W.W. Grainger, Inc. — Q1 2011 Form 10-Q
Business context and period. Grainger distributes maintenance, repair and operating supplies and related services. Its operations are primarily in the United States and Canada, with a growing presence in other markets. This summary covers the unaudited three months ended March 31, 2011, compared with the same period in 2010; balance-sheet comparisons are with December 31, 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,883.6 million | $1,672.4 million | +12.6%; +11% per sales day |
| Gross profit | $829.6 million | $705.7 million | +17.6% |
| Gross margin | 44.0% | 42.2% | +1.8 percentage points |
| Operating earnings | $262.6 million | $182.9 million | +43.6% |
| Operating margin | 13.9% | 10.9% | +3.0 percentage points |
| Net earnings attributable to Grainger | $157.9 million | $99.2 million | +59.3% |
| Diluted EPS | $2.18 | $1.31 | +66% |
| Cash dividends paid per share | $0.54 | $0.46 | +17% |
Sales growth reflected approximately 7 percentage points from volume, 2 from price, 1 from acquisitions and 1 from foreign exchange. Q1 2011 had 64 sales days versus 63 in Q1 2010. Higher sales, improved gross margin and expenses growing more slowly than sales drove operating earnings growth.
Segments: United States sales were $1,537.7 million (+9%) and operating earnings were $256.4 million (+27%). Canada sales were $242.4 million (+25%; +17% in local currency) and operating earnings were $23.9 million, up 279%. Other businesses sales increased 44% to $116.9 million, with operating earnings of $6.4 million versus a near break-even result a year earlier.
Cash flow, liquidity and debt
- Operating cash flow was $118.4 million, compared with $113.2 million. Changes in operating assets and liabilities used $79.0 million of cash, primarily reflecting lower other current liabilities after annual profit-sharing and bonus payments.
- Investing activities used $28.0 million, including $28.4 million of capital expenditures, versus $22.9 million used in investing activities in Q1 2010.
- Financing activities used $73.4 million, including $50.7 million for treasury-stock purchases and $38.3 million for dividends. Cash increased $21.2 million to $334.7 million during the quarter.
- Working capital was $1,479.7 million, up $110.9 million from year-end; the current ratio rose to 2.9 from 2.6.
- Total debt, including short-term debt and current maturities, was approximately $489.9 million at March 31, versus approximately $494.3 million at year-end. Debt was 17.0% of total capitalization, down from 17.8%.
Outlook, commentary and risks
- On April 18, 2011, Grainger raised 2011 sales growth guidance to 7%–10% and EPS guidance to $8.10–$8.60, from initial guidance of 5%–9% sales growth and $7.15–$7.90 EPS.
- Management expected sales growth for the rest of 2011 to be below Q1’s pace: Q1 included an extra selling day, and Q2 would not repeat incremental sales associated with the 2010 Gulf of Mexico oil spill.
- Management expected lower gross margins after Q1 because of seasonal patterns, higher product and fuel costs, and higher operating spending on growth initiatives, sales representatives, e-commerce and advertising. Additional costs were expected for extending the U.S. SAP platform and opening a Northern California distribution center in Q4.
- Management attributed Q1 margin expansion primarily to price increases exceeding product-cost increases. Canada also benefited from less discounting, customer mix and currency-related product-cost deflation.
- Prior-period comparability: Q1 2010 included an $11.2 million non-cash deferred-tax-asset write-down related to healthcare legislation and a $10.3 million benefit from a paid-time-off policy change. Excluding those items, Q1 2011 diluted EPS was 58% higher, according to the company.
- DOJ and USPS investigations concern pricing and disclosure compliance under government contracts. Discussions were ongoing; possible settlement or litigation could include treble damages and penalties. Grainger said it believes it complied in all material respects, but could not estimate possible losses; an unfavorable outcome could require significant payments.
- Other stated risks include economic and market conditions, competition, product and fuel costs, supply disruption, currency and commodity volatility, technology or data-security disruption, labor constraints, catastrophes, and litigation or regulatory outcomes.
On April 27, the board declared a quarterly dividend of $0.66 per share, a 22% increase from $0.54, payable June 1, 2011 to shareholders of record May 9.
Important facts for investors to verify
- Whether sales growth and margins remain consistent with the raised full-year guidance, accounting for the extra Q1 selling day and the prior-year oil-spill-related sales comparison.
- How product and fuel costs, seasonal margin patterns, and growth-related spending affect profitability in subsequent quarters.
- Developments and potential financial exposure from the DOJ and USPS contract investigations; the filing provides no clear estimate of possible loss.
- Cash conversion and working-capital trends, including the effects of bonus payments, receivables growth, capital spending, dividends and share repurchases.
- Execution and costs of the SAP expansion and planned distribution-center opening.