W.W. Grainger, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also presents unaudited fourth-quarter results. Grainger distributes maintenance, repair and operating supplies through branches, distribution centers, sales representatives and eCommerce, primarily in the United States and Canada.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $9.965 billion | $9.438 billion |
| Gross profit / margin | $4.314 billion / 43.3% | $4.136 billion / 43.8% |
| Operating earnings / margin | $1.347 billion / 13.5% | $1.297 billion / 13.7% |
| Net earnings attributable to Grainger | $801.7 million | $797.0 million |
| Diluted EPS | $11.45 | $11.13 |
| Operating cash flow | $959.8 million | $986.5 million |
| Capital expenditures | $387.4 million | $272.1 million |
| Cash and cash equivalents at year-end | $226.6 million | $430.6 million |
| Total debt at year-end | $484.8 million | $542.8 million |
| Working capital / current ratio | $1.697 billion / 2.4 | $1.621 billion / 2.5 |
FY 2014 sales increased 5.6%; reported diluted EPS rose 2.9%. Management’s adjusted diluted EPS, a non-GAAP measure excluding specified items, was $12.26 versus $11.52, up 6%. Cash dividends paid were $4.17 per share, compared with $3.59. Grainger repurchased $525.1 million of treasury stock during the year.
Fourth quarter: Sales were $2.511 billion versus $2.377 billion, up 5.6%. Operating earnings were $266.5 million versus $256.8 million; net earnings attributable to Grainger were $148.8 million versus $156.7 million. Diluted EPS was $2.14 versus $2.20.
Material changes versus prior year
- Sales growth reflected volume (+5 percentage points), acquisitions net of divestitures (+1), and price (+1), partly offset by foreign exchange (-1).
- Gross margin declined 0.5 percentage point, primarily from acquired-business mix, faster growth among lower-margin customers, and Brazil and Europe charges; price inflation exceeding product-cost inflation partly offset the decline.
- U.S. sales rose 7% to $7.926 billion and operating earnings rose 11% to $1.444 billion. Canada sales fell 3% to $1.076 billion in U.S. dollars, although they increased 4% in local currency; Canadian operating earnings fell 32% to $87.6 million.
- Other-business sales increased 14% to $1.182 billion, but operating results shifted to a $37.8 million loss from $7.6 million of earnings, including Brazil closure, Europe pension transition and restructuring, and Colombia impairment charges.
- Operating cash flow decreased $26.7 million, primarily due to higher inventory purchases. Investing cash use was $384.1 million; financing cash use increased to $758.1 million, including higher share repurchases and dividends and debt repayment.
- Debt as a percentage of total capitalization decreased to 12.9% from 14.0%, mainly following partial repayment of the U.S. term loan. Capital spending increased substantially, including investment in U.S. and Canadian distribution centers and technology.
Outlook, commentary and risks
- On January 26, 2015, Grainger lowered 2015 guidance: sales growth to 3%–7% from 5%–9%, and EPS to $12.60–$13.60 from $12.90–$13.80. The company cited unfavorable foreign exchange and weakness in Canada.
- Planned 2015 capital expenditures were $375 million–$425 million, funded from operating cash. Management planned continued investment in supply chain, information systems, eCommerce, sales and inventory-management services.
- Brazil operations were scheduled to cease during 2015. FY 2014 included $29 million of Brazil shutdown costs, $14 million for a European retirement-plan transition, $10 million of European restructuring costs and a $12 million Colombia goodwill impairment. The specified items reduced reported diluted EPS by a net $0.81.
- Risk factors include economic weakness, competitive and pricing pressure, customer/product mix and margin pressure, commodity and freight costs, supply-chain disruption, information-system and cybersecurity incidents, foreign-exchange movements, acquisition integration and regulatory or litigation exposure.
- Fabory had $118 million of goodwill; its estimated fair value exceeded carrying value by 31%. The filing cautions that future impairment risk depends on uncertain assumptions, including sales growth, margins and discount rates. The company also reported approximately $49 million of noncurrent liability for tax uncertainties and interest.
- Grainger reported no material off-balance-sheet arrangements. It disclosed asbestos/silica litigation involving approximately 1,376 plaintiffs as of January 16, 2015, but stated it did not expect the matters discussed to have a material adverse effect. The financial statement and internal-control audits received unqualified opinions; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether 2015 sales and EPS guidance, particularly the impact of Canadian weakness and foreign exchange, was achieved or revised further.
- Whether gross-margin pressure persists and whether U.S. growth offsets Canadian operating deterioration.
- Cash conversion and working-capital trends, given lower operating cash flow, higher inventory purchases and significant planned capital spending.
- Progress and final costs of the Brazil closure, European restructuring and retirement-plan transition, and performance of the Colombia and Fabory businesses.
- Debt repayment, share repurchases, dividend capacity and the timing of contractual obligations, including debt maturities and purchase commitments.
- Developments in tax audits and uncertain tax positions, and any material change in litigation or other contingencies.