01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's FY2010 10-K shows a strong rebound year. Net sales rose 15.4% to $7.18 billiona, with volume growth of about 10 points, acquisitions adding 4 points, and FX adding 2 points. Operating earnings grew 29.4% to $860.5 million, and the operating margin expanded from 10.7% to 11.9%.
Diluted EPS was $6.93b, up 23.3% from $5.62. Management notes that 2010 included two non-cash items: a $0.28 per share benefit from a paid time off policy change and a $0.15 per share tax expense from healthcare legislation, for a net $0.13 benefit. Excluding these items and the 2009 MonotaRO gain, EPS grew about 29.5%.
The balance sheet and cash flow profile remain conservative. Total assets were $3.90 billionc, and total debt as a percent of capitalization fell to 17.8% from 19.1%. Operating cash flow declined to $596.4 million from $732.4 million, mainly because of working capital investment in receivables and inventory to support higher sales.
Grainger returned substantial capital in 2010, with $504.8 milliond of share repurchases and $152.3 million of dividends. Management guides to 2011 sales growth of 5% to 9% and EPS of $7.15 to $7.90, with sales growth expected to slow from 2010 because of tougher comparisons and the non-recurring oil spill cleanup demand. Key risks include a Department of Justice inquiry into GSA contract pricing and disclosure compliance, and USPS Office of Inspector General investigations into the MRO and Custodial contracts.
Each could lead to False Claims Act treble damages, though management believes none will have a material adverse effect. Asbestos and silica litigation involves roughly 1,900 plaintiffs. International expansion in Japan, Canada, and Colombia is a growing share of the business, and the company also faces commodity price exposure and competitive pressure from manufacturers and online competitors.
02—Key points
Key Highlights
- Net sales rose 15.4% to $7,182.2 million, with about 10 points from volume, 4 points from acquisitions, and 2 points from FX.
- Operating earnings increased 29.4% to $860.5 million, and operating margin expanded to 11.9% from 10.7%.
- Diluted EPS was $6.93, up 23.3% year over year. Excluding unusual non-cash items, EPS grew about 29.5%.
- Cash returned to shareholders totaled about $657 million in 2010, including $504.8 million in buybacks and $152.3 million in dividends. Dividends per share rose to $2.08 from $1.78.
- Operating cash flow fell to $596.4 million from $732.4 million, driven by higher receivables and inventory tied to growth.
- 2011 guidance calls for 5% to 9% sales growth and EPS of $7.15 to $7.90, with growth slowing from 2010 due to tougher comparisons and non-recurring oil spill cleanup sales.
- Open government investigations involving the GSA and USPS contracts carry potential False Claims Act treble damages, though management does not expect a material adverse effect.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, W.W. Grainger kept $0.07.
- Revenue$7.18B100.0%
- Cost of revenue−$4.18B58.2%
- Gross profit$3.01B41.8%
- Operating costs−$2.15B29.9%
- Operating income$860.5M12.0%
- Interest, other & tax−$349.6M4.9%
- Net income$510.9M7.1%
Where FY2010 revenue went
$7.18B- Cost of revenue: $4.18B, 58% of revenue
- SG&A: $2.15B, 30% of revenue
- Net income: $510.9M, 7.1% of revenue
- Interest, other & tax: $349.6M, 4.9% of revenue
Kept 7.1% as net incomeNet income $510.9M · 7.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $7.18B$6.22B | +15.4% |
| Cost of Revenue | $4.18B$3.62B | +15.3% |
| Gross Profit | $3.01B$2.60B | +15.7% |
| SG&A Expenses | $2.15B$1.93B | +11.0% |
| Operating Income | $860.48M$665.22M | +29.4% |
| Interest Expense | $8.19M$8.77M | −6.6% |
| Net Income | $510.87M$430.47M | +18.7% |
| EPS (Basic) | $7.05$5.70 | +23.7% |
| EPS (Diluted) | $6.93$5.62 | +23.3% |
| Shares Outstanding (Basic) | 70.84M73.79M | −4.0% |
| Shares Outstanding (Diluted) | 72.14M74.89M | −3.7% |
05—Questions
Frequently Asked Questions
What drove Grainger's strong 2010 revenue and earnings growth?
Growth came mainly from volume recovery as the economy improved, with industrial production up 5.9% in 2010. Sales to heavy and light manufacturing customers grew strongly, and reseller sales rose 30% on oil spill cleanup demand. Acquisitions added about 4 points and FX about 2 points. Operating expenses grew more slowly than sales, which lifted operating margin.
How much of 2010 EPS came from one-time or non-cash items?
The net effect was a $0.13 per share benefit. This consisted of a $0.28 per share gain from a paid time off policy change, partly offset by a $0.15 per share tax expense from the healthcare legislation. The 2009 comparison also included a $0.37 per share non-cash gain from the MonotaRO transaction.
Is Grainger's balance sheet and capital allocation strategy sustainable?
The balance sheet is conservative. Total debt was 17.8% of capitalization, the company had no debt covenants restricting operations, and it repaid $239.1 million of long-term debt in 2010. Management plans to fund 2011 capital expenditures of $175 million to $200 million from operating cash flow and expects treasury repurchases of $210 million to $265 million. Operating cash flow fell in 2010, so the pace of buybacks depends on continued working capital discipline.
What are the main legal and regulatory risks disclosed?
Grainger is under DOJ review of its GSA contract disclosure and pricing compliance, and USPS Inspector General investigations of its MRO and Custodial contracts. Any settlement or civil suit could seek treble damages and penalties under the False Claims Act, but the timing and amount cannot be estimated. Grainger also faces asbestos and silica lawsuits involving about 1,900 plaintiffs, which it believes are largely covered by insurance.
What does the company's international expansion mean for investors?
International operations are a growing contributor. Other businesses, including Japan, Mexico, China, India, and Colombia, grew net sales 136% in 2010, largely from consolidating Japan and Colombia. Those businesses are still small, with operating earnings of $11.7 million in 2010, and they carry lower margins. Investors should watch whether they can reach profitability at scale.
06—Continue