UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 8-K

CURRENT REPORT


PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):
October 18, 2011

W.W. Grainger, Inc.
(Exact name of Registrant as Specified in its Charter)


Illinois
1-5684
36-1150280
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)

100 Grainger Parkway, Lake Forest, Illinois  60045
(Address of Principal Executive Offices and Zip Code)

(847) 535-1000
(Registrant's Telephone Number, Including Area Code)

Not applicable
(Former Name or Former Address, if Changed Since Last Report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





        

Item 2.02.   Results of Operations and Financial Condition
On October 18, 2011 the registrant issued a press release announcing financial results for the quarter ended September 30, 2011. A copy is provided as Exhibit 99.1 to this report.

Item 9.01.   Financial Statements and Exhibits
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
 
 
Exhibit No.
Document Description
99.1
Press release announcing financial results for the quarter ended September 30, 2011

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: October 18, 2011

 
W.W. GRAINGER, INC.
 
 
 
 
 By:
/s/ R. L. Jadin
 
 
R. L. Jadin
Senior Vice President and
Chief Financial Officer




 


GRAINGER REPORTS RECORD RESULTS FOR THE 2011 THIRD QUARTER
Raises 2011 EPS guidance range to $8.80 - $9.00

Quarterly Highlights
Sales of $2.1 billion, up 11 percent
Operating earnings of $303 million, up 21 percent
Net earnings of $182 million, up 21 percent
EPS of $2.51, up 22 percent
Pretax ROIC* of 34.3 percent versus 30.2 percent in Q3 2010

CHICAGO, October 18, 2011 - Grainger (NYSE: GWW) today reported record results for the 2011 third quarter ended September 30, 2011. Sales of $2.1 billion increased 11 percent versus $1.9 billion in the third quarter 2010. The 2011 third quarter had the same number of selling days (64) as the third quarter of 2010. Net earnings for the quarter increased 21 percent to $182 million versus $150 million in 2010. Earnings per share increased 22 percent to $2.51 versus $2.06 for the third quarter 2010.

The third quarter of 2010 included a non-cash benefit of $5 million after-tax, or $0.07 per share, from changes to the company's paid time off policy. Excluding this item, earnings per share increased 26 percent versus the 2010 third quarter.

“This was an exceptional quarter for Grainger,” said Chairman, President and Chief Executive Officer Jim Ryan. “We saw consistent, double-digit, sales growth each month of the quarter and delivered strong earnings growth and cash flow. Grainger's ability to help customers do more with less has been key to our success. Our growth drivers such as product line expansion, eCommerce, inventory management services and sales force expansion are paying off and helping us gain share. Given our strong performance to date, we are aggressively investing in these proven growth drivers to help meet customers' needs, create competitive advantage and grow the business.”


*The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation.  ROIC is calculated using operating earnings (annualized based on sales days) divided by net working assets (a 4-point average for the year-to-date). Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (4-point average of $316.1 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (4-point average of $342.1 million).  Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.


1




“Given our strong operating performance to date, and the inclusion of Fabory starting in September,” Ryan continued, “we have raised our 2011 sales growth guidance to a range of 11 to 12 percent and increased our expected earnings per share guidance to a range of $8.80 to $9.00.” The company's EPS guidance excludes the expected $5 million after-tax gain on the sale of its minority ownership position in MRO Korea, announced on October 11, 2011. The company's previous guidance, effective July 19, 2011, projected sales growth of 9 to 10 percent and earnings per share in the range of $8.40 to $8.70.

On August 31, 2011, Grainger completed the acquisition of Fabory Group. Fabory is a leading European distributor of fasteners and related MRO products serving 120,000 customers with more than 80,000 products in 14 countries. Effective September 1, 2011, results of Fabory's operations are included in Grainger's consolidated results. Fabory is expected to be earnings neutral in 2011 and accretive to earnings in 2012.

Grainger's 11 percent sales growth for the third quarter consisted of 8 percent volume growth, 3 percentage points from price, 2 percentage points from acquisitions and 1 percentage point from foreign exchange. Sales growth for the quarter was negatively affected by 3 percentage points due to sales in 2010 related to the oil spill clean up in the Gulf of Mexico. On a daily basis, sales increased 10 percent in July, 10 percent in August and 14 percent in September. Excluding Fabory, sales on a daily basis in September grew 10 percent.

For the quarter, company operating earnings of $303 million increased 21 percent, driven primarily by sales volume and higher gross profit margins, partially offset by operating expenses growing faster than sales, up 13 percent. Excluding the $8 million pre-tax benefit from the change in paid time off policy in 2010, company operating expenses grew 12 percent and operating earnings increased 25 percent.

Grainger has two reportable business segments, the United States and Canada, which represent approximately 94 percent of company year-to-date sales. The remaining operating units (Europe (Fabory), Japan, Mexico, Colombia, India, China, Puerto Rico and Panama) are included in Other Businesses and are not reportable segments.

2


United States
Sales for the United States segment increased 7 percent in the 2011 third quarter, driven by a 7 percentage point contribution from volume and 3 percentage points from price, offset by a 3 percentage point drag due to sales in 2010 related to the Gulf of Mexico oil spill. Daily sales increased 5 percent in July, 8 percent in August and 7 percent in September. Sales related to the 2010 oil spill created a 3 percentage point drag in July, August and September, respectively. Sales to all customer end-markets, except for reseller, were up in the quarter, led by heavy manufacturing, which increased in the mid-teens. The reseller end-market was down in the low twenties due to strong sales in 2010 related to the oil spill.

Operating earnings in the United States segment increased 15 percent versus the 2010 third quarter. The increase in operating earnings was primarily the result of higher sales and improved gross profit margins. Gross profit margins for the quarter increased 180 basis points driven primarily by price increases exceeding product cost increases and positive selling mix. Operating expenses increased 9 percent, 7 percent excluding the 2010 paid time off benefit, and were driven by higher volume and growth-related spending on eCommerce, advertising, the opening of a new distribution center and the addition of sales representatives.

Canada
Sales for the Acklands-Grainger business in the quarter increased 23 percent in U.S. dollars versus the 2010 third quarter. In local currency, sales increased 16 percent for the quarter, driven by 14 percentage points from volume and 2 percentage points from acquisitions. Daily sales in local currency increased 18 percent in July, 14 percent in August and 15 percent in September. Sales in Canada benefited from strength in the heavy manufacturing, retail/wholesale, transportation, and agriculture and mining customer end-markets.

Operating earnings in Canada increased 72 percent for the 2011 third quarter, 63 percent in local currency. The increase in operating earnings was primarily due to higher sales and a 30 basis point increase in gross profit margins. Positive operating expense leverage from continued cost management also contributed to the improvement in operating performance.

3


Other Businesses
Sales for the Other Businesses, which include Europe (Fabory), Japan, Mexico, Colombia, India, China, Puerto Rico and Panama, increased 66 percent versus prior year, due primarily to the Fabory acquisition and strong growth in Japan and Mexico. Although smaller in size, the remaining businesses also posted strong sales growth in the quarter.
 
Operating earnings for Other Businesses were $11 million for the third quarter of 2011 compared to $4 million a year ago. The improvement was primarily driven by strong earnings growth in Japan and Mexico, coupled with lower operating losses in China. Earnings from Fabory in the month of September also contributed to the earnings growth for the Other Businesses in the quarter.

Other
Interest expense net of interest income was $2.0 million versus $1.6 million the prior year. The increase was primarily attributable to interest on the new debt of €120 million used to finance part of the Fabory acquisition. Grainger's effective income tax rates were 38.7 percent and 39.4 percent for the third quarter of 2011 and 2010, respectively. The 2011 effective rate is lower than the prior year's rate primarily due to higher earnings in foreign jurisdictions with lower tax rates.

Cash Flow
Operating cash flow was $251 million for the 2011 third quarter versus $206 million in the third quarter of 2010. Capital expenditures were $47 million in the quarter compared to $43 million in the prior year quarter. Dividends paid in the 2011 third quarter were $47 million. The company purchased 360,000 shares of stock in the 2011 third quarter and has approximately 7.3 million shares remaining under the current repurchase authorization.

4


Year to Date
For the nine months ended September 30, 2011, sales of $6.0 billion increased 12 percent, or 11 percent on a daily basis, versus the nine months ended September 30, 2010. Net earnings increased 35 percent to $510 million versus $379 million in the first nine months of 2010. Earnings per share for the nine months increased 38 percent to $7.03 versus $5.10 for 2010. The first nine months of 2011 included a $0.12 per share benefit from the settlement of tax examinations related to 2007 and 2008. In the first nine months of 2010, there were two unusual non-cash items; a $0.24 per share benefit from changes to the company's paid time off policy and a $0.15 per share expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, which resulted in a net benefit of $0.09 per share for the nine months ended September 30, 2010. Excluding unusual items in both years, earnings per share for the first nine months of 2011 increased 38 percent versus 2010.

W.W. Grainger, Inc., with 2010 sales of $7.2 billion, is North America's leading broad line supplier of maintenance, repair and operating products, with an expanding presence in Europe, Asia and Latin America.

Visit www.grainger.com/investor to access a podcast describing Grainger's performance in more detail.

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 “helping us gain share”, “proven growth drivers”, “sales growth guidance”, “expected earnings per share guidance”, “guidance range”, “projected” 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
 
Laura Brown
 
 
Director, Corporate Communications
SVP, Communications & Investor Relations
 
& Public Affairs
 
847/535-0409
 
 
847/535-4339
 
 
 
 
 
 
 
 
 
Robb Kristopher
 
William Chapman
 
 
Director, Media Relations
Director, Investor Relations
 
847/535-0879
 
847/535-0881
 
 
 
 
 
 
 





5

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except for per share amounts)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
2,114,647

 
$
1,899,412

 
$
6,001,281

 
$
5,355,462

Cost of merchandise sold
1,201,648

 
1,109,688

 
3,396,274

 
3,112,910

Gross profit
912,999

 
789,724

 
2,605,007

 
2,242,552

 
 
 


 
 
 
 
Warehousing, marketing and administrative expenses
609,959

 
538,451

 
1,774,071

 
1,593,479

Operating earnings
303,040

 
251,273

 
830,936

 
649,073

 
 
 
 
 
 
 
 
Other income and (expense)
 
 
 
 
 
 
 
Interest income
553

 
324

 
1,560

 
845

Interest expense
(2,579
)
 
(1,954
)
 
(6,437
)
 
(6,204
)
Equity in net income (loss) of unconsolidated entity
129

 
(6
)
 
261

 
(257
)
Other non-operating income and (expense)
(684
)
 
207

 
(871
)
 
173

Total other (expense)
(2,581
)
 
(1,429
)
 
(5,487
)
 
(5,443
)
 
 
 
 
 
 
 
 
Earnings before income taxes 
300,459

 
249,844

 
825,449

 
643,630

 
 
 
 
 
 
 
 
Income taxes
116,412

 
98,547

 
310,745

 
263,249

 
 
 
 
 
 
 
 
Net earnings
184,047

 
151,297

 
514,704

 
380,381

 
 
 
 
 
 
 
 
Net earnings attributable to noncontrolling interest
1,926

 
892

 
4,765

 
1,726

 
 
 
 
 
 
 
 
Net earnings attributable to W.W. Grainger, Inc.
$
182,121

 
$
150,405

 
$
509,939

 
$
378,655

 
 
 
 
 
 
 
 
Earnings per share
  -Basic
$
2.56

 
$
2.10

 
$
7.18

 
$
5.19

  -Diluted
$
2.51

 
$
2.06

 
$
7.03

 
$
5.10

Average number of shares outstanding
  -Basic
69,846

 
69,924

 
69,622

 
71,384

  -Diluted
71,280

 
71,168

 
71,105

 
72,638

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Net earnings as reported
$
182,121

 
$
150,405

 
$
509,939

 
$
378,655

Earnings allocated to participating securities
(3,285
)
 
(3,447
)
 
(9,953
)
 
(8,294
)
Net earnings available to common shareholders
$
178,836

 
$
146,958

 
$
499,986

 
$
370,361

Weighted average shares adjusted for dilutive securities
71,280

 
71,168

 
71,105

 
72,638

Diluted earnings per share
$
2.51

 
$
2.06

 
$
7.03

 
$
5.10


6

SEGMENT RESULTS (Unaudited)
(In thousands of dollars, except for per share amounts)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Sales
 
 
 
 
 
 
 
United States
$
1,715,120

 
$
1,608,058

 
$
4,878,582

 
$
4,513,623

Canada
248,398

 
202,162

 
747,683

 
604,153

Other Businesses
168,251

 
101,603

 
420,768

 
273,342

Intersegment sales
(17,122
)
 
(12,411
)
 
(45,752
)
 
(35,656
)
Net sales to external customers
$
2,114,647

 
$
1,899,412

 
$
6,001,281

 
$
5,355,462

 
 
 
 
 
 
 
 
Operating earnings
 
 
 
 
 
 
 
United States
$
302,858

 
$
262,803

 
$
829,866

 
$
695,445

Canada
25,016

 
14,522

 
78,194

 
33,534

Other Businesses
10,551

 
4,412

 
25,576

 
6,264

Unallocated expense
(35,385
)
 
(30,464
)
 
(102,700
)
 
(86,170
)
Operating earnings
$
303,040

 
$
251,273

 
$
830,936

 
$
649,073

 
 
 
 
 
 
 
 
Company operating margin
14.3
%
 
13.2
%
 
13.8
%
 
12.1
%
ROIC* for Company
 
 
 
 
34.3
%
 
30.2
%
ROIC* for United States
 
 
 
 
48.7
%
 
43.2
%
ROIC* for Canada
 
 
 
 
20.3
%
 
10.4
%
*See page 1 for a definition of ROIC
 
 
 
 
 
 
 

7

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Preliminary
(In thousands of dollars)

 
At September 30,
Assets
2011
 
2010
Cash and cash equivalents (1)
$
360,663

 
$
286,508

Accounts receivable – net (2)
944,984

 
784,922

Inventories (3)
1,114,291

 
935,219

Prepaid expenses and other assets
108,127

 
81,048

Deferred income taxes
49,629

 
59,860

Total current assets
2,577,694

 
2,147,557

Property, buildings and equipment - net
1,007,623

 
942,354

Deferred income taxes
102,902

 
89,632

Goodwill (4)
546,701

 
374,785

Other assets and intangibles – net (4)
315,725

 
234,909

Total assets
$
4,550,645

 
$
3,789,237

Liabilities and Shareholders’ Equity
 
 

Short-term debt
$
63,580

 
$
41,877

Current maturities of long-term debt (5)
230,430

 
35,775

Trade accounts payable
447,687

 
402,568

Accrued compensation and benefits
193,022

 
168,305

Accrued contributions to employees’ profit sharing plans
125,206

 
109,912

Accrued expenses
148,872

 
120,711

Income taxes payable
15,811

 
16,112

Total current liabilities
1,224,608

 
895,260

Long-term debt (5)
313,416

 
427,495

Deferred income taxes, tax uncertainties and derivative instruments
114,872

 
71,324

Accrued employment-related benefits
266,244

 
246,629

Shareholders' equity (6)
2,631,505

 
2,148,529

Total liabilities and shareholders’ equity
$
4,550,645

 
$
3,789,237


(1)
Cash and cash equivalents increased $74 million, or 26%, due primarily to less share repurchase activity and higher earnings.
(2)
Accounts receivable increased $160 million, or 20%, primarily due to higher sales and the Fabory Group acquisition.
(3)
Inventories increased $179 million, or 19%, due to higher purchases during 2011 in response to the higher sales volume and the Fabory Group acquisition.
(4)
Goodwill and intangibles increased primarily due to the Fabory Group acquisition.
(5)
The balance of the term loan is due within one year resulting in an increase in current maturities of long-term debt with the offsetting decrease in the long-term debt balance. The decrease in long-term debt was partially offset by new debt incurred as part of the Fabory Group acquisition.
(6)
Common stock outstanding as of September 30, 2011 was 69,747,589 shares as compared with 69,061,513 shares at September 30, 2010.





8

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Preliminary
(In thousands of dollars)

 
Nine Months Ended September 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net earnings
$
514,704

 
$
380,381

Provision for losses on accounts receivable
5,019

 
5,912

Deferred income taxes and tax uncertainties
(6,765
)
 
(26,179
)
Depreciation and amortization
103,573

 
109,223

Stock-based compensation
41,538

 
38,167

Change in operating assets and liabilities – net of business acquisitions
 
 
 
Accounts receivable
(138,726
)
 
(153,807
)
Inventories
(55,527
)
 
(30,460
)
Prepaid expenses and other assets
23,103

 
36,015

Trade accounts payable
59,193

 
97,473

Other current liabilities
(17,814
)
 
7,996

Current income taxes payable
9,715

 
8,970

Accrued employment-related benefits cost
22,012

 
23,775

Other – net
(54
)
 
(5,495
)
Net cash provided by operating activities
559,971

 
491,971

Cash flows from investing activities:
 
 
 
Additions to property, buildings and equipment – net of dispositions
(123,840
)
 
(64,867
)
Net cash paid for business acquisitions and other investments
(348,251
)
 
(51,644
)
Net cash used in investing activities
(472,091
)
 
(116,511
)
Cash flows from financing activities:
 
 
 
Net increase in short-term debt
15,652

 
7,097

Net increase (decrease) in long-term debt
101,817

 
(25,784
)
Proceeds from stock options exercised
52,837

 
68,325

Excess tax benefits from stock-based compensation
31,575

 
19,249

Purchase of treasury stock
(101,382
)
 
(504,375
)
Cash dividends paid
(132,719
)
 
(114,128
)
Net cash used in financing activities
(32,220
)
 
(549,616
)
Exchange rate effect on cash and cash equivalents
(8,451
)
 
793

Net change in cash and cash equivalents
47,209

 
(173,363
)
Cash and cash equivalents at beginning of year
313,454

 
459,871

Cash and cash equivalents at end of period
$
360,663

 
$
286,508


###

9