W.W. Grainger, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results. Grainger distributes maintenance, repair and operating products and services, primarily in North America, Europe and Japan.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2.947 billion | $2.831 billion | $8.639 billion | $8.458 billion |
| Gross margin | 37.3% | 38.1% | 38.4% | 38.8% |
| Operating earnings | $338 million | $189 million | $1.081 billion | $868 million |
| Net earnings attributable to Grainger | $233 million | $104 million | $746 million | $573 million |
| Diluted EPS | $4.25 | $1.82 | $13.40 | $10.04 |
- Q3 sales increased 4% reported, but 2.5% on a per-sales-day basis; 2019 had one additional sales day. Nine-month sales rose 2%.
- Q3 gross margin declined 0.8 percentage point, reflecting the timing of pricing adjustments and a greater mix of lower-margin endless-assortment sales. Nine-month gross margin declined 0.4 point.
- Reported Q3 operating earnings rose 78%, but adjusted operating earnings increased 2% to $339 million. Adjusted net earnings declined 3% to $233 million; adjusted diluted EPS increased 2% to $4.26.
- For nine months, adjusted operating earnings increased 5% to $1.081 billion; adjusted net earnings increased 3% to $746 million and adjusted diluted EPS increased 5% to $13.40. Adjusted figures are non-GAAP measures.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $770 million, versus $743 million in 2018. Capital additions to property, equipment and intangibles were $163 million; net investing cash outflow was $145 million.
- Financing cash outflow was $875 million, including $600 million of treasury-stock purchases and $242 million of dividends. Cash declined $252 million from year-end to $286 million.
- At September 30, current assets were $3.396 billion and current liabilities $1.572 billion; the reported current ratio was 2.6. Management-defined working capital was $2.059 billion, up from $1.898 billion at December 31, 2018.
- Short-term debt was $51 million, current maturities of long-term debt $219 million, and long-term debt net of current maturities $1.918 billion. Operating lease liabilities were $213 million. Debt including lease liabilities as a percentage of total capitalization was 53.7%, versus 51.5% at year-end.
Material changes and business drivers
- The U.S. segment grew: Q3 sales increased 4% and operating earnings 5%; nine-month sales increased 3% and operating earnings 5%. Management cited market-share gains and U.S. SG&A leverage.
- Canada remained weak: Q3 sales fell 14% and nine-month sales fell 21%, with management citing market-share declines and customer disruption from branch-footprint reductions and sales-coverage changes. Nine-month operating losses narrowed to $4 million from $38 million.
- Other businesses’ Q3 sales increased 11%, led by endless-assortment growth. Nine-month sales increased 8%. Excluding prior-year restructuring and impairment items, other-business operating earnings declined, reflecting growth investments and weakness in international high-touch businesses.
- The prior-year quarter included $139 million of Cromwell-related impairment charges and other restructuring charges; the prior-year nine-month period included $166 million of restructuring and impairment adjustments used in the company’s reconciliation. These items materially amplify reported year-over-year earnings growth.
- The company repurchased $600 million of stock in the first nine months; weighted-average diluted shares fell to 55.2 million from 56.6 million.
Outlook, risks and contingencies
- The filing provides no specific company revenue, earnings or EPS guidance. Grainger describes its U.S. priorities as building differentiated MRO solutions, differentiated sales and services, and improved customer experience.
- Management cited forecasts for softer U.S. business investment, exports, industrial production and GDP, and slowing Canadian investment, exports, industrial production and GDP. Trade uncertainty, slower global growth, a strong U.S. dollar and weaker oil demand were among the stated pressures.
- Key disclosed risks include competition and pricing pressure, customer or supplier losses, execution of technology and strategic initiatives, economic and currency changes, cybersecurity or IT disruption, labor and transportation issues, litigation and regulatory matters, and potential impairment of goodwill or intangibles. No impairment-triggering events were identified in the first nine months of 2019.
- Management said routine legal and administrative matters were not expected to have a material adverse effect. Adoption of lease accounting added approximately $208 million of right-of-use assets and $205 million of lease liabilities at January 1, 2019, with no material overall impact on the financial statements.
Important facts for investors to verify
- How much of reported earnings growth reflects the prior-year Cromwell impairment and restructuring, versus underlying operating improvement.
- Whether U.S. growth and market-share gains can offset continued Canadian weakness and pressure on gross margins.
- Whether endless-assortment growth can translate into improved profitability after growth investments and promotional, freight and mix pressures.
- Cash generation and balance-sheet capacity following substantial buybacks and dividends; confirm debt and lease obligations and upcoming maturities.
- Developments in trade and economic conditions, and any changes in the company’s outlook or disclosed risk exposures.