W.W. Grainger, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The unaudited statements cover Grainger, a distributor of maintenance, repair and operating supplies, with operations primarily in the United States and Canada and a growing international presence. Comparisons are with Q1 2012 unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $2.280 billion | $2.193 billion | +4%; +6% per sales day |
| Gross profit | $1.032 billion | $974 million | +6% |
| Gross margin | 45.2% | 44.4% | +0.8 percentage point |
| Operating earnings | $343 million | $304 million | +13% |
| Net earnings attributable to Grainger | $212 million | $188 million | +13% |
| Diluted EPS | $2.94 | $2.57 | +14% |
| Operating cash flow | $176 million | $106 million | +$70 million |
| Capital expenditures | $43 million | $41 million | +$2 million |
Operating margin increased to 15.1% from 13.9%. Management attributed higher operating earnings to sales growth, improved gross margin and positive expense leverage. Gross-margin improvement primarily reflected price increases exceeding product-cost increases, partly offset by customer mix. Earnings per share also benefited from lower average diluted shares.
Cash, debt and liquidity
- Cash and cash equivalents were $486 million at March 31, 2013, versus $452 million at December 31, 2012.
- Total debt was approximately $550 million, comprising $74 million short-term debt, $22 million current maturities and $455 million long-term debt. Debt as a percentage of total capitalization was 14.6%, down from 15.3% at year-end 2012.
- Management reported working capital of $1.660 billion, up from $1.604 billion, and a working-capital-assets-to-liabilities ratio of 2.9, versus 2.6. The increase primarily reflected the timing of annual compensation, benefits, profit-sharing and bonus payments.
- Cash used in financing was $98 million, mainly reflecting $70 million of treasury-stock purchases and $57 million of dividends paid. Cash used in investing was $41 million.
Material changes and operating detail
- Q1 2013 had 63 sales days versus 64 in Q1 2012; Easter affected the 2013 comparison. Daily sales growth contributors included volume 3%, price 2%, acquisitions 1%, seasonal effects 1% and foreign exchange negative 1%.
- Operating expenses rose 3% to $688 million. Growth-program spending increased by $22 million and expenses associated with 2012 acquisitions by $9 million; savings from restructuring in Europe and Asia partly offset these increases.
- U.S. sales increased 4% as reported and 6% per sales day; segment operating earnings rose 11% to $331 million. Canada sales increased 4% as reported and 5% per sales day; segment operating earnings rose 11% to $33 million. Other-business sales rose 4% as reported, while operating earnings declined to $8 million from $11 million, mainly due to losses in the acquired Brazil business and weaker results in some smaller operations.
- Retiree healthcare plan changes reduced quarterly net periodic benefit costs to $2.5 million from $7.7 million. Employees hired after January 1, 2013 are not eligible for retiree health benefits.
- Comprehensive earnings attributable to Grainger were $190 million, down from $208 million, including a negative foreign-currency translation adjustment of $31 million in 2013 versus a positive $16 million in 2012.
Outlook, risks and contingencies
- On April 16, 2013, Grainger raised 2013 sales-growth guidance to 5%–9% from 3%–9%, and diluted EPS guidance to $11.30–$12.00 from $10.85–$12.00. Management cited strong Q1 performance and expected returns from company initiatives.
- Management projected a full-year effective tax rate of 37.3%–37.7%. The filing’s cited 2013 economic forecasts included U.S. GDP growth of 2.0% and industrial-production growth of 3.2%; Canada forecasts were 1.6% and negative 0.2%, respectively.
- Risks identified include economic and industry conditions, competition and pricing, product costs, customer losses, supply disruptions, execution of technology and business strategies, litigation or regulatory matters, cybersecurity and IT disruption, currency and commodity volatility, labor shortages, transportation or facility disruptions, and weather or other catastrophes.
- The company reported routine legal and administrative matters, including product, premises, environmental, employment and governmental pricing-compliance matters. Management did not expect their resolution to have a material adverse effect on consolidated financial position or results of operations.
- The board declared a quarterly dividend of $0.93 per share on April 24, payable June 1, 2013, a 16% increase from the prior $0.80 rate.
Important facts for investors to verify
- Whether the raised 2013 sales and EPS guidance was achieved, and the assumptions underlying it.
- Whether gross-margin expansion and operating leverage persisted as growth-program and acquisition expenses continued.
- Performance and profitability of the Brazil acquisition and other international businesses, where Q1 operating earnings weakened.
- Cash conversion, working-capital movements and the sustainability of cash available for repurchases and dividends.
- Potential effects of the listed forward-looking risks and any developments in legal, regulatory or pricing-compliance matters.