Grainger Reports Results For The 2014 Third Quarter

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Quarterly Highlights
-- Sales of $2.6 billion, up 7 percent
-- Operating earnings of $386 million, up 11 percent
-- EPS of $3.30, up 12 percent

CHICAGO, Oct. 16, 2014 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2014 third quarter ended September 30, 2014.  Sales of $2.6 billion increased 7 percent versus $2.4 billion in the 2013 third quarter.  There were 64 selling days in the quarter, the same as in 2013.  Net earnings for the third quarter increased 9 percent to $230 million versus $211 million in 2013.  Earnings per share of $3.30 increased 12 percent versus $2.95 in 2013.

"We were pleased with the overall performance of the business in the quarter," said Chairman, President and Chief Executive Officer Jim Ryan.  "Strong volume growth and positive operating leverage in the U.S. business were the primary drivers of our results.  We were encouraged by better top line growth in Canada this quarter, but margins remain under pressure due to currency and additional investments.  Outside of North America, we were disappointed with the performance of several multichannel businesses and are committed to improving or exiting those operations."  Ryan added, "We are very excited about the continued success of our single channel businesses in Japan and the United States, and we are evaluating and testing additional markets for expansion of this model."  Ryan concluded, "Despite headwinds from historically low inflation and a sluggish global economy, we will continue to invest in infrastructure and growth to capitalize on the attractive share gain opportunity in the large and fragmented MRO market."  

With three quarters complete, the company lowered the top end of its sales and earnings per share guidance for 2014.  For 2014, the company now expects 5.0 to 5.5 percent sales growth and earnings per share of $12.20 to $12.30, excluding the $0.15 per share charge for the Fabory retirement plan transition in the second quarter of 2014.  The company's previous 2014 guidance was issued on July 17, 2014, of 5 to 7 percent sales growth and earnings per share of $12.20 to $12.60.  The previous guidance assumed an effective tax rate of 37.5 to 37.8 percent.  The company is now forecasting an effective tax rate of 38.3 percent due to a higher proportion of earnings from the U.S. segment, reducing earnings for the full year by approximately $0.12 per share.   

Company
Sales in the 2014 third quarter increased 7 percent consisting of 2 percentage points from acquisitions, net of dispositions, and a 1 percentage point reduction from unfavorable foreign exchange. (See Exhibit 1 at the end of this press release for a schedule of acquisitions and divestitures.)  Excluding acquisitions and foreign exchange, organic sales increased 6 percent driven by 6 percentage points from volume and 1 percentage point from price, partially offset by a 1 percentage point decline from lower sales of seasonal products.     

The company's gross profit margin decreased 0.8 percentage point to 43.0 percent versus 43.8 percent in the 2013 third quarter, with more than half the decline due to unfavorable mix from the recently acquired businesses. The remainder of the decline was due to faster growth with lower gross margin customers and lower gross profit margins outside the United States.  Operating expenses for the company increased 2 percent including approximately $17 million in incremental growth and infrastructure spending versus the 2013 quarter and incremental expenses from the acquired businesses.

Company operating earnings increased 11 percent to $386 million for the 2014 third quarter versus $347 million in the prior year.  The increase was driven by the 7 percent sales increase and positive expense leverage, partially offset by lower gross profit margins.      

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 located primarily in Asia, Europe and Latin America and are included in Other Businesses and are not reportable segments.  Results for the company's single channel businesses in Japan, the United States and Europe are also included in Other Businesses.  

United States
Sales for the U.S. segment increased 7 percent in the 2014 third 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 1 percentage point from lower sales of seasonal products.  Sales growth to customers in the Heavy and Light Manufacturing, Commercial, Retail and Natural Resources customer end markets contributed to the sales increase. 

Operating earnings for the segment increased 13 percent in the quarter driven by the 7 percent sales growth and positive 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 lower gross margins from the acquired businesses.  Operating expenses for the quarter were essentially flat versus the prior year.  Operating expenses included $12 million in incremental growth-related spending and incremental expenses from the acquired businesses, which were essentially offset by productivity and controlled spending. 

Canada
Sales in the 2014 third quarter in Canada increased 3 percent versus the prior year, 8 percent in local currency.  The 8 percent increase in local currency consisted of 5 percentage points from volume, 2 percentage points from acquisitions and 1 percentage point from price.  The sales increase for the quarter was led by solid growth to customers in the Commercial, Transportation, Oil and Gas, Government, and Heavy and Light Manufacturing end markets. 

Operating earnings in Canada declined 14 percent in the 2014 third quarter, down 10 percent in local currency.  The lower operating performance was primarily the result of a lower gross profit margin and negative expense leverage.  The gross profit margin in Canada declined 1.5 percentage points versus the prior year primarily due to unfavorable foreign exchange from products sourced from the United States, lower supplier rebates and higher freight costs.  The increase in operating expenses was primarily driven by higher payroll, occupancy costs and incremental costs from the acquisition of WFS Enterprises, Inc. on September 2, 2014.    

Other Businesses
Sales for the Other Businesses increased 16 percent for the 2014 third quarter versus the prior year.  This performance consisted of 18 percentage points of growth from volume and price, partially offset by a 2 percentage points decline from unfavorable foreign exchange.  The sales increase was primarily driven by the single channel businesses, MonotaRO in Japan and Zoro in the United States, and from the business in Mexico. 

Operating earnings for the Other Businesses were $5 million in the 2014 third quarter versus $6 million in the 2013 third quarter.  The earnings decline for the quarter versus the prior year was primarily driven by incremental expenses associated with the start-up of the single channel business in Europe and continued soft performance from the multichannel business in Europe (Fabory).  This decline was partially offset by improved performance in Mexico and continued strong results from the single channel models in Japan and United States and narrowing of losses in China. 

Other
Other income and expense of $3 million in the 2014 third quarter was flat versus the 2013 third quarter.  The tax rate in the quarter was 39.1 percent versus 38.0 percent in the 2013 quarter.  The increase was primarily due to a higher proportion of year-to-date earnings from the U.S. segment with higher tax rates than previously expected.  This shift in earnings in higher tax jurisdictions reduced earnings per share by $0.09 for the quarter.  The company now projects an annual effective tax rate of 38.3 percent, versus the previous estimate of 37.5 to 37.8 percent, excluding the effect of the $0.15 per share charge related to the Fabory retirement plan transition in the second quarter of 2014.

Cash Flow
Operating cash flow was $329 million in the 2014 third quarter versus $354 million in the 2013 third quarter.  Cash flow in the 2014 third quarter was lower than the previous year primarily due to higher inventory purchases and accounts receivables.  The company used cash from operations to fund capital expenditures of $84 million in the quarter versus $65 million in the third quarter of 2013.  In the 2014 third quarter, Grainger returned $156 million to shareholders through $74 million in dividends and $82 million to buy back 336,000 shares of stock.  As of September 30, 2014, the company had 9.4 million shares remaining on its share repurchase authorization.

Year-to-Date
For the nine months ended September 30, 2014, sales of $7.5 billion increased 6 percent versus $7.1 billion in the nine months ended September 30, 2013.  There were 191 selling days in the first nine months of 2014, the same number of selling days as 2013.  Reported net earnings increased 2 percent to $653 million versus $640 million in the first nine months of 2013.  Reported earnings per share for the first nine months increased 4 percent to $9.30 versus $8.92 for 2013.  The year 2014 includes the $10 million after-tax, or $0.15 per share, charge related to the transition of the employee retirement plan in Europe.        

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 third 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 "estimate", "expects", "guidance", "earnings per share guidance", "will continue to", "potentially", "projects" 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.

 

Exhibit 1

Acquisition / Divestiture Schedule





Action

Segment

Date

Pre-acquisition Revenue

Acquired Techni-Tool

U.S.

December 31, 2012

$88 Million

Acquired E&R Industrial, Inc.

U.S.

August 23, 2013

$180 Million

Acquired Safety Solutions, Inc.

U.S.

December 3, 2013

$63 Million

Divested Specialty Brands

U.S.

December 31, 2013

$96 Million

Acquired WFS Enterprises, Inc.

Canada

September 2, 2014

$90 Million

Note: E&R results were first consolidated in the fourth quarter of 2013.

 


CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands, except for per share amounts)



Three Months Ended September 30,


Nine Months Ended September 30,


2014



2013



2014



2013


Net sales

$

2,562,263



$

2,398,530



$

7,453,994



$

7,060,526


Cost of merchandise sold

1,459,479



1,347,164



4,194,553



3,930,440


Gross profit

1,102,784



1,051,366



3,259,441



3,130,086


Warehousing, marketing and administrative expense

717,271



704,651



2,178,838



2,089,995


Operating earnings

385,513



346,715



1,080,603



1,040,091


Other income and (expense)












Interest income

630



822



1,684



2,516


Interest expense

(2,377)



(3,734)



(7,997)



(10,102)


Other non-operating income

(1,131)



58



(1,617)



799


Total other expense

(2,878)



(2,854)



(7,930)



(6,787)


Earnings before income taxes

382,635



343,861



1,072,673



1,033,304


Income taxes

149,585



130,786



411,491



384,948


Net earnings

233,050



213,075



661,182



648,356


Net earnings attributable to noncontrolling interest

2,728



2,286



8,292



8,069


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

$

230,322



$

210,789



$

652,890



$

640,287














Earnings per share

  -Basic

$

3.33



$

2.99



$

9.42



$

9.06


  -Diluted

$

3.30



$

2.95



$

9.30



$

8.92


Average number of shares outstanding

  -Basic

68,296



69,461



68,482



69,562


  -Diluted

69,112



70,547



69,375



70,707














Diluted Earnings Per Share












Net earnings as reported

$

230,322



$

210,789



$

652,890



$

640,287


Earnings allocated to participating securities

(2,591)



(2,969)



(7,882)



(9,600)


Net earnings available to common shareholders

$

227,731



$

207,820



$

645,008



$

630,687


Weighted average shares adjusted for dilutive securities

69,112



70,547



69,375



70,707


Diluted earnings per share

$

3.30



$

2.95



$

9.30



$

8.92


 

SEGMENT RESULTS (Unaudited)

(In thousands of dollars)



Three Months Ended September 30,


Nine Months Ended September 30,


2014



2013



2014



2013


Sales












United States

$

2,045,077



$

1,904,552



$

5,935,343



$

5,542,202


Canada

278,271



270,660



796,614



842,446


Other Businesses

300,760



258,442



874,592



767,598


Intersegment sales

(61,845)



(35,124)



(152,555)



(91,720)


Net sales to external customers

$

2,562,263



$

2,398,530



$

7,453,994



$

7,060,526














Operating earnings












United States

$

386,499



$

342,420



$

1,105,286



$

1,012,192


Canada

27,466



31,798



67,974



101,953


Other Businesses

5,162



6,182



13,180



27,232


Unallocated expense

(33,614)



(33,685)



(105,837)



(101,286)


Operating earnings

$

385,513



$

346,715



$

1,080,603



$

1,040,091














Company operating margin

15.0

%


14.5

%


14.5

%


14.7

%

ROIC* for Company







33.4

%


34.2

%

ROIC* for United States







51.7

%


51.3

%

ROIC* for Canada







14.4

%


22.8

%













*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 4-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 (4-point average of $228.4 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (4-point average of $390.8 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

September 30, 2014


December 31, 2013

Cash and cash equivalents (1)

$

314,744



$

430,644


Accounts receivable – net (2)

1,234,884



1,101,656


Inventories - net

1,306,504



1,305,520


Prepaid expenses and other assets

110,094



130,646


Deferred income taxes

53,492



75,819


Total current assets

3,019,718



3,044,285


Property, buildings and equipment – net

1,259,264



1,208,562


Deferred income taxes

18,553



16,209


Goodwill

540,407



525,467


Other assets and intangibles – net

463,065



471,805


Total assets

$

5,301,007



$

5,266,328


Liabilities and Shareholders' Equity






Short-term debt

$

48,391



$

66,857


Current maturities of long-term debt

23,610



30,429


Trade accounts payable

493,254



510,634


Accrued compensation and benefits

189,490



185,905


Accrued contributions to employees' profit sharing plans

136,795



176,800


Accrued expenses

241,033



218,835


Income taxes payable

16,776



6,330


Total current liabilities

1,149,349



1,195,790


Long-term debt

385,191



445,513


Deferred income taxes and tax uncertainties

95,861



113,585


Employment-related and other non-current liabilities

194,200



184,604


Shareholders' equity (3)

3,476,406



3,326,836


Total liabilities and shareholders' equity

$

5,301,007



$

5,266,328



 

(1)

Cash and cash equivalents decreased $116 million primarily due to share repurchases, dividend payments and contributions to the profit sharing plan.

(2)

Accounts receivable - net increased $133 million primarily due to higher sales.

(3)

Common stock outstanding as of September 30, 2014 was 68,183,321 shares as compared with 68,853,938  shares at December 31, 2013.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Preliminary

(In thousands of dollars)



Nine Months Ended September 30,


2014



2013


Cash flows from operating activities:






Net earnings

$

661,182



$

648,356


Provision for losses on accounts receivable

7,479



5,775


Deferred income taxes and tax uncertainties

(10,078)



(8,683)


Depreciation and amortization

147,751



126,164


Losses (gains) from non-cash charges and sales of assets

15,157



(408)


Stock-based compensation

38,859



44,028


Change in operating assets and liabilities – net of business

acquisitions and divestitures:






Accounts receivable

(163,072)



(130,068)


Inventories

(19,755)



44,957


Prepaid expenses and other assets

17,670



40,290


Trade accounts payable

(10,532)



1,727


Other current liabilities

(45,887)



(46,521)


Current income taxes payable

11,589



6,243


Employment-related and other non-current liabilities

9,257



13,955


Other – net

(1,777)



(5,387)


Net cash provided by operating activities

657,843



740,428


Cash flows from investing activities:






Additions to property, buildings and equipment

(240,196)



(148,361)


Proceeds from sale of property, buildings and equipment

9,062



3,654


Net cash paid for business acquisitions, net of divestitures

(10,606)



(127,960)


Other – net

6,816



(160)


Net cash used in investing activities

(234,924)



(272,827)


Cash flows from financing activities:






Net (decrease) in short-term debt

(16,579)



(5,860)


Net (decrease) in long-term debt

(52,321)



(14,157)


Proceeds from stock options exercised

41,461



66,512


Excess tax benefits from stock-based compensation

29,442



53,319


Purchase of treasury stock

(317,420)



(279,619)


Cash dividends paid

(215,265)



(188,688)


Net cash used in financing activities

(530,682)



(368,493)


Exchange rate effect on cash and cash equivalents

(8,137)



(11,176)


Net change in cash and cash equivalents

(115,900)



87,932


Cash and cash equivalents at beginning of year

430,644



452,063


Cash and cash equivalents at end of period

$

314,744



$

539,995


 

SOURCE W.W. Grainger, Inc.

Media: Joseph Micucci, Director, Media 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 Casey Darby, Sr. Manager, Investor Relations, O: 847-535-0099, M: 847-964-3281


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