01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's fiscal 2013 was a year of solid top-line and earnings growth, with net sales rising 5% to $9.44 billiona and net earnings attributable to the company up 16% to $797 million. Diluted EPS reached $11.13, up 17% year over year. Excluding a $0.29 goodwill impairment charge and a $0.10 restructuring charge, adjusted diluted EPS was $11.52, up 10% from $10.43 on a comparably adjusted basis.
Growth was driven by volume (3 points), acquisitions (2 points) and price (1 point), partly offset by a 1-point currency headwind. Gross margin held flat at 43.8%b, and operating margin improved to 13.7% from 12.6%, reflecting operating expenses growing more slowly than sales. The U.S. business, which accounts for roughly 79% of sales, grew 7% and drove most of the improvement, while Canada was nearly flat in U.S. dollars (up 1%, or 4% in local currency).
The company continued to invest heavily in growth initiatives, including sales representatives, eCommerce (now $2.5 billionc, up 16%) and inventory management services, as well as in a new 1 million square-foot Chicago-area distribution center. Cash flow from operations rose to $986 million, and Grainger returned substantial capital to shareholders through $438 million of buybacks and $255 million of dividends.
Looking ahead, management lowered its 2014 guidance on January 24, 2014, to EPS of $12.10 to $12.85d (from $12.25 to $13.00) and sales growth of 5% to 9% (from 6% to 10%), citing unfavorable foreign exchange and the divestiture of four direct marketing brands. Balance sheet strength is solid, with total debt at 14.0% of capitalization and no financial covenants restricting the business, though investors should monitor goodwill exposure at Fabory and Grainger Colombia, where fair value cushions are relatively thin, and the performance of international operations, including Latin America and Brazil.
02—Key points
Key Highlights
- Net sales grew 5% to $9.44 billion; U.S. segment sales rose 7% to $7.41 billion, led by light and heavy manufacturing customers.
- Diluted EPS of $11.13 rose 17% from $9.52; adjusted diluted EPS of $11.52 rose 10% excluding $0.39 per share of impairment and restructuring charges.
- Operating earnings rose 15% to $1.30 billion, with operating margin expanding to 13.7% from 12.6% as operating expenses grew slower than sales.
- eCommerce revenues reached $2.5 billion in 2013, up 16%, and accounted for 33% of total revenues.
- Operating cash flow increased to $986 million from $816 million, and the company repurchased $438 million of stock while paying $255 million in dividends.
- 2014 guidance was lowered to EPS of $12.10 to $12.85 and sales growth of 5% to 9%, citing foreign exchange and the divestiture of four direct marketing brands.
- Goodwill impairments of $24 million were recorded for Grainger Lighting Services and Grainger Brazil, and Fabory's goodwill fair value exceeds carrying value by only 17%, a potential future risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, W.W. Grainger kept $0.08.
- Revenue$9.44B100.0%
- Cost of revenue−$5.30B56.2%
- Gross profit$4.14B43.8%
- Operating costs−$2.84B30.1%
- Operating income$1.30B13.7%
- Interest, other & tax−$499.8M5.3%
- Net income$797.0M8.4%
Where FY2013 revenue went
$9.44B- Cost of revenue: $5.30B, 56% of revenue
- SG&A: $2.84B, 30% of revenue
- Net income: $797.0M, 8.4% of revenue
- Interest, other & tax: $499.8M, 5.3% of revenue
Kept 8.4% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $9.44B$8.95B | +5.4% |
| Cost of Revenue | $5.30B$5.03B | +5.3% |
| Gross Profit | $4.14B$3.92B | +5.6% |
| SG&A Expenses | $2.84B$2.79B | +2.0% |
| Operating Income | $1.30B$1.13B | +14.7% |
| Interest Expense | $13.22M$16.08M | −17.7% |
| Net Income | $797.04M$689.88M | +15.5% |
| EPS (Basic) | $11.31$9.71 | +16.5% |
| EPS (Diluted) | $11.13$9.52 | +16.9% |
| Shares Outstanding (Basic) | 69.46M69.81M | −0.5% |
| Shares Outstanding (Diluted) | 70.58M71.18M | −0.9% |
05—Questions
Frequently Asked Questions
What drove Grainger's earnings growth in 2013?
Net earnings attributable to Grainger rose 16% to $797 million, driven mainly by higher operating earnings. Sales growth came from volume (3 points), acquisitions including E&R Industrial and Safety Solutions (2 points), and price (1 point), partly offset by foreign exchange (-1 point). Gross margin was flat at 43.8%, and operating expenses grew only 2% against a 5% sales increase, expanding operating margin.
Were there any one-time items affecting 2013 results?
Yes. 2013 included a $0.29 per share non-cash impairment charge, primarily for goodwill at Grainger Lighting Services and Grainger Brazil, and a $0.10 per share restructuring charge tied to improving performance in Europe and China. Combined, these reduced diluted EPS by $0.39. Excluding them, adjusted diluted EPS was $11.52, up 10%. The prior year also had larger one-time items, including a $0.66 per share GSA/USPS settlement.
What is the outlook for 2014?
On January 24, 2014, Grainger lowered its 2014 guidance to diluted EPS of $12.10 to $12.85 (from $12.25 to $13.00) and sales growth of 5% to 9% (from 6% to 10%). The company attributed the change mainly to unfavorable foreign exchange and the divestiture of four direct marketing brands sold on December 31, 2013. Management plans continued investment in supply chain, eCommerce, the sales force and inventory management services, with capital expenditures expected between $375 million and $425 million.
How strong is Grainger's balance sheet and how is it returning capital?
Total debt was 14.0% of total capitalization at year-end 2013, down from 15.3%, and the company's debt agreements contain no restrictive financial or performance covenants. Working capital was $1.62 billion, with a current ratio of 2.5. Operating cash flow of $986 million covered $272 million of capital expenditures, with the remainder used for $438 million of share repurchases and $255 million of dividends. Quarterly dividends totaled $3.59 per share for 2013, up from $3.06.
What are the main risks to watch in Grainger's business?
Key risks include a slowdown in U.S. or Canadian industrial activity, competitive pressure from manufacturers and online retailers, commodity price volatility affecting margins, and customer or product mix shifting toward lower-margin large accounts. Foreign currency movements affect results, and the company faces goodwill impairment risk at Fabory (17% headroom) and Grainger Colombia (26% headroom). Management also noted that its Brazil and Grainger Lighting Services businesses underperformed, and that rapid growth with large customers pressures gross margins.
06—Continue