Grainger Reports 2012 Third Quarter Results Sales Up 10 Percent on a Daily Basis

Company Reaffirms 2012 Earnings Per Share Guidance of $10.50 to $10.80* and Now Expects 2012 Sales Growth of 11 to 12 Percent

Quarterly Highlights

- Sales of $2.3 billion, up 8 percent, 10 percent on a daily basis**

- Company establishes $0.66 per share reserve for expected settlement with the U.S. Department of Justice

- EPS of $2.81, up 12 percent excluding the reserve

- Operating cash flow of $338 million, up 35 percent

CHICAGO, Oct. 16, 2012 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2012 third quarter ended September 30, 2012.  Sales for the 2012 third quarter of $2.3 billion increased 8 percent versus $2.1 billion in the 2011 third quarter.  There were 63 selling days in the quarter, one less than in 2011.  Sales on a daily basis increased 10 percent versus the 2011 third quarter. 

During the third quarter, the Company recorded a $70 million pre-tax reserve for a settlement in principle to resolve pricing disclosure issues relating to government contracts with General Services Administration (GSA) and United States Postal Service (USPS).  The proposed settlement, which covers 12 years of sales to the GSA and 10 years of sales to the USPS, remains subject to the approval of the U.S. Department of Justice (DOJ).  In addition, the company has established a $6 million pre-tax reserve for resolving tax, freight and miscellaneous billing issues with these government customers.  

Excluding the reserve, net earnings increased 11 percent and earnings per share of $2.81 increased 12 percent.  Including the reserve, reported net earnings for the third quarter decreased 15 percent to $155 million versus $182 million in 2011 and earnings per share of $2.15 decreased 14% versus $2.51 in 2011.

"We delivered a solid quarter, with stronger organic sales growth in September than in August and continued to gain market share, expand margins and generate nearly $100 million in operating cash flow over the prior year.  We are also resolving an ongoing dispute with the GSA and USPS and are pleased to be near final settlement with the DOJ.  We value our long-standing relationship with these important federal government customers and look forward to continuing to expand the products and services we provide to them in the future," said Chairman, President and Chief Executive Officer Jim Ryan.

Ryan continued, "Grainger is committed to providing great service to businesses and institutions and we continue to invest in what matters to them, including more products and services, more extensive sales coverage and enhanced eCommerce capabilities.  At the same time, we are driving improved profitability by expanding our private label program while harvesting productivity through continuous improvement programs throughout the company."

Ryan added, "We have delivered solid sales and earnings growth year to date.  However, in light of the sluggish global economy, we are slightly revising our 2012 sales guidance to 11 to 12 percent growth.  Our EPS guidance remains unchanged at $10.50 to $10.80*.  We remain committed to our strategy and leading position in the fragmented global MRO market," Ryan concluded.

Sales in the 2012 third quarter increased 8 percent, 10 percent on a daily basis, with 11 percent daily sales growth in July, 10 percent in August and 9 percent in September.  The 10 percent increase in daily sales in the quarter included 3 percentage points from acquisitions and a 1 percentage point decline attributable to unfavorable foreign exchange.  Daily organic sales for the quarter increased 8 percent including 4 percentage points from volume and 4 percentage points from price.  Daily organic sales growth by month was as follows: 8 percent in July, 7 percent in August, and 8 percent in September.

Company operating earnings of $254 million for the 2012 third quarter decreased 16 percent. Excluding the reserve, operating earnings increased 9 percent to $330 million.  This earnings growth was driven by higher sales and improved gross profit margins.  The increase in the company's gross profit margin and expenses were driven by a number of factors that are examined at the segment level that follows. 

The company has two reportable business segments, the United States and Canada, which represented approximately 89 percent of company sales for the quarter.  The remaining operating units located in Asia, Europe, and Latin America are included in Other Businesses and are not reportable segments.  

United States
Sales for the United States segment increased 4 percent, 5 percent on a daily basis, in the 2012 third quarter versus the prior year.  The 5 percent daily sales growth for the quarter was driven by 4 percentage points from price and 1 percent volume growth.  Daily sales increased 6 percent in July, 4 percent in August and 6 percent in September.  Solid sales growth and market share gains in the heavy manufacturing, light manufacturing, commercial, government and retail end markets contributed to the sales performance for the quarter.

Operating earnings for the United States segment increased 7 percent, excluding the reserve, driven primarily by the 4 percent sales growth and higher gross profit margins.  Gross profit margins for the quarter increased 50 basis points driven by price inflation exceeding product cost inflation, partially offset by negative customer mix.  Operating expenses, excluding the reserve, increased in line with the sales growth and included an incremental $19 million in growth-related spending on new sales representatives, eCommerce and advertising.  Including the reserve, quarterly operating earnings in the United States decreased 18 percent versus the 2011 quarter.

Canada
Sales in the 2012 third quarter at Acklands-Grainger increased 10 percent, 12 percent on a daily basis.  In local currency, sales increased 11 percent, 13 percent on a daily basis.  The 13 percent sales growth consisted of 11 percent from volume and 2 percent from price.  Daily sales in local currency increased 16 percent in July, 13 percent in August and 11 percent in September.  The sales increase for the quarter in Canada was led by strong growth to customers in the commercial services, oil and gas, forestry, contractor and utilities end markets.

Operating earnings in Canada increased 37 percent in the 2012 third quarter, up 38 percent in local currency.  The strong improvement in operating performance was driven by strong sales growth, a 140 basis point improvement in gross profit margins and positive operating expense leverage.

Other Businesses
Sales for the Other Businesses, which includes operations in Asia, Europe and Latin America, increased 54 percent for the 2012 third quarter versus the prior year.  This increase was primarily due to the incremental sales from the business in Europe (Fabory) acquired in August 2011, and the business in Brazil (AnFreixo) acquired in April 2012.  Excluding acquisitions, sales for the Other Businesses increased 20 percent, primarily the result of strong revenue growth in Japan and Mexico. 

Operating earnings for the Other Businesses were $9 million in the 2012 third quarter versus $11 million in the 2011 third quarter.  Earnings performance for the quarter was primarily driven by performance in Japan and Mexico, which was partially offset by small operating losses from the businesses in Europe and Brazil.

Other
Interest expense, net of interest income, was $4.0 million in the 2012 third quarter versus $2.0 million in the 2011 third quarter.  The increase was primarily attributable to higher average borrowings and higher interest rates in the 2012 third quarter versus the 2011 quarter.  In addition, interest expense adjustments related to capital leases for the acquired business in Europe also contributed to the increase in 2012.

In the 2012 third quarter, the effective tax rate was 37.1 percent versus 38.7 percent in 2011.  This decline was primarily due to higher earnings in foreign jurisdictions with lower tax rates and a lower blended state tax rate.  The company continues to expect the effective tax rate for the full year 2012 to be in the range of 37.4 to 37.7 percent.

Cash Flow
Operating cash flow was $338 million in the 2012 third quarter versus $251 million in the 2011 third quarter.  The company used cash from operations to fund capital expenditures of $59 million in the quarter versus $47 million in the third quarter of 2011.  In the 2012 third quarter, Grainger returned $142 million to shareholders through $57 million in dividends and $85 million to buy back 421,000 shares of stock.  As of September 30, 2012, the company had approximately 5.6 million shares remaining on its share repurchase authorization.

Year-to-Date
For the nine months ended September 30, 2012, sales of $6.7 billion increased 12 percent, 13 percent on a daily basis, versus $6.0 billion for the nine months ended September 30, 2011.  The first nine months of 2012 included a reserve for expected settlements of $0.66 per share and the first nine months of 2011 included a $0.12 per share benefit primarily from the settlement of tax examinations related to 2007 and 2008.  Excluding these items from both years, net earnings for the first nine months increased 16 percent and earnings per share increased 16 percent versus 2011. Reported net earnings increased 5 percent to $534 million versus $510 million in the first nine months of 2011.  Reported earnings per share for the nine months increased 5 percent to $7.35 versus $7.03 for 2011. 

W.W. Grainger, Inc. with 2011 sales of $8.1 billion is North America's leading broad line supplier of maintenance, repair and operating products, with expanding global operations.

Visit www.grainger.com/investor to view information about the company, including a history of daily sales by segment and a podcast regarding 2012 third quarter results. The Grainger Industrial Supply website also includes more information on Grainger's proven growth drivers, including product line expansion, sales force expansion, eCommerce, inventory services and international expansion.

Forward-Looking Statements
This document contains forward-looking statements under the federal securities law.  Forward-looking statements relate to the company's expected future financial results and business plans, strategies and objectives and are not historical facts.  They are generally identified by qualifiers such as "proposed", "continues to expect", "earnings per share guidance", "EPS guidance", "sales guidance", or similar expressions. There are risks and uncertainties, the outcome of which could cause the company's results to differ materially from what is projected.  The forward-looking statements should be read in conjunction with the company's most recent annual report, as well as the company's Form 10-K, Form 10-Q and other reports filed with the Securities & Exchange Commission, containing a discussion of the company's business and various factors that may affect it.

*Earnings per share guidance of $10.50 to $10.80, excludes reserve adjustment.

**In the 2012 third quarter one selling day represents approximately $33 to $38 million in sales and approximately $0.05 to $0.10 in earnings per share on an incremental basis.

 

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands, except for per share amounts)

 


Three Months Ended

September 30,


Nine Months Ended

September 30,


2012


2011


2012


2011

Net sales

$

2,281,205



$

2,114,647



$

6,723,925



$

6,001,281


Cost of merchandise sold

1,287,245



1,201,648



3,777,290



3,396,274


Gross profit

993,960



912,999



2,946,635



2,605,007










Warehousing, marketing and administrative expense

739,634



609,959



2,073,948



1,774,071


Operating earnings

254,326



303,040



872,687



830,936










Other income and (expense)








Interest income

707



553



1,904



1,560


Interest expense

(4,751)



(2,579)



(10,718)



(6,437)


Other non-operating income and

(expense)

438



(555)



89



(610)


Total other expense

(3,606)



(2,581)



(8,725)



(5,487)










Earnings before income taxes

250,720



300,459



863,962



825,449










Income taxes

92,916



116,412



323,599



310,745










Net earnings

157,804



184,047



540,363



514,704










Net earnings attributable to

noncontrolling interest

2,410



1,926



6,749



4,765










Net earnings attributable to W.W.

Grainger, Inc.

$

155,394



$

182,121



$

533,614



$

509,939










Earnings per share

  -Basic

$

2.19



$

2.56



$

7.50



$

7.18


  -Diluted

$

2.15



$

2.51



$

7.35



$

7.03


Average number of shares outstanding

  -Basic

69,625



69,846



69,897



69,622


  -Diluted

70,961



71,280



71,306



71,105










Diluted Earnings Per Share








Net earnings as reported

$

155,394



$

182,121



$

533,614



$

509,939


Earnings allocated to participating securities

(2,748)



(3,285)



(9,480)



(9,953)


Net earnings available to common shareholders

$

152,646



$

178,836



$

524,134



$

499,986


Weighted average shares adjusted for dilutive securities

70,961



71,280



71,306



71,105


Diluted earnings per share

$

2.15



$

2.51



$

7.35



$

7.03


         

SEGMENT RESULTS (Unaudited)

(In thousands of dollars)

 


Three Months Ended

September 30,


Nine Months Ended

September 30,


2012


2011


2012


2011

Sales








United States

$

1,776,749



$

1,715,120



$

5,219,559



$

4,878,582


Canada

272,943



248,398



825,443



747,683


Other Businesses

254,817



168,251



742,904



420,768


Intersegment sales

(23,304)



(17,122)



(63,981)



(45,752)


Net sales to external customers

$

2,281,205



$

2,114,647



$

6,723,925



$

6,001,281










Operating earnings








United States

$

247,054



$

302,858



$

856,701



$

829,866


Canada

34,247



25,016



97,502



78,194


Other Businesses

8,778



10,551



30,737



25,576


Unallocated expense

(35,753)



(35,385)



(112,253)



(102,700)


Operating earnings

$

254,326



$

303,040



$

872,687



$

830,936










Company operating margin

11.2

%


14.3

%


13.0

%


13.8

%

ROIC* for Company





30.2

%


34.3

%

ROIC* for United States





46.4

%


48.7

%

ROIC* for Canada





23.4

%


20.3

%









    

*The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation.  ROIC is calculated using operating earnings divided by net working assets (a 4-point average for the year-to-date).  Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (4-point average of $197.4 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (4-point average of $365.0 million).  Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Preliminary

(In thousands of dollars)



Assets

September 30, 2012


December 31, 2011

Cash and cash equivalents

$

420,803



$

335,491


Accounts receivable – net (1)

1,022,185



888,697


Inventories

1,269,683



1,268,647


Prepaid expenses and other assets

112,927



154,655


Deferred income taxes

49,355



47,410


Total current assets

2,874,953



2,694,900


Property, buildings and equipment – net

1,093,197



1,060,295


Deferred income taxes

116,084



100,830


Goodwill

526,634



509,183


Other assets and intangibles – net

372,876



350,854


Total assets

$

4,983,744



$

4,716,062


Liabilities and Shareholders' Equity




Short-term debt (2)

$

75,998



$

119,970


Current maturities of long-term debt (3)

6,392



221,539


Trade accounts payable

439,595



477,648


Accrued compensation and benefits

179,755



207,010


Accrued contributions to employees' profit sharing plans

127,758



159,950


Accrued expenses (4)

243,412



178,652


Income taxes payable

10,291



23,156


Total current liabilities

1,083,201



1,387,925


Long-term debt (3)

479,699



175,055


Deferred income taxes and tax uncertainties

109,012



100,218


Employment-related and other non-current liabilities

343,469



328,585


Shareholders' equity (5)

2,968,363



2,724,279


Total liabilities and shareholders' equity

$

4,983,744



$

4,716,062


    

(1)

Accounts receivable increased $133 million, or 15%, primarily due to higher sales.

(2)

Short-term debt decreased $44 million, or 37%, primarily due to the paydown of remainder of the commercial paper.

(3)

Change in both current maturities of long-term debt and long-term debt was due to the refinancing of an existing bank term loan.

(4)

Accrued expenses increased primarily due to the reserve recorded for the proposed GSA and USPS settlement.

(5)

Common stock outstanding as of September 30, 2012 was 69,494,573 shares as compared with 69,962,852 shares at December 31, 2011.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Preliminary

(In thousands of dollars)


Nine Months Ended September 30,


2012


2011

Cash flows from operating activities:




Net earnings

$

540,363



$

514,704


Provision for losses on accounts receivable

6,604



5,019


Deferred income taxes and tax uncertainties

(6,315)



(6,765)


Depreciation and amortization

113,338



103,573


Stock-based compensation

42,815



41,538


Change in operating assets and liabilities – net of business

acquisitions




Accounts receivable

(131,057)



(138,726)


Inventories

12,116



(55,527)


Prepaid expenses and other assets

46,648



23,103


Trade accounts payable

(39,657)



59,193


Other current liabilities

(3,861)



(17,814)


Current income taxes payable

(12,890)



9,715


Employment-related and other non-current liabilities

11,478



22,012


Other – net

(3,473)



(54)


Net cash provided by operating activities

576,109



559,971


Cash flows from investing activities:




Additions to property, buildings and equipment

(155,163)



(131,304)


Proceeds from sale of property, buildings and equipment

5,035



7,464


Net cash paid for business acquisitions

(24,384)



(348,348)


Other – net

440



97


Net cash used in investing activities

(174,072)



(472,091)


Cash flows from financing activities:




Net (decrease) increase in short-term debt

(44,110)



15,652


Net increase in long-term debt

81,650



101,817


Proceeds from stock options exercised

54,266



52,837


Excess tax benefits from stock-based compensation

44,177



31,575


Purchase of treasury stock

(296,458)



(101,382)


Cash dividends paid

(161,998)



(132,719)


Net cash used in financing activities

(322,473)



(32,220)


Exchange rate effect on cash and cash equivalents

5,748



(8,451)


Net change in cash and cash equivalents

85,312



47,209


Cash and cash equivalents at beginning of year

335,491



313,454


Cash and cash equivalents at end of period

$

420,803



$

360,663


 

SOURCE W.W. Grainger, Inc.



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