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