10-QPeriod: Q2 FY2014

W.W. GRAINGER, INC. Quarterly Report for Q2 Ended Jun 30, 2014

Filed July 31, 2014For Securities:GWW

Summary

W.W. Grainger, Inc. reported mixed financial results for the second quarter and first half of 2014. While net sales showed growth, driven primarily by volume and acquisitions, profitability metrics such as gross profit margin and operating earnings experienced pressure. This was partly attributed to the impact of newly acquired businesses, international market challenges, and specific charges related to a European retirement plan transition and IT system integration. The company revised its full-year 2014 guidance downwards for both sales growth and earnings per share, reflecting these pressures. Despite these challenges, the company maintained a strong financial position, with healthy working capital and a stable debt-to-capitalization ratio. Cash flow from operations remained a significant source of liquidity, although it was lower than the prior year. The company continued its share repurchase program and paid dividends, underscoring a commitment to shareholder returns.

Financial Highlights

53 data points
Beta

Revenue

$2.51B

43.1% Gross Margin

Net Income

$205.91M

8.2% Net Margin

EPS (Diluted)

$2.94

Total Assets

$5.31B

Cash & Equivalents

$331.71M

Free Cash Flow

$70.40M

Financial Statements
Beta
Revenue$2.51B
Cost of Revenue$1.43B
Gross Profit$1.08B
SG&A Expenses$739.93M
Operating Income$340.75M
Interest Expense$2.76M
Net Income$205.91M
EPS (Basic)$2.97
EPS (Diluted)$2.94
Shares Outstanding (Basic)68.45M
Shares Outstanding (Diluted)69.34M

Key Highlights

  • 1Net sales increased by 5.2% to $2,506.1 million for the three months ended June 30, 2014, compared to the same period in 2013, driven by volume, acquisitions, and the timing of Good Friday.
  • 2Gross profit margin for the second quarter of 2014 decreased by 0.9 percentage points to 43.1%, attributed to lower margins from acquisitions, international operations, and growth with lower-margin customers.
  • 3Operating earnings for the second quarter of 2014 decreased by 2.7% to $340.8 million, impacted by a $14 million non-cash charge related to a European retirement plan transition and other operating expense increases.
  • 4The company revised its full-year 2014 guidance downwards on July 17, 2014, to a sales growth range of 5% to 7% and an EPS range of $12.20 to $12.60.
  • 5The US segment showed resilience with a 7% net sales increase in Q2 2014, while the Canada segment experienced a 9% decrease in net sales due to foreign exchange and market challenges.
  • 6Net cash provided by operating activities for the six months ended June 30, 2014, decreased to $328.5 million from $386.8 million in the prior year, primarily due to higher inventory purchases.
  • 7The company repurchased 333,615 shares of common stock during the second quarter of 2014 under its share repurchase program.

Frequently Asked Questions

The decrease in operating earnings was primarily driven by a combination of factors. These included a 0.9 percentage point decline in gross profit margin due to lower margins from newly acquired businesses, international operations, and an increased mix of lower-margin customers. Additionally, operating expenses increased by 6%, notably including a $14 million non-cash charge related to the transition of an employee retirement plan in Europe and higher incremental spending on growth initiatives and IT systems.

The Canadian segment experienced a 9% decrease in net sales for the second quarter of 2014 compared to the prior year. This decline was largely due to a 6% negative impact from foreign exchange rates and a 2% impact from the timing of Good Friday. Performance was further hampered by declines in sectors like construction, mining, and oil & gas. Gross profit margins also decreased due to unfavorable foreign exchange on sourced products and higher freight costs.

The transition of the employee retirement plan in the Netherlands from a defined benefit to a defined contribution plan resulted in a $14 million non-cash charge recognized in operating expenses during the second quarter of 2014. This charge, along with a related tax benefit, impacted the operating earnings and the effective income tax rate for the period.

Yes, on July 17, 2014, W.W. Grainger revised its full-year 2014 guidance. The company now expects sales growth to be in the range of 5% to 7%, down from the previous guidance of 5% to 9%. Earnings per share guidance was also revised downwards to a range of $12.20 to $12.60, excluding the European retirement plan transition charge, from the previously communicated range of $12.10 to $12.85.