01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2009 results reflected a sharp cyclical downturn in its core U.S. industrial business, with net sales falling 9.2% to $6.22 billiona from $6.85 billion. Volume declined roughly 14 percentage points, partly offset by about 5 points of price increases, and the heavy manufacturing customer sector fell in the mid-20% range. Operating earnings dropped 15.0% to $665.2 million, and operating margin contracted to 10.7% from 11.4%.
Net earnings attributable to Grainger fell 9.4% to $430.5 million, and diluted EPS declined to $5.62b from $5.97. Net earnings were cushioned by a one-time, non-cash $47.4 million pre-tax gain from remeasuring the prior 48% stake in MonotaRO after Grainger became majority owner (53%). Gross margin improved 0.8 points to 41.8%, driven by price increases exceeding product cost inflation, which helped offset the volume decline.
Balance sheet and cash flow remained strong. Operating cash flow rose to $732.4 millionc from $530.1 million, aided by a $175 million inventory reduction, and Grainger repurchased 4.5 million shares for $372.7 million while paying $134.7 million in dividends. Total debt was 19.1% of total capitalization, and the company carried $437.5 million of long-term debt, mainly a $483 million bank term loan maturing in 2012.
Management guided to 2010 sales growth of 6%d to 10%, supported by 2009 acquisitions, favorable foreign exchange, and organic growth from the multiyear product line expansion, while expecting operating expenses to rise and the effective tax rate to reach roughly 39.3%. Key risks for investors include the pace of economic and manufacturing recovery, commodity-driven margin pressure, and government contracting exposure.
Grainger disclosed open DOJ and USPS inquiries into GSA and USPS contract pricing compliance, with potential treble damages under the False Claims Act, though management does not expect a material adverse effect. Asbestos and silica lawsuits involving about 1,900 plaintiffs also remain pending, which management believes are largely insured and immaterial.
02—Key points
Key Highlights
- Net sales declined 9.2% to $6,222.0 million in 2009, with volume down about 14 points and price up about 5 points; the U.S. segment fell 10.1% and Canada fell 10.6% (down 3.9% in local currency).
- Operating earnings fell 15.0% to $665.2 million; operating margin was 10.7% versus 11.4% in 2008.
- Gross margin improved 0.8 points to 41.8%, as price increases outpaced product cost increases.
- Net earnings attributable to Grainger fell 9.4% to $430.5 million, helped by a one-time $47.4 million pre-tax gain on the MonotaRO stake step-up; diluted EPS was $5.62 versus $5.97.
- Operating cash flow rose to $732.4 million from $530.1 million, and share repurchases of $372.7 million plus $134.7 million in dividends were funded from cash generation.
- 2010 guidance calls for sales growth of 6% to 10%, capital expenditures of $150 million to $175 million, and an effective tax rate of about 39.3%.
- Open government investigations (GSA contract, USPS MRO and Custodial contracts) carry potential False Claims Act exposure, though management does not expect a material adverse effect.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, W.W. Grainger kept $0.07.
- Revenue$6.22B100.0%
- Cost of revenue−$3.62B58.2%
- Gross profit$2.60B41.8%
- Operating costs−$1.93B31.1%
- Operating income$665.2M10.7%
- Interest, other & tax−$234.8M3.8%
- Net income$430.5M6.9%
Where FY2009 revenue went
$6.22B- Cost of revenue: $3.62B, 58% of revenue
- SG&A: $1.93B, 31% of revenue
- Net income: $430.5M, 6.9% of revenue
- Interest, other & tax: $234.8M, 3.8% of revenue
Kept 6.9% as net incomeNet income $430.5M · 6.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $6.22B$6.85B | −9.2% |
| Cost of Revenue | $3.62B$4.04B | −10.4% |
| Gross Profit | $2.60B$2.81B | −7.5% |
| SG&A Expenses | $1.93B$2.03B | −4.6% |
| Operating Income | $665.22M$782.67M | −15.0% |
| Interest Expense | $8.77M$14.48M | −39.5% |
| Net Income | $430.47M$475.36M | −9.4% |
| EPS (Basic) | $5.70$6.07 | −6.1% |
| EPS (Diluted) | $5.62$5.97 | −5.9% |
| Shares Outstanding (Basic) | 73.79M76.58M | −3.6% |
| Shares Outstanding (Diluted) | 74.89M77.89M | −3.8% |
05—Questions
Frequently Asked Questions
How did Grainger perform in 2009 compared with 2008?
Net sales fell 9.2% to $6.22 billion as customers cut spending during the recession, with a mid-20% decline in heavy manufacturing. Operating earnings dropped 15.0% to $665.2 million, and diluted EPS fell to $5.62 from $5.97. Gross margin improved to 41.8%, but operating expenses fell more slowly than sales, which compressed operating margin.
Why did net earnings fall less than operating earnings?
Non-operating income increased by about $51.6 million, mainly due to a one-time, non-cash $47.4 million pre-tax gain from remeasuring the previously held 48% stake in MonotaRO when Grainger became a majority owner in September 2009. This gain is not expected to recur, so underlying earnings declined more than the reported 9.4% decrease in net earnings.
What is management's outlook for 2010?
Management expects 2010 sales growth of 6% to 10%, driven by 2009 acquisitions, favorable foreign exchange, and organic growth from the product line expansion program. Operating expenses are expected to rise due to acquisitions and the return of compensation costs cut in 2009, and the effective tax rate is projected at about 39.3%. Capital expenditures are planned at $150 million to $175 million, funded from operating cash flow.
How strong is Grainger's balance sheet and capital return program?
The balance sheet remains solid, with a current ratio of 2.7, working capital of $1.35 billion, and total debt at 19.1% of capitalization. Long-term debt was $437.5 million, mostly a $483 million term loan, and the company carries an S&P long-term debt rating of AA+. Grainger returned capital through $372.7 million of buybacks (4.5 million shares) and $134.7 million of dividends, with 3.1 million shares remaining under its authorization.
What legal and regulatory risks should investors consider?
Grainger faces an unresolved DOJ inquiry into its GSA contract's disclosure and pricing compliance, which could lead to civil litigation with treble damages and penalties under the False Claims Act. It also faces USPS Office of Inspector General investigations into its MRO and Custodial contracts. Asbestos and silica lawsuits involving about 1,900 plaintiffs are pending. Management does not expect any of these to have a material adverse effect, but an unfavorable outcome could result in significant payments.
06—Continue