the foreign exchange and other expense line, we had $7.6 million compared to $100,000 in the prior year quarter.

Excluding the $4.6 million of expense related to the loss on the extinguishment of the 2019 senior notes, the adjusted FX and other expense of $3 million compares to just $100,000 in the prior year. This increase was primarily currency driven. Turning to taxes, our fourth-quarter 2018 adjusted effective tax rate of 28.6% compares to 38.5%. For the full year, our 2018 non-GAAP ETR of 29.3% compares to 37.8% in 2017, with the favorable rate changes in both the fourth-quarter and full-year rates due primarily to the impact of the Tax Cuts and Jobs Act of 2017 and our country mix of earnings.

Our diluted share count was 34.1 million shares. Looking ahead, we would expect our share count to be approximately 34.2 million in 2019. Moving down to EPS, our adjusted diluted earnings per share of $1.53 increased by 9% or $0.12 from the year-ago quarter. As we discussed, both copper and currency were headwinds in the quarter.

The $27.5 million impact on sales translates into a $0.10 unfavorable impact on diluted EPS with a disproportionate impact on the EES segment. Turning to Slide 16, our working capital ratio of 18.2% compares to 18.4% in the prior-year quarter. This 20-basis-point improvement was driven by our ongoing focus on working capital efficiency. While working capital dollars have increased to support the higher sales growth, we continue to drive improvements in our working capital processes to enable more efficient use of our balance sheet.

We generated $138 million in cash from operations in 2018, which compares to $184 million in 2017, with the change driven by an increase in working capital to support growth in the business, despite the improvement in working capital efficiency. Looking ahead, we expect to generate cash flow from operations of $150 million to $175 million for the full-year 2019. Finally, in addition to investing $150 million in the security acquisitions, we invested $42.4 million in capital expenditures in 2018 compared to $41.1 million in 2017. We expect to invest $55 million to $60 million in capital expenditures in 2019, with the year-over-year increase primarily due to our increased investment in innovation and business transformation.

Turning to Slide 17, our fourth-quarter 2018 debt-to-capital ratio of 44.4% compares to 46.1% at year-end 2017, slightly below our target range of 45% to 50%. Our debt-to-adjusted EBITDA ratio of three times is at the high end of our target range of 2.5 to three times. Both metrics reflect the impact of the Q2 security acquisitions. A weighted average cost of borrowed capital of 5.5% compares to 5.6% at the end of 2017, and our liquidity position remains strong with total available liquidity under revolving lines of credit and secured accounts receivable and inventory facilities of $599 million at the end of the quarter.

Turning to our outlook for sales growth, as Bill said, our outlook range for full-year 2019 organic growth is 3% to 6%, which compares to 2018 organic growth of 4.8%. Based on trends in the business through the month of January and supported by generally favorable economic indicators, we are estimating first quarter 2019 organic growth to be in the 3% to 5% range. As Bill indicated, we expect gross margin to improve for the year by 20 to 40 basis points. In the fourth quarter, we saw a 50 basis point improvement in year-over-year margin.

And as we look at the first quarter, we expect a similar 40- to 50-basis-point improvement in gross margin on a year-over-year basis. Turning to operating expense, for the full year, we expect adjusted operating expense as a percent of sales to increase slightly. However, as Bill said, we expect the actions we are taking to improve gross margin will both fund investment and innovation and create operating margin expansion. Looking at the first quarter, we expect our adjusted operating expense dollars to decrease slightly on a sequential basis due to somewhat lower volume.

To further help with your modeling, I will provide our estimates for the impacts of currency, copper and acquisition on our first quarter and full-year 2019 sales, as detailed on Slide 19 of today's presentation. Based on the current value of the U.S. dollar against other currencies, we estimate a sales headwind of $25 million to $30 million for the first quarter and a headwind of $40 million to $50 million for the full year. Based on recent copper prices of approximately $2.70 a pound, we estimate unfavorable sales impacts of $10 million to $15 million in the first quarter and $25 million to $30 million for the full year.

As a reminder, average copper price was $3.14 in the first quarter of last year and $2.93 for the full year of 2018. Finally, the sales impact from the acquired businesses will be approximately $25 million in the first quarter and $50 million for the full year, reflecting an incremental 5 months of ownership. Let me conclude my comments by reiterating that we were pleased to deliver strong sales growth in the fourth quarter and for the full year. We believe we have significant opportunity to leverage our unique set of products and innovative solutions across our global network.

As we discussed, our highest priority remains improving gross margin, and we are pleased that we are beginning to see the benefits of the actions we have implemented. We are also in the early stages of our business transformation, which will deliver state-of-the-art customer-facing technologies and best-in-class enterprise efficiencies. We expect our investment and innovation to deliver significant long-term benefits with the goals of improving profitability, generating strong cash flow from operations and creating value for all of our stakeholders. With that, we will now open the call for questions. 

Questions and Answers:

Operator

[Operator instructions] And your first question comes from the line of Shawn Harrison from Longbow Research. Go ahead please. Your line is open.

Shawn Harrison -- Longbow Research -- Analyst

Good Morning. Wanted to delve into the, I guess, the slowing in the legacy in NSS business, as well as kind of the industrial business within EES. And whether this was a function of just tough comps or was there something in terms of timing or something else going on in the market, particularly, as we look forward into 2019?

Bill Galvin -- President and Chief Executive Officer

Yes. Shawn, it's Bill. The industrial one, as we said, was a really tough comps on the Q4 of last year. If you remember that EES business really started to accelerate in the Q4 of 2017.

So to us, it was actually fairly decent performance on the stack basis. On the NSS side, I believe that, that's been consistently improving since the fourth quarter of '17, which was soft, if you remember. So...

Ted Dosch -- Executive Vice President and Chief Financial Officer

Yes, Shawn. I'm not sure if you're referring to on the NSS side, slowing on the North America side, with growth rates not as high as elsewhere around the world. But that's pretty consistent with what we saw throughout the year and was not a big surprise for us. We had a couple percent growth in that North American NSS business on an organic basis.

Again, we were comping a little bit tougher comparisons. Prior year Q4 of 2017 was the best quarter of the year for NSS. And we were comparing against some high project growth and so forth. So we don't feel that, that's indicative of a weakness necessarily in that North American business, though.

Bill Galvin -- President and Chief Executive Officer

Shawn, I'd also say though that, if you remember, in 2017, we slowed down considerably in the global account because that was the first time we've seen that in many years. And it came back in '18. And a lot of the growth you saw internationally was with multinational customers. So it's a function of where these customers were spending investment and that's why you saw stronger growth outside of North America.

Shawn Harrison -- Longbow Research -- Analyst

That's very helpful. As a follow-up, if you look toward the organic growth forecast for calendar '19, if you could maybe offer up NSS, EES and UPS, whether they're going to be kind of above the midpoint of that trend line or maybe a little bit below, in terms of your expectations?

Bill Galvin -- President and Chief Executive Officer

Yes. Good question, Shawn. We can tell you that the UPS will probably be above. The trends in that continue to strengthen.

I think, the NSS will be right in there. And I think EES, because of the strong comps of 2018, will probably be just below that. So aggregating out to that point, but that's generally how it's going to look.

Shawn Harrison -- Longbow Research -- Analyst

OK. And then lastly, just on -- the gross margin was extraordinary for this quarter, up 50 basis points year over year, particularly, given the strength in UPS and the security business. So if you could maybe just go underneath the covers a little bit in terms of what exactly happened? Because usually when you see that type of volume strength in those businesses, you don't see that type of gross margin expansion?

Bill Galvin -- President and Chief Executive Officer

Yes. Shawn, we kind of talked about it on the last call and tried to give you some view into that. It is a long-term training initiative and process to really improve a lot of different areas. It's not just one piece.

And we expect this to be kind of a long-term continuous improvement process for us. And it was across the entire company and across many different aspects of where we felt we could get improvement. And look, as you're driving a global long-term strategy, sometimes you get away from the fundamentals. And I feel like we're back on that and we have a process now that we feel like we can continue to improve on.

So it was a companywide initiative and great effort by the team on all basis.

Ted Dosch -- Executive Vice President and Chief Financial Officer

Shawn, the only thing I would add to Bill's comments there, as he referred to, what we've done here. Keep in mind that, we were doing this on the heels of the most significant inflationary trends on a material cost side that we've experienced in probably pushing nearly a decade. And so for several quarters of last year, we were constantly playing catch-up in trying to pass those costs on through to the business. And we feel that we have made substantial progress here over the course of, say, the last four months of 2018, and a lot of that has to do with providing better, more timely information to our sales folks as they make pricing decisions.

Shawn Harrison -- Longbow Research -- Analyst

Perfect. Congratulations on the quarter.

Bill Galvin -- President and Chief Executive Officer

Thanks, Shawn.

Operator

[Operator instructions] Our next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead. Your line is open.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Hi, guys, good morning. Just to keep on that gross margin and the utility impact, I mean, is there a way? It seems like it technically should have been better on the underlying despite the mix from EPS. I mean, is there any way to help us understand what that mix headwind, per se, would have been in Q4?

Ted Dosch -- Executive Vice President and Chief Financial Officer

The mix of the three segments?

Allison Poliniak -- Wells Fargo Securities -- Analyst

Well, with UPS outgrowth rate, so there had to have been some level of mix headwind, I think, if I go back to the other question. Is there any way to quantify for that?

Ted Dosch -- Executive Vice President and Chief Financial Officer

Yes. The thing, I would say, Allison, to keep in mind, there was definitely a negative mix impact at the gross margin line, but not a negative mix impact at the operating margin line. If you look at that business, again, because it does have a profile with significantly lower operating expense, UPS growing faster than the other businesses did not have any material -- measurable impact on the operating margin percentage. But it did have slight negative impact at the gross margin line because of the double-digit growth that we had in that business.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Great, thanks. And then on just your comments around tempered demand, really strong outlook for '19 despite that going on. I mean, can you maybe expand on that comment? Are you seeing project delays or just not necessarily quick execution on making decisions about future projects? Any thoughts there?

Bill Galvin -- President and Chief Executive Officer

Yes. As you -- look, I think, we're not seeing and we're watching to, Allison, but we're not seeing any general slowdown of decision processes. As a matter of fact, we continue to see good project activity in many aspects of the global account side and security and so on. So for us, the -- if you remember in NSS, for instance, the acceleration, we started to see in backlog and bookings at the end of '17, we kind of missed and thought it'd be sooner in '18, but really, you could see it come through in the last three quarters of '18, right? So we continued to see that activity.

And you know, our exposure in China is limited. So we're not seeing any kind of headwinds there. And generally, we're still seeing activity that leads us to believe we can get the 3% to 5% range that Ted mentioned.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Great. Thanks so much.

Operator

And our next question comes from the line of David Manthey from Baird. Go ahead please. Your line is open.

David Manthey -- Robert W. Baird & Co. -- Analyst

Thanks. Good morning, everyone. First off, looking at Slide 20, when I read things like business transformation and innovation investments, are these code words for ERP?

Ted Dosch -- Executive Vice President and Chief Financial Officer

Dave, I would say, no. It's not code words for ERP. What we are doing, though, is very much a customer-facing business process transformation, not just to go back to those words. And so a big part of our focus is looking at our business processes, making it easier for our customers to do business with us.

But as part of that, yes, there is a IT platform as part of it. As you know, we've got a very old homegrown mainframe based system, and we've been already on a journey for the last couple of years, if you will, moving toward an integrated ERP system, but that will only take place over a period of several years.

Bill Galvin -- President and Chief Executive Officer

David, I'd add to this, too. Look, we're focused on customers, how we service our customers, how we support them, how we integrate with them and how we provide, kind of, best-in-class services. And for us to continue that journey, we need to continue to innovate in both customer-facing digital capabilities, which we've been on that journey for many years now, as well as other systems so that we can provide the data analytics and the things we need to make good proper decisions in the future. And hopefully, we painted the picture to everyone that with all the moving pieces, the margin improvement, other efficiencies that we're driving, we'll continue to drive EBITDA margin improvement and accelerate that long-term by the efficiencies we know we're going to get.

So it's been a strategic planning process that we've all been part of and thinking about how we get to those long-term goals that we know we can achieve, but we need to do some of this additional innovation to do that.

David Manthey -- Robert W. Baird & Co. -- Analyst

OK. When we're looking at what amounts to a five-year sort of systems project, can you give us a little more detail in terms of what this new platform is? Are you doing it in-house? Are you bringing in an integrator? And then when you look out to 2023 and you start to develop these full benefits, what are the sources of those benefits?

Bill Galvin -- President and Chief Executive Officer

Yes. Good question. So to clarify, as I said, we've started on this journey a couple of years ago. We've been moving toward an Oracle shop as opposed to, as I said, our in-house homegrown systems that we've relied on for so long.

And again, as a distributor, our lifeblood is all about order management, inventory management, warehouse management. That's the core of our integrated operating system going forward. But we also will be doing some conversions to global financial systems today, especially on the heels of the large acquisitions we've done more recently. We still have disparate systems across our company.

So the savings that we anticipate driving over time will largely be back office-driven. But what that doesn't even begin to touch on is the leverage we think we can drive by having the better systems, the better data analytics and so forth, which will drive even better support for the growth that we're focused on across our business. You've heard us talk about in previous calls and investor meetings and so forth about our customer access strategy. And this is really all about helping to support our growth goals as we look at the change in the marketplace and kind of the blurring of the lines, if you will, between different customers and different technologies.

Ted Dosch -- Executive Vice President and Chief Financial Officer

And I'll add to that also, David, that there's innovation in the entire supply chain that's in the market today, whether it's block chain or other types of innovation that in order to take advantage of that innovation, you have to have the capability to do that. So this allows us to then adapt very quickly to new technologies and becomes an important part of it. But again, I focus on the fact that it's -- and we called it innovation because it's so many other components. It's digital.

It's other efficiencies that we're driving in the company that will allow us to meet our long-term financial goals.

David Manthey -- Robert W. Baird & Co. -- Analyst

OK. Thanks. And then, Ted, just a couple of financial questions. First is the operating cash flow.

If my notes are right here, I think last quarter you were guiding to $160 million to $180 million for the full year and you came in at $138 million. And I'm just wondering, if that is the case, if I have that right, what led to that shortfall over the course of 90 days?

Ted Dosch -- Executive Vice President and Chief Financial Officer

Yes, Dave. You absolutely got the numbers right. On the cash flow for full year -- fourth-quarter and full-year 2018, that was lower than what we had projected at the beginning of the quarter. But as I said, it was completely driven by the higher level of working capital.

And I would tell you, across the buckets of working capital, the biggest driver, that was higher levels of inventory. So even though as I said, we improved our working capital efficiency, the 18.2% working capital as a percent of sales is the lowest we've ever had at the end of a year. But having said that, with the continual up-tick in the projects we have in our pipeline and in essence project inventory that we had on hand at year end, we did come up a little bit short of that cash flow target. So we can feel good about the working capital efficiency we drove.

But obviously, that's an indication of our internal targets were to drive even more efficiency out of that. The other thing that's clearly an impact for us as a company that closes our books on a four, four, five calendar, our December, our Q4, ended on December 28. So that hurt us a little bit also on the AR collections. Lot of companies are paying under calendar months.

So our AR -- whereas it was also up to support the higher sales, was up a little bit higher than what we would have expected, and we attribute that to the calendar timing as well.

David Manthey -- Robert W. Baird & Co. -- Analyst

OK. Thanks for that. And then last one and then I'll pass it on. In light of the investments you're making and so forth, could you give us an idea of what we should think about for the unallocated corporate items in 2019? And sort of does that -- is it even or does it increase through the year? And the same thing for D&A, I would imagine that some of these things are going to be depreciated over time.

Ted Dosch -- Executive Vice President and Chief Financial Officer

Yes. So I'll take that in reverse. The easy part is, no significant increase in D&A, because what we're developing is going to be done over a multiyear period of time. So we won't see that increase in 2019 on the depreciation side.

Separately, you're right. The bulk of these expenses that we're making in innovation are flowing through our corporate OPEX, not within one of the three individual businesses. So whereas we would expect to see that gradually go up over time, keep in mind, we are -- with the rate of spend that we ramped up over the course of 2018, including through this fourth quarter, we wouldn't see that going up significantly more from the run rate that we exited the year.

David Manthey -- Robert W. Baird & Co. -- Analyst

OK. Great. Thanks a lot guys.

Bill Galvin -- President and Chief Executive Officer

Thank you.

Operator

And there are no further questions at this time. I'd like to turn the call back over to our presenters for some closing remarks.

Bill Galvin -- President and Chief Executive Officer

Great. That concludes today's call. If you have any additional questions, please don't hesitate to reach out to Kevin or Lisa. As always, thank you for listening to the call today.

Ted Dosch -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator instructions]

Duration: 43 minutes

Call Participants:

Lisa Gregory -- Vice President of Investor Relations

Bill Galvin -- President and Chief Executive Officer

Ted Dosch -- Executive Vice President and Chief Financial Officer

Shawn Harrison -- Longbow Research -- Analyst

Allison Poliniak -- Wells Fargo Securities -- Analyst

David Manthey -- Robert W. Baird & Co. -- Analyst

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