What is the impact of the government contract settlement on Grainger's earnings?

W.W. Grainger recorded a $76.0 million liability in the third quarter of 2012 related to the expected resolution of government contract issues. This charge negatively impacted reported operating earnings by $35.7 million (as $76.0M - $35.7M = ~$40.3M in operating earnings from segments, and the report shows $254.3M consolidated operating earnings which is a decrease of 16.1% or $48.7M from Q3 2011's $303.0M, suggesting the charge's direct impact was closer to the full $76M before accounting for other variances) and diluted earnings per share by $0.66 for the third quarter and the first nine months of 2012.

How did Grainger's sales perform in the reported period, and what drove the growth?

Grainger reported robust net sales growth, with a 7.9% increase in the third quarter to $2.28 billion and a 12.0% increase for the first nine months to $6.72 billion. This growth was fueled by an improving economic environment, particularly in industrial production and manufacturing employment, along with contributions from strategic acquisitions and favorable pricing strategies.

What is the outlook for W.W. Grainger for the remainder of 2012?

Grainger revised its full-year 2012 sales growth guidance to 11% to 12%, down from the previous 12% to 14%. However, earnings per share guidance remained unchanged at $10.50 to $10.80, excluding the impact of the government contract settlement. Management expects gross profit margins to remain consistent with third-quarter levels.

How are Grainger's different business segments performing?

The United States segment, the largest, saw a 3.5% increase in net sales for Q3 2012 and a 7% increase for the nine months, driven by manufacturing and commercial services. The Canada segment demonstrated strong growth with a 10% increase in Q3 sales and a 10% increase for the nine months, particularly in western provinces. 'Other Businesses' experienced significant sales growth of 51% in Q3 and 77% for the nine months, largely due to recent acquisitions in Europe and Asia, though this segment also showed operating losses from some acquired businesses and startups.

GWW 10-Q Quarterly Report Q3 FY2012 — Revenue, Net Income, EPS

Summary

W.W. Grainger, Inc. reported solid top-line growth in the third quarter and first nine months of 2012, with net sales increasing by 7.9% and 12.0%, respectively, compared to the prior year periods. This growth was driven by favorable economic indicators like increased industrial production and manufacturing employment, along with strategic acquisitions. However, reported operating earnings and net earnings saw a significant decline in the third quarter due to a $76.0 million charge related to the expected resolution of government contract issues. Excluding this one-time expense, the underlying operational performance remained strong, with adjusted operating earnings up 9% for the quarter and adjusted earnings per share up 12% for the quarter and 16% for the nine months. The company also saw improvements in gross profit margins across its segments, particularly in the United States and Canada. Financially, the company maintained a strong balance sheet with a stable debt-to-capitalization ratio. Cash flow from operations remained robust, providing ample liquidity. While the company revised its full-year sales growth guidance slightly downward, its earnings per share guidance remained unchanged, indicating management's confidence in its ability to manage the impact of the government contract settlement. Investors should note the significant impact of the settlement charge on current quarter results, but focus on the underlying operational improvements and growth drivers, including acquisitions and favorable market conditions.

Financial Highlights

51 data points

Beta

Revenue

$2.28B

0.4% Gross Margin

Net Income

$155.39M

0.1% Net Margin

EPS (Diluted)

$2.15

Total Assets

$4.98B

Cash & Equivalents

$420.80M

Free Cash Flow

$279.10M

Financial Statements

Beta

Revenue	$2.28B
Cost of Revenue	$1.29B
Gross Profit	$993.96M
SG&A Expenses	$739.63M
Operating Income	$254.33M
Interest Expense	$4.75M
Net Income	$155.39M
EPS (Basic)	$2.19
EPS (Diluted)	$2.15
Shares Outstanding (Basic)	69.63M
Shares Outstanding (Diluted)	70.96M

Key Highlights

1Net sales increased by 7.9% to $2.28 billion for the third quarter and 12.0% to $6.72 billion for the first nine months of 2012, indicating strong demand.
2A significant $76.0 million charge was recorded in the third quarter for the expected resolution of government contract issues, negatively impacting reported operating earnings and net earnings.
3Excluding the government contract charge, adjusted operating earnings increased by 9% for the third quarter and adjusted diluted EPS grew by 16% for the first nine months, demonstrating underlying operational strength.
4Gross profit margin improved by 0.4 percentage points for the quarter and 0.4 percentage points for the nine months, driven by price increases outpacing cost increases.
5The company experienced strong sales growth in its manufacturing customer end-markets, aligning with positive industrial production and employment trends.
6Acquisitions, including Fabory and AnFreixo, contributed to sales growth, particularly in the 'Other Businesses' segment, which saw a 51% increase in Q3 sales.
7The company maintained a healthy liquidity position, with net cash provided by operating activities of $576.1 million for the nine months ended September 30, 2012.

W.W. GRAINGER, INC. Quarterly Report for Q3 Ended Sep 30, 2012

Summary

Financial Highlights

Key Highlights

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