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News Release


Grainger Reports Results For The 2018 Third Quarter
Revenue grows 7.4%; 8.2% excluding foreign exchange and impact of hurricanes
Quarterly Summary
- Reported operating earnings of $189 million, down 32 percent; adjusted operating earnings of $332 million, up 15 percent
- Reported operating margin of 6.7 percent, down 380 basis points; adjusted operating margin of 11.7 percent, up 80 basis points
- Reported EPS of $1.82, down 35 percent; adjusted EPS of $4.19, up 44 percent

CHICAGO, Oct. 16, 2018 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the third quarter ended September 30, 2018. Sales of $2.8 billion increased 7.4 percent versus $2.6 billion in the third quarter of 2017. Normalizing for foreign exchange and the impact of hurricanes, sales increased 8.2 percent versus the third quarter of 2017.

Reported earnings contained $139 million in non-cash impairment charges relating to the Cromwell business in the U.K., reflecting a slower growth trajectory and structural issues. These issues include prolonged Brexit uncertainty that impacted the market outlook and higher discount rates, which together account for a majority of the reduction in valuation.

Operating earnings for the quarter of $189 million were down 32 percent versus $278 million in the 2017 third quarter. On an adjusted basis, operating earnings for the quarter of $332 million were up 15 percent versus $287 million in the 2017 third quarter. Earnings per share of $1.82 were down 35 percent versus $2.79 in the 2017 third quarter. Adjusted earnings per share of $4.19 increased 44 percent versus $2.90 in the 2017 third quarter. The improvement in adjusted earnings per share was due primarily to higher sales, operating expense leverage and a lower tax rate.

Quarterly Financial Summary


($ in millions)

Q3 2018

Q3 2017

Change


Reported

Adjusted (1)

Reported

Adjusted (1)

Reported

Adjusted (1)

Net sales

$2,831

$2,831

$2,636

$2,636

7%

7%

Gross profit

$1,079

$1,079

$1,017

$1,018

6%

6%

Operating earnings

$189

$332

$278

$287

-32%

15%

Net earnings

$104

$240

$162

$169

-36%

43%

Diluted earnings per share

$1.82

$4.19

$2.79

$2.90

-35%

44%








Gross profit margin

38.1%

38.1%

38.6%

38.6%

(50) bps

(50) bps

Gross profit margin (rev. rec.) (2)

38.6%

38.6%

38.6%

38.6%

0 bps

0 bps

Operating margin

6.7%

11.7%

10.5%

10.9%

(380) bps

80 bps

Tax rate

32.7%

20.0%

31.7%

31.7%

100 bps

(1170) bps

(1)

Results exclude restructuring and impairment of intangible assets as shown on pages 8-9 of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided on pages 8-9 of this release.

(2)

Gross margin normalized for the new revenue recognition standard.

"The third quarter represented another solid quarter of profitable growth across the business," said DG Macpherson, Chairman and Chief Executive Officer. "Even though we lapped the 2017 U.S. pricing changes during the quarter, we saw continued strong momentum and share gains from large and medium customers. Adjusted for the new revenue recognition standard, gross profit margin in the United States was up modestly over last year. The balance of the portfolio is performing as expected, particularly in Canada and with the single channel online businesses. We are confident in our ability to lead the industry with the best service and solutions for our customers."

Company
Sales increased 7.4 percent in the 2018 third quarter versus the 2017 third quarter, driven by a 7 percentage point increase from volume and 1 percentage point increase in price, partially offset by a 1 percentage point decline from foreign exchange and the impact of hurricanes.

Gross profit margin for the quarter was 38.1 percent versus 38.6 percent in the 2017 third quarter. The lower gross profit margin reflects a 50 basis point decline from implementation of a new revenue recognition standard. When normalized for the new standard, gross profit margin for the 2018 third quarter was 38.6 percent, flat to the 2017 third quarter.

For the third quarter, the company's reported tax rate was 32.7 percent versus 31.7 percent in the 2017 third quarter. The increase was primarily due to the Cromwell impairment charges that lowered reported earnings and were not tax deductible, net of the benefit from U.S. tax reform. The adjusted tax rate was 20.0 percent in the 2018 third quarter versus 31.7 percent in the 2017 third quarter. The lower tax rate reflects the impact of U.S. tax reform and the tax benefit from stock-based compensation. For the fourth quarter, the company projects a reported and adjusted tax rate of 23 to 26 percent, which does not include any future tax benefit from stock-based compensation.

Cash Flow
Operating cash flow for the quarter was $367 million versus $349 million in the 2017 third quarter, an increase of 5 percent compared to the same period last year, due to increased net earnings, partially offset by working capital investments to support growth. Free cash flow in the quarter was $334 million versus $329 million in the 2017 third quarter. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchases and dividends. During the quarter, capital expenditures were $66 million. In the quarter, Grainger returned $159 million to shareholders through $77 million in dividends and $82 million to buy back 243,000 shares.

Webcast
Grainger will conduct a live conference call and webcast at 11:00 a.m. Eastern Daylight Time on October 16, 2018, to discuss the third quarter. The webcast will be hosted by DG Macpherson and Tom Okray, Senior Vice President and Chief Financial Officer and can be accessed at www.grainger.com/investor. For those unable to participate in the live event, a webcast replay will be available for 90 days at www.grainger.com/investor.

About Grainger
W.W. Grainger, Inc., with 2017 sales of $10.4 billion, is North America's leading broad line supplier of maintenance, repair and operating products (MRO), with operations also in Europe, Asia and Latin America.

Visit www.grainger.com/investor to view information about the company, including a supplement regarding 2018 third quarter results. The Grainger Investor Relations website also includes company information in our Fact Book and Corporate Social Responsibility report.

Safe Harbor Statement

All statements in this communication, other than those relating to historical facts, are "forward-looking statements." These forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from expectations include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies; the implementation, timing and success of our strategic pricing initiatives; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in credit ratings; changes in effective tax rates and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands of dollars, except for per share amounts)



Three Months Ended
September 30,


   Nine Months Ended
September 30,


2018


2017


2018


2017

Net sales

$

2,831,429



$

2,635,999



$

8,458,042



$

7,792,397


Cost of goods sold

1,752,194



1,618,819



5,176,107



4,716,069


Gross profit

1,079,235



1,017,180



3,281,935



3,076,328


Selling, general and administrative expense

890,113



739,442



2,413,997



2,277,009


Operating earnings

189,122



277,738



867,938



799,319


Other income and (expense)








Interest income

2,003



707



3,645



1,365


Interest expense

(22,353)



(23,790)



(69,942)



(64,971)


Equity method investment

(3,731)



(10,635)



(18,271)



(25,130)


Other non-operating income

5,976



5,978



18,001



17,284


Total other expense, net

(18,105)



(27,740)



(66,567)



(71,452)


Earnings before income taxes

171,017



249,998



801,371



727,867


Income taxes

55,972



79,182



197,798



267,239


Net earnings

115,045



170,816



603,573



460,628


Net earnings attributable to noncontrolling interest

10,668



8,810



30,680



25,957


Net earnings attributable to W.W. Grainger, Inc.

$

104,377



$

162,006



$

572,893



$

434,671










Earnings per share

  -Basic

$

1.84



$

2.80



$

10.12



$

7.43


  -Diluted

$

1.82



$

2.79



$

10.04



$

7.39


Average number of shares outstanding

  -Basic

56,340



57,317



56,172



58,010


  -Diluted

56,804



57,521



56,589



58,330


Diluted Earnings Per Share








Net earnings as reported

$

104,377



$

162,006



$

572,893



$

434,671


Earnings allocated to participating securities

(882)



(1,406)



(4,682)



(3,532)


Net earnings available to common shareholders

$

103,495



$

160,600



$

568,211



$

431,139


Weighted average shares adjusted for dilutive securities

56,804



57,521



56,589



58,330


Diluted earnings per share

$

1.82



$

2.79



$

10.04



$

7.39



NOTE: Results for 2017 have been restated due to adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU effectively increases Selling, general and administrative expense, lowering Operating earnings, and decreases total other expense, net, with no impact on Net earnings or Earnings per share. Restated 2017 quarterly and annual financials can be found at www.grainger.com/investor.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands of dollars)




Assets

September 30, 2018


December 31, 2017

Cash and cash equivalents

$

516,850



$

326,876


Accounts receivable – net

1,481,300



1,325,186


Inventories

1,473,117



1,429,199


Prepaid expenses and other assets

93,586



86,667


Prepaid income taxes

18,491



38,061


Total current assets

3,583,344



3,205,989


Property, buildings and equipment – net

1,348,914



1,391,967


Deferred income taxes

20,726



22,362


Goodwill (1)

429,818



543,903


Intangibles - net (1)

479,521



569,115


Other assets

69,860



70,918


Total assets

$

5,932,183



$

5,804,254


Liabilities and Shareholders' Equity




Short-term debt

$

49,429



$

55,603


Current maturities of long-term debt

36,973



38,709


Trade accounts payable

730,215



731,582


Accrued compensation and benefits

215,727



254,560


Accrued contributions to employees' profit sharing plans

93,509



92,682


Accrued expenses

302,263



313,766


Income taxes payable

39,216



19,759


Total current liabilities

1,467,332



1,506,661


Long-term debt

2,148,399



2,248,036


Deferred income taxes and tax uncertainties

115,644



111,710


Employment-related and other non-current liabilities

100,754



110,114


Shareholders' equity (2)

2,100,054



1,827,733


Total liabilities and shareholders' equity

$

5,932,183



$

5,804,254




(1)

Primarily related to a goodwill impairment of $105 million and an intangible impairment of $34 million relating to Cromwell. Also includes foreign currency translation and amortization of intangibles.

(2)

Common stock outstanding as of September 30, 2018 was 56,320,463 compared with 56,328,863 shares at December 31, 2017, primarily due to share repurchases.


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands of dollars)



Three Months Ended
September 30,


Nine Months Ended

September 30,


2018


2017


2018


2017

Cash flows from operating activities:








Net earnings

$

115,045



$

170,816



$

603,573



$

460,628


Provision for losses on accounts receivable

3,166



2,418



6,784



15,187


Deferred income taxes and tax uncertainties

6,928



(7,922)



10,004



(15,261)


Depreciation and amortization

63,871



66,143



191,602



194,338


Net gains from sale of assets and divestitures

(4,813)



(1,241)



(22,270)



(7,163)


Impairment of goodwill, intangible and other assets

138,829





142,155



18,459


Stock-based compensation

8,408



7,122



36,241



27,152


Losses from equity method investment

3,731



10,635



18,271



25,130


Change in operating assets and liabilities:








Accounts receivable

(23,681)



(8,787)



(171,829)



(145,631)


Inventories

(8,930)



4,915



(53,270)



34,851


Prepaid expenses and other assets

12,231



20,026



(12,920)



(4,206)


Trade accounts payable

(1,006)



19,900



4,419



56,717


Other current liabilities

42,638



48,632



(36,377)



29,643


Current income taxes payable, net

10,122



11,655



38,666



18,015


Accrued employment-related benefits cost

(4,803)



651



(18,408)



4,306


Other – net

5,355



3,737



6,363



8,713


Net cash provided by operating activities

367,091



348,700



743,004



720,878


Cash flows from investing activities:








Additions to property, buildings and equipment and intangibles

(65,813)



(60,036)



(168,896)



(191,183)


Proceeds from sales of assets

32,278



40,663



75,558



110,421


Equity method investment

2,111



(9,130)



(11,875)



(22,430)


Other – net



3,700





3,554


Net cash used in investing activities

(31,424)



(24,803)



(105,213)



(99,638)


Cash flows from financing activities:








Net (decrease) increase in commercial paper



(99,907)



18



(369,748)


Borrowings under lines of credit

1,638



3,557



23,782



33,931


Payments against lines of credit

(5,591)



(21,669)



(27,899)



(39,705)


Net (decrease) increase of long-term debt

 

(53,160)



335



(89,223)



408,208


Proceeds from stock options exercised

92,415



191



179,549



27,255


Payments for employee taxes withheld from stock awards

(1,281)



(827)



(11,381)



(17,546)


Purchase of treasury stock

(81,868)



(122,421)



(282,746)



(435,983)


Cash dividends paid

(77,157)



(73,867)



(232,289)



(225,504)


Other – net

7





2,747




Net cash used in financing activities

(124,997)



(314,608)



(437,442)



(619,092)


Exchange rate effect on cash and cash equivalents

(6,281)



221



(10,375)



8,281


Net change in cash and cash equivalents

204,389



9,510



189,974



10,429


Cash and cash equivalents at beginning of period

312,461



275,065



326,876



274,146


Cash and cash equivalents at end of period

$

516,850



$

284,575



$

516,850



$

284,575



SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)
(In thousands of dollars, except for per share amounts)

The company supplemented the reporting of financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial measures, which the company refers to as "adjusted" measures, including adjusted net sales growth, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share and adjusted tax rate. Free cash flow is not defined under GAAP. The company defines free cash flow as net cash flow provided by operating activities less purchases of property, buildings and equipment plus proceeds from the sale of assets. The company believes free cash flow is meaningful to investors as a useful measure of performance and the company uses this measure as an indication of the strength of the company and its ability to generate cash. Adjusted measures exclude items that may not be indicative of core operating results. The company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance. Management believes adjusted net sales growth, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share and adjusted tax rate are important indicators of operations because they exclude items that may not be indicative of our core operating results, and provide a better baseline for analyzing trends in our underlying businesses. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported results. These non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. The company strongly encourages investors and shareholders to review company financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

The reconciliations provided below reconcile the non-GAAP financial measures adjusted net sales growth, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share and adjusted tax rate with GAAP financial measures:


Three Months Ended
September 30, 2018


Nine Months Ended
September 30, 2018

Net sales growth reported

7.4

%


8.5

%

Foreign exchange

0.4



(0.7)


Hurricane

0.4



0.1


Net sales growth adjusted

8.2

%


7.9

%

 


Three Months Ended  September 30,


  Nine Months Ended September 30,


2018

Gross
Profit %


2017

Gross
Profit %


2018

Gross
Profit %


2017

Gross
Profit %

Gross profit reported

$

1,079,235


38.1

%


$

1,017,180


38.6

%


$

3,281,935


38.8

%


$

3,076,328


39.5

%

    Restructuring, net (1)

(141)




481




820




3,055



Gross profit adjusted

$

1,079,094


38.1

%


$

1,017,661


38.6

%


$

3,282,755


38.8

%


$

3,079,383


39.5

%

 

SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)

(In thousands of dollars, except for per share amounts)



Three Months Ended September 30,


  Nine Months Ended September 30,


2018

Operating
Margin %


2017

Operating
Margin %


2018

Operating
Margin %


2017

Operating
Margin %

Operating earnings reported

$

189,122


6.7

%


$

277,738


10.5

%


$

867,938


10.3

%


$

799,319


10.3

%

Restructuring, impairment and other charges, net (1)

142,484


5.0



9,648


0.4



165,818


1.9



66,511


0.8


Operating earnings adjusted

$

331,606


11.7

%


$

287,386


10.9

%


$

1,033,756


12.2

%


$

865,830


11.1

%


 


Three Months Ended
September 30,



Nine Months Ended
September 30,



2018


2017

%


2018


2017

%

Net earnings reported

$

104,377



$

162,006


(36)%



$

572,893



$

434,671


32

%

Restructuring, impairment and other charges, net (1)

136,029



6,519




154,066



66,576



Net earnings adjusted

$

240,406



$

168,525


43

%


$

726,959



$

501,247


45

%











Diluted earnings per share reported

$

1.82



$

2.79


(35)%



$

10.04



$

7.39


36

%

 Pretax restructuring, impairment and other charges, net (1)

2.48



0.17




2.90



1.13



  Tax effect (2)

(0.11)



(0.06)




(0.20)





Total, net of tax

2.37



0.11




2.70



1.13



Diluted earnings per share adjusted

$

4.19



$

2.90


44

%


$

12.74



$

8.52


50

%


 


Three Months Ended
September 30, 2018

Three Months Ended
September 30, 2017

Tax rate reported

32.7

%

31.7

%

  Stock-based compensation

(2.6)


(0.2)


 Restructuring, impairment and other charges, net (1)

(10.1)


0.2


Tax rate adjusted

20.0

%

31.7

%


(1)  Third quarter 2018 charges primarily related to the impairment of intangible assets in Cromwell. The charges also included restructuring actions in the United States and Canada. Third quarter 2017 charges related to restructuring actions and sales of branches in the United States and branch closures and other restructuring in Canada.


(2) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the company's ability to realize the associated tax benefits.

 

SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF EARNINGS

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)

(In thousands of dollars, except for per share amounts)


Free Cash Flow

Three Months Ended
September 30,


Nine Months Ended
September 30,


2018


2017


2018


2017

Net cash provided by operating activities

$

367,091



$

348,700



$

743,004



$

720,878


Less:








Additions to property, building and equipment

65,813



60,036



168,896



191,183


Add:








Proceeds from the sale of assets

32,278



40,663



75,558



110,421


Free Cash Flow

$

333,556



$

329,327



$

649,666



$

640,116


 

Cision View original content:http://www.prnewswire.com/news-releases/grainger-reports-results-for-the-2018-third-quarter-300731413.html

SOURCE W.W. Grainger, Inc.

Media: Joseph Micucci, Senior Director, External Affairs, O: 847-535-0879, M: 847-830-5328; Grainger Media Relations Hotline, 847-535-5678; Investors: Irene Holman, Vice President, Investor Relations, O: 847-535-0809, M: 847-217-8679; Michael Ferreter, Senior Manager, Investor Relations, O: 847-535-1439, M: 847-271-6357