Second Quarter Performance
Sales of $1.3 billion for the second quarter were flat to the prior year quarter. Strong growth was seen in the industrial supplies category with sales up 31.5%, which benefited from the acquisition of OKI Supply in the fourth quarter of 2012. Janitorial/breakroom sales for the second quarter grew 2.6%. Sales for office products, technology, and furniture categories were down 4.0%, 6.3% and 5.0%, respectively reflecting a soft demand environment.
Gross margin for the quarter was $201.9 million or 15.8% of sales, compared with $188.3 million or 14.8% of sales in the year-ago quarter. Gross margin improved due to a more favorable product mix, margin improvement initiatives, and higher purchase-related supplier allowances. War on Waste (WOW) cost savings also contributed to the improvement in gross margin.
Second quarter 2013 operating expenses were $143.0 million or 11.2% of sales compared with $137.9 million or 10.8% of sales, in the second quarter of 2012. These results reflected investments in growth businesses, the OKI acquisition, and variable management compensation partially offset by savings from our restructuring programs and ongoing cost savings initiatives.
Operating income for the quarter ended June 30, 2013 grew by 17% to $58.9 million or 4.6% of sales, versus $50.3 million or 3.9% of sales in the second quarter of 2012.
Diluted earnings per share for the latest quarter were up 30% to $0.86, compared with $0.66 in the prior-year period. Earnings per share in the 2013 quarter were favorably affected by increased operating income and lower interest expense.
Six-Month Performance
Sales in the first half of 2013 were $2.5 billion, flat compared with the prior-year period. This was led by a 33.5% increase in industrial supplies and a 2.8% increase in janitorial/breakroom after adjusting for workdays. Office products were down by 5.2%, furniture sales were down 4.1% and technology sales declined 6.1%.
Gross margin for the first half of 2013 was $390.5 million or 15.5% of sales, compared to $369.2 million or 14.5% of sales in the same prior-year period. The primary drivers of this increase were a shift to a higher margin mix, ongoing margin improvement initiatives, and higher purchase-related supplier allowances.
Operating expenses in 2013 were $306.3 million or 12.1% of sales, compared with $287.3 million or 11.3% of sales. Included in these results are a $14.4 million first quarter 2013 charge and a $6.2 million first quarter 2012 charge, both associated with workforce reduction and facility closure programs. Excluding these items, operating expenses in 2013 were $291.9(1) or 11.6%(1) of sales, compared with the prior year of $281.0 million(1) or 11.0%(1) of sales.
Operating income for the first half of 2013 was $84.2 million or 3.3% of sales, compared with $81.9 million or 3.2% of sales in the prior year period. Excluding the items mentioned above, operating income through the first six months of 2013 was $98.6(1) million or 3.9%(1) of sales, compared with $88.2 million(1) or 3.5%(1) of sales in the same period last year.
Diluted earnings per share for the first half of 2013 were $1.20 versus $1.01 in the first half of 2012. Excluding the items mentioned above, diluted earnings per share for the first half of 2013 were up 28% to $1.42(1), compared with $1.11(1) in the prior-year period.
Cash Flow, Debt Trends and Share Repurchases
Net cash provided by operating activities for the six months ended June 30, 2013 was $45.3 million, compared with $48.3 million in the same period last year. Cash flow used in investing activities totaled $13.5 million in 2013, compared with $10.2 million in the same period last year. Capital spending for 2013 is expected to be approximately $35 million.
The company currently has approximately $1.0 billion of total committed debt capacity and $518.5 million outstanding at June 30, 2013. Debt-to-total capitalization declined to 40.5% at June 30, 2013 from 43.3% at June 30, 2012. During the latest six months, the company paid $39.8 million to acquire approximately 1.2 million shares and paid cash dividends of $11.2 million to common shareholders.
Outlook
"We continue to strengthen our core businesses while diversifying our portfolio into categories that are highly relevant to our customers while leveraging our capabilities and supply chain infrastructure," stated Phipps. "A soft demand environment will necessitate a strong focus on the fundamentals and close management of our cost structure in the near term as we invest in the future. We expect the benefits from the OKI acquisition and our restructuring actions to continue into the second half of the year. We will keep our businesses healthy and profitable while we enhance shareholder value through earnings growth, accretive acquisitions, dividends and share repurchases."
