EX-99.1 2 gww8kex991q32018.htm EXHIBIT 99.1 Exhibit
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, October 16, 2018 - 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.




1

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

2

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.

3


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.

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

4

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.


5

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.


6


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


7

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
%

 
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
%


8

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
 
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.
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


###

9