W.W. Grainger, Inc. — Q2 2018 Form 10-Q
Business and period. Grainger distributes maintenance, repair and operating supplies and related services, primarily in the U.S. and Canada. This unaudited report covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net sales | $2.860 billion, up 9% | $5.627 billion, up 9% |
| Gross margin | 38.8%, down 1.0 percentage point | 39.1%, down 0.8 percentage point |
| Operating earnings | $344 million, up 50% | $679 million, up 30% |
| Net earnings attributable to Grainger | $237 million, up 142% | $469 million, up 72% |
| Diluted EPS | $4.16, versus $1.67 | $8.23, versus $4.61 |
| Operating cash flow | Not separately presented | $395 million, versus $372 million |
Q2 sales growth reflected 9% volume growth and 1% foreign-exchange benefit, partly offset by a 1% divestiture impact. For the first half, volume growth was also 9%, with the same respective foreign-exchange and divestiture effects. U.S. market-share gains and stronger demand, along with growth in single-channel businesses, were key drivers.
Q2 gross margin pressure included 0.5 percentage point from adoption of the new revenue-recognition standard, 0.2 point from sales-meeting timing, and continuing U.S. price deflation. Reported SG&A fell 5% in Q2, largely because the prior-year quarter included Colombia wind-down costs. Excluding restructuring and branch gains, Q2 operating earnings rose 23%; first-half adjusted operating earnings rose 21%. These adjusted figures are non-GAAP measures.
For the six months, investing cash outflow was $74 million and financing cash outflow was $331 million. Capital additions to property, equipment and intangibles were $103 million. Cash and equivalents were $312 million at June 30, 2018, compared with $327 million at year-end 2017.
At June 30, total current assets were $3.373 billion and current liabilities $1.424 billion; the reported current ratio was 2.5. Total interest-bearing debt was approximately $2.295 billion, including $54 million short-term debt, $30 million current maturities and $2.210 billion long-term debt. Debt as a share of total capitalization was 52.8%, down from 56.2% at year-end.
Changes, outlook and notable items
- The U.S. segment grew Q2 sales 9% and operating earnings 13%. Canada sales fell 6% and the segment remained loss-making, though its operating loss narrowed to $14 million from $28 million. Other businesses’ sales increased 18%, with strong single-channel growth.
- On July 18, 2018, Grainger raised full-year guidance to sales growth of 5.5%–8.5% and EPS of $15.05–$16.05, from prior ranges of 5.0%–8.0% and $14.30–$15.30. Management projected a 2018 effective tax rate of 23%–26%.
- Q2 eCommerce sales were $1.539 billion, up 18%, and represented 54% of sales, versus 50% a year earlier. Including KeepStock, eCommerce and KeepStock represented 62% of sales.
- Q2 restructuring costs, net of gains, were $15 million, versus $62 million in 2017; the prior-year comparison included Colombia business wind-down costs. Active restructuring programs had $16 million of additional costs expected through 2019.
- The 2018 effective tax rate benefited from the Tax Cuts and Jobs Act and excess tax benefits on stock awards. The company had not completed its analysis of all Tax Act effects at June 30.
- Management cited risks including competitive pricing, product and operating costs, customer or supplier disruption, execution of strategic pricing and technology initiatives, economic and currency changes, labor and transport constraints, cybersecurity, and litigation or regulatory proceedings. Ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification points
- Track whether U.S. volume and market-share growth can continue without further erosion in gross margin from pricing and cost pressures.
- Assess Canada’s turnaround: sales volume remained weak despite price increases, improved margin and lower operating losses.
- Compare future results with the raised sales and EPS guidance, including the assumptions behind the projected tax rate.
- Review cash conversion and working-capital use: first-half accounts receivable and inventory increases used cash despite higher operating cash flow.
- Monitor restructuring execution and expected remaining costs, and distinguish reported results from management’s non-GAAP adjusted measures.
- Consider the company’s debt burden and risks to goodwill and intangible assets; management reported no impairment triggering events in the first half.