Chicago, IL - Grainger 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.
