01—Abstract
Summary
Summary of the 10-K filed February 28, 2013. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2012 10-K shows a year of strong top-line growth and solid profit expansion despite a one-time legal charge. Net sales rose 11% to $8.95 billiona, driven by 6% volume growth, 3% from acquisitions, and 3% from price, with sales growth slowing in each quarter and a sharp drop in late December. Gross margin improved 0.3 points to 43.8%, reflecting price increases outpacing cost inflation.
Reported diluted EPS rose 5% to $9.52b, but this included $0.91 per share of net charges, primarily a $0.66 per share expense for settling GSA and USPS contract disputes. On an adjusted basis, diluted EPS was $10.43, up 15%, indicating underlying earnings momentum that investors should weigh against the reported figure. The balance sheet and cash generation remain healthy.
Operating cash flow was $816 millionc, capital expenditures were $250 million, and dividends paid rose to $3.06 per share from $2.52. Total debt as a percent of capitalization fell to 15.3% from 15.9%. Management guided 2013 EPS to $10.85 to $12.00 and raised sales growth guidance to 3% to 9%, though it noted softer macro indicators.
Key forward-looking items include a new Illinois distribution center becoming fully operational in 2013, expected 2013 capital spending of $280 to $350 milliond, and continued investment in sales force, eCommerce, and international expansion. Risks to monitor include the sensitivity of pricing and margins to commodity costs, dependence on supply chain and information system continuity, ongoing asbestos and silica litigation involving about 1,925 plaintiffs, and the cost of regulatory compliance as a government contractor. Working capital improved to $1.6 billion with a current ratio of 2.6, and the company reported no material weaknesses in internal controls.
02—Key points
Key Highlights
- Net sales grew 11% to $8.95 billion, with volume up 6%, acquisitions adding 3%, and price up 3%; sales growth decelerated in each quarter of 2012.
- Reported diluted EPS was $9.52 (up 5%), but adjusted diluted EPS excluding $0.91 per share of charges was $10.43 (up 15%), led by the $0.66 GSA/USPS settlement.
- Gross profit margin expanded to 43.8% (up 0.3 points) as price increases exceeded product cost increases.
- Operating cash flow reached $816 million, up 9%, while capex rose to $250 million and cash dividends increased to $3.06 per share from $2.52.
- 2013 guidance calls for EPS of $10.85 to $12.00 and sales growth of 3% to 9%, raised from 2% to 8% after the Techni-Tool acquisition.
- Total debt to capitalization improved to 15.3% from 15.9%, and the company's debt covenants are not restrictive, reflecting a strong financial position.
- The U.S. business ended the year with 369 branches and 15 distribution centers, and a new Illinois distribution center began phasing in during Q4 2012.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, W.W. Grainger kept $0.08.
- Revenue$8.95B100.0%
- Cost of revenue−$5.03B56.2%
- Gross profit$3.92B43.8%
- Operating costs−$2.79B31.1%
- Operating income$1.13B12.6%
- Interest, other & tax−$441.2M4.9%
- Net income$689.9M7.7%
Where FY2012 revenue went
$8.95B- Cost of revenue: $5.03B, 56% of revenue
- SG&A: $2.79B, 31% of revenue
- Net income: $689.9M, 7.7% of revenue
- Interest, other & tax: $441.2M, 4.9% of revenue
Kept 7.7% as net incomeNet income $689.9M · 7.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 28, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $8.95B$8.08B | +10.8% |
| Cost of Revenue | $5.03B$4.57B | +10.2% |
| Gross Profit | $3.92B$3.51B | +11.5% |
| SG&A Expenses | $2.79B$2.46B | +13.3% |
| Operating Income | $1.13B$1.05B | +7.5% |
| Interest Expense | $16.08M$9.09M | +76.9% |
| Net Income | $689.88M$658.42M | +4.8% |
| EPS (Basic) | $9.71$9.26 | +4.9% |
| EPS (Diluted) | $9.52$9.07 | +5.0% |
| Shares Outstanding (Basic) | 69.81M69.69M | +0.2% |
| Shares Outstanding (Diluted) | 71.18M71.18M | 0.0% |
05—Questions
Frequently Asked Questions
How did Grainger perform in 2012 on a reported versus underlying basis?
Reported net earnings attributable to Grainger rose 5% to $690 million, with diluted EPS of $9.52. Excluding $0.91 per share of net charges, primarily the $0.66 per share GSA/USPS settlement, adjusted diluted EPS was $10.43, up 15% from $9.04 on a comparable adjusted basis.
What drove the revenue growth and did it slow during the year?
Sales grew 11%, with volume contributing 6%, acquisitions 3%, and price 3%, partly offset by a 1% foreign exchange headwind. Sequential growth declined in each quarter, and management noted a sudden sales decrease in the last third of December.
What is the outlook for 2013?
Management reiterated 2013 EPS guidance of $10.85 to $12.00 and raised sales growth guidance to 3% to 9%, including the Techni-Tool acquisition. It expects capital spending of $280 to $350 million and projects an effective tax rate of 37.3% to 37.7%, while acknowledging that macro indicators point to a softer economy.
What are the main risks and legal exposures?
Key risks include economic slowdowns, commodity price volatility that may pressure margins, supplier and distribution disruptions, information system and data security breaches, and integration risk from acquisitions. The company faces asbestos and silica lawsuits involving about 1,925 plaintiffs, which management believes will not have a material adverse effect, and the GSA/USPS settlement was resolved for $70 million plus interest.
Is Grainger's balance sheet and cash flow position strong?
Yes. Working capital rose to $1.6 billion, the current ratio improved to 2.6, and cash and equivalents increased to $452 million. Long-term debt rose to $467 million after a new $300 million term loan, but leverage declined as retained earnings grew, and the company returned cash through $341 million of share repurchases and $220 million of dividends.
06—Continue