01—Abstract
Summary
Summary of the 10-K filed March 25, 1996. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 1995 10-K shows a company that grew sales and earnings strongly while keeping a conservative balance sheet. Net sales rose 8.4% to $3.28 billiona (about 8.8% on a daily basis, since 1995 had one fewer sales day), driven mainly by volume from new product additions, branch expansion, Zone Distribution Centers, and the National Accounts program, where daily sales rose about 22%. Selling price increases were modest at roughly 1.5%.
Net earnings climbed 46.0% to $186.7 millionb, or $3.64 per share, but that comparison flatters 1995 because 1994 absorbed a $49.8 million after-tax restructuring charge. Excluding that charge, earnings grew 5.1%, which trailed sales growth because operating expenses rose faster than sales. The balance sheet and cash flow profile is strong.
Working capital was $618.5 millionc with a current ratio of 2.4, and total debt was only 5% of shareholders' equity. Operating cash flow fell to $126.3 million from $191.4 million, largely due to higher inventory and receivables, and capital spending was $111.9 million. Dividends rose to $0.89 per share, and the company bought back no stock in 1995 or 1994, retaining about 3.6 million shares of repurchase authorization.
Management describes the company as a service business and points to the integration of Allied Safety and Bossert Industrial Supply, expected to finish in 1996, as the next step in its strategy. The filing also shows some risks to monitor. Inventory grew faster than sales, rising to $602.6 milliond, and operating cash flow weakened materially.
Operating expenses are rising from investment in infrastructure, freight, and benefits. Gross margin gains were slight, and mix shifted toward lower-margin National Accounts business. The company reported no material pending legal proceedings, and its auditor, Grant Thornton, issued a clean opinion.
02—Key points
Key Highlights
- Net sales grew 8.4% to $3,276.9 million in 1995, primarily volume-driven, with National Accounts daily sales up about 22%.
- Net earnings rose 46.0% to $186.7 million ($3.64 per share), but only 5.1% excluding the 1994 restructuring charge of $49.8 million after tax.
- Gross margin was essentially flat (up 0.06 percentage points excluding 1994 inventory write-downs), with operating expenses growing faster than sales at 3.0% (see Item 7).
- Operating cash flow declined to $126.3 million from $191.4 million, as inventories rose $82.7 million and receivables rose $31.6 million.
- Balance sheet remains conservative: total debt was 5% of equity, working capital was $618.5 million, and the current ratio was 2.4.
- Dividends increased to $0.89 per share from $0.78, and no shares were repurchased in 1995 or 1994.
- The company operates 344 branches and six Zone Distribution Centers, with 1995 capital expenditures of $111.9 million and the Bossert integration planned for completion in 1996.
03—Questions
Frequently Asked Questions
How much of the 1995 earnings increase was real operating improvement versus a easy comparison?
Much of the reported 46% increase reflects the absence of the 1994 restructuring charge, which reduced 1994 net earnings by $49.8 million. Excluding that charge, net earnings grew 5.1%, which was less than the 8.4% sales growth, because operating expenses rose faster than sales.
Why did operating cash flow drop in 1995 even though earnings rose?
Operating cash flow fell to $126.3 million from $191.4 million mainly because of working capital investment. Inventories increased $82.7 million, accounts receivable increased $31.6 million, and trade payables declined $21.5 million, partly offset by higher earnings.
What is driving sales growth at Grainger?
Sales growth was primarily volume-driven, supported by new product additions, branch expansion, the addition of Zone Distribution Centers, and the National Accounts program. Selling prices rose only about 1.5%, and all geographic regions contributed.
How strong is the company's financial position and what are its capital return policies?
The company has a low debt load, with total debt at 5% of shareholders' equity, and holds $618.5 million in working capital. It paid $45.2 million in dividends in 1995, raising the annual rate to $0.89 per share, and retained authorization to repurchase about 3.6 million shares, though it made no repurchases in 1995 or 1994.
Are there any significant legal, customer, or supplier concentration risks?
Management reports no material pending legal proceedings. Customer concentration is low, since the largest customer, General Motors, accounted for 0.7% of sales. The largest supplier accounted for 11.0% of purchases, and management reports no significant difficulty with supply sources.
04—Continue