W.W. Grainger, Inc. - 10-Q Summary (Period Ended Sept 30, 2002)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, and the nine-month period ended on that date. W.W. Grainger, Inc. is a distributor of maintenance, repair, and operating (MRO) supplies, services, and information to businesses and institutions in North America. The company operates through three primary segments: Branch-based Distribution Businesses, Lab Safety Supply, and Grainger Integrated Supply. The Digital Businesses segment ceased operations in the third quarter of 2001 following the shutdown of Material Logic.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2002 |
3 Months Ended Sept 30, 2001 |
9 Months Ended Sept 30, 2002 |
9 Months Ended Sept 30, 2001 |
|---|---|---|---|---|
| Net Sales | $1,203,400 | $1,199,358 | $3,523,457 | $3,643,818 |
| Gross Profit | $402,560 | $395,851 | $1,185,151 | $1,185,678 |
| Operating Earnings | $100,190 | $95,377 | $284,414 | $232,754 |
| Net Earnings | $59,953 | $56,022 | $148,989 | $113,017 |
| Diluted EPS | $0.64 | $0.59 | $1.57 | $1.19 |
| Cash from Operations | N/A | N/A | $274,791 | $395,074 |
| Cash & Equivalents | $218,470 | N/A | $218,470 | N/A |
| Total Debt (Short + Long) | $132,606 | N/A | $132,606 | N/A |
Note: Debt figures represent Short-term debt ($3,345) + Current maturities of long-term debt ($10,620) + Long-term debt ($118,641) as of Sept 30, 2002.
Material Changes vs. Prior Period
- Revenue: Net sales were flat for the quarter (+0.3%) but declined 3% for the nine-month period. The decline is attributed to general weakness in the North American economy and a 13% drop in Canadian sales due to the natural resources sector and the formation of a joint venture that removed automotive after-market parts sales from consolidated results.
- Profitability: Operating earnings increased 5% for the quarter and 22% for the nine-month period. The nine-month improvement was driven by the elimination of Material Logic losses ($50.2 million in 2001) and improved performance in Branch-based Distribution and Grainger Integrated Supply.
- Accounting Change: The company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) effective Jan 1, 2002. This resulted in a non-cash, after-tax charge of $23.9 million ($0.25 per diluted share) recorded as a cumulative effect of an accounting change due to a goodwill impairment write-down for its Canadian subsidiary, Acklands-Grainger Inc. (AGI).
- Segment Performance:
- Branch-based Distribution: Sales flat for the quarter; operating earnings up 3%.
- Lab Safety Supply: Sales down 5% (quarter) and 11% (nine months) due to weak manufacturing demand; operating earnings up 6% (quarter) but down 7% (nine months).
- Grainger Integrated Supply: Sales up 14% (quarter) and 25% (nine months); operating earnings improved from a loss in 2001 to $1.7 million (quarter) and $4.6 million (nine months).
Guidance, Outlook, and Risks
Management Commentary: Management notes that sales performance continues to be affected by general economic weakness in North America. However, the company has improved operating margins through pricing actions and cost controls. The company expects to fund remaining restructuring reserves from internally generated cash.
Liquidity and Capital: Working capital increased by $16.8 million in the first nine months. The current ratio was 2.4 at Sept 30, 2002. The company issued $113.7 million in commercial paper in September 2002 to repay long-term Canadian debt, which was replaced by a cross-currency swap to hedge net investment in the Canadian subsidiary.
Risks and Contingencies:
- Market Risk: Exposure to currency fluctuations (hedged via cross-currency swap) and interest rate changes.
- Contingent Liability: The company guarantees employee loans totaling $22.2 million as of Sept 30, 2002, under an executive stock purchase program.
- Restructuring: A remaining reserve of $4.8 million exists for the shutdown of Material Logic operations, with cash payments expected to continue until 2004.
Investor Verification Checklist
- Goodwill Impairment: Verify the $23.9 million non-cash charge related to the Canadian subsidiary (AGI) under SFAS No. 142 and its impact on future earnings.
- Canadian Operations: Assess the impact of the joint venture with Uni-Select Inc. on future Canadian revenue streams, specifically the loss of automotive after-market parts sales.
- Debt Structure: Confirm the classification of the $113.7 million commercial paper as long-term debt and the terms of the cross-currency swap.
- Restructuring Costs: Monitor the utilization of the $4.8 million remaining reserve for Material Logic shutdown costs.
- Executive Loan Guarantees: Review the $22.2 million contingent liability associated with employee stock purchase loans.