filings.toolsItem 1. Financial Statements
63K characters. Original on sec.gov · Markdown
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 | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 3,372 | $ | 3,018 | $ | 9,663 | $ | 8,856 | |||||||||||||||
| Cost of goods sold | 2,122 | 1,944 | 6,196 | 5,645 | |||||||||||||||||||
| Gross profit | 1,250 | 1,074 | 3,467 | 3,211 | |||||||||||||||||||
| Selling, general and administrative expenses | 812 | 694 | 2,337 | 2,467 | |||||||||||||||||||
| Operating earnings | 438 | 380 | 1,130 | 744 | |||||||||||||||||||
| Other (income) expense: | |||||||||||||||||||||||
| Interest expense - net | 22 | 23 | 65 | 72 | |||||||||||||||||||
| Other - net | (6) | (5) | (19) | (16) | |||||||||||||||||||
| Total other expense - net | 16 | 18 | 46 | 56 | |||||||||||||||||||
| Earnings before income taxes | 422 | 362 | 1,084 | 688 | |||||||||||||||||||
| Income tax provision | 107 | 106 | 271 | 118 | |||||||||||||||||||
| Net earnings | 315 | 256 | 813 | 570 | |||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interest | 18 | 16 | 53 | 43 | |||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | 297 | $ | 240 | $ | 760 | $ | 527 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 5.68 | $ | 4.43 | $ | 14.48 | $ | 9.74 | |||||||||||||||
| Diluted | $ | 5.65 | $ | 4.41 | $ | 14.40 | $ | 9.70 | |||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic | 51.8 | 53.6 | 52.1 | 53.6 | |||||||||||||||||||
| Diluted | 52.1 | 53.9 | 52.4 | 53.8 | |||||||||||||||||||
| Cash dividends paid per share | $ | 1.62 | $ | 1.53 | $ | 4.77 | $ | 4.41 |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Net earnings | $ | 315 | $ | 256 | $ | 813 | 570 | ||||||||||||||||||||||||||||
| Other comprehensive earnings (losses): | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of reclassification to earnings | (17) | 24 | (43) | 30 | |||||||||||||||||||||||||||||||
| Postretirement benefit plan losses, net of tax benefit of $1, $1, $3, and $3, respectively | (4) | (2) | (10) | (8) | |||||||||||||||||||||||||||||||
| Other | — | — | 1 | 4 | |||||||||||||||||||||||||||||||
| Total other comprehensive earnings (losses) | (21) | 22 | (52) | 26 | |||||||||||||||||||||||||||||||
| Comprehensive earnings - net of tax | 294 | 278 | 761 | 596 | |||||||||||||||||||||||||||||||
| Less: Comprehensive earnings (losses) attributable to noncontrolling interest | |||||||||||||||||||||||||||||||||||
| Net earnings | 18 | 16 | 53 | 43 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (1) | 5 | (19) | 6 | |||||||||||||||||||||||||||||||
| Total comprehensive earnings (losses) attributable to noncontrolling interest | 17 | 21 | 34 | 49 | |||||||||||||||||||||||||||||||
| Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 277 | $ | 257 | $ | 727 | $ | 547 |
The accompanying notes are an integral part of these financial statements.
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) September 30, 2021 | December 31, 2020 | |||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 328 | $ | 585 | |||||||
| Accounts receivable (less allowances for credit losses of $29 and $27, respectively) | 1,742 | 1,474 | |||||||||
| Inventories - net | 1,786 | 1,733 | |||||||||
| Prepaid expenses and other current assets | 149 | 127 | |||||||||
| Total current assets | 4,005 | 3,919 | |||||||||
| Property, buildings and equipment - net | 1,429 | 1,395 | |||||||||
| Goodwill | 387 | 391 | |||||||||
| Intangibles - net | 233 | 228 | |||||||||
| Other assets | 336 | 362 | |||||||||
| Total assets | $ | 6,390 | $ | 6,295 | |||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Current maturities of long-term debt | $ | — | $ | 8 | |||||||
| Trade accounts payable | 933 | 779 | |||||||||
| Accrued compensation and benefits | 259 | 307 | |||||||||
| Accrued expenses | 336 | 305 | |||||||||
| Income taxes payable | 22 | 42 | |||||||||
| Total current liabilities | 1,550 | 1,441 | |||||||||
| Long-term debt (less current maturities) | 2,372 | 2,389 | |||||||||
| Deferred income taxes and tax uncertainties | 88 | 110 | |||||||||
| Other non-current liabilities | 263 | 262 | |||||||||
| Shareholders' equity | |||||||||||
| Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding | — | — | |||||||||
| Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares | 55 | 55 | |||||||||
| Additional contributed capital | 1,255 | 1,239 | |||||||||
| Retained earnings | 9,301 | 8,779 | |||||||||
| Accumulated other comprehensive losses | (94) | (61) | |||||||||
| Treasury stock, at cost – 58,139,172 and 57,134,828 shares, respectively | (8,690) | (8,184) | |||||||||
| Total W.W. Grainger, Inc. shareholders’ equity | 1,827 | 1,828 | |||||||||
| Noncontrolling interest | 290 | 265 | |||||||||
| Total shareholders' equity | 2,117 | 2,093 | |||||||||
| Total liabilities and shareholders' equity | $ | 6,390 | $ | 6,295 |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 813 | $ | 570 | |||||||
| Provision for credit losses | 12 | 18 | |||||||||
| Deferred income taxes and tax uncertainties | (7) | 9 | |||||||||
| Depreciation and amortization | 137 | 137 | |||||||||
| Impairment of goodwill, intangible and long-lived assets | — | 177 | |||||||||
| Net (gains) losses from sale or redemption of assets and business divestitures | (3) | 104 | |||||||||
| Stock-based compensation | 33 | 36 | |||||||||
| Subtotal | 172 | 481 | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (298) | (145) | |||||||||
| Inventories | (64) | (222) | |||||||||
| Prepaid expenses and other assets | (1) | (29) | |||||||||
| Trade accounts payable | 167 | 145 | |||||||||
| Accrued liabilities | (13) | (13) | |||||||||
| Income taxes - net | (42) | (19) | |||||||||
| Other non-current liabilities | (10) | 19 | |||||||||
| Subtotal | (261) | (264) | |||||||||
| Net cash provided by operating activities | 724 | 787 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, buildings, equipment and intangibles | (197) | (152) | |||||||||
| Proceeds from sale or redemption of assets and business divestitures | 17 | 22 | |||||||||
| Other - net | — | (2) | |||||||||
| Net cash used in investing activities | (180) | (132) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under lines of credit | — | 12 | |||||||||
| Payments against lines of credit | — | (65) | |||||||||
| Proceeds from long-term debt | — | 1,583 | |||||||||
| Payments of long-term debt | (8) | (1,361) | |||||||||
| Proceeds from stock options exercised | 31 | 47 | |||||||||
| Payments for employee taxes withheld from stock awards | (29) | (16) | |||||||||
| Purchases of treasury stock | (525) | (101) | |||||||||
| Cash dividends paid | (261) | (246) | |||||||||
| Other - net | 2 | — | |||||||||
| Net cash used in financing activities | (790) | (147) | |||||||||
| Exchange rate effect on cash and cash equivalents | (11) | (9) | |||||||||
| Net change in cash and cash equivalents | (257) | 499 | |||||||||
| Cash and cash equivalents at beginning of year | 585 | 360 | |||||||||
| Cash and cash equivalents at end of period | $ | 328 | $ | 859 |
The accompanying notes are an integral part of these financial statements.
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, 2020 | $ | 55 | $ | 1,182 | $ | 8,405 | $ | (154) | $ | (7,633) | $ | 205 | $ | 2,060 | |||||||||
| Stock-based compensation | — | 10 | — | — | 13 | — | 23 | ||||||||||||||||
| Purchases of treasury stock | — | — | — | — | (100) | — | (100) | ||||||||||||||||
| Net earnings | — | — | 173 | — | — | 12 | 185 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | (63) | — | 3 | (60) | ||||||||||||||||
| Cash dividends paid ($1.44 per share) | — | — | (78) | — | — | — | (78) | ||||||||||||||||
| Balance at March 31, 2020 | $ | 55 | $ | 1,192 | $ | 8,500 | $ | (217) | $ | (7,720) | $ | 220 | $ | 2,030 | |||||||||
| Stock-based compensation | — | 6 | — | — | 11 | — | 17 | ||||||||||||||||
| Purchases of treasury stock | — | — | — | — | — | (1) | (1) | ||||||||||||||||
| Net earnings | — | — | 114 | — | — | 15 | 129 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | 66 | — | (2) | 64 | ||||||||||||||||
| Cash dividends paid ($1.44 per share) | — | — | (78) | — | — | (9) | (87) | ||||||||||||||||
| Balance at June 30, 2020 | $ | 55 | $ | 1,198 | $ | 8,536 | $ | (151) | $ | (7,709) | $ | 223 | $ | 2,152 | |||||||||
| Stock-based compensation | — | 16 | — | — | 11 | — | 27 | ||||||||||||||||
| Net earnings | — | — | 240 | — | — | 16 | 256 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | 17 | — | 5 | 22 | ||||||||||||||||
| Cash dividends paid ($1.53 per share) | — | — | (82) | — | — | — | (82) | ||||||||||||||||
| Balance at September 30, 2020 | $ | 55 | $ | 1,214 | $ | 8,694 | $ | (134) | $ | (7,698) | $ | 244 | $ | 2,375 |
The accompanying notes are an integral part of these financial statements.
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 | $ | 55 | $ | 1,239 | $ | 8,779 | $ | (61) | $ | (8,184) | $ | 265 | $ | 2,093 | |||||||||
| Stock-based compensation | — | 9 | — | — | 5 | — | 14 | ||||||||||||||||
| Purchases of treasury stock | — | — | — | — | (175) | — | (175) | ||||||||||||||||
| Net earnings | — | — | 238 | — | — | 17 | 255 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | (20) | — | (18) | (38) | ||||||||||||||||
| Reclassification due to the adoption of ASU 2019-12 | — | — | 12 | — | — | — | 12 | ||||||||||||||||
| Cash dividends paid ($1.53 per share) | — | — | (81) | — | — | — | (81) | ||||||||||||||||
| Balance at March 31, 2021 | $ | 55 | $ | 1,248 | $ | 8,948 | $ | (81) | $ | (8,354) | $ | 264 | $ | 2,080 | |||||||||
| Stock-based compensation | — | (1) | — | — | 12 | 1 | 12 | ||||||||||||||||
| Purchases of treasury stock | — | — | — | — | (107) | (1) | (108) | ||||||||||||||||
| Net earnings | — | — | 225 | — | — | 18 | 243 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | 7 | — | — | 7 | ||||||||||||||||
| Capital contribution | — | — | — | — | — | 2 | 2 | ||||||||||||||||
| Cash dividends paid ($1.62 per share) | — | — | (84) | — | — | (11) | (95) | ||||||||||||||||
| Balance at June 30, 2021 | $ | 55 | $ | 1,247 | $ | 9,089 | $ | (74) | $ | (8,449) | $ | 273 | $ | 2,141 | |||||||||
| Stock-based compensation | — | 8 | — | — | 1 | — | 9 | ||||||||||||||||
| Purchases of treasury stock | — | — | — | — | (242) | — | (242) | ||||||||||||||||
| Net earnings | — | — | 297 | — | — | 18 | 315 | ||||||||||||||||
| Other comprehensive earnings (losses) | — | — | — | (20) | — | (1) | (21) | ||||||||||||||||
| Cash dividends paid ($1.62 per share) | — | — | (85) | — | — | — | (85) | ||||||||||||||||
| Balance at September 30, 2021 | $ | 55 | $ | 1,255 | $ | 9,301 | $ | (94) | $ | (8,690) | $ | 290 | $ | 2,117 |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
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 “Company” or “Grainger” 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.
The Company's Condensed Consolidated Financial Statements (Financial Statements) and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and associated notes for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 24, 2021 (2020 Form 10-K). The Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (U.S.) for complete financial statements.
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained in this report.
Changes to Reportable Segments
Effective January 1, 2021, Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. On March 8, 2021, the Company provided investors with segment summary historical financial information and segment historical data that is consistent with its new reportable segment structure and reflective of the intersegment accounting policies described in Note 10 - Segment Information.
The Company's High-Touch Solutions N.A. segment provides value-added MRO solutions that are rooted in deep product knowledge and customer expertise. This segment includes the Grainger-branded businesses in the U.S., Canada, Mexico and Puerto Rico. The Company’s Endless Assortment segment provides a simple, transparent and streamlined experience for customers to shop millions of products online. This segment includes the Company’s Zoro Tools, Inc. (Zoro) businesses in the U.S. and U.K. and MonotaRO Co., Ltd. (MonotaRO), which operates predominately in Japan. The remaining international High-Touch Solutions businesses, operating primarily in the U.K., are classified as “Other” to reconcile to consolidated results. These businesses individually do not meet the criteria of a reportable segment.
NOTE 2 - NEW ACCOUNTING STANDARDS
Accounting Pronouncements Recently Adopted
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intra-period tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. The effective date of this ASU was for fiscal years and interim periods beginning after December 15, 2020. The Company adopted this ASU effective January 1, 2021 and it did not have a material impact on the Financial Statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU simplifies the understanding and application of the codification topics by eliminating inconsistencies and providing clarifications. The effective date of this ASU was for fiscal years and interim periods beginning after December 15, 2020. The Company adopted this ASU effective January 1, 2021 and it did not have a material impact on the Financial Statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. These amendments improve consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the codification by amending and adding new headings, cross referencing to other guidance and refining or correcting terminology. The effective date of this ASU was for fiscal
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
years and interim periods beginning after December 15, 2020. The Company adopted this ASU effective January 1, 2021 and it did not have a material impact on the Financial Statements.
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 generally accepted accounting principles 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 into or evaluated on or before December 31, 2022. The Company is evaluating the impact of this ASU and does not expect a material impact on the Financial Statements.
NOTE 3 - REVENUE
Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services. Total service revenue is not material and accounted for approximately 1% of the Company's revenue for the three and nine months ended September 30, 2021 and 2020, respectively.
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 Company 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 customer spot buys. The following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | Endless Assortment | Total Company(2) | High-Touch Solutions N.A. | Endless Assortment | Total Company(2) | ||||||||||||||||||||||||||||||
| Contractors | 9 | % | 15 | % | 10 | % | 8 | % | 15 | % | 10 | % | |||||||||||||||||||||||
| Commercial | 9 | % | 15 | % | 10 | % | 9 | % | 15 | % | 10 | % | |||||||||||||||||||||||
| Government | 18 | % | 3 | % | 15 | % | 22 | % | 3 | % | 18 | % | |||||||||||||||||||||||
| Healthcare | 7 | % | 2 | % | 6 | % | 8 | % | 2 | % | 6 | % | |||||||||||||||||||||||
| Manufacturing | 29 | % | 30 | % | 29 | % | 27 | % | 27 | % | 28 | % | |||||||||||||||||||||||
| Retail/Wholesale | 9 | % | 10 | % | 10 | % | 9 | % | 10 | % | 9 | % | |||||||||||||||||||||||
| Transportation | 5 | % | 3 | % | 5 | % | 5 | % | 3 | % | 5 | % | |||||||||||||||||||||||
| Others(1) | 14 | % | 22 | % | 15 | % | 12 | % | 25 | % | 14 | % | |||||||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||
| Percent of Total Company Revenue | 79 | % | 19 | % | 100 | % | 79 | % | 19 | % | 100 | % |
(1) Others 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 in the U.K., as well as the China business in the period prior to its divestiture in the third quarter of 2020. Other businesses account for approximately 2% of revenue for the three months ended September 30, 2021 and September 30, 2020.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | Endless Assortment | Total Company(2) | High-Touch Solutions N.A. | Endless Assortment | Total Company(2) | ||||||||||||||||||||||||||||||
| Contractors | 9 | % | 15 | % | 10 | % | 9 | % | 15 | % | 10 | % | |||||||||||||||||||||||
| Commercial | 9 | % | 15 | % | 10 | % | 9 | % | 15 | % | 9 | % | |||||||||||||||||||||||
| Government | 19 | % | 3 | % | 15 | % | 20 | % | 3 | % | 16 | % | |||||||||||||||||||||||
| Healthcare | 7 | % | 2 | % | 6 | % | 9 | % | 2 | % | 7 | % | |||||||||||||||||||||||
| Manufacturing | 30 | % | 29 | % | 29 | % | 28 | % | 29 | % | 29 | % | |||||||||||||||||||||||
| Retail/Wholesale | 9 | % | 10 | % | 10 | % | 9 | % | 10 | % | 9 | % | |||||||||||||||||||||||
| Transportation | 5 | % | 3 | % | 5 | % | 5 | % | 3 | % | 5 | % | |||||||||||||||||||||||
| Others(1) | 12 | % | 23 | % | 15 | % | 11 | % | 23 | % | 15 | % | |||||||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||
| Percent of Total Company Revenue | 78 | % | 20 | % | 100 | % | 78 | % | 18 | % | 100 | % |
(1) Others 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 in the U.K., as well as the Fabory and China businesses in the period prior to their divestitures in the second and third quarter of 2020, respectively. Other businesses account for approximately 2% and 4% of revenue for the nine months ended September 30, 2021 and September 30, 2020.
Total accrued sales returns were approximately $41 million and $31 million as of September 30, 2021 and December 31, 2020, respectively and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $65 million and $58 million as of September 30, 2021 and December 31, 2020 and are reported as part of Accrued expenses. The Company had no material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2021 and December 31, 2020.
NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Land | $ | 329 | $ | 329 | |||||||
| Building, structures and improvements | 1,445 | 1,330 | |||||||||
| Furniture, fixtures, machinery and equipment | 1,566 | 1,878 | |||||||||
| Property, buildings and equipment | $ | 3,340 | $ | 3,537 | |||||||
| Less: Accumulated depreciation and amortization | 1,911 | 2,142 | |||||||||
| Property, buildings and equipment - net | $ | 1,429 | $ | 1,395 |
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Grainger tests reporting units' goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Accordingly, Grainger performs quarterly qualitative assessments of significant events and circumstances such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors, including the current global outbreak of the Coronavirus (COVID-19 pandemic) and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting units' goodwill or intangible assets is less than their carrying value. If indicators of impairment are identified, a quantitative impairment test is performed. The Company did not identify any significant events or changes in circumstances that indicated
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the existence of impairment indicators during the three and nine months ended September 30, 2021. As such, quantitative assessments were not required.
The balances and changes in the carrying amount of Goodwill (net of cumulative goodwill impairments) by segment are as follows (in millions of dollars):
| High-Touch Solutions N.A | Endless Assortment | Other | Total | |||||||||||||||||||||||
| Balance at January 1, 2020 | $ | 318 | $ | 52 | $ | 59 | $ | 429 | ||||||||||||||||||
| Acquisition | — | 15 | — | 15 | ||||||||||||||||||||||
| Impairment | — | — | (58) | (58) | ||||||||||||||||||||||
| Translation | 3 | 3 | (1) | 5 | ||||||||||||||||||||||
| Balance at December 31, 2020 | 321 | 70 | — | 391 | ||||||||||||||||||||||
| Translation | — | (4) | — | (4) | ||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 321 | $ | 66 | $ | — | $ | 387 |
The cumulative goodwill impairments as of September 30, 2021, were $137 million and consisted of $32 million within High-Touch Solutions N.A. and $105 million in Other. During the first quarter of 2020, the Company recorded $58 million of impairment charges in Selling, general and administrative expenses (SG&A) in connection with the impairment of Fabory's goodwill. The impairment is presented in Other in the table above. The Company divested the Fabory business during the second quarter of 2020. Grainger's current business portfolio had no impairments to goodwill for the three and nine months ended September 30, 2021 and 2020.
The balances in Intangible assets, net are as follows (in millions of dollars):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Weighted average life | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships | 11.8 years | $ | 221 | $ | 175 | $ | 46 | $ | 223 | $ | 171 | $ | 52 | ||||||||||||||||||||||||||||
| Trademarks, trade names and other | 14.1 years | 36 | 24 | 12 | 36 | 22 | 14 | ||||||||||||||||||||||||||||||||||
| Non-amortized trade names and other | Indefinite | 26 | — | 26 | 28 | — | 28 | ||||||||||||||||||||||||||||||||||
| Capitalized software | 4.2 years | 510 | 361 | 149 | 461 | 327 | 134 | ||||||||||||||||||||||||||||||||||
| Total intangible assets | 6.9 years | $ | 793 | $ | 560 | $ | 233 | $ | 748 | $ | 520 | $ | 228 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 - DEBT
There was no short-term debt as of September 30, 2021 and December 31, 2020.
Long-term debt, including current maturities and debt issuance costs and discounts, net, consisted of the following (in millions of dollars):
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| Carrying Value | Fair Value(4) | Carrying Value | Fair Value(4) | ||||||||||||||||||||
| 4.60% senior notes due 2045(1) | $ | 1,000 | $ | 1,298 | $ | 1,000 | $ | 1,343 | |||||||||||||||
| 3.75% senior notes due 2046(1) | 400 | 463 | 400 | 479 | |||||||||||||||||||
| 4.20% senior notes due 2047(1) | 400 | 497 | 400 | 514 | |||||||||||||||||||
| 1.85% senior notes due 2025(2) | 500 | 515 | 500 | 526 | |||||||||||||||||||
| Japanese Yen term loan(3) | 81 | 81 | 87 | 87 | |||||||||||||||||||
| Other | 14 | 14 | 34 | 34 | |||||||||||||||||||
| Subtotal | 2,395 | 2,868 | 2,421 | 2,983 | |||||||||||||||||||
| Less: Current maturities | — | — | (8) | (8) | |||||||||||||||||||
| Debt issuance costs and discounts, net of amortization | (23) | (23) | (24) | (24) | |||||||||||||||||||
| Long-term debt (less current maturities) | $ | 2,372 | $ | 2,845 | $ | 2,389 | $ | 2,951 | |||||||||||||||
(1) In the years 2015-2017, Grainger issued $1.8 billion in long-term debt (Senior Notes). Debt was issued as follows:
-
In May 2017, $400 million payable in 30 years and carries a 4.20% interest rate, payable semi-annually.
-
In May 2016, $400 million payable in 30 years and carries a 3.75% interest rate, payable semi-annually.
-
In June 2015, $1 billion payable in 30 years and carries a 4.60% interest rate, payable semi-annually.
The Company may redeem the Senior Notes in whole at any time or in part from time to time at a “make-whole” redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the Senior Notes plus 20-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the Senior Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. Within one year of the maturity date, the Company may redeem the Senior Notes in whole at any time or in part at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. At the time of issuance, costs and discounts of approximately $24 million, representing underwriting fees and other expenses, were recorded as a contra-liability within Long-term debt and are being amortized to interest expense over the term of the Senior Notes.
(2) In February 2020, the Company issued $500 million of unsecured 1.85% Senior Notes (1.85% Notes) and used the proceeds to repay the British pound term loan, Euro term loan and the Canadian dollar revolving credit facility, and to fund general working capital needs. The 1.85% Notes mature in February 2025 and they require no principal payments until the maturity date and interest is payable semi-annually on February 15 and August 15, beginning in August 2020. Prior to January 2025, the Company may redeem the 1.85% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 1.85% Notes plus 10 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 1.85% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. On or after January 15, 2025, the Company may redeem the 1.85% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. At the time of issuance, costs and discounts of approximately $5 million, representing underwriting fees and other expenses, were recorded as a contra-liability within Long-term debt and are being amortized to interest expense, net over the term of the 1.85% Notes. In connection with the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1.85% Notes, in February 2020, the Company entered into derivative instrument agreements to manage its risks associated with interest rates on the 1.85% Notes and foreign currency fluctuations related to the financing of international operations. See Note 7 to the Financial Statements for further discussion of these derivative instruments and the Company's hedge accounting policies.
(3) In August 2020, MonotaRO Co. Ltd., entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center network. The Japanese Yen term loan matures in 2024, payable over four equal semi-annual principal installments in 2023 and 2024, and bears average interest at 0.05%.
(4) 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 within the fair value hierarchy. The carrying value of other long-term debt approximates fair value due to their variable interest rates.
NOTE 7 - DERIVATIVE INSTRUMENTS
The Company maintains various agreements with bank counterparties that permit the Company to enter into "over-the-counter" derivative instrument agreements to manage its risk associated with interest rates and foreign currency fluctuations. In February 2020, the Company entered into certain derivative instrument agreements to manage its risk associated with interest rates on its 1.85% Notes and foreign currency fluctuations in connection with its foreign currency-denominated intercompany financing arrangements. The Company did not enter into these agreements for trading or speculative purposes.
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 swap, 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 September 30, 2021 and December 31, 2020 was $500 million.
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 September 30, 2021 and December 31, 2020 was approximately $34 million.
The effect of the Company's fair value and cash flow hedges on the Company's Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2021 and 2020 is as follows (in millions of dollars):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | Other, net | Interest expense, net | Other, net | Interest expense, net | Other, Net | Interest expense, net | Other, Net | |||||||||||||||||||||||||||||||||||||||||||
| Gain or (loss) recognized in earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value hedge: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged item | $ | 3 | $ | — | $ | — | $ | — | $ | 12 | $ | — | $ | (22) | $ | — | ||||||||||||||||||||||||||||||||||
| Interest rate swap designated as hedging instrument | $ | (3) | $ | — | $ | — | $ | — | $ | (12) | $ | — | $ | 22 | $ | — | ||||||||||||||||||||||||||||||||||
| Cash flow hedge: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged item | $ | — | $ | (1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Cross-currency swap designated as hedging instrument | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
The effect of the Company’s fair value and cash flow hedges on AOCE for the three and nine months ended September 30, 2021 and 2020 was not material.
The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 were as follows (in millions of dollars):
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||
| Balance Sheet Classification | Fair Value and Carrying Amounts | Fair Value and Carrying Amounts | |||||||||||||||
| Cross-currency swap | Other non-current liabilities | $ | 2 | $ | 2 | ||||||||||||
| Interest rate swap | Other assets | $ | 9 | $ | 21 |
The carrying amount of the liability hedged by the interest rate swap (long-term debt), including the cumulative amount of fair value hedging adjustments, as of September 30, 2021 and December 31, 2020 amounted to $509 million and $521 million, respectively.
The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 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 were required during the current period to reflect the counterparty’s credit risk and/or the Company’s own nonperformance risk.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 - INCOME TAXES
The reconciliations of income tax expense with federal income taxes at the statutory rate are as follows (in millions of dollars):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Federal income tax | $ | 89 | $ | 89 | $ | 228 | $ | 171 | |||||||||||||||
| States income taxes, net of federal income tax benefit | 12 | 12 | 29 | 23 | |||||||||||||||||||
| Foreign rate difference | 7 | 10 | 19 | 17 | |||||||||||||||||||
| Net tax benefit related to foreign subsidiaries | — | (4) | — | (92) | |||||||||||||||||||
| Other - net | (1) | (1) | (5) | (1) | |||||||||||||||||||
| Income tax provision | $ | 107 | $ | 106 | $ | 271 | $ | 118 | |||||||||||||||
| Effective tax rate | 25.5 | % | 29.3 | % | 25.0 | % | 17.3 | % |
The changes to the Company's effective tax rate for the three and nine months ended September 30, 2021 were primarily driven by the absence of the tax impacts and the prior year net tax benefit from the Company's investment in Fabory. The Company divested the Fabory business during the second quarter of 2020.
NOTE 9 - DIVIDEND
On October 27, 2021, the Company’s Board of Directors declared a quarterly dividend of $1.62 per share, payable December 1, 2021, to shareholders of record on November 8, 2021.
NOTE 10 - SEGMENT INFORMATION
Following is a summary of segment results (in millions of dollars):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales | Operating earnings | Net sales | Operating earnings | Net sales | Operating earnings | Net sales | Operating earnings | ||||||||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | $ | 2,663 | $ | 387 | $ | 2,377 | $ | 334 | $ | 7,558 | $ | 975 | $ | 6,929 | $ | 933 | |||||||||||||||||||||||||||||||
| Endless Assortment | 646 | 59 | 572 | 48 | 1,913 | 172 | 1,593 | 125 | |||||||||||||||||||||||||||||||||||||||
| Other | 63 | (8) | 69 | (2) | 192 | (17) | 334 | (314) | |||||||||||||||||||||||||||||||||||||||
| Total Company | $ | 3,372 | $ | 438 | $ | 3,018 | $ | 380 | $ | 9,663 | $ | 1,130 | $ | 8,856 | $ | 744 |
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. 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.
Intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of third-party sales. Service fees for intersegment sales from the High-Touch Solutions N.A. segment to the Endless Assortment segment are included in SG&A.
Corporate costs are substantially allocated to each reportable segment based on benefits received. Assets for reportable segments are not disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 - CONTINGENCIES, LEGAL MATTERS, COMMITMENTS AND OTHER CONTRACTUAL OBLIGATIONS
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 as to 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 16 lawsuits and 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 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.
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, which are at an early stage, 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 a 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.
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 2020 Form 10-K.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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