Grainger Reports Results For The 2013 Third Quarter

Narrows 2013 Sales and Earnings Guidance
Quarterly Highlights
-- Sales of $2.4 billion, up 5 percent, 4 percent daily
-- Sales for the U.S. segment up 7 percent, 6 percent daily
-- EPS of $2.95, up 37 percent, up 5 percent excluding 2012 reserves of $0.66 per share
-- Operating cash flow of $354 million, up 5 percent

PR Newswire

CHICAGO, Oct. 16, 2013 /PRNewswire/ -- Grainger (GWW) today reported results for the 2013 third quarter ended September 30, 2013.  Sales of $2.4 billion increased 5 percent versus $2.3 billion in the third quarter of 2012.  There were 64 selling days in the quarter, one more than in 2012.  Sales on a daily basis increased 4 percent versus the 2012 third quarter.  Net earnings for the third quarter increased 36 percent to $211 million versus $155 million in 2012.  Earnings per share of $2.95 increased 37 percent versus $2.15 in 2012.

During the 2012 third quarter, the company recorded $76 million in pre-tax reserves, or $0.66 per share, consisting of a $70 million reserve for a settlement in principle to resolve pricing disclosure issues relating to government contracts with the General Services Administration (GSA) and United States Postal Service (USPS) and a $6 million reserve for resolving related tax, freight and miscellaneous billing issues.  Excluding the effect of the reserves in the 2012 third quarter, net earnings for the quarter increased 4 percent and earnings per share increased 5 percent. 

"Despite a challenging environment, our U.S. business delivered solid volume growth and earnings that were in line with our expectations," said Chairman, President and Chief Executive Officer Jim Ryan.  "Our businesses outside of the United States remain affected by weaker macroeconomic conditions and unfavorable foreign exchange rates," Ryan added.  "We are continuing to aggressively invest for the future with $135 million in incremental growth spending planned for 2013 designed to build additional scale and accelerate our market share gains.  Given our commitment to our growth investments, coupled with the continuing headwinds of a softer global economy and stronger U.S. dollar, we are narrowing our guidance range for full year 2013," Ryan concluded.

The company now expects 2013 sales growth of 5 to 6 percent and earnings per share of $11.45 to $11.65.  The company's previous 2013 guidance issued on July 17, 2013, was sales growth of 5 to 8 percent and earnings per share of $11.40 to $12.00. 

Company
Sales in the 2013 third quarter increased 5 percent, 4 percent on a daily basis.  The 4 percent increase in daily sales in the quarter consisted of 4 percentage points from volume and 1 percentage point from acquisitions, partially offset by a 1 percentage point decline attributable to unfavorable foreign exchange.     

The company's gross profit margin increased 0.2 percentage point to 43.8 percent versus 43.6 percent in the 2012 third quarter, driven by Canada and the Other Businesses.  Company operating earnings of $347 million for the 2013 third quarter increased 36 percent versus the prior year.  Excluding the effect of the 2012 reserves, operating earnings increased 5 percent.  The 5 percent increase in operating earnings was driven by higher sales and improved gross profit margins.  Company operating expenses in the quarter, excluding the $76 million in reserves in the 2012 third quarter, increased 6 percent driven primarily by payroll and benefits and included an incremental $40 million in spending to fund the company's growth programs.  Unfavorable foreign exchange, tied primarily to the businesses in Canada and Japan, represented a $3 million reduction in operating earnings.

Grainger has two reportable business segments, the United States and Canada, which represented approximately 89 percent of company sales for the quarter.  The remaining operating units located primarily in Asia, Europe and Latin America are included in Other Businesses and are not reportable segments.  

United States
Sales for the United States segment increased 7 percent, 6 percent on a daily basis, in the 2013 third quarter versus the prior year.  The 6 percent daily sales growth was driven by 5 percentage points from volume and 1 percentage point from acquisitions.  The sales increase for the quarter was led by solid growth primarily to large customers in the light and heavy manufacturing, natural resources and commercial customer end markets.

Quarterly operating earnings in the United States increased 39 percent versus the 2012 quarter.  Excluding the 2012 reserves, operating earnings increased 6 percent, primarily driven by sales growth.  Gross profit margin for the quarter decreased by 0.3 percentage point versus the prior year driven by strong growth and share gain among large customers, which carry lower gross margins.  In addition, the company did not implement mid-year price increases due to a lower inflationary environment in 2013, unlike the past two years.  Operating expenses, excluding the 2012 reserves, increased slightly slower than sales growth and included an incremental $36 million in growth-related spending.  These investments are intended to drive market share gains and build additional scale. 

Canada
Sales in the 2013 third quarter in Canada decreased 1 percent, 2 percent on a daily basis versus the prior year.  In local currency, sales increased 4 percent, 2 percent on a daily basis on higher volume.  The sales increase for the quarter in Canada was led by solid growth to customers in the oil and gas, forestry, light manufacturing and utilities end markets. 

Operating earnings in Canada decreased 7 percent in the 2013 third quarter, down 3 percent in local currency.  The lower operating performance was primarily the result of approximately $3.5 million in incremental spending for the new IT system scheduled for implementation in late 2014.  Excluding the IT investment, the business generated positive operating leverage.  Gross profit margins increased 0.4 percentage point.  The gross profit margin improvement was due to cost savings from freight consolidation and higher supplier rebates.

Other Businesses
Daily sales for the Other Businesses, which includes operations primarily in Asia, Europe and Latin America, were flat for the 2013 third quarter versus the prior year.  This performance consisted of 7 percentage points of growth from volume and price, offset by a 7 percentage point decline from unfavorable foreign exchange. 

Operating earnings for the Other Businesses were $6 million in the 2013 third quarter versus $9 million in the 2012 third quarter.  The earnings decline for the quarter was primarily driven by weaker performance in Mexico, Colombia and Brazil.  Strong earnings growth in Japan was essentially offset by the weakness in the Japanese yen versus the U.S. dollar.

Other
Interest expense, net of interest income, was $2.9 million in the 2013 third quarter versus $4.0 million in the 2012 third quarter.  The tax rate in the quarter was 38.0 percent versus 37.1 percent in the 2012 quarter.  The increase was primarily due to lower earnings in foreign jurisdictions with lower tax rates.  The company projects an effective tax rate for the full year 2013 of 37.4 to 37.8 percent.

Cash Flow
Operating cash flow was $354 million in the 2013 third quarter versus $338 million in the 2012 third quarter.  Cash flow in the 2013 third quarter benefited from higher earnings and lower inventory purchases versus the prior year.  The company used cash from operations to fund capital expenditures of $65 million in the quarter versus $59 million in the third quarter of 2012.  In the 2013 third quarter, Grainger returned $142 million to shareholders through $65 million in dividends and $77 million to buy back 300,000 shares of stock.  As of September 30, 2013, the company had 4.2 million shares remaining on its share repurchase authorization.

Year-to-Date
For the nine months ended September 30, 2013, sales of $7.1 billion increased 5 percent versus $6.7 billion in the nine months ended September 30, 2012.  Reported net earnings increased 20 percent to $640 million versus $534 million in the first nine months of 2012.  Reported earnings per share for the first nine months increased 21 percent to $8.92 versus $7.35 for 2012.  The first nine months of 2012 included reserves of $0.66 per share.  Excluding these items from 2012, net earnings for the first nine months increased 10 percent and earnings per share increased 11 percent versus 2012.      

W.W. Grainger, Inc., with 2012 sales of $9 billion, is North America's leading broad line supplier of maintenance, repair and operating products, with expanding global operations.

Visit www.grainger.com/investor to view information about the company, including a history of daily sales by segment and a podcast regarding 2013 third quarter results. The Grainger website also includes more information on Grainger's proven growth drivers, including product line expansion, sales force expansion, eCommerce, inventory services and international expansion.

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 "will continue to invest", "further refine our expectations for 2013 sales and earnings per share", "expects 2013 sales growth", "2013 guidance", "expected to continue", "continues to project an effective tax rate" 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
September 30,


Nine Months Ended
September 30,


2013


2012


2013


2012

Net sales

$

2,398,530


$

2,281,205


$

7,060,526


$

6,723,925

Cost of merchandise sold

1,347,164


1,287,245


3,930,440


3,777,290

Gross profit

1,051,366


993,960


3,130,086


2,946,635

Warehousing, marketing and administrative expense

704,651


739,634


2,089,995


2,073,948

Operating earnings

346,715


254,326


1,040,091


872,687

Other income and (expense)








Interest income

822


707


2,516


1,904

Interest expense

(3,734)


(4,751)


(10,102)


(10,718)

Other non-operating income

58


438


799


89

Total other expense

(2,854)


(3,606)


(6,787)


(8,725)

Earnings before income taxes

343,861


250,720


1,033,304


863,962

Income taxes

130,786


92,916


384,948


323,599

Net earnings

213,075


157,804


648,356


540,363

Net earnings attributable to noncontrolling interest

2,286


2,410


8,069


6,749

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

$

210,789


$

155,394


$

640,287


$

533,614

Earnings per share

  -Basic

$

2.99


$

2.19


$

9.06


$

7.50

  -Diluted

$

2.95


$

2.15


$

8.92


$

7.35

Average number of shares outstanding

  -Basic

69,461


69,625


69,562


69,897

  -Diluted

70,547


70,961


70,707


71,306









Diluted Earnings Per Share








Net earnings as reported

$

210,789


$

155,394


$

640,287


$

533,614

Earnings allocated to participating securities

(2,969)


(2,748)


(9,600)


(9,480)

Net earnings available to common shareholders

$

207,820


$

152,646


$

630,687


$

524,134

Weighted average shares adjusted for dilutive securities

70,547


70,961


70,707


71,306

Diluted earnings per share

$

2.95


$

2.15


$

8.92


$

7.35

 

SEGMENT RESULTS (Unaudited)

(In thousands of dollars)



Three Months Ended
September 30,


Nine Months Ended

September 30,


2013


2012


2013


2012

Sales








United States

$

1,904,552



$

1,776,749



$

5,542,202



$

5,219,559


Canada

270,660



272,943



842,446



825,443


Other Businesses

258,442



254,817



767,598



742,904


Intersegment sales

(35,124)



(23,304)



(91,720)



(63,981)


Net sales to external customers

$

2,398,530



$

2,281,205



$

7,060,526



$

6,723,925










Operating earnings








United States

$

342,420



$

247,054



$

1,012,192



$

856,701


Canada

31,798



34,247



101,953



97,502


Other Businesses

6,182



8,778



27,232



30,737


Unallocated expense

(33,685)



(35,753)



(101,286)



(112,253)


Operating earnings

$

346,715



$

254,326



$

1,040,091



$

872,687










Company operating margin

14.5

%


11.2

%


14.7

%


13.0

%

ROIC* for Company





34.2

%


30.2

%

ROIC* for United States





51.3

%


46.4

%

ROIC* for Canada





22.8

%


23.4

%









*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 $365.2 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (4-point average of $383.2 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

September 30, 2013


December 31, 2012

Cash and cash equivalents (1)

$

539,995


$

452,063

Accounts receivable – net

1,082,108


940,020

Inventories - net

1,256,852


1,301,935

Prepaid expenses and other assets

110,511


150,655

Deferred income taxes

59,631


55,967

Total current assets

3,049,097


2,900,640

Property, buildings and equipment – net

1,136,316


1,144,573

Deferred income taxes

58,054


51,536

Goodwill

568,954


543,670

Other assets and intangibles – net (2)

439,128


374,179

Total assets

$

5,251,549


$

5,014,598

Liabilities and Shareholders' Equity




Short-term debt

$

73,023


$

79,071

Current maturities of long-term debt

27,501


18,525

Trade accounts payable

435,165


428,782

Accrued compensation and benefits

179,202


165,450

Accrued contributions to employees' profit sharing plans

134,636


170,434

Accrued expenses

206,927


204,800

Income taxes payable

18,038


12,941

Total current liabilities

1,074,492


1,080,003

Long-term debt

448,127


467,048

Deferred income taxes and tax uncertainties

120,703


119,280

Employment-related and other non-current liabilities

239,088


230,901

Shareholders' equity (3)

3,369,139


3,117,366

Total liabilities and shareholders' equity

$

5,251,549


$

5,014,598



(1)

Cash and cash equivalents increased $88 million primarily due to higher earnings.

(2)

Other assets and intangibles increased $65 million primarily due to the Techni-Tool and E&R Industrial acquisitions.

(3)

Common stock outstanding as of September 30, 2013 was 69,411,710 shares as compared with 69,478,495  shares at December 31, 2012.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Preliminary

(In thousands of dollars)



Nine Months Ended September 30,


2013


2012

Cash flows from operating activities:




Net earnings

$

648,356


$

540,363

Provision for losses on accounts receivable

5,775


6,604

Deferred income taxes and tax uncertainties

(8,683)


(6,315)

Depreciation and amortization

126,164


113,338

Stock-based compensation

44,028


42,815

Change in operating assets and liabilities – net of business

acquisitions:




Accounts receivable

(130,068)


(131,057)

Inventories

44,957


12,116

Prepaid expenses and other assets

40,290


46,648

Trade accounts payable

1,727


(39,657)

Other current liabilities

(46,521)


(3,861)

Current income taxes payable

6,243


(12,890)

Employment-related and other non-current liabilities

13,955


11,478

Other – net

(5,795)


(3,473)

Net cash provided by operating activities

740,428


576,109

Cash flows from investing activities:




Additions to property, buildings and equipment

(148,361)


(155,163)

Proceeds from sale of property, buildings and equipment

3,654


5,035

Net cash paid for business acquisitions

(127,960)


(24,384)

Other – net

(160)


440

Net cash used in investing activities

(272,827)


(174,072)

Cash flows from financing activities:




Net (decrease) in short-term debt

(5,860)


(44,110)

Net (decrease) increase in long-term debt

(14,157)


81,650

Proceeds from stock options exercised

66,512


54,266

Excess tax benefits from stock-based compensation

53,319


44,177

Purchase of treasury stock

(279,619)


(296,458)

Cash dividends paid

(188,688)


(161,998)

Net cash used in financing activities

(368,493)


(322,473)

Exchange rate effect on cash and cash equivalents

(11,176)


5,748

Net change in cash and cash equivalents

87,932


85,312

Cash and cash equivalents at beginning of year

452,063


335,491

Cash and cash equivalents at end of period

$

539,995


$

420,803

 

Rates

View Comments (0)