W.W. Grainger, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited, with comparison to Q1 2014. Grainger distributes maintenance, repair and operating supplies and related services, primarily in the United States and Canada, with other international operations.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2,439.7 million | $2,385.6 million | +2.3% |
| Gross profit / margin | $1,093.7 million / 44.8% | $1,076.0 million / 45.1% | Profit +1.7%; margin down 0.3 percentage point |
| Operating earnings / margin | $351.2 million / 14.4% | $354.3 million / 14.9% | Earnings down 0.9% |
| Net earnings attributable to Grainger | $211.0 million | $216.7 million | Down 2.6% |
| Diluted EPS | $3.07 | $3.07 | Flat |
| Cash from operations | $156.2 million | $167.5 million | Down $11.3 million |
| Capital expenditures | $99.5 million | $65.7 million | Higher, mainly supply-chain investment |
Sales growth included 4% volume, 1% acquisition contribution and a 3% foreign-exchange impact. Operating expenses rose 2.9% to $742.5 million, including $33 million of incremental growth and infrastructure spending. The effective tax rate was 38.4%, versus 37.7%.
Segments
- United States: Segment sales were $1,971 million, up 4%; operating earnings increased 4% to $366 million. Growth initiatives and sales to Zoro supported sales, while lower margins on intersegment sales to Zoro weighed on gross margin.
- Canada: Segment sales were $235 million, down 8% in U.S. dollars but up 3% in local currency; operating earnings fell 56% to $9 million. Foreign exchange, oil-sector weakness, lower margins at acquired WFS and higher operating costs were factors.
- Other businesses: Sales were $298 million, up 8%; operating earnings were $10 million versus $8 million. Zoro and Japan improved, partly offset by European startup and restructuring costs and the Brazil shutdown.
Financial position and liquidity
At March 31, 2015, cash was $243.4 million. Total debt, including short-term debt, current maturities and long-term debt, was approximately $628.0 million, versus $484.8 million at December 31, 2014. Debt was 16.4% of total capitalization, up from 12.9%. Short-term debt was $231.5 million, including $195 million of commercial paper. The company reported working capital of $1.802 billion and a working-capital assets-to-liabilities ratio of 2.7, compared with $1.697 billion and 2.4 at year-end.
Operating cash flow remained the primary liquidity source. Cash used in investing was $92.2 million; cash used in financing was $40.0 million, including $150.0 million of treasury-stock purchases and $73.4 million of dividends. The committed credit line was increased after quarter-end from $600 million to $900 million and supports commercial paper.
Outlook, developments and risks
- On April 16, 2015, Grainger cut 2015 sales-growth guidance from 3%–7% to 1%–4% and EPS guidance from $12.60–$13.60 to $12.25–$12.95. Management cited slower expected macroeconomic growth, planned sales-force investment and additional planned repurchases.
- The company planned to repurchase an additional $1 billion of shares in 2015 beyond the previously announced $400 million, as part of a broader $3 billion repurchase plan. It planned to issue $1.8 billion in long-term debt over three years, including $1 billion expected in June 2015, and projected debt/EBITDA of 1.0–1.5x after the new borrowing.
- Q1 diluted EPS included $0.02 of Brazil shutdown charges and $0.01 of European restructuring costs. European restructuring expenses were expected to continue through the second half of 2015.
- Management highlighted pressure from lower oil and commodity prices, particularly in Alberta and Canadian oil and gas markets; a stronger U.S. dollar; and U.S. export and business-investment weakness. Other stated risks include competition and pricing, supply disruption, technology and data-security issues, litigation and regulatory matters, currency and commodity volatility, labor and transportation disruptions, and economic conditions.
- The company said resolution of its routine legal and administrative matters was not expected to have a material adverse effect on consolidated financial position or results. The board declared a quarterly dividend of $1.17 per share after quarter-end, an 8% increase from $1.08.
Most important facts for investors to verify
- Whether sales and EPS performance meet the revised 2015 guidance, especially given macroeconomic and foreign-exchange headwinds.
- Whether sales-force and other growth investments improve growth and margins enough to offset higher expenses and Q1 margin contraction.
- Canadian performance and exposure to oil and gas, alongside the effects of currency movements and WFS integration.
- Execution and funding of the repurchase and debt plans, including the impact on leverage, interest costs and liquidity.
- Progress and remaining costs for the Brazil shutdown and European restructuring.