CHICAGO — Grainger today reported results for the year ended Dec. 31, 2017. Sales of $10.4 billion were up 3 percent versus $10.1 billion in 2016. Reported net earnings of $586 million declined 3 percent versus $606 million in 2016. Reported earnings per share of $10.02 were up 2 percent versus $9.87 in 2016.
“Overall we were pleased with the year. We made progress by removing the pricing barrier and improving service for customers while improving our cost structure. This continued in the fourth quarter with strong performance, as customers responded positively to our actions. We’re encouraged that we remain on track with our volume growth and expense management goals in an improving demand environment,” said DG Macpherson, Chairman and Chief Executive Officer. “In Canada, we are in the early stages of a business model reset and like the progress we are seeing. We remain focused in 2018 on providing the best experience and value for our customers,” he concluded.
The company updated its 2018 sales and earnings per share guidance issued on Nov. 10, 2017, to reflect U.S. tax legislation and 2017 actual results. The company still expects 3 to 7 percent sales growth and now expects earnings per share of $12.95 to $14.15 for 2018. The prior earnings per share guidance for 2018 was $10.60 to $11.80. The increase in the midpoint of the earnings per share guidance is composed of $0.50 from better than expected 2017 operating performance, $2.15 from a lower corporate tax rate under U.S.tax legislation and $0.06 from incremental share buybacks funded by the benefits of the tax legislation, partially offset by $0.10 of lower benefits from clean energy investments and $0.26 in increased investment in the business funded by the benefits of the tax legislation.
For the full year, the company generated $1.1 billion in operating cash flow versus $1.0 billion in 2016. Gross capital expenditures for the year were $237 million versus $284 million in 2016. Grainger repurchased approximately 3.0 million shares of stock for $605 million in 2017, and dividends paid in 2017 totaled $304 million. For the year, Grainger returned $910 million to shareholders in the form of share repurchases and dividends.
2017 Fourth Quarter
Sales for the 2017 fourth quarter of $2.6 billion were up 7 percent versus the 2016 fourth quarter. Reported net earnings of $151 million increased 149 percent versus $61 million in 2016. Reported fourth quarter earnings per share of $2.63 increased 160 percent versus $1.01 in 2016.
In the United States, restructuring charges related to branch closures and severance. Restructuring in Canada related to turnaround costs, which include branch closures. Discrete tax items included the release of tax reserves related to the expiration of statute of limitation periods, items related to uncertain tax positions or benefits and other items. The Other Businesses recorded restructuring charges related to Fabory and Latin America. In total there were $0.31 per share of charges net of tax benefits in the 2017 quarter versus $1.44 per share in the 2016 quarter.
Company sales in the 2017 fourth quarter were up 7 percent versus the prior year. There were 63 selling days in both the 2017 fourth quarter and the 2016 fourth quarter. The sales increase consisted of an 11 percentage point increase from volume, partially offset by a 3 percentage point decline from price and a 1 percentage point decline from the divestiture of a specialty business.
Company operating earnings of $240 million for the 2017 fourth quarter increased 38 percent versus the 2016 quarter. The increase was driven by higher sales and gross profit dollars along with lower restructuring costs and other charges versus the prior year. The company’s gross profit margin for the quarter decreased 1.3 percentage points, primarily driven by price deflation in the United States, partially offset by higher gross profit margin in Canada. Operating expenses decreased 4 percent. Excluding restructuring items noted in the fourth quarter table, adjusted operating expenses were up 4 percent and adjusted operating earnings in the quarter were up 4 percent.
The company has two reportable business segments, the United States and Canada, which represented approximately 79 percent of company sales for the quarter. The remaining operating businesses are located in Europe, Asia and Latin America. The single channel online businesses are included in Other Businesses and are not reportable segments.
Sales in the U.S. segment were up 5 percent versus the prior year. The sales increase consisted of a volume increase of 11 percentage points, partially offset by 5 percentage points from price and a 1 percentage point decline from the divestiture of a specialty business. Resellers and Heavy Manufacturing end markets had the strongest sales performance in the quarter.
U.S. segment operating earnings increased 16 percent versus the 2016 quarter. The increase was driven by higher sales and lower restructuring charges. The segment’s gross profit margin for the quarter decreased 1.8 percentage points driven by price deflation. Operating expenses decreased 6 percent due to lower restructuring charges. Excluding restructuring items, adjusted operating expenses were up 2 percent and adjusted operating earnings in the quarter were down 1 percent.
Sales in the Canada segment were up 5 percent in U.S. dollars versus the prior year. The sales increase consisted of 5 percentage points from favorable foreign exchange and a 4 percentage point increase from price, partially offset by a 4 percentage point decrease from volume. Sales to Oil and Gas and Agriculture/Mining customer end markets had the strongest performance in the quarter.
The Canada segment operating loss was $17 million versus a $10 million loss in the 2016 quarter, driven by higher operating expenses. The segment’s gross profit margin increased 1.4 percentage points, primarily due to price increases taken in the fourth quarter. Operating expenses increased 18 percent in the quarter due to restructuring charges. Excluding restructuring items, adjusted operating expenses were up 7 percent, up 2 percent in local currency, and adjusted operating earnings in the quarter were up 59 percent.
Sales for the Other Businesses were up 16 percent versus the prior year, composed of volume and price. Sales growth in the Other Businesses was primarily driven by MonotaRO in Japan and Zoro in the United States.
The Other Businesses operating earnings were $11 million versus $36 million of operating losses in the 2016 fourth quarter. The increase was driven by impairment charges in 2016 for Fabory and Colombia. Excluding restructuring items, adjusted operating expenses were up 13 percent and adjusted operating earnings were up 51 percent.
Other income and expense was a net expense of $32 million in the 2017 fourth quarter versus a net expense of $29 million in the 2016 fourth quarter. This increase was primarily due to additional interest expense from the $400 million of debt issued in May 2017 and higher losses from the company’s clean energy investments.
The effective tax rate in 2017 was 22.0 percent for the quarter and 33.5 percent for the full year, compared to 53.0 percent for the 2016 quarter and 37.9 percent for full year 2016. The lower rate in the fourth quarter was primarily due to the comparison to the prior year’s non-tax deductibility of a goodwill impairment, discrete tax items from prior years and the tax benefit from stock-based awards. The lower rate in 2017 was driven by the tax benefit from stock-based awards, higher clean energy credits and U.S. tax legislation. The company’s clean energy investments generated $0.24 per share of earnings for the year. As a result of U.S. tax legislation signed into law on Dec. 22, 2017, the company is currently projecting a tax rate of 23.0 to 26.0 percent for 2018, versus its prior projection of 34.5 to 35.5 percent on Nov. 10, 2017.
Operating cash flow was $336 million in the 2017 fourth quarter versus $335 million in the 2016 fourth quarter. The company used the cash generated during the quarter to invest in the business, pay down debt and return cash to shareholders through share repurchase and dividends. Capital expenditures were $46 million in the 2017 fourth quarter versus $71 million in the fourth quarter of 2016. In the 2017 fourth quarter, Grainger returned $248 million to shareholders through $79 million in dividends and $169 million to buy back 855,000 shares of stock. Free cash flow for the quarter was $299 million versus $271 million in the 2016 quarter.
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