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Grainger Reports Record Sales of $6.9 Billion and Earnings Per Share of $6.04 for the Year Ended December 31, 2008

Posted on: Monday, 26 January 2009, 06:59 CST

CHICAGO, Jan. 26 /PRNewswire-FirstCall/ -- Grainger (NYSE: GWW) today reported record sales, earnings and earnings per share for the year ended December 31, 2008. Sales of $6.9 billion were up 7 percent versus 2007. Net earnings of $475 million increased 13 percent versus $420 million in 2007. Earnings per share of $6.04 increased 22 percent versus $4.94 in 2007.

"Grainger had another record year in 2008," said President and Chief Executive Officer Jim Ryan. "We were pleased with our operating performance, particularly given the challenging economic environment in the fourth quarter. Our 11.4 percent operating margin was an improvement of approximately 100 basis points over 2007."

* 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 13 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.

Ryan said, "At the same time we were expanding our operating margins, we also made great progress on our market expansion and product line expansion programs. These programs should continue to help us gain share during the current economic environment."

Ryan added, "We cannot accurately predict or control the economy, however, we can control how we run the business. We are focusing on our strengths of helping customers save money through a broad offering of products, fast delivery, outstanding customer service and a strong balance sheet to back it up."

He concluded, "In November, we gave annual sales guidance of -5% to +5% for 2009. Since then, the macroeconomic trends have deteriorated. Based on our sales run rate in January, we are somewhat below the low end of this range, so we are implementing actions now in anticipation of weak sales results. Given the great uncertainty in the economy, we are not providing 2009 annual sales and earnings guidance at this time."

For Grainger's 2008 fourth quarter, sales were $1.6 billion, a decrease of 1 percent versus the 2007 fourth quarter. There were 64 sales days in both the 2008 and 2007 fourth quarters. Daily sales increased 4 percent in October, decreased 2 percent in November and decreased 5 percent in December. The 1 percent decline for the quarter included a 2 percentage point decline from foreign exchange, offset by a net 1 percentage point lift from price and volume. Net earnings of $108 million increased 3 percent versus $104 million in 2007. Earnings per share of $1.39 increased 9 percent versus $1.28 in 2007. Included in net earnings was a $6 million write down of Grainger's investment in a joint venture in India, or $0.08 per share.

Grainger Branch-based segment

Daily sales in the 2008 fourth quarter for this segment, which includes branch-based businesses in the United States, Mexico, China and Panama, were flat. Daily sales grew by 5 percent in October, declined by 2 percent in November and declined by 5 percent in December.

During the quarter, the company opened two new full-service branches in the United States and closed one storefront location. As part of the market expansion program in Mexico, the company opened two new branches.

Fourth Quarter 2008 Branch Summary 9/30/08 Opened Closed 12/31/08 United States Branch 418 2 (1) 419 Will-Call Express 20 20 Mexico 20 2 22 China 1 1 Panama 1 1 Total 460 4 (1) 463

As a result of relocating branches under the U.S. market expansion program, the company sold one branch for a gain of $4.6 million in the fourth quarter of 2008 compared to a gain of $1.8 million in the fourth quarter of 2007. For the full year, the company sold 7 branches for a gain of $9.7 million as compared to gains on the sale of property in 2007 of $6.6 million. The market expansion program in the United States is now complete.

In the United States, sales in the quarter decreased 1 percent. The largest declines came from heavy manufacturing, retail and contractors, partially offset by an increase in sales to the government sector.

Results for market expansion by phase were: 4Q'08 Full Year Increase/ Increase/ Phase Markets (Decrease) (Decrease) 1 Atlanta, Denver, Seattle (5)% 7% 2 Four markets in Southern California (2)% 5% 3 Houston, St. Louis, Tampa 6 % 10% 4 Baltimore, Cincinnati, Kansas City, (5)% 2% Miami, Philadelphia, Washington, D.C. 5 Dallas, Detroit, Greater New York, (6)% 3% Phoenix 6 Chicago, Minneapolis, Pittsburgh (1)% 6% and San Francisco

Market expansion contributed $476 million in incremental sales in 2008 versus $402 million in 2007. Program related operating earnings were $43.2 million in 2008 versus $21.4 million in 2007. Consistent with the overall downturn in the economy, beginning in October most of these markets saw negative sales growth, which significantly affected sales and operating margin results for the quarter and year. "We are pleased with customer response to the upgrades. We expect the program to continue to yield incremental benefits through 2013," said Ryan. "As a result, we plan to selectively make upgrades in other markets in the future."

Product line expansion contributed approximately 1 percentage point to the quarterly growth for this segment. Products added over the last three years delivered $687 million in sales in 2008, which exceeded the company's expectations.

Sales in Mexico were down 11 percent in U.S. dollars for the fourth quarter versus the same period in 2007, but were up 8 percent in local currency. Sales benefited from Mexico's market expansion program including the seven new branches opened in 2008, but the rate of growth slowed as a result of the weakening U.S. and Mexican economies.

Operating earnings for the quarter were up 13 percent in the Grainger branch-based segment despite the 1 percent decline in sales. This positive operating leverage was the result of a 1 percent improvement in gross profit margins and a 2 percent decline in operating expenses. Contributing to the decline in operating expenses were lower advertising expenses, bonus accruals, sales commissions, severance and lower bad debt provisions, due to improved collection efficiency.

Acklands-Grainger Branch-based segment

Sales for the quarter were down 6 percent versus the 2007 fourth quarter in U.S. dollars, up 16 percent in local currency. On a daily basis, sales in local currency were up 18 percent in October, 18 percent in November and 15 percent in December. Strong sales to agriculture, mining, oil and gas and government customers were partially offset by weakness in the forestry sector. During the quarter, Acklands did not open or close any branches and ended the year at 154 branches.

Operating earnings declined 14 percent in the 2008 fourth quarter, but increased 5 percent in local currency. This improvement resulted from increased sales and improved gross profit margins, partially offset by higher operating expenses which included expenses related to the bankruptcy of a provider of freight payment services.

Lab Safety Supply (LSS)

Sales for the fourth quarter of 2008 were down 3 percent versus the 2007 fourth quarter. Daily sales were up 3 percent in October, down 2 percent in November and down 11 percent in December. Sales from the acquisition of Highsmith contributed 9 percentage points to growth in the quarter. Excluding this acquisition, sales were down by 12 percent reflecting continued weakness with Lab Safety's government and manufacturing customers. Operating earnings declined 57 percent for the quarter, due to lower sales and gross profit margins, and higher operating expenses related to integration costs for the Highsmith acquisition.

Other

During the quarter, the company recorded net interest expense of $3.5 million versus $0.2 million of net interest expense recorded in the fourth quarter of 2007. This was primarily the result of the $500 million in intermediate debt obtained in May 2008.

In the fourth quarter, the company wrote down its entire investment in Asia Pacific Brands India Ltd. The write down, due to the inability of Asia Pacific Brands India Ltd. to maintain adequate operating capital, resulted in a $0.08 per share charge. The weakened global economy significantly affected Asia Pacific Brands' outlook, including the bankruptcy of one of its major suppliers. This write down combined with the $0.05 per share charge the company took in the second quarter relating to a legal settlement with the government, made up the $0.13 per share in unusual items for the year.

The effective income tax rate was 37.9 percent and 38.1 percent in the 2008 and 2007 fourth quarters, respectively. Excluding the effect of after tax items related to the write down and the earnings of unconsolidated entities, the effective tax rate for the 2008 fourth quarter was 36.7 percent versus 38.5 percent in the 2007 fourth quarter. The lower effective tax rate for 2008 was primarily the result of a lower weighted average state tax rate and increased deductibility of executive compensation expenses.

For the full year, the effective income tax rate was 38.5 percent in 2008 and 38.4 percent in 2007. For 2009, the company is estimating its effective tax rate to be approximately 38.9 percent, excluding the effect of equity in net income of unconsolidated entities.

Cash flow

Operating cash flow was $195 million for the quarter and $530 million for the year. The company paid $31 million in dividends to shareholders and repurchased 1.4 million shares of stock for $104 million in the quarter. In 2008 the company used cash from operations to fund growth initiatives through capital expenditures of $195 million and returned $516 million in cash to shareholders in the form of dividends and share repurchases.

Approximately 7.4 million shares remain under the current repurchase authorization at the end of the year.

W.W. Grainger, Inc. with 2008 sales of $6.9 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 fourth 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 "anticipation", "estimating", "expect", "plan to", "predict", "sales and earnings guidance", "should" 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 Twelve Months Ended December 31, December 31, ($ in thousands except for per share data) 2008 2007 2008 2007 Net sales $1,592,655 $1,611,753 $6,850,032 $6,418,014 Cost of merchandise sold 912,592 940,272 4,041,810 3,814,391 Gross profit 680,063 671,481 2,808,222 2,603,623 Warehousing, marketing and administrative expenses 499,506 504,320 2,025,550 1,932,970 Operating earnings 180,557 167,161 782,672 670,653 Other income and (expense) Interest income 1,427 943 5,069 12,125 Interest expense (4,894) (1,157) (14,485) (2,974) Equity in net income of unconsolidated entities 807 1,663 3,642 2,016 Write-off of investments in unconsolidated entity (6,031) -- (6,031) -- Unclassified-net 1,782 94 2,351 41 Total other income and (expense) (6,909) 1,543 (9,454) 11,208 Earnings before income taxes 173,648 168,704 773,218 681,861 Income Taxes 65,733 64,312 297,863 261,741 Net earnings $107,915 $104,392 $475,355 $420,120 Earnings per share -Basic $1.42 $1.32 $6.21 $5.10 -Diluted $1.39 $1.28 $6.04 $4.94 Average number of shares outstanding -Basic 75,882,116 79,324,996 76,579,856 82,403,958 -Diluted 77,754,362 81,837,403 78,750,328 85,044,963 Segment results: 2008 2007 2008 2007 Sales Grainger Branch-based $1,331,966 $1,337,998 $5,678,823 $5,352,520 Acklands-Grainger 162,065 171,673 727,989 636,524 Lab Safety Supply 100,693 104,010 450,725 434,663 Intersegment sales (2,069) (1,928) (7,505) (5,693) Net sales to external customers $1,592,655 $1,611,753 $6,850,032 $6,418,014 Operating earnings Grainger Branch-based $186,336 $164,414 $782,747 $669,441 Acklands-Grainger 12,407 14,508 54,263 44,218 Lab Safety Supply 4,790 11,096 45,386 54,287 Unallocated expense (22,976) (22,857) (99,724) (97,293) Operating earnings $180,557 $167,161 $782,672 $670,653 Company operating margin 11.3% 10.4% 11.4% 10.5% ROIC* for Company 29.8% 28.5% ROIC* for Grainger Branch-based 38.7% 36.7% ROIC* for Acklands-Grainger 14.3% 12.9% ROIC* for Lab Safety Supply 23.2% 29.5% * See page 1 for a definition of ROIC CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Preliminary At December 31, ($ in thousands) Assets 2008 2007 Cash and cash equivalents $396,290 $113,437 Marketable securities -- 20,074 Accounts receivable - net 589,416 602,650 Inventories (1) 1,009,932 946,327 Prepaid expenses and other assets 73,359 61,666 Deferred income taxes 52,556 56,663 Prepaid income taxes 20,535 -- Total current assets 2,142,088 1,800,817 Property, buildings and equipment - net 930,310 878,345 Deferred income taxes 97,442 54,658 Investment in unconsolidated entities 20,830 14,759 Goodwill 213,159 233,028 Other assets and intangibles - net 109,566 112,421 Total assets $3,513,395 $3,094,028 Liabilities and Shareholders' Equity Short-term debt $19,960 $102,060 Current maturities of long-term debt 21,257 4,590 Trade accounts payable 290,802 297,929 Accrued compensation and benefits 309,302 308,758 Accrued expenses 118,633 102,607 Income taxes payable 1,780 10,459 Total current liabilities 761,734 826,403 Long-term debt (2) 488,228 4,895 Deferred income taxes and tax uncertainties 31,197 20,727 Accrued employment-related benefits (3) 198,431 143,895 Shareholders' equity (4) 2,033,805 2,098,108 Total liabilities and shareholders' equity $3,513,395 $3,094,028 (1) Inventories increased $64 million, or 7%, primarily due to increased sales volumes and the product line expansion initiative. (2) Long-term debt increased $483 million due to the term loan agreement entered into in May 2008. (3) Accrued employment-related benefits increased $55 million or 38% due to increases in post-retirement liabilities resulting from declines in market values of underlying plan assets and also a decrease in assumed discount rates, driven by recent economic conditions. (4) Common stock outstanding as of December 31, 2008 was 74,781,029 shares as compared with 79,459,415 shares at December 31, 2007. The Company repurchased 1.4 million shares during the 2008 fourth quarter, bringing the total for the year to 5.7 million shares. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Preliminary Twelve Months Ended December 31, ($ in thousands) 2008 2007 Cash flows from operating activities: Net earnings $475,355 $420,120 Provision for losses on accounts receivable 12,924 15,436 Deferred income taxes and tax uncertainties 3,161 (18,632) Depreciation and amortization: Property, buildings and equipment 112,443 106,839 Capitalized software and other intangibles 27,127 25,160 Stock-based compensation 45,945 35,551 Tax benefit of stock incentive plans 2,299 3,193 Net gains on sales of property, buildings and equipment (9,232) (7,254) Write-off of unconsolidated entity 6,031 -- (Income) losses from unconsolidated entities - net (3,642) (2,016) Change in operating assets and liabilities: (Increase) in accounts receivable (5,592) (41,814) (Increase) in inventories (92,518) (97,234) (Increase) in prepaid income taxes (20,535) -- (Increase) in prepaid expenses (11,073) (2,342) (Decrease) in trade accounts payable (6,960) (39,436) Increase (decrease) in other current liabilities (51,085) 54,457 Increase (decrease) in current income taxes payable (7,784) 2,304 Increase in accrued employment-related benefits cost 54,536 17,705 Other - net (923) (3,162) Net cash provided by operating activities 530,477 468,875 Cash flows from investing activities: Additions to property, buildings and equipment - net (169,013) (176,783) Additions to capitalized software (12,343) (8,556) Cash paid for business acquisitions (34,290) (4,698) Investments in unconsolidated entities (6,487) (2,138) Other - net 19,498 (4,782) Net cash used in investing activities (202,635) (196,957) Cash flows from financing activities: Net (decrease) increase in short-term debt (81,425) 102,303 Long-term debt issuance 500,000 -- Stock options exercised 46,797 113,500 Excess tax benefits from stock-based compensation 13,158 30,696 Purchase of treasury stock (394,247) (647,293) Cash dividends paid (121,504) (113,093) Net cash (used in) financing activities (37,221) (513,887) Exchange rate effect on cash and cash equivalents (7,768) 6,935 Net increase (decrease) in cash and cash equivalents 282,853 (235,034) Cash and cash equivalents at beginning of year 113,437 348,471 Cash and cash equivalents at end of period $396,290 $113,437

SOURCE Grainger

Source: PR Newswire

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