W.W. Grainger, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results. Grainger distributes maintenance, repair and operating supplies, primarily in the U.S. and Canada, with operations also in Europe, Asia and Latin America.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2.382 billion | $2.249 billion | $4.662 billion | $4.443 billion |
| Operating earnings | $350.1 million | $314.0 million | $693.4 million | $618.4 million |
| Net earnings attributable to Grainger | $217.7 million | $190.7 million | $429.5 million | $378.2 million |
| Diluted EPS | $3.03 | $2.63 | $5.97 | $5.20 |
- Growth and margins: Q2 sales rose 5.9%; daily sales rose 6%, reflecting volume +4%, price +2%, acquisitions +1% and foreign exchange -1%. Gross margin was 44.0%, up 0.5 percentage point; operating margin was 14.7%, versus 14.0%. Grainger-attributable net earnings increased 14.1% and diluted EPS increased 15%.
- For the first half, sales increased 4.9% (daily sales +6%), operating earnings rose 12.1%, and attributable net earnings rose 13.6%. Gross margin was 44.6%, up 0.7 percentage point, and operating margin was 14.9%, versus 13.9%.
- Cash flow, first half: Operating cash flow was $386.8 million, versus $238.2 million. Investing activities used $88.8 million, including $83.2 million of property, equipment and capitalized software additions. Financing activities used $250.0 million, including $202.4 million for treasury shares and $123.5 million in dividends. Ending cash was $488.7 million, up from $452.1 million at year-end.
- Liquidity and debt: Working capital was $1.701 billion, with a working-capital assets-to-liabilities ratio of 2.9, versus 2.6 at December 31, 2012. Total debt was approximately $548 million, comprising short-term debt, current maturities and long-term debt; debt was 14.5% of total capitalization, down from 15.3% at year-end.
- Dividends and repurchases: Cash dividends paid were $0.93 per share in Q2 and $1.73 per share in the first half. The company repurchased 521,012 shares in Q2 for an average $254.63 per share. A $0.93 quarterly dividend was declared July 31, payable September 1, 2013.
Material changes and management commentary
- Management attributed margin improvement mainly to price increases exceeding product-cost increases; stronger sales to large customers partly offset this through unfavorable customer mix. In Canada, freight consolidation savings, supplier rebates and private-label sales supported margins.
- Operating expenses increased 4.9% in Q2 and 3.8% for the first half. Growth-program spending increased by $37 million in Q2 and $59 million in the first half, primarily for eCommerce, sales-force expansion and inventory-management solutions.
- U.S. sales increased 7% in Q2; Canada sales increased 3% reported, or 5% in local currency. Other-business sales increased 5% daily, while first-half operating earnings in those businesses declined to $21 million from $22 million.
- First-half operating cash flow improved as the net cash use from changes in operating assets and liabilities was lower than in 2012, primarily due to lower inventory purchases. The company also acquired the remaining interest in its Colombian business during Q2.
- The effective tax rate was 36.5% in Q2 and 36.9% for the first half. Both periods benefited from resolution of foreign tax matters; excluding the benefit, management reported rates of 37.3%.
Outlook, risks and contingencies
- On July 17, 2013, Grainger revised 2013 sales growth guidance to 5%–8% from 5%–9%, and diluted EPS guidance to $11.40–$12.00 from $11.30–$12.00. Estimates reflect first-half performance and expectations for the second half.
- Management cited economic activity, industrial production, business investment, manufacturing trends and Canadian exposure to oil prices as relevant business drivers. Forward-looking risks include economic and market conditions, competition and pricing, product costs, customer or supplier disruptions, currency and commodity volatility, technology and data-security issues, labor and transportation constraints, catastrophes, and litigation or regulatory matters.
- The company reported ordinary-course legal and administrative proceedings, including product, premises, environmental, employment and pricing-compliance matters; it did not expect their resolution to have a material adverse effect on consolidated financial position or results.
- Foreign-currency translation reduced first-half comprehensive earnings; the filing reports a $69.8 million translation adjustment. Derivatives were used to manage portions of interest-rate and currency exposures, not for trading or speculation.
Important facts for investors to verify
- Whether second-half sales and earnings support the revised 2013 guidance, particularly given the sales-growth range reduction.
- Whether price-cost benefits persist and offset customer-mix pressure as growth-program spending continues.
- Cash conversion and working-capital trends, including receivables, inventory and the timing of profit-sharing payments.
- Segment and currency trends, especially Canada and the other businesses, and the contribution from acquisitions.
- The size and recurrence of the foreign-tax benefit, and any material developments in legal, regulatory or pricing-compliance matters.