W.W. Grainger, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Grainger distributes maintenance, repair and operating products and services, primarily in North America, Europe and Japan. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2.799 billion | $2.766 billion | +1% reported; +3% on a daily basis |
| Gross profit / margin | $1.095 billion / 39.1% | $1.092 billion / 39.5% | Margin down 0.35 percentage point |
| SG&A | $732 million | $757 million | Down 3% |
| Operating earnings / margin | $363 million / 13.0% | $335 million / 12.1% | +8% |
| Net earnings attributable to Grainger | $253 million | $232 million | +9% |
| Diluted EPS | $4.48 | $4.07 | +10% |
| Operating cash flow | $127 million | $147 million | Down $20 million |
| Capital spending | $60 million | $49 million | — |
| Cash and cash equivalents at quarter-end | $392 million | $302 million | Prior-year quarter-end |
Liquidity, debt and capital allocation
- At March 31, 2019, total current assets were $3.508 billion and current liabilities were $1.462 billion; the current ratio was 2.6, versus 2.4 at December 31, 2018. Management reported working capital of $2.086 billion, excluding specified cash, debt and lease-liability items.
- Debt comprised $52 million of short-term debt, $82 million of current maturities and $2.077 billion of long-term debt, net of issuance costs and discounts. Operating lease liabilities totaled $195 million.
- Total debt, including lease liabilities, was 52.8% of total capitalization, compared with 51.5% at year-end 2018.
- Financing cash outflow was $221 million, including $135 million of treasury-stock purchases and $76 million of cash dividends. The quarterly dividend was $1.36 per share, up from $1.28.
Material changes and drivers
- Daily sales growth reflected volume growth of 3.0% and price growth of 1.5%, offset by foreign exchange of 1.0% and a 0.5% impact from a U.S. cash-to-accrual transition. The quarter had 63 sales days versus 64 in Q1 2018.
- U.S. segment sales increased 2% reported and 3.5% daily; operating earnings rose 2% to $364 million. Growth reflected market-share gains and improved demand, with commercial end-market sales up high single digits.
- Canada sales fell 25% reported and 24% daily to $136 million. Volume was down 24%, partly reflecting branch-footprint reductions and sales-coverage optimization. The segment reported a $5 million operating loss, improved from a $20 million loss.
- Other businesses’ sales increased 8% reported and 9.5% daily, led by endless-assortment growth. Operating earnings fell to $30 million from $36 million, primarily due to investment to support long-term growth.
- Consolidated SG&A declined 3%, aided by prior cost-reduction actions in Canada. Gross margin fell, driven mainly by other businesses and the timing of the North American sales meeting. Lower other expense also supported earnings; the prior-year period included clean-energy investment losses.
- The effective tax rate rose to 25.4% from 21.6%, primarily because of lower stock-compensation tax benefits and the absence of clean-energy tax benefits.
Outlook, risks and unusual items
- The filing provides no specific company revenue or earnings guidance. Management described U.S. strategy priorities as building advantaged MRO solutions, differentiated sales and services, and customer service.
- Management cited forecasts for slower but stable U.S. business investment, industrial production, exports and GDP in 2019. Canadian investment, exports, industrial production and GDP were also forecast to slow, with weakness in oil prices among the factors noted.
- Operating cash flow declined mainly because of higher payments for employee variable compensation and benefits. Investing outflows increased with higher capital additions and lower asset-sale proceeds.
- Grainger adopted lease accounting on January 1, 2019, recording approximately $208 million of right-of-use assets and $205 million of lease liabilities at adoption; management said adoption did not materially affect earnings or cash flows.
- Restructuring actions were substantially complete. Q1 restructuring costs were approximately $2 million, and the $35 million reserve was primarily expected to be paid during 2019.
- Management said routine legal and administrative proceedings were not expected to have a material adverse effect. Disclosed risks include economic and market conditions, competitive pricing, supply or technology disruptions, currency and commodity volatility, labor and facility disruptions, cybersecurity, regulatory matters and litigation.
Key facts for investors to verify
- Whether U.S. and endless-assortment growth can offset continued weakness in Canada, and whether Canada’s restructuring and coverage changes stabilize sales and margins.
- Whether reported margin pressure and spending in other businesses affect future earnings as growth initiatives continue.
- How working-capital movements, incentive payments and capital spending affect cash generation over the rest of the year.
- Debt and lease obligations, the rising debt-to-capitalization measure, and continued buybacks and dividends relative to internally generated cash.
- The filing’s stated market forecasts and risk factors; it does not give company-specific financial guidance.