Grainger Reports Results For The 2018 Second Quarter

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Raises Sales Guidance to 5.5% to 8.5% and EPS Guidance to $15.05 to $16.05
Quarterly Summary
- Sales of $2.9 billion, up 9.4 percent
- Reported operating earnings of $344 million, up 50 percent; adjusted operating earnings of $359 million, up 23 percent
- Reported operating margin of 12.0 percent, up 320 basis points; adjusted operating margin of 12.6 percent, up 150 basis points
- Reported EPS of $4.16, up 149 percent; adjusted EPS of $4.37, up 59 percent

CHICAGO, July 18, 2018 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2018 second quarter ended June 30, 2018. Sales of $2.9 billion increased 9.4 percent versus $2.6 billion in the second quarter of 2017. Operating earnings for the quarter of $344 million were up 50 percent versus $229 million in the 2017 second quarter. Earnings per share of $4.16 increased 149 percent versus $1.67 in the 2017 second quarter. Adjusted earnings per share of $4.37 increased 59 percent versus $2.74 in the 2017 second quarter. The improvement in earnings was driven mostly by higher sales, operating expense leverage, a lower tax rate and a lower share count.

Quarterly Financial Summary

($ in millions)

Q2 2018

Q2 2017

Change


Reported

Adjusted (1)

Reported

Adjusted (1)

Reported

Adjusted (1)

Net sales

$2,860

$2,860

$2,615

$2,615

9%

9%

Gross profit

$1,111

$1,112

$1,040

$1,043

7%

7%

Operating earnings

$344

$359

$229

$291

50%

23%

Net earnings

$237

$249

$98

$161

142%

54%

Diluted earnings per share

$4.16

$4.37

$1.67

$2.74

149%

59%








Gross profit margin

38.8%

38.9%

39.8%

39.9%

(100) bps

(100) bps

Operating margin

12.0%

12.6%

8.8%

11.1%

320 bps

150 bps

(1)   Results exclude restructuring as shown on pages 8-9 of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided on pages 8-9 of this release.  

"The second quarter exceeded our expectations, with strong growth from U.S. large and medium customers, gross profit that was better than anticipated and meaningful operating expense leverage. We continue to gain share across both large and medium customers and acquire medium customers amid a strong economy. In Canada, we are on schedule with the business turnaround. And the single channel and international businesses also improved operating performance," said DG Macpherson, Chairman and Chief Executive Officer. "Based on our performance and momentum, we are raising our sales and earnings per share guidance for the year."

The company raised its 2018 sales and earnings per share guidance for the year and now expects sales growth of 5.5 to 8.5 percent and earnings per share of $15.05 to $16.05. The company's previous 2018 guidance, communicated on April 19, 2018, was sales growth of 5 to 8 percent and earnings per share of $14.30 to $15.30.

2018 Guidance


As of
4/19/2018

As of
7/18/2018

Sales ($ billions)

$10.9 - $11.3

$11.0 - $11.3

 % vs. prior year

5% to 8%

5.5% to 8.5%

Adjusted operating earnings ($ billions)

$1.2 - $1.3

$1.3 - $1.4

 % vs. prior year

6% to 14%

10% to 18%

Adjusted operating margin

11.1% - 11.5%

11.5% - 11.9%

 bps vs. prior year

10 to 50

50 to 90

Adjusted earnings per share

$14.30 - $15.30

$15.05 - $16.05

 % vs. prior year

25% to 33%

32% to 40%

Company
Sales increased 9.4 percent in the 2018 second quarter versus the 2017 second quarter, driven by a 9 percentage point increase from volume and 1 percentage point from foreign exchange, partially offset by a 1 percentage point decline from the divestiture of a specialty business.

Reported gross profit margin for the quarter was 38.8 percent vs. 39.8 percent in the 2017 second quarter. Adjusted gross profit margin for the quarter was 38.9 percent vs. 39.9 percent in the prior year. The lower gross profit margin includes a 0.5 percentage point decline from implementation of the Financial Accounting Standards Board's new revenue recognition standard that primarily reclassifies certain costs related to KeepStock services from operating expenses to cost of goods sold and a 0.2 percentage point decline from the timing of the company's annual sales meeting. When normalized for the impact of the revenue recognition standard and the timing of the sales meeting, gross profit margin for the 2018 second quarter was 39.2 percent, a decline of 0.3 percentage points versus the 2017 second quarter.

Company operating earnings of $344 million for the 2018 second quarter increased 50 percent versus $229 million in the 2017 second quarter. Adjusted operating earnings of $359 million increased 23 percent versus $291 million in 2017. The improvement in earnings was driven by higher sales and strong operating expense leverage. Reported operating margin for the quarter was 12.0 percent, an increase of 3.2 percentage points versus the prior year. Adjusted operating margin was 12.6 percent, an increase of 1.5 percentage points versus the prior year.

For the second quarter, the effective tax rate in 2018 was 23.4 percent versus 48.4 percent in the 2017 second quarter. The decrease was primarily due to the 2017 U.S. tax legislation and the 2017 impact from the wind-down of the Colombia business. The company is currently projecting an effective tax rate of 23 to 26 percent for the year 2018. The second quarter contained a benefit from the tax treatment of stock-based awards. Estimated tax benefits from stock-based awards are not included in the full year projected tax rate.

Cash Flow
Due to strong operating performance, operating cash flow was $248 million in the 2018 second quarter versus $191 million in the 2017 second quarter, representing a 30 percent increase versus the 2017 second quarter. Free cash flow in the quarter was $211 million versus $160 million in the prior year, representing a 32 percent increase. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchase and dividends. Capital expenditures in the 2018 second quarter were $54 million. In the quarter, Grainger returned $111 million to shareholders through $83 million in dividends and $28 million to buy back 96,000 shares of stock.

Webcast
Grainger will conduct a live conference call and webcast at 11:00 a.m. Eastern Daylight Time on July 18, 2018, to discuss the second quarter. The webcast will be hosted by DG Macpherson and Tom Okray, Senior Vice President and Chief Financial Officer and can be accessed at www.grainger.com/investor. For those unable to participate in the live event, a webcast replay will be available for 90 days at www.grainger.com/investor.

About Grainger
W.W. Grainger, Inc., with 2017 sales of $10.4 billion, is North America's leading broad line supplier of maintenance, repair and operating products (MRO), with operations also in Europe, Asia and Latin America.

Visit www.grainger.com/investor to view information about the company, including a supplement regarding 2018 second 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 forward-looking 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 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; the implementation, timing and success of our strategic pricing initiatives; 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; changes in credit ratings; changes in effective tax rates 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 communication 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 of dollars, except for per share amounts)



Three Months Ended
June 30,

  Six Months Ended
June 30,


2018


2017

2018


2017

Net sales

$

2,860,212



$

2,615,269


$

5,626,613



$

5,156,398


Cost of goods sold

1,749,271



1,575,313


3,423,913



3,097,250


Gross profit

1,110,941



1,039,956


2,202,700



2,059,148


Selling, general and administrative expense

766,955



810,876


1,523,884



1,537,567


Operating earnings

343,986



229,080


678,816



521,581


Other income and (expense)







Interest income

1,014



465


1,642



658


Interest expense

(22,924)



(22,468)


(47,589)



(41,181)


Equity method investment

(3,043)



(6,121)


(14,540)



(14,495)


Other non-operating income

4,327



6,240


12,025



11,306


Total other expense, net

(20,626)



(21,884)


(48,462)



(43,712)


Earnings before income taxes

323,360



207,196


630,354



477,869


Income taxes

75,617



100,237


141,826



188,057


Net earnings

247,743



106,959


488,528



289,812


Net earnings attributable to noncontrolling interest

10,762



9,038


20,012



17,147


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

$

236,981



$

97,921


$

468,516



$

272,665









Earnings per share







 -Basic

$

4.19



$

1.68


$

8.29



$

4.64


 -Diluted

$

4.16



$

1.67


$

8.23



$

4.61


Average number of shares outstanding


 -Basic

56,110



58,013


56,087



58,363


 -Diluted

56,553



58,287


56,479



58,741


Diluted Earnings Per Share







Net earnings as reported

$

236,981



$

97,921


$

468,516



$

272,665


Earnings allocated to participating securities

(1,806)



(643)


(3,797)



(2,125)


Net earnings available to common shareholders

$

235,175



$

97,278


$

464,719



$

270,540


Weighted average shares adjusted for dilutive securities

56,553



58,287


56,479



58,741


Diluted earnings per share

$

4.16



$

1.67


$

8.23



$

4.61



NOTE: Results for 2017 have been restated due to adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU effectively increases Selling, general and administrative expense, lowering Operating earnings, and decreases Total other expense, net, with no impact on Net earnings or Earnings per share. Restated 2017 quarterly and annual financials can be found at www.grainger.com/investor.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands of dollars)


Assets

June 30, 2018


December 31, 2017

Cash and cash equivalents

$

312,461



$

326,876


Accounts receivable – net

1,462,603



1,325,186


Inventories

1,464,181



1,429,199


Prepaid expenses and other assets

106,672



86,667


Prepaid income taxes

27,085



38,061


Total current assets

3,373,002



3,205,989


Property, buildings and equipment – net

1,359,908



1,391,967


Deferred income taxes

27,619



22,362


Goodwill

535,121



543,903


Intangibles – net

533,641



569,115


Other assets

75,281



70,918


Total assets

$

5,904,572



$

5,804,254


Liabilities and Shareholders' Equity




Short-term debt

$

54,222



$

55,603


Current maturities of long-term debt

30,172



38,709


Trade accounts payable

735,266



731,582


Accrued compensation and benefits

234,791



254,560


Accrued contributions to employees' profit sharing plans (1)

59,375



92,682


Accrued expenses

272,238



313,766


Income taxes payable

38,431



19,759


Total current liabilities

1,424,495



1,506,661


Long-term debt

2,210,358



2,248,036


Deferred income taxes and tax uncertainties

117,209



111,710


Employment-related and other non-current liabilities

102,241



110,114


Shareholders' equity (2)

2,050,269



1,827,733


Total liabilities and shareholders' equity

$

5,904,572



$

5,804,254




(1)

Accrued contributions to employees' profit sharing plans decreased $33 million primarily due to the annual cash contributions to the profit sharing plan.

(2)

Common stock outstanding as of June 30, 2018 was 56,133,815 compared with 56,328,863 shares at December 31, 2017, primarily due to share repurchases.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands of dollars)



Three Months Ended
June 30,


Six Months Ended
June 30,


2018


2017


2018


2017

Cash flows from operating activities:








Net earnings

$

247,743



$

106,959



$

488,528



$

289,812


Provision for losses on accounts receivable

66



8,851



3,618



12,769


Deferred income taxes and tax uncertainties

4,736



293



3,076



(7,339)


Depreciation and amortization

63,800



65,946



127,731



128,195


Net (gains) losses from sale of assets and non-cash charges

(8,417)



23,503



(14,131)



12,537


Stock-based compensation

16,181



13,273



27,833



20,030


Losses from equity method investment

3,043



6,121



14,540



14,495


Change in operating assets and liabilities:








Accounts receivable

(53,927)



(41,425)



(148,148)



(136,844)


Inventories

(47,476)



2,110



(44,340)



29,936


Prepaid expenses and other assets

7,800



1,711



(25,151)



(24,232)


Trade accounts payable

(7,819)



18,766



5,425



36,817


Other current liabilities

42,575



45,182



(60,089)



(18,989)


Current income taxes payable, net

(15,300)



(66,867)



28,544



6,360


Accrued employment-related benefits cost

(6,655)



2,135



(13,605)



3,655


Other – net

1,604



4,674



1,008



4,976


Net cash provided by operating activities

247,954



191,232



394,839



372,178


Cash flows from investing activities:








Additions to property, buildings and equipment and intangibles

(53,934)



(52,379)



(103,083)



(131,147)


Proceeds from sales of assets

17,293



21,452



43,280



69,758


Equity method investment

(5,871)



(6,233)



(13,986)



(13,300)


Other – net



(146)





(146)


Net cash used in investing activities

(42,512)



(37,306)



(73,789)



(74,835)


Cash flows from financing activities:








Net (decrease) increase in commercial paper

(89,886)



(304,787)



18



(269,841)


Borrowings under lines of credit

11,959



20,491



22,144



30,374


Payments against lines of credit

(2,385)



(8,869)



(22,308)



(18,036)


Net (decrease) increase of long-term debt

(10,878)



410,191



(36,063)



407,873


Proceeds from stock options exercised

28,131



719



87,134



27,064


Payments for employee taxes withheld from stock awards

(14,148)



(5,094)



(29,026)



(16,719)


Purchase of treasury stock

(27,961)



(154,416)



(200,878)



(313,562)


Cash dividends paid

(82,878)



(79,519)



(155,132)



(151,637)


Other – net

2,740





2,740




Net cash used in financing activities

(185,306)



(121,284)



(331,371)



(304,484)


Exchange rate effect on cash and cash equivalents

(9,690)



3,622



(4,094)



8,060


Net change in cash and cash equivalents

10,446



36,264



(14,415)



919


Cash and cash equivalents at beginning of year

302,015



238,801



326,876



274,146


Cash and cash equivalents at end of period

$

312,461



$

275,065



$

312,461



$

275,065


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 gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings and adjusted diluted earnings per share. Free cash flow is not defined under GAAP. The company defines free cash flow as net cash flow provided by operating activities less purchases of property, buildings and equipment plus proceeds from the sale of assets. The company believes free cash flow is meaningful to investors as a useful measure of performance and the company uses this measure as an indication of the strength of the company and its ability to generate cash. 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 gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, 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 gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings and adjusted diluted earnings per share with GAAP financial measures:


Three Months Ended June 30,


 Six Months Ended June 30,


2018

Gross
Profit %


2017

Gross
Profit %


2018

Gross
Profit %


2017

Gross
Profit %

Gross profit reported

$

1,110,941


38.8

%


$

1,039,956


39.8

%


$

2,202,700


39.1

%


$

2,059,148


39.9

%

Restructuring, net (1)

1,349


0.1



2,574


0.1



961


0.1



2,574


0.1


Gross profit adjusted

$

1,112,290


38.9

%


$

1,042,530


39.9

%


$

2,203,661


39.2

%


$

2,061,722


40.0

%

 


Three Months Ended June 30,


 Six Months Ended June 30,


2018

Operating
Margin %


2017

Operating
Margin %


2018

Operating
Margin %


2017

Operating
Margin %

Operating earnings reported

$

343,986


12.0

%


$

229,080


8.8

%


$

678,816


12.1

%


$

521,581


10.1

%

Restructuring, net (1)

15,296


0.6



62,098


2.3



23,334


0.4



56,863


1.1


Operating earnings adjusted

$

359,282


12.6

%


$

291,178


11.1

%


$

702,150


12.5

%


$

578,444


11.2

%

 

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,



2018


2017

%


2018


2017

%

Net earnings reported

$

236,981



$

97,921


142

%


$

468,516



$

272,665


72

%

Restructuring, net (1)

11,839



63,209




18,034



60,051



Net earnings adjusted

$

248,820



$

161,130


54

%


$

486,550



$

332,716


46

%











Diluted earnings per share reported

$

4.16



$

1.67


149

%


$

8.23



$

4.61


79

%

Pretax restructuring, net (1)

0.27



1.06




0.41



0.96



Tax effect (2)

(0.06)



0.01




(0.09)



0.05



Total, net of tax

0.21



1.07




0.32



1.01



Diluted earnings per share adjusted

$

4.37



$

2.74


59

%


$

8.55



$

5.62


52

%



(1)

Second quarter 2018 charges related to restructuring actions and sales of branches in the United States, restructuring actions in Canada, restructuring in Other Businesses and the sale of real estate in Unallocated expense. Second quarter 2017 charges related to restructuring actions and sales of branches in the United States, branch closures and other restructuring in Canada and primarily the wind-down of the business in Colombia in Other Businesses.



(2)

The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the company's ability to realize the associated tax benefits.

 

Free Cash Flow



Three Months Ended
June 30,


Six Months Ended
June 30,


2018


2017


2018


2017

Net cash provided by operating activities

$

247,954



$

191,232



$

394,839



$

372,178


Less:








Additions to property, building and equipment

53,934



52,379



103,083



131,147


Add:








Proceeds from the sale of assets

17,293



21,452



43,280



69,758


Free Cash Flow

$

211,313



$

160,305



$

335,036



$

310,789


 

Cision View original content:http://www.prnewswire.com/news-releases/grainger-reports-results-for-the-2018-second-quarter-300682603.html

SOURCE W.W. Grainger, Inc.

Media: Joseph Micucci, Senior Director, External Affairs, O: 847-535-0879, M: 847-830-5328, or Grainger Media Relations Hotline, 847-535-5678, Investors: Irene Holman, Vice President, Investor Relations, O: 847-535-0809, M: 847-217-8679, or Michael Ferreter, Senior Manager, Investor Relations, O: 847-535-1439, M: 847-271-6357


Stock Quote

GWW (Common Stock)
ExchangeNYSE (US Dollar)
Price$357.73
Change (%) Stock is Down 2.22 (0.62%)
Volume480,664
Data as of 08/17/18 4:01 p.m. ET
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