W.W. Grainger, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Grainger distributes maintenance, repair and operating supplies and related services, primarily in the United States and Canada, with additional international businesses. Financial statements are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2.506 billion | $2.382 billion | $4.892 billion | $4.662 billion |
| Gross profit | $1.081 billion | $1.047 billion | $2.157 billion | $2.079 billion |
| Operating earnings | $341 million | $350 million | $695 million | $693 million |
| Net earnings attributable to Grainger | $206 million | $218 million | $423 million | $429 million |
| Diluted EPS | $2.94 | $3.03 | $6.00 | $5.97 |
- Q2 sales rose 5.2%; six-month sales rose 4.9%. Q2 gross margin was 43.1%, down 0.9 percentage point; operating margin was 13.6%, down 1.1 points. For six months, gross margin was 44.1%, down 0.5 point, while operating margin was approximately 14.2%, versus 14.9%.
- Q2 diluted EPS declined 3%, while six-month diluted EPS increased 1%, helped by fewer average shares outstanding. Dividends paid per share were $1.08 in Q2 and $2.01 for the six-month period, up from $0.93 and $1.73, respectively.
- Six-month operating cash flow was $328 million, compared with $387 million. Investing cash outflow was $132 million (including $156 million of property and equipment additions); financing cash outflow was $297 million, including $236 million of treasury-stock purchases and $141 million of dividends. Cash declined to $332 million from $431 million at year-end.
- At June 30, cash was $332 million, current assets were $3.031 billion and current liabilities were $1.126 billion. Management reported working capital of $1.865 billion and a working-capital-assets-to-liabilities ratio of 2.9, up from 2.5 at year-end. Total debt was approximately $567 million, and debt was 14.1% of total capitalization. The $55 million commercial-paper balance outstanding at quarter-end matured July 7 and was repaid in full.
Changes and operating drivers
- Q2 consolidated sales growth reflected volume of 5%, acquisitions net of dispositions of 2%, and negative 1% each from Good Friday timing and foreign exchange. For the six-month period, growth reflected volume of 3%, acquisitions of 2%, price of 1%, and foreign exchange of negative 1%.
- The U.S. segment grew Q2 sales 7% and operating earnings 8%. Canada sales fell 9% in reported dollars (3% in local currency) and operating earnings fell 48%. Other-business sales rose 14%, but operating earnings were approximately break-even versus $13 million a year earlier.
- Management attributed margin pressure to lower margins at acquired and international businesses and faster growth among lower-margin customers. Canada also faced unfavorable currency effects on U.S.-sourced products, inventory markdowns and higher freight costs. The weaker Canadian dollar and weakness in natural-resources-related markets affected the Canadian business.
- Q2 operating expenses included a $14 million noncash charge tied to transitioning the Netherlands retirement plan from defined benefit to defined contribution. Excluding this charge, Q2 operating expenses rose 4% and operating earnings rose 1%. Expenses also included a $7 million noncash write-off of capitalized software costs, primarily in Canada and Mexico. Grainger decided to implement one integrated North American IT system rather than separate instances.
Outlook, risks and other matters
- On July 17, Grainger revised 2014 sales-growth guidance to 5%–7%, from 5%–9%, and EPS guidance to $12.20–$12.60, from $12.10–$12.85. EPS guidance excludes the Q2 European retirement-plan transition charge.
- Management cited U.S. manufacturing-market strength but noted Canadian economic pressure, a weaker Canadian dollar, and softness in agriculture and mining. The filing identifies risks including economic and industry conditions, competition and pricing, customer or supply losses, currency and commodity fluctuations, technology or data-security disruptions, labor and transportation issues, weather and legal or regulatory matters.
- Grainger said resolution of its ordinary-course legal, administrative and governmental matters was not expected to materially adversely affect consolidated financial position or results. It reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
- The board declared a $1.08 quarterly dividend payable September 1, 2014. The company repurchased 333,615 shares during Q2. The filing states that adoption of the new revenue-recognition standard was still under evaluation and was not yet effective.
Important facts for investors to verify
- Whether the revised 2014 sales and EPS guidance was achieved, and how the excluded retirement-plan charge affects reported versus guided earnings.
- Whether gross-margin pressure and elevated growth, infrastructure and IT spending persist, particularly as sales mix and acquired businesses evolve.
- Whether Canada’s sales and profitability stabilize amid currency weakness and pressure in natural-resources-related markets.
- Whether operating cash flow recovers and supports capital spending, dividends and share repurchases without materially increasing debt.
- The ongoing cost and execution effects of the integrated North American IT-system decision and related software write-offs.