10-QPeriod: Q3 FY2010

W.W. GRAINGER, INC. Quarterly Report for Q3 Ended Sep 30, 2010

Filed October 28, 2010For Securities:GWW

Summary

W.W. Grainger, Inc. reported a significant increase in sales and earnings for the third quarter and first nine months of 2010 compared to the same periods in 2009. Net sales for the third quarter rose by 19.5% to $1.9 billion, driven by a combination of volume increases and acquisitions, with particular strength in the manufacturing and reseller customer segments. This sales growth, coupled with improved gross profit margins and operating expense management, led to a 34.6% increase in operating earnings and a 4.0% rise in net earnings attributable to W.W. Grainger, Inc., reaching $150.4 million ($2.06 per diluted share). The positive momentum carried through the first nine months of 2010, with net sales up 16.7% to $5.36 billion and net earnings increasing by 13.6% to $378.7 million ($5.10 per diluted share). The company is investing in growth initiatives, including expanding its sales force and eCommerce capabilities, and has raised its full-year 2010 guidance for sales growth to 14-15% and earnings per share to $6.40-$6.70. Despite the positive financial performance, investors should note ongoing discussions with the DOJ and USPS regarding contract compliance and pricing, although the company believes it has complied in all material respects and does not expect these to have a material adverse financial impact.

Financial Highlights

50 data points
Beta

Revenue

$1.90B

41.6% Gross Margin

Net Income

$150.41M

7.9% Net Margin

EPS (Diluted)

$2.06

Total Assets

$3.79B

Cash & Equivalents

$286.51M

Free Cash Flow

$167.76M

Financial Statements
Beta
Revenue$1.90B
Cost of Revenue$1.11B
Gross Profit$789.72M
SG&A Expenses$538.45M
Operating Income$251.27M
Interest Expense$1.95M
Net Income$150.41M
EPS (Basic)$2.10
EPS (Diluted)$2.06
Shares Outstanding (Basic)69.92M
Shares Outstanding (Diluted)71.17M

Key Highlights

  • 1Strong Sales Growth: Net sales increased by 19.5% year-over-year to $1.9 billion for Q3 2010 and by 16.7% for the first nine months of 2010 to $5.36 billion.
  • 2Earnings Improvement: Diluted EPS grew by 9.6% to $2.06 in Q3 2010 and by 17.5% to $5.10 for the nine-month period, excluding certain one-time items.
  • 3Acquisition Contribution: Business acquisitions contributed approximately 5% to sales growth in Q3 and 9 months of 2010.
  • 4Segment Performance: The US segment saw a 15.0% sales increase in Q3, while Canada experienced a 21.6% increase. 'Other Businesses' also showed substantial growth, particularly due to the inclusion of Japan and Colombia.
  • 5Increased Shareholder Returns: The company repurchased $504.4 million of treasury stock in the first nine months of 2010, a significant increase from $127.7 million in the prior year period.
  • 6Raised Full-Year Guidance: Grainger increased its 2010 sales growth guidance to 14-15% and EPS guidance to $6.40-$6.70.
  • 7Ongoing Legal Discussions: The company is engaged in ongoing discussions with the DOJ and USPS regarding pricing compliance under government contracts, though it maintains its compliance and does not anticipate a material adverse effect.

Frequently Asked Questions

The primary drivers of W.W. Grainger's sales growth are an increase in volume of sales and contributions from business acquisitions. For the third quarter of 2010, approximately 13 percentage points of sales growth came from volume and 5 percentage points from acquisitions. Sales related to the Gulf of Mexico oil spill cleanup also provided a temporary boost.

W.W. Grainger has seen improved profitability. For the third quarter of 2010, operating earnings increased by 34.6% year-over-year, and net earnings attributable to W.W. Grainger, Inc. increased by 4.0%. Diluted earnings per share rose to $2.06 from $1.88 in the same period last year. Excluding certain one-time items, the year-over-year earnings per share growth was even more substantial.

W.W. Grainger has raised its full-year 2010 guidance, expecting sales growth between 14% and 15%, and earnings per share in the range of $6.40 to $6.70. This optimistic outlook is based on strong performance in the first nine months, though the company anticipates that fourth-quarter organic revenue growth may moderate due to tougher year-over-year comparisons and a slowdown in customer inventory building.

Yes, W.W. Grainger is involved in ongoing discussions with the Department of Justice (DOJ) regarding its contract with the U.S. General Services Administration (GSA) and with the United States Postal Service (USPS) concerning its pricing compliance under specific contracts. While the company believes it has complied with contract terms, an unfavorable resolution could potentially lead to significant payments. However, these matters are not currently expected to have a material adverse effect on the company's financial position.