W.W. Grainger, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request references 2017 Q4, this filing is an annual report; fourth-quarter figures are identified separately below. Grainger distributes maintenance, repair and operating supplies through U.S. and Canadian businesses, online channels, and international operations.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $10.425 billion | $10.137 billion | Up 3% reported |
| Gross profit margin | 39.3% | 40.6% | Down 1.3 percentage points |
| Operating earnings | $1.049 billion | $1.119 billion | Down 6% |
| Net earnings attributable to Grainger | $585.7 million | $605.9 million | Down 3% |
| Diluted EPS | $10.02 | $9.87 | Up 2% |
| Operating cash flow | $1.057 billion | $1.024 billion | Up $32 million |
- Sales growth reflected volume gains, led by single-channel online businesses and U.S. customer gains following pricing actions; lower prices reduced reported sales growth. E-commerce sales rose 11% to $5.283 billion, or 51% of sales.
- Gross margin pressure primarily reflected U.S. pricing actions and price deflation. Operating earnings also faced higher employee-related expenses. Other expense rose to $113 million, including higher interest expense and clean-energy investment losses.
- Management’s non-GAAP adjusted net earnings were $669.6 million, down 6% from $711.2 million. The company reported $83.9 million of net earnings adjustments for 2017; this measure excludes items management considers not indicative of core operations.
- Fourth-quarter 2017 sales were $2.632 billion, operating earnings $239.9 million, net earnings attributable to Grainger $151.1 million, and diluted EPS $2.63. Fourth-quarter 2016 comparatives were $2.471 billion, $174.2 million, $60.7 million, and $1.01, respectively.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $326.9 million at year-end, versus $274.1 million a year earlier; approximately 64% was held outside the U.S. business. Working capital was $1.669 billion, and the current ratio was 2.2, down from 2.4.
- Interest-bearing debt totaled approximately $2.343 billion, including short-term debt and current maturities; long-term debt, net of current maturities, was $2.248 billion. Debt was 56.2% of total capitalization, versus 54.1%; management reported debt/EBITDA of 1.8x.
- Investing activities used $146.1 million, including $237.3 million of capital expenditures, partially offset by asset-sale and divestiture proceeds. Financing activities used $867.1 million, including $605.4 million of treasury-stock purchases and $304.5 million of dividends paid.
- Grainger issued $400 million of 4.20% senior notes due 2047. It reported no commercial paper outstanding at year-end and had a $750 million revolving credit facility, with an option to increase it to $1.1 billion. The company was in compliance with debt covenants.
Material changes, outlook and notable items
- U.S. sales rose 1% reported; on a daily basis they increased 2%, with volume gains offset by pricing-related deflation. Canada sales rose 3%, but the business continued to report operating losses. Other-business sales increased 12%, driven principally by Zoro and MonotaRO.
- Restructuring and other actions included U.S. and Canadian branch closures, U.S. contact-center consolidation, and the wind-down of Colombia operations. The company announced plans to close 113 Canada branches. 2017 restructuring costs, net of gains, were $116.2 million; the filing’s selected-data discussion describes an approximately $102 million net charge for restructuring and other items.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% effective in 2018. Grainger recorded a provisional net tax benefit of $3.2 million for 2017 and estimated a 2018 tax rate of 23%–26%; some tax calculations remained incomplete. The 2017 effective tax rate was 33.5%, versus 37.9%.
- Updated 2018 guidance: sales growth of 3%–7% and diluted EPS of $12.95–$14.15. The company expected capital expenditures of $290–$330 million, primarily funded from operating cash flow. Management priorities include U.S. growth and digital capabilities, a Canada business-model reset, profitable international growth, and cost reductions while maintaining customer service.
- Management cited economic cyclicality, intense price competition, customer and product mix, commodity and freight costs, supply-chain and technology disruption, cybersecurity, foreign-exchange movements, regulatory matters and tax changes as risks. Legal proceedings, including asbestos- and silica-related claims, were not expected to have a material adverse effect, though outcomes remain uncertain.
- The company and its auditor reported effective internal control over financial reporting at December 31, 2017; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether U.S. pricing and volume gains can sustain sales growth without further material erosion in gross margin and operating earnings.
- Progress and costs of the Canada turnaround, including branch closures, and whether online growth in Zoro and MonotaRO translates into durable profitability.
- Execution of 2018 sales and EPS guidance, including the assumptions for tax rate, share repurchases, digital investment and restructuring.
- Debt, cash generation and capital returns relative to ongoing investment needs; review debt maturities, interest commitments and postretirement benefit obligations.
- Final accounting and cash-tax effects of the Tax Act, and developments in tax uncertainties, legal claims and goodwill or intangible-asset impairment assumptions.