W.W. GRAINGER, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
For the Second Quarter Ended June 30, 2006
(Unaudited)
| | | | Company Contacts: |
| | | | W. D. Chapman | 847-535-0881 |
| | | | N. A. Hobor | 847-535-0065 |
| | | | Issued: July 17, 2006 |
Second Quarter Highlights
| • | Sales of $1.5 billion were up 8% versus 2005. |
| • | Operating earnings for the quarter were $145 million, an increase of 15% versus 2005. |
| • | Earnings per share for the quarter were $1.02, up 15% versus $0.89 in 2005. |
Contents |
I. | EARNING REVIEW | | 2 |
II. | BALANCE SHEET DATA | | 4 |
III. | CASH FLOW DATA | | 5 |
IV. | BUSINESS SEGMENT RESULTS | | 6 |
| | | |
| EXHIBITS | | |
| A. Daily Sales Growth by Segment | | 10 |
| B. Sales by Segment | | 11 |
| C. Operating Earnings by Segment | | 12 |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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| | | Net Sales | |
| | Three Months Ended | | Six Months Ended |
| | ($ in millions) |
| | 06/30/06 | | 06/30/05 | | Inc/(Dec) | | 06/30/06 | | 06/30/05 | | Inc/(Dec) |
Net Sales | | $ 1,483 | | $ 1,373 | | 8% | | $ 2,902 | | $ 2,708 | | 7% |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Sales Days | | 2006 | | 2005 |
| Second Quarter | | 64 | | 64 |
| First Half | | 128 | | 128 |
| Total Year | | 254 | | 255 |
Sales in the second quarter benefited from the economy, ongoing strategic initiatives and a favorable Canadian exchange rate. Partially offsetting these improvements was the negative effect of the wind-down of low margin integrated supply and automotive contracts.
| | Daily Sales Inc/(Dec) 2006 vs. 2005 |
2006 Month | | Total Company | | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety |
April | | 5.8% | | 5.5% | | 8.4% | | 5.3% |
May | | 10.3 | | 10.1 | | 17.0 | | 3.9 |
June | | 7.7 | | 6.9 | | 14.0 | | 8.3 |
Second Quarter | | 8.0 | | 7.6 | | 13.4 | | 5.7 |
First Half | | 7.2 | | 6.1 | | 15.9 | | 8.4 |
Sales were up 8% driven by increases across all three segments. The Company’s two major growth initiatives, market expansion and product line expansion, contributed to the growth in the Grainger Branch-based segment. Acklands-Grainger benefited from a favorable exchange rate. Lab Safety benefited from the acquisition of the Rand Materials Handling Equipment Co. business (Rand). For all three segments, April sales were negatively affected by the timing of the Easter holiday, which fell into the second quarter of 2006 versus the first quarter of 2005.
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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Operating Earnings
| Three Months Ended | | Six Months Ended |
| 06/30/06 | | 06/30/05 | | Inc/(Dec) | | 06/30/06 | | 06/30/05 | | Inc/(Dec) |
Operating Earnings | $ 145 | | $ 126 | | 15% | | $ 279 | | $ 239 | | 17% |
Operating Margin | 9.7% | | 9.2% | | 0.5pp | | 9.6% | | 8.8% | | 0.8pp |
ROIC* | | | | | | | 25.7% | | 23.7% | | 2.0pp |
| | | | | | | | | | | |
The Company’s operating earnings were $145 million for the second quarter of 2006 versus $126 million for the second quarter of 2005. The improvement in operating earnings was driven by higher sales and a higher gross profit margin, partially offset by increased operating expenses.
The increase in ROIC was primarily attributable to higher operating earnings, partially offset by lower asset turnover.
Other Income and Expense
For the 2006 second quarter, “Other Income and Expense” was income of $8.3 million versus $2.8 million for the 2005 quarter. The increase was primarily attributable to higher interest income in 2006 versus 2005 and a $2.3 million gain on the sale of Acklands-Grainger’s interest in the USI-AGI Prairies joint venture in 2006.
Income Taxes
The Company’s effective income tax rate was 38.7% for the 2006 second quarter and 36.7% for the 2005 second quarter. Excluding the effect of equity in unconsolidated entities, which is recorded net of tax, the effective income tax rate was 38.9% for the second quarter of 2006 and 37.0% for the second quarter of 2005. The full year 2005 rate was 35.0% and benefited from a favorable revision to the estimate of income taxes for various state and local tax jurisdictions and the resolution of certain federal and state tax contingencies.
*See footnote, page 9.
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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II. BALANCE SHEET DATA
Selected Balance Sheet data as of June 30, 2006 (preliminary) and 2005 follow:
| | 2006 | | 2005 |
ASSETS | | ($ in thousands) |
Cash and Cash Equivalents | | $ 453,746 | | $ 326,033 |
Accounts Receivable – net (1) | | 614,376 | | 531,710 |
Inventories (2) | | 781,991 | | 728,468 |
Other Current Assets | | 137,168 | | 145,457 |
Total Current Assets | | 1,987,281 | | 1,731,668 |
Property, Buildings and Equipment – net (3) | | 784,589 | | 763,737 |
Investments in Unconsolidated Entities (4) | | 7,484 | | 22,686 |
All Other Assets (5) | | 328,552 | | 295,868 |
Total Assets | | $ 3,107,906 | | $ 2,813,959 |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current Maturities of Long-Term Debt | | $4,590 | | $9,485 |
Trade Accounts Payable | | 324,111 | | 304,925 |
Other Current Liabilities | | 320,553 | | 315,082 |
Total Current Liabilities | | 649,254 | | 629,492 |
Long-Term Debt | | 4,895 | | – |
All Other Liabilities | | 97,890 | | 86,803 |
Shareholders’ Equity (6) | | 2,355,867 | | 2,097,664 |
Total Liabilities and Shareholders’ Equity | | $ 3,107,906 | | $ 2,813,959 |
(1) | Accounts receivable-net increased by $83 million, or 16%, due to higher sales and an increase in days sales outstanding primarily due to systems conversions. |
(2) | Inventories increased by $54 million, or 7%, primarily in the Grainger Branch-based segment, due to volume increases and the product line expansion program. |
(3) | Depreciation and amortization of property, buildings, and equipment amounted to $24 million for the 2006 second quarter and $23 million for the 2005 second quarter. |
(4) | Investment in unconsolidated entities decreased $15 million, primarily due to the sale of Acklands-Grainger’s interest in the USI-AGI Prairies joint venture. |
(5) | Other assets increased $33 million, or 11%, due primarily to increased capitalized software and increased intangibles related to the acquisition of the assets of Rand. |
(6) | Common stock outstanding as of June 30, 2006 was 88,576,212 shares as compared with 89,105,942 shares at June 30, 2005. The Company repurchased 1.6 million shares during the 2006 second quarter, bringing the total for the year to 2.0 million shares. As of June 30, 2006, approximately 2.6 million shares remained under the share repurchase authorization. |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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III. CASH FLOW DATA
The following is a summarized cash flow statement for the six months ended
June 30, 2006 (preliminary) and 2005:
| Six Months Ended June 30, |
| ($ in thousands) |
| 2006 | | 2005 |
Cash Flows from Operating Activities: | | | |
Net Earnings | $ 179,972 | | $ 154,381 |
Depreciation and Amortization | 54,824 | | 52,796 |
(Income) Losses in Unconsolidated Entities | (2,069) | | (1,310) |
(Increase) Decrease in Accounts Receivable – net | (93,086) | | (51,070) |
(Increase) Decrease in Inventories | 14,286 | | (27,370) |
(Increase) Decrease in Prepaid Expenses | 7,684 | | (7,635) |
Increase (Decrease) in Trade Accounts Payable | 1,528 | | 13,867 |
Increase (Decrease) in Other Current Liabilities | (88,111) | | (48,459) |
Other – net | 25,699 | | 29,374 |
| | | |
Net Cash Provided by Operating Activities | 100,727 | | 114,574 |
| | | |
Cash Flows from Investing Activities: | | | |
Additions to Property, Buildings
and Equipment – net | (52,494) | | (45,631) |
Additions to Capitalized Software | (3,368) | | (23,515) |
Net Cash Paid for Business Acquisition | (13,859) | | (24,838) |
Other – net | 25,696 | | 4,140 |
| | | |
Net Cash Used in Investing Activities | (44,025) | | (89,844) |
| | | |
Cash Flows from Financing Activities: | | | |
Cash Dividends Paid | (47,715) | | (39,723) |
Purchase of Treasury Stock – net | (150,116) | | (102,756) |
Other – net | 49,195 | | 14,627 |
| | | |
Net Cash Used in Financing Activities | (148,636) | | (127,852) |
| | | |
Exchange Rate Effect on Cash and Cash Equivalents | 786 | | (91) |
| | | |
Net (Decrease) in Cash and Cash Equivalents from beginning of year | $ (91,148) | | $ (103,213) |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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IV. BUSINESS SEGMENT RESULTS
GRAINGER BRANCH-BASED
| Three Months Ended | | Six Months Ended |
| ($ in millions) |
| 06/30/06 | 06/30/05 | Inc/(Dec) | | 06/30/06 | 06/30/05 | Inc/(Dec) |
Net Sales | $ 1,234 | $ 1,147 | 8% | | $ 2,411 | $ 2,272 | 6% |
Operating Earnings | $ 152 | $ 126 | 21% | | $ 285 | $ 235 | 21% |
Operating Margin | 12.3% | 10.9% | 1.4pp | | 11.8% | 10.4% | 1.4pp |
ROIC* | | | | | 33.8% | 30.0% | 3.8pp |
Number of Branches
| 2006 Second Quarter |
| 3/31/06 | | Opened | | Closed | | 06/30/06 |
United States | | | | | | | |
Branch | 400 | | 10 | | (2) | | 408 |
Will Call Express | 18 | | 1 | | – | | 19 |
Mexico | 6 | | 1 | | – | | 7 |
Total | 424 | | 12 | | (2) | | 434 |
| 2006 Year-to-Date |
| 12/31/05 | | Opened | | Closed | | 06/30/06 |
United States | | | | | | | |
Branch | 400 | | 10 | | (2) | | 408 |
Will Call Express | 18 | | 1 | | – | | 19 |
Mexico | 6 | | 1 | | – | | 7 |
Total | 424 | | 12 | | (2) | | 434 |
Net Sales – Sales for this segment were up 8% for the quarter, primarily reflecting the stronger U.S. and Mexican economies and ongoing strategic initiatives. Partially offsetting these improvements were reduced integrated supply and automotive sales and the negative effect from the timing of the Easter holiday, which fell in the second quarter of 2006 versus the first quarter of 2005.
Sales in the United States were up 8% versus 2005, reflecting growth across all customer segments, led by the heavy manufacturing and government sectors. Sales were positively affected 1 percentage point due to higher sales of seasonal products. Product line expansion contributed approximately 1 percentage point to the growth in the segment. The wind-down of the Company’s low margin integrated supply and automotive contracts reduced sales growth by 2 percentage points.
*See footnote, page 9.
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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GRAINGER BRANCH-BASED (continued)
Market expansion contributed 2 percentage points to the sales growth for the segment. Results for the market expansion program were as follows:
| | 2006 Second Quarter |
| | Sales Increase | | Percent Complete |
Phase 1 (Atlanta, Denver, Seattle) | | 14% | | 100% |
Phase 2 (Four markets in Southern California) | | 14% | | 95% |
Phase 3 (Houston, St. Louis, Tampa) | | 15% | | 85% |
Phase 4 (Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington DC) | | 9% | | 75% |
Sales in Mexico were up 16% for the quarter versus 2005 driven by an improving economy, an expanded telesales operation, a new branch in Santa Catarina and an expanded presence in Tijuana. In local currency, sales were up 19%.
Operating Earnings – Operating earnings for the 2006 second quarter were up 21% compared with the 2005 period, primarily the result of higher sales and increased gross profits.
The gross profit margin was up 1.1 percentage points versus the comparable 2005 quarter driven by positive inflation recovery, a positive change in selling price category mix and changes in the timing of certain inventory-related transactions and estimates. A major driver in the improvement in selling price category mix was the reduced sales to low margin integrated supply and automotive customers. Gross profit margins benefited from an improved methodology to capture data related to certain inventory transactions and estimates, as a result of recent system enhancements. The quarter benefited $0.05 per share from this timing change. Under the old system, these quarterly inventory adjustments would have been recorded in the fourth quarter of 2006.
Operating expenses increased 6% in the second quarter of 2006 versus 2005. Contributing to the increase were higher payroll and benefits costs, the result of increased headcount, higher stock-based compensation expense due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, higher profit sharing accruals and increased advertising expenses. The effect of the adoption of SFAS No. 123R was approximately a $0.05 per share reduction for the quarter. The full year effect is expected to be $0.15 per share. Partially offsetting these increases were lower market expansion costs, primarily the result of the sale of branches.
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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ACKLANDS-GRAINGER BRANCH-BASED
| Three Months Ended | | Six Months Ended |
| ($ in millions) |
| 06/30/06 | 06/30/05 | Inc/(Dec) | | 06/30/06 | 06/30/05 | Inc/(Dec) |
Net Sales | $ 147 | $ 130 | 13 % | | $ 286 | $ 247 | 16 % |
Operating Earnings | $ 3 | $ 4 | (32)% | | $ 7 | $ 8 | (11)% |
Operating Margin | 2.1% | 3.5% | (1.4)pp | | 2.4% | 3.1% | (0.7) pp |
ROIC* | | | | | 4.3% | 5.5% | (1.2) pp |
| Number of Branches |
| |
| 2006 Second Quarter |
| 3/31/06 | | Opened | | Closed | | 06/30/06 |
| | | | | | | |
Canada | 164 | | – | | (2) | | 162 |
| 2006 Year-to-Date |
| 12/31/05 | | Opened | | Closed | | 06/30/06 |
| | | | | | | |
Canada | 165 | | 1 | | (4) | | 162 |
Net Sales – Sales in Canada increased 13% for the quarter versus 2005 including the effect of a favorable Canadian exchange rate. In local currency, sales for this business were up 2%.
Operating Earnings – The decrease in operating earnings for the 2006 second quarter was primarily the result of higher operating expenses. The operating expense growth was primarily driven by payroll and benefits due to increased headcount, higher severance costs as a result of a leadership change and higher information technology costs.
*See footnote, page 9.
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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LAB SAFETY
| Three Months Ended | | Six Months Ended |
| ($ in millions) |
| 06/30/06 | 06/30/05 | Inc/(Dec) | | 06/30/06 | 06/30/05 | Inc/(Dec) |
Net Sales | $ 103 | $ 98 | 6 % | | $ 207 | $ 191 | 8% |
Operating Earnings | $ 13 | $ 14 | (1)% | | $ 29 | $ 27 | 6% |
Operating Margin | 13.1% | 13.9% | (0.8)pp | | 13.9% | 14.2% | (0.3)pp |
ROIC* | | | | | 35.4% | 38.1% | (2.7)pp |
Net Sales – Sales increased 6% for the quarter for Lab Safety, the Company’s direct marketing business, including the benefit of incremental sales from the acquisition of Rand on January 31, 2006. Excluding the Rand acquisition, sales increased 2% versus 2005.
Operating Earnings – Operating earnings for the 2006 second quarter were down 1%. Gross profit margins were down 0.2 percentage point driven primarily by lower margin Rand sales. Operating expenses were up 8% due to higher healthcare costs and incremental costs from the acquisition of Rand.
*Footnote:
The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using annualized operating earnings based on year-to-date operating earnings divided by a seven point average for net working assets. Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (non operating cash), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve. Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees’ profit sharing plans, and accrued expenses.
Forward-Looking Statements
This document contains forward-looking statements under the federal securities laws. The 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 “percent complete”, “may”, “estimated”, “projected” 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 and other reports filed with the Securities and Exchange Commission, containing a discussion of the Company’s business and of various factors that may affect it.
-End-
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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EXHIBIT A Daily Sales Growth By Segment |
| 2006 vs. 2005 | | 2005 vs. 2004 |
Month | Company | Grainger Branch-based | Acklands-Grainger Branch-based | Lab Safety | | Company | Grainger Branch-based | Acklands-Grainger Branch-based | Lab Safety |
January | 6.1% | 3.8% | 20.0% | 19.5% | | 10.4% | 10.9% | 10.9% | 3.0% |
February | 4.6% | 3.1% | 21.2% | 1.7% | | 10.3% | 9.7% | 12.8% | 15.2% |
March | 8.0% | 6.7% | 15.5% | 13.1% | | 5.9% | 4.9% | 12.6% | 8.7% |
First Quarter | 6.3% | 4.6% | 18.7% | 11.1% | | 8.7% | 8.3% | 12.1% | 9.0% |
| | | | | | | | | |
April | 5.8% | 5.5% | 8.4% | 5.3% | | 11.6% | 10.3% | 20.2% | 15.6% |
May | 10.3% | 10.1% | 17.0% | 3.9% | | 5.6% | 3.9% | 15.9% | 13.7% |
June | 7.7% | 6.9% | 14.0% | 8.3% | | 10.5% | 9.4% | 21.2% | 11.5% |
Second Quarter | 8.0% | 7.6% | 13.4% | 5.7% | | 9.3% | 8.0% | 19.2% | 13.6% |
| | | | | | | | | |
July | | | | | | 10.9% | 10.5% | 15.4% | 10.3% |
August | | | | | | 9.2% | 8.3% | 16.1% | 13.8% |
September | | | | | | 9.3% | 8.2% | 16.6% | 13.9% |
Third Quarter | | | | | | 9.8% | 8.9% | 16.0% | 12.9% |
| | | | | | | | | |
October | | | | | | 11.3% | 10.9% | 11.6% | 15.7% |
November | | | | | | 10.0% | 9.0% | 14.6% | 15.4% |
December | | | | | | 8.4% | 6.7% | 19.3% | 18.1% |
Fourth Quarter | | | | | | 9.9% | 8.9% | 15.0% | 16.4% |
| | | | | | | | | |
Full Year | | | | | | 9.4% | 8.5% | 15.6% | 12.9% |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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EXHIBIT B Sales by Segment ($000’s) |
Second Quarter | | | | | | | | |
| | Three Months Ended June 30, 2006 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total net sales | | 1,233,574 | | 146,920 | | 103,273 | | 1,483,767 |
Intersegment net sales | | (345) | | - | | (542) | | (887) |
Net sales to external customers | | 1,233,229 | | 146,920 | | 102,731 | | 1,482,880 |
| | Three Months Ended June 30, 2005 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total net sales | | 1,146,819 | | 129,609 | | 97,668 | | 1,374,096 |
Intersegment net sales | | (785) | | - | | (503) | | (1,288) |
Net sales to external customers | | 1,146,034 | | 129,609 | | 97,165 | | 1,372,808 |
2006 vs. 2005 | | | | | | | | |
Total net sales | | 7.6% | | 13.4% | | 5.7% | | 8.0% |
Intersegment net sales | | -56.1% | | 0.0% | | 7.8% | | -31.1% |
Net sales to external customers | | 7.6% | | 13.4% | | 5.7% | | 8.0% |
Year | | | | | | | | |
| | Six Months Ended June 30, 2006 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total net sales | | 2,410,715 | | 285,942 | | 207,152 | | 2,903,809 |
Intersegment net sales | | (660) | | - | | (1,152) | | (1,812) |
Net sales to external customers | | 2,410,055 | | 285,942 | | 206,000 | | 2,901,997 |
| | Six Months Ended June 30, 2005 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total net sales | | 2,272,056 | | 246,772 | | 191,151 | | 2,709,979 |
Intersegment net sales | | (1,144) | | - | | (1,147) | | (2,291) |
Net sales to external customers | | 2,270,912 | | 246,772 | | 190,004 | | 2,707,688 |
2006 vs. 2005 | | | | | | | | |
Total net sales | | 6.1% | | 15.9% | | 8.4% | | 7.2% |
Intersegment net sales | | -42.3% | | 0.0% | | 0.4% | | -20.9% |
Net sales to external customers | | 6.1% | | 15.9% | | 8.4% | | 7.2% |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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EXHIBIT C Operating Earnings by Segment ($000’s) |
Second Quarter | | | | | | | | |
| | Three Months Ended June 30, 2006 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total operating earnings | | 151,811 | | 3,070 | | 13,472 | | 168,353 |
Unallocated expenses and eliminations | | - | | - | | - | | (23,809) |
Total consolidated operating earnings | | 151,811 | | 3,070 | | 13,472 | | 144,544 |
| | Three Months Ended June 30, 2005 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total operating earnings | | 125,505 | | 4,491 | | 13,547 | | 143,543 |
Unallocated expenses and eliminations | | - | | - | | - | | (17,350) |
Total consolidated operating earnings | | 125,505 | | 4,491 | | 13,547 | | 126,193 |
2006 vs. 2005 | | 21.0% | | -31.6% | | -0.6% | | 14.5% |
Year | | | | | | | | |
| | Six Months Ended June 30, 2006 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total operating earnings | | 284,663 | | 6,948 | | 28,699 | | 320,310 |
Unallocated expenses and eliminations | | - | | - | | - | | (41,349) |
Total consolidated operating earnings | | 284,663 | | 6,948 | | 28,699 | | 278,961 |
| | Six Months Ended June 30, 2005 |
| | Grainger Branch-based | | Acklands-Grainger Branch-based | | Lab Safety | | Totals |
Total operating earnings | | 235,377 | | 7,767 | | 27,175 | | 270,319 |
Unallocated expenses and eliminations | | - | | - | | - | | (31,169) |
Total consolidated operating earnings | | 235,377 | | 7,767 | | 27,175 | | 239,150 |
2006 vs. 2005 | | 20.9% | | -10.5% | | 5.6% | | 16.6% |
W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2006
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