Grainger Profit, Revenue Better Than Expected

CHICAGO, Ill. — Grainger reported results for the year ended December 31, 2015. Sales of $10 billion were flat versus 2014. Reported net earnings of $769 million decreased 4 percent versus $802 millionin 2014. Reported earnings per share of $11.58 increased 1 percent versus $11.45 in 2014. The years 2015 and 2014 included the following restructuring/non-operating items:

Note: Information regarding the adjustments is detailed in the discussion of the 2015 fourth quarter and in the podcast.

“This was a challenging year for us and for most industrial companies, with an unprecedented combination of declining oil and commodity prices, low inflation and a strong U.S. dollar,” said Chairman, President and Chief Executive Officer Jim Ryan. “We took action in 2015 by restructuring several of our businesses, resulting in a leaner cost structure. As previously communicated, we will continue to execute changes in the United States and Canada in 2016.” Ryan concluded, “We also continued to invest for the future by expanding and upgrading our industry-leading supply chain, digital capabilities, sales force productivity tools and KeepStock, which enables us to serve customers the way they want to be served.”

Results in 2015 benefited from a net $0.16 per share of non-repeating operating benefits primarily related to the shift in timing of the implementation of SAP in Canada into the first quarter of 2016 and a one-time reduction in healthcare liabilities in the United States.

The company reiterated its 2016 sales and earnings per share guidance issued on November 12, 2015. The company continues to expect -1 to 7 percent sales growth and earnings per share of $10.80 to $13.00.  Further information on 2016 guidance assumptions can be found in the podcast available on the company’s website.  

For the full year, the company generated $1.0 billion in operating cash flow versus $994 million in 2014. Gross capital expenditures for the year were $374 million versus $387 million in 2014, including expansion of the distribution center network inNorth America and investments in SAP. Grainger repurchased approximately 6.1 million shares of stock for $1.4 billion in 2015 as part of the expanded share buyback program announced in April 2015.  The company expects to deploy $1.6 billion to share repurchases in 2016 and 2017. As of year-end 2015, the company had 9.5 million shares remaining under the current repurchase authorization. Dividends paid in 2015 totaled $306 million. For the year, Grainger returned $1.7 billion in cash to shareholders in the form of share repurchases and dividends.

During 2015, the company achieved the following:

• Adjusted its capital structure by completing a $1 billion debt initial public offering while maintaining a AA- rating;
• Improved customer service and efficiency by relocating to larger distribution centers in Toronto for Acklands-Grainger and inOsaka, Japan, for MonotaRO;
• Established a leading position in the United Kingdom MRO market with the September 1st acquisition of Cromwell Group (Holdings) Limited and created further opportunity for online growth in the U.K. and Europe;
• Announced DG Macpherson as Chief Operating Officer;
• Improved network efficiency by closing 49 branches in the United States, 16 branches in Canada and 16 branches at Fabory in Europe;
• Reorganized the U.S. sales and marketing team to accelerate market share gains for large and medium-sized customers;
• Recorded $296 million in sales for Zoro in the United States, a 62 percent increase over 2014;
• Received the Internet Retailer award for B2B eCommerce Player of the Year;
• Installed SAP in Mexico, with Canada scheduled for February 1, 2016, allowing for better data visibility across North American businesses and ultimately enabling direct ship to customers from distribution centers in Canada and
• Raised the quarterly dividend by 8 percent, representing the 44th consecutive year of increased dividends.

Branch closures and reorganizations like those noted above drove the majority of restructuring costs recorded in the 2015 fourth quarter.

2015 Fourth Quarter
Sales for the 2015 fourth quarter of $2.5 billion decreased 1 percent versus the 2014 fourth quarter. Reported net earnings of$145 million declined 2 percent versus $149 million in 2014. Reported fourth quarter earnings per share of $2.30 increased 7 percent versus $2.14 in 2014. Results for the quarter included a net $0.16 per share of non-repeating operating benefits already noted for the year. The 2015 and 2014 fourth quarters included the following restructuring/non-operating items:

During the quarter, the company recorded net charges totaling $0.19 per share resulting in an adjusted earnings per share of$2.49.  In the 2015 fourth quarter, the company incurred restructuring for the business in the United States and initiated restructuring in Canada. In the 2014 fourth quarter, the company closed or restructured operations in Brazil, Colombia and Fabory, totaling $0.66 per share, resulting in adjusted earnings per share of $2.80. Excluding items detailed above in both years, adjusted company net earnings for the 2015 quarter decreased 19 percent and adjusted earnings per share decreased 11 percent versus the prior year.

Company sales in the 2015 fourth quarter decreased 1 percent. There were 64 selling days in both the 2015 and 2014 fourth quarters.  The 1 percent sales decline for the quarter consisted of a 2 percentage point decline from unfavorable foreign exchange, a 1 percentage point decline from price, a 1 percentage point decline from lower sales of seasonal products and a 1 percentage point decline from sales of Ebola related safety products in 2014 that did not repeat, partially offset by 4 percentage points from the Cromwell acquisition.

Company operating earnings of $252 million for the 2015 fourth quarter decreased 6 percent versus the 2014 quarter. This decrease was driven by the 1 percent sales decline and a lower gross profit margin, partially offset by operating expense leverage as expenses declined at a faster rate than sales.  The company’s gross profit margin for the quarter declined 1.6 percentage point, primarily driven by better relative performance with lower margin customers and price deflation versus slight cost inflation. Cost inflation at the company level was driven by the business in Canada.  Continued weakness in the Canadian dollar versus the U.S. dollar drove product cost inflation for U.S.-denominated purchases. Excluding the business in Canada, the company experienced slight product cost deflation versus the 2014 fourth quarter. Operating expenses declined due to lower employee benefits costs, partially offset by higher severance and contract service costs and included $32 million of growth and infrastructure spend. Excluding $30 million of restructuring costs in 2015 and $51 million of restructuring costs in 2014, adjusted operating earnings in the quarter were down 11 percent.  

The company has two reportable business segments, the United States and Canada, which represented approximately 82 percent of company sales for the quarter. The remaining operating units located primarily in Europe, Asia and Latin America are included in Other Businesses and are not reportable segments. Results for the company’s single channel online model businesses are included in Other Businesses.

United States
Sales in the United States segment decreased 3 percent in the 2015 fourth quarter versus the prior year. The 3 percent sales decline was driven by a 2 percentage point decline from volume, a 1 percentage point decline from price, a 1 percentage point decline from lower sales of seasonal products and a 1 percentage point decline from sales of Ebola related safety products in 2014 that did not repeat, partially offset by 1 percentage point from higher intercompany sales to Zoro and 1 percentage point from the favorable timing of the Christmas holiday. Retail and Government customers had the strongest sales performance in the quarter.

Operating earnings for the United States segment decreased 16 percent in the quarter driven by the 3 percent sales decline and lower gross profit margins. Gross profit margins for the quarter decreased 1.7 percentage point driven by price deflation exceeding cost deflation and better relative performance with lower margin customers. Operating expenses declined 1 percent due to lower employee benefits costs, partially offset by higher severance and contract service costs.  Excluding $25 million of restructuring costs, adjusted operating earnings for the U.S. segment in the quarter were down 9 percent versus the prior year.

Canada
Sales in the 2015 fourth quarter at Acklands-Grainger decreased 27 percent in U.S. dollars, 14 percent in local currency. The 14 percent sales decrease consisted of a 17 percentage point decrease from volume and a 1 percentage point decrease from lower sales of seasonal products, offset by a 4 percentage point contribution from price. Weakness in the oil and gas industries continued to affect sales to Canada’s customers.  Sales to all customer end markets except Government and Forestry were down versus the prior year.

Operating earnings in Canada declined 75 percent in the 2015 fourth quarter. The gross profit margin in Canada improved 1.3 percentage point versus the prior year.  The 2015 fourth quarter contained favorable inventory adjustments versus the 2014 quarter; in the absence of those adjustments, the gross profit margin would have been down versus the prior year. Operating expenses in Canada were down 12 percent in the quarter. Excluding $3 million of restructuring costs, adjusted operating expenses were down 15 percent and adjusted operating earnings in the quarter were down 60 percent.

Other Businesses
Sales for the Other Businesses increased 41 percent for the 2015 fourth quarter versus the prior year. This performance consisted of 33 percentage points from Cromwell, acquired on September 1, 2015, and 18 percentage points of growth from volume and price, partially offset by a 10 percentage point decline from unfavorable foreign exchange. Organic sales growth in the Other Businesses was primarily driven by MonotaRO in Japan and Zoro in the United States.

The Other Businesses posted $9 million of operating earnings in the 2015 fourth quarter versus a $51 million operating loss in the 2014 fourth quarter. During the 2014 fourth quarter, the company recorded the impairment and restructuring actions noted in the table above, resulting in a $51 million charge. Excluding these charges, the Other Businesses were breakeven in the 2014 period.  The increase in earnings versus the prior year was driven by strong operating performance from MonotaRO and Zoro U.S.

Other
Other income and expense was a net expense of $17 million in the 2015 fourth quarter versus a net expense of $5 million in the 2014 fourth quarter. This increase was primarily attributable to higher interest expense from the $1 billion in long-term debt issued in June 2015 used to fund the share repurchases and losses from the company’s investment in clean energy that began in 2015.

The effective tax rate in 2015 was 36.5 percent for the quarter and 37.2 percent for the full year. Excluding the effect of the items detailed in the tables above, the adjusted tax rate was 39.2 percent for the quarter and 37.6 percent for 2015, compared to 38.2 percent in the 2014 quarter and year. The discrete tax items primarily relate to reduced deferred tax liabilities stemming from a lower enacted tax rate in the United Kingdom for Cromwell. The increase in the adjusted quarterly rate was primarily due to a higher proportion of earnings in the United States versus geographies with lower tax rates. The company’s clean energy investment generated $0.09 per share of earnings for the year. The company is currently projecting a tax rate of 35.2 to 36.2 percent for 2016, compared to the prior projection of 36.3 to 37.3 percent on November 12, 2015. The lower rate is driven by the incremental benefit from the company’s second clean energy investment.

Cash Flow
Operating cash flow was $256 million in the 2015 fourth quarter versus $300 million in the 2014 fourth quarter. The company used the cash generated during the quarter and proceeds from debt to invest in the business and return cash to shareholders through share repurchase and dividends. Gross capital expenditures were $121 million in the 2015 fourth quarter versus $147 million in the fourth quarter of 2014. In the quarter, Grainger returned $299 million to shareholders through $75 million in dividends and $224 million to buy back 1.0 million shares of stock.