W.W. Grainger, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Grainger distributes maintenance, repair and operating supplies and related services, primarily in the United States and Canada, with additional international operations. Comparisons are with Q1 2013 unless noted.
Financial performance
| Metric | Q1 2014 | Prior period / change |
|---|---|---|
| Net sales | $2.386 billion | $2.280 billion; up 4.6% (reported as 5% in MD&A) |
| Gross profit / margin | $1.076 billion / 45.1% | $1.032 billion / 45.2%; margin down 0.1 percentage point |
| Operating earnings / margin | $354.3 million / 14.9% | $343.3 million / 15.1%; earnings up 3.2% |
| Net earnings attributable to Grainger | $216.7 million | $211.8 million; up 2.3% |
| Diluted EPS | $3.07 | $2.94; up 4% |
| Operating cash flow | $167.5 million | $176.4 million |
| Cash and cash equivalents | $375.6 million | $430.6 million at Dec. 31, 2013 |
| Total debt | $574.7 million | $542.8 million at Dec. 31, 2013; debt-to-capitalization ratio 14.7%, versus 14.0% |
Cash used in investing was $52.2 million, including $65.7 million of additions to property, equipment and capitalized software. Cash used in financing was $165.6 million, including $150.6 million for treasury-stock purchases and $64.7 million of dividends. Working capital was $1.742 billion, with a working-capital assets-to-liabilities ratio of 2.7, up from 2.5 at year-end.
Material changes and drivers
- Sales growth reflected volume (+4%), acquisitions (+2%) and price (+1%), partly offset by foreign exchange (-2%). There were 63 selling days in both periods; 2014 results did not include Good Friday, unlike 2013.
- Gross margin eased mainly because acquired businesses and faster growth among lower-margin customers diluted margins; price inflation exceeding cost inflation partly offset the pressure. Operating expenses rose 4.8%, including $31 million of incremental growth and infrastructure spending and acquisition-related costs.
- United States segment sales were $1.897 billion, up 7%, and operating earnings were $353.7 million, up 7%. Canada sales were $254.3 million, down 10% in reported dollars and 2% in local currency; operating earnings fell 35% to $21.3 million. Other-business sales were $274.9 million, up 11%, while operating earnings were essentially flat at $8.5 million.
- Operating cash flow declined year over year, primarily reflecting lower trade payables tied to inventory-purchase timing and a lower inventory investment, partly offset by higher income-tax liabilities. The company attributed higher financing cash use mainly to increased share repurchases.
Outlook, risks and notable items
- On April 16, 2014, Grainger reiterated full-year 2014 guidance: sales growth of 5%–9% and EPS of $12.10–$12.85.
- Management cited improving U.S. industrial production and mid-single-digit sales growth in heavy and light manufacturing. In Canada, weaker commodity prices and lower-than-expected job growth pressured a business with significant natural-resources exposure.
- The Board declared a quarterly dividend of $1.08 per share on April 30, up 16% from $0.93; the dividend is payable June 1, 2014. The company repurchased 614,915 shares in Q1 at an average $244.84 per share. The Board restored authorization to repurchase up to 10 million shares effective April 30.
- At March 31, $40 million of commercial paper was outstanding for working capital; it matured and was paid in full on April 1.
- Management said routine legal and administrative proceedings, including government-contract pricing inquiries or audits, were not expected to have a material adverse effect. Forward-looking risks include economic conditions, competition and pricing, supply disruption, technology and data-security issues, currency and commodity volatility, litigation and regulatory matters, labor, transportation, facilities and weather disruptions.
Important facts for investors to verify
- Whether sales and EPS remain within the reiterated full-year guidance, particularly given margin pressure and uneven regional performance.
- Whether U.S. growth initiatives and acquisitions generate returns that offset higher operating expenses and lower acquired-business margins.
- Whether Canadian sales and profitability stabilize amid resource-sector weakness, foreign-exchange effects and higher local operating costs.
- Cash-flow and working-capital trends, including the effects of inventory purchasing, profit-sharing payments, capital spending and share repurchases.
- Developments in legal, governmental or regulatory proceedings and the company’s exposure to currency, commodity, supply-chain and technology risks.