During the quarter, the company recorded a $10 million after-tax, or $0.15 per share, charge related to the transition of its employee retirement plan in Europe from a defined benefit plan to a defined contribution plan, while simultaneously transferring the existing defined benefit obligation to a third party.
“We continue to be pleased with the performance of our U.S. business, including our three most recent acquisitions. The investments we are making in growth and infrastructure continue to drive share gain, particularly among our large, more complex customers who have fully embraced our value proposition,” said Chairman, President and Chief Executive Officer Jim Ryan. “We are also seeing strong growth from our single-channel businesses, which are meeting the less complex needs of smaller customers in Japan and the United States,” Ryan added. “Even so, sluggish performance elsewhere dampened results. It was a challenging quarter in Canada due to a difficult macroeconomy, coupled with our investments in IT and supply chain. We are excited about the long-term growth and margin prospects for Canada and are confident that these investments will enable this business to reach its full potential. In the Other Businesses, we are making progress to improve the health of the portfolio by driving better profitability, while evaluating markets to potentially downsize or exit.” Ryan concluded, “Given our results to date, we have updated our sales and EPS guidance for the year.”
The company’s previous 2014 guidance of 5 to 9 percent sales growth and earnings per share of $12.10 to $12.85 was originally issued on January 24, 2014. The company now expects 5 to 7 percent sales growth and earnings per share of $12.20 to $12.60, excluding the $0.15 per share charge for the retirement plan transition.
Sales increased five percent in the 2014 second quarter versus the prior year, including two percentage points from acquisitions, net of dispositions, and a one percentage point reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased four percent driven by five percentage points from volume, partially offset by a one percentage point decline from the timing of Good Friday. In 2014, Good Friday fell in April versus 2013 when it occurred in March.
The company’s gross profit margin for the quarter decreased 0.9 percentage point versus the prior year to 43.1 percent, due primarily to unfavorable mix from the acquired businesses, faster growth with lower gross margin customers and lower gross profit margins from the international businesses. Operating expenses for the company increased six percent, driven by the following:
- $20 million in incremental growth and infrastructure spending;
- $14 million pre-tax for the retirement plan transition costs noted earlier;
- Incremental expenses from the acquired businesses; and
- $7 million related to the write-off of capitalized software development costs primarily for Canada and Mexico.
During the quarter, the company made the decision to extend its U.S. ERP system across North America as opposed to the previous plan to run two separate ERP instances. The decision to implement a single ERP instance led to the write-off of $7 million, or $0.06 per share, of capitalized software development costs tied to the multiple instance approach.
Company operating earnings of $341 million for the 2014 second quarter decreased three percent versus the prior year. Excluding the retirement transition, company operating earnings increased one percent and net earnings decreased one percent.
Grainger has two reportable business segments, the United States and Canada, which represented approximately 88 percent of company sales for the quarter. The remaining operating units are included in Other Businesses and are not reportable segments.
Sales for the United States segment increased seven percent in the 2014 second quarter versus the prior year. Results for the quarter included two percentage points from acquisitions, net of dispositions. Excluding acquisitions, organic sales increased five percent driven by six percentage points from volume, partially offset by a one percentage point decline from the timing of Good Friday. Sales growth to customers in the Heavy and Light Manufacturing, Retail, Natural Resources and Commercial customer end markets contributed to the sales increase in the quarter.
Operating earnings for the United States segment increased eight percent in the quarter driven by the seven percent sales growth and positive operating expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter decreased 0.8 percentage point from unfavorable mix due to faster growth with lower margin customers and from the mix of lower gross margins from the acquired businesses. Operating expenses increased three percent including $19 million in incremental growth-related spending and the incremental expenses from the acquired
Sales in the 2014 second quarter in Canada decreased nine percent in U.S. dollars versus the prior year and were down three percent in local currency. The three percent sales decline consisted of two percentage points from the timing of Good Friday and a one percentage point decline from volume. Lower sales to the Construction, Mining, Oil and Gas, Government, Light Manufacturing and Reseller customer end markets more than offset growth to customers in the Commercial, Forestry, Utilities, Transportation, Heavy Manufacturing and Retail end markets.
Operating earnings in Canada declined 48 percent in the 2014 second quarter and were down 45 percent in local currency. The earnings decrease was primarily driven by lower sales, a lower gross profit margin and negative operating expense leverage. The gross profit margin in Canada declined two percentage points versus the prior year primarily due to unfavorable foreign exchange from products sourced from the United States, inventory markdowns and higher freight costs. The increase in operating expenses was primarily driven by higher IT expenses along with some non-recurring costs. The decision during the quarter to extend the U.S. ERP instance resulted in the write-off of $4 million of software development costs related to a multiple instance approach. The company also spent an incremental $1 million on the implementation of the ERP system in Canada.
Sales for the Other Businesses increased 14 percent for the 2014 second quarter versus the prior year. The sales growth consisted of 16 percentage points from volume and price, partially offset by a two percentage points decline from unfavorable foreign exchange. The sales increase was primarily due to strong revenue growth from Zoro and the business in Japan, which more than offset modest sales declines in Europe and Latin America.
Operating earnings for the Other Businesses were roughly breakeven in the 2014 second quarter versus $13 million in the 2013 second quarter. Lower performance versus the prior year was primarily driven by the $14 million expense incurred for the retirement plan transition in Europe and $2 million for the write-off of capitalized software development costs for Mexico. The rationale for the retirement plan change was to eliminate the company’s existing and future obligations under the defined benefit plan, align with market trends in the Netherlands and better manage employee benefits costs going forward.
For the six months ended June 30, 2014, sales of $4.9 billion increased five percent versus $4.7 billion in the six months ended June 30, 2013. There were 127 selling days in the first six months of 2014, the same number of selling days in 2013. Net earnings decreased two percent to $423 million versus $429 million in the first half of 2013. Earnings per share for the six months increased one percent to $6.00 versus $5.97 for 2013. Excluding the charge in the 2014 second quarter, net earnings increased one percent and earnings per share increased 3 percent to $6.15.
W.W. Grainger, Inc. netted 2013 sales of $9.4 billion.