W.W. GRAINGER, INC. CHICAGO, July 17, 2015 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2015 second quarter ended June 30, 2015. Sales of $2.5 billion increased 1 percent versus $2.5 billion in the 2014 second quarter. There were 64 selling days in the quarter, the same as in 2014. Net earnings for the quarter increased 7 percent to $221 million versus $206 million in 2014. Earnings per share of $3.25 increased 11 percent versus $2.94 in 2014.
"While this continues to be a difficult economic environment, we are focusing on the things we can control," said Chairman, President and Chief Executive Officer Jim Ryan. "Despite continued softness in sales and gross profit margins from a tough industrial economy, we continue to invest for the long term while driving significant productivity to fund growth and infrastructure investments and reduce overall margin pressure. We have also leveraged our strong balance sheet with a recent $1 billion bond placement and lowered our tax rate through improved tax planning strategies. We expect the current economic conditions to continue through the end of the year and as a result we are updating our guidance," Ryan concluded. The company now expects 0 to 2 percent sales growth and earnings per share of $12.00 to $12.50 for the full year 2015. The company's previous 2015 guidance, issued on April 16, 2015, included 1 to 4 percent sales growth and earnings per share of $12.25 to $12.95.
The 2015 second quarter included charges of $2 million, or $0.02 per share, related to the restructuring at Fabory in Europe and the shutdown of the business in Brazil. During the 2014 second quarter, the company recorded a charge of $10 million after-tax, or $0.15 per share, related to the transition of its employee retirement plan for Fabory in Europe. On an adjusted basis for both years, earnings per share were as follows:
Three Months Ended
June 30,
--------
2015 2014 % Change
---- ---- --------
Diluted Earnings Per Share as reported: $3.25 $2.94 11%
Restructuring costs in Brazil and Europe 0.02
Retirement plan transition 0.15
Diluted Earnings Per Share as adjusted: $3.27 $3.09 6%
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Company
Sales increased 1 percent in the 2015 second quarter versus the prior year, including 1 percentage point from acquisitions and a 3 percentage point reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 3 percent driven by 4 percentage points from volume, partially offset by a 1 percentage point decline in price.
The company's gross profit margin for the quarter declined 0.5 percentage point versus the prior year to 42.6 percent, due primarily to faster growth with lower gross margin customers, lower supplier rebates tied to lower-than-expected volume and price deflation versus cost inflation driven by foreign exchange. Operating expenses for the company declined 3 percent driven by lower payroll and benefits. Incremental growth and infrastructure spending of $25 million was funded by $28 million in productivity savings in the quarter.
Company operating earnings of $357 million for the 2015 second quarter increased 5 percent versus the prior year. Excluding the 2014 retirement plan transition for Fabory in Europe and 2015 restructuring costs, company operating earnings increased 1 percent.
Grainger has two reportable business segments, the United States and Canada, which represented approximately 87 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 2 percent in the 2015 second quarter versus the prior year driven by 2 percentage points from volume and 1 percentage point from increased sales to Zoro, the single channel online business in the United States, partially offset by a 1 percentage point decline in price. Sales growth to customers in the Commercial, Government, Light Manufacturing and Retail customer end markets contributed to the sales increase in the quarter.
Operating earnings for the United States segment increased 1 percent in the quarter driven by the 2 percent sales growth and positive operating expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter declined 0.7 percentage point primarily driven by faster growth with larger customers, higher sales to Zoro reflecting the lower transfer price used to account for these intersegment sales and price deflation exceeding cost deflation. Excluding Zoro, gross profit margins were down 0.4 percentage point versus the prior year. Operating expenses were down in the quarter versus the prior year driven primarily by lower payroll and benefits which offset incremental growth and infrastructure spending of $23 million.
Canada
Sales for Acklands-Grainger (AGI) declined 9 percent in U.S. dollars in the second quarter of 2015 but were up 2 percent in local currency. The 2 percent sales increase consisted of 8 percentage points from WFS Enterprises, Inc. acquired on September 2, 2014, and 4 percentage points from price partially offset by a 10 percentage point decline in volume. AGI had lower sales to the Oil and Gas, Construction, Commercial, Retail, Heavy Manufacturing, Forestry and Transportation customer end markets, which were partially offset by growth to customers in the Light Manufacturing, Mining, Government and Utilities customer end markets. The business in Canada continues to be affected by weak oil and gas prices and lower commodity prices. Sales in the province of Alberta, which represents more than a third of the company's business in Canada, were down 18 percent in local currency versus the prior year. In aggregate, sales growth for the remaining provinces was positive in local currency versus the prior year.
In U.S. dollars, operating earnings in Canada declined 51 percent in the 2015 second quarter primarily driven by the 9 percent sales decline and lower gross profit margins. In local currency, operating earnings in Canada were down 44 percent primarily driven by lower gross profit margins and negative expense leverage. The gross profit margin in Canada declined 1.1 percentage points versus the prior year. Excluding WFS, gross profit margins were down 0.3 percentage point versus the prior year primarily related to unfavorable foreign exchange from products sourced from the United States and inventory write-downs related to the Toronto distribution center move, partially offset by price increases and higher freight revenue. Operating expenses increased 10 percent consisting of incremental costs from WFS, one-time costs related to the relocation to the new Toronto distribution center and spending for the SAP implementation. Expenses in Canada related to SAP are expected to continue through the end of 2015.
Other Businesses
Sales for the Other Businesses increased 7 percent, consisting of 21 percentage points of growth from volume and price, partially offset by a 14 percentage points decline from foreign exchange. Local currency sales growth in the Other Businesses was driven by Zoro U.S., Japan and Mexico.
Operating earnings for the Other Businesses were $15 million in the 2015 second quarter, which included $2 million of restructuring charges. Operating earnings in the 2014 second quarter were essentially break-even, which included a $14 million charge for the retirement plan transition for Fabory in Europe and $2 million for the write-off of capitalized software development costs for Mexico. Adjusting for these items, operating earnings increased approximately $2 million versus the prior year driven by strong performance from Zoro U.S. and the business in Japan, partially offset by an incremental $3 million in start-up costs for the for the single channel online business in Europe.
Other
Other income and expense was a net $8 million expense in the 2015 second quarter versus a net $2 million expense in the 2014 second quarter. During the 2015 second quarter, Grainger invested in a limited liability company established to produce clean energy. As part of supporting the operations of this entity, Grainger receives its share of energy tax credits. The increase in expense was driven by losses on the company's clean energy investment and higher interest expense associated with the $1 billion in long-term debt issued in early June. Tax credits earned, net of operating losses, from this investment lowered the company's effective tax rate in the 2015 second quarter and contributed approximately $0.09 per share to earnings. For the full year, energy credits are expected to result in a reduction of approximately 1.4 percentage point in the company's effective tax rate representing the $0.09 per share benefit recognized in the 2015 second quarter.
The Company's tax rate for the quarter was 35.4 percent compared to 38.2 percent in the 2014 second quarter. Excluding the benefit of the energy tax credits for the first quarter of 2015 recorded in the second quarter, the tax rate for the 2015 second quarter was 36.9 percent. In comparison, the 2014 second quarter reflected a higher tax rate due to the effect of the retirement plan transition for Fabory in Europe. Excluding the retirement plan transition cost, the tax rate was 37.7 percent in the 2014 second quarter.
The Company expects to benefit from the energy tax credits going forward and is currently projecting an effective tax rate of approximately 36.6 to 37.2 percent for 2015.
Cash Flow
Operating cash flow in the 2015 second quarter was $213 million versus $161 million in the 2014 second quarter. On April 16, 2015, the company announced a new capital structure and a plan to repurchase $3 billion of stock over the next three years. In June, the company issued $1 billion in new 30-year debt to fund part of the share repurchase program. The company bought back 1.3 million shares of stock for $293 million in the 2015 second quarter. As of June 30, 2015, the company had 13.7 million shares remaining on its share repurchase authorization. Grainger returned a total of $373 million to shareholders in the quarter including $80 million in dividends. Capital expenditures were $71 million in the quarter versus $90 million in the second quarter of 2014.
Year-to-Date
For the six months ended June 30, 2015, sales of $5.0 billion increased 1 percent versus $4.9 billion in the six months ended June 30, 2014. There were 127 selling days in the first six months of 2015, the same number of selling days in 2014. Net earnings increased 2 percent to $432 million versus $423 million in the first half of 2014. Earnings per share for the six months increased 5 percent to $6.32 versus $6.00 in the first half of 2014. Excluding the adjustments in both years noted below, net earnings increased 1 percent and earnings per share increased 4 percent. On an adjusted basis, earnings per share are as follows:
Six Months Ended
June 30,
--------
2015 2014 % Change
---- ---- --------
Diluted Earnings Per Share as reported: $6.32 $6.00 5%
Restructuring costs in Brazil and Europe 0.05
Retirement plan transition 0.15
Diluted Earnings Per Share as adjusted: $6.37 $6.15 4%
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About Grainger
W.W. Grainger, Inc., with 2014 sales of $10 billion, is North America's leading broad line supplier of maintenance, repair and operating products, with operations also 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 2015 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(s)", "earnings per share guidance", "sales guidance", "guidance", "expects", "continue to invest", "currently projecting", "working on extending", "to better position" 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,
--------------------------- -------------------------
2015 2014 2015 2014
---- ---- ---- ----
Net sales $2,522,565 $2,506,104 $4,962,226 $4,891,731
Cost of merchandise sold 1,449,133 1,425,418 2,795,052 2,735,074
--------- --------- --------- ---------
Gross profit 1,073,432 1,080,686 2,167,174 2,156,657
Warehousing, marketing and administrative expense 716,715 739,935 1,459,209 1,461,567
------- ------- --------- ---------
Operating earnings 356,717 340,751 707,965 695,090
Other income and (expense)
Interest income 277 413 469 1,053
Interest expense (4,184) (2,757) (5,819) (5,620)
Loss from equity method investment (4,302) - (4,302) -
Other non-operating income 178 18 (1,988) (485)
--- --- ------ ----
Total other expense (8,031) (2,326) (11,640) (5,052)
------ ------ ------- ------
Earnings before income taxes 348,686 338,425 696,325 690,038
Income taxes 123,451 129,348 256,944 261,906
------- ------- ------- -------
Net earnings 225,235 209,077 439,381 428,132
------- ------- ------- -------
Net earnings attributable to noncontrolling interest 4,687 3,162 7,818 5,564
----- ----- ----- -----
Net earnings attributable to W.W. Grainger, Inc. $220,548 $205,915 $431,563 $422,568
======== ======== ======== ========
Earnings per share $3.28 $2.97 $6.38 $6.08
-Basic
-Diluted $3.25 $2.94 $6.32 $6.00
===== ===== ===== =====
Average number of shares outstanding 66,652 68,454 66,939 68,576
-Basic
-Diluted 67,317 69,342 67,648 69,509
====== ====== ====== ======
Diluted Earnings Per Share
--------------------------
Net earnings as reported $220,548 $205,915 $431,563 $422,568
Earnings allocated to participating securities (2,146) (2,372) (4,360) (5,278)
------ ------ ------ ------
Net earnings available to common shareholders $218,402 $203,543 $427,203 $417,290
======== ======== ======== ========
Weighted average shares adjusted for dilutive securities 67,317 69,342 67,648 69,509
====== ====== ====== ======
Diluted earnings per share $3.25 $2.94 $6.32 $6.00
===== ===== ===== =====
SEGMENT RESULTS (Unaudited)
(In thousands of dollars)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2015 2014 2015 2014
---- ---- ---- ----
Sales
United States $2,030,633 $1,992,955 $4,002,088 $3,890,265
Canada 239,466 264,046 473,996 518,342
Other Businesses 318,898 298,926 616,697 573,832
Intersegment sales (66,432) (49,823) (130,555) (90,708)
------- ------- -------- -------
Net sales to external customers $2,522,565 $2,506,104 $4,962,226 $4,891,731
---------- ---------- ---------- ----------
Operating earnings
United States $369,533 $365,099 $735,622 $718,786
Canada 9,499 19,212 18,886 40,508
Other Businesses 15,158 (456) 24,684 8,019
Unallocated expense (37,473) (43,104) (71,227) (72,223)
------- ------- ------- -------
Operating earnings $356,717 $340,751 $707,965 $695,090
-------- -------- -------- --------
Company operating margin 14.1% 13.6% 14.3% 14.2%
ROIC* for Company 32.4% 32.4%
ROIC* for United States 48.7% 50.8%
ROIC* for Canada 5.8% 13.2%
*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 $293.0
million), deferred taxes, and
investments in unconsolidated
entities, plus the LIFO reserve
(3-point average of $389.9
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, 2015 December 31, 2014
------ ------------- -----------------
Cash and cash equivalents (1) $819,786 $226,644
Accounts receivable - net 1,197,856 1,172,924
Inventories - net 1,302,977 1,356,396
Prepaid expenses and other
assets 142,832 150,198
Deferred income taxes 60,295 61,387
------ ------
Total current assets 3,523,746 2,967,549
Property, buildings and
equipment - net 1,324,551 1,324,346
Deferred income taxes 17,360 16,718
Goodwill 486,612 506,905
Other assets and intangibles
- net 474,640 467,531
------- -------
Total assets $5,826,909 $5,283,049
---------- ----------
Liabilities and Shareholders' Equity
------------------------------------
Short-term debt $30,495 $56,896
Current maturities of long-
term debt 26,275 23,404
Trade accounts payable 498,416 554,088
Accrued compensation and
benefits 155,048 191,696
Accrued contributions to
employees' profit sharing
plans (2) 70,130 178,076
Accrued expenses 255,910 245,300
Income taxes payable 10,828 12,256
------ ------
Total current liabilities 1,047,102 1,261,716
Long-term debt 1,348,642 403,333
Deferred income taxes and tax
uncertainties 95,464 95,455
Employment-related and other
non-current liabilities 236,263 238,444
Shareholders' equity (3) 3,099,438 3,284,101
--------- ---------
Total liabilities and
shareholders' equity $5,826,909 $5,283,049
========== ==========
(1) Cash and cash equivalents
increased $593 million
primarily due to the issuance
of new long-term debt.
(2) Accrued contributions to
employees' profit sharing
plans were $108 million lower
as the June 30, 2015 balance
reflects a 6 month accrual
versus a 12 month accrual in
the prior year.
(3) Common stock outstanding as of
June 30, 2015 was 65,975,137
shares as compared with
67,432,041 shares at December
31, 2014.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
(In thousands of dollars)
Six Months Ended June 30,
-------------------------
2015 2014
---- ----
Cash flows from operating activities:
Net earnings $439,381 $428,132
Provision for losses on accounts
receivable 4,630 4,782
Deferred income taxes and tax
uncertainties 1,995 (9,605)
Depreciation and amortization 106,937 93,796
Stock-based compensation 27,043 28,988
(Gains) losses from non-cash charges and
sales of assets (51) 14,576
Losses from equity method investment 4,302 -
Change in operating assets and liabilities - net of
business
acquisitions and divestitures:
Accounts receivable (50,586) (98,574)
Inventories 26,075 (13,497)
Prepaid expenses and other current assets 6,929 (4,610)
Trade accounts payable (29,144) 2,852
Accrued liabilities (169,123) (127,930)
Current income taxes payable (847) 1,601
Employment-related and other non-
current liabilities 4,231 6,712
Other - net (2,267) 1,243
------ -----
Net cash provided by operating activities 369,505 328,466
------- -------
Cash flows from investing activities:
Additions to property, buildings and
equipment (170,873) (156,210)
Proceeds from sales of property,
buildings and equipment 10,119 5,416
Equity method investment (10,190) -
Net cash received for business
divestitures 1,114 19,199
Other - net (567) -
---- ---
Net cash used in investing activities (170,397) (131,595)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in short-term
debt (24,774) 35,049
Net increase (decrease) in long-term debt 970,250 (9,538)
Proceeds from stock options exercised 35,549 31,816
Excess tax benefits from stock-based
compensation 17,106 22,177
Purchase of treasury stock (442,595) (235,847)
Cash dividends paid (153,906) (140,885)
-------- --------
Net cash provided (used) in financing
activities 401,630 (297,228)
------- --------
Exchange rate effect on cash and cash
equivalents (7,596) 1,420
------ -----
Net change in cash and cash equivalents 593,142 (98,937)
Cash and cash equivalents at beginning of
year 226,644 430,644
------- -------
Cash and cash equivalents at end of
period $819,786 $331,707
======== ========
SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)
(In thousands of dollars)
The company supplemented the reporting of financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial measures, which the company refers to as "adjusted" measures, including adjusted operating earnings, adjusted segment operating earnings, adjusted net earnings and adjusted diluted earnings per share. Adjusted measures exclude items that may not be indicative of core operating results. The company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance. Management believes adjusted operating earnings, adjusted net earnings and adjusted diluted earnings per share are important indicators of operations because they exclude items that may not be indicative of our core operating results, and provide a better baseline for analyzing trends in our underlying businesses. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported results. These non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. The company strongly encourages investors and shareholders to review company financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The reconciliations provided below reconcile the non-GAAP financial measures adjusted net earnings, adjusted diluted earnings per share, adjusted operating earnings and adjusted segment operating earnings with GAAP financial measures:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2015 2014% 2015 2014%
---- ---- ---- ----
Operating
earnings
reported $356,717 $340,751 5% $707,965 $695,090 2%
Pension change
(Fabory) - 13,639 - 13,639
Restructuring
(Europe and
Brazil) 2,066 - 4,086 -
Subtotal 2,066 13,639 4,086 13,639
----- ------ ----- ------
Operating
earnings
adjusted $358,783 $354,390 1% $712,051 $708,729
-%
SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)
(In thousands of dollars)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2015 2014% 2015 2014%
---- ---- ---- ----
Segment operating earnings adjusted
United States 369,533 365,099 735,622 718,786
Canada 9,499 19,212 18,886 40,508
Other Businesses 17,224 13,183 28,770 21,658
Unallocated expense (37,473) (43,104) (71,227) (72,223)
------- ------- ------- -------
Segment operating earnings
adjusted $358,783 $354,390 1% $712,051 $708,729 -%
======== ======== ======== ========
Company operating margin
adjusted 14.2% 14.1% 14.3% 14.5%
ROIC* for Company 32.5% 33.0%
ROIC* for United States 48.7% 50.8%
ROIC* for Canada 5.8% 13.2%
*Adjusted ROIC is
calculated as defined on
page 9, excluding the
items adjusting
operating earnings as
noted above.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2015 2014% 2015 2014%
---- ---- ---- ----
Net earnings
reported $220,548 $205,915 7% $431,563 $422,568 2%
Pension change
(Fabory) - 10,229 - 10,229
Restructuring
(Europe and
Brazil) 1,676 - 3,504 -
----- --- ----- ---
Subtotal 1,676 10,229 3,504 10,229
----- ------ ----- ------
Net earnings
adjusted $222,224 $216,144 3% $435,067 $432,797 1%
======== ======== ======== ========
Diluted earnings
per share
reported $3.25 $2.94 11% $6.32 $6.00 5%
Pension change
(Fabory) - 0.15 - 0.15
Restructuring
(Europe and
Brazil) 0.02 - 0.05 -
---- --- ---- ---
Subtotal 0.02 0.15 0.05 0.15
---- ---- ---- ----
Diluted earnings
per share
adjusted $3.27 $3.09 6% $6.37 $6.15 4%
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SOURCE W.W. Grainger, Inc.
