01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2011 results show strong top-line and earnings growth. Net sales rose 12.5% to $8.08 billiona, with daily sales up 12.0%. Volume contributed roughly 8 points, acquisitions about 2 points (including the August 2011 Fabory Group purchase), price about 2 points and foreign exchange about 1 point.
Gross margin expanded 1.7 points to 43.5%, driven by price increases exceeding cost inflation and a shift away from low-margin sourced products. Operating earnings grew 22.3% to $1.05 billionb, and diluted EPS rose 30.9% to $9.07. Those figures include a net $0.03 per-share benefit from several one-time items: a $0.16 charge for U.S. branch closures, a $0.12 tax-settlement benefit and a $0.07 gain on the sale of the MRO Korea joint venture.
The U.S. segment, roughly 80% of sales, grew 8.0% with operating earnings up 15.9%. Canada grew 20.9% (15.7% in local currency), and operating earnings more than doubled to $107.6 millionc. The newer international businesses grew 66.2%, led by Fabory in Europe.
Cash generation stayed solid: operating cash flow was $746 milliond, capital spending was about $197 million, and cash returned to shareholders included $180 million in dividends and $151 million in buybacks. Total debt fell to 15.9% of capitalization from 17.8%.
Management guided 2012 sales growth of 10% to 14% and diluted EPS of $9.90 to $10.65. Risks flagged in the filing include a pending DOJ/USPS pricing review under government contracts, a China-related internal investigation with possible FCPA implications opened in January 2012, asbestos and silica litigation involving about 1,800 plaintiffs, and exposure to commodity prices and foreign currency.
02—Key points
Key Highlights
- Net sales grew 12.5% to $8.08 billion in 2011, with volume contributing about 8 points of growth and acquisitions about 2 points.
- Gross profit margin rose 1.7 points to 43.5%, reflecting price increases above cost inflation and a mix shift away from low-margin sourced products.
- Diluted EPS increased 30.9% to $9.07 and net earnings rose 28.9% to $658.4 million; excluding one-time items, EPS rose about 33%.
- Canada's operating earnings more than doubled to $107.6 million, and the newly acquired Fabory Group (Europe) lifted international sales 66.2%.
- 2012 guidance calls for 10–14% sales growth and EPS of $9.90–$10.65, implying roughly 9–17% EPS growth.
- Debt-to-capitalization fell to 15.9% from 17.8%, and the company returned $331 million to shareholders through dividends and buybacks.
- Open legal and regulatory matters include a DOJ/USPS pricing review of government contracts and an internal China investigation with possible FCPA exposure disclosed to the DOJ and SEC.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, W.W. Grainger kept $0.08.
- Revenue$8.08B100.0%
- Cost of revenue−$4.57B56.5%
- Gross profit$3.51B43.5%
- Operating costs−$2.46B30.4%
- Operating income$1.05B13.0%
- Interest, other & tax−$394.0M4.9%
- Net income$658.4M8.2%
Where FY2011 revenue went
$8.08B- Cost of revenue: $4.57B, 57% of revenue
- SG&A: $2.46B, 30% of revenue
- Net income: $658.4M, 8.2% of revenue
- Interest, other & tax: $394.0M, 4.9% of revenue
Kept 8.2% as net incomeNet income $658.4M · 8.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $8.08B$7.18B | +12.5% |
| Cost of Revenue | $4.57B$4.18B | +9.4% |
| Gross Profit | $3.51B$3.01B | +16.8% |
| SG&A Expenses | $2.46B$2.15B | +14.6% |
| Operating Income | $1.05B$860.48M | +22.3% |
| Interest Expense | $9.09M$8.19M | +11.0% |
| Net Income | $658.42M$510.87M | +28.9% |
| EPS (Basic) | $9.26$7.05 | +31.3% |
| EPS (Diluted) | $9.07$6.93 | +30.9% |
| Shares Outstanding (Basic) | 69.69M70.84M | −1.6% |
| Shares Outstanding (Diluted) | 71.18M72.14M | −1.3% |
05—Questions
Frequently Asked Questions
What drove Grainger's strong 2011 earnings growth?
Growth came mainly from volume, which added about 8 points of sales growth, along with price, acquisitions and favorable FX. Gross margin expanded because price increases outpaced product cost inflation and the company sold less low-margin sourced product. Operating expenses rose more slowly than sales on a percentage basis, so operating earnings grew 22.3%, faster than sales.
Were there one-time items that affected 2011 results?
Yes. The company took a $0.16 per-share charge for closing 35 U.S. branches, and it booked a $0.12 per-share benefit from settling prior-year tax reviews and a $0.07 per-share gain on the sale of its MRO Korea joint venture. The net effect was a $0.03 per-share benefit. In 2010, a paid-time-off policy change and a tax charge tied to healthcare legislation netted to a $0.13 per-share benefit.
What is the outlook for 2012?
As of January 25, 2012, management guided to 10–14% sales growth, with volume contributing 5–8 points, price 2–3 points and acquisitions about 3 points. Diluted EPS is forecast at $9.90–$10.65. Management expects gross margin to keep expanding, though faster growth in lower-margin large contract customers will partly offset that. Capital spending is planned at $200–225 million.
What are the main legal and regulatory risks?
The company is in ongoing discussions with the DOJ over its GSA contract pricing and disclosure obligations, and it faces DOJ and USPS reviews of pricing under two USPS contracts. Any of these could lead to settlements or False Claims Act damages. In January 2012 Grainger also disclosed an internal investigation into expense falsification and possible gift-card payments at its China subsidiary, which may raise FCPA issues. Management says none of these matters is expected to have a material adverse effect, but it cannot estimate possible losses. Asbestos and silica suits covering about 1,800 plaintiffs are also pending, and the company believes most are insured.
How strong is Grainger's balance sheet and cash flow?
Operating cash flow was $746 million in 2011, up from $596 million, though working capital build from inventory and receivables absorbed part of the gain. Total debt fell to 15.9% of capitalization. Current assets covered current liabilities 1.9 times, down from 2.6 times, largely because short-term debt and payables rose. The debt agreements contain no restrictive financial covenants. The company spent about $359 million on acquisitions in 2011, mostly Fabory.
06—Continue