01—Abstract
Summary
Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's fiscal 2007 results show a company growing sales and earnings while returning significant capital to shareholders. Net sales rose 9.1% to $6.42 billiona, and operating earnings grew 16.0% to $670.7 million, as gross margin expanded 0.6 points to 40.6%. Net earnings increased 9.6% to $420.1 million, and diluted EPS reached $4.94, up 16.5%, helped by a share count reduction from buybacks.
Growth was driven by the multiyear U.S. market expansion program, the product line expansion (roughly 90,000 new products added over two years), and strength in government and commercial customer sectors, partly offset by the wind-down of low-margin integrated supply contracts. Capital deployment was aggressive. Grainger repurchased 7.05 million shares for about $647 millionb in cash during 2007, including a $500 million accelerated share repurchase agreement executed in August 2007 that was completed in January 2008.
Dividends rose to $1.34c per share from $1.11. These actions were funded partly with commercial paper and short-term borrowings, pushing total debt to 5.0% of total capitalization from 0.4% a year earlier and reducing working capital and cash to $113 million. Operating cash flow of $468.9 million remained solid, and the company retains an AA+ S&P long-term debt rating.
Investors should weigh the strong operating momentum against a meaningful risk: the U.S. Justice Department intervened in a qui tam lawsuit in January 2008 alleging Grainger violated pricing and Trade Agreement Act provisions under its GSA government contract, seeking treble damages. Management says it has complied with the contract in all material respects and cannot predict the outcome. Separately, the company faces asbestos/silica lawsuits involving about 2,800 plaintiffs, which management believes are largely insured and not materially adverse.
02—Key points
Key Highlights
- Net sales rose 9.1% to $6.42 billion; daily sales grew 8.7%, with upper-teens growth in government and high single-digit growth in commercial sectors.
- Operating earnings increased 16.0% to $670.7 million, with operating margin expanding to 10.5% from 9.8%, driven by a 0.6-point gross margin improvement to 40.6%.
- Diluted EPS of $4.94 rose 16.5% from $4.24, benefiting from a lower share count after repurchasing 7.05 million shares for roughly $647 million.
- A $500 million accelerated share repurchase with Goldman Sachs was executed in 2007 and settled in January 2008, pushing total debt to 5.0% of capitalization from 0.4%.
- Dividends per share increased 21% to $1.34 from $1.11, and cash flow from operations rose to $468.9 million.
- Segment performance: Grainger Branch-based operating earnings up 12.8% to $669.4 million; Acklands (Canada) earnings up 190% to $44.2 million; Lab Safety up 3.8% to $54.3 million.
- Material legal exposure: the Justice Department intervened in a qui tam suit alleging GSA contract pricing and Trade Agreement Act violations, with treble damages sought; the outcome cannot currently be predicted.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, W.W. Grainger kept $0.07.
- Revenue$6.42B100.0%
- Cost of revenue−$3.81B59.4%
- Gross profit$2.60B40.6%
- Operating costs−$1.93B30.1%
- Operating income$670.7M10.4%
- Interest, other & tax−$250.5M3.9%
- Net income$420.1M6.5%
Where FY2007 revenue went
$6.42B- Cost of revenue: $3.81B, 59% of revenue
- SG&A: $1.93B, 30% of revenue
- Net income: $420.1M, 6.5% of revenue
- Interest, other & tax: $250.5M, 3.9% of revenue
Kept 6.5% as net incomeNet income $420.1M · 6.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 27, 2008Financial Statements
| Revenue | $6.42B |
| Cost of Revenue | $3.81B |
| Gross Profit | $2.60B |
| SG&A Expenses | $1.93B |
| Operating Income | $670.65M |
| Interest Expense | $2.97M |
| Net Income | $420.12M |
| EPS (Basic) | $5.01 |
| EPS (Diluted) | $4.91 |
| Shares Outstanding (Basic) | 82.40M |
| Shares Outstanding (Diluted) | 84.17M |
05—Questions
Frequently Asked Questions
What drove Grainger's earnings growth in 2007?
Operating earnings rose 16.0% on 9.1% sales growth, reflecting a 0.6-point gross margin improvement (driven by inflation recovery) and operating expenses growing slightly slower than sales. Growth was supported by the U.S. market expansion program and product line expansion, which contributed roughly 3 percentage points of sales growth.
How did Grainger return capital to shareholders in 2007?
The company repurchased 7,051,607 shares for about $647 million in cash, including a $500 million accelerated share repurchase agreement, and paid $113 million in dividends ($1.34 per share). Stock option exercises brought in $144 million in cash and tax benefits.
How significant is the government contract legal matter?
The Justice Department intervened in a qui tam action alleging Grainger failed to comply with GSA contract pricing provisions and Buy American and Trade Agreement Act requirements, seeking treble damages and penalties. Grainger believes it complied with the contract in all material respects but cannot predict the outcome. The filing does not quantify potential exposure, so investors should monitor subsequent developments closely.
Is Grainger's balance sheet still strong after the share buybacks?
Largely yes. Total debt rose to about 5% of total capitalization, primarily from short-term commercial paper and borrowings used to fund the accelerated repurchase, and the company held an S&P rating of AA+. Long-term debt remained small at $4.9 million, and available committed credit lines totaled $250 million, though cash fell to $113 million and working capital declined to $974 million.
What are the main risks to Grainger's growth outlook?
Key risks include a slowdown in economic activity affecting industrial production and non-farm employment, competitive pressure in a highly fragmented market, potential supply disruptions, and execution risk on the remaining phases five and six of the market expansion program, which were more than 50% complete at year-end. Management projected slower 2008 U.S. GDP growth of 1.6% versus 2.2% in 2007.
06—Continue