W.W. Grainger, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; unaudited. Grainger distributes maintenance, repair and operating supplies and related products and services, primarily in the United States and Canada, with operations in other markets.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | First 9 months 2010 | First 9 months 2009 |
|---|---|---|---|---|
| Net sales | $1,899.4 | $1,589.7 | $5,355.5 | $4,588.2 |
| Gross profit | $789.7 | $659.9 | $2,242.6 | $1,914.3 |
| Operating earnings | $251.3 | $186.7 | $649.1 | $499.9 |
| Net earnings attributable to Grainger | $150.4 | $144.6 | $378.7 | $333.4 |
| Diluted EPS | $2.06 | $1.88 | $5.10 | $4.34 |
| Gross margin | 41.6% | 41.5% | 41.9% | 41.7% |
| Operating margin | 13.2% | 11.7% | 12.1% | 10.9% |
- Revenue growth: Sales rose 19.5% in Q3 and 16.7% year to date. Management attributed Q3 growth mainly to volume (about 13 percentage points), acquisitions (about 5 points) and foreign exchange (about 1 point). Oil-spill cleanup products contributed about 3 points to Q3 volume growth.
- Cash flow: Operating cash flow was $492.0 million for the first nine months, versus $509.7 million in 2009. Investing used $116.5 million, including $64.9 million of capital expenditures and $51.6 million for acquisitions and other investments. Financing used $549.6 million, primarily reflecting $504.4 million of treasury-stock purchases and $114.1 million of dividends. Cash declined $173.4 million to $286.5 million.
- Liquidity and debt: Working capital was $1,252.3 million, down $102.4 million from year-end 2009; the current ratio was 2.4 versus 2.7. Debt totaled approximately $505.1 million at quarter-end, including $200 million of commercial paper classified as long-term; debt was 19.0% of total capitalization. Grainger replaced a $250 million credit line with a $400 million facility that has no financial performance covenants.
- Shareholder returns: Grainger repurchased $504.4 million of stock during the first nine months. Dividends paid were $1.54 per share year to date; the board declared a further $0.54 quarterly dividend payable December 1, 2010.
Changes versus comparable periods
- Q3 sales increased 19.5%, operating earnings 34.6%, and diluted EPS 9.6%. Net earnings attributable to Grainger rose 4.0%; the comparison is affected by a $47.4 million pretax, one-time gain recognized in Q3 2009 when Grainger obtained control of MonotaRO.
- Excluding the MonotaRO gain in 2009 and the paid-time-off policy benefit in 2010, management said Q3 2010 EPS of $1.99 was 31.8% above the comparable adjusted 2009 level.
- For the first nine months, sales rose 16.7%, operating earnings 29.9%, and diluted EPS 17.5%. Management stated that excluding identified unusual items in both years, EPS was $5.01, up 26.2%.
- Margins improved modestly. Management cited price increases exceeding product-cost increases, partly offset by faster growth in lower-margin international businesses and larger customers. Q3 2009 gross margin included a $10 million LIFO reserve benefit.
- United States segment sales rose 15.0% in Q3; Canada sales rose 21.6% reported (15.3% local-currency daily sales). Other Businesses sales increased sharply, largely due to consolidation of Japan and the Colombia acquisition.
Outlook, commentary and risks
- On October 14, 2010, Grainger raised 2010 sales-growth guidance to 14%–15% and EPS guidance to $6.40–$6.70. EPS guidance excludes the healthcare-legislation charge and the benefit from the paid-time-off policy change.
- Management expected Q4 organic revenue growth to moderate because of tougher comparisons, lower oil-spill cleanup product sales and slowing customer inventory building. The company planned continued investment in sales representatives, onsite inventory services and eCommerce.
- The paid-time-off policy change reduced expenses by $8.3 million in Q3 and $28.9 million year to date; management reported an after-tax year-to-date benefit of $17.6 million, or $0.24 per share. A $11.2 million, $0.15-per-share charge was recorded in Q1 to write down a deferred tax asset related to the Medicare Part D subsidy after healthcare legislation.
- Pending government matters involve DOJ review of GSA contract disclosure and pricing and USPS investigations of two contracts. Outcomes and timing are uncertain; possible settlement or litigation could include treble damages and penalties. Grainger said it believes it complied in all material respects and does not expect a material adverse effect on financial position, but an unfavorable resolution could require significant payments.
- Forward-looking risks include economic and market conditions, competition and pricing, product costs and supply disruptions, litigation or regulatory outcomes, technology and data-security disruptions, currency and commodity volatility, labor constraints, and transportation or facility disruptions.
Important facts for investors to verify
- Whether the 2010 sales and EPS outlook was achieved, particularly given the expected Q4 moderation and temporary oil-spill-related demand.
- How much growth and profitability came from organic demand versus acquisitions, foreign exchange and unusual items; review the sustainability of margin gains and paid-time-off savings.
- Cash conversion and working-capital trends, including receivables and inventory growth, alongside continued buybacks, dividends and growth investment.
- Developments and any estimated financial exposure from the DOJ and USPS contract-pricing matters.
- The commercial-paper funding strategy and the company’s ability to maintain the paper on a long-term basis, as described in the filing.