GRAINGER REPORTS RECORD SALES AND EPS FOR 2008 THIRD QUARTER
Raises 2008 EPS guidance to $6.00 to $6.20
Quarterly Highlights
| · | Sales up 11 percent, 9 percent on a daily basis |
| · | Net earnings up 28 percent |
| · | Generated year-to-date pretax ROIC of 30.5 percent* |
Visit www.grainger.com/investor to access a podcast describing Grainger’s performance in more detail.
CHICAGO, October 14, 2008 – Grainger (NYSE: GWW) today reported record sales, earnings and earnings per share for the quarter ended September 30, 2008. Sales of $1.8 billion were up 11 percent, 9 percent on a daily basis, versus the third quarter of 2007. Net earnings for the quarter increased 28 percent to $140 million versus $109 million in 2007. Earnings per share grew 39 percent to $1.79, versus $1.29 for the 2007 third quarter. There were 64 sales days in the 2008 third quarter versus 63 days in 2007.
“Our third quarter and year-to-date results are a testimony to Grainger’s winning strategy and our employees’ ability to execute,” said James T. Ryan, Grainger President and Chief Executive Officer. “Going forward, the credit crisis and its effect on the economy create uncertainty; however, our national scale and local inventory availability help customers be more efficient as they maintain their facilities during these challenging times.”
*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. – 2008 third quarter results
“With our strong performance this quarter, we are raising our earnings per share guidance this year to $6.00 to $6.20 from $5.80 to $6.10,” Ryan added.
Daily sales for the company increased 11 percent in July, 7 percent in August and 9 percent in September. For the quarter, sales were positively affected by price inflation of approximately 4 percentage points and by market expansion and product line expansion, which contributed approximately 3 percentage points of growth. Sales for the quarter were negatively affected by approximately 1 percentage point due to lower sales of seasonal products, while they benefited by approximately 1 percentage point from an acquisition completed in July.
Grainger Branch-based segment
Daily sales in the 2008 third quarter for this segment, which includes branch-based businesses in the United States, Mexico, China and Panama, increased 10 percent, 8 percent on a daily basis. Daily sales grew by 10 percent in July, 6 percent in August and 8 percent in September. Sales for the quarter were negatively affected by approximately 1 percentage point due to lower sales of seasonal products. The U.S. branch-based business raised prices in August to reflect higher costs from suppliers.
During the quarter, the U.S. branch-based business did not open any new full service branches, closed three full service branches as a result of relocations under market expansion and closed two will-call express locations. The company opened one full service branch in Mexico and one in Panama, and closed six will-call expresses in China, bringing the total number of branches in the segment to 460. A will-call express is a non-inventory carrying branch used by customers to pick up products ordered in advance.
W.W. Grainger, Inc. – 2008 third quarter results
| | Third Quarter 2008 Branch Summary |
| | 6/30/08 | | Opened | | Closed | | 9/30/08 |
| United States | | | | | | | |
| Branch | 421 | | | | 3 | | 418 |
| Will-Call Express | 22 | | | | 2 | | 20 |
| Mexico | 19 | | 1 | | | | 20 |
| China | | | | | | | |
| Branch | 1 | | | | | | 1 |
| Will-Call Express | 6 | | | | 6 | | 0 |
| Panama | | | 1 | | | | 1 |
| Total | 469 | | 2 | | 11 | | 460 |
Sales in the U.S. branch-based business increased 10 percent, 8 percent on a daily basis, with the strongest growth coming from government and national account customers.
Market expansion is targeted for completion in 2008, with only four projects remaining in the top 25 metro markets. Results for market expansion by phase were:
Phase | Markets | 3Q’08 Daily Sales Increase | 9/30/08 Percent Complete |
| 1 | Atlanta, Denver, Seattle | 11% | 100% |
| 2 | Four markets in Southern California | 5% | 100% |
| 3 | Houston, St. Louis, Tampa | 10% | 100% |
| 4 | Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington, D.C. | 4% | 100% |
| 5 | Dallas, Detroit, Greater New York, Phoenix | 5% | 95% |
| 6 | Chicago, Minneapolis, Pittsburgh and San Francisco | 7% | 95% |
Sales growth in certain areas of the country, including Southern California and South Florida, were negatively affected by the local economies. The company expects to see continued incremental sales growth from the market expansion program through 2013.
W.W. Grainger, Inc. – 2008 third quarter results
Product line expansion also contributed to the strong sales performance in the quarter. The company has added approximately 150,000 new products since 2005.
Sales in Mexico were up 17 percent, 15 percent on a daily basis, in the quarter versus the same period in 2007. In local currency, daily sales increased 8 percent. Stronger sales in natural resources were partially offset by slower sales in the hospitality and manufacturing sectors. The company opened one new branch in the third quarter, with two more branches planned for the fourth quarter.
Operating earnings for the quarter were up 31 percent in the Grainger branch-based segment. The operating earnings increase was the result of sizable positive operating expense leverage from strong sales growth, an extra selling day and a 0.8 percentage point increase in gross profit margins. Operating earnings for the quarter were also aided by lower advertising expenses and a positive adjustment to the reserve for bad debts due to improved collection effectiveness. The operating earnings improvements were partially offset by start-up expenses related to Panama.
Gains on the sales of fixed assets, primarily related to the market expansion program, totaled $1.5 million in the third quarter of 2008 compared to $1.3 million in the third quarter of 2007.
Acklands-Grainger Branch-based segment
Sales for the quarter were up 17 percent, 15 percent on a daily basis, versus the 2007 third quarter. In local currency, daily sales were up 14 percent. On a daily basis, sales in local currency were up 13 percent in July, 11 percent in August and 17 percent in September. Strong sales to agriculture, mining, oil and gas and government customers were partially offset by weakness in the forestry sector. There was a small effect on sales from foreign exchange in the quarter, unlike what was experienced during the first half of the year. During the quarter, Acklands did not open or close any branches ending the quarter at 154 branches.
Operating earnings increased 38 percent for the 2008 third quarter, primarily the result of strong sales and improved gross margins, which were up 0.7 percentage points.
W.W. Grainger, Inc. – 2008 third quarter results
Lab Safety Supply (LSS)
Sales for the third quarter of 2008 were up 14 percent, 13 percent on a daily basis, versus the 2007 third quarter. Daily sales were up 10 percent in July, 14 percent in August and 14 percent in September. Sales from the July 2008 acquisition of Highsmith, a direct marketing business serving libraries, contributed all of the sales growth for the quarter; excluding the acquisition, the rest of the business was down 5 percent.
Operating earnings at Lab decreased 14 percent for the 2008 third quarter due to lower gross profit margins and operating expenses which grew faster than sales. A negative change in selling price mix and lower gross profit margins at Highsmith contributed to a reduction in Lab’s gross profit margins by 1.7 percentage points. One-time integration costs related to the Highsmith acquisition contributed to the growth in Lab’s operating expenses.
Other
During the quarter, the company recorded net interest expense of $2.8 million versus $2.4 million net interest income recorded in the third quarter of 2007. This was primarily the result of $500 million in intermediate term debt obtained in May 2008 and lower cash balances.
The effective income tax rate was 38.8 percent and 38.4 percent in the 2008 and 2007 third quarters, respectively. Excluding the effect of equity in net income of unconsolidated entities, the effective tax rate for the 2008 quarter was 38.9 percent versus 38.5 percent in the 2007 quarter.
Cash flow
Operating cash flow was $217 million for the 2008 third quarter versus $157 million for the 2007 third quarter. The company used cash from operations to fund growth initiatives through net capital expenditures of $32 million and return cash to shareholders in the form of dividends and share repurchases. The company paid $31 million in dividends to shareholders and repurchased 350,000 shares of stock for $29 million in the quarter.
W.W. Grainger, Inc. – 2008 third quarter results
Approximately 8.8 million shares remain under the current repurchase authorization. However, given current market conditions, the company has elected to build its cash position. As of September 30, Grainger had $364 million in cash which provides flexibility for future investment in the business.
For the nine months ended September 30, 2008, sales of $5.3 billion were up 9 percent, versus the nine months ended September 30, 2007. Net earnings increased 16 percent to $367 million versus $316 million in 2007. Earnings per share for the nine months ended September 30, 2008 grew 27 percent to $4.65, versus $3.67 for 2007.
W.W. Grainger, Inc. with 2007 sales of $6.4 billion is the leading broad line supplier of facilities maintenance products serving businesses and institutions in the United States, Canada, Mexico, China and Panama. Through a highly integrated network including more than 600 branches, 18 distribution centers and multiple Web sites, Grainger's employees help customers get the job done. Visit www.grainger.com/investor to view information about the company, including a history of daily sales by segment and a Podcast regarding third quarter 2008 results.
Forward-Looking Statements
This document contains forward-looking statements under the federal securities law. Forward-looking statements relate to the company’s expected future financial results and business plans, strategies and objectives and are not historical facts. They are generally identified by qualifiers such as “earnings per share”, “expects”, “going forward”, “percent complete”, “targeted for completion” or similar expressions. There are risks and uncertainties the outcome of which could cause the company’s results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the company’s most recent annual report, as well as the company’s Form 10-K, Form 10-Q and other reports filed with the Securities & Exchange Commission, containing a discussion of the company’s business and various factors that may affect it.
| Contacts: | | |
| | | |
| Media: | | Investors: |
| Ernest Duplessis | | Laura Brown |
| Vice President, Internal & External Communications | | Vice President, Investor Relations |
| 847/535-4356 | | 847/535-0409 |
| | | |
| Robb Kristopher | | William Chapman |
| Director, Media Relations | | Director, Investor Relations |
| 847/535-0879 | | 847/535-0881 |
W.W. Grainger, Inc. – 2008 third quarter results
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | ($ in thousands except for per share data) | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Net sales | | $ | 1,839,475 | | | $ | 1,658,592 | | | $ | 5,257,377 | | | $ | 4,806,261 | |
| Cost of merchandise sold | | | 1,097,127 | | | | 999,003 | | | | 3,129,218 | | | | 2,874,119 | |
| Gross profit | | | 742,348 | | | | 659,589 | | | | 2,128,159 | | | | 1,932,142 | |
| | | | | | | | | | | | | | | | | |
Warehousing, marketing and administrative expenses | | | 510,891 | | | | 485,257 | | | | 1,526,044 | | | | 1,428,650 | |
| Operating earnings | | | 231,457 | | | | 174,332 | | | | 602,115 | | | | 503,492 | |
| | | | | | | | | | | | | | | | | |
| Other income and (expense) | | | | | | | | | | | | | | | | |
| Interest income | | | 1,602 | | | | 3,144 | | | | 3,642 | | | | 11,182 | |
| Interest expense | | | (4,393 | ) | | | (721 | ) | | | (9,591 | ) | | | (1,817 | ) |
Equity in net income of unconsolidated entities | | | 755 | | | | 470 | | | | 2,835 | | | | 353 | |
| Unclassified-net | | | (731 | ) | | | (41 | ) | | | 569 | | | | (53 | ) |
| Total other income and (expense) | | | (2,767 | ) | | | 2,852 | | | | (2,545 | ) | | | 9,665 | |
| | | | | | | | | | | | | | | | | |
| Earnings before income taxes | | | 228,690 | | | | 177,184 | | | | 599,570 | | | | 513,157 | |
| | | | | | | | | | | | | | | | | |
| Income taxes | | | 88,667 | | | | 68,034 | | | | 232,130 | | | | 197,429 | |
| | | | | | | | | | | | | | | | | |
| Net earnings | | $ | 140,023 | | | $ | 109,150 | | | $ | 367,440 | | | $ | 315,728 | |
| | | | | | | | | | | | | | | | | |
Earnings per share -Basic | | $ | 1.84 | | | $ | 1.33 | | | $ | 4.78 | | | $ | 3.78 | |
| -Diluted | | $ | 1.79 | | | $ | 1.29 | | | $ | 4.65 | | | $ | 3.67 | |
| | | | | | | | | | | | | | | | | |
Average number of shares outstanding -Basic | | | 75,967,774 | | | | 82,233,231 | | | | 76,813,709 | | | | 83,437,184 | |
| -Diluted | | | 78,279,422 | | | | 84,864,258 | | | | 79,085,640 | | | | 86,119,670 | |
| | | | | | | | | | | | | | | | | |
| Segment results: | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Sales | | | | | | | | | | | | | | | | |
| Grainger Branch-based | | $ | 1,523,543 | | | $ | 1,385,278 | | | $ | 4,346,857 | | | $ | 4,014,522 | |
| Acklands-Grainger | | | 190,754 | | | | 163,519 | | | | 565,924 | | | | 464,851 | |
| Lab Safety Supply | | | 127,321 | | | | 111,199 | | | | 350,032 | | | | 330,653 | |
| Intersegment sales | | | (2,143 | ) | | | (1,404 | ) | | | (5,436 | ) | | | (3,765 | ) |
| Net sales to external customers | | $ | 1,839,475 | | | $ | 1,658,592 | | | $ | 5,257,377 | | | $ | 4,806,261 | |
| | | | | | | | | | | | | | | | | |
| Operating earnings | | | | | | | | | | | | | | | | |
| Grainger Branch-based | | $ | 226,602 | | | $ | 173,115 | | | $ | 596,411 | | | $ | 505,027 | |
| Acklands-Grainger | | | 14,168 | | | | 10,243 | | | | 41,856 | | | | 29,710 | |
| Lab Safety Supply | | | 12,212 | | | | 14,213 | | | | 40,596 | | | | 43,191 | |
| Unallocated expense | | | (21,525 | ) | | | (23,239 | ) | | | (76,748 | ) | | | (74,436 | ) |
| Operating earnings | | $ | 231,457 | | | $ | 174,332 | | | $ | 602,115 | | | $ | 503,492 | |
| | | | | | | | | | | | | | | | | |
| Company operating margin | | | 12.6 | % | | | 10.5 | % | | | 11.5 | % | | | 10.5 | % |
| ROIC* for Company | | | | | | | | | | | 30.5 | % | | | 28.9 | % |
| ROIC* for Grainger Branch-based | | | | | | | | | | | 39.4 | % | | | 37.3 | % |
| ROIC* for Acklands-Grainger | | | | | | | | | | | 14.5 | % | | | 12.0 | % |
| ROIC* for Lab Safety Supply | | | | | | | | | | | 28.1 | % | | | 31.2 | % |
| * See page 1 for a definition of ROIC | |
W.W. Grainger, Inc. – 2008 third quarter results
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Preliminary
| | | At September 30, ($ in thousands) |
| Assets | | 2008 | | | 2007 |
| Cash and Cash Equivalents | | $ | 364,417 | | | $ | 109,199 | |
| Accounts Receivable – net (1) | | | 721,387 | | | | 674,787 | |
| Inventories (2) | | | 961,094 | | | | 889,166 | |
| Prepaid Expenses and Other Assets | | | 63,028 | | | | 51,861 | |
| Deferred Income Taxes | | | 61,395 | | | | 53,705 | |
Total Current Assets | | | 2,171,321 | | | | 1,778,718 | |
| Property, Buildings and Equipment - net | | | 928,496 | | | | 860,635 | |
| Deferred Income Taxes | | | 72,760 | | | | 60,644 | |
| Investment in Unconsolidated Entities | | | 23,089 | | | | 9,164 | |
| Goodwill | | | 231,945 | | | | 232,498 | |
| Other Assets and Intangibles – net | | | 108,830 | | | | 118,286 | |
Total Assets | | $ | 3,536,441 | | | $ | 3,059,945 | |
| | | | | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | | | |
| Short-Term Debt | | $ | 16,431 | | | $ | 144,214 | |
| Current Maturities of Long-Term Debt | | | 12,923 | | | | 4,590 | |
| Trade Accounts Payable (3) | | | 314,445 | | | | 377,315 | |
| Accrued Compensation and Benefits | | | 275,090 | | | | 245,282 | |
| Accrued Expenses | | | 99,386 | | | | 94,613 | |
| Income Taxes Payable | | | 16,589 | | | | 11,493 | |
Total Current Liabilities | | | 734,864 | | | | 877,507 | |
| Long-Term Debt (4) | | | 496,562 | | | | 4,895 | |
| Deferred Income Taxes and Tax Uncertainties | | | 23,531 | | | | 24,590 | |
| Accrued Employment-Related Benefits | | | 153,393 | | | | 168,717 | |
| Shareholders’ Equity | | | | | | | | |
Common Stock | | | 54,830 | | | | 54,829 | |
Additional Contributed Capital | | | 555,410 | | | | 527,065 | |
Retained Earnings | | | 3,593,931 | | | | 3,180,680 | |
Accumulated Other Comprehensive Earnings | | | 46,096 | | | | 55,982 | |
Treasury Stock, at Cost | | | (2,122,176 | ) | | | (1,834,320 | ) |
Total Shareholders' Equity (5) | | | 2,128,091 | | | | 1,984,236 | |
Total Liabilities and Shareholders’ Equity | | $ | 3,536,441 | | | $ | 3,059,945 | |
| (1) | Accounts receivable-net increased by $47 million, or 7%, primarily due to higher sales. |
| (2) | Inventories increased $72 million, or 8%, primarily due to increased sales volumes and the product line expansion initiative. |
| (3) | Trade accounts payable decreased $63 million or 17% primarily due to the timing of vendor payments. |
| (4) | Long-term debt increased $492 million due to the term loan agreement entered into in May 2008. |
| (5) | Common stock outstanding as of September 30, 2008 was 76,067,844 shares as compared with 79,244,196 shares at September 30, 2007. The Company repurchased 0.4 million shares during the 2008 third quarter, bringing the total for the year to 4.3 million shares. |
W.W. Grainger, Inc. – 2008 third quarter results
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
| | | Nine Months Ended September 30, ($ in thousands) | |
| | | 2008 | | | 2007 | |
| Cash Flows from Operating Activities: | | | | | | |
Net Earnings | | $ | 367,440 | | | $ | 315,728 | |
Provision For Losses on Accounts Receivable | | | 11,867 | | | | 7,824 | |
Deferred Income Taxes and Tax Uncertainties | | | (18,432 | ) | | | (7,437 | ) |
Depreciation and Amortization: | | | | | | | | |
Property, Buildings and Equipment | | | 81,507 | | | | 75,113 | |
Capitalized Software and Other Intangibles | | | 19,258 | | | | 18,486 | |
Stock-Based Compensation | | | 36,655 | | | | 28,988 | |
Tax Benefit of Stock Incentive Plans | | | 1,612 | | | | 2,820 | |
Net Gains on Sales of Property, Buildings and Equipment | | | (4,760 | ) | | | (5,433 | ) |
(Income) Losses from Unconsolidated Entities – net | | | (2,835 | ) | | | (353 | ) |
Change in Operating Assets and Liabilities: | | | | | | | | |
(Increase) in Accounts Receivable | | | (125,936 | ) | | | (105,145 | ) |
(Increase) in Inventories | | | (17,360 | ) | | | (39,532 | ) |
Decrease in Prepaid Expenses | | | 645 | | | | 7,410 | |
Increase in Trade Accounts Payable | | | 13,069 | | | | 39,188 | |
(Decrease) in Other Current Liabilities | | | (42,191 | ) | | | (16,324 | ) |
Increase in Current Income Taxes Payable | | | 6,466 | | | | 3,598 | |
Increase in Accrued Employment-Related Benefits Cost | | | 9,498 | | | | 17,697 | |
Other – net | | | (1,186 | ) | | | (4,876 | ) |
Net Cash Provided by Operating Activities | | | 335,317 | | | | 337,752 | |
| Cash Flows from Investing Activities: | | | | | | | | |
Additions to Property, Buildings and Equipment – net | | | (125,020 | ) | | | (128,744 | ) |
Additions to Capitalized Software | | | (6,571 | ) | | | (5,726 | ) |
Cash Paid for Business Acquisitions | | | (33,995 | ) | | | (4,684 | ) |
Investments in Unconsolidated Entities | | | (6,486 | ) | | | – | |
Other – net | | | 19,212 | | | | (4,719 | ) |
Net Cash Used in Investing Activities | | | (152,860 | ) | | | (143,873 | ) |
| Cash Flows from Financing Activities: | | | | | | | | |
Net (Decrease) Increase in Short-Term Debt | | | (85,019 | ) | | | 144,428 | |
Long-Term Debt Issuance | | | 500,000 | | | | – | |
Stock Options Exercised | | | 41,103 | | | | 103,465 | |
Excess Tax Benefits from Stock-Based Compensation | | | 11,733 | | | | 27,050 | |
Purchase of Treasury Stock | | | (307,552 | ) | | | (647,293 | ) |
Cash Dividends Paid | | | (90,384 | ) | | | (84,766 | ) |
Net Cash Provided by (Used in) Financing Activities | | | 69,881 | | | | (457,116 | ) |
| Exchange Rate Effect on Cash and Cash Equivalents | | | (1,358 | ) | | | 4,132 | |
| Net Increase (Decrease) in Cash and Cash Equivalents | | | 250,980 | | | | (259,105 | ) |
| Cash and Cash Equivalents at Beginning of Year | | | 113,437 | | | | 348,471 | |
| Cash and Cash Equivalents at End of Period | | $ | 364,417 | | | $ | 89,366 | |
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