10-QPeriod: Q3 FY2009

W.W. GRAINGER, INC. Quarterly Report for Q3 Ended Sep 30, 2009

Filed October 29, 2009For Securities:GWW

Summary

W.W. Grainger, Inc. (GWW) reported its third-quarter and nine-month results for the period ending September 29, 2009, amidst a challenging economic environment characterized by declining industrial production. For the third quarter, net sales decreased by 13.6% year-over-year, reflecting a significant volume decline partially offset by price increases and foreign exchange impacts. Despite the sales decline, net earnings saw a modest increase of 3.2% due to a substantial one-time, non-cash gain from the remeasurement of an equity investment in MonotaRO Co., Ltd. (MonotaRO) upon gaining controlling interest. The company also experienced a decline in operating earnings, primarily due to lower sales and operating expenses not decreasing at the same pace. The nine-month period showed a similar trend, with net sales down 12.7% year-over-year. Net earnings for the nine months decreased by 9.3%, impacted by the lower sales and operating earnings, though partially mitigated by the same one-time MonotaRO gain. The company strategically managed its expenses, with operating expenses decreasing, partly due to headcount reductions and reduced commissions and bonuses, with a portion expected to be permanent. The company's financial position remained solid, with an increased working capital and a strong cash flow from operations, partly driven by inventory reductions.

Financial Highlights

50 data points
Beta

Revenue

$1.59B

41.5% Gross Margin

Net Income

$144.56M

9.1% Net Margin

EPS (Diluted)

$1.88

Total Assets

$3.75B

Cash & Equivalents

$672.03M

Free Cash Flow

$240.88M

Financial Statements
Beta
Revenue$1.59B
Cost of Revenue$929.72M
Gross Profit$659.95M
SG&A Expenses$473.23M
Operating Income$186.72M
Interest Expense$2.20M
Net Income$144.56M
EPS (Basic)$1.91
EPS (Diluted)$1.88
Shares Outstanding (Basic)74.05M
Shares Outstanding (Diluted)75.20M

Key Highlights

  • 1Net sales for the third quarter of 2009 decreased by 13.6% to $1,589.7 million, reflecting a 17% volume decline, partially offset by a 4% price increase.
  • 2Net earnings for the third quarter increased by 3.2% to $144.6 million, largely driven by a $47.4 million pre-tax, non-cash gain from the step-up in the fair value of an investment in MonotaRO Co., Ltd.
  • 3Diluted earnings per share (EPS) for the third quarter increased to $1.88, up 6.2% from $1.77 in the prior year, primarily due to the aforementioned MonotaRO gain.
  • 4For the nine months ended September 30, 2009, net sales decreased by 12.7% to $4,588.2 million, while net earnings decreased by 9.3% to $333.4 million.
  • 5Operating earnings for the third quarter declined 19.3% to $186.7 million, and for the nine-month period, they decreased 17.0% to $499.9 million, impacted by lower sales.
  • 6The company managed operating expenses effectively, with a 7.4% decrease in the third quarter and a 7.3% decrease for the nine months, attributed to lower payroll, benefits, commissions, and bonus accruals.
  • 7Net cash provided by operating activities for the nine months increased significantly to $509.7 million from $335.3 million in the prior year, driven by reduced inventory levels and lower other current liabilities.

Frequently Asked Questions

The primary driver for the increase in net earnings was a one-time, non-cash pre-tax gain of $47.4 million ($28 million after tax) recognized from the step-up in the fair value of W.W. Grainger's investment in MonotaRO Co., Ltd. upon acquiring a controlling interest. This gain significantly boosted net earnings, offsetting the negative impact of declining sales on operating performance.

The challenging economic environment, characterized by declining industrial production, significantly impacted Grainger's sales. Net sales for the third quarter decreased by 13.6%, with volume declining by approximately 17%, particularly in sectors like heavy manufacturing and resellers. This trend was consistent across most customer segments and geographic regions, except for some growth in specific 'Other Businesses'.

W.W. Grainger implemented cost-saving measures, leading to a 7.4% decrease in operating expenses for the third quarter. These reductions were primarily driven by lower payroll and benefit costs due to reduced headcount, decreased commissions, and the absence of bonus accruals. Management indicated that approximately one-third of these operating expense reductions are expected to be permanent.

Net cash provided by operating activities saw a substantial increase for the nine months ended September 30, 2009, rising to $509.7 million from $335.3 million in the prior year. Key contributors included higher net earnings (though lower than the previous year for the nine-month period), non-cash expenses like depreciation and stock-based compensation, and favorable changes in operating assets and liabilities. Notably, a decrease in inventory levels due to lower purchases and a reduction in other current liabilities (like profit sharing and bonus accruals) were significant drivers.