W.W. Grainger, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Financial statements are unaudited. Grainger distributes facilities-maintenance products and related services, primarily in North America, through branches, sales representatives, catalogs and online channels.
Financial results and position
| Metric | Q2 2009 | Change vs. Q2 2008 | Six months 2009 | Change vs. six months 2008 |
|---|---|---|---|---|
| Net sales | $1,533.3 million | -12.7% | $2,998.5 million | -12.3% |
| Gross profit / margin | $625.0 million / 40.8% | -11.5%; margin +0.6 percentage point | $1,254.4 million / 41.8% | -9.5%; margin +1.3 points |
| Operating earnings / margin | $153.9 million / 10.1% | -16.7%; margin down from 10.5% | $313.1 million / 10.4% | -15.5%; margin down from 10.8% |
| Net earnings | $92.5 million | -18.3% | $188.8 million | -17.0% |
| Diluted EPS | $1.21 | -14.8% | $2.46 | -13.1% |
| Operating cash flow | Not stated separately for the quarter | $232.6 million | Up from $118.7 million |
For Q2, pricing contributed approximately 6 percentage points to sales, offset by an 18-point volume decline; foreign exchange reduced sales by about 2 points and acquisitions added about 1 point. Management attributed improved gross margin mainly to inflation recovery, partly offset by product-category mix. Expenses fell more slowly than sales, weighing on operating earnings.
At June 30, cash and equivalents were $416.3 million; current assets were $2,025.0 million and current liabilities $581.6 million. Working capital was $1,443.4 million and the current ratio was 3.5, versus 2.8 at year-end 2008. Total debt was approximately $535.0 million, compared with $529.4 million at year-end; debt was 20.2% of total capitalization, versus 20.7%. Six-month investing cash outflow was $49.6 million and financing cash outflow $163.8 million. Capital spending on property, equipment and software was $53.5 million. The company repurchased $127.7 million of stock and paid $65.2 million in dividends during the first half.
Material changes and segment performance
- Severe industrial downturn drove lower demand: U.S. industrial production fell 13.6% year over year through June. Heavy manufacturing sales declined almost 30%; government sales rose in the low single digits.
- U.S. Q2 segment sales fell 12.3% and operating earnings fell 15.8%. Canada sales fell 18.8% in U.S. dollars; operating earnings fell 39.2%, with weaker margins also affected by foreign exchange, competition and customer mix.
- Other Businesses sales fell 8.6% in Q2 and recorded a $3.3 million operating loss, versus a $1.9 million loss a year earlier. China sales increased, while Mexico remained weak.
- Grainger acquired the remaining 50.1% of Asia Pacific Brands India for $1.2 million in June and began consolidating its results. The business had been written off in 2008 after losing a major supplier and facing financing difficulties; management reported recent operational improvement.
- Share repurchases were lower than in the prior-year period: 1.9 million shares in the first half versus 3.5 million. No shares were repurchased during Q2.
Outlook, commentary, risks and unusual items
- Management expected continued sales declines and increased pricing pressure through the remainder of 2009. It planned to expand the sales force and offer additional customer incentives to pursue market share, estimating costs of $25–$50 million for the year, more likely toward the lower end. Some operating-margin reduction was expected.
- The company eliminated 298 positions during the first half and recorded approximately $8 million in severance expense; its February plan had targeted 300–400 job eliminations.
- Grainger planned an August tender offer for MonotaRO shares, aiming to increase its existing 38.3% ownership to a majority stake. It expected to invest approximately $4.0 million; completion was anticipated in Q3. Majority ownership would trigger consolidation and could produce a significant one-time gain.
- A DOJ inquiry concerning compliance with GSA contract disclosure and pricing provisions remained unresolved. The company said an unfavorable outcome could involve significant payments, including potential treble damages and penalties, while maintaining that it complied in all material respects.
- The Board declared a quarterly dividend of $0.46 per share, payable September 1, 2009. Management cited risks including economic conditions, competitive pricing, supply disruptions, litigation, currency movements, technology and information-security disruptions, and transportation or facility disruptions.
Important facts for investors to verify
- Whether sales volumes and demand in manufacturing, contractor and reseller markets stabilize, and whether pricing pressure erodes margins.
- Whether planned sales-force and customer-incentive spending remains near the lower end of the $25–$50 million estimate and supports market-share gains.
- The status, potential financial exposure and resolution of the DOJ/GSA matter.
- Completion and accounting effects of the MonotaRO tender offer, including the size and timing of any one-time gain.
- Asia Pacific Brands’ recovery and the financial effects of consolidating its results.
- Cash generation, debt levels, capital spending, dividends and repurchases amid continued economic weakness.
- Comparability of reported EPS: Grainger adopted the two-class method for participating securities in 2009 and retrospectively restated prior-period EPS; the change did not affect net earnings or operating cash flow.