HSC Harsco Corporation

W.W. Grainger Inc. (GWW) reported earnings of $2.51 per share, exceeding the Zacks Consensus estimate by 17 cents. Results were 26% above the year ago earnings of $1.99 per share. Net income increased 25.5% year over year to $182 million.

The improvement stemmed largely from strong sales across all the segments.

Operational Update

Revenues in the quarter were $2.11 billion, up 11.3% from $1.90 billion in the year-ago period. Revenue also surpassed the Zacks Consensus Estimate of $2.09 billion. On a daily basis, sales improved 10% year over year in July, 10% year over year in August and 14% year over year in September.

The improvement in revenue was attributable to volume growth and favorable pricing coupled with favorable foreign exchange rates and acquisitions, partly offset by negative impacts from the oil spill clean-up in the Gulf of Mexico in 2010.

Operating earnings in the quarter improved 25% to $303 million from $243.3 million last year, primarily driven by higher sales volume and higher gross profit margins, partially offset by higher operating expenses.

Segment Performance            

Revenues from the United States segment increased 7% year over year to $1.72 billion, driven by favorable volume and price growth, partially offset by negative impacts from the oil spill in the Gulf. On a daily basis, sales increased 5% in July, 8% year over year in August and 7% year over year in September.

Operating income for the segment shot up 15% to $302.6 million, mainly due to higher sales and improved gross profit margins from the region.

Revenues from the Acklands-Grainger business in Canada climbed 23% to $248.4 million, which was attributable to the improvements in transportation, heavy manufacturing, retail/wholesale, and agriculture and mining customer end-markets. On a daily basis, sales in the segment increased 18% in July, 14% year over year in August and 15% year over year in September.

Operating income in Canada expanded significantly to $25.0 million as a result of strong sales and improvement in gross margins and operating expenses.

Revenues from the Other businesses (which include Europe, Japan, Mexico, India, Colombia, Puerto Rico, China and Panama) were up 66% year over year to $168.3 million, based on strong growth in Japanese and Mexican businesses as well as the Fabory acquisition.

Operating earnings also rose significantly to $10.6 million as compared with $4 million in the year-ago quarter, primarily driven by strong earnings growth in Japan and Mexico, coupled with lower operating losses in China. Earnings from Fabory also aided the improvement.

Financial Position

Grainger had cash and cash equivalents of $360.7 million and long-term debt of $313.4 million, as of September 30, 2011. That compares with a cash balance of $286.5 million and long-term debt of $427.5 million, as of September 30, 2010.

The company generated net cash from operating activities of $251 million in third quarter, up from $206 million in the year-ago period. Capital expenditures for the quarter were $47 million versus $43 million in the prior-year period.

Grainger repurchased 0.36 million shares in the quarter and has approximately 7.3 million shares remaining under its current repurchase authorization. However, the company paid total dividends of $47 million during the quarter.

Outlook

Grainger increased both its sales and earnings estimates for the full year. The company now expects sales growth in the range of 11% to 12% compared with the prior guidance range of 9% to 10% based on the year -to- date performance as well as the acquisition of Fabory Group. The company forecasts fiscal 2011 EPS between $8.80 and $9.00 versus its prior expected range of $8.40 to $8.70.

Our Take

Grainger remains focused on expanding its product offering as well as its private label products. The company introduced a multi-year product line expansion program in 2006. Since then, the company has launched approximately 234,000 new products.

Grainger expects to roll out almost 500,000 products over a number of years. The continued success of this program is expected to drive sales growth in 2011 and beyond. 

The company’s balance sheet remains strong and, given its strong cash position, we believe the company will further invest in growth opportunities, increase dividends and use capital for share repurchases.

Grainger is currently on an expansion spree to strengthen its business across each of its operating regions including North America, Canada, Asia and Latin America. Also, the acquisition of Fabory Group -- a leading European distributor of fasteners and related maintenance, repair and overhaul (MRO) products marks the company’s entry in the world's largest MRO market.

However, the increasing competition in the industry may also restrict the company’s progress and the desired business growth. The company’s key competitors include TMS International Corp. (TMS), Harsco Corporation (HSC) and ScanSource, Inc. (SCSC).

We retain our Neutral recommendation on W.W. Grainger. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

 
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