W.W. GRAINGER, INC. 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.
