W.W. Grainger, Inc. — 2009 Form 10-K
Business context and reporting period: Grainger distributes facilities-maintenance products and related services through branches, distribution centers, catalogs and online channels. Its reportable segments are the United States and Canada, with additional operations in Japan, Mexico, India and other markets. This 10-K covers the fiscal year ended December 31, 2009; the fourth-quarter figures below are unaudited.
Key financial results
| Metric | FY 2009 | FY 2008 | Q4 2009 | Q4 2008 |
|---|---|---|---|---|
| Net sales | $6,222.0 million | $6,850.0 million | $1,633.8 million | $1,592.7 million |
| Gross profit / margin | $2,598.5 million / 41.8% | $2,808.2 million / 41.0% | $684.2 million / 41.9% | $680.1 million / 42.7% |
| Operating earnings / margin | $665.2 million / 10.7% | $782.7 million / 11.4% | $165.4 million / 10.1% | $180.6 million / 11.3% |
| Net earnings attributable to Grainger | $430.5 million | $475.4 million | $97.1 million | $107.9 million |
| Diluted EPS | $5.62 | $5.97 | $1.27 | $1.37 |
| Cash from operating activities | $732.4 million | $530.1 million | Not stated | Not stated |
Annual sales declined 9.2%, largely due to lower volume amid the economic downturn; price increases partly offset that decline. Gross margin improved year over year as price increases exceeded product-cost increases, but operating earnings fell 15.0% as sales contracted and operating expenses declined more slowly. Annual net earnings fell 9.4%. In Q4, sales rose about 2.6% year over year, while operating earnings, net earnings and diluted EPS declined.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $459.9 million at year-end, versus $396.3 million a year earlier. Working capital was $1,354.7 million and the current ratio was 2.7.
- Total debt was approximately $525.4 million, including current maturities and short-term debt; long-term debt excluding current maturities was $437.5 million. Debt was primarily variable-rate. Debt to total capitalization was 19.1%, and the company reported $250 million of available committed credit lines.
- Operating cash flow increased to $732.4 million, supported in part by a $175.3 million cash source from lower inventories. Investing activities used $262.6 million, including $121.8 million for acquisitions and other investments. Financing activities used $413.5 million.
- Capital expenditures were $142.4 million on the cash-flow statement. Grainger forecast 2010 capital spending of $150 million to $175 million, funded from operating cash flow.
- Grainger repurchased 4.5 million shares for $372.7 million during 2009 and paid $134.7 million in dividends. The annual dividend per share increased to $1.78 from $1.55.
Material changes and unusual items
- Grainger acquired businesses in the United States and Canada and obtained control of operations in India and Japan. The acquisitions expanded goodwill and intangibles; purchase-price allocations were preliminary.
- Consolidating MonotaRO after increasing ownership to 53% generated a one-time, noncash pretax gain of $47.3 million ($28 million after tax). This materially boosted other income and partly cushioned the annual earnings decline.
- Other businesses’ sales rose 47.7%, principally reflecting the acquired Japan and India operations; the segment continued to report an operating loss of $11.6 million.
- The company recorded $9.0 million of impairment charges on certain long-lived assets. The 2009 EPS presentation also changed to the two-class method; comparative 2008 and 2007 EPS were restated.
Outlook, risks and contingencies
Management expected 2010 sales growth of 6% to 10%, citing acquisitions, favorable foreign exchange and organic growth. It expected higher operating expenses than in 2009 as acquisition costs and some compensation expenses returned, partly offset by savings from changes to paid time off. Management noted early signs of economic improvement but expected job growth to lag the recovery. The product-line expansion program, which added approximately 234,000 U.S. products since 2006, was expected to remain a growth driver.
- Principal business risks include economic weakness, competition, commodity-cost volatility, product shortages, information-system disruption, foreign-exchange movements, employee costs and the execution and integration risks of acquisitions.
- Grainger faced asbestos and silica litigation involving approximately 1,900 plaintiffs as of February 2, 2010. Management did not expect a material adverse effect, citing dismissals, potential indemnification and insurance, but outcomes remain uncertain.
- DOJ discussions concerning the GSA contract and USPS investigations into two contracts’ pricing compliance remained unresolved. The company disputed noncompliance and did not expect a material effect on financial position, but an unfavorable outcome could involve significant payments, including potential False Claims Act damages and penalties.
- Market-risk disclosures quantify sensitivity to variable interest rates and foreign exchange. A 1 percentage-point rate increase was estimated to reduce 2009 net earnings by $3.3 million; a 10% stronger U.S. dollar was estimated to reduce net earnings by $0.9 million.
Important facts for investors to verify
- Whether the forecast 6%–10% sales growth was achieved, and how much came from acquired sales versus organic growth.
- Underlying earnings and margins excluding the $47.3 million MonotaRO remeasurement gain; also assess the Q4 margin decline.
- Acquisition integration, preliminary purchase accounting, and the performance and impairment risk of acquired goodwill and intangibles.
- Developments and any recorded reserves or subsequent payments related to GSA/USPS pricing matters and asbestos/silica litigation.
- Debt maturities, variable-rate exposure, cash conversion and the sustainability of repurchases and dividend growth.