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Grainger Reports Results For The 2014 Second Quarter

Revises 2014 EPS GuidanceReported EPS of $2.94 Includes $0.15 Non-Cash ChargeQuarterly Highlights-- Sales of $2.5 billion, up 5 percent-- U.S. Segment up 7 percent-- Adjusted EPS of $3.09, up 2 perce... (July 17, 2014)

CHICAGO, July 17, 2014 /PRNewswire/ --Grainger (NYSE: GWW) today reported results for the 2014 second quarter ended June 30, 2014. Sales of $2.5billion increased 5 percent versus $2.4billion in the 2013 second quarter. There were 64 selling days in the quarter, the same as in 2013. Netearnings for the quarter decreased 5percent to $206 million versus $218million in 2013. Earnings per share of $2.94 decreased 3percent 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 JimRyan. "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 9percent 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 7percent 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 2percentage points from acquisitions, net of dispositions, and a 1percentage point reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 4percent driven by 5percentage points from volume, partially offset by a 1percentage 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 43.1percent, 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 6percent, 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 NorthAmerica 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 $0.06per 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 2percentage points from acquisitions, net of dispositions. Excluding acquisitions, organic sales increased 5 percent driven by 6percentage points from volume, partially offset by a 1percentage 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 7percent sales growth and positive operating expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter decreased 0.8percentage 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 3percent including $19million 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 3percent in local currency. The3percent sales decline consisted of 2percentage 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 45percent 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 2percentage 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 $4million of software development costs related to a multiple instance approach. The company also spent an incremental $1million 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 $13million 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 $2.6million expense in the 2013 second quarter. The tax rate in the quarter was 38.2percent versus 36.5percent 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$90million in the quarter versus $40million in the second quarter of 2013. Grainger alsoreturned $161million to shareholders in the quarterthrough $76million in dividends and $85million to buy back 334,000 shares of stock. As of June30,2014, the company had 9.9million 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 $4.7billion 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 $423million 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

Costofmerchandisesold

1,425,418


1,334,577


2,735,074


2,583,276

Grossprofit

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

Operatingearnings

340,751


350,072


695,090


693,376

Otherincomeand(expense)








Interestincome

413


796


1,053


1,694

Interestexpense

(2,757)


(3,201)


(5,620)


(6,367)

Other non-operating income

18


(147)


(485)


741

Totalother expense

(2,326)


(2,552)


(5,052)


(3,932)

Earningsbeforeincometaxes

338,425


347,520


690,038


689,444

Income taxes

129,348


126,767


261,906


254,164

Netearnings

209,077


220,753


428,132


435,280

Net earnings attributable to noncontrolling interest

3,162


3,093


5,564


5,782

Netearnings attributable to W.W. Grainger, Inc.

$

205,915


$

217,660


$

422,568


$

429,498

Earningspershare

-Basic

$

2.97


$

3.08


$

6.08


$

6.07

-Diluted

$

2.94


$

3.03


$

6.00


$

5.97

Averagenumberofsharesoutstanding

-Basic

68,454


69,665


68,576


69,614

-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

Intersegmentsales

(49,823)


(31,478)


(90,708)


(56,596)

Netsalestoexternalcustomers

$

2,506,104


$

2,381,561


$

4,891,731


$

4,661,996









Operatingearnings








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

Unallocatedexpense

(43,104)


(38,910)


(72,223)


(67,601)

Operatingearnings

$

340,751


$

350,072


$

695,090


$

693,376









Company operatingmargin

13.6%


14.7%


14.2%


14.9%

ROIC*forCompany





32.4%


34.6%

ROIC*forUnited States





50.8%


51.4%

ROIC*forCanada





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.

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