01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2015 results were essentially flat on the top line, with net sales of $9.97 billiona versus $9.96 billion in 2014, while profitability weakened. Gross margin fell 0.9 percentage points to 42.4%, operating earnings declined 3% to $1.30 billion, and diluted EPS rose 1% to $11.58 only because of a 5.8% reduction in average diluted shares. Excluding restructuring charges and discrete tax items, adjusted diluted EPS fell 3% to $11.94.
Foreign currency was a 3-point drag on sales, and eCommerce grew 16% to $4.1 billionb, representing 41% of sales. The results reflect a weak industrial backdrop, particularly in oil-and-gas-exposed natural resources customers and Canada, where Canadian sales fell 17% and operating earnings fell 69%. Capital allocation and balance sheet changes were significant.
Grainger repurchased $1.4 billionc of stock in 2015, issued a $1 billion 4.60% senior note due 2045, and acquired Cromwell, a U.K. MRO distributor, for $464 million. Total debt as a percent of total capitalization rose to 45.8% from 12.9%, and long-term debt increased to $1.39 billion from $403 million.
Management plans to keep debt-to-EBITDA in a 1.0–1.5x range. Operating cash flow was steady at $990 million, and the dividend was raised to $4.59d per share from $4.17. Looking ahead, management reiterated 2016 guidance of EPS of $10.80–$13.00 and sales of -1% to +7%.
The company is pursuing restructuring, including closing 49 U.S. branches in 2015 and announcing 55 more closures for 2016, and it is investing in its supply chain and eCommerce platforms. Investors should weigh the strong cash generation and eCommerce momentum against thinning margins, a leveraged balance sheet, and continued softness in energy-linked and Canadian end markets.
02—Key points
Key Highlights
- Flat sales of $9.97 billion (vs. $9.96B in 2014): volume +2%, acquisitions +2%, price -1%, foreign exchange -3%.
- Gross margin contracted 0.9 pts to 42.4%, driven by mix shift to large customers and price deflation exceeding cost deflation.
- Operating earnings fell 3% to $1.30B; adjusted diluted EPS fell 3% to $11.94 after excluding $0.36 net restructuring and tax items.
- eCommerce sales rose 16% to $4.1B, representing 41% of total sales, a key growth driver.
- Canada was weak: sales fell 17% (down 5% in local currency) and operating earnings fell 69%, reflecting the oil-price downturn.
- Heavy capital return and leverage: $1.4B of share buybacks, a $1B 30-year note at 4.60%, and total debt-to-capitalization up to 45.8% from 12.9%.
- 2016 guidance reiterated at EPS of $10.80–$13.00 and sales of -1% to +7%, with 55 additional U.S. branch closures announced.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, W.W. Grainger kept $0.08.
- Revenue$9.97B100.0%
- Cost of revenue−$5.74B57.6%
- Gross profit$4.23B42.4%
- Operating costs−$2.93B29.4%
- Operating income$1.30B13.0%
- Interest, other & tax−$531.3M5.3%
- Net income$769.0M7.7%
Where FY2015 revenue went
$9.97B- Cost of revenue: $5.74B, 58% of revenue
- SG&A: $2.93B, 29% of revenue
- Net income: $769.0M, 7.7% of revenue
- Interest, other & tax: $531.3M, 5.3% of revenue
Kept 7.7% as net incomeNet income $769.0M · 7.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $9.97B$9.96B | +0.1% |
| Cost of Revenue | $5.74B$5.65B | +1.6% |
| Gross Profit | $4.23B$4.31B | −1.9% |
| SG&A Expenses | $2.93B$2.97B | −1.2% |
| Operating Income | $1.30B$1.35B | −3.5% |
| Interest Expense | $33.57M$10.09M | +232.6% |
| Net Income | $769.00M$801.73M | −4.1% |
| EPS (Basic) | $11.69$11.59 | +0.9% |
| EPS (Diluted) | $11.58$11.45 | +1.1% |
| Shares Outstanding (Basic) | 65.16M68.33M | −4.6% |
| Shares Outstanding (Diluted) | 65.77M69.21M | −5.0% |
05—Questions
Frequently Asked Questions
Why did EPS rise while net earnings fell?
Diluted EPS increased 1% to $11.58 while net earnings attributable to Grainger fell 4% to $769 million. The difference is driven by a roughly 5.8% decline in weighted average diluted shares, from 69.2 million to 65.8 million, reflecting heavy share repurchases of $1.4 billion in 2015.
How is the Cromwell acquisition expected to affect the business?
Grainger acquired Cromwell, a U.K. MRO distributor with about £285 million in annual sales, for £310 million ($464 million) in September 2015. It added roughly $357 million of goodwill and intangibles, and it is intended to help Grainger scale its Zoro single-channel online business in Europe. Other Businesses sales rose 19% in 2015, largely from Cromwell, Zoro, and MonotaRO.
What is driving the margin pressure and how serious is it?
Gross margin fell to 42.4% from 43.3% due to growth with lower-margin large customers, price deflation outpacing cost deflation, and mix. Operating expense leverage offset part of the pressure, but operating margin still declined to 13.0% from 13.5%. Management's 2016 guidance and the ongoing restructuring suggest margin recovery depends on cost savings from branch closures and supply-chain investments.
How much has leverage increased and is the balance sheet at risk?
Long-term debt rose to $1.39 billion from $403 million, and short-term debt increased to $353 million. Total debt as a percent of total capitalization rose to 45.8% from 12.9%, largely because of buybacks and the Cromwell financing. Management targets debt-to-EBITDA of 1.0–1.5x and says it has no financial covenants in its debt instruments. Interest expense rose to $33.6 million from $10.1 million, and operating cash flow of $990 million provides coverage.
What are the main risks for 2016?
Key risks include continued weakness in the oil and gas and natural resources sectors, a Canadian economy that management expects to grow only about 1.3% in 2016, a strong U.S. dollar that reduces foreign-currency-translated sales, and industrial softness that has slowed manufacturing demand. Competitive pressure from Internet-based and low-cost distributors could also weigh on pricing and gross margin, and the company faces ongoing asbestos and silica lawsuits, although management considers them not material.
06—Continue