W.W. Grainger, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Financial figures below are in millions of dollars unless stated otherwise.
Business context
Grainger distributes maintenance, repair and operating supplies and related services, primarily in the United States and Canada, with smaller operations in Asia and Latin America. It serves customers through branches, distribution centers, sales representatives, catalogs and e-commerce. The company acquired four businesses and took an 80% interest in a Colombian joint venture during 2010.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $7,182.2 | $6,222.0 | +15.4% |
| Gross profit / margin | $3,005.7 / 41.8% | $2,598.5 / 41.8% | +15.7%; margin unchanged |
| Operating earnings / margin | $860.5 / 12.0% | $665.2 / 10.7% | +29.4% |
| Net earnings attributable to Grainger | $510.9 | $430.5 | +18.7% |
| Diluted EPS | $6.93 | $5.62 | +23.3% |
| Operating cash flow | $596.4 | $732.4 | −$136.0 |
Sales growth reflected approximately 10 percentage points from volume, 4 from acquisitions and 2 from foreign exchange. Daily sales rose 15.9% despite one fewer selling day. The U.S. segment’s sales increased 10.6%; Canada’s rose 26.1% (14.9% in local-currency daily sales); other businesses’ sales increased 136.1%, largely reflecting consolidation of Japan and Colombia and growth in other markets.
Operating cash flow fell mainly because higher sales drove increases in receivables and inventory. Cash and cash equivalents were $313.5 at year-end, down from $459.9. Working capital was $1,368.8 and the current ratio was 2.6, versus 2.7 in 2009. Long-term debt, less current maturities, was $420.4; current maturities were $31.1 and short-term debt was $42.8. Debt was 17.8% of total capitalization, down from 19.1%. Available committed credit lines were $400.0.
Capital expenditures were $131.5. Grainger repurchased 4.6 million shares for $504.8 and paid $152.3 in cash dividends. The annual dividend per share was $2.08, up from $1.78.
Fourth-quarter results
For the quarter ended December 31, 2010, sales were $1,826.7, compared with $1,633.8 in 2009; net earnings attributable to Grainger were $132.2 versus $97.1, and diluted EPS was $1.83 versus $1.27.
Comparability, outlook and risks
2010 earnings included a non-cash $0.28-per-share benefit from a paid-time-off policy change and a $0.15-per-share tax expense related to healthcare legislation, for a net benefit of $0.13 per share. 2009 included a $0.37-per-share non-cash gain related to MonotaRO. Excluding these items, management reported 2010 net earnings growth of 29.4% and EPS growth of 29.5%.
As of January 25, 2011, management forecast full-year 2011 sales growth of 5%–9% and EPS of $7.15–$7.90. It expected growth to moderate from 2010 because of tougher comparisons and the nonrecurring contribution from Gulf oil-spill cleanup products. Planned investments included sales staffing, product breadth and availability, e-commerce and international expansion. Management projected 2011 capital expenditures of $175–$200 and share repurchases of $210–$265.
Key risks include economic weakness, competitive pressure, commodity and fuel costs, supply interruptions, information-system or data-security failures, foreign exchange exposure, and integration or impairment risks from acquisitions. The company disclosed ongoing DOJ discussions concerning GSA contract pricing and disclosure, and USPS investigations concerning two contracts. Possible losses could not be estimated; Grainger said it believed it had complied in all material respects, while noting that an unfavorable resolution could require significant payments. Asbestos and silica lawsuits involved approximately 1,900 plaintiffs as of January 24, 2011; the company expected no material adverse effect, citing insurance and potential indemnification.
Important facts for investors to verify
- Whether the 2011 sales and EPS outlook was achieved, and how much reported growth depended on volume, acquisitions and currency.
- Whether operating cash flow recovered as receivables and inventory expanded with sales.
- Whether margins and Canadian operating earnings held up as operating expenses rose faster than local-currency sales.
- Developments and potential financial exposure in the GSA and USPS pricing matters; the filing provides no reliable loss estimate.
- Whether acquisitions and international expansion generated expected returns without goodwill or intangible-asset impairments.
- The sustainability of large share repurchases and dividend growth alongside planned capital spending and debt repayment.