W.W. Grainger, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone Q4 report; selected quarterly figures are included. Grainger distributes maintenance, repair and operating supplies through branches, sales representatives, catalogs and eCommerce, primarily in the United States and Canada.
Financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $9.438 billion | $8.950 billion | +5.4% |
| Gross profit / margin | $4.136 billion / 43.8% | $3.916 billion / 43.8% | Profit +5.6%; margin flat |
| Operating earnings / margin | $1.297 billion / 13.7% | $1.131 billion / 12.6% | +14.7% |
| Net earnings attributable to Grainger | $797 million | $690 million | +15.5% |
| Diluted EPS | $11.13 | $9.52 | +16.9% |
| Cash from operating activities | $986 million | $816 million | +$170 million |
| Capital expenditures | $272 million | $250 million | +$22 million |
Gross margin held steady as price increases exceeding product cost increases were offset by lower margins at acquired businesses and faster growth among lower-margin customers. Operating earnings benefited from sales growth and expense growth below the sales rate. Management’s adjusted diluted EPS, a non-GAAP measure, was $11.52 in 2013 versus $10.43 in 2012, excluding specified unusual items.
Cash, debt and liquidity
Year-end cash was $431 million, total debt was approximately $543 million, and working capital was $1.621 billion, versus $1.604 billion in 2012. The current ratio was 2.5, compared with 2.6. Debt was 14.0% of total capitalization, down from 15.3%. Operating cash flow less capital expenditures was approximately $714 million. Cash used in investing was $399 million, including $154 million net cash paid for acquisitions; cash used in financing was $591 million, including $438 million of treasury-share purchases and $255 million of dividends. The annual dividend paid per share rose to $3.59 from $3.06.
Material changes and Q4 performance
- U.S. sales increased 7% to $7.414 billion; Canada sales rose 1% to $1.114 billion, or 4% in local currency; other-business sales rose 3% to $1.040 billion. Foreign exchange reduced reported growth in Canada and other businesses.
- eCommerce revenue was $2.5 billion, up 16%, and represented 33% of consolidated revenue.
- Grainger acquired E&R Industrial Sales and Safety Solutions in 2013 and divested four direct-marketing brands on December 31, 2013.
- Q4 sales were $2.377 billion versus $2.226 billion a year earlier; operating earnings were $257 million versus $258 million; net earnings attributable to Grainger were $157 million versus $156 million; diluted EPS was $2.20 versus $2.17.
- FY2013 included $26 million of impairment expense, principally for Grainger Lighting Services and Brazil, and $10 million of restructuring expense related mainly to Europe and China. The filing reports a combined $0.39-per-share impact. FY2012 included a $76 million GSA/USPS settlement expense and other charges, with a combined $0.91-per-share impact.
Outlook, risks and contingencies
On January 24, 2014, Grainger reduced its 2014 guidance to sales growth of 5%–9% (from 6%–10%) and EPS of $12.10–$12.85 (from $12.25–$13.00), primarily because of unfavorable foreign exchange and the brand divestitures. Planned 2014 capital expenditures were $375 million–$425 million, focused on supply chain, technology, eCommerce and sales initiatives.
Key risks cited include economic weakness, competition and pricing pressure, commodity and freight-cost volatility, product or supply-chain disruption, cybersecurity and information-system failures, foreign-exchange fluctuations, acquisition integration and impairment risk, and regulatory or litigation outcomes. Fabory’s $134 million goodwill balance had only a 17% fair-value cushion over carrying value, and the filing warns that continued weakness in Europe or changed assumptions could lead to impairment. Unresolved items include a $6 million reserve for certain GSA-related claims and approximately $44 million of tax uncertainty liabilities and interest; the timing of the latter cannot be reliably estimated. Asbestos and silica litigation involved approximately 1,929 plaintiffs as of January 23, 2014; management did not expect these matters to materially adversely affect consolidated results or financial position. The GSA/USPS settlement amounts were paid.
Management and the independent auditor concluded internal control over financial reporting was effective at year-end. Ernst & Young issued an unqualified opinion on the financial statements.
Investor verification priorities
- Track whether 2014 sales and EPS meet the revised guidance, particularly after foreign-exchange effects and the divestitures.
- Assess the durability of gross margins amid customer mix, acquisition-related margins, pricing and cost changes.
- Monitor cash conversion and capital spending against the $375 million–$425 million 2014 plan, alongside buybacks and dividends.
- Review impairment assumptions and performance at Grainger Lighting Services, Brazil and Fabory, including Fabory’s limited valuation headroom.
- Follow the remaining GSA-related claims, tax examinations and uncertain tax positions, and asbestos/silica litigation developments.