the costs associated with the SAP implementation.
Acklands-Grainger Branch-based segment
Beginning with the first quarter 2006, Grainger is reporting its Canadian branch-based business as a separate segment. Acklands-Grainger is Canada’s leading broad-line distributor of industrial, automotive fleet and safety supplies, serving customers through 164 branches and five distribution centers across the country.
Sales for the quarter of $139 million were up 19 percent versus the 2005 first quarter, 12 percent in Canadian currency. Sales in Canada continued to benefit from increased sales to energy, mining and government customers, new branches, as well as from the timing of the Easter holiday. Operating earnings were up 18 percent for the 2006 first quarter, resulting from positive inflation recovery offset by higher payroll and benefit expenses.
“Breaking out the Canadian business as a separate segment illustrates the earnings power of our U.S. operations and demonstrates the opportunity to improve Acklands-Grainger,” said Keyser. “We are in the process of bringing the performance of Acklands-Grainger more in line with that of the U.S. branch-based business through improving service and productivity by implementing the common SAP platform, rationalizing the branch and supply chain network and establishing a uniform purchasing program.”
Lab Safety Supply (LSS)
Sales for the quarter were up 11 percent versus the 2005 first quarter. Contributing to the growth was the acquisition of the business of Rand Materials Handling Equipment Co. in January 2006. Excluding the acquisition, sales grew 8 percent in the quarter. Operating earnings were up 12 percent for the 2006 first quarter. The improvement was due to better gross profit margins, partially offset by increased operating expenses related to the Rand acquisition and higher employee healthcare costs.
Operating cash flow was $27 million for the quarter. The company used cash flow from operations to fund growth initiatives, pay dividends and repurchase 461,400 shares of stock during the quarter. Approximately 4.2 million shares remain under the current repurchase authorization.
Grainger, Chicago, IL, reported sales for the first quarter ended March 31, 2006 were $1.4 billion, up 6 percent over the prior year’s first quarter. Net earnings for the quarter increased 18 percent to $86.2 million, as compared to $72.8 million in the 2005 first quarter. For the first time, the company split out its Canadian business, Acklands-Grainger, which reported sales for the quarter of $139 million were up 19 percent versus the 2005 first quarter, 12 percent in Canadian currency. In its Branch-based segment, the company’s decision to wind-down its integrated supply and automotive-related contracts resulted in a 3 percentage point reduction in the segment’s sales growth.
In January, Grainger successfully implemented the U.S. phase of its SAP system. The company said it now has an integrated enterprise management system that helps improve customer service and provides greater operational visibility throughout the U.S. branch-based business. The new system uses an improved methodology to capture data related to certain inventory transactions and estimates. This methodology resulted in a $0.05 earnings per share improvement for the 2006 first quarter that would have been recorded in the fourth quarter of 2006 under the prior years’ inventory transaction procedures.
Beginning January 1, 2006, the company revised its segment reporting from two reportable segments to three reportable segments (Grainger Branch-based, Acklands-Grainger Branch-based, Lab Safety). Prior periods have been restated for comparability.
Sales in its Branch-based segment, which now includes the U.S., Mexico and China, increased 5 percent in the 2006 first quarter. Sales in the U.S. were up 5 percent as compared to the 2005 first quarter. The company’s decision to wind-down its integrated supply and automotive-related contracts resulted in a 3 percentage point reduction in the segment’s sales growth. Sales for the quarter were positively affected by sales in market expansion markets, timing of the Easter holiday and higher sales to manufacturing and reseller markets. Partially offsetting these were slower growth in commercial, government and transportation sectors and lower sales of seasonal products.
The market expansion program contributed approximately 2 percentage points to the 5 percent segment sales growth for the quarter. The company is currently enhancing its presence in the top U.S. metropolitan markets. Sales in Phase 1 of the program — Atlanta, Denver and Seattle — grew by 11 percent in the quarter versus first quarter 2005. Sales in Phase 2, covering four markets in Southern California, were up 13 percent. Sales in Phase 3 — Houston, St. Louis and Tampa — were up 13 percent. Phase 1 was completed in the first quarter of 2005. As of the end of the 2006 first quarter, Phase 2 was 90 percent complete and Phase 3 was 70 percent complete. Phase 4 of the program — Baltimore, Cincinnati, Kansas City, Miami, Philadelphia and Washington D.C. — is underway but is less than 50 percent complete. In the second quarter 2006, the company expects to open, relocate or expand more than 25 branches.
Sales in Mexico were up 23 percent in the quarter versus the same period in 2005 driven by an expanded telesales operation and direct marketing efforts.
Operating earnings for the quarter were up 21 percent in the Grainger Branch-based segment, the result of higher sales and an improved gross profit margin, partially offset by operating expenses, which grew faster than sales. The segment’s gross profit margin benefited from the new SAP system, positive inflation recovery and from exiting integrated supply and automotive contracts.
Operating expenses grew 12 percent during the quarter. Contributing to the increase were the accounting change for stock-based compensation, higher profit sharing accruals and