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Grainger Reports Results For The 2014 Second Quarter

July 17, 2014

Revises 2014 EPS Guidance

CHICAGO, July 17, 2014 /PRNewswire/ — Grainger (NYSE: GWW) today reported results for the 2014 second quarter ended June 30, 2014. Sales of $2.5 billion increased 5 percent versus $2.4 billion in the 2013 second quarter. There were 64 selling days in the quarter, the same as in 2013. Net earnings for the quarter decreased 5 percent to $206 million versus $218 million in 2013. Earnings per share of $2.94 decreased 3 percent versus $3.03 in 2013.

During the quarter, the company recorded a $10 million after-tax, or $0.15 per share, charge related to the transition of its employee retirement plan in Europe from a defined benefit plan to a defined contribution plan, while simultaneously transferring the existing defined benefit obligation to a third party. Adjusted earnings per share are as follows:


                                             Three Months Ended
                                                  June 30,
                                                  --------

                                                2014          2013 % Change
                                                ----          ---- --------

     Diluted Earnings Per Share as reported:   $2.94         $3.03          -3%

        Retirement plan transition in Europe    0.15

     Diluted Earnings Per Share as adjusted:   $3.09         $3.03           2%
                                               =====         =====

“We continue to be pleased with the performance of our U.S. business, including our three most recent acquisitions. The investments we are making in growth and infrastructure continue to drive share gain, particularly among our large, more complex customers who have fully embraced our value proposition,” said Chairman, President and Chief Executive Officer Jim Ryan. “We are also seeing strong growth from our single-channel businesses, which are meeting the less complex needs of smaller customers in Japan and the United States,” Ryan added. “Even so, sluggish performance elsewhere dampened results. It was a challenging quarter in Canada due to a difficult macroeconomy, coupled with our investments in IT and supply chain. We are excited about the long term growth and margin prospects for Canada and are confident that these investments will enable this business to reach its full potential. In the Other Businesses, we are making progress to improve the health of the portfolio by driving better profitability, while evaluating markets to potentially downsize or exit.” Ryan concluded, “Given our results to date, we have updated our sales and EPS guidance for the year.” The company’s previous 2014 guidance of 5 to 9 percent sales growth and earnings per share of $12.10 to $12.85 was originally issued on January 24, 2014. The company now expects 5 to 7 percent sales growth and earnings per share of $12.20 to $12.60, excluding the $0.15 per share charge for the retirement plan transition.

Company

Sales increased 5 percent in the 2014 second quarter versus the prior year, including 2 percentage points from acquisitions, net of dispositions, and a 1 percentage point reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 4 percent driven by 5 percentage points from volume, partially offset by a 1 percentage point decline from the timing of Good Friday. In 2014, Good Friday fell in April versus 2013 when it occurred in March.

The company’s gross profit margin for the quarter decreased 0.9 percentage point versus the prior year to 43.1 percent, due primarily to unfavorable mix from the acquired businesses, faster growth with lower gross margin customers and lower gross profit margins from the international businesses. Operating expenses for the company increased 6 percent, driven by the following:

    --  $20 million in incremental growth and infrastructure spending;
    --  $14 million pre-tax for the retirement plan transition costs noted
        earlier;
    --  Incremental expenses from the acquired businesses; and
    --  $7 million related to the write-off of capitalized software development
        costs primarily for Canada and Mexico.

During the quarter, the company made the decision to extend its U.S. ERP system across North America as opposed to the previous plan to run two separate ERP instances. The decision to implement a single ERP instance led to the write-off of $7 million, or $0.06 per share, of capitalized software development costs tied to the multiple instance approach.

Company operating earnings of $341 million for the 2014 second quarter decreased 3 percent versus the prior year. Excluding the retirement transition, company operating earnings increased 1 percent and net earnings decreased 1 percent.

Grainger has two reportable business segments, the United States and Canada, which represented approximately 88 percent of company sales for the quarter. The remaining operating units are included in Other Businesses and are not reportable segments.

United States

Sales for the United States segment increased 7 percent in the 2014 second quarter versus the prior year. Results for the quarter included 2 percentage points from acquisitions, net of dispositions. Excluding acquisitions, organic sales increased 5 percent driven by 6 percentage points from volume, partially offset by a 1 percentage point decline from the timing of Good Friday. Sales growth to customers in the Heavy and Light Manufacturing, Retail, Natural Resources and Commercial customer end markets contributed to the sales increase in the quarter.

Operating earnings for the United States segment increased 8 percent in the quarter driven by the 7 percent sales growth and positive operating expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter decreased 0.8 percentage point from unfavorable mix due to faster growth with lower margin customers and from the mix of lower gross margins from the acquired businesses. Operating expenses increased 3 percent including $19 million in incremental growth-related spending and the incremental expenses from the acquired businesses.

Canada

Sales in the 2014 second quarter in Canada decreased 9 percent in U.S. dollars versus the prior year and were down 3 percent in local currency. The 3 percent sales decline consisted of 2 percentage points from the timing of Good Friday and a 1 percentage point decline from volume. Lower sales to the Construction, Mining, Oil and Gas, Government, Light Manufacturing and Reseller customer end markets more than offset growth to customers in the Commercial, Forestry, Utilities, Transportation, Heavy Manufacturing and Retail end markets.

Operating earnings in Canada declined 48 percent in the 2014 second quarter and were down 45 percent in local currency. The earnings decrease was primarily driven by lower sales, a lower gross profit margin and negative operating expense leverage. The gross profit margin in Canada declined 2 percentage points versus the prior year primarily due to unfavorable foreign exchange from products sourced from the United States, inventory markdowns and higher freight costs. The increase in operating expenses was primarily driven by higher IT expenses along with some non-recurring costs. The decision during the quarter to extend the U.S. ERP instance resulted in the write-off of $4 million of software development costs related to a multiple instance approach. The company also spent an incremental $1 million on the implementation of the ERP system in Canada.

Other Businesses

Sales for the Other Businesses increased 14 percent for the 2014 second quarter versus the prior year. The sales growth consisted of 16 percentage points from volume and price, partially offset by a 2 percentage points decline from unfavorable foreign exchange. The sales increase was primarily due to strong revenue growth from Zoro and the business in Japan, which more than offset modest sales declines in Europe and Latin America.

Operating earnings for the Other Businesses were roughly breakeven in the 2014 second quarter versus $13 million in the 2013 second quarter. Lower performance versus the prior year was primarily driven by the $14 million expense incurred for the retirement plan transition in Europe and $2 million for the write-off of capitalized software development costs for Mexico. The rationale for the retirement plan change was to eliminate the company’s existing and future obligations under the defined benefit plan, align with market trends in the Netherlands and better manage employee benefits costs going forward.

Other

Other income and expense was a net $2.3 million expense in the 2014 second quarter versus a net $2.6 million expense in the 2013 second quarter. The tax rate in the quarter was 38.2 percent versus 36.5 percent in the 2013 quarter. The 2014 second quarter reflects a higher tax rate due to the effect of the retirement plan transition in Europe. Excluding the retirement plan transition, the effective tax rate for the 2014 second quarter was 37.7 percent. The 2013 second quarter tax rate reflected a benefit from a resolution of foreign tax matters in that period. Excluding this benefit, the effective tax rate for the 2013 second quarter was 37.3 percent. The company projects an effective tax rate for the year 2014 of approximately 37.5 to 37.8 percent, excluding the effect of the retirement plan transition.

Cash Flow

Operating cash flow in the 2014 second quarter was $161 million versus $210 million in the 2013 second quarter. Cash flow in the 2014 second quarter was lower than the previous year primarily due to higher inventory purchases and higher tax payments. The company used cash from operations and cash on hand to fund capital expenditures and return cash to shareholders. Capital expenditures were $90 million in the quarter versus $40 million in the second quarter of 2013. Grainger also returned $161 million to shareholders in the quarter through $76 million in dividends and $85 million to buy back 334,000 shares of stock. As of June 30, 2014, the company had 9.9 million shares remaining on its share repurchase authorization.

Year-to-Date

For the six months ended June 30, 2014, sales of $4.9 billion increased 5 percent versus $4.7 billion in the six months ended June 30, 2013. There were 127 selling days in the first six months of 2014, the same number of selling days in 2013. Net earnings decreased 2 percent to $423 million versus $429 million in the first half of 2013. Earnings per share for the six months increased 1 percent to $6.00 versus $5.97 for 2013. Excluding the charge in the 2014 second quarter, net earnings increased 1 percent and earnings per share increased 3 percent to $6.15.

W.W. Grainger, Inc., with 2013 sales of $9.4 billion, is North America’s leading broad line supplier of maintenance, repair and operating products, with operations in Asia, Europe and Latin America.

Visit www.grainger.com/investor to view information about the company, including a history of sales by segment and a podcast regarding 2014 second quarter results. The Grainger website also includes more information on Grainger’s proven growth drivers, including product line expansion, sales force expansion, eCommerce and inventory services.

Forward-Looking Statements

This document contains forward-looking statements under the federal securities law. Forward-looking statements relate to the company’s expected future financial results and business plans, strategies and objectives and are not historical facts. They are generally identified by qualifiers such as “plan”, “expects”, “guidance”, “earnings per share guidance”, “continue to”, “currently projecting”, “long term”, “potentially” or similar expressions. There are risks and uncertainties, the outcome of which could cause the company’s results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the company’s most recent annual report, as well as the company’s Form 10-K, Form 10-Q and other reports filed with the Securities & Exchange Commission, containing a discussion of the company’s business and various factors that may affect it.



                                                             CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

                                                               (In thousands, except for per share amounts)

                                                                           Three Months Ended June 30,           Six Months Ended June 30,
                                                                           ---------------------------           -------------------------

                                                                            2014                       2013         2014                      2013
                                                                            ----                       ----         ----                      ----

    Net sales                                                                       $2,506,104               $2,381,561                            $4,891,731 $4,661,996

    Cost of merchandise sold                                           1,425,418                  1,334,577    2,735,074                 2,583,276
                                                                       ---------                  ---------    ---------                 ---------

    Gross profit                                                       1,080,686                  1,046,984    2,156,657                 2,078,720

    Warehousing, marketing and administrative expense                    739,935                    696,912    1,461,567                 1,385,344
                                                                         -------                    -------    ---------                 ---------

    Operating earnings                                                   340,751                    350,072      695,090                   693,376

    Other income and (expense)

    Interest income                                                          413                        796        1,053                     1,694

    Interest expense                                                     (2,757)                   (3,201)     (5,620)                  (6,367)

    Other non-operating income                                                18                      (147)       (485)                      741
                                                                             ---                       ----         ----                       ---

    Total other expense                                                  (2,326)                   (2,552)     (5,052)                  (3,932)
                                                                          ------                     ------       ------                    ------

    Earnings before income taxes                                         338,425                    347,520      690,038                   689,444

    Income taxes                                                         129,348                    126,767      261,906                   254,164
                                                                         -------                    -------      -------                   -------

    Net earnings                                                         209,077                    220,753      428,132                   435,280
                                                                         -------                    -------      -------                   -------

    Net earnings attributable to noncontrolling interest                   3,162                      3,093        5,564                     5,782
                                                                           -----                      -----        -----                     -----

    Net earnings attributable to W.W. Grainger, Inc.                                  $205,915                 $217,660                              $422,568   $429,498
                                                                                      ========                 ========                              ========   ========

    Earnings per share                                                                   $2.97                    $3.08                                 $6.08      $6.07

      -Basic
                                                                                                                                                                  ===

      -Diluted                                                                           $2.94                    $3.03                                 $6.00      $5.97
                                                                                         =====                    =====                                 =====      =====

    Average number of shares outstanding                                  68,454                     69,665       68,576                    69,614

      -Basic
                                                                                                                                            ===

      -Diluted                                                            69,342                     70,801       69,509                    70,788
                                                                          ======                     ======       ======                    ======

    Diluted Earnings Per Share
    --------------------------

    Net earnings as reported                                                          $205,915                 $217,660                              $422,568   $429,498

    Earnings allocated to participating securities                       (2,372)                   (3,055)     (5,278)                  (6,642)
                                                                          ------                     ------       ------                    ------

    Net earnings available to common shareholders                                     $203,543                 $214,605                              $417,290   $422,856
                                                                                      ========                 ========                              ========   ========

    Weighted average shares adjusted for dilutive securities              69,342                     70,801       69,509                    70,788
                                                                          ======                     ======       ======                    ======

    Diluted earnings per share                                                           $2.94                    $3.03                                 $6.00      $5.97
                                                                                         =====                    =====                                 =====      =====


                                                 SEGMENT RESULTS (Unaudited)

                                                  (In thousands of dollars)

                                       Three Months Ended June 30,                Six Months Ended June 30,
                                       ---------------------------                -------------------------

                                        2014                          2013          2014                          2013
                                        ----                          ----          ----                          ----

    Sales

    United States                                $1,992,955                  $1,863,112                                $3,890,265 $3,637,650

    Canada                           264,046                       288,645       518,342                       571,786

    Other Businesses                 298,926                       261,282       573,832                       509,156

    Intersegment sales              (49,823)                     (31,478)     (90,708)                     (56,596)
                                     -------                       -------       -------                       -------

    Net sales to external customers              $2,506,104                  $2,381,561                                $4,891,731 $4,661,996
                                                 ----------                  ----------                                ---------- ----------

    Operating earnings

    United States                                  $365,099                    $338,884                                  $718,786   $669,772

    Canada                            19,212                        37,299        40,508                        70,155

    Other Businesses                   (456)                       12,799         8,019                        21,050

    Unallocated expense             (43,104)                     (38,910)     (72,223)                     (67,601)
                                     -------                       -------       -------                       -------

    Operating earnings                             $340,751                    $350,072                                  $695,090   $693,376
                                                   --------                    --------                                  --------   --------

    Company operating margin           13.6%                        14.7%        14.2%                        14.9%

    ROIC* for Company                                                          32.4%                        34.6%

    ROIC* for United States                                                    50.8%                        51.4%

    ROIC* for Canada                                                           13.2%                        23.7%

    *The GAAP financial statements are
     the source for all amounts used in
     the Return on Invested Capital
     (ROIC) calculation.  ROIC is
     calculated using operating earnings
     divided by net working assets (a 3-
     point average for the year-to-
     date).  Net working assets are
     working assets minus working
     liabilities defined as follows:
     working assets equal total assets
     less cash equivalents (3-point
     average of $241.0 million), deferred
     taxes, and investments in
     unconsolidated entities, plus the
     LIFO reserve (3-point average of
     $390.2 million).  Working
     liabilities are the sum of trade
     payables, accrued compensation and
     benefits, accrued contributions to
     employees' profit sharing plans, and
     accrued expenses.


                          CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

                                             Preliminary

                                      (In thousands of dollars)

    Assets                                          June 30, 2014                December 31,
                                                                                 2013
    ------                                          -------------               -------------

    Cash and
     cash
     equivalents
     (1)                                                              $331,707                  $430,644

    Accounts
     receivable
     - net                                              1,177,543                    1,101,656

    Inventories
     - net                                              1,317,467                    1,305,520

    Prepaid
     expenses
     and other
     assets                                               137,368                      130,646

    Deferred
     income
     taxes                                                 76,050                       75,819
                                                           ------                       ------

    Total
     current
     assets                                             3,040,135                    3,044,285

    Property,
     buildings
     and
     equipment -
     net                                                1,249,088                    1,208,562

    Deferred
     income
     taxes                                                  6,800                       16,209

    Goodwill                                              554,719                      525,467

    Other assets
     and
     intangibles
     - net                                                460,570                      471,805
                                                          -------                      -------

    Total assets                                                     $5,311,312                $5,266,328
                                                                     ----------                ----------

    Liabilities and
     Shareholders' Equity
    ---------------------

    Short-term
     debt                                                              $101,617                   $66,857

    Current
     maturities
     of long-
     term debt                                             33,352                       30,429

    Trade
     accounts
     payable                                              513,829                      510,634

    Accrued
     compensation
     and
     benefits                                             160,712                      185,905

    Accrued
     contributions
     to
     employees'
     profit
     sharing
     plans (2)                                             93,764                      176,800

    Accrued
     expenses                                             214,479                      218,835

    Income taxes
     payable                                                8,700                        6,330
                                                            -----                        -----

    Total
     current
     liabilities                                        1,126,453                    1,195,790

    Long-term
     debt                                                 432,485                      445,513

    Deferred
     income
     taxes and
     tax
     uncertainties                                        112,319                      113,585

    Employment-
     related and
     other non-
     current
     liabilities                                          192,031                      184,604

     Shareholders'
     equity (3)                                         3,448,024                    3,326,836
                                                        ---------                    ---------

    Total
     liabilities
     and
     shareholders'
     equity                                                          $5,311,312                $5,266,328
                                                                     ==========                ==========

    (1)              Cash and cash equivalents
                     decreased $99 million primarily
                     due to share repurchases,
                     dividend payments and
                     contributions to the profit
                     sharing plan.

    (2)              Accrued contributions to
                     employees' profit sharing plans
                     decreased $83 million due to the
                     annual cash contributions to the
                     profit sharing plan.

    (3)              Common stock outstanding as of
                     June 30, 2014 was 68,395,811
                     shares as compared with
                     68,853,938  shares at December
                     31, 2013.


                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

                                                   Preliminary

                                            (In thousands of dollars)

                                                                      Six Months Ended June 30,
                                                                      -------------------------

                                                                       2014                     2013
                                                                       ----                     ----

    Cash flows from operating activities:

    Net earnings                                                               $428,132              $435,280

    Provision for losses on accounts
     receivable                                                       4,782                    3,783

    Deferred income taxes and tax
     uncertainties                                                  (9,605)                 (1,074)

    Depreciation and amortization                                    93,796                   80,813

    Losses (gains) from non-cash charges and
     sales of assets                                                 14,576                    (868)

    Stock-based compensation                                         28,988                   31,372

    Change in operating assets and liabilities - net of
     business

    acquisitions and divestitures:

    Accounts receivable                                            (98,574)               (155,887)

    Inventories                                                    (13,497)                  57,771

    Prepaid expenses and other assets                               (4,610)                  31,369

    Trade accounts payable                                            2,852                   31,472

    Other current liabilities                                     (127,930)               (128,468)

    Current income taxes payable                                      1,601                  (2,648)

    Employment-related and other non-current
     liabilities                                                      6,712                    8,088

    Other - net                                                       1,243                  (4,180)
                                                                      -----                   ------

    Net cash provided by operating activities                       328,466                  386,823
                                                                    -------                  -------

    Cash flows from investing activities:

    Additions to property, buildings and
     equipment                                                    (156,210)                (83,175)

    Proceeds from sale of property, buildings
     and equipment                                                    5,416                    2,528

    Net cash received (paid) for business
     divestitures (acquisitions)                                     19,199                  (8,234)

    Other - net                                                           -                     100
                                                                        ---                     ---

    Net cash used in investing activities                         (131,595)                (88,781)
                                                                   --------                  -------

    Cash flows from financing activities:

    Net increase (decrease) in short-term debt                       35,049                  (9,024)

    Net (decrease) in long-term debt                                (9,538)                 (4,845)

    Proceeds from stock options exercised                            31,816                   48,142

    Excess tax benefits from stock-based
     compensation                                                    22,177                   41,690

    Purchase of treasury stock                                    (235,847)               (202,400)

    Cash dividends paid                                           (140,885)               (123,549)
                                                                   --------                 --------

    Net cash used in financing activities                         (297,228)               (249,986)
                                                                   --------                 --------

    Exchange rate effect on cash and cash
     equivalents                                                      1,420                 (11,378)
                                                                      -----                  -------

    Net change in cash and cash equivalents                        (98,937)                  36,678

    Cash and cash equivalents at beginning of
     year                                                           430,644                  452,063
                                                                    -------                  -------

    Cash and cash equivalents at end of period                                 $331,707              $488,741
                                                                               ========              ========

SOURCE W.W. Grainger, Inc.


Source: PR Newswire



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