William D. Chapman | | Ernest Duplessis |
Director, Investor Relations | | Director, External Communications |
847-535-0881 | | 847-535-4356 |
william.chapman@grainger.com | | ernest.duplessis@grainger.com |
GRAINGER REPORTS RECORD EPS OF $1.29 FOR 2007 THIRD QUARTER
Company Raises 2007 EPS Guidance to a Range of $4.85 to $4.95
Highlights
• | Sales of $1.7 billion grew 9 percent |
• | Operating earnings increased 15 percent to $174 million |
• | Generated $157 million in operating cash flow for the quarter |
• | Year-to-date pretax ROIC* of 28.9 percent versus 26.1 percent in 2006 |
Click here to access a Podcast describing Grainger’s performance in more detail
CHICAGO, October 15, 2007 – Grainger (NYSE: GWW) today reported record sales, net earnings and earnings per share for the quarter ended September 30, 2007. Sales were up 9 percent versus third quarter 2006, operating earnings grew 15 percent and net earnings increased 4 percent. Earnings per share grew 11 percent compared with the third quarter 2006. The 2006 third quarter included an $8.5 million or $0.09 per share benefit from the settlement of the 2004 federal tax audit. Excluding this benefit, net earnings increased 14 percent and earnings per share increased 21 percent for the 2007 third quarter.
For the nine months ended September 30, 2007, sales were $4.8 billion, up 9 percent, net earnings were $316 million, up 11 percent, and earnings per share were $3.67 versus $3.11, up 18 percent. Excluding the tax benefit in 2006, net earnings increased 14 percent and earnings per share increased 22 percent.
*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 10 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.
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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“We are pleased with our solid sales and earnings growth in the quarter. Going forward, we continue to look for ways of improving productivity and efficiency. In the fourth quarter, for example, we have identified up to 125 positions we can eliminate in information technology. As a result, we anticipate incurring up to a $6 million charge (4 cents a share) in the fourth quarter and savings of up to $12 million in 2008,” said Grainger’s Chairman and Chief Executive Officer Richard L. Keyser. “Because of our strong performance to date, we expect to deliver 2007 earnings per share in the range of $4.85 to $4.95 including this charge.” The company’s prior forecast for EPS was $4.75 to $4.90.
Daily sales improved throughout the quarter versus the prior year: up 7 percent in July, 9 percent in August and 11 percent in September. There were 63 sales days for the quarter in both years and 191 sales days in the nine months for both years.
Grainger Branch-based segment
Sales in this segment, which includes branch-based businesses in the United States, Mexico and China, increased 9 percent in the third quarter 2007. Daily sales in this segment grew by 6 percent in July, 9 percent in August and 11 percent in September. An estimated 4 percentage points came from the company’s two growth initiatives in the United States, market expansion and product line expansion.
Sales growth was reduced by approximately 1 percentage point due to the continued wind-down of low margin contracts with integrated-supply customers as the company exits the remaining contracts throughout 2007.
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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During the quarter, the company opened two new full service branches and two will-call express locations in the United States. As part of the expansion program in Mexico, the company opened one new branch and one master branch. In China, the company opened two will-call express locations.
| Third Quarter 2007 Branch Summary |
| 6/30/07 | | Opened | | Closed | | 9/30/07 |
United States | | | | | | | |
Branch | 410 | | 2 | | (1) | | 411 |
Will-Call Express | 20 | | 2 | | | | 22 |
Mexico | 10 | | 2 | | | | 12 |
China | | | | | | | |
Branch | 1 | | | | | | 1 |
Will-Call Express | 3 | | 2 | | | | 5 |
Total | 444 | | 8 | | (1) | | 451 |
Sales in the United States increased 9 percent. The strongest sales growth came from government customers, particularly in September, followed by the commercial and contractor markets. Sales to retail and heavy manufacturing customers grew at a slower rate. Geographically, the Great Plains, South Central and Pacific Northwest regions of the country posted the strongest growth while the West Coast and the Mid-Atlantic regions grew at a slower pace.
The market expansion program contributed approximately 1 percentage point to the segment’s sales growth and remained profitable on an operating basis. Results for the market expansion program were:
Phase | | 3Q’07 Daily Sales Increase | 9/30/07 Percent Complete |
1 | Atlanta, Denver, Seattle | 16% | 100% |
2 | Four markets in Southern California | 7% | 100% |
3 | Houston, St. Louis, Tampa | 14% | 95% |
4 | Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington, D.C. | 8% | 95% |
5 | Dallas, Detroit, New York City, Phoenix | 8% | 75% |
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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Work on the last phase, Phase 6 (Chicago, Minneapolis, Pittsburgh and San Francisco), continued and should be at least 50 percent complete in the 2007 fourth quarter.
As a result of repositioning and relocating branches under the market expansion program, the company sold one branch for a gain of $1.3 million in the third quarter. This compares to the sale of two branches for a gain of $1.4 million in the third quarter of 2006.
Products added in 2006 and 2007 under an aggressive expansion of the company’s product lines contributed about 3 percentage points to the segment growth for the quarter. The company has added approximately 70,000 products particularly in the plumbing, fastener, material handling and security product lines.
Sales in Mexico were up 24 percent in the third quarter versus the same period in 2006. Sales benefited from the ongoing branch expansion program. The company plans to double the number of branches over the next several years.
Operating earnings for the Grainger Branch-based segment were up 16 percent in the quarter, the result of positive operating expense leverage from the sales growth and a higher gross profit margin.
Acklands-Grainger Branch-based segment
Sales for the quarter were up 15 percent versus the 2006 third quarter, up 8 percent in local currency. On a daily basis, sales in local currency were up 9 percent in July, 8 percent in August and 6 percent in September. Acklands-Grainger continued to achieve strong sales growth from the oil and mining sectors. During the quarter, the company did not open or close any branches, ending the quarter at 154 branches.
Operating earnings increased 100 percent for the 2007 third quarter, primarily as a result of improved gross profit margins and operating expense leverage.
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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Lab Safety Supply (LSS)
Sales for the third quarter of 2007 were up 6 percent versus the 2006 third quarter (daily sales were up 8 percent in July, 7 percent in August and 4 percent in September). Sales from recent acquisitions - Professional Inspection Equipment and Construction Book Express in November 2006 and McFeely’s in May 2007 -contributed 7 percentage points to the sales growth. Excluding these acquisitions, sales were down by 1 percent reflecting weakness with manufacturing and government customers.
Operating earnings grew by 4 percent. This improvement was primarily the result of the 6 percent sales increase offset by a decline in gross margins due to product and selling price mix and higher operating expenses, including healthcare costs, which increased at a faster rate than sales.
Tax rate
The effective income tax rate was 38.4 percent for the 2007 third quarter versus 33.4 percent for the 2006 third quarter. The 2006 third quarter rate included the benefit from the settlement of the 2004 tax audit. The third quarter 2006 effective income tax rate was 38.9 percent without that benefit.
Cash flow
Operating cash flow was $157 million for the quarter. The company used cash from operations to fund its growth initiatives and to buy back stock. Capital expenditures in the quarter were $60 million compared to $38 million in 2006. In August, the company purchased approximately 5.3 million shares of stock under an accelerated share repurchase agreement. The company used a combination of cash and short-term debt to accomplish the accelerated share repurchase, resulting in lower interest income and higher interest expense in the quarter
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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W.W. Grainger, Inc. (NYSE: GWW), with 2006 sales of $5.9 billion, is the leading broad line supplier of facilities maintenance products serving businesses and institutions in Canada, China, Mexico and the United States. Through a highly integrated network including more than 600 branches, 18 distribution centers and multiple Web sites, Grainger’s employees help customers get the job done, saving them time and money by having the right products to keep their facilities running. Click here to view information about the company, including a history of daily sales by segment and a prerecorded message regarding third quarter results.
Forward-Looking Statements
This document contains forward-looking statements under the federal securities laws. The forward-looking statements relate to the company’s expected future financial results and business plans, strategies and objectives and are not historical facts. They are generally identified by qualifiers such as “EPS guidance,” “anticipate,” “continue to look,” “expect to deliver,” “forecast,” “percent complete,” “range,” “plans,” “should be” or similar expressions. There are risks and uncertainties the outcome of which could cause the company’s results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the company’s most recent annual report, as well as the company’s Form 10-K and other reports filed with the Securities & Exchange Commission, containing a discussion of the company’s business and of various factors that may affect it.
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands except for per share data) |
| 2007 | | 2006 | | 2007 | | 2006 |
Net sales | $ 1,658,592 | | $ 1,519,499 | | $ 4,806,261 | | $ 4,421,496 |
Cost of merchandise sold | 999,003 | | 920,412 | | 2,874,119 | | 2,668,777 |
Gross profit | 659,589 | | 599,087 | | 1,932,142 | | 1,752,719 |
| | | | | | | |
Warehousing, marketing and administrative expenses | 485,257 | | 447,774 | | 1,428,650 | | 1,322,445 |
Operating earnings | 174,332 | | 151,313 | | 503,492 | | 430,274 |
| | | | | | | |
Other income and (expense) | | | | | | | |
Interest income | 3,144 | | 5,571 | | 11,182 | | 16,311 |
Interest expense | (721) | | (485) | | (1,817) | | (1,480) |
Equity in income of unconsolidated entities | 470 | | 480 | | 353 | | 2,549 |
Gain on sale of unconsolidated entities | - | | - | | - | | 2,291 |
Unclassified-net | (41) | | (75) | | (53) | | 95 |
Total other income and (expense) | 2,852 | | 5,491 | | 9,665 | | 19,766 |
| | | | | | | |
Earnings before income taxes | 177,184 | | 156,804 | | 513,157 | | 450,040 |
| | | | | | | |
Income taxes | 68,034 | | 52,310 | | 197,429 | | 165,574 |
| | | | | | | |
Net earnings | $ 109,150 | | $ 104,494 | | $ 315,728 | | $ 284,466 |
| | | | | | | |
Earnings per share -Basic | $ 1.33 | | $ 1.20 | | $ 3.78 | | $ 3.21 |
-Diluted | $ 1.29 | | $ 1.16 | | $ 3.67 | | $ 3.11 |
| | | | | | | |
Average number of shares outstanding -Basic | 82,233,231 | | 87,258,559 | | 83,437,184 | | 88,746,312 |
-Diluted | 84,864,258 | | 89,682,032 | | 86,119,670 | | 91,423,719 |
| | | | | | | |
Segment results: | | | | | | | |
| 2007 | | 2006 | | 2007 | | 2006 |
Sales | | | | | | | |
Grainger Branch-based | $ 1,385,278 | | $ 1,274,219 | | $ 4,014,522 | | $ 3,684,934 |
Acklands-Grainger | 163,519 | | 141,586 | | 464,851 | | 427,528 |
Lab Safety Supply | 111,199 | | 104,671 | | 330,653 | | 311,823 |
Intersegment sales | (1,404) | | (977) | | (3,765) | | (2,789) |
Net sales to external customers | $ 1,658,592 | | $ 1,519,499 | | $ 4,806,261 | | $ 4,421,496 |
| | | | | | | |
Operating earnings | | | | | | | |
Grainger Branch-based | $ 173,115 | | $ 149,260 | | $ 505,027 | | $ 433,923 |
Acklands-Grainger | 10,243 | | 5,122 | | 29,710 | | 12,070 |
Lab Safety Supply | 14,213 | | 13,625 | | 43,191 | | 42,324 |
Unallocated expense | (23,239) | | (16,694) | | (74,436) | | (58,043) |
Operating earnings | $ 174,332 | | $ 151,313 | | $ 503,492 | | $ 430,274 |
| | | | | | | |
Company operating margin | 10.5% | | 9.9% | | 10.5% | | 9.7% |
ROIC* for Grainger Branch-based | | | | | 37.3% | | 34.3% |
ROIC* for Acklands-Grainger | | | | | 12.0% | | 5.0% |
ROIC* for Lab Safety Supply | | | | | 31.2% | | 34.9% |
* See page 1 for a definition of ROIC |
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Preliminary
| | At September 30, |
| | ($ in thousands) |
| | 2007 | | 2006 |
Assets | | |
Cash and Cash Equivalents (1) | | $ 94,332 | | $ 427,354 |
Marketable Securities | | 14,867 | | 13,234 |
Accounts Receivable – net (2) | | 674,786 | | 610,762 |
Inventories (3) | | 889,166 | | 772,121 |
Other Current Assets | | 120,205 | | 107,352 |
Total Current Assets | | 1,793,356 | | 1,930,823 |
Property, Buildings and Equipment – net (4) | | 860,635 | | 794,455 |
Investments in Unconsolidated Entities | | 9,164 | | 7,706 |
All Other Assets (5) | | 411,428 | | 349,936 |
Total Assets | | $ 3,074,583 | | $ 3,082,920 |
| | | | |
Liabilities And Shareholders’ Equity | | | | |
Short-Term Debt (6) | | $ 144,214 | | $ - |
Current Maturities of Long-Term Debt | | 4,590 | | 4,590 |
Trade Accounts Payable | | 377,315 | | 344,976 |
Other Current Liabilities | | 365,277 | | 321,091 |
Total Current Liabilities | | 891,396 | | 670,657 |
Long-Term Debt | | 4,895 | | 4,895 |
All Other Liabilities (7) | | 194,056 | | 130,821 |
Shareholders’ Equity (8) | | 1,984,236 | | 2,276,547 |
Total Liabilities and Shareholders’ Equity | | $ 3,074,583 | | $ 3,082,920 |
(1) Cash and cash equivalents decreased by $333 million, or 78%, primarily due to share repurchases. |
(2) Accounts receivable-net increased by $64 million, or 10%, primarily due to higher sales. |
(3) Inventories increased $117 million, or 15%, primarily due to the product line expansion initiative and to improve customer service through better product availability. |
(4) Depreciation and amortization of property, buildings, and equipment amounted to $27 million for the 2007 third quarter and $25 million for the 2006 third quarter. |
(5) All other assets increased $61 million, or 18%, due primarily to an increase in deferred taxes and increased intangibles related to the acquisitions. |
(6) Short-term debt increased $144 million due to a line of credit obtained for the purchase of a building in China and short-term borrowings to fund the accelerated share repurchase program. |
(7) All other liabilities increased $63 million, or 48%, due primarily to an increased accrual for postretirement health care benefits as a result of the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” during the fourth quarter of 2006. |
(8) Common stock outstanding as of September 30, 2007 was 79,244,196 shares as compared with 86,037,276 shares at September 30, 2006. The Company repurchased 5.3 million shares during the 2007 third quarter, bringing the total repurchases for 2007 to 7.1 million shares. |
W.W. Grainger, Inc. – 2007 Third Quarter Results |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
| Nine Months Ended September 30, |
| ($ in thousands) |
| | 2007 | | 2006 |
Cash Flows from Operating Activities: | | | | |
Net Earnings | | $ 315,728 | | $ 284,466 |
Depreciation and Amortization | | 93,599 | | 84,372 |
(Income) Loss in Unconsolidated Entities | | (353) | | (2,549) |
(Increase) Decrease in Accounts Receivable – net | | (97,321) | | (89,381) |
(Increase) Decrease in Inventories | | (39,532) | | 24,357 |
(Increase) Decrease in Prepaid Expenses | | 7,410 | | 7,608 |
Increase (Decrease) in Trade Accounts Payable | | 39,188 | | 22,460 |
Increase (Decrease) in Other Current Liabilities | | (16,324) | | (44,580) |
Other – net | | 35,357 | | 26,229 |
| | | | |
Net Cash Provided by Operating Activities | | 337,752 | | 312,982 |
| | | | |
Cash Flows from Investing Activities: | | | | |
Additions to Property, Buildings and Equipment – net | | (128,744) | | (85,561) |
Additions for Capitalized Software | | (5,726) | | (5,167) |
Net Cash Paid for Business Acquisition | | (4,684) | | (13,859) |
Other – net | | (250) | | 12,637 |
| | | | |
Net Cash Used in Investing Activities | | (139,404) | | (91,950) |
| | | | |
Cash Flows from Financing Activities: | | | | |
Increase (Decrease) in Short Term Debt | | 144,428 | | - |
Cash Dividends Paid | | (84,766) | | (73,136) |
Purchase of Treasury Stock | | (647,293) | | (319,163) |
Other – net | | 130,515 | | 53,205 |
| | | | |
Net Cash Used in Financing Activities | | (457,116) | | (339,094) |
| | | | |
Exchange Rate Effect on Cash and Cash Equivalents | | 4,629 | | 522 |
| | | | |
Net (Decrease) in Cash and Cash Equivalents from beginning of year | | $ (254,139) | | $ (117,540) |
| | | | |
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