What drove Grainger's revenue growth in 1998?

Sales rose 4.9% to $4.34 billion, primarily from volume gains tied to new product additions, National Accounts, Integrated Supply, and direct marketing programs. Selling price increases were about 0.7%. Weakness at the Canadian subsidiary AGI, partly due to an unfavorable exchange rate and weak resource-sector demand, offset some of that growth.

Why did earnings grow more slowly than sales?

Operating expenses grew faster than sales (8.0% versus 4.9%), reaching 27.4% of sales. Contributors included losses from developing business ventures (Integrated Supply and Mexico), Internet and Custom Solutions investments, roughly $15 million of higher data processing costs tied to Year 2000 and the new enterprise system, lower interest income, higher interest expense, and foreign currency losses in Mexico.

Is Grainger's balance sheet and liquidity sound?

Yes, by the company's assessment. Working capital was $542 million, the current ratio was 1.8, and operating cash flow was $335 million, which covered capital expenditures of $167 million and dividends of $57 million. Debt increased to 18% of equity, largely due to share repurchases and short-term borrowings, but management characterizes the company as maintaining a low debt ratio.

What are the main risks flagged in the filing?

The filing highlights Year 2000 compliance risk, including failures by suppliers, customers, or other companies whose systems interact with Grainger's, which could have a material adverse effect. It also notes losses in newer business units (Integrated Supply, Mexico), exposure to Canadian dollar fluctuations through AGI, and the execution risk of the major new enterprise system conversion that continues into 1999.

What is the outlook for the company's new initiatives?

Management is investing in Grainger.com, the OrderZone.com multi-distributor marketplace (expected to open later in 1999), Grainger Custom Solutions, and Lab Safety Supply. Integrated Supply's rapid sales growth suggests momentum, but the filing does not provide explicit earnings guidance, and these investments are expected to keep pressuring operating margins in the near term.

GWW 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.

W.W.

Grainger, Inc. (GWW) closed 1998 with net sales of $4.34 billion^a, up 4.9% from $4.14 billion in 1997, and net earnings of $238.5 million, up 2.9%. Diluted EPS rose to $2.44 from $2.27, aided by a 2-for-1 stock split in May 1998 and about 4.5 million shares repurchased during the year. Growth was primarily volume-driven, supported by National Accounts, Integrated Supply, and direct marketing programs.

Canadian subsidiary Acklands-Grainger (AGI) was a drag on reported sales because of currency translation and weak resource-sector demand, and excluding AGI, sales grew 6.1%. Profitability was pressured by investment spending. Net earnings grew more slowly than sales because of pre-tax losses at Grainger Integrated Supply ($17.7 million^b) and the Mexico business ($3.4 million), rising operating expenses, Year 2000 and new enterprise system costs, and higher interest and foreign currency losses.

Gross margin improved 0.67 percentage points to 36.8%, reflecting cost reduction programs, a 0.7% price increase, and favorable mix. Operating expenses rose to 27.4% of sales from 26.6%. The balance sheet remains conservative, with working capital of $542 million^c, a current ratio of 1.8, and operating cash flow of $335 million.

Total debt rose to 18% of equity from 12%, mainly because of $193 million^d of share repurchases and short-term borrowings. Management describes the Year 2000 and business enterprise system projects as a total cost of roughly $34 to $39 million remaining, with completion targeted for Q3 1999. Management also flagged that Year 2000 failures at other companies could have a material adverse effect.

02—Key points

Key Highlights

Net sales of $4.34 billion, up 4.9% year over year; growth was volume-driven, and excluding AGI, sales grew 6.1%.
Net earnings of $238.5 million, up 2.9%; diluted EPS of $2.44 versus $2.27 in 1997, lagging sales growth due to investment spending.
Gross profit margin expanded 0.67 points to 36.8%, supported by product cost reductions, a 0.7% price increase, and a more favorable mix.
Grainger Integrated Supply (pre-tax loss of $17.7M on $80.6M sales) and Mexico (pre-tax loss of $3.4M) remain in investment phase, though Integrated Supply average daily sales grew about 56%.
Share repurchases of 4.48 million shares in 1998 ($194M), with about 5.6 million shares remaining under authorization; a 2-for-1 split took effect May 1998.
Balance sheet remains strong with working capital of $542M and operating cash flow of $335M, though total debt rose to 18% of equity from 12%.
Year 2000 and new enterprise system projects carry an estimated remaining cost of $34-39M, with completion targeted for Q3 1999.

03—Questions

Frequently Asked Questions

What drove Grainger's revenue growth in 1998?
Sales rose 4.9% to $4.34 billion, primarily from volume gains tied to new product additions, National Accounts, Integrated Supply, and direct marketing programs. Selling price increases were about 0.7%. Weakness at the Canadian subsidiary AGI, partly due to an unfavorable exchange rate and weak resource-sector demand, offset some of that growth.
Why did earnings grow more slowly than sales?
Operating expenses grew faster than sales (8.0% versus 4.9%), reaching 27.4% of sales. Contributors included losses from developing business ventures (Integrated Supply and Mexico), Internet and Custom Solutions investments, roughly $15 million of higher data processing costs tied to Year 2000 and the new enterprise system, lower interest income, higher interest expense, and foreign currency losses in Mexico.
Is Grainger's balance sheet and liquidity sound?
Yes, by the company's assessment. Working capital was $542 million, the current ratio was 1.8, and operating cash flow was $335 million, which covered capital expenditures of $167 million and dividends of $57 million. Debt increased to 18% of equity, largely due to share repurchases and short-term borrowings, but management characterizes the company as maintaining a low debt ratio.
What are the main risks flagged in the filing?
The filing highlights Year 2000 compliance risk, including failures by suppliers, customers, or other companies whose systems interact with Grainger's, which could have a material adverse effect. It also notes losses in newer business units (Integrated Supply, Mexico), exposure to Canadian dollar fluctuations through AGI, and the execution risk of the major new enterprise system conversion that continues into 1999.
What is the outlook for the company's new initiatives?
Management is investing in Grainger.com, the OrderZone.com multi-distributor marketplace (expected to open later in 1999), Grainger Custom Solutions, and Lab Safety Supply. Integrated Supply's rapid sales growth suggests momentum, but the filing does not provide explicit earnings guidance, and these investments are expected to keep pressuring operating margins in the near term.

04—Continue

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