W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies and other related products and services used by businesses and institutionswith operations primarily in the United States (U.S.)North America, Japan and Canada, with a presence also in Europe, Asia and Latin America.Europe. 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.
Grainger’s two reportable segments are the U.S. and Canada, and they are further described further below. Other businesses include the endless assortment businesses, Zoro Tools, Inc. (Zoro), the single channel online business in the U.S.,and MonotaRO, Co. (MonotaRO) in Japan and operationssmaller international businesses primarily in Europe Asia and Latin America. These businesses generate revenue through the distribution of MRO supplies and products and provide related services.Mexico. For further segment and geographicalfinancial information, and consolidated net sales and operating earnings, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1614 to the Consolidated Financial Statements.Statements (Financial Statements).
The U.S. business offers a broad selection of MRO supplies and other related products and services through its eCommerce platforms, catalogs, branches and sales representatives, catalogs, eCommerce and local branches.service representatives. A combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services is provided by this business. Products offered include material handling equipment, safety
Information about our Executive Officers
Following is information about the executive officers of Grainger including age as of January 31, 2020. Executive officers of Grainger generally serve until the next annual appointment of officers, or until earlier resignation or removal.
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Name and Age | Positions and Offices Held and Principal Occupation and Employment During the Past Five Years |
Kathleen S. Carroll (51) | Senior Vice President and Chief Human Resources Officer, a position assumed in December 2018. Previously, Ms. Carroll served as Executive Vice President, Chief Human Resources Officer of First Midwest Bancorp, Inc., a diversified financial services company, from 2017 to 2018. Prior to that role, Ms. Carroll was employed at Aon Corporation, a global insurance brokerage and consulting company, between 2006 and 2017, in various human resources roles, culminating in her position as Vice President, Global Head of Talent Acquisition.
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John L. Howard (62) | Senior Vice President and General Counsel, a position assumed in January 2000. Previously, Mr. Howard served in several roles of increasing responsibility at Tenneco, Inc., a global conglomerate. Prior to those roles, Mr. Howard held a variety of legal positions in the federal government, including Associate Deputy Attorney General in the U.S. Department of Justice and in The White House as Counsel to the Vice President.
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D.G. Macpherson (52) | Chairman of the Board, a position assumed in October 2017, and Chief Executive Officer, a position assumed in October 2016 at which time he was also appointed to the Board of Directors. Previously, Mr. Macpherson served as Chief Operating Officer, a position assumed in 2015, Senior Vice President and Group President, Global Supply Chain and International, a position assumed in 2013, Senior Vice President and President, Global Supply Chain and Corporate Strategy, a position assumed in 2012, and Senior Vice President, Global Supply Chain, a position assumed in 2008.
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Deidra C. Merriwether (51) | Senior Vice President and President, North American Sales & Service, a position assumed in November 2019. Previously, Ms. Merriwether served as Senior Vice President, U.S. Direct Sales and Strategic Initiatives, a position assumed in September 2017, Vice President, Pricing and Indirect Procurement, a position assumed in 2016, and as a Vice President in Finance from 2013 to 2016. Prior to joining Grainger in September 2013, Ms. Merriwether held various positions as a Vice President, including positions of increasing responsibility at Sears Holdings Corporation, a broadline retailer, PriceWaterhouseCoopers, a global professional services firm, and Eli Lilly & Company, a global pharmaceutical company, across Finance, Procurement and Operations, lastly serving as Chief Operating Officer, Retail Formats, at Sears Holdings Corporation.
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Thomas B. Okray (57) | Senior Vice President and Chief Financial Officer, a position assumed in May 2018. Prior to joining Grainger, Mr. Okray served as Executive Vice President, Chief Financial Officer of Advance Auto Parts, Inc., a leading automotive aftermarket parts provider in North America, a position assumed in 2016. Previously, Mr. Okray served as Vice President, Finance, Global Customer Fulfillment, of Amazon.com, Inc., an online retailer, from January 2016 to October 2016, as Vice President, Finance, North American Operations of Amazon, from June 2015 to January 2016, and was employed by General Motors Company, a global automotive company, from July 1989 to June 2015, in a variety of finance and supply chain related roles, culminating in his position as CFO, Global Product Development, Purchasing & Supply Chain, from January 2010 to June 2015.
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Paige K. Robbins (51) | Senior Vice President, Grainger Technology, Merchandising, Marketing, and Strategy, a position assumed in November 2019. Previously, Ms. Robbins served as Senior Vice President and Chief Merchandising, Marketing, Digital, Strategy Officer, a position assumed in May 2019, as Senior Vice President and Chief Digital Officer, a position assumed in September 2017, and as Senior Vice President, Global Supply Chain, Branch Network, Contact Centers and Corporate Strategy, a position assumed in 2016. Since joining Grainger in September 2010, Ms. Robbins has held various positions as a Vice President, including in the areas of Global Supply Chain and Logistics.
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Eric R. Tapia (43)
| Vice President and Controller, a position assumed in October 2016. Mr. Tapia served as Vice President, Internal Audit, from 2010 to 2016. Mr. Tapia is a Certified Public Accountant (CPA) and before joining Grainger in 2010 was an audit partner with KPMG.
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Item 1A: Risk Factors
The following is a discussion of significant risk factors relevant to Grainger’sGrainger's business that could adversely affect its financial condition, results of operations and cash flows. The risk factors discussed in this section should be considered together with information included elsewhere in this Annual Report on Form 10-K and should not be considered the only risks to which the Company is exposed.
Weakness in the economy, market trends and other conditions affecting the profitability and financial stability of Grainger’sGrainger's customers could negatively impact Grainger’sGrainger's sales growth and results of operations.
Economic, political, and industry trends affect Grainger’sGrainger's business environments. Grainger serves several industries and markets in which the demand for its products and services is sensitive to the production activity, capital spending and demand for products and services of Grainger’sGrainger's customers. Many of these customers operate in markets that are subject to cyclical fluctuations resulting from market uncertainty, trade and tariff policies, costs of goods sold, currency exchange rates, central bank interest rate changes, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, labor shortages, inflation, deflation, and a variety of other factors beyond Grainger’sGrainger's control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels, or experience reductions in the demand for their own products or services.
Any of these events could impair the ability of Grainger’s customers to make full and timely payments oralso reduce the volume of products and services these customers purchase from Grainger or impair the ability of Grainger's customers to make full and timely payments, and could cause increased pressure on Grainger’sGrainger's selling prices and terms of sale. Accordingly, a significant or prolonged slowdown in economic activity in the United States (U.S.)U.S., Canada or any other major world economy, or a segment of any such economy, could negatively impact Grainger’sGrainger's sales growth and results of operations.
The facilities maintenance industry is highly fragmented,competitive, and changes in competition could result in decreased demand for Grainger’sGrainger's products and services.
Grainger competes in a variety of ways, including product assortment and availability, services offered to customers, pricing, purchasing convenience, and the overall experience Grainger offers. This includes the ease of use of Grainger's high-touch high-service operations (branches and digital platforms) and delivery of products.
There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-basedonline businesses that compete with price transparency. The industry
To remain competitive, the Company must be willing and able to respond to market pressures. Downward pressure on sales prices, changes in the volume of our orders, and an inability to pass higher product costs on to customers could cause our gross profit percentage to fluctuate or decline. We may not be able to pass rising product costs to customers if those customers have ready product or supplier alternatives in the marketplace. These pressures could have a material effect on Grainger’s sales and profitability. If the Company is also consolidating as customers are increasingly awareunable to grow sales or reduce costs, among other actions, the Company’s results of operations and financial condition may be adversely affected.
Moreover, Grainger expects technological advancements and the total costsincreased use of fulfillment and of the need to have consistent sources of supply at multiple locations. This consolidation could causeeCommerce solutions within the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are ablecontinue to operate with lower prices and gross profit on products. These competitive pressures could adversely affect Grainger’s sales and profitability.
Changes in inflation may adversely affect gross margins.
Inflation impacts the costsevolve at which Grainger can procure product and thea rapid pace. As a result, Grainger's ability to increase priceseffectively compete requires Grainger to customers over time. Prolonged periods of deflation could adversely affect the degreerespond and adapt to which Grainger is ablenew industry trends and developments. Implementing new technology and innovations may result in unexpected costs and interruptions to increase sales through price increases.operations, may take longer than expected, and may not provide all anticipated benefits.
Volatility in commodity prices may adversely affect gross margins.
Some of Grainger’sGrainger's products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives, or rare earth minerals, and are subject to price changes based uponon fluctuations in the commodities market. Fluctuations in the price of fuel could affect transportation costs. Grainger’sGrainger's ability to pass on such increases in costs in a timely manner depends on market conditions. The inability to pass along cost increases could result in lower gross margins. In addition, higher prices could impactreduce demand for these products, resulting in lower sales volumes.
Unexpected product shortages, tariffs, and risks associated with Grainger's suppliers could negatively impact customer relationships resultingor result in an adverse impact on results of operations.
Grainger’sGrainger's competitive strengths include product selection and availability. Products are purchased from more than 5,100approximately 5,000 suppliers located in various countries around the world, nonot one of which accounted for more than 5% of total purchases.
Historically, no significant difficulty has been encountered with respect to sources of supply; however, disruptions could occur due to factors beyond Grainger’sGrainger's control, including economic downturns, politicalgeopolitical unrest, port slowdowns,tariffs, new tariffs or tariff increases, trade issues and policies, labor problems experienced by Grainger's suppliers, transportation availability and cost, shortage of raw materials, inflation and other factors, any of which could adversely affect a supplier’ssupplier's ability to manufacture or deliver products or could result in an increase in Grainger's product costs.
deliver products. AsFurther, Grainger continues to source lower costsources products from Asia and other areas of the world,world. This increases the risk for disruptions has increasedof supply disruption due to the additional lead time required and distances involved.
If Grainger was to experience difficulty in obtaining products, there could be a short-term adverse effect on results of operations and a longer-term adverse effect on customer relationships and Grainger’sGrainger's reputation. In addition, Grainger has strategic relationships with a number of vendors. In the event Grainger was unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.
Changes in customer base or product mix could cause thechanges in Grainger's gross margin percentage to decline. or affect Grainger's competitive position.
From time to time, Grainger experiences changes in customer base and product mix that affect gross margin. Changes in customer base and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities, competition and competition. If rapid growth with lower margin customers continues,the increased use of eCommerce by Grainger will face pressure to maintain current gross margins, as these customers receive more discounted pricing due to their higher sales volume.and its competitors. There can be no assurance that Grainger will be able to maintain historical gross margins in the future.
Additionally, as customer base and product mix change over time, Grainger must identify new products, product lines and services that respond to industry trends and customer needs. The inability to introduce new products and effectively integrate them into Grainger's existing product mix could have a negative impact on future sales growth and Grainger's competitive position.
Disruptions in Grainger’sGrainger's supply chain could result in an adverse impact on results of operations.
AThe occurrence of one or more natural disasters such as earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather; pandemic diseases or viral contagions such as the coronavirus outbreak; geopolitical events, such as war, civil unrest or terrorist attacks in a country in which Grainger operates or in which its suppliers are located; and the imposition of measures that create barriers to or increase the costs associated with international trade could result in disruption within Grainger’sof Grainger's logistics or supply chain network, including damage, destruction, extreme weathernetwork. For example, should the coronavirus outbreak persist or spread, it could disrupt the operations of the Company and its suppliers and customers. Any such disruption or other events, whichcatastrophic event could cause one or more of Grainger’sGrainger's distribution centers or branches to become non-operational, could adversely affect Grainger’sGrainger's ability to obtain or deliver inventory in a timely manner, impair Grainger’sGrainger's ability to meet customer demand for products, and result in lost sales, additional costs, or penalties, or damage to Grainger’sGrainger's reputation. Grainger’sGrainger's ability to provide same-day shipping and next-day delivery is an integral component of Grainger’sGrainger's business strategy and any such disruption could adversely impact results of operations.operations and financial performance.
Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues.
The proper functioning of Grainger’sGrainger's information systems is critical to the successful operation of its business. Grainger continues to invest in software, hardware and network infrastructures in order to effectively manage its information systems. Although Grainger’sGrainger's information systems are protected with robust backup and security systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to damage or interruption from natural disasters, power losses, computer viruses, telecommunication failures, user error, third party actions
such as malicious computer programs, denial-of-service attacks and cybersecurity breaches, and other problems. In addition, from time to time Grainger relies on the IT systems of third parties to assist in conducting its business.
If Grainger's systems or those of third parties on which Grainger depends are damaged, breached or cease to function properly Grainger may have to make a significant investment to repair or replace them and may suffer interruptions in its business operations in the interim. If critical information systems fail or otherwise become unavailable, among other things, Grainger’sGrainger's ability to operate its eCommerce platforms, process orders, maintain proper levels of inventories, collect accounts receivable, and disburse funds, manage its supply chain, monitor results of operations, and process and store employee or customer data, among other functions, could be adversely affected. Any such interruption of Grainger’sGrainger's information systems could also subject Grainger to additional costs.have a material adverse effect on its business or results of operations.
BreachesCybersecurity incidents, including breaches of information systems security, could damage Grainger’sGrainger's reputation, disrupt operations, increase costs and/or decrease revenues.
Through Grainger’sGrainger's sales and eCommerce channels, Grainger collects and stores personally identifiable, confidential, proprietary and other information from customers so that they may, among other things, purchase products or services, enroll in promotional programs, register on Grainger’sGrainger's websites or otherwise communicate or interact with the Company. Moreover, Grainger’sGrainger's operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to its business, customers, suppliers and employees, and other sensitive matters.
While Grainger has instituted safeguardsCyber threats are rapidly evolving and those threats and the means for the protection of suchobtaining access to information during the normal course of business, Grainger has experiencedin digital and expects to continue to experienceother storage media are becoming increasingly sophisticated. Each year, cyber-attackers make numerous attempts to breachaccess the Company’s information systems, and Grainger may be unable to protect sensitive data and/orstored in the integrity of the Company’sCompany's information systems. A cybersecurity incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, Grainger may be unable to anticipate these techniques or implement adequate preventative measures.
Moreover, from time to time, Grainger may share information with vendors and other third parties that assist with certain aspects of the business. While Grainger requires assurances that these vendors and other parties will protect confidential information, there is a risk that the confidentiality of data held or accessed by them may be compromised. If successful, those attempting to penetrate Grainger’sGrainger's or its vendors’vendors' information systems may misappropriate
intellectual property or personally identifiable, credit card, confidential, proprietary or other sensitive customer, supplier, employee or business information.information, or cause systems disruption.
In addition, a Grainger employee, contractor or other third party with whom Grainger does business may attempt to circumvent security measures in order to obtain such information or inadvertently cause a breach involving such information. Further, Grainger’sGrainger's systems are integrated with customer systems in certain cases, and a breach of the Company’sCompany's information systems could be used to gain illicit access to customer systems and information.
While Grainger has instituted safeguards for the protection of such information, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, Grainger may be unable to anticipate these techniques or implement adequate preventative measures. Any breach of Grainger's security measures or any breach, error or malfeasance of those of its third party service providers could cause Grainger to incur significant costs to protect any customers, suppliers, employees, and other parties whose personal data is compromised and to make changes to its information systems and administrative processes to address security issues.
Loss of customer, supplier, employee or intellectual property or other business information or failure to comply with data privacy and security laws could disrupt operations, damage Grainger’sGrainger's reputation and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and others, any of which could have a material adverse effect on Grainger, its financial condition and results of operations. In the past, Grainger has experienced certain cybersecurity incidents. In each instance, Grainger provided notifications and adopted remedial measures. While these incidents have not been deemed to be material to Grainger, there can be no assurance that a future breach or incident would not be material to Grainger's operations and financial condition.
Grainger's ability to adequately protect its intellectual property or successfully defend against infringement claims by others may have an adverse impact on operations.
Grainger's business relies on the use, validity and continued protection of certain proprietary information and intellectual property, which includes current and future patents, trade secrets, trademarks, service marks, copyrights and confidentiality agreements as well as license and sublicense agreements to use intellectual property owned by affiliated entities or third parties. Unauthorized use of Grainger's intellectual property by others could result in harm to various
aspects of the business and may result in costly and protracted litigation in order to protect Grainger’s rights. In addition, Grainger may be subject to claims that it has infringed on the intellectual property rights of others, which could subject Grainger to liability, require Grainger to obtain licenses to use those rights at significant cost or otherwise cause Grainger to modify its operations.
Fluctuations in foreign currency could have an effect on reported results of operations.operations.
Grainger’sGrainger's exposure to fluctuations in foreign currency rates results primarily from the translation exposure associated with the preparation of the Consolidated Financial Statements, as well as from transaction exposure associated with transactions in currencies other than an entity’sentity's functional currency. While the Consolidated Financial Statements are reported in U.S. dollars, the financial statements of Grainger’sGrainger's subsidiaries outside the U.S. are prepared using the local currency as the functional currency and translated into U.S. dollars. In addition, Grainger is exposed to foreign currency exchange rate risk with respect to the U.S. dollar relative to the local currencies of Grainger’sGrainger's international subsidiaries, primarily the Canadian dollar, euro, pound sterling, Mexican peso, renminbi and yen, arising from transactions in the normal course of business, such as sales and loans to wholly owned subsidiaries, sales to third-party customers, purchases from suppliers, and bank loans and lines of credit denominated in foreign currencies. Grainger also has foreign currency exposure to the extent receipts and expenditures are not denominated in the subsidiary’sa subsidiary's functional currency and that could have an impact on sales, costs and cash flows. These fluctuations in foreign currency exchange rates could affect Grainger’sGrainger's results of operations and impact reported net sales and net earnings.
Changes inAn inability to successfully implement Grainger’s credit ratings and outlook may reduce accessstrategy or to capital and increase borrowing costs.
Grainger’s credit ratings are based on a number of factors, including Grainger’s financial strength and factors outside of Grainger’s control, such as conditions affecting Grainger’s industry generally or the introduction of new rating practices and methodologies. Grainger cannot provide assurances that Grainger’s current credit ratings will remain in effect or that the ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. If rating agencies lower, suspend or withdraw the ratings, the market price or marketability of Grainger’s securities may be adversely affected. In addition, any change in ratings could make it more difficult for the Grainger to raise capital on acceptable terms, impact the ability to obtain adequate financing and result in higher interest costs for Grainger’s existing credit facilities or on future financings.
Acquisitions,integrate acquisitions, partnerships, joint ventures and other business combination transactions involve a number of inherent risks, any of which could result in the benefits anticipated not being realized and could have an adverse effect on results of operations.
Acquisitions,Grainger has implemented and is implementing several initiatives to increase sales and earnings. If Grainger is unable to successfully implement these initiatives, Grainger’s business, financial condition and results of operations could be materially adversely affected. In addition, acquisitions, partnerships, joint ventures and other business combination transactions, both foreign and domestic, involve various inherent risks, such as uncertainties in assessing value, strengths, weaknesses, liabilities and potential profitability. There is also risk relating to Grainger’sGrainger's ability to achieve identified operating and financial synergies anticipated to result from the transactions. Additionally, problems could arise from the integration of acquired businesses, including unanticipated changes in the business or industry or general economic or political conditions that affect the assumptions underlying the acquisition. Any one or more of these factors could cause Grainger to not realize the benefits anticipated or have a negative impact on the fair value of the reporting units. Accordingly, goodwill and intangible assets recorded as a result of acquisitions could, and have in the past, become impaired.
In order to compete, Grainger must attract, retain and motivate key employees, and the failure to do so could have an adverse effect on results of operations.
In order to compete and have continued growth, Grainger must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Grainger competes to hire employees and then must train them and develop their skills and competencies. Grainger’sGrainger's results of operations
could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
Grainger’s continued success is substantially dependent on positive perceptions of Grainger’s reputation.
One of the reasons why customers choose to do business with Grainger and why employees choose Grainger as a place of employment is the reputation that Grainger has built over many years. To be successful in the future, Grainger must continue to preserve, grow and leverage the value of Grainger’sGrainger's brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Grainger’sGrainger's brand and lead to adverse effects on Grainger’sGrainger's business.
Grainger is subject to various domestic and foreign laws, regulations and standards. Failure to comply or unforeseen developments in related contingencies such as litigation could adversely affect Grainger’sGrainger's financial condition, results of operations and cash flows.
Grainger’sGrainger's business is subject to alegislative, legal, and regulatory risks and conditions specific to the countries in which it operates. In addition to Grainger's U.S. operations, which in 2019 generated approximately 72% of its consolidated net sales, Grainger operates its business principally through wholly-owned subsidiaries in Canada, China, Germany, Mexico, the Netherlands, and the United Kingdom, and its majority-owned subsidiary in Japan.
The wide array of laws, regulations and standards in everyeach domestic and foreign jurisdiction where itGrainger operates, includinginclude, but are not limited to: advertising and marketing regulations, anti-bribery and corruption laws, anti-competition regulations, data protection (including, payment card industry data security standards)because Grainger accepts credit cards, the Payment Card Industry Data Security Standard), data privacy (including in the U.S., the California Consumer Privacy Act, and in the European Union, which has traditionally imposed strict obligations under data privacy lawsthe General Data Protection Regulation 2016, with interpretations varying from state to state and regulations that vary from country to country) and cybersecurity requirements (including as to protection of information and incident responses), environmental protection laws, foreign exchange controls and cash repatriation restrictions, government business regulations applicable to Grainger as a government contractor selling to federal, state and local government entities, health and safety laws, import and export requirements, intellectual property laws, labor laws (including federal and state wage and hour laws), product compliance or safety laws, supplier regulations regarding the sources of supplies or products, tax laws (including as to U.S. taxes on foreign subsidiaries), unclaimed property laws and laws, regulations and standards applicable to other commercial matters. Moreover, Grainger is also subject to audits and inquiries in the normal course of business.
Failure to comply with any of these laws, regulations and standards could result in civil, criminal, monetary and non-monetary fines, penalties and/or, remediation costs as well as potential damage to the Company’sCompany's reputation. Changes in these laws, regulations and standards, or in their interpretation, could increase the cost of doing business, including, among other factors, as a result of increased investments in technology and the development of new operational processes. Furthermore, while Grainger has implemented policies and procedures designed to facilitate compliance with these laws, regulations and standards, there can be no assurance that employees, contractors, suppliers, vendors, or agentsother third parties will not violate such laws, regulations and standards or Grainger’sGrainger's policies. Any such failure to comply or violation could individually or in the aggregate materially adversely affect Grainger’sGrainger's financial condition, results of operations and cash flows.
In addition, Grainger's business and results of operations in the UK may be negatively affected by changes in trade policies, or changes in labor, immigration, tax or other laws, resulting from the UK's anticipated exit from the European Union.
Grainger alsois subject to a number of rules and regulations related to its government contracts, which may result in increased compliance costs and potential liabilities.
Grainger's contracts with U.S. federal, state and local government entities are subject to various regulations related to procurement, formation and performance. In addition, the Company's government contracts may provide for termination, reduction or modification by the government at any time, with or without cause. From time to time, Grainger is subject to governmental or regulatory investigations or audits related to its compliance with these rules and regulations. Violations of these regulations could result in fines, criminal sanctions, the inability to participate in existing or future government contracting and other administrative sanctions. Any such penalties could result in damage to the Company's reputation, increased costs of compliance and/or remediation and could adversely affect the Company's financial condition and results of operations.
In conducting its business Grainger may become subject to legal proceedings or governmental investigations, including in connection with product liability or product compliance claims if people, property or the environment are harmed by Grainger’s products or services.
Grainger is, and from time to time may become, party to a number of legal proceedings or governmental investigations for alleged violations of laws, rules or regulations. Grainger also may be subject to disputes and proceedings incidental to Grainger’sits business, involving alleged damagesincluding product-related claims for personal injury or injuries arising out ofillness, death, or environmental or property damage, including the use of Grainger’sproceedings discussed in Part I, Item 3. Legal Proceedings. Grainger also may be requested or required to recall products and services or violations of these laws, regulations or standards.take other actions. The defense of these proceedings may require significant expenses and divert management’smanagement's time and attention, and Grainger may be required to pay damages that could individually or in the aggregate materially adversely affect its financial condition, results of operations and cash flows. The Company’s
reputation could also be adversely affected by any resulting negative publicity. In addition, any insurance or indemnification rights that Grainger may have with respect to such matters may be insufficient or unavailable to protect the Company against potential loss exposures.
Tax changes could affect Grainger’sGrainger's effective tax rate and future profitability.
Grainger’sGrainger's future results could be adversely affected by changes in the effective tax rate as a result of changes in Grainger’sGrainger's overall profitability and changes in the mix of earnings in countries with differing statutory tax rates, changes in tax legislation, the results of the examination of previously filed tax returns and continuing assessment of the Company’sCompany's tax exposures.
In December 2017, the U.S. government enacted comprehensive tax legislation that included significant changes to the taxation of business entities. The Company's accounting for the tax effects of such legislation may be subject to change due to subsequent clarification or amendment of the tax law which could adversely affect the Company's operating results or financial condition.
Grainger's common stock may be subject to volatility or price declines.
The trading price of Grainger's common stock is subject to broad and unpredictable fluctuation due to changes in economic, political and market conditions, the operating results of Grainger and its competitors, changes in expectations as to Grainger's future financial or operating performance, including estimates by securities analysts and investors, the Company’s failure to meet the financial performance guidance or other forward-looking statements provided to the public, changes in capital structure, share repurchase programs or dividend policies, and a number of other factors, including those discussed in this Item 1A. These factors, many which are outside of Grainger's control, could cause stock price volatility or Grainger's stock price to decline.
Changes in Grainger’s credit ratings and outlook may reduce access to capital and increase borrowing costs.
Grainger’s credit ratings are based on a number of factors, including the Company’s financial strength and factors outside of Grainger’s control, such as conditions affecting Grainger’s industry generally or the introduction of new rating practices and methodologies. Grainger cannot provide assurances that its current credit ratings will remain in effect or that the ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. If rating agencies lower, suspend or withdraw the ratings, the market price or marketability of Grainger’s securities may be adversely affected. In addition, any change in ratings could make it more difficult for the Company to raise capital on favorable terms, impact the Company’s ability to obtain adequate financing, and result in higher interest costs for the Company’s existing credit facilities or on future financings.
Grainger has incurred substantial indebtedness and may incur substantial additional indebtedness, which could adversely affect cash flow, decrease business flexibility, or prevent Grainger from fulfilling its obligations.
As of December 31, 2019, Grainger’s consolidated indebtedness was approximately $2.4 billion. The Company’s indebtedness could, among other things, limit Grainger’s ability to respond to rapidly changing business and economic conditions, require the Company to dedicate a substantial portion of its cash flows to the payment of principal and interest on its indebtedness, reducing the funds available for other business purposes, and make it more difficult to satisfy the Company’s financial obligations as they come due during periods of adverse economic and industry conditions.
The agreements governing Grainger’s debt agreements and instruments contain representations, warranties, affirmative, negative and financial covenants, and default provisions. Grainger’s failure to comply with these restrictions and obligations could result in a default under such agreements, which may allow Grainger’s creditors to accelerate the related indebtedness. Any such acceleration could have a material adverse effect on Grainger’s business, financial condition, results of operations, cash flows, and its ability to obtain financing on favorable terms in the future.
In addition, Grainger may in the future seek to raise additional financing for working capital, capital expenditures, refinancing of indebtedness, share repurchases or other general corporate purposes. Grainger’s ability to obtain additional financing will be dependent on, among other things, the Company’s financial condition, prevailing market conditions and numerous other factors beyond the Company’s control. Such additional financing may not be available
on commercially reasonable terms or at all. Any inability to obtain financing when needed could materially adversely affect the Company’s business, financial condition or results of operations.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
As of December 31, 20162019, Grainger’s owned and leased facilities totaled approximately 29.328.2 million square feet. The U.S. and Canada businesses accounted for the majority of the total square footage. Grainger believes that its properties are generally in excellent condition, well maintained and suitable for the conduct of business.
A brief description of significant facilities follows:
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Location | | Facility and Use (6)(7) | | Size in Square Feet (in 000's)thousands) |
U.S. (1) | | 284 U.S.282 branch locations | | 6,4776,348 |
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U.S. (2) | | 18 Distribution Centers17 DCs | | 8,7219,660 |
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U.S. (3) | | Other facilities | | 4,8463,970 |
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Canada (4) | | 159 Acklands – Grainger facilities53 branch locations | | 3,284686 |
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Other BusinessesCanada (5) | | 5 DCs | | 968 |
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Canada | | Other facilities | | 4,771578 |
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Other businesses (6) | | Other facilities | | 5,034 |
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Chicago Areaarea (2) | | Headquarters and General Officesgeneral offices | | 1,226947 |
|
| | Total Square Feet | | 29,32528,191 |
|
|
| |
(1) | Consists of 211246 stand-alone, 34 onsite and 2 will-call express locations, of which 202 are owned and 73 leased properties located throughout the U.S. ranging80 are leased. These branches range in size from approximately 1,000500 to 109,000 square feet. |
(2) | These facilities are primarily owned and they range in size from approximately 45,000 square feet to 1.31.5 million square feet. |
(3) | These facilities include both owned and leased locations consistingand primarily consist of storage facilities, office space and call centers and idle properties.centers. |
(4) | Consists of general offices, distribution centers34 stand-alone and branches located throughout Canada,19 onsite locations, of which 6618 are owned and 9335 are leased. These branches range in size from approximately 500 to 70,000 square feet. |
(5) | These facilities are primarily owned and range in size from approximately 40,000 to 540,000 square feet. |
(6) | These facilities include owned and leased locations in Europe, Asia, LatinNorth America, Japan and other U.S. operations.Europe. |
(6)(7) | Owned facilities are not subject to any mortgages. |
Item 3: Legal Proceedings
Environmental Matters
As previously disclosed, on August 5, 2015, Environment Canada initiated a proceeding against the Company’s Canadian subsidiary, Acklands-Grainger, in the Provincial Court of Alberta seeking monetary sanctions based on allegations that Acklands-Grainger sold certain products containing an ozone-depleting substance in violation of the Canadian Environmental Protection Act, 1999 and prohibited by the Ozone-Depleting Substances Regulations, 1998. On December 12, 2016, as part of a negotiated plea agreement, Acklands-Grainger pleaded guilty in the Provincial Court of Alberta to two counts of violating the Ozone-Depleting Substances Regulations and agreed to pay a fine of C$500,000. Acklands-Grainger intends to seek indemnification from the suppliers that sold Acklands-Grainger the products in question.
Other Matters
For a description of other legal proceedings, see the disclosure contained in Note 1715 to the Consolidated Financial Statements included underin "Part II, Item 8.8: Financial Statements and Supplementary Data" of this report, which is incorporated herein by reference.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividends
Grainger's common stock is listed and traded on the New York Stock Exchange, withunder the ticker symbol GWW. Effective January 1, 2015, Grainger voluntarily delisted its common stock from the Chicago Stock Exchange to eliminate duplicative administrative requirements. The high and low sales prices for the common stock and the dividends declared and paid per share for each calendar quarter during 2016 and 2015 are shown below.
|
| | | | | | | | | | | | |
| | Prices | | |
| Quarters | High | | Low | | Dividends |
2016 | First | $ | 234.77 |
|
| $ | 176.85 |
| | $ | 1.17 |
|
| Second | 239.95 |
|
| 212.64 |
| | 1.22 |
|
| Third | 235.53 |
|
| 212.54 |
| | 1.22 |
|
| Fourth | 240.74 |
|
| 201.94 |
| | 1.22 |
|
| Year | $ | 240.74 |
|
| $ | 176.85 |
| | $ | 4.83 |
|
2015 | First | $ | 256.97 |
|
| $ | 228.15 |
| | $ | 1.08 |
|
| Second | 252.87 |
|
| 228.05 |
| | 1.17 |
|
| Third | 240.00 |
|
| 194.42 |
| | 1.17 |
|
| Fourth | 233.00 |
|
| 189.60 |
| | 1.17 |
|
| Year | $ | 256.97 |
|
| $ | 189.60 |
| | $ | 4.59 |
|
Grainger expects that its practice of paying quarterly dividends on its common stock will continue, although the payment of future dividends is at the discretion of Grainger’s Board of Directors and will depend upon Grainger’s earnings, capital requirements, financial condition and other factors.
Holders
The approximate number of shareholders of record of Grainger’s common stock as of January 31, 2017,2020, was 720604 with approximately 218,500206,588 additional shareholders holding stock through nominees.
Issuer Purchases of Equity Securities - Fourth Quarter
| | Period | Total Number of Shares Purchased (A) | Average Price Paid Per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs | Total Number of Shares Purchased (A) | Average Price Paid Per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
Oct. 1 – Oct. 31 | 306,313 | $212.89 | 306,313 | 6,367,978 |
| shares | 112,700 | $301.83 | 112,700 | 3,284,920 |
| shares |
Nov. 1 – Nov. 30 | 239,007 | $216.57 | 239,007 | 6,128,971 |
| shares | 126,183 | $320.04 | 126,183 | 3,158,737 |
| shares |
Dec. 1 – Dec. 31 | 270,264 | $236.75 | 270,264 | 5,858,707 |
| shares | 81,184 | $319.32 | 80,144 | 3,078,593 |
| shares |
Total | 815,584 | $221.87 | 815,584 | | | 320,067 (D) |
| 319,027 | | |
| |
(A) | There were no shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards.obligations. |
| |
(B) | Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs.paid. |
| |
(C) | Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors. Activity is reportedDirectors and announced on a trade date basis.April 24, 2019 (2019 Program). The 2019 Program authorizes the repurchase of up to 5 million shares with no expiration date. |
| |
(D) | The difference of 1,040 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. Employees Profit Sharing Plan for the benefit of the employees who participate in the plan. |
Company Performance
The following stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the Dow Jones US Industrial Suppliers Total Stock Market Index and the S&P 500 Stock Index. It covers the period commencing December 31, 20112014, and ending December 31, 20162019. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 20112014, and that all dividends were reinvested.
| | | December 31, | December 31, |
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
W.W. Grainger, Inc. | $ | 100 |
| $ | 110 |
| $ | 141 |
| $ | 143 |
| $ | 116 |
| $ | 136 |
| $ | 100 |
| $ | 81 |
| $ | 95 |
| $ | 99 |
| $ | 121 |
| $ | 148 |
|
Dow Jones US Industrial Suppliers Total Stock Market Index | 100 |
| 113 |
| 135 |
| 132 |
| 107 |
| 134 |
| 100 |
| 81 |
| 102 |
| 114 |
| 105 |
| 139 |
|
S&P 500 Stock Index | 100 |
| 116 |
| 154 |
| 175 |
| 177 |
| 198 |
| 100 |
| 101 |
| 114 |
| 138 |
| 132 |
| 174 |
|
Item 6: Selected Financial Data
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (In thousands of dollars, except for per share amounts) | (In millions of dollars, except for per share amounts) |
Net sales | $ | 10,137,204 |
|
| $ | 9,973,384 |
| | $ | 9,964,953 |
| | $ | 9,437,758 |
| | $ | 8,950,045 |
| $ | 11,486 |
| | $ | 11,221 |
| | $ | 10,425 |
| | $ | 10,137 |
| | $ | 9,973 |
|
Net earnings attributable to W.W. Grainger, Inc. | 605,928 |
|
| 768,996 |
| | 801,729 |
| | 797,036 |
| | 689,881 |
| |
Gross profit | | 4,397 |
| | 4,348 |
| | 4,098 |
| | 4,115 |
| | 4,231 |
|
Operating earnings | | 1,262 |
| | 1,158 |
| | 1,035 |
| | 1,113 |
| | 1,294 |
|
Net earnings attributable to W.W. Grainger, Inc. (herein referred to as Net earnings) | | 849 |
| | 782 |
| | 586 |
| | 606 |
| | 769 |
|
Net earnings per basic share | 9.94 |
|
| 11.69 |
| | 11.59 |
| | 11.31 |
| | 9.71 |
| 15.39 |
| | 13.82 |
| | 10.07 |
| | 9.94 |
| | 11.69 |
|
Net earnings per diluted share | 9.87 |
|
| 11.58 |
| | 11.45 |
| | 11.13 |
| | 9.52 |
| 15.32 |
| | 13.73 |
| | 10.02 |
| | 9.87 |
| | 11.58 |
|
Total assets | 5,694,307 |
|
| 5,857,755 |
| | 5,283,049 |
| | 5,266,328 |
| | 5,014,598 |
| |
Long-term debt (less current maturities) and other long-term liabilities | 2,159,602 |
| | 1,716,507 |
| | 737,232 |
| | 743,702 |
| | 817,229 |
| |
Total current assets | | 3,555 |
| | 3,557 |
| | 3,206 |
| | 3,020 |
| | 3,049 |
|
Property, building and equipment, net | | 1,400 |
| | 1,352 |
| | 1,392 |
| | 1,421 |
| | 1,431 |
|
Long-term debt (less current maturities) | | 1,914 |
| | 2,090 |
| | 2,248 |
| | 1,841 |
| | 1,388 |
|
Total shareholders' equity | | 2,060 |
| | 2,093 |
| | 1,828 |
| | 1,906 |
| | 2,353 |
|
Operating cash flow | | 1,042 |
| | 1,057 |
| | 1,057 |
| | 1,024 |
| | 1,036 |
|
Cash dividends paid per share | $ | 4.83 |
|
| $ | 4.59 |
| | $ | 4.17 |
| | $ | 3.59 |
| | $ | 3.06 |
| $ | 5.68 |
| | $ | 5.36 |
| | $ | 5.06 |
| | $ | 4.83 |
| | $ | 4.59 |
|
The items discussed below are considered to materially affect the comparability of the information reflected in the selected financial data. For further information see“Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations” of this report, which is incorporated herein by reference.
Net earnings for 2019 included a net expense of $109 million primarily consisting of a $104 million net non-cash charge related to intangible assets impairment at the Cromwell business in the U.K., which is part of other businesses and a net charge of $5 million related to restructuring primarily in the U.S business.
Net earnings for 2018 included a net expense of $170 million primarily consisting of a $133 million net non-cash charge related to goodwill and intangible asset impairment at Cromwell, which is part of other businesses and a net charge of $37 million related to restructuring primarily consisting of asset impairment charges in Canada and other related charges, net of gains from the sale of real estate in the U.S., Canada and corporate offices.
Net earnings for 2017 included a net expense of $84 million primarily consisting of a net charge of $102 million related to restructuring and other charges primarily consisting of branch closures in the U.S. and Canada businesses, net of gains on sale of real estate in the U.S., the consolidation of the contact center network in the U.S. and the wind-down of operations in Colombia, which was part of other businesses. This was partially offset by the net benefit of $15 million related to U.S. tax legislation and other discrete tax items.
Net earnings for 2016 included a net expense of $105 million or $1.71 per share, consisting of the following:
Restructuring: A net charge of $26 million, or $0.43 after-tax earnings per share expenseprimarily related to restructuring actions. These actions primarily included branch closures, net of gains on sale of branch real estate in the United States (U.S.)U.S. and Canadian businesses.
Goodwill and intangible impairments: A non-cash impairment charge of $52 million, or $0.85 after-tax earning per share, related toCanada, goodwill and intangible impairments in Other Businesses.
Unclaimed property contingency: A charge of $23 million, or $0.37 after-tax earnings per share, related to an adjustment for unclaimed property in the U.S. business primarily related to activity from 2008 through 2012.
General Services Administration (GSA) contingency: An expense of $6 million, or $0.09 after-tax earnings per share, to increase the U.S. business reserve for certainEurope and Latin America operations, contingencies and a net tax freight and miscellaneous billing issues in connection with the audit of government contracts with the GSA first entered in 1999.
Inventory adjustment: A charge of $7 million, or $0.12 after-tax earnings per share, related to an inventory adjustment in the Canadian business to reflect on updated reserve methodology and better visibility to inventory performance provided by the conversion to the U.S. ERP system.
Discrete tax items: A benefit of $9 million, or $0.15 earnings per share, related to the conclusion of the federal income tax audit for the years 2009 through 2012 in the U.S. business and other discrete tax items.benefit.
Net earnings for 2015 included a $0.33 per share expense related to reorganization in the U.S. business and at the corporate office, a $0.05 per share expense related to reorganization in the Canadian business and a $0.07 per share expense for restructuring in Other Businesses. Results also included a $0.09 per share benefit primarily related to revaluation of deferred tax liabilities resulting from tax law changes in the United Kingdom. When combined, these items had a net expense effect of $0.36 per share.
Net earnings for 2014 included a $0.40 per share expense related to closing of the business in Brazil, a $0.15 per share non-cash charge due to the retirement plan transition in Europe and a $0.15 per share expense related to restructuring the business in Europe. Results also included a $0.11 per share expense related to a non-cash goodwill impairment charge in Other Businesses. When combined, these items had a net expense effect of $0.81 per share.
Net earnings for 2013 included a $0.29 per share expense related to non-cash impairment charges in Other Businesses, primarily for goodwill. Results also included a $0.10 per share expense related to restructuring the businesses in Europe and China. When combined, these items had a net expense effect of $0.39 per share.
Net earnings for 2012 included a $0.66 per share expense related to the settlement of disputes involving the GSA and United States Postal Service (USPS) contracts in the U.S. business. Results also included a $0.18 per share expense related to restructuring the businesses in Europe, India and China; a $0.04 per share expense due to a non-cash impairment charge in the U.S. business and a $0.03 per share expense related to U.S. branch closures. When combined, these items had a net expense effect of $0.91 per share.
Grainger completed several acquisitions for the years presented above, all of which were immaterial individually and in the aggregate. Operating results have included the results of each business acquired since the respective acquisition dates.
For further information see“Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
OverviewGeneral
General.W.W. Grainger, Inc. (Grainger or Company) is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies and other related products and services used by businesses and institutions. Grainger’swith operations are primarily in the United States (U.S.)North America, Japan and Canada, with a presence in Europe, Asia and Latin America. Grainger uses a combination of multichannel and single channel business models to provide customers with a range of options for finding and purchasing products utilizing sales representatives, catalogs, direct marketing materials and eCommerce. Grainger serves approximately 3Europe. More than 3.5 million customers worldwide rely on Grainger for products such as safety, gloves, ladders, motors and janitorial supplies, along with services such as inventory management and technical support. These customers represent a broad collection of industries (see Note 2 to the Consolidated Financial Statements (Financial Statements)). They place orders through a network of highly integrated branches,digital channels, over the phone and at local branches. Approximately 5,000 suppliers provide Grainger with about 1.6 million products stocked in Grainger's distribution centers (DCs) and websites.branches worldwide.
Grainger’s two reportable segments are the U.S. and Canada. The U.S. operating segment reflectsCanada (Acklands - Grainger, Inc. and its subsidiaries). These reportable segments reflect the results of Grainger’s U.S. business. The Canada operating segment reflects the results for Acklands – Grainger Inc., Grainger’s Canadian business.Company's high-touch solutions businesses in those geographies. Other Businessesbusinesses include single channel onlinethe endless assortment businesses, such as MonotaRO in Japan and Zoro in the U.S., and business units in Europe, Asia and Latin America.
Business Environment. Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger's growth. Grainger’s sales(Zoro in the U.S. and Canada tend to positively correlate with Business Investment, Business Inventory, ExportsMonotaRO in Japan), and Industrial Production. In the U.S., sales tend to positively correlate with Gross Domestic Product (GDP). In Canada, sales tend to positively correlate with oil prices. smaller international high-touch solutions businesses in Europe and Mexico.
Outlook
The table below provides these estimated indicatorsCompany’s strategic priority for 2016 and 2017:
|
| | | | | | | | | | | |
| U.S. | | Canada |
| Estimated 2016 | | Forecasted 2017 | | Estimated 2016 | | Forecasted 2017 |
| | | | | | | |
Business Investment | (2.8 | )% | | 3.4 | % | | (2.8 | )% | | 0.7 | % |
Business Inventory | 1.0 | % | | 0.6 | % | | — |
| | — |
|
Exports | 0.4 | % | | 1.9 | % | | 1.0 | % | | 1.9 | % |
Industrial Production | (1.0 | )% | | 1.4 | % | | (0.5 | )% | | 1.9 | % |
GDP | 1.6 | % | | 2.3 | % | | 1.3 | % | | 2.1 | % |
Oil Prices | — |
| | — |
| | $43/barrel |
| | $57/barrel |
|
Source: Global Insight (February 2017) | | | | | | | |
In the U.S., Business Investment and Exports are two major indicators of MRO spending. Per the Global Insight February 2017 forecast, Business Investment2020 is forecast to improve in 2017 through equipment related spendings as the influence from slow growth abroad andclear: relentlessly expand Grainger’s leadership position in the United States fades. ExportMRO space by being the go-to-partner for people who build and run safe, sustainable and productive operations. To achieve this, each Grainger business has a set of strategic objectives focused on top line growth through market share gain. The U.S. business is expectedfocused on growing through differentiated sales and services (e.g., direct customer relationships and onsite services), advantaged MRO solutions (e.g., get customers the exact products and services they need to improve in 2017 as the global economy stabilizessolve a problem quickly) and attracts more capital to the United States.
Per the Global Insight February 2017 forecast, Canada economic growth in 2016 is forecast to continue to remain low but improve in 2017. For the year, the Canadian economy, as measured by GDP, is forecast to grow to 2.1% in 2017 compared to the 2016 estimate of 1.3%unparalleled customer service (e.g., deliver flawlessly on every customer transaction). The 2017 forecast assumes that oil prices will continueCanada business is focused on growing volume and gaining market share after substantially completing a slow but steady risemulti-year turnaround. The other businesses are primarily focused on profitably growing the international high-touch businesses in Europe and that business nonresidental investment (a component of Business Investment) will begin to increase. The latest forecast forMexico and the Canadian dollar includes further downward adjustmentsendless assortment businesses through product assortment expansion and weakness over the next two years compared to the U.S. dollar.
Outlook.innovative customer acquisition. Additionally, all Grainger plans to continue to make investmentsbusinesses are focused on continuously improving cost structures, investing in itsdigital marketing, technology and supply chain eCommerce capabilities, information systems, sales force productivity tools and inventory management services. These investments will support the Company’s revenue growth objectives of (i) continuinginfrastructure to grow its share of business with large, complex customers; (ii) creating a unique value proposition to further penetrate the medium customer segment and (iii) further leveraging its eCommerce capabilities to serve smaller customers. Through the execution of continuous improvement initiatives, the U.S. business will reduce its cost base while ensuring that it continues toultimately deliver an effortless customer experience. In Canada, the Company took aggressive actions in 2016 that will position the businesslong-term returns for long-term sustainable growth and profitability. These actions, which included business and personnel reorganization, branch closures, ERP and eCommerce investments, should position the Canadian business for growth in 2017 and restore the business to break even by the end of 2017.shareholders.
On January 25, 2017, Grainger reiterated its 2017 sales and earnings per share guidance issued on November 11, 2016, and continues to expect 2 to 6 percent sales growth and earnings per share of $11.30 to $12.40 for 2017.
Matters Affecting Comparability. There were 255 sales days in the full year 2016 and 2015. Grainger completed one acquisition in 2015 and one in 2014, both of which were immaterial individually and in the aggregate. Grainger’s operating results have included the results of each business acquired since the respective acquisition dates.
Results of Operations
The following table is included as an aid to understanding changes in Grainger's Consolidated Statements of Earnings (in millions of dollars):
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| | | | | | | Percent Increase/(Decrease) from Prior Year | | As a Percent of Net Sales | | | | | Percent Increase/(Decrease) from Prior Year | As a Percent of Net Sales |
| 2016 (A) | | 2015 (A) | | 2014 (A) | | 2016 | | 2015 | | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2019 | | 2019 | | 2018 |
Net sales | $ | 10,137 |
| | $ | 9,973 |
| | $ | 9,965 |
| | 2 | % | | — | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | $ | 11,486 |
| | $ | 11,221 |
| | 2 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 6,023 |
| | 5,742 |
| | 5,651 |
| | 5 | % | | 2 | % | | 59.4 |
| | 57.6 |
| | 56.7 |
| |
Cost of goods sold | | 7,089 |
| | 6,873 |
| | 3 | % | | 61.7 | % | | 61.3 | % |
Gross profit | 4,115 |
| | 4,231 |
| | 4,314 |
| | (3 | )% | | (2 | )% | | 40.6 |
| | 42.4 |
| | 43.3 |
| 4,397 |
| | 4,348 |
| | 1 | % | | 38.3 | % | | 38.7 | % |
Operating expenses | 2,995 |
| | 2,931 |
| | 2,967 |
| | 2 | % | | (1 | )% | | 29.6 |
| | 29.4 |
| | 29.8 |
| |
Selling, general and administrative expenses | | 3,135 |
| | 3,190 |
| | (2 | )% | | 27.3 | % | | 28.4 | % |
Operating earnings | 1,119 |
| | 1,300 |
| | 1,347 |
| | (14 | )% | | (4 | )% | | 11.0 |
| | 13.0 |
| | 13.5 |
| 1,262 |
| | 1,158 |
| | 9 | % | | 11.0 | % | | 10.3 | % |
Other expense | 100 |
| | 50 |
| | 13 |
| | 102 | % | | 290 | % | | 1.0 |
| | 0.5 |
| | 0.1 |
| |
Other expense, net | | 53 |
| | 77 |
| | (31 | )% | | 0.5 | % | | 0.7 | % |
Income taxes | 386 |
| | 466 |
| | 522 |
| | (17 | )% | | (11 | )% | | 3.8 |
| | 4.7 |
| | 5.2 |
| 314 |
| | 258 |
| | 22 | % | | 2.7 | % | | 2.3 | % |
Net earnings | | 895 |
| | 823 |
| | 9 | % | | 7.8 | % |
| 7.3 | % |
Noncontrolling interest | 27 |
| | 16 |
| | 11 |
| | 66 | % | | 53 | % | | 0.3 |
| | 0.2 |
| | 0.1 |
| 46 |
| | 41 |
| | 12 | % | | 0.4 | % | | 0.4 | % |
Net earnings attributable to W.W. Grainger, Inc. | $ | 606 |
| | $ | 769 |
| | $ | 801 |
| | (21 | )% | | (4 | )% | | 6.0 | % | | 7.7 | % | | 8.1 | % | $ | 849 |
| | $ | 782 |
| | 8 | % | | 7.4 | % | | 7.0 | % |
(A) May not sum due to rounding
20162019 Compared to 20152018
Grainger's net sales of $10,137$11,486 million for 2016 were an increase of 2% when compared with net sales of $9,973 million for the comparable 2015 period. The 2% increase for the year consisted ofended 2019 increased $265 million, or 2.5%, compared to the following:
|
| |
| Percent Increase/ (Decrease) |
Cromwell acquisition | 3 |
Volume | 1 |
Price | (2) |
Total | 2% |
Sales growth to government, retail and light manufacturing customers were offset by a declinesame period in sales to natural resource customers, resellers, contractors and heavy manufacturing customers. In 2016, eCommerce sales for Grainger were $4,757 million, an2018. The increase of 15% over the prior year and represented 47% of total sales. The increasein net sales was primarily driven by an increase in sales via EDI and electronic purchasing platformsvolume increases in the U.S. business from market share gain and Japancontinued double-digit growth in the endless assortments businesses, partially offset by lower sales in the Canada business and other businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 56% of total sales. ReferSee Note 14 to the Financial Statements and refer to the Segment Analysis below for further details.
Gross profit of $4,115$4,397 million for 2016 decreased 3%the year ended 2019 increased $49 million, or 1% compared with the same period in 2018. The gross profit margin for 2016 was 40.6%, down 1.8of 38.3% decreased 0.5 percentage points versus 2015when compared to the same period in 2018, primarily due to price deflation exceeding cost deflation and unfavorable customer mix.
Operating expensesdriven by the lower margin endless assortment businesses which are growing at a faster rate than the rest of $2,995 million for 2016 increased 2% from $2,931 million for 2015. The increase was primarily due to the following:
$35 million of restructuring charges primarilyCompany. Elsewhere, lower gross profit margins in the U.S. were offset by supply chain favorability in Canada.
The tables below reconcile reported Selling, general and Canadian businesses.
$52 million of impairment charges for goodwill and intangible assets in Other Businesses.
$36 million adjustment for unclaimed property in the U.S. business, primarily for the five years 2008 through 2012.
$9 million increase in the U.S. business reserve related to certain tax, freight and miscellaneous billing issues in connection with the audit of government contracts with the General Services Administration first entered in 1999.
In 2015administrative expenses (SG&A), operating expenses included $42 million related to restructuring and other charges primarily in the U.S. and Canadian business. Excluding the charges from both years, operating expenses were down 1%.
Operating earnings, of $1,119 million for 2016 decreased 14% from $1,300 million for 2015. The decrease in operating earnings was driven by lower gross profit margin and higher restructuring costs and other charges. Operating earnings included the charges noted above. Excluding these charges from both years, operating earnings decreased 6%.
Netnet earnings attributable to W.W. Grainger, for 2016 decreased by 21% to $606 million from $769 million in 2015. The decrease in net earnings primarily resulted from lower operating earnings, partially offset by lower income taxes. Excluding the charges from both years mentioned aboveInc. and discrete tax items, net earnings decreased 10%.
Diluted earnings per share of $9.87 in 2016 were 15% lower than $11.58 for 2015, due to lower earnings, partially offset by lower average shares outstanding as a result of share repurchases. Excluding the charges mentioned above diluted earnings per share would have been $11.58 compared to $11.94 in 2015, a decrease of 3%.
The table below reconciles reported diluted earnings per share, determined in accordance with generally accepted accounting principlesGenerally Accepted Accounting Principles (GAAP) in the U.S.United States of America to adjusted SG&A, operating earnings, net earnings attributable to W.W. Grainger, Inc. and diluted earnings per share, which are all considered non-GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance as they provide a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicatorbetter baseline for analyzing the ongoing performance of operations because it excludesits businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measurethese measures with other companies' non-GAAP financial measures having the same or similar names. These non-GAAP measures should not be considered in isolation or as a substitute for reported results. These non-GAAP measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. All tables below are in millions of dollars:
|
| | | | | | | | | |
| Twelve Months Ended December 31, | |
| 2016 | | 2015 | % |
Diluted earnings per share reported | $ | 9.87 |
| | $ | 11.58 |
| (15 | )% |
Adjustments, pretax (1) | 2.41 |
| | 0.69 |
| |
Tax effect (1)(2) | (0.55 | ) | | (0.24 | ) | |
Discrete tax items | (0.15 | ) | | (0.09 | ) | |
Subtotal | 1.71 |
| | 0.36 |
| |
Diluted earnings per share adjusted | $ | 11.58 |
| | $ | 11.94 |
| (3 | )% |
|
| | | | | | | | | |
| Twelve Months Ended | |
| December 31, | |
| 2019 | | 2018 | % |
SG&A reported | $ | 3,135 |
| | $ | 3,190 |
| (2 | )% |
Restructuring, net of branch gains (U.S.) | 5 |
| | 9 |
| |
Restructuring, net of branch gains (Canada) | — |
| | 35 |
| |
Restructuring (Other businesses) | 2 |
| | 5 |
| |
Impairment charges (Other businesses) | 120 |
| | 139 |
| |
Restructuring (Unallocated expense) | (1 | ) | | (2 | ) | |
Subtotal | 126 |
| | 186 |
| |
SG&A adjusted | $ | 3,009 |
| | $ | 3,004 |
| — | % |
| | | | |
| 2019 | | 2018 | % |
Operating earnings reported | $ | 1,262 |
| | $ | 1,158 |
| 9 | % |
Total restructuring, net and impairment charges | 126 |
| | 186 |
| |
Operating earnings adjusted | $ | 1,388 |
| | $ | 1,344 |
| 3 | % |
| | | | |
| 2019 | | 2018 | % |
Net earnings attributable to W.W. Grainger, Inc. reported | $ | 849 |
| | $ | 782 |
| 8 | % |
Total restructuring, net and impairment charges | 126 |
| | 186 |
| |
Tax effect (1) | (17 | ) | | (16 | ) | |
Total restructuring and impairment charges, net of branch gains and tax | 109 |
| | 170 |
| |
Net earnings attributable to W.W. Grainger, Inc. adjusted | $ | 958 |
| | $ | 952 |
| 1 | % |
|
(1) The tax impact of adjustments and non-cash impairments are calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility and the Company's ability to realize the associated tax benefits. |
(1) Adjustments discussed
SG&A of $3,135 million for the year ended December 31, 2019 decreased $55 million, or 2% compared to $3,190 million in detailthe same period in Item 6.2018. In the fourth quarter of 2019, Grainger recorded $120 million of impairment charges related to intangible assets at the Cromwell business in the U.K., which is in other businesses and in the third quarter of 2018, the Company recorded $139 million of impairment charges related to goodwill and other intangible assets for Cromwell. Excluding restructuring, net and impairment charges in both periods as noted in the table above, SG&A was flat to prior year on net sales growth of 2.5%.
(2) The tax impact
Operating earnings of adjustments is calculated based on$1,262 million in 2019 increased $104 million, or 9% compared to $1,158 million in the income tax ratesame period in each applicable jurisdiction.
Segment Analysis
Grainger’s two reportable segments are2018. Excluding restructuring, net and impairment charges in both periods as noted in the table above, operating earnings increased $44 million, or 3%, driven primarily by cost take-out actions in the Canadian business and improved SG&A leverage in the U.S. business.
Other expense, net of $53 million for the year ended 2019, decreased $24 million, or 31% compared to the same period in 2018. The decrease in expense was primarily due to lower losses from the conclusion of the Company's clean energy investments during the second half of 2018.
Income taxes of $314 million for the year ended 2019 increased $56 million, or 22% compared to $258 million for the same period in 2018. Grainger's effective tax rates were 26.0% and Canada.23.9% in 2019 and 2018, respectively. The U.S. operating segment reflectsincrease was primarily driven by lower tax benefit from stock-based compensation and the resultsabsence of Grainger’s U.S. business. The Canada operating segment reflects the results for Acklands –Company's clean energy tax benefits in 2019 as the Company concluded its investments in 2018.
Net earnings attributable to W.W. Grainger, Inc., Grainger’s Canadian business. Other businesses include single channel online businesses such as MonotaRO in Japan and Zoro for the year ended 2019 increased $67 million, or 8% to $849 million from $782 million in the U.S.same period in 2018. Excluding restructuring, net and impairment charges and income taxes from both periods as noted in the table above, net earnings increased $6 million, or 1%. The increase in net earnings primarily resulted from lower SG&A and other expense, net.
Diluted earnings per share was $15.32 for the year ended 2019 and increased 12% compared to $13.73 for the same period in 2018, due to higher net earnings and business unitslower average shares outstanding. Excluding restructuring, net and impairment charges and income taxes from both periods as noted in Europe, Asiathe table above, diluted earnings per share would have been $17.29 compared to $16.70 in 2018, an increase of 4%.
2018 Compared to 2017
For the full year 2017 to 2018 comparative discussion, see Item 7: Management’s Discussion and Latin America.Analysis of Financial Condition and Results of Operations - Results of Operations in Grainger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Segment Analysis - 2019 Compared to 2018
The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 1614 to the Consolidated Financial Statements.
United States
Net sales were $7,870$8,815 million for 2016the year ended 2019, a decreasean increase of $93$227 million,, or 1% when2.5% compared with net sales of $7,963$8,588 million for 2015. The 1% decrease for the year2018 and consisted of the following contributors:
|
| |
| Percent Increase/(Decrease) |
Intercompany sales to Zoro | 1 |
Volume | (1) |
Price | (1) |
Total | (1)% |
Mid-single-digit sales growth to government and retail customers and low single-digit growth to light manufacturing was offset by mid-teen declines in sales to natural resource and reseller customers and mid-single-digit declines to heavy manufacturing customers and contractors.
In 2016, eCommerce sales for the U.S. business were $3,660 million, an increase of 12% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 57% of total sales.
The segment gross profit margin decreased 1.3 percentage points in 2016 compared to 2015, driven by price deflation exceeding cost deflation and stronger sales growth to lower margin customers.
Operating expenses were down 2% for 2016 versus 2015. The decrease in operating expenses was driven by lower employees benefit costs, partially offset by higher restructuring costs and other charges discussed above. Excluding the restructuring and other charges in both periods, operating expenses would have been down 4%.
For the segment, operating earnings of $1,275 million for 2016 decreased 7% versus $1,372 million in 2015. The decline in operating earnings for 2016 was primarily driven by lower sales and gross profit margin, partially offset by lower operating expenses. Excluding the restructuring costs and other charges in both periods, operating earnings decreased 5%.
Canada
Net sales were $734 million for 2016, a decrease of $157 million, or 18%, when compared with $891 million for 2015. In local currency, sales decreased 15% for 2015. The 18% decrease for the year consisted of the following contributors:
|
| |
| Percent Decrease |
Volume | (10) |
Foreign exchange | (3) |
Price | (2) |
ERP implementation | (2) |
Wildfire impact | (1) |
Total | (18)% |
Sales performance in Canada was primarily driven by declines within the oil and gas sector in Alberta, combined with declines in all other end markets across the country. The Alberta region, which represents about one-third of the sales in the Canadian business, decreased 23% versus prior year, as it was negatively impacted by oil prices. Sales growth
for the remaining regions in aggregate was down 10% in local currency. In addition, the Canadian business implemented the U.S. ERP system in February 2016, which negatively impacted sales as employees transitioned to operating with the new system.
In 2016, eCommerce sales for the Canada business were $98 million, a decrease of 8% over the prior year and represented 13% of total sales. The decrease was primarily driven by lower sales volume. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 26% of total sales.
The segment gross profit margin decreased 7.8 percentage points in 2016 versus 2015, due to an inventory adjustment of $10 million in the second quarter of 2016, along with price deflation versus cost inflation and higher freight costs from an increase in shipping directly to customers. As a result of service issues due to the ERP system implementation, the Company did not increase prices to customers during 2016.
Operating expenses decreased 8% in 2016 versus 2015. The decrease was due to the benefit of a $7 million gain from the sale of the former Toronto DC in the first quarter of 2016 and lower ERP system project costs, partially offset by higher restructuring costs. Excluding the restructuring costs from both periods, operating expenses decreased 11%.
Operating losses of $65 million for 2016 versus operating earnings of $27 million in 2015, a decrease of $92 million. Excluding the restructuring costs mentioned above, the operating losses would have been $41 million due to lower sales and gross profit margin and operating expenses declining at a slower rate than sales when compared to the prior period.
Other Businesses
Net sales for other businesses, which include MonotaRO in Japan, Zoro in the U.S. and operations in Europe, Asia, Latin America and Cromwell in the United Kingdom (U.K.) (acquired September 1, 2015) were $1,885 million for 2016, an increase of $479 million, or 34%, when compared to $1,406 million for 2015. The net sales increase was primarily due to the Cromwell acquisition and incremental sales at Zoro and MonotaRO. The 34% increase for the year consisted of the following contributors:following:
|
| |
| Percent Increase |
Cromwell acquisition | 18 (Decrease) |
Volume | 152.0% |
Foreign exchangePrice | 10.5 |
Intersegment sales to Zoro (included in other businesses) | 0.5 |
Other | (0.5) |
Total | 34%2.5% |
Overall, revenue increases were primarily driven by market share gains. See Note 2 to the Financial Statements for information related to disaggregated revenue.
Gross profit margin decreased 0.4 percentage points compared to the same period in 2018 reflecting the impact of contract renegotiations and customer mix.
SG&A for the year ended 2019 was flat compared to the same period in 2018 due to strong expense management.
Operating earnings of $1,391 million increased $53 million, or 4% from $1,338 million in the same period of 2018. This increase was driven primarily by higher sales, higher gross profit dollars and improved SG&A leverage.
Canada
Net sales were $529 million for the year ended 2019, a decrease of $124 million, or 19% when compared with $653 million for 2018 and consisted of the following:
|
| |
| Percent (Decrease)/Increase |
Volume | (19.0)% |
Price | 2.0 |
Foreign Exchange | (2.0) |
Total | (19.0)% |
For the year ended 2019, volume decreased by 19 percentage points compared to the same period in 2018 due to customer disruption as a result of actions taken to reduce the branch footprint and optimize sales coverage.
Gross profit margin increased 0.7 percentage points in 2019 compared to the same period in 2018 primarily due to inventory and supply chain efficiencies.
SG&A decreased $89 million, or 34% in 2019 compared to the same period in 2018. Excluding restructuring, net in both periods as noted in the table above, SG&A would have decreased $54 million, or 24% compared to the prior period. This decrease was primarily due to cost reduction actions and lower variable expense as a result of lower sales volume.
Operating earnings were $3 million for the year ended 2019 compared to losses of $49 million in the same period in 2018. Excluding restructuring, net in both periods (as noted in the table above and Note 5 to the Financial Statements), operating earnings would have been $3 million compared to operating losses of $14 million in the prior period primarily due to lower SG&A and lower sales volume.
Other businesses
Net sales for other businesses were $41$2,651 million for 2016the year ended 2019, an increase of $210 million, or 8.5%, when compared to $48 million for 2015the same period in 2018. Excluding goodwill and intangible impairment charges of $52 million in the Fabory and Colombia businesses and other restructuring charges in the prior year, operating earnings for other business increased by $39 million driven by strong performance from MonotaRO, Zoro and the earnings contribution from Cromwell.
Other Income and Expense
Other expense was $100 million in 2016 compared to $50 million of expense in 2015. The following table summarizes the components of other income and expense (in thousands of dollars):
|
| | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 |
Interest income (expense) - net | $ | (65,615 | ) | | $ | (32,405 | ) |
Loss from equity method investment | (31,193 | ) | | (11,740 | ) |
Other non-operating income | 1,300 |
| | 1,102 |
|
Other non-operating expense | (4,931 | ) | | (6,572 | ) |
Total | $ | (100,439 | ) | | $ | (49,615 | ) |
Thenet sales increase in expense was driven by higher interest expense from the $1 billion in long-term debt issued in June 2015 and $400 million in long-term debt issued in May 2016, as well as higher operating losses from the Company's clean energy investments.
Income Taxes
Income taxes of $386 million in 2016 decreased 17% compared with $466 million in 2015. Grainger's effective tax rates were 37.9% and 37.2% in 2016 and 2015, respectively. The year-over-year increase in the tax rate was primarily due to a larger proportion of earnings from higher tax rate jurisdictions, partially offset by a higher benefit fromincremental sales at the Company’s clean energy investments. The twelve months ended December 31, 2016, included a benefit from the conclusionendless assortment businesses and consisted of the federal income tax audit for the years 2009 through 2012 and other discrete items. Excluding the discrete tax benefits and non-deductible intangible write-downs, the Company’s effective tax rate was 37.1%. The Company's clean energy investment generated $0.15 per share of earnings for the year ended December 31, 2016.
2015 Compared to 2014
Grainger's net sales of $9,973 million for 2015 were flat when compared with net sales of $9,965 million for 2014. Contributors to the sales performance for 2015 were as follows:
following:
|
| |
| Percent Increase/ (Decrease) |
Volume | 2 |
Business acquisition | 2 |
Price | (1)9.5% |
Foreign exchange | (3)(1.0) |
Total | —%8.5% |
Sales growth to light manufacturing and government customers were offset by a decline in sales to natural resource customers, contractors, resellers and heavy manufacturing customers. In 2015, eCommerce sales for Grainger were $4,133 million, an increase of 16% over the prior year and represented 41% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms in the U.S. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 50% of total sales. Refer to the Segment Analysis below for further details.
Gross profit of $4,231 million for 2015 decreased 2%. The gross profit margin for 2015 was 42.4%, down 0.9 percentage point versus 2014, primarily driven by higher sales to lower margin customers and price deflation exceeding cost deflation.
Operating expenses of $2,931 million for 2015 decreased 1% from $2,967 million for 2014. The decrease was primarily driven by lower employee benefits, partially offset by higher severance and contract services costs. Operating expenses included new sales representatives, supply chain and inventory management solutions, as well as $42 million of charges primarily related to reorganizing the businesses in the U.S. and Canada. In 2014, operating expenses included $51 million related to the closing of the business in Brazil, restructuring costs, the transition of the retirement plan in Europe and an impairment charge for the business in Colombia. Excluding the reorganization and restructuring costs from both years, operating expenses were down 1%.
Operating earnings of $1,300 million for 2015 decreased 3% from $1,347 million for 2014. Operating earnings declined due to a lower gross profit margin, partially offset by operating expense leverage. Operating earnings included the charges noted above. Excluding these charges from both years, operating earnings decreased 5%.
Net earnings attributable to Grainger for 2015 decreased by 4% to $769 million from $802 million in 2014. The decrease in net earnings primarily resulted from lower operating earnings, partially offset by lower income taxes. Diluted earnings per share of $11.58 in 2015 were 1% higher than $11.45 for 2014, due to lower average shares outstanding.
The following table reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the U.S. to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
|
| | | | | | | | | |
| Twelve Months Ended December 31, | |
| 2015 | | 2014 | % |
Diluted earnings per share reported | $ | 11.58 |
| | $ | 11.45 |
| 1 | % |
Adjustments, pretax | 0.69 |
| | 0.94 |
| |
Tax effect (1) | (0.24 | ) | | (0.13 | ) | |
Discrete tax items | (0.09 | ) | | — |
| |
Total, net of tax | 0.36 |
| | 0.81 |
| |
Diluted earnings per share adjusted | $ | 11.94 |
| | $ | 12.26 |
| (3 | )% |
(1) The tax impact of adjustments is calculated on the income tax rate in each applicable jurisdiction.
Segment Analysis
The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 16 to the Consolidated Financial Statements.
United States
Net sales were $7,963 million for 2015, an increase of $37 million, or flat when compared with net sales of $7,926 million for 2014. Contributors to the sales performance for 2015 were as follows:
|
| |
| Percent Increase/(Decrease) |
Volume | — |
Intercompany sales to Zoro | 1 |
Price | (1) |
Total | —% |
Mid-single-digit sales growth to light manufacturing and government customers and low single-digit growth to commercial services were offset by a mid-teen decline in sales to natural resource customers and low-single-digit declines to heavy manufacturing customers and contractors. In 2015, eCommerce sales for the U.S. business were $3,275 million, an increase of 16% over the prior year, and represented 41% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 51% of total sales.
The segment gross profit margin decreased 1.0 percentage point in 2015 compared to 2014, primarily driven by price decreases exceeding product cost decreases and higher sales to lower margin customers.
Operating expenses were up 1% for 2015 versus 2014. Operating expenses included an incremental $96 million in growth-related spending on eCommerce, new sales representatives, supply chain and inventory management solutions, as well as $32 million of charges related to reorganizing the business, including branch closures. Excluding the reorganization costs, operating expenses decreased 1% primarily due to lower employee benefit costs.
For the segment, operating earnings of $1,372 million for 2015 decreased 5% versus $1,444 million in 2014. Excluding the reorganization expenses mentioned above, operating earnings were down 3%. The decline in operating earnings for 2015 was due to a lower gross profit margin, partially offset by positive operating expense leverage.
Canada
Net sales were $891 million for 2015, a decrease of $185 million, or 17%, when compared with $1,076 million for 2014. In local currency, sales increased 5% for 2015. The 17% decrease for the year consisted of the following contributors:
|
| |
| Percent Increase/ (Decrease) |
Volume | (14) |
Foreign exchange | (12) |
Acquisition | 5 |
Price | 4 |
Total | (17)% |
Sales performance in Canada was driven by mid-teen declines in the oil and gas, contractor, commercial services, heavy manufacturing, resellers and retail markets. Net sales in the agriculture and mining and utilities end markets were up in the mid-single digits. In 2015, eCommerce sales for Canada were $107 million, a decrease of 13% versus the prior year and represented 12% of total sales. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 23% of total sales.
The segment gross profit margin decreased 0.4 percentage point in 2015 versus 2014, primarily driven by product cost inflation exceeding price inflation driven by unfavorable foreign exchange, partially offset by higher supplier rebates.
Operating expenses decreased 4% in 2015. In local currency, operating expenses increased 11%, primarily due to higher severance costs related to reorganizing the business, higher depreciation driven primarily by a new DC and incremental costs from the WFS Enterprises Inc. (WFS) acquisition as 2014 included a partial year. Excluding the reorganization costs, operating expenses increased 9%.
Operating earnings of $27 million for 2015 decreased $61 million, or 69%, versus 2014. In local currency, operating earnings decreased 64%. The decrease in earnings was due to lower sales, lower gross profit margins and negative operating expense leverage.
Other Businesses
Net sales for Other Businesses, which include Zoro in the U.S. and operations in Europe, Asia and Latin America and Cromwell in the U.K. (acquired September 1, 2015), were $1,406 million for 2015, an increase of $224 million, or 19%, when compared with $1,182 million for 2014. The net sales increase was primarily due to incremental salescustomer acquisition growth from Cromwell, Zorothe endless assortment businesses,
partially offset by foreign exchange headwinds from the euro and MonotaRO. The 19% increase for the year consisted of the following contributors:pound sterling.
|
| |
| Percent Increase/ (Decrease) |
Volume/Price | 21 |
Acquisition | 12 |
Foreign exchange | (14) |
Total | 19% |
Operating earningslosses for other businesses were $48$9 million for 2015the year ended 2019, a decrease of $17 million, or 216% compared to a lossoperating earnings of $38$8 million for 2014. The year 20152018. Other businesses included $6 million ofimpairment charges forin 2019 and 2018 relating to the continuing restructuring of theCromwell business in Europethe U.K. See Note 4 and additional costs to shut down the business in Brazil. The year 2014 included a $29 million charge related to closing the business in Brazil, a $14 million charge relatedNote 5 to the transition of the employee retirement plan in Europe, a $12 millionFinancial Statements. Excluding restructuring, net and impairment charge for the business in Colombia and $10 million in restructuring costs for the business in Europe. Excluding these charges in both years,periods, operating earnings increased $27decreased $40 million, primarily driven by improved operating performance by MonotaRO and Zoro, partially offset by incremental expenses associated with the single channel online business model in Europe.
Other Income and Expense
Other income and expense was $50 million of expense in 2015 compared with $13 million of expense in 2014. The following table summarizes the components of other income and expense (in thousands of dollars):
|
| | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 |
Interest income (expense) - net | $ | (32,405 | ) | | $ | (8,025 | ) |
Loss from equity method investment | (11,740 | ) | | — |
|
Other non-operating income | 1,102 |
| | 483 |
|
Other non-operating expense | (6,572 | ) | | (5,189 | ) |
Total | $ | (49,615 | ) | | $ | (12,731 | ) |
The increase in expense was driven by higher interest expense from the $1 billion in long-term debt issued in June 2015, as well as operating losses from the Company's clean energy investments. As discussed below, the operating losses in this investment were more than offset by energy tax credits that lowered Grainger's tax rate, which provided Grainger with positive net earnings and cash flow. The clean energy investment generated $0.09 per share of earnings for 2015.
Income Taxes
Income taxes of $466 million in 2015 decreased 11% compared with $522 million in 2014. Grainger's effective tax rates were 37.2% and 39.1% in 2015 and 2014, respectively. Excluding the effect of restructuring and non-operating items reported in both 2015 and 2014, Grainger's adjusted tax rate was 37.6% and 38.2% in 2015 and 2014, respectively. Theor 27%. This decrease in the tax rate in 2015 wasis primarily due to the Company's clean energyendless assortment businesses' investments partially offset by a higher proportion of earningsto drive long-term growth and performance in the U.S. versus geographies with lower tax rates.high-touch solutions businesses.
Segment Analysis - 2018 Compared to 2017
For the full year 2017 to 2018 comparative discussion, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segment Analysis - 2018 Compared to 2017 in Grainger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Financial Condition
For the full year 2017 discussion, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition in Grainger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Grainger believes that its current level of cash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to meet its liquidity needs. Grainger expects to continue to invest in its strong working capital position,business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through total available liquidity and cash flows generated from operationsoperations. Grainger also maintains access to capital markets and borrowing capacitymay issue debt or equity securities from time to continue, allowing it to fund its operations, including growth initiatives, capital expenditures, acquisitions and repurchasetime, which may provide an additional source of shares, as well as to pay cash dividends.liquidity.
Cash Flowand Cash Equivalents
At December 31, 2019 and 2018, Grainger had cash and cash equivalents of $360 million and $538 million, respectively. Approximately 69% and 49% were outside the U.S. as of December 31, 2019 and 2018, respectively. Grainger has no material limits or restrictions on its ability to use these foreign liquid assets.
2016
Cash Flows
2019 Compared to 20152018
Net cash provided by operating activities was $1,003$1,042 million and $990$1,057 million for the twelve monthsyears ended December 31, 20162019 and 2015,2018, respectively. The increasedecrease in cash provided by operating activities was primarily the result of lowerrelated to employee related costs.variable compensation payments, partially offset by favorable net income and changes in working capital.
Net cash used in investing activities was $262$202 million and $843$166 million for the twelve monthsyears ended December 31, 20162019 and 2015,2018, respectively. The higher use ofThis increase in net cash used in 2015investing activities was primarily driven by lower proceeds from the Cromwell acquisition in September 2015. In 2016, lower additions to property, buildings and equipmentsales of assets when compared to the prior year and higher proceeds from the sale of branch real estate assets contributed to the reduction in cash used in investing activities.year.
Net cash used in financing activities was $755$1,023 million and $63$670 million in the twelve monthsyears ended December 31, 20162019 and 2015,2018, respectively. The changeincrease in net cash used in financing activities was primarily driven by the issuance of $400 million in Senior Notes in 2016 compared to the issuance of $1 billion in Senior Notes in 2015 and significantly lowerhigher treasury stock repurchases in 20162019 compared to 2015.
2015 Compared to 2014
Net cash provided by operating activities in 2015 were $990 million versus $960 million in 2014. This positive cash flow was due to relatively flat receivable balances, partially offset by a decrease in employee benefit liabilities.
Net cash used in investing activities was $843 million2018 and $384 million in 2015 and 2014, respectively. The higher use of cash was primarily driven by $464 million of net cash paid for a business acquisition in 2015 versus $31 million in 2014.
Net cash used in financing activities of $63 million in 2015 decreased $695 million from $758 million in 2014. The decrease was primarily due tolower proceeds from the issuance of $1 billion in Senior Notes, a £160 million term loan and issuance of commercial paper to support the acquisition of Cromwell, as well as ¥6 billion term loans to support the construction of a new distribution center in MonotaRO. These proceeds were partially offset by an increase in share repurchases and dividends paid.stock options exercised.
Working Capital
Internally generated funds are the primary source of working capital and funds used in business expansion, supplemented by debt. In addition, funds are expended to support growth initiatives as well as for business and systems development and other infrastructure improvements.including capital expenditures. Grainger's working capital is not impacted by significant seasonality trends throughout the year.
Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt, and current maturities of long-term debt)debt and lease liabilities). Working capital was $1,722$2,092 million at December 31, 2016,2019, compared with $1,794$1,898 million at December 31, 2015.2018, primarily due to an increase in accounts receivable and inventory and decreases in accrued compensation and benefits partially offset by increases in accounts payable. At these dates, the ratio of current assets to current liabilities was 2.42.6 and 2.5,2.4, respectively. The decrease in working capital was primarily related to increases in accounts payable.
Capital Expenditures
In each of the past threetwo years, a portion of operatingthe Company's net cash flows has been used for additions to property, buildings, equipment and capitalized software (presented in Intangibles - net on the Consolidated Balance Sheet) as summarized in the following table (in thousandsmillions of dollars):
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2016 | | 2015 | | 2014 | 2019 | | 2018 |
Land, buildings, structures and improvements | $ | 70,942 |
| | $ | 86,082 |
| | $ | 159,793 |
| $ | 47 |
| | $ | 69 |
|
Furniture, fixtures, machinery and equipment | 139,474 |
| | 202,137 |
| | 140,358 |
| 131 |
| | 137 |
|
Subtotal | 210,416 |
| | 288,219 |
| | 300,151 |
| 178 |
| | 206 |
|
Capitalized software | 73,833 |
| | 85,649 |
| | 87,239 |
| 43 |
| | 33 |
|
Total | $ | 284,249 |
| | $ | 373,868 |
| | $ | 387,390 |
| $ | 221 |
| | $ | 239 |
|