W.W. GRAINGER, INC. - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - October 16, 2013

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8-K - 8-K - W.W. GRAINGER, INC.gww8kq32013.htm

 
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

CHICAGO, October 16, 2013 - Grainger (NYSE: 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.

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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.



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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.







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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 benefitted 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.


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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.




Contacts:
Media:
 
Investors:
 
Joseph Micucci
 
Laura Brown
 
Director, Media Relations
SVP, Communications & Investor Relations
O: 847-535-0879
 
O: 847-535-0409
 
M: 847-830-5328
 
M: 847-804-1383
 
 
 
 
 
Grainger Media Relations Hotline
William Chapman
 
847-535-5678
 
Sr. Director, Investor Relations
 
 
O: 847-535-0881
 
 
 
M: 847-456-8647
 
 
 
 
 
 
 
Casey Darby
 
 
 
Sr. Manager, Investor Relations
 
 
O: 847-535-0099
 
 
 
M: 847-964-3281
 

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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


6

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.


7

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.


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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


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W.W. GRAINGER, INC. Reports