01—Abstract
Summary
Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2018 10-K shows a year of strong top-line growth and a sharp rebound in profitability. Net sales rose 8% to $11,221 milliona, driven by U.S. volume gains from market share growth and improved demand, plus double-digit growth in the endless assortment businesses (Zoro and MonotaRO), partly offset by a 13% decline in Canada. Reported operating earnings rose 12% to $1,158 million and diluted EPS rose 37% to $13.73.
Excluding restructuring and impairment charges, which include a $139 millionb non-cash impairment at the Cromwell business in the U.K., adjusted operating earnings grew 17% and adjusted diluted EPS rose 46% to $16.70, per management's non-GAAP reconciliation. Quality of earnings warrants some scrutiny. Gross margin fell 0.6 points to 38.7%, with about 0.5 points attributable to the new FASB revenue recognition standard, which reclassified KeepStock costs from SG&A into COGS.
Operating cash flow was flat at $1,057 millionc, weighed by inventory investment and payables timing. Free cash flow after $239 million of capex was roughly $818 million, and the company returned capital through $316 million of dividends and $425 million of buybacks, while total debt as a percentage of capitalization fell to 51.5% from 56.2%. Looking ahead, management expects U.S. business investment and industrial production to slow in 2019 while remaining stable, Canada to stabilize volumes after its cost reset, and 2019 capex of $300 million to $350 million.
The company also adopted the new lease standard on January 1, 2019, recording right-of-use assets and lease liabilities of roughly $210 million to $230 milliond, with no material expected impact on earnings or cash flows. Key risks include the cyclical exposure of industrial customers, commodity and tariff-driven cost pressure, supply chain and cybersecurity disruption, and the UK's exit from the EU.
02—Key points
Key Highlights
- Net sales grew 8% to $11.2 billion, with U.S. volume up 8% on market share gains and the endless assortment businesses growing double digits, while Canada sales fell 14% on a daily basis.
- Operating earnings rose 12% to $1.16 billion; excluding $186 million of restructuring and impairment charges, adjusted operating earnings rose 17% to $1.34 billion.
- Diluted EPS of $13.73 rose 37% (adjusted $16.70, up 46%), helped by lower share count from buybacks and a lower effective tax rate of 23.9% versus 33.5%.
- Gross margin declined 0.6 points to 38.7%, with roughly 0.5 points from the revenue recognition standard reclassifying KeepStock costs from SG&A to COGS.
- Cromwell (U.K.) impairment of $139 million, comprising $105 million goodwill and $34 million trade name, weighed on other businesses, which posted only $8 million of operating earnings.
- Balance sheet strengthened: total debt to capitalization fell to 51.5% from 56.2%, and the company returned $316 million in dividends and $425 million in share repurchases.
- Capex guidance for 2019 is $300 million to $350 million, and the new lease standard adds roughly $210 million to $230 million of right-of-use assets without material earnings impact.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, W.W. Grainger kept $0.07.
- Revenue$11.22B100.0%
- Cost of revenue−$6.87B61.3%
- Gross profit$4.35B38.7%
- Operating costs−$3.19B28.4%
- Operating income$1.16B10.3%
- Interest, other & tax−$376.0M3.4%
- Net income$782.0M7.0%
Where FY2018 revenue went
$11.22B- Cost of revenue: $6.87B, 61% of revenue
- SG&A: $3.19B, 28% of revenue
- Net income: $782.0M, 7.0% of revenue
- Interest, other & tax: $376.0M, 3.4% of revenue
Kept 7.0% as net incomeNet income $782.0M · 7.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 28, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $11.22B$10.43B | +7.6% |
| Cost of Revenue | $6.87B$6.33B | +8.6% |
| Gross Profit | $4.35B$4.10B | +6.1% |
| SG&A Expenses | $3.19B$3.06B | +4.1% |
| Operating Income | $1.16B$1.03B | +11.9% |
| Interest Expense | $88.00M$89.00M | −1.1% |
| Net Income | $782.00M$586.00M | +33.4% |
| EPS (Basic) | $13.82$10.07 | +37.2% |
| EPS (Diluted) | $13.73$10.02 | +37.0% |
| Shares Outstanding (Basic) | 56.10M57.70M | −2.8% |
| Shares Outstanding (Diluted) | 56.50M58.00M | −2.6% |
05—Questions
Frequently Asked Questions
Why did reported earnings grow so much faster than sales in 2018?
Operating earnings grew 12% on 8% sales growth, and net earnings rose 33%. Drivers include operating leverage on higher volume, a lower effective tax rate from the Tax Cuts and Jobs Act (23.9% vs. 33.5%), and a lower share count from buybacks. Restructuring and impairment charges in 2017 and 2018 also distort year-over-year comparisons, and management's adjusted figures show a more modest but still strong improvement.
How much of the 2018 profit improvement came from one-time items?
The 2018 results include $186 million of pre-tax restructuring and impairment charges, net of branch gains, versus $112 million in 2017. Management's adjusted net earnings were $952 million versus $670 million, a 42% increase. The $139 million Cromwell impairment is non-cash, but the restructuring costs in Canada and corporate represent continuing cash-related spend. Investors should weigh the adjusted figures carefully because the company has used non-GAAP adjustments for several consecutive years.
What is the outlook for the U.S. and Canadian businesses?
Management forecasts that U.S. business investment, industrial production and GDP will slow in 2019 but remain stable, while business inventory and exports improve. The U.S. business is focused on market share growth, differentiated sales and service, and flawless order-to-cash execution. In Canada, the focus is on stabilizing volume after completing the majority of its cost structure reset, following a 14% sales decline in 2018 driven by branch closures and coverage optimization.
Is Grainger's balance sheet and cash generation under pressure?
The balance sheet is in reasonable shape. Total debt to capitalization improved to 51.5%, and the company has no material debt covenants beyond customary terms. Long-term debt is $2.09 billion, with the largest tranche being $1 billion of 4.60% notes due 2045. Operating cash flow was $1,057 million, flat year over year, as inventory growth ($129 million) and payables timing absorbed gains. Cash rose to $538 million, though about 49% of that is held outside the U.S.
What are the main risks investors should monitor?
Key risks include cyclical demand from industrial customers tied to capital spending and commodity prices, commodity and tariff-driven cost inflation that may not be fully passed to customers, supply disruptions from Asian sourcing, and cybersecurity incidents. The company also faces risks from competition from manufacturers and online players, foreign currency exposure, goodwill impairment risk in international units such as Cromwell, and regulatory exposure as a government contractor. The UK's exit from the EU is specifically cited as a source of uncertainty for the UK business.
06—Continue