W.W. Grainger, Inc. — Q1 2010 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2010, compared with Q1 2009. Grainger distributes maintenance, repair and operating supplies, primarily in the U.S. and Canada, with expanding operations elsewhere. It reported U.S. and Canada as its two reportable segments.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $1,672.4 million | $1,465.2 million | +14.1% |
| Gross profit / margin | $705.7 million / 42.2% | $629.4 million / 43.0% | Profit +12.1%; margin down 0.8 percentage point |
| Operating earnings / margin | $182.9 million / 10.9% | $159.2 million / 10.9% | +14.9% |
| Net earnings attributable to Grainger | $99.2 million | $96.4 million | +2.9% |
| Diluted EPS | $1.31 | $1.25 | +4.8% |
| Operating cash flow | $113.2 million | $42.5 million | Increased $70.7 million |
Cash and equivalents were $548.5 million at March 31, 2010, versus $459.9 million at year-end 2009. Working capital was $1,493.9 million and the current ratio was 3.0, up from 2.7. Debt totaled approximately $517.5 million, including short-term debt and current maturities; debt as a percentage of total capitalization was 18.0%, versus 19.1% at year-end. Cash dividends paid were $0.46 per share. The Board later declared a $0.54 quarterly dividend, a 17% increase.
Material changes and management commentary
- Management attributed sales growth to approximately 6 percentage points from volume, 5 points from acquisitions and 3 points from foreign exchange. Sales rose across customer sectors except contractors, which declined in the mid-single digits. Manufacturing-sector sales increased in the low double digits.
- Gross margin declined mainly because international businesses grew faster and large-customer sales, generally at lower margins, increased. Management expected both trends to continue.
- Operating expenses rose 11.2%, slower than sales, reflecting higher sales commissions and bonus/profit-sharing accruals, partly offset by a $10.3 million benefit from a paid-time-off policy change.
- Q1 included an $11.2 million noncash tax charge, or $0.15 per share, from writing down a deferred tax asset following healthcare legislation. The paid-time-off benefit contributed $0.08 per share. Excluding both items, management reported EPS of $1.38, up 10.4% year over year.
- U.S. segment sales increased 7.6%; operating earnings increased 16.4%. Canada sales increased 35.0% in U.S. dollars and 12.7% in local-currency daily sales, while local-currency operating earnings declined 11.6%. Other Businesses sales rose sharply, principally reflecting inclusion of Japan following the 2009 acquisition of a controlling interest.
- Operating cash flow improved, while investing used $22.9 million and financing used $7.2 million. Lower share repurchases were the main reason financing cash use was substantially below Q1 2009.
Outlook, risks and contingencies
On April 14, 2010, Grainger raised 2010 sales growth guidance to 9%–12%, from an initial 6%–10%, and EPS guidance to $5.70–$6.10. The EPS range excludes the healthcare-legislation charge and paid-time-off benefit described above. Management cited improving U.S., Canadian and Mexican economies, while cautioning that job growth was expected to lag the recovery.
DOJ discussions concerning alleged pricing and disclosure issues under the GSA contract were ongoing. USPS investigations concerned pricing compliance under two contracts; substantive discussions had not begun. The company said it believed it had complied in all material respects and did not expect the matters to materially adversely affect its financial position, but an unfavorable outcome could involve significant payments, including potential False Claims Act treble damages and penalties. Other stated risks include economic and market conditions, competition, product costs, customer or supplier disruption, currency and commodity volatility, litigation, regulatory changes, IT/data-security disruption, labor, transportation and catastrophic events.
Important facts for investors to verify
- Whether sales growth and raised full-year guidance are sustained, and how much reflects organic volume, acquisitions and foreign exchange.
- Whether lower gross margins—especially from international and large-customer mix—persist, and whether Canadian operating performance improves.
- The comparability and repeatability of EPS after the one-time tax charge and paid-time-off benefit.
- Updates to the GSA and USPS matters, including any settlement, litigation or financial exposure.
- Cash-flow and working-capital trends, debt levels, and the ability to fund investment and dividends.