GWW 10-Q
W.W. Grainger, Inc. (GWW)
10-Q
2022-07-29
For: 2022-06-30
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2022
OR
For the transition period from ______ to _______
Commission file number 1-5684
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
Registrant’s telephone number, including area code: (847 ) 535-1000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
There were 50,871,195 shares of the Company’s Common Stock outstanding as of July 22, 2022.
1
| TABLE OF CONTENTS | ||||||||
| Page | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1: | Financial Statements (Unaudited) | |||||||
| Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2022 and 2021 | ||||||||
| Condensed Consolidated Statements of Comprehensive Earnings for the Three and Six Months Ended June 30, 2022 and 2021 | ||||||||
| Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 | ||||||||
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 | ||||||||
| Condensed Consolidated Statements of Shareholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021 | ||||||||
| Notes to Condensed Consolidated Financial Statements | ||||||||
| Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4: | Controls and Procedures | |||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1: | Legal Proceedings | |||||||
| Item 1A: | Risk Factors | |||||||
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 6: | Exhibits | |||||||
| Signatures | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1: Financial Statements
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of dollars and shares, except for per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating earnings | |||||||||||||||||||||||
| Other (income) expense: | |||||||||||||||||||||||
| Interest expense – net | |||||||||||||||||||||||
| Other – net | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense – net | |||||||||||||||||||||||
Earnings before income taxes | |||||||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||
| Less net earnings attributable to noncontrolling interest | |||||||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
3
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | ||||||||||||||||||||
| Other comprehensive earnings (losses): | |||||||||||||||||||||||
| Foreign currency translation adjustments – net of reclassification to earnings | ( | ( | ( | ||||||||||||||||||||
Postretirement benefit plan losses and other – net of tax benefit of $ | ( | ( | ( | ( | |||||||||||||||||||
| Total other comprehensive earnings (losses) | ( | ( | ( | ||||||||||||||||||||
| Comprehensive earnings – net of tax | |||||||||||||||||||||||
| Less comprehensive earnings (losses) attributable to noncontrolling interest | |||||||||||||||||||||||
Net earnings | |||||||||||||||||||||||
Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive earnings attributable to noncontrolling interest | ( | ( | |||||||||||||||||||||
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
4
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
| As of | |||||||||||
| Assets | (Unaudited) June 30, 2022 | December 31, 2021 | |||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (less allowances for credit losses of $ | |||||||||||
| Inventories – net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, buildings and equipment – net | |||||||||||
| Goodwill | |||||||||||
| Intangibles – net | |||||||||||
| Operating lease right-of-use | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Current maturities of long-term debt | $ | $ | |||||||||
| Trade accounts payable | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Operating lease liability | |||||||||||
| Accrued expenses | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt (less current maturities) | |||||||||||
| Long-term operating lease liability | |||||||||||
| Deferred income taxes and tax uncertainties | |||||||||||
| Other non-current liabilities | |||||||||||
| Shareholders' equity | |||||||||||
Cumulative preferred stock – $ | |||||||||||
Common Stock – $ | |||||||||||
| Additional contributed capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive losses | ( | ( | |||||||||
Treasury stock, at cost – | ( | ( | |||||||||
| Total W.W. Grainger, Inc. shareholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
5
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | |||||||||||
| Deferred income taxes and tax uncertainties | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Net gains from sale or redemption of assets | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Trade accounts payable | |||||||||||
| Accrued liabilities | ( | ( | |||||||||
| Income taxes – net | ( | ||||||||||
| Other non-current liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, buildings, equipment and intangibles | ( | ( | |||||||||
| Proceeds from sale or redemption of assets | |||||||||||
| Other – net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments of long-term debt | ( | ||||||||||
| Proceeds from stock options exercised | |||||||||||
| Payments for employee taxes withheld from stock awards | ( | ( | |||||||||
| Purchases of treasury stock | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Other – net | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Exchange rate effect on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
6
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock | Noncontrolling Interest | Total | |||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | ( | — | ( | ||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | ( | — | ( | ( | ||||||||||||||||
| Reclassification due to the adoption of ASU 2019-12 | — | — | — | — | — | ||||||||||||||||||
Cash dividends paid ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Stock-based compensation | — | ( | — | — | |||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | ( | ( | ( | ||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | — | — | ||||||||||||||||||
| Capital contribution | — | — | — | — | — | ||||||||||||||||||
Cash dividends paid ($ | — | — | ( | — | — | ( | ( | ||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
7
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock | Noncontrolling Interest | Total | |||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | ( | — | ( | ||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | ( | — | ( | ( | ||||||||||||||||
Cash dividends paid ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | ( | ( | ( | ||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | ( | — | ( | ( | ||||||||||||||||
Cash dividends paid ($ | — | — | ( | — | — | ( | ( | ||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
8
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
Basis of Presentation
The Company's Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and therefore do not include all information and disclosures normally included in the annual Consolidated Financial Statements. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from these estimated amounts. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
The Condensed Consolidated Balance Sheet at December 31, 2021, has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2022 (2021 Form 10-K).
There were no material changes to the Company’s significant accounting policies from those disclosed in Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2021 Form 10-K.
New Accounting Standards
Accounting Pronouncements Recently Adopted
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update provides increased transparency of government assistance, including the disclosure of the types of assistance an entity receives, an entity's method of accounting for government assistance and the effect of the assistance on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021 and should be applied prospectively or retrospectively. Early adoption is permitted. The Company adopted this ASU on January 1, 2022 on a prospective basis and it did not have a material impact on the Consolidated Financial Statements and related disclosures.
Accounting Pronouncements Recently Issued
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting as modified by subsequently issued ASU 2021-01. This update provides optional expedients and exceptions for applying GAAP to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied prospectively to contract modifications made and hedging relationships entered or evaluated on or before December 31, 2022. The Company evaluated the impact of this ASU and it does not expect a material impact on the Consolidated Financial Statements.
9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 - REVENUE
Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services. Total service revenue accounted for approximately 1
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market-specific factors. The Company's presentation of revenue by segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions N.A. segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from non-contractual purchases.
The following tables present the Company's percentage of revenue by reportable segment and by major customer industry:
| Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | Endless Assortment | Total Company (2) | High-Touch Solutions N.A. | Endless Assortment | Total Company (2) | ||||||||||||||||||||||||||||||
| Contractors | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Commercial | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Government | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Healthcare | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Manufacturing | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Retail/Wholesale | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Transportation | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Other (1) | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Total net sales | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Percent of total company revenue | % | % | % | % | % | % | |||||||||||||||||||||||||||||
(1) Other primarily includes revenue from industries and customers that are not material individually, including agriculture, mining, natural resources and resellers not aligned to a major industry segment. | |||||||||||||||||||||||||||||||||||
(2) Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately | |||||||||||||||||||||||||||||||||||
10
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | Endless Assortment | Total Company (2) | High-Touch Solutions N.A. | Endless Assortment | Total Company (2) | ||||||||||||||||||||||||||||||
| Contractors | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Commercial | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Government | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Healthcare | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Manufacturing | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Retail/Wholesale | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Transportation | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Other (1) | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Total net sales | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Percent of total company revenue | % | % | % | % | % | % | |||||||||||||||||||||||||||||
(1) Other primarily includes revenue from industries and customers that are not material individually, including agriculture, mining, natural resources and resellers not aligned to a major industry segment. | |||||||||||||||||||||||||||||||||||
(2) Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately | |||||||||||||||||||||||||||||||||||
Total accrued sales incentives were approximately $92 million and $73 million as of June 30, 2022 and December 31, 2021, and are reported as part of Accrued expenses.
The Company had no material unsatisfied performance obligations, contract assets or liabilities as of June 30, 2022 and December 31, 2021.
NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
| As of | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Building, structures and improvements | |||||||||||
| Furniture, fixtures, machinery and equipment | |||||||||||
| Property, buildings and equipment | $ | $ | |||||||||
| Less accumulated depreciation and amortization | |||||||||||
| Property, buildings and equipment – net | $ | $ | |||||||||
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| High-Touch Solutions N.A. | Endless Assortment | Other | Total | |||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||
| Translation | ( | ( | ||||||||||||||||||||||||
| Balance at December 31, 2021 | ||||||||||||||||||||||||||
| Translation | ( | ( | ( | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
The cumulative goodwill impairments as of June 30, 2022, were $137 million and consisted of $32 million within High-Touch Solutions N.A. and $105 million in Other.
There were no
The balances in Intangible assets – net are as follows (in millions of dollars):
| As of | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Weighted average life | Gross carrying amount | Accumulated amortization/impairment | Net carrying amount | Gross carrying amount | Accumulated amortization/impairment | Net carrying amount | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Trademarks, trade names and other | |||||||||||||||||||||||||||||||||||||||||
| Non-amortized trade names and other | Indefinite | ||||||||||||||||||||||||||||||||||||||||
| Capitalized software | |||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
12
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 - DEBT
Long-term debt, including current maturities and debt issuance costs and discounts – net, consisted of the following (in millions of dollars):
| As of | |||||||||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Japanese yen term loan | |||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Less current maturities | ( | ( | |||||||||||||||||||||
Debt issuance costs and discounts – net of amortization | ( | ( | ( | ( | |||||||||||||||||||
| Long-term debt (less current maturities) | $ | $ | $ | $ | |||||||||||||||||||
Senior Notes
In the years 2015-2020, Grainger issued $2.3 billion in unsecured long-term debt (Senior Notes) primarily to provide flexibility in funding general working capital needs, share repurchases and long-term cash requirements. The Senior Notes require no principal payments until maturity and interest is paid semi-annually.
The Company incurred debt issuance costs related to its Senior Notes of approximately $29 million, representing underwriting fees and other expenses, that were recorded as a contra-liability within Long-term debt and are being amortized over the term of the Senior Notes using the straight-line method to Interest expense – net.
The Company uses interest rate swaps to manage the risks associated with its 1.85 % Senior Notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of June 30, 2022 and December 31, 2021, are presented within Other in the table above. For further discussion on the Company's hedge accounting policies and derivative instruments, see Note 6.
Term Loan
In August 2020, MonotaRO entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of June 30, 2022 and December 31, 2021, the carrying amount of the term loan, including current maturities due within one year, was $67 million and $78 million, respectively. The term loan matures in 2024, payable over four equal semi-annual principal installments in 2023 and 2024 and bears an average interest of 0.05 %.
Fair Value
The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy.
For further information on the Company’s debt instruments, see Note 6 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company’s 2021 Form 10-K.
NOTE 6 - DERIVATIVE INSTRUMENTS
13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
currency-denominated intercompany borrowings. The Company did not enter into these agreements for trading or speculative purposes.
Cash Flow Hedges
The Company uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from foreign currency-denominated intercompany borrowings via cross-currency swaps. Gains or losses on the cross-currency swaps are reported as a component of Accumulated other comprehensive earnings (losses) (AOCE) and reclassified into earnings in the same period during which the hedged transaction affects earnings. The notional amount of the Company’s outstanding cash flow hedges as of June 30, 2022 and December 31, 2021 was approximately $34
The effect of the Company’s cash flow hedges on the Condensed Consolidated Statement of Earnings (Other – net) and AOCE for the three and six months ended June 30, 2022 and 2021 was not material.
Fair Value Hedges
The Company uses fair value hedges primarily to hedge a portion of its fixed-rate long-term debt via interest rate swaps. Changes in the fair value of the interest rate swaps, along with the gain or loss on the hedged item, is recorded in earnings under the same line item, Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of June 30, 2022 and December 31, 2021 was $500
The effect of the Company's fair value hedges in Interest expense – net on the Condensed Consolidated Statement of Earnings for the three and six months ended June 30, 2022 and 2021, respectively, is as follows (in millions of dollars):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Gains (losses) | |||||||||||||||||||||||
| Interest rate swaps: | |||||||||||||||||||||||
| Hedged item | $ | $ | ( | $ | $ | ||||||||||||||||||
| Derivatives designated as hedging instrument | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021, respectively, were as follows (in millions of dollars):
| As of | |||||||||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| Balance Sheet Classification | Fair Value and Carrying Amounts | ||||||||||||||||
| Cross-currency swap | Accrued expenses | $ | $ | ||||||||||||||
| Other non-current liabilities | $ | $ | |||||||||||||||
| Interest rate swaps | Other assets | $ | $ | ||||||||||||||
| Other non-current liabilities | $ | $ | |||||||||||||||
The carrying amount of the liability hedged by the interest rate swaps (Long-term debt), including the cumulative amount of fair value hedging adjustments, as of June 30, 2022 and December 31, 2021 totaled $477 million and $501 million, respectively.
Fair Value
The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 inputs within the fair value hierarchy and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments
14
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7 - DIVIDEND
NOTE 8 - SEGMENT INFORMATION
Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining international businesses, which include the Cromwell business, are classified as Other to reconcile to consolidated results. These businesses individually and in the aggregate do not meet the criteria of a reportable segment.
Corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for intersegment sales from the High-Touch Solutions N.A. segment to the Endless Assortment segment are included in each segment's Selling, general and administrative expenses (SG&A) and are eliminated in consolidation.
Following is a summary of segment results (in millions of dollars):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | ||||||||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Endless Assortment | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Total Company | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory assortment. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked.
Assets for reportable segments are not disclosed. This information is not regularly reviewed by the Company's Chief Operating Decision Maker.
NOTE 9 - CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings, including claims related to: product liability, safety or compliance; privacy and cybersecurity matters; negligence; contract disputes; environmental issues; unclaimed property; wage and hour laws; intellectual property; advertising and marketing; consumer protection; pricing (including disaster or emergency declaration pricing statutes); employment practices; regulatory compliance, including trade and export matters; anti-bribery and corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.
As previously disclosed, beginning in the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints in which Grainger has been named, which to date encompass approximately 186 plaintiffs, seek recovery of compensatory and other damages and relief in relation to personal injury, including one death and various other alleged injuries. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in
15
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the case KMCO, LLC, No. 20-60028. As a result of the Chapter 7 proceedings, the claims against KMCO in the Harris County lawsuits were stayed. Effective January 1, 2021, the Bankruptcy Court lifted the stay with respect to KMCO. In the product liability related cases, the Harris County District Court has decided to conduct bellwether trials involving a subset of plaintiffs the Court believes are representative of the parties' claims and defenses. The first such trial is scheduled for early 2023 and will include six plaintiffs. Additional trials may follow after the resolution of this initial trial.
On December 16, 2020, KMCO, the trustee of its estate and ORG Chemical Holdings, LLC, KMCO’s parent company (ORG), filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, which seeks unspecified damages (the KMCO Case). On April 1, 2021, 24 individual plaintiffs filed a petition in intervention seeking to be added as plaintiffs in the KMCO Case and seeking unspecified damages. On March 24, 2021, Indian Harbor Insurance Company, together with other insurance companies and underwriters, filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, seeking reimbursement of insurance payments made to or on behalf of KMCO and ORG, the insured parties under their respective policies, and other damages.
Grainger is investigating each of the various claims against the Company relating to the KMCO chemical refinery incident and intends to contest these matters vigorously.
Also, as a government contractor selling to federal, state and local governmental entities, the Company may be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration, pricing and product compliance.
From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits.
While the Company is unable to predict the outcome of any of these proceedings and other matters, it believes that their ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition or results of operations.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of W.W. Grainger, Inc. (Grainger or Company) as it is viewed by the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2021 included in the Company's 2021 Form 10-K and the Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1: Financial Statements of this Form 10-Q.
Percentage figures included in this section have not been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in the Company's Condensed Consolidated Financial Statements or in the associated text.
General
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America, Japan and the U.K. Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its customers worldwide, which rely on Grainger for products and services that enable them to run safe, sustainable and productive operations.
Strategic Priorities and Recent Events
The Company continues to adhere to its purpose to keep the world working while using its core principles as the framework for expanding Grainger’s leadership position and ensuring Grainger is the go-to-partner for building and running safe, sustainable and productive operations.
For a discussion of the Company’s strategic priorities for 2022, see Part 1, Item 1: Business and Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Overview) in the Company’s 2021 Form 10-K.
Russia’s Invasion of Ukraine
In February 2022, Russia invaded Ukraine. In response to the conflict, the United States (U.S.) and other countries have implemented economic and other sanctions. While Grainger has limited direct exposure in Russia and Ukraine, the Company continues to monitor any broader impact on the global economy, including with respect to inflation, supply chains and fuel prices. The full impact of the conflict on the Company’s business and financial results remains uncertain and will depend on the severity and duration of the conflict and its impact on global and regional economic conditions. The Company does not currently expect significant disruption to its overall business resulting from the conflict.
Inflationary Cost Environment
During fiscal 2021 and continuing into the first half of fiscal 2022, in combination with the economic recovery of the ongoing COVID-19 pandemic, the global economy continues to experience disruptions including to the commodity, labor and transportation markets. These disruptions have contributed to an inflationary environment which has affected, and may continue to affect, the price and availability of certain products and services necessary for the Company's operations. Such disruptions have impacted, and may continue to impact, the Company's business, financial condition and results of operations. As a result of continued inflation, the Company has implemented strategies designed to mitigate certain adverse effects of higher costs during the first half of fiscal 2022 while also remaining market price competitive.
For further discussion of the Company's risks and uncertainties, see Part II, Item 1A: Risk Factors of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2022 and Part I, Item 1A: Risk Factors in the Company’s 2021 Form 10-K.
17
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations –Three Months Ended June 30, 2022
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
Three Months Ended June 30, | |||||||||||||||||||||||||||||
Percent Increase from Prior Year | As a Percent of Net Sales | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
Net sales (1) | $ | 3,837 | $ | 3,207 | 19.6 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 2,396 | 2,083 | 15.0 | 62.4 | 65.0 | ||||||||||||||||||||||||
| Gross profit | 1,441 | 1,124 | 28.3 | 37.6 | 35.0 | ||||||||||||||||||||||||
| SG&A | 907 | 790 | 14.9 | 23.7 | 24.6 | ||||||||||||||||||||||||
| Operating earnings | 534 | 334 | 60.0 | 13.9 | 10.4 | ||||||||||||||||||||||||
| Other expense – net | 17 | 15 | 11.2 | 0.4 | 0.5 | ||||||||||||||||||||||||
| Income tax provision | 128 | 76 | 70.6 | 3.4 | 2.3 | ||||||||||||||||||||||||
| Net earnings | 389 | 243 | 59.8 | 10.1 | 7.6 | ||||||||||||||||||||||||
| Noncontrolling interest | 18 | 18 | 0.1 | 0.4 | 0.6 | ||||||||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | 371 | $ | 225 | 64.5 | 9.7 | 7.0 | ||||||||||||||||||||||
| Diluted earnings per share: | $ | 7.19 | $ | 4.27 | 68.4 | % | |||||||||||||||||||||||
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q. | |||||||||||||||||||||||||||||
The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior period to the most recent period (in millions of dollars):
| Three Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net sales | $ | 3,837 | $ | 3,207 | |||||||
| $ Change from prior-year period | 630 | 370 | |||||||||
| % Change from prior-year period | 19.6 | % | 13.1 | % | |||||||
Daily sales (1) | $ | 60.0 | $ | 50.1 | |||||||
| $ Change from prior-year period | 9.9 | 5.8 | |||||||||
| % Change from prior-year period | 19.6 | % | 13.1 | % | |||||||
| Daily sales impact of currency fluctuations | (2.4) | % | 0.9 | % | |||||||
(1) Daily sales are defined as the total net sales for the period divided by the number of U.S. selling days in the period. There were 64 sales days in both the three months ended June 30, 2022 and June 30, 2021. | |||||||||||
Net sales of $3,837 million for the three months ended June 30, 2022 increased $630 million, or 19.6%, compared to the same period in 2021. The increase in net sales was primarily due to growth in the High-Touch Solutions N.A. and Endless Assortment segments. For further discussion on the Company's net sales, see the Segment Analysis section below.
Gross profit of $1,441 million for the three months ended June 30, 2022 increased $317 million, or 28%, compared to the same period in 2021. Gross profit margin of 37.6% increased 2.6 percentage points. The increase was due to
18
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
lapping pandemic-related inventory adjustments in the second quarter of 2021 and improved product mix in the second quarter of 2022.
SG&A of $907 million for the three months ended June 30, 2022 increased $117 million, or 15%, compared to the same period in 2021. The increase was primarily due to higher marketing, payroll and variable compensation expenses.
Operating earnings of $534 million for the three months ended June 30, 2022 increased $200 million, or 60%, compared to the same period in 2021.
Income taxes of $128 million for the three months ended June 30, 2022 increased $52 million or 71%, compared to the same period in 2021. The increase was primarily driven by higher taxable operating earnings in the second quarter of 2022. Grainger's effective tax rates were 24.8% and 23.6% for the three months ended June 30, 2022 and 2021, respectively.
Net earnings of $371 million attributable to W.W. Grainger, Inc. for the three months ended June 30, 2022 increased $146 million, or 65%, compared to the same period in 2021.
Diluted earnings per share was $7.19 for the three months ended June 30, 2022, an increase of 68% compared to $4.27 for the same period in 2021.
Segment Analysis
For further segment information, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
| Three Months Ended June 30, | |||||||||||||||||
| 2022 | 2021 | Percent Increase | |||||||||||||||
| Net sales | $ | 3,053 | $ | 2,498 | 22.2 | % | |||||||||||
| Gross profit | $ | 1,211 | $ | 922 | 31.4 | % | |||||||||||
| SG&A | $ | 736 | $ | 640 | 15.0 | % | |||||||||||
| Operating earnings | $ | 475 | $ | 282 | 68.3 | % | |||||||||||
Net sales of $3,053 million for the three months ended June 30, 2022 increased $555 million, or 22.2%, compared to the same period in 2021. The increase in net sales was due to growth in all geographies and included increased volume, which includes product mix, of 11.8% and price, which includes customer mix, of 10.6%, partially offset by unfavorable foreign exchange of 0.2%.
Gross profit of $1,211 million for the three months ended June 30, 2022 increased $289 million, or 31%, compared to the same period in 2021. Gross profit margin of 39.7% increased 2.8 percentage points. The increase was due to lapping pandemic-related inventory adjustments in the second quarter of 2021 and improved product mix in the second quarter of 2022.
SG&A of $736 million for the three months ended June 30, 2022 increased $96 million, or 15%, compared to the same period in 2021. The increase was primarily due to higher marketing, payroll and variable compensation expenses. SG&A leverage improved by 1.5 percentage points.
Operating earnings of $475 million for the three months ended June 30, 2022 increased $193 million, or 68%, compared to the same period in 2021.
19
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Endless Assortment
The following table shows reported segment results (in millions of dollars):
| Three Months Ended June 30, | |||||||||||||||||
| 2022 | 2021 | Percent Increase | |||||||||||||||
| Net sales | $ | 719 | $ | 645 | 11.4 | % | |||||||||||
| Gross profit | $ | 209 | $ | 182 | 15.4 | % | |||||||||||
| SG&A | $ | 147 | $ | 124 | 18.9 | % | |||||||||||
| Operating earnings | $ | 62 | $ | 58 | 8.0 | % | |||||||||||
Net sales of $719 million for the three months ended June 30, 2022, increased $74 million, or 11.4%, compared to the same period in 2021. The increase was due to sales growth of 21.1%, driven by continued customer acquisition and repeat and enterprise customer growth at MonotaRO, partially offset by unfavorable foreign exchange of 9.7% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.
Gross profit of $209 million for the three months ended June 30, 2022 increased $27 million, or 15%, compared to the same period in 2021. Gross profit margin of 29.2% increased 1.0 percentage point compared to the same period in 2021. The increase was driven by freight efficiencies at Zoro and MonotaRO.
SG&A of $147 million for the three months ended June 30, 2022 increased $23 million, or 19%, compared to the same period in 2021. The increase was primarily driven by higher marketing, occupancy and payroll and benefits expenses in the second quarter of 2022. SG&A leverage decreased by 1.3 percentage points.
Operating earnings of $62 million for the three months ended June 30, 2022 increased $4 million, or 8%, compared to the same period in 2021.
Other
Net sales of $65 million for the three months ended June 30, 2022, increased $1 million, or 2.7%, compared to the same period in 2021. The increase was due to sales growth of 14.4%, partially offset by unfavorable foreign exchange of 11.7% due to changes in the exchange rate between the U.S. dollar and the British pound sterling.
Operating losses of $3 million for the three months ended June 30, 2022 improved $3 million, or 47.2%, compared to the same period in 2021.
20
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Six Months Ended June 30, 2022
The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior period to the most recent period (in millions of dollars):
Six Months Ended June 30, | |||||||||||||||||||||||||||||
Percent Increase from Prior Year | As a Percent of Net Sales | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
Net sales (1) | $ | 7,484 | $ | 6,291 | 19.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 4,660 | 4,074 | 14.4 | 62.3 | 64.8 | ||||||||||||||||||||||||
| Gross profit | 2,824 | 2,217 | 27.4 | 37.7 | 35.2 | ||||||||||||||||||||||||
| SG&A | 1,756 | 1,525 | 15.1 | 23.4 | 24.2 | ||||||||||||||||||||||||
| Operating earnings | 1,068 | 692 | 54.4 | 14.3 | 11.0 | ||||||||||||||||||||||||
| Other expense – net | 34 | 30 | 13.7 | 0.5 | 0.5 | ||||||||||||||||||||||||
| Income tax provision | 260 | 164 | 59.0 | 3.5 | 2.6 | ||||||||||||||||||||||||
| Net earnings | 774 | 498 | 55.4 | 10.3 | 7.9 | ||||||||||||||||||||||||
| Noncontrolling interest | 37 | 35 | 6.1 | 0.4 | 0.5 | ||||||||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | 737 | $ | 463 | 59.1 | 9.9 | 7.4 | ||||||||||||||||||||||
| Diluted earnings per share: | $ | 14.26 | $ | 8.76 | 62.8 | % | |||||||||||||||||||||||
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q. | |||||||||||||||||||||||||||||
The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior period to the most recent period (in millions of dollars):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net sales | $ | 7,484 | $ | 6,291 | |||||||
| $ Change from prior-year period | 1,193 | 453 | |||||||||
| % Change from prior-year period | 19.0 | % | 7.8 | % | |||||||
Daily sales (1) | $ | 58.5 | $ | 49.5 | |||||||
| $ Change from prior-year period | 9.0 | 3.9 | |||||||||
| % Change from prior-year period | 18.0 | % | 8.6 | % | |||||||
| Daily sales impact of currency fluctuations | (2.0) | % | 1.0 | % | |||||||
(1) Daily sales are defined as the total net sales for the period divided by the number U.S. selling days in the period. There were 128 and 127 sales days in the six months ended June 30, 2022 and June 30, 2021, respectively. | |||||||||||
Net sales of $7,484 million for the six months ended June 30, 2022 increased $1,193 million, or 19.0%, and on a daily basis, net sales increased 18.0% compared to the same period in 2021. The increase in net sales was primarily due to sales growth in the High-Touch Solutions N.A. and Endless Assortment segments. For further discussion on the Company's net sales, see the Segment Analysis section below.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit of $2,824 million for the six months ended June 30, 2022 increased $607 million, or 27%, compared to the same period in 2021. Gross profit margin of 37.7% increased 2.5 percentage points. The increase was due to lapping pandemic-related inventory adjustments in the first half of 2021 and improved product mix in the first half of 2022.
SG&A of $1,756 million for the six months ended June 30, 2022 increased $231 million, or 15%, compared to the same period in 2021. The increase was primarily due to higher marketing, payroll and variable compensation expenses.
Operating earnings of $1,068 million for the six months ended June 30, 2022 increased $376 million, or 54%, compared to the same period in 2021.
Income taxes of $260 million for the six months ended June 30, 2022 increased $96 million or 59%, compared to the same period in 2021. The increase was primarily driven by higher taxable operating earnings in the first half of 2022. Grainger's effective tax rates were 25.2% and 24.7% for the six months ended June 30, 2022 and June 30, 2021, respectively.
Net earnings of $737 million attributable to W.W. Grainger, Inc. for the six months ended June 30, 2022 increased $274 million, or 59%, compared to the same period in 2021.
Diluted earnings per share was $14.26 for the six months ended June 30, 2022, an increase of 63% compared to $8.76 for the same period in 2021.
Segment Analysis
For further segment information, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
| Six Months Ended June 30, | |||||||||||||||||
| 2022 | 2021 | Percent Increase | |||||||||||||||
| Net sales | $ | 5,931 | $ | 4,895 | 21.2 | % | |||||||||||
| Gross profit | $ | 2,375 | $ | 1,817 | 30.7 | % | |||||||||||
| SG&A | $ | 1,419 | $ | 1,229 | 15.4 | % | |||||||||||
| Operating earnings | $ | 956 | $ | 588 | 62.6 | % | |||||||||||
Net sales of $5,931 million for the six months ended June 30, 2022 increased $1,036 million, or 21.2%, compared to the same period in 2021. On a daily basis, net sales increased 20.2% due to increased volume, which includes product mix, of 10.9% and price, which includes customer mix, of 9.4%, driven by sales growth in all geographies, partially offset by unfavorable foreign exchange of 0.1%.
Gross profit of $2,375 million for the six months ended June 30, 2022 increased $558 million, or 31%, compared to the same period in 2021. Gross profit margin of 40.0% increased 2.9 percentage points. The increase was due to lapping pandemic-related inventory adjustments in the first half of 2021 and improved product mix in the first half of 2022.
SG&A of $1,419 million for the six months ended June 30, 2022 increased $190 million, or 15% compared to the same period in 2021. The increase was primarily due to higher marketing, payroll and variable compensation expenses. SG&A leverage improved by 1.2% percentage point.
Operating earnings of $956 million for the six months ended June 30, 2022 increased $368 million, or 63%, compared to the same period in 2021.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Endless Assortment
The following table shows reported segment results (in millions of dollars):
| Six Months Ended June 30, | |||||||||||||||||
| 2022 | 2021 | Percent Increase | |||||||||||||||
| Net sales | $ | 1,416 | $ | 1,267 | 11.7 | % | |||||||||||
| Gross profit | $ | 406 | $ | 357 | 14.0 | % | |||||||||||
| SG&A | $ | 289 | $ | 244 | 18.6 | % | |||||||||||
| Operating earnings | $ | 117 | $ | 113 | 4.0 | % | |||||||||||
Net sales of $1,416 million for the six months ended June 30, 2022, increased $149 million, or 11.7%, compared to the same period in 2021. On a daily basis, net sales increased 10.9%. The increase was due to sales growth of 19.3%, driven by continued customer acquisition at Zoro and repeat customer growth at MonotaRO, partially offset by unfavorable foreign exchange of 8.4% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.
Gross profit of $406 million for the six months ended June 30, 2022 increased $49 million, or 14% compared to the same period in 2021. Gross profit margin of 28.7% increased 0.6 percentage point compared to the same period in 2021. The increase was driven by freight efficiencies at Zoro and MonotaRO.
SG&A of $289 million for the six months ended June 30, 2022 increased $45 million, or 19%, compared to the same period in 2021. The increase was primarily driven by higher occupancy expenses at MonotaRO due to the DC placed into service in the first quarter of 2022 and higher marketing and payroll and benefits expenses compared to the first half of 2021. SG&A leverage decreased by 1.2 percentage points.
Operating earnings of $117 million for the six months ended June 30, 2022 increased $4 million, or 4%, compared to the same period in 2021.
Other
Net sales of $137 million for the six months ended June 30, 2022 increased $8 million, or 6.2%, compared to the same period in 2021. On a daily basis, net sales increased 5.3%. The increase was due to sales growth of 12.6%, partially offset by unfavorable foreign exchange of 7.3% due to changes in the exchange rate between the U.S. dollar and the British pound sterling.
Operating losses of $5 million for the six months ended June 30, 2022 improved $4 million, or 42%, compared to the same period in 2021.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Grainger believes its current balances of cash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to meet its liquidity needs for the next twelve months. The Company expects to continue to invest in its business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through cash flows generated from operations. Grainger also maintains access to capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity.
Cash, Cash Equivalents and Liquidity
As of June 30, 2022 and December 31, 2021, Grainger's cash and cash equivalents were $262 million and $241 million, respectively. As of June 30, 2022, the Company had approximately $1.5 billion in available liquidity.
Cash Flows
Net cash provided by operating activities was $593 million and $563 million for the six months ended June 30, 2022 and 2021, respectively. The increase in cash provided by operating activities was primarily due to higher net earnings, partially offset by unfavorable working capital and increased tax payments compared to the same period in 2021.
Net cash used in investing activities was $172 million and $130 million for the six months ended June 30, 2022 and 2021, respectively. The change in net cash used in investing activities was primarily due to timing of Japanese supply chain investments.
Net cash used in financing activities was $388 million and $463 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in net cash used in financing activities was due to lower volume of treasury stock repurchases in the first half of 2022.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures. Working capital as of June 30, 2022, was $2,664 million, an increase of $209 million when compared to $2,455 million as of December 31, 2021. The increase was primarily driven by increased accounts receivable and inventory due to continued sales growth, partially offset by higher accounts payable. As of June 30, 2022 and December 31, 2021, the ratio of current assets to current liabilities was 2.6 and 2.7, respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit.
Total debt, which is defined as total interest-bearing debt and lease liabilities as a percent of total capitalization, was 52.3% and 56.2% as of June 30, 2022 and December 31, 2021, respectively.
Grainger receives ratings from two independent credit rating agencies: Moody's Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade.
The following table summarizes the Company's credit ratings at June 30, 2022:
| Corporate | Senior Unsecured | Short-term | |||||||||||||||
| Moody's | A3 | A3 | P2 | ||||||||||||||
| S&P | A+ | A+ | A1 | ||||||||||||||
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Commitments and Other Contractual Obligations
There were no material changes to the Company’s commitments and other contractual obligations from those disclosed in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2021 Form 10-K.
Critical Accounting Estimates
The preparation of Grainger’s Condensed Consolidated Financial Statements and accompanying notes are in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make assumptions and estimates that affect the reported amounts. The Company considers an accounting policy to be a critical estimate if: (i) it involves assumptions that are uncertain when judgment was applied, and (ii) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on Grainger’s consolidated financial position and results. While the Company believes the assumptions and estimates used are reasonable, the Company’s management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances.
Note 1 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q and in Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements of the Company's 2021 Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s Condensed Consolidated Financial Statements.
There were no material changes to the Company's critical accounting estimates from those disclosed in Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2021 Form 10-K.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
From time to time in this Quarterly Report on Form 10-Q as well as in other written reports, communications and verbal statements, the Company makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions.
The Company cannot guarantee that any forward-looking statement will be realized and achievement of future results is subject to risks and uncertainties, many of which are beyond the Company’s control, which could cause the Company’s results to differ materially from those that are presented.
Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 and its variants (COVID-19), as well as the impact of actions taken or contemplated by government authorities to mitigate the spread of COVID-19 (such as vaccine mandates for certain federal contractors, mask mandates, social distancing or other requirements) and to promote economic stability and recovery, on the Company’s businesses, its employees, customers and suppliers, including disruption to the Company’s operations resulting from employee illnesses, the development, availability and usage of effective treatment or vaccines, changes in customers’ product needs, the acquisition of excess inventory leading to additional inventory carrying costs and inventory obsolescence, raw material, inventory and labor shortages, continued strain on global supply chains, and diminished transportation availability and efficiency, disruption caused by business responses to the COVID-19 pandemic, including remote working arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company’s controls and procedures required by remote working arrangements, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the Company’s products; inflation, higher product costs or other expenses, including operational expenses; the impact of Russia's invasion of Ukraine on the global economy; a major loss of customers; loss or disruption of sources of supply; changes in customer or product mix; increased competitive pricing pressures; failure to enter into or sustain contractual arrangements on a satisfactory basis with group purchasing organizations; failure to develop, manage or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company’s gross profit margin; the Company’s responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising and marketing, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, compliance or safety, trade and export compliance, general commercial disputes, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards, including new or stricter environmental laws or regulations; government contract matters; disruption or breaches of information technology or data security systems involving the Company or third parties on which the Company depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including price and trading volume volatility or price declines of the Company’s common stock; commodity price volatility; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; geopolitical events, including war or acts of terrorism; other pandemic diseases or viral contagions; natural or human induced disasters, extreme weather and other catastrophes or conditions; effects of climate change; competition for, or failure to attract, retain, train, motivate and develop key employees; loss of key members of management or key employees; changes in effective tax rates; changes in credit ratings or outlook; the Company’s incurrence of indebtedness and other factors identified under Part I, Item 1A: Risk Factors in the Company's 2021 Form 10-K, as updated from time to time in the Company’s Quarterly Reports on Form 10-Q.
Caution should be taken not to place undue reliance on the Company’s forward-looking statements and the Company undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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W.W. Grainger, Inc. and Subsidiaries
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Grainger’s primary market risk exposures include changes in foreign currency exchange and interest rates.
There were no material changes to the Company’s market risk from those described in Part II, Item 7A: Quantitative and Qualitative Disclosures About Market Risk in the Company's 2021 Form 10-K.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in Grainger's internal control over financial reporting for the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1: Legal Proceedings
For a description of the Company’s legal proceedings, see Note 9 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1: Financial Information of this Form 10-Q.
Item 1A: Risk Factors
There have been no material changes from the risk factors previously disclosed in Part II, Item 1A: Risk Factors in the Company's quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2022 and Part 1, Item 1A: Risk Factors in the Company's 2021 Form 10-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – Second Quarter 2022
| Period | Total Number of Shares Purchased (A) (B) | Average Price Paid per Share (C) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (D) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs | |||||||||||||
| April 1 – April 30 | 78,309 | $510.71 | 78,309 | 3,656,983 | |||||||||||||
| May 1 – May 31 | 103,261 | $474.04 | 103,261 | 3,553,722 | |||||||||||||
| June 1 – June 30 | 60,354 | $468.97 | 60,280 | 3,493,442 | |||||||||||||
| Total | 241,924 | 241,850 | |||||||||||||||
(A)There were no shares withheld to satisfy tax withholding obligations.
(B)The difference of 74 shares between the Total Number of Shares Purchased and the Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs represents shares purchased by the administrator and record keeper of the W.W. Grainger, Inc. Retirement Savings Plan for the benefit of the employees who participate in the plan.
(C)Average price paid per share excludes commissions of $0.01 per share paid.
(D)Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors and announced April 28, 2021 (2021 Program). The 2021 Program authorized the repurchase of up to 5 million shares with no expiration date.
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W.W. Grainger, Inc. and Subsidiaries
Item 6: Exhibits
| EXHIBIT NO. | DESCRIPTION | |||||||
| 2022 Form of W.W. Grainger, Inc. 2022 Incentive Plan Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* | ||||||||
| 2022 Form of W.W. Grainger, Inc. 2022 Incentive Plan Performance Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* | ||||||||
| W.W. Grainger, Inc. 2022 Incentive Plan, incorporated by reference to Appendix C of the Company's Definitive Proxy Statement on Schedule 14A filed on March 17, 2022.* | ||||||||
| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||
(*) Management contract or compensatory plan or arrangement | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| W.W. GRAINGER, INC. | |||||||||||
| Date: | July 29, 2022 | By: | /s/ Deidra C. Merriwether | ||||||||
| Deidra C. Merriwether | |||||||||||
| Senior Vice President | |||||||||||
| and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| Date: | July 29, 2022 | By: | /s/ Laurie R. Thomson | ||||||||
| Laurie R. Thomson | |||||||||||
| Vice President and Controller | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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