W.W. Grainger, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Grainger is a business-to-business distributor of maintenance, repair and operating products and services, with U.S. and Canada reportable segments and additional “Other businesses,” including Zoro and MonotaRO.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.893 billion | $2.861 billion | $5.692 billion | $5.627 billion |
| Gross profit margin | 38.7% | 38.8% | 38.9% | 39.1% |
| Operating earnings | $380 million | $344 million | $743 million | $679 million |
| Net earnings attributable to Grainger | $260 million | $237 million | $513 million | $469 million |
| Diluted EPS | $4.67 | $4.16 | $9.14 | $8.23 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $450 million | $395 million |
Q2 sales rose 1%; daily sales growth comprised 1.5% volume and 0.5% price, partly offset by 1.0% foreign-exchange impact. Operating earnings increased 11% and diluted EPS rose 12%, benefiting from higher earnings and fewer average shares. Adjusted, non-GAAP operating earnings increased 5% and adjusted diluted EPS increased 6%; the company cautions that its non-GAAP measures may not be comparable with similarly named measures at other companies.
For the first half, sales rose 1% reported and 2% on a daily basis. Operating earnings increased 9% reported and 6% adjusted; diluted EPS increased 11% reported and 7% adjusted. Gross margin declined 0.2 percentage point. Effective tax rates rose to 25.5% from 22.5% for the six-month period, primarily due to reduced stock-compensation tax benefits and the absence of clean-energy tax benefits.
Cash, liquidity and debt
- Cash and cash equivalents were $315 million at June 30, 2019, down from $538 million at year-end 2018.
- Six-month operating cash flow was $450 million; investing used $91 million and financing used $586 million. Financing outflows included $400 million of treasury-stock purchases and $163 million of dividends.
- At June 30, current assets were $3.456 billion and current liabilities $1.452 billion; the reported current ratio was 2.7. Management-defined working capital was $2.109 billion, up from $1.898 billion at year-end.
- Debt comprised $51 million short-term debt, $81 million current maturities and $2.080 billion long-term debt, totaling $2.212 billion before lease liabilities. Operating lease liabilities were $202 million. Debt, including lease liabilities, was 53.3% of total capitalization, versus 51.5% at year-end.
Material changes and business drivers
- U.S.: Q2 segment sales increased 2%; operating earnings rose 9% to $381 million. Management cited market-share gains, higher sales and stable price-cost spread.
- Canada: Q2 segment sales fell 23% and operating earnings were $1 million, compared with a $14 million loss a year earlier. Management attributed the volume decline to customer disruption from branch-footprint reductions and sales-coverage changes; margin also weakened amid competitive pricing.
- Other businesses: Q2 sales rose 6.5%, mainly from customer acquisition at the endless-assortment businesses, but operating earnings fell $14 million to $27 million as those businesses invested for growth and high-touch businesses performed less strongly.
- Lower SG&A reflected prior cost-reduction actions in Canada and lower variable compensation. Restructuring activity was not material in 2019; prior-year restructuring costs were $15 million in Q2 and $23 million in the first half.
Outlook, risks and notable items
The filing provides no specific company revenue or earnings guidance. Management described U.S. strategy priorities as market share growth through MRO solutions, differentiated sales and services, and customer service. External forecasts cited by management anticipated slowing U.S. business investment, exports, industrial production and GDP, with Canadian indicators also expected to soften, reflecting global growth, trade uncertainty and other factors.
Management identified risks including competitive pricing, economic and industry conditions, currency movements, supply disruption, technology or cybersecurity incidents, litigation and regulatory matters, labor and transportation disruptions, and execution of growth initiatives. It stated that routine legal and administrative proceedings were not expected, individually or collectively, to materially adversely affect financial position or results. No goodwill or intangible-asset impairment indicators were identified in the first half, but management noted future performance and market assumptions could affect impairment assessments.
Grainger adopted lease accounting Topic 842 on January 1, 2019, recording approximately $208 million of right-of-use assets and $205 million of lease liabilities; adoption did not materially affect earnings or cash flows. The company repurchased $400 million of shares in the first half and paid $2.80 per share in dividends. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether U.S. growth and margin performance can offset the sharp Canada sales decline and competitive pricing pressure.
- Whether investment in endless-assortment businesses translates into improved future operating earnings.
- How foreign exchange, slowing economic indicators and trade uncertainty affect sales and margins.
- Cash-flow and capital-allocation trends, including continued buybacks, dividends, debt and lease obligations.
- Non-GAAP reconciliations and the effect of restructuring, taxes and other unusual or nonrecurring items on reported comparisons.