W.W. Grainger, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Grainger distributes maintenance, repair and operating supplies, primarily in the United States and Canada, with international operations and online businesses.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $9.973 billion | $9.965 billion | +0.1% |
| Gross profit / margin | $4.231 billion / 42.4% | $4.314 billion / 43.3% | Gross profit -1.9%; margin -0.9 percentage point |
| Operating earnings / margin | $1.300 billion / 13.0% | $1.347 billion / 13.5% | Operating earnings -3.5% |
| Net earnings attributable to Grainger | $769 million | $802 million | -4.1% |
| Diluted EPS | $11.58 | $11.45 | +1.1%; adjusted EPS was $11.94 vs. $12.26 |
| Cash from operations | $990 million | $960 million | +$30 million |
| Capital expenditures | $374 million | $387 million | -$13 million |
Operating cash flow less capital expenditures was approximately $616 million in 2015. Cash and cash equivalents were $290 million at year-end, compared with $227 million a year earlier. Working capital was $1.794 billion; the current ratio was 2.5 in both years.
Total debt on the balance sheet was approximately $1.989 billion at year-end, versus approximately $484 million in 2014. Debt as a percentage of total capitalization rose to 45.8% from 12.9%, primarily following the 2015 debt issuance. Grainger paid $306 million in cash dividends and repurchased approximately $1.4 billion of stock. The annual dividend per share was $4.59.
Fourth-quarter results
In the quarter ended December 31, 2015, sales were $2.478 billion versus $2.511 billion a year earlier (-1.3%). Operating earnings were $252 million versus $267 million (-5.6%); net earnings attributable to Grainger were $145 million versus $149 million (-2.4%). Diluted EPS was $2.30, compared with $2.14.
Material changes and drivers
- U.S. sales were essentially flat at $7.963 billion; segment operating earnings fell 5% to $1.372 billion. Lower margins reflected price deflation exceeding cost deflation and a greater share of lower-margin customers.
- Canada sales fell 17% to $891 million, including a 5% decline in local currency; operating earnings fell 69% to $27 million. Weak oil and gas markets, currency effects, lower sales and margin pressure weighed on results.
- Other-business sales grew 19% to $1.406 billion, including Cromwell, acquired in September for approximately $464 million. Segment operating earnings improved to $48 million from a $38 million loss in 2014.
- eCommerce sales were reported as $4.133 billion, up 16% and 41% of sales in MD&A. The U.S. business reported $3.275 billion, also up 16% and 41% of its sales. The filing’s accounting policy section separately states eCommerce was 43% of consolidated revenue; investors should verify the definition or scope behind this difference.
Outlook, commentary and risks
- Management reiterated 2016 guidance of sales growth from -1% to 7% and diluted EPS of $10.80 to $13.00. Planned 2016 capital expenditures were $300 million to $350 million.
- Grainger planned continued investment in supply chain, eCommerce, information systems, sales productivity and inventory management, alongside restructuring and cost reductions. It announced plans to close 55 additional U.S. branches and three co-located contact centers in 2016, following 49 U.S. and 16 Canadian branch closures in 2015.
- 2015 diluted EPS included a net $0.36 per-share expense from U.S., Canadian and international restructuring, partly offset by a tax benefit. A clean-energy investment generated a reported $0.09 per-share earnings benefit and reduced the effective tax rate.
- Principal risks include economic weakness and lower industrial or energy-sector demand; competitive pricing and margin pressure; foreign-exchange and commodity volatility; supply-chain, logistics and systems disruptions; cybersecurity and privacy incidents; acquisition integration and potential goodwill impairment; and regulatory, tax and litigation exposure. Management identified Fabory goodwill as sensitive to assumptions, though its 2015 impairment test showed fair value exceeded carrying value by 15%.
- Grainger disclosed asbestos and silica litigation involving approximately 603 plaintiffs at year-end and stated it did not expect the matters, individually or together, to materially adversely affect consolidated results. It also reported approximately $66 million of noncurrent tax uncertainty liabilities and noted pending tax audits.
Most important facts for investors to verify
- Whether the 2016 sales and EPS guidance was achieved, and how results compare with the wide sales-growth range.
- Whether gross-margin pressure and weakness in Canada continued, particularly given exposure to energy and industrial markets.
- The reconciliation of the filing’s 41% versus 43% eCommerce revenue disclosures and the associated revenue definitions.
- Debt and capital-return plans: the filing described a planned $3 billion share repurchase program partly funded by up to $1.8 billion of debt over three years; assess leverage and interest costs alongside repurchases and dividends.
- Integration and performance of Cromwell and other online businesses, including whether acquisition-related goodwill and intangibles remain supportable.
- Developments in litigation, tax uncertainties and restructuring costs, and any differences between reported and adjusted earnings.