W.W. Grainger, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Grainger distributes maintenance, repair and operating products and services, principally in North America, Japan and Europe, through high-touch and online “endless assortment” businesses.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $11.486 billion | $11.221 billion | +2.5% |
| Gross profit / margin | $4.397 billion / 38.3% | $4.348 billion / 38.7% | Profit +1%; margin -0.5 percentage points |
| Operating earnings / margin | $1.262 billion / 11.0% | $1.158 billion / 10.3% | +9% |
| Net earnings attributable to Grainger | $849 million | $782 million | +8% |
| Diluted EPS | $15.32 | $13.73 | +12% |
| Operating cash flow | $1.042 billion | $1.057 billion | Down $15 million |
Reported results included $126 million of restructuring and impairment charges before tax in 2019, compared with $186 million in 2018. Adjusted operating earnings increased 3% to $1.388 billion; adjusted diluted EPS increased 4% to $17.29. These are company-defined non-GAAP measures. The reported effective tax rate rose to 26.0% from 23.9%.
- Liquidity: Cash and cash equivalents were $360 million, down from $538 million. Current assets were $3.555 billion and current liabilities $1.678 billion; the reported current ratio was 2.6.
- Debt: Balance-sheet short-term debt was $55 million and long-term debt, including current maturities, totaled $2.160 billion before debt issuance costs. The filing describes consolidated indebtedness as approximately $2.4 billion and reports debt plus lease liabilities at 54.3% of total capitalization. The company was in compliance with debt covenants.
- Capital allocation: Capital expenditures were $221 million. Treasury-share purchases used $700 million of cash; dividends paid were $328 million, or $5.68 per share.
Material changes and operating trends
- U.S. sales grew 2.5%, principally on volume and market-share gains; U.S. operating earnings rose 4%. Gross margin declined 0.4 percentage points, reflecting contract renegotiations and customer mix.
- Canada sales fell 19% to $529 million amid customer disruption associated with branch-footprint reductions and sales-coverage optimization. The segment returned to $3 million of operating earnings from a $49 million loss in 2018, with cost reductions and supply-chain efficiencies contributing.
- Other-business sales increased 8.5% to $2.651 billion, driven mainly by growth in the endless-assortment businesses. The unit reported a $9 million operating loss, versus $8 million of earnings in 2018; excluding restructuring and impairment charges, earnings declined, partly due to growth investments.
- Faster growth in lower-margin endless-assortment businesses contributed to the companywide gross-margin decline. Operating cash flow edged down, while financing cash outflows increased, principally because of higher share repurchases.
Outlook, risks and unusual items
- Management’s 2020 priorities are market-share growth, customer service and sales differentiation in the U.S., renewed volume growth in Canada, profitable growth across other businesses, and continued investment in digital capabilities and supply-chain infrastructure. No companywide revenue or earnings guidance is stated in the supplied filing text.
- Management expected approximately $250 million of 2020 capital spending, primarily funded from operating cash flow.
- In the fourth quarter, Grainger recorded $120 million of Cromwell U.K. intangible-asset impairment charges; Cromwell’s declining performance and accelerated customer attrition contributed. The filing’s selected-data discussion describes the 2019 net expense as $109 million after tax, including restructuring and tax effects.
- Canada goodwill of $126 million was not impaired, but its valuation depends on assumptions about revenue growth, cash flows and operating earnings; unfavorable conditions could prompt a future impairment.
- Key disclosed risks include economic cyclicality, competitive pricing and margin pressure, tariffs and supply disruption, commodity and fuel costs, foreign exchange, cybersecurity and technology interruptions, regulation and litigation, and indebtedness. The filing specifically identifies the then-emerging coronavirus outbreak as a potential supply-chain and operating risk.
- Grainger disclosed product-liability lawsuits related to an explosion at a Texas refinery and asbestos/silica litigation. It said the ultimate resolution of these matters was not expected to have a material adverse effect, while noting outcomes could not be predicted.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether U.S. market-share gains and endless-assortment growth can continue without further material pressure on gross margin.
- Whether Canada can sustain its turnaround and achieve volume recovery after customer disruption from network and sales-coverage changes.
- The assumptions underlying the Canada goodwill valuation and the outlook for Cromwell following its impairment.
- Cash generation, planned capital spending, and the pace of share repurchases and dividends relative to debt and lease obligations.
- Subsequent developments in coronavirus-related supply and demand risks, the Texas refinery litigation, and other legal or regulatory contingencies.