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8-K - FORM 8-K Q4 2009 - W.W. GRAINGER, INC. | form8kq42009.htm |
GRAINGER
REPORTS SALES OF $6.2 BILLION AND
EARNINGS
PER SHARE OF $5.62 FOR THE YEAR ENDED DECEMBER 31, 2009
Highlights
·
|
4Q09
sales of $1.6 billion, up 3 percent
|
·
|
4Q09
EPS of $1.27, down 7 percent, including the following
items:
|
·
|
$0.07
in asset impairment charges
|
·
|
$0.05
in severance charges
|
·
|
$732
million in operating cash flow for the
year
|
·
|
$507
million returned to shareholders in dividends & share repurchases in
2009
|
·
|
Pretax
ROIC* of 24.9 percent versus 29.8 percent in
2008
|
Visit
www.grainger.com/investor to access a podcast describing Grainger’s performance
in more detail.
CHICAGO, January
26, 2010 – Grainger (NYSE: GWW) today reported sales, earnings and earnings per
share for the year ended December 31, 2009. Sales of
$6.2 billion were down 9 percent versus
2008. Net earnings of $430 million decreased 9 percent versus
$475 million in 2008. Earnings per share of $5.62 decreased 6 percent
versus $5.97** in 2008.
“I
am very proud of our employees and how they have successfully navigated this
company through one of the most difficult economic times in our history,” said
Chairman, President and Chief Executive Officer Jim Ryan. “The
actions we took in 2009 to keep service levels and customer relationships strong
are paying off. I am excited about the opportunity we have going
forward to gain additional market share and create value for our shareholders by
serving as the indispensable MRO partner to businesses and
institutions.”
*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.
**
Reported 2008 EPS were $6.04, which was restated after adopting FSP 03-6-1 on
January 1, 2009, resulting in a 7 cent reduction in EPS in 2008 and 6 cents in
2009. (See page K-41 of the company’s 2008 10-K for additional
information).
1
Ryan added, “We are
seeing some initial signs of improvement in the overall economy, although job
growth is expected to lag the recovery. Stronger sales growth in
December and January give us greater confidence to raise our 2010 sales growth
guidance to a range of 6 to 10 percent and our earnings per share guidance to
the new range of $5.40 to $5.90. We remain cautiously optimistic
about the economy and are executing on the things we can control like our
customer service and high product availability. As a result, we are
well positioned for continued share gain, particularly as many competitors have
been forced to reduce inventories.” The company had previously issued
2010 guidance of 4 to 9 percent sales growth and earnings per share of
$5.30 to $5.80.
For the 2009 fourth
quarter, sales of $1.6 billion increased 3 percent versus the fourth
quarter of 2008. There were 64 sales days in both the 2009 and 2008 fourth
quarters. Daily sales decreased 3 percent in October, increased 2
percent in November and increased 11 percent in December. The 3
percent increase for the quarter included a 4 percentage point contribution
from acquisitions, a 2 percentage point benefit from foreign exchange and a
2 percentage point lift from price increases, partially offset by a
5 percentage point decline in volume. Net earnings of $97
million decreased 10 percent versus $108 million in
2008. Earnings per share of $1.27 decreased 7 percent versus $1.37 in
2008. The effect of adopting FSP 03-6-1 was a 1 cent per share reduction in the
fourth quarter of 2009 and 2 cents in the 2008 quarter.
During the quarter,
the company continued to lower its cost structure by closing branches and
reducing headcount. In total, 12 branches, including 6 Will Call
Express locations, were closed. These closures, along with other
asset write-downs, resulted in asset impairment charges of $9 million or 7
cents per share. In addition, the company reduced headcount by
another 200 positions in the 2009 fourth quarter, incurring $7.5 million or
5 cents per share in severance cost. For the full year 2009, the
company eliminated approximately 600 positions and incurred
$18 million in severance or 11 cents per share.
2
Effective with the
first quarter of 2009, the company has two reportable business segments, the
United States and Canada, which represent approximately 98 percent of full year
company sales. This reporting structure reflects the integration of
Lab Safety Supply with Grainger’s U.S. branch-based business. The
remaining operating units (Japan, Mexico, India, Puerto Rico, China and Panama)
are included in other businesses and are not considered a
segment. The company acquired Asia Pacific Brands India Private
Limited in June 2009 resulting in the inclusion of the India operations in other
businesses in the third quarter. The company also acquired a majority
ownership of MonotaRO in September 2009, consolidated this Japanese entity in
its balance sheet as of the end of the third quarter and began consolidating its
income statement in the fourth quarter.
United
States
Sales for the
United States segment decreased 2 percent in the 2009 fourth quarter, with daily
sales down 7 percent in October, down 3 percent in November and up
5 percent in December. Acquisitions and the timing of the
Christmas holiday accounted for 3 percentage points of the sales growth in
December.
Grainger serves a
diverse set of customer end-markets in the United States. During the
quarter, sales to government and commercial customers increased versus the 2008
fourth quarter, while sales to resellers, contractors, manufacturing and retail
customers declined.
Throughout 2009,
Grainger added products to its already broad offering that will result in having
approximately 307,000 in-stock products in the 2010 catalog. Product
line expansion contributed $260 million in sales for the fourth quarter versus
$185 million in the 2008 fourth quarter. Products added over the last
four years resulted in $934 million in sales in 2009.
3
Also contributing
to segment performance in the quarter was ongoing work to integrate Lab Safety
Supply with Grainger Industrial Supply. The company still expects
this combination to deliver $70-$100 million in incremental revenue and $20-$30
million in cost savings by mid-2010. Through the end of 2009, the
integration has generated $44 million of the additional revenue and $22
million of the cost savings.
Operating earnings
for the quarter were down 6 percent in the United States, the result of
operating expenses declining at a slower rate than sales. The decline
in operating expenses was primarily the result of lower payroll-related
expenses, reduced commissions and no bonus accruals, partially offset by higher
severance and asset impairment charges particularly related to the branch
closings. Gross profit margins for the quarter were flat with the prior
year.
Canada
Sales for the
Acklands-Grainger business in the quarter were up 11 percent versus the 2008
fourth quarter in U.S. dollars. In local currency, sales
were down 3 percent for the quarter and on a daily basis were down 7 percent in
October, down 8 percent in November and up 7 percent in
December. Sales performance in December benefited from some large
customer orders and the incremental sales from an acquisition. From a
customer sector standpoint, the 3 percent sales decline for the quarter was
attributable to continued weakness among heavy manufacturing, contractor and
forestry, partially offset by growth among utilities, government and agriculture
and mining.
4
Operating earnings
in Canada increased 59 percent in the 2009 fourth quarter and were up
38 percent in local currency. This improvement resulted from the
sales increase, a 0.9 percentage point improvement in gross profit margins,
and operating expenses which increased at a slower rate than sales. The
improvement in gross margins was driven by a year-end inventory pick up
primarily attributable to lower than forecasted transportation and product
costs. Product costs were lower than expected due in part to
favorable foreign exchange. The 2008 fourth quarter included a charge
for the bankruptcy of a provider of freight payment
services. Excluding these items, operating earnings were up
6 percent in U.S. dollars, and down 7 percent in local currency, versus
2008.
Other
businesses
Sales for the other
businesses, which now include Japan, Mexico, India, Puerto Rico, China, and
Panama, were up 214 percent for the 2009 fourth quarter versus prior
year. The sales increase was due primarily to the acquisition of the
businesses in India and Japan, along with contributions from Mexico and
China. Operating losses for other businesses were $3 million in
both the 2009 and 2008 quarters.
Taxes
The fourth quarter
2009 tax rate of 40.6 percent includes the effect of a one-time tax expense
resulting from tax law changes in Mexico. Excluding the effect of this
one-time expense, the effective tax rate for the fourth quarter was 39.1
percent. The effective tax rate for the year 2009 was also 39.1 percent,
excluding the effects of the Mexican tax expense recognized in the fourth
quarter and a tax benefit recorded in the 2009 third
quarter.
5
Cash
flow
Operating cash flow
was $223 million versus $195 million in the 2008 fourth quarter. For
the full year, the company generated $732 million in operating cash flow versus
$530 million in 2008. The company used cash from operations to fund capital
expenditures of $53 million in the quarter versus $54 million in the fourth
quarter of 2008. Capital expenditures for the year were $142
million versus $195 million in 2008. The company paid $35 million in
dividends to shareholders and repurchased 2.5 million shares of stock in the
quarter. For the full year, Grainger returned $507 million in cash to
shareholders in the form of dividends and share repurchases. After buying back
4.5 million shares of stock in 2009, approximately 3.1 million shares
remain under the current repurchase authorization at the end of the
year.
W.W. Grainger, Inc.
with 2009 sales of $6.2 billion is the leading broad line supplier of facilities
maintenance products serving businesses and institutions in the United States
and Canada, with an expanding presence in Japan, Mexico, India, China and
Panama. Through a highly integrated network including branches, distribution
centers and Web sites, Grainger's employees help customers get the job
done. Visit www.grainger.com/investor to view information about the company,
including a history of daily sales by segment and a podcast regarding fourth
quarter 2009 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 “earnings per share guidance”, “expected”, “opportunity to gain
additional market share and create value”, “positioned for continued share
gain”, “sales growth guidance”, “range”, “will”, 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.
Contacts:
|
||
Media:
|
Investors:
|
|
Jan
Tratnik
|
Ernest
Duplessis
|
|
Director,
Corporate Communications & Public Affairs
|
Vice
President, Investor Relations
|
|
847/535-4339
|
847/535-4356
|
|
Erin
Ptacek
|
William
Chapman
|
|
Director,
Corporate Brand & Reputation
|
Director,
Investor Relations
|
|
847/535-1543
|
847/535-0881
|
6
CONSOLIDATED
STATEMENTS OF EARNINGS (Unaudited)
(In thousands,
except for per share amounts)
Three
Months Ended
December
31,
|
Twelve
Months Ended
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net sales
|
$ | 1,633,815 | $ | 1,592,655 | $ | 6,221,991 | $ | 6,850,032 | ||||||||
Cost of merchandise sold
|
949,617 | 912,592 | 3,623,465 | 4,041,810 | ||||||||||||
Gross profit
|
684,198 | 680,063 | 2,598,526 | 2,808,222 | ||||||||||||
|
||||||||||||||||
Warehousing, marketing and administrative expenses
|
518,837 | 499,506 | 1,933,302 | 2,025,550 | ||||||||||||
Operating earnings
|
165,361 | 180,557 | 665,224 | 782,672 | ||||||||||||
Other income and (expense)
|
||||||||||||||||
Interest income
|
310 | 1,427 | 1,358 | 5,069 | ||||||||||||
Interest expense
|
(2,032 | ) | (4,894 | ) | (8,766 | ) | (14,485 | ) | ||||||||
Equity in net
income of unconsolidated entities
|
136 | 807 | 1,497 | 3,642 | ||||||||||||
Gain on
previously held equity interest
|
– | – | 47,343 | – | ||||||||||||
Write-off of
investment in unconsolidated entity
|
– | (6,031 | ) | – | (6,031 | ) | ||||||||||
Unclassified-net
|
48 | 1,782 | 681 | 2,351 | ||||||||||||
Total other income and (expense)
|
(1,538 | ) | (6,909 | ) | 42,113 | (9,454 | ) | |||||||||
Earnings before income taxes
|
163,823 | 173,648 | 707,337 | 773,218 | ||||||||||||
Income
taxes
|
66,459 | 65,733 | 276,565 | 297,863 | ||||||||||||
Net earnings
|
97,364 | 107,915 | 430,772 | 475,355 | ||||||||||||
Less: Net
earnings attributable to noncontrolling interest
|
306 | – | 306 | – | ||||||||||||
Net earnings
attributable to W.W. Grainger, Inc.
|
$ | 97,058 | $ | 107,915 | $ | 430,466 | $ | 475,355 | ||||||||
Earnings per share
-Basic
|
$ | 1.29 | $ | 1.39 | $ | 5.70 | $ | 6.07 | ||||||||
-Diluted
|
$ | 1.27 | $ | 1.37 | $ | 5.62 | $ | 5.97 | ||||||||
Average number of shares outstanding
-Basic
|
73,398 | 75,882 | 73,786 | 76,580 | ||||||||||||
-Diluted
|
74,660 | 76,880 | 74,892 | 77,888 | ||||||||||||
Diluted
Earnings Per Share
|
||||||||||||||||
Net Earnings
as reported
|
$ | 97,058 | $ | 107,915 | $ | 430,466 | $ | 475,355 | ||||||||
Less:
earnings allocated to participating securities
|
(2,249 | ) | (2,464 | ) | (9,947 | ) | (10,365 | ) | ||||||||
Net earnings
available to common shareholders
|
$ | 94,809 | $ | 105,451 | $ | 420,519 | $ | 464,990 | ||||||||
Weighted
average shares adjusted for dilutive securities
|
74,660 | 76,880 | 74,892 | 77,888 | ||||||||||||
Diluted
earnings per share
|
$ | 1.27 | $ | 1.37 | $ | 5.62 | $ | 5.97 | ||||||||
7
SEGMENT
RESULTS (Unaudited)
(In thousands of
dollars, except for per share amounts)
Three
Months Ended
December
31,
|
Twelve
Months Ended
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales
|
||||||||||||||||
United
States
|
$ | 1,384,282 | $ | 1,416,138 | $ | 5,445,390 | $ | 6,057,828 | ||||||||
Canada
|
180,385 | 162,065 | 651,166 | 727,989 | ||||||||||||
Other
Businesses
|
79,717 | 25,353 | 165,051 | 111,732 | ||||||||||||
Intersegment sales
|
(10,569 | ) | (10,901 | ) | (39,616 | ) | (47,517 | ) | ||||||||
Net sales to external customers
|
$ | 1,633,815 | $ | 1,592,655 | $ | 6,221,991 | $ | 6,850,032 | ||||||||
Operating earnings
|
||||||||||||||||
United
States
|
$ | 181,429 | $ | 193,994 | $ | 735,586 | $ | 840,408 | ||||||||
Canada
|
19,687 | 12,407 | 43,742 | 54,263 | ||||||||||||
Other
Businesses
|
(3,458 | ) | (2,947 | ) | (11,634 | ) | (11,827 | ) | ||||||||
Unallocated expense
|
(32,297 | ) | (22,897 | ) | (102,470 | ) | (100,172 | ) | ||||||||
Operating earnings
|
$ | 165,361 | $ | 180,557 | $ | 665,224 | $ | 782,672 | ||||||||
Company
operating margin
|
10.1 | % | 11.3 | % | 10.7 | % | 11.4 | % | ||||||||
ROIC* for Company
|
24.9 | % | 29.8 | % | ||||||||||||
ROIC* for United
States
|
34.8 | % | 39.5 | % | ||||||||||||
ROIC* for Canada
|
11.5 | % | 14.3 | % | ||||||||||||
* See page 1
for a definition of ROIC
|
8
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
Preliminary
(In thousands of
dollars)
At
December 31,
|
||||||||
Assets
|
2009
|
2008
|
||||||
Cash and cash
equivalents
|
$ | 459,871 | $ | 396,290 | ||||
Accounts
receivable – net (1)
|
624,910 | 589,416 | ||||||
Inventories
(2)
|
889,679 | 1,009,932 | ||||||
Prepaid
expenses and other assets
|
88,364 | 73,359 | ||||||
Deferred
income taxes
|
42,023 | 52,556 | ||||||
Prepaid
income taxes
|
26,668 | 22,556 | ||||||
Total current
assets
|
2,131,515 | 2,144,109 | ||||||
Property,
buildings and equipment – net
|
953,271 | 930,311 | ||||||
Deferred
income taxes
|
79,472 | 97,442 | ||||||
Investment in
unconsolidated entities (3)
|
3,508 | 20,830 | ||||||
Goodwill
(4)
|
351,182 | 213,159 | ||||||
Other assets
and intangibles – net (4)
|
207,384 | 109,566 | ||||||
Total
assets
|
$ | 3,726,332 | $ | 3,515,417 | ||||
Liabilities
and Shareholders’ Equity
|
||||||||
Short-term
debt
|
$ | 34,780 | $ | 19,960 | ||||
Current
maturities of long-term debt (5)
|
53,128 | 21,257 | ||||||
Trade
accounts payable
|
300,791 | 290,802 | ||||||
Accrued
compensation and benefits
|
135,323 | 162,380 | ||||||
Accrued
contributions to employees’ profit sharing plans
|
121,895 | 146,922 | ||||||
Accrued
expenses
|
124,150 | 118,633 | ||||||
Income taxes
payable
|
6,732 | 1,780 | ||||||
Total current
liabilities
|
776,799 | 761,734 | ||||||
Long-term
debt
|
437,500 | 488,228 | ||||||
Deferred
income taxes and tax uncertainties
|
62,215 | 33,219 | ||||||
Accrued
employment-related benefits (6)
|
222,619 | 198,431 | ||||||
Shareholders'
equity (7)
|
2,227,199 | 2,033,805 | ||||||
Total liabilities and
shareholders’ equity
|
$ | 3,726,332 | $ | 3,515,417 |
(1)
|
Accounts
receivable increased $36 million, or 6%, due to higher sales in the month
of December.
|
(2)
|
Inventories
decreased $120 million, or 12%, due to lower purchases in response to the
decline in annual sales.
|
(3)
|
Investment in
unconsolidated entities decreased $17 million, or 83%, due to acquiring
the majority ownership of MonotaRo Co. Ltd. which was previously held as
an investment in unconsolidated
entities.
|
(4)
|
Goodwill and
intangibles increased due primarily to
acquisitions.
|
(5)
|
Current
maturities of long-term debt increased $32 million, or 150%, due to
payments on the term loan obtained in May 2008 that will be due within one
year.
|
(6)
|
Accrued
employment-related benefits increased $24 million, or 12%, due to
increases in post-retirement
liabilities.
|
(7)
|
Common stock
outstanding as of December 31, 2009 was 72,276,516 shares as compared with
74,781,029 shares at December 31, 2008. The Company repurchased
2.5 million shares during the 2009 fourth
quarter.
|
9
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
(In thousands of
dollars)
Twelve
Months Ended Dec. 31,
|
||||||||
2009
|
2008
|
|||||||
Cash flows
from operating activities:
|
||||||||
Net earnings
|
$ | 430,772 | $ | 475,355 | ||||
Provision for losses on accounts
receivable
|
10,748 | 12,924 | ||||||
Deferred income taxes and tax
uncertainties
|
21,683 | 5,182 | ||||||
Depreciation and
amortization
|
147,531 | 139,570 | ||||||
Stock-based compensation
|
40,407 | 45,945 | ||||||
Tax benefit of stock incentive
plans
|
2,894 | 1,925 | ||||||
Net losses (gains) on property, buildings
and equipment
|
8,642 | (9,232 | ) | |||||
(Income) from unconsolidated entities –
net
|
(1,497 | ) | (3,642 | ) | ||||
(Gain) on previously held equity
interests
|
(47,343 | ) | – | |||||
Write-off of unconsolidated
entity
|
– | 6,031 | ||||||
Change in operating assets and liabilities
– net of business acquisitons
|
||||||||
(Increase) decrease in accounts
receivable
|
2,794 | (5,592 | ) | |||||
(Increase) decrease in
inventories
|
175,286 | (92,518 | ) | |||||
(Increase) decrease in prepaid income
taxes
|
(4,112 | ) | (22,556 | ) | ||||
(Increase) decrease in prepaid
expenses
|
(7,068 | ) | (11,073 | ) | ||||
Increase (decrease) in trade accounts
payable
|
(16,736 | ) | (6,960 | ) | ||||
Increase (decrease) in other current
liabilities
|
(52,944 | ) | 199 | |||||
Increase (decrease) in current income
taxes payable
|
2,472 | (7,784 | ) | |||||
Increase (decrease) in accrued
employment-related benefits cost
|
22,080 | 3,216 | ||||||
Other – net
|
(3,213 | ) | (924 | ) | ||||
Net cash provided by operating
activities
|
732,396 | 530,066 | ||||||
Cash flows
from investing activities:
|
||||||||
Additions to property, buildings and
equipment – net
|
(140,730 | ) | (181,355 | ) | ||||
Net cash paid for business
acquisitions
|
(123,093 | ) | (34,290 | ) | ||||
Investments in unconsolidated
entities
|
– | (6,487 | ) | |||||
Other – net
|
1,260 | 19,497 | ||||||
Net cash used in investing
activities
|
(262,563 | ) | (202,635 | ) | ||||
Cash flows
from financing activities:
|
||||||||
Net increase (decrease) in short-term
debt
|
2,542 | (81,425 | ) | |||||
Long-term debt payments
|
(18,856 | ) | – | |||||
Proceeds from issuance of long-term
debt
|
– | 500,000 | ||||||
Stock options exercised
|
91,165 | 46,833 | ||||||
Excess tax benefits from stock-based
compensation
|
19,030 | 13,533 | ||||||
Purchase of treasury stock
|
(372,727 | ) | (394,247 | ) | ||||
Cash dividends paid
|
(134,684 | ) | (121,504 | ) | ||||
Net cash (used in) financing
activities
|
(413,530 | ) | (36,810 | ) | ||||
Exchange rate
effect on cash and cash equivalents
|
7,278 | (7,768 | ) | |||||
Net increase
in cash and cash equivalents
|
63,581 | 282,853 | ||||||
Cash and cash
equivalents at beginning of year
|
396,290 | 113,437 | ||||||
Cash and cash
equivalents at end of period
|
$ | 459,871 | $ | 396,290 |
10