Grainger Reports Results For The 2016 First Quarter

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Narrows 2016 Sales and EPS Guidance
Quarterly Summary
- Sales of $2.5 billion, up 3 percent
- Reported EPS of $2.98, down 3 percent
- Adjusted EPS of $3.18, up 3 percent

CHICAGO, April 18, 2016 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2016 first quarter ended March 31, 2016.  Sales of $2.5 billion increased 3 percent versus $2.4 billion in the first quarter of 2015.  There were 64 selling days in the 2016 first quarter, one more than the 2015 first quarter.  On a daily basis, sales in the quarter increased 1 percent versus the prior year. Net earnings for the quarter of $187 million were down 12 percent versus $211 million in 2015.  Earnings per share of $2.98 declined 3 percent versus $3.07 in 2015. 

The first quarter contained the following restructuring items:


Three Months Ended
March 31,





2016

2015

% Change

Diluted Earnings Per Share as reported:

$2.98

$3.07

(3)%

   Restructuring (United States)

0.16



   Restructuring (Canada)

0.04



   Restructuring (Other Businesses)


0.03


         Subtotal

0.20

0.03


Diluted Earnings Per Share as adjusted:

$3.18

$3.10

3%

 

"Revenue and share gains are tracking as we expected given the tough economic environment," said Chairman, President and Chief Executive Officer Jim Ryan.  "In our U.S. business, share gains with large and small businesses continue to outpace our performance with medium-sized customers.  We continue to see price and gross margin pressure driven primarily by the low inflation economic environment and faster growth from lower gross margin customers.  At the same time, we have reduced our operating expenses to offset some of the gross margin decline.  In early February, we reached a significant milestone, successfully implementing SAP in Canada.  We now have our North American business running on one platform, which will drive better service and increased productivity over time.  In addition, I continue to be very pleased with the strong growth of our single channel businesses."  Ryan concluded, "Despite the current short-term uncertainty, we will continue to invest in the business to drive long term results."

The company also narrowed its 2016 sales and earnings per share guidance for the year and now expects sales growth of 0 to 6 percent and earnings per share of $11.00 to $12.80.  The company's previous 2016 guidance, communicated on January 26, 2016, was sales growth of -1 to 7 percent and earnings per share of $10.80 to $13.00.

Company
Sales increased 3 percent and 1 percent daily in the 2016 first quarter versus the prior year.  The daily sales performance included a 4 percentage point contribution from acquisitions and a 1 percentage point reduction from foreign exchange.  Excluding acquisitions and foreign exchange, organic sales declined 2 percent driven by a 3 percentage point reduction in price and a 1 percentage point reduction in sales of seasonal products, partially offset by a 2 percentage point increase from higher volume.

Company operating earnings of $317 million for the 2016 first quarter declined 10 percent versus $351 million in the 2015 quarter.  The decline was driven primarily by lower gross profit margins and $19 million in restructuring charges recorded in the quarter.

The company has two reportable business segments, the United States and Canada, which represented approximately 82 percent of company sales for the quarter.  The remaining operating businesses are located in Europe, Asia and Latin America.  The single channel online businesses are included in Other Businesses and are not reportable segments. 

United States
Sales for the U.S. segment were flat versus the 2015 first quarter and declined 2 percent on a daily basis. The 2 percent decrease was driven by a 3 percentage point decline in price and a 1 percentage point decline from lower sales of seasonal products, partially offset by 1 percent from volume growth and a 1 percentage point contribution from increased sales to Zoro, the single channel online business in the United States.  Sales to customers in the Government and Light Manufacturing end markets led the sales performance in the quarter.   

Operating earnings for the U.S. segment declined 9 percent in the quarter driven by flat sales and lower gross profit margins partially offset by lower operating expenses.  Gross profit margins for the quarter declined 2.8 percentage points driven by unfavorable selling mix, price deflation outpacing cost deflation and changes in the classification of certain funding received from vendors related to the annual trade show. In the first quarter, operating expenses were down 4 percent including $16 million of restructuring costs related to planned branch closures as well as a reorganization of the sales force.  Excluding restructuring, operating expenses were down 7 percent and operating earnings were down 5 percent.   

Canada
First quarter 2016 sales for Acklands-Grainger declined 24 percent in U.S. dollars. On a daily basis, sales declined 25 percent and 17 percent in local currency.  The 17 percent decline consisted of 14 percentage points from lower volume and 6 percentage points from the SAP implementation, partially offset by 3 percentage points from price.  The business in Canada continues to be affected by weak oil and gas prices and lower commodity prices, resulting in lower sales to all customer end markets.  Daily sales in the province of Alberta, which represents about a third of the company's business in Canada, were down 26 percent in local currency versus the prior year.  Daily sales growth for all other provinces was down 10 percent in local currency versus the prior year.

The business in Canada posted a $12 million operating loss in the 2016 first quarter versus operating earnings of $9 million in the prior year, primarily driven by the sales decline, a lower gross profit margin and negative expense leverage.  The gross profit margin in Canada declined 6.7 percentage points versus the prior year largely due to cost of goods inflation exceeding price inflation due to unfavorable foreign exchange.  Operating expenses decreased 14 percent, benefiting from a $7 million gain from the sale of a property, partially offset by $3 million in restructuring costs. Adjusted for these two items, operating expenses decreased by 9 percent.  

Other Businesses
Sales for the Other Businesses increased 50 percent for the 2016 first quarter versus the prior year. On a daily basis, sales increased 47 percent, consisting of 33 percentage points from Cromwell, acquired on September 1, 2015, and 17 percentage points of growth from volume and price, partially offset by a 3 percentage points decline from foreign exchange.  Strong performance for the Other Businesses was driven by 34 percent daily sales growth for the single channel online businesses.

Operating earnings for the Other Businesses were $22 million in the 2016 first quarter versus $10 million in the prior year.  This performance included strong results from Zoro in the United States and MonotaRO in Japan.  In addition, the acquisition of Cromwell also contributed to the positive earnings growth. 

Other
Other income and expense was a net expense of $20 million in the 2016 first quarter versus a net expense of $4 million in the 2015 first quarter.  This increase was primarily due to interest expense from the $1 billion of debt the company issued in 2015, as well as expected losses from the company's investments in clean energy.  For the quarter, the effective tax rate in 2016 was 35.6 percent versus 38.4 percent in 2015.  The decrease was primarily due to tax credits earned from the company's clean energy investments.  The company is currently projecting an effective tax rate of 35.2 to 36.2 percent for the year 2016.

Cash Flow
Operating cash flow was $154 million in the 2016 first quarter versus $156 million in the 2015 first quarter.  The company used the cash generated during the quarter along with short term borrowings to invest in the business and return cash to shareholders through share repurchase and dividends.  Capital expenditures were $52 million in the 2016 first quarter versus $99 million in the first quarter of 2015.  In the 2016 first quarter, Grainger returned $245 million to shareholders through $73 million in dividends and $172 million to buy back 893,000 shares of stock. 

W.W. Grainger, Inc., with 2015 sales of $10 billion, is North America's leading broad line supplier of maintenance, repair and operating products, with operations also in Europe, Asia 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 2016 first quarter results. The Grainger website also includes more information through our Fact Book and Corporate Social Responsibility report.

Safe Harbor Statement

All statements in this communication, other than those relating to historical facts, are "forward-looking statements." These forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from our expectations include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this release and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

 

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands, except for per share amounts)



Three Months Ended
March 31,



2016


2015


Net sales

$

2,506,538



$

2,439,661



Cost of merchandise sold

1,461,485



1,345,918



Gross profit

1,045,053



1,093,743



Warehousing, marketing and administrative expenses

727,961



742,496



Operating earnings

317,092



351,247



Other income and (expense)





Interest income

165



192



Interest expense

(13,725)



(1,636)



Loss from equity method investment

(6,388)





Other non-operating income and (expense)

440



(2,164)



Total other expense

(19,508)



(3,608)



Earnings before income taxes

297,584



347,639



Income taxes

105,940



133,493



Net earnings

191,644



214,146



Net earnings attributable to noncontrolling interest

4,931



3,131



Net earnings attributable to W.W. Grainger, Inc.

$

186,713



$

211,015



Earnings per share

  -Basic

$

3.00



$

3.11



  -Diluted

$

2.98



$

3.07



Average number of shares outstanding

  -Basic

61,669



67,230



  -Diluted

62,100



67,982








Diluted Earnings Per Share





Net earnings as reported

$

186,713



$

211,015



Earnings allocated to participating securities

(1,740)



(2,213)



Net earnings available to common shareholders

$

184,973



$

208,802



Weighted average shares adjusted for dilutive securities

62,100



67,982



Diluted earnings per share

$

2.98



$

3.07



 

SEGMENT RESULTS (Unaudited)

(In thousands of dollars)



Three Months Ended
March 31,


2016


2015

Sales




United States

$

1,966,267



$

1,971,455


Canada

178,771



234,530


Other Businesses

445,333



297,800


Intersegment sales

(83,833)



(64,124)


Net sales to external customers

$

2,506,538



$

2,439,661






Operating earnings




United States

$

331,857



$

366,089


Canada

(12,347)



9,387


Other Businesses

21,783



9,526


Unallocated expense

(24,201)



(33,755)


Operating earnings

$

317,092



$

351,247






Company operating margin

12.7%



14.4%


ROIC* for Company

25.6%



32.6%


ROIC* for United States

42.4%



49.3%


ROIC* for Canada

(8.2)%



5.7%


 

*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 2-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 (2-point average of $84.0 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (2-point average of $387.7 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

March 31,
2016


December 31,
2015


Cash and cash equivalents

$

279,906



$

290,136



Accounts receivable – net

1,304,560



1,209,641



Inventories

1,420,897



1,414,177



Prepaid expenses and other assets

133,598



134,688



Total current assets

3,138,961



3,048,642



Property, buildings and equipment – net

1,442,191



1,431,241



Deferred income taxes

66,251



83,996



Goodwill

595,487



582,336



Intangibles – net

458,230



463,294



Other assets 

263,718



248,246



Total assets

$

5,964,839



$

5,857,755



Liabilities and Shareholders' Equity





Short-term debt (1)

$

569,367



$

353,072



Current maturities of long-term debt (1)

135,834



247,346



Trade accounts payable

620,410



583,474



Accrued compensation and benefits

208,024



196,667



Accrued contributions to employees' profit sharing plans (2)

22,058



124,587



Accrued expenses

274,458



266,702



Income taxes payable

50,289



16,686



Total current liabilities

1,880,440



1,788,534



Long-term debt

1,387,124



1,388,414



Deferred income taxes and tax uncertainties

158,238



154,352



Employment-related and other non-current liabilities

174,837



173,741



Shareholders' equity (3)

2,364,200



2,352,714



Total liabilities and shareholders' equity

$

5,964,839



$

5,857,755





(1)

Short-term debt increased $216 million due to an increase in the amount of commercial paper issued to pay off term loan and for repurchase of treasury stock.

(2)

Accrued contributions to employees' profit sharing plans decreased $103 million primarily due to the annual cash contributions to the profit sharing plan.

(3)

Common stock outstanding as of March 31, 2016, was 61,322,179 compared with 62,028,708 shares at December 31, 2015, primarily due to share repurchases.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Preliminary

(In thousands of dollars)



Three Months Ended
March 31,


2016


2015

Cash flows from operating activities:




Net earnings

$

191,644



$

214,146


Provision for losses on accounts receivable

3,454



2,558


Deferred income taxes and tax uncertainties

21,035



1,732


Depreciation and amortization

56,294



52,411


Gains from non-cash charges and sales of assets

(7,465)




Stock-based compensation

7,456



9,161


Losses from equity method investment

6,388




Change in operating assets and liabilities – net of business acquisitions:




Accounts receivable

(84,435)



(50,968)


Inventories

10,831



(2,808)


Prepaid expenses and other assets

4,370



34,433


Trade accounts payable

30,827



(7,326)


Other current liabilities

(111,458)



(160,239)


Current income taxes payable

32,757



62,893


Accrued employment-related benefits cost

323



2,296


Other – net

(8,290)



(2,080)


Net cash provided by operating activities

153,731



156,209


Cash flows from investing activities:




Additions to property, buildings and equipment

(51,797)



(99,489)


Proceeds from sales of assets

13,817



7,333


Equity method investment

(7,199)




Other – net

(206)



(48)


Net cash used in investing activities

(45,385)



(92,204)


Cash flows from financing activities:




Net increase in commercial paper

214,645




Borrowings under lines of credit

12,028



204,380


Payments against lines of credit

(11,060)



(28,333)


Payments of long-term debt

(124,769)



(1,860)


Proceeds from stock options exercised

5,206



4,883


Excess tax benefits from stock-based compensation

17,287



4,319


Purchase of treasury stock

(172,047)



(149,992)


Cash dividends paid

(72,632)



(73,393)


Net cash used in financing activities

(131,342)



(39,996)


Exchange rate effect on cash and cash equivalents

12,766



(7,226)


Net change in cash and cash equivalents

(10,230)



16,783


Cash and cash equivalents at beginning of year

290,136



226,644


Cash and cash equivalents at end of period

$

279,906



$

243,427


 

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 operating earnings, adjusted segment operating earnings, adjusted net earnings and adjusted diluted earnings per share with GAAP financial measures:


Three Months Ended
March 31,


2016


2015

%

Operating earnings reported

$

317,092


$

351,247

(10)%

Restructuring (United States)

16,407



Restructuring (Canada)

3,077



Restructuring (Other Businesses)


2,020


Subtotal

19,484


2,020


Operating earnings adjusted

$

336,576


$

353,267

(5)%







SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)

(In thousands of dollars)



Three Months Ended
March 31,


2016


2015

%

Segment operating earnings adjusted





United States

348,264


366,089


Canada

(9,270)


9,387


Other Businesses

21,783


11,546


Unallocated expense

(24,201)


(33,755)


Operating earnings adjusted

$

336,576


$

353,267

(5)%






Company operating margin adjusted

13.4%


14.5%


ROIC* for Company

27.1%


32.7%


ROIC* for United States

44.4%


49.3%


ROIC* for Canada

(6.2)%


5.7%



*Adjusted ROIC is calculated as defined on page 7, excluding the items adjusting operating

earnings as noted above.



Three Months Ended
March 31,


2016


2015

%

Net earnings reported

$

186,713


$

211,015

(12)%

Restructuring (United States)

10,268



Restructuring (Canada)

2,262



Restructuring (Other Businesses)


1,828


Subtotal

12,530


1,828


Net earnings adjusted

$

199,243


$

212,843

(6)%






Diluted earnings per share reported

$

2.98


$

3.07

(3)%

Restructuring (United States)

0.16



Restructuring (Canada)

0.04



Restructuring (Other Businesses)


0.03


Subtotal

0.20


0.03


Diluted earnings per share adjusted

$

3.18


$

3.10

3%






 

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/grainger-reports-results-for-the-2016-first-quarter-300252438.html

SOURCE W.W. Grainger, Inc.

Media: Joseph Micucci, Director, External Relations, O: 847-535-0879, M: 847-830-5328; or Grainger Media Relations Hotline, 847-535-5678; or Investors: Laura Brown, SVP, Communications & Investor Relations, O: 847-535-0409, M: 847-804-1383; or William Chapman, Sr. Director, Investor Relations, O: 847-535-0881, M: 847-456-8647; or Michael Ferreter, Financial Communications Manager, O: 847-535-1439, M: 847-271-6357


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