Raises 2008 EPS guidance to $6.00 to $6.20
CHICAGO, Oct. 14 /PRNewswire-FirstCall/ -- 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.
"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.
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:
3Q'08 9/30/08
Daily Sales Percent
Phase Markets Increase 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, 4% 100%
Philadelphia, Washington, D.C.
5 Dallas, Detroit, Greater New York, Phoenix 5% 95%
6 Chicago, Minneapolis, Pittsburgh and 7% 95%
San Francisco
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.
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.
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.
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 $6.4 billion is the leading broad
line supplier of facilities maintenance products serving businesses and
institutions in the United States, Canada, Mexico, China and Panama. Through a
highly integrated network including more than 600 branches, 18 distribution
centers and multiple Web sites, Grainger's employees help customers get the
job done. Visit http://www.grainger.com/investor to view information about the
company, including a history of daily sales by segment and a Podcast regarding
third quarter 2008 results.
Forward-Looking Statements
This document contains forward-looking statements under the federal
securities law. Forward-looking statements relate to the company's expected
future financial results and business plans, strategies and objectives and are
not historical facts. They are generally identified by qualifiers such as
"earnings per share guidance", "expects", "going forward", "percent complete",
"targeted for completion" or similar expressions. There are risks and
uncertainties the outcome of which could cause the company's results to differ
materially from what is projected. The forward-looking statements should be
read in conjunction with the company's most recent annual report, as well as
the company's Form 10-K, Form 10-Q and other reports filed with the Securities
& Exchange Commission, containing a discussion of the company's business and
various factors that may affect it.
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
($ 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 $503,492
Company operating margin 12.6% 10.5% 11.5% 10.5%
ROIC* for Company 30.5% 28.9%
ROIC* for Grainger
Branch-based 39.4% 37.3%
ROIC* for Acklands-
Grainger 14.5% 12.0%
ROIC* for Lab Safety
Supply 28.1% 31.2%
* See page 1 for a definition of ROIC
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Preliminary
At September 30,
($ 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 $492 million due to the term loan agreement
entered into in May 2008.
(5) Common stock outstanding as of September 30, 2008 was 76,067,844
shares as compared with 79,244,196 shares at September 30, 2007.
The Company repurchased 0.4 million shares during the 2008 third
quarter, bringing the total for the year to 4.3 million shares.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
Nine Months Ended
September 30,
($ 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
SOURCE W.W. Grainger, Inc.