CHICAGO — 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.
“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.