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Industrial distributor reports 2012 first quarter up 16% from year ago

Chicago, IL – W.W. Grainger Inc. today reported record results for the 2012 first quarter ended March 31, 2012. Sales of $2.2 billion were up 16% versus $1.9 billion in the first quarter of 2011 (all figures in US dollars). There were 64...


Chicago, IL – W.W. Grainger Inc. today reported record results for the 2012 first quarter ended March 31, 2012. Sales of $2.2 billion were up 16% versus $1.9 billion in the first quarter of 2011 (all figures in US dollars). There were 64 selling days in the quarter, the same as in 2011. Net earnings for the quarter increased 19% to $188 million versus $158 million in 2011. Earnings per share of $2.57 increased 18% versus $2.18 in 2011.

“Our record performance in the quarter is further evidence that we are realizing the benefits of our growth initiatives,” said chairman, president and chief executive officer Jim Ryan.

“We continued to aggressively invest in growing the business through product line expansion, sales force expansion, eCommerce, inventory management services and international expansion,” he said.

“Given the opportunity in the MRO market, coupled with continued investments in our proven growth drivers, we remain confident in our strategy and the prospects for future growth. We also expect to generate better earnings leverage as the year progresses. As such, we are increasing our 2012 guidance to reflect 12% to 14% sales growth and earnings per share of $10.40 to $10.80.” The company’s previous guidance for 2012 was 10 to 14% sales growth and earnings per share of $9.90 to $10.65, as communicated in Grainger’s fourth quarter 2011 earnings release on January 25, 2012.

Sales in the 2012 first quarter increased 16% consisting of 10 percentage points from volume, 5 percentage points from acquisitions and 3 percentage points from price. This growth was partially offset by a 1 percentage point drag from lower sales of seasonal products due to milder weather across the United States and Canada and a 1 percentage point drag from foreign exchange. On a daily basis, sales increased 17% in January, 18% in February and 15% in March.

Company operating expenses in the quarter increased 18% driven primarily by expenses from Fabory, an incremental $27 million in spending to fund the company’s growth programs, volume-related expenses and corporate support services costs.

Company operating earnings of $304 million for the 2012 first quarter increased 16%. This earnings growth was driven by higher sales and improved gross profit margins, partially offset by operating expenses, which grew at a faster rate than sales. The increase in the company’s gross profit margin was driven by a number of factors that are addressed at the segment level. For the quarter, the Fabory business, which was acquired in August 2011 and represents less than 4% of total company sales, had a positive contribution to gross margin expansion, but resulted in an unfavorable mix on the company’s operating margin.

The company has two reportable business segments, the United States and Canada, which represented approximately 89% of company sales for the quarter. The remaining operating units (Asia, Europe and Latin America) are included in Other Businesses and are not reportable segments. Results from AnFreixo S.A., the Brazilian MRO business Grainger acquired in early April, will be included in the Other Businesses beginning in the second quarter.

United States

Sales for the United States segment increased 11% in the 2012 first quarter versus the prior year. The 11% sales growth for the quarter was driven primarily by 9% volume growth and 3 percentage points from price, partially offset by a 1 percentage point drag from lower sales of seasonal products due to the unusually warm weather in the 2012 first quarter. Daily sales were up 11% in January, up 12% in February and up 9% in March. All customer end markets in the United States posted sales growth versus the 2011 first quarter, led by a strong increase in heavy manufacturing and natural resources.

Quarterly operating earnings in the US increased 17% versus the prior year. The growth in operating earnings was primarily driven by strong sales performance and positive expense leverage. Gross profit margins for the quarter increased 10 basis points driven by price increases exceeding cost inflation, partially offset by higher freight costs and unfavorable mix as lower sales of seasonal products slowed the sales growth of private label products. Expense leverage in the US was positive despite higher growth-related spending on new sales representatives, eCommerce and advertising.

Canada

First quarter sales for Acklands-Grainger increased 13% (or 14% in local currency). Strong volume growth during the quarter contributed 13 percentage points to the sales increase, while price contributed 1 percentage point, partially offset by a 1 percentage point decline from foreign exchange. Daily sales in local currency were up 19% in January, up 14% in February and up 11% in March. The sales increase for the quarter in Canada was led by strong growth to customers in the construction, agriculture and mining, and transportation sectors of the economy, partially offset by lower sales to the government.

Operating earnings in Canada increased 24% in the 2012 first quarter (up 26% in local currency). The strong improvement in operating performance was driven by strong sales and a 60 basis point improvement in gross profit margins. Positive operating expense leverage also contributed to the improvement in operating performance in Canada.

Other Businesses

Sales for the Other Businesses, which includes operations in Asia, Europe and Latin America, increased 104% for the 2012 first quarter versus the prior year. This increase was primarily due to the incremental sales from the business in Europe (Fabory) acquired on August 31, 2011, combined with strong revenue growth in Japan and Mexico. Excluding Fabory, sales for the Other Businesses increased 33%.

Operating earnings for the Other Businesses were $11 million in the 2012 first quarter versus $6 million in the 2011 first quarter. Earnings performance for the quarter was primarily driven by strong earnings growth in Japan and Mexico, combined with $1 million dollars in operating earnings from the Fabory business in Europe.

Other

Below the operating line, interest expense, net of interest income, was $2.5 million in the 2012 first quarter versus $1.4 million in the 2011 first quarter. The increase was primarily attributable to interest on the debt of EUR 120 million used to finance a portion of the Fabory acquisition.

As communicated at the company’s November analyst meeting and in the 2011 Form 10-K, Grainger was originally forecasting an effective tax rate of 37.9% for the full year 2012. In the 2012 first quarter, the effective tax rate was 37.4% primarily due to higher earnings in foreign jurisdictions with lower tax rates and a lower blended state tax rate. The difference between the actual effective rate and the forecasted rate resulted in a $0.02 per share benefit for the quarter. The company now expects the full year 2012 effective tax rate to be in the range of 37.4 to 37.7%.

Cash Flow

Operating cash flow was $106 million in the 2012 first quarter versus $118 million in the 2011 first quarter. The year-over-year reduction in cash flow was driven by lower trade accounts payable balances due to the timing of inventory purchases and a higher contribution to the company’s retirement plan tied to strong company performance and increased payroll expense in the prior year. The company used cash from operations to fund capital expenditures of $41 million in the quarter versus $33 million in the first quarter of 2011. In the 2012 first quarter, Grainger returned $109 million to shareholders through $47 million in dividends and $62 million to buy back 291,000 shares of stock.

W.W. Grainger Inc., with 2011 sales of $8.1 billion, is North America’s leading broad line supplier of maintenance, repair and operating products, with expanding global operations.

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