W.W. Grainger, Inc. and Subsidiaries
We have audited W.W. Grainger, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO Criteria). In our opinion, W.W Grainger, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172019 and 2016,2018, and the related consolidated statements of earnings, comprehensive earnings, and shareholders’ equity and cash flows for each of the three years in the period ended December 31, 20172018 and the related notes and our report dated February 26, 201820, 2020 expressed an unqualified opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of effectiveness of the internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousandsmillions of dollars)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net earnings | $ | 622,443 |
|
| $ | 632,838 |
|
| $ | 785,174 |
|
Other comprehensive earnings: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of reclassification (see Note 6 and Note 13) | 92,711 |
|
| (38,729 | ) |
| (154,096 | ) |
Postretirement benefit plan remeasurement, net of tax expense $29,172 (see Note 9 and Note 13) | 46,543 |
|
| — |
|
| — |
|
Postretirement benefit plan reclassification, net of tax (expense) benefit of $(1,017), $6,991 and $(17,013) | 2,043 |
| | (12,453 | ) | | 27,846 |
|
Other | — |
| | 885 |
| | 1,300 |
|
Comprehensive earnings, net of tax | 763,740 |
| | 582,541 |
| | 660,224 |
|
Less: Comprehensive earnings attributable to noncontrolling interest: |
|
| |
|
| |
|
|
Net earnings | 36,713 |
|
| 26,910 |
|
| 16,178 |
|
Foreign currency translation adjustments | 3,677 |
|
| 906 |
|
| (532 | ) |
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 723,350 |
| | $ | 554,725 |
| | $ | 644,578 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net earnings | $ | 895 |
| | $ | 823 |
| | $ | 623 |
|
Other comprehensive earnings (losses): | | | | | |
Foreign currency translation adjustments, net of reclassification (see Note 5 and Note 12) | 26 |
| | (41 | ) | | 93 |
|
Postretirement benefit plan re-measurement, net of tax expense $29 million (see Note 8 and Note 12) | — |
| | — |
| | 47 |
|
Postretirement benefit plan reclassification, net of tax benefit of $2 million, $3 million and $1 million, respectively | (6 | ) | | (7 | ) | | 2 |
|
Total other comprehensive earnings (losses) | 20 |
| | (48 | ) | | 142 |
|
Comprehensive earnings, net of tax | 915 |
| | 775 |
| | 765 |
|
Less: Comprehensive earnings (losses) attributable to noncontrolling interest |
|
| |
|
| |
|
|
Net earnings | 46 |
| | 41 |
| | 37 |
|
Foreign currency translation adjustments | 3 |
| | 3 |
| | 4 |
|
Total comprehensive earnings (losses) attributable to noncontrolling interest | 49 |
| | 44 |
| | 41 |
|
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 866 |
| | $ | 731 |
| | $ | 724 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
|
| | | | | | | |
| As of December 31, |
ASSETS | 2019 | | 2018 |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 360 |
| | $ | 538 |
|
Accounts receivable (less allowance for doubtful accounts of $21 million and $25 million, respectively) | 1,425 |
| | 1,385 |
|
Inventories – net | 1,655 |
| | 1,541 |
|
Prepaid expenses and other assets | 104 |
| | 83 |
|
Prepaid income taxes | 11 |
| | 10 |
|
Total current assets | 3,555 |
| | 3,557 |
|
PROPERTY, BUILDINGS AND EQUIPMENT – NET | 1,400 |
| | 1,352 |
|
DEFERRED INCOME TAXES | 11 |
| | 12 |
|
GOODWILL | 429 |
| | 424 |
|
INTANGIBLES – NET | 304 |
| | 460 |
|
OTHER ASSETS | 306 |
| | 68 |
|
TOTAL ASSETS | $ | 6,005 |
| | $ | 5,873 |
|
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
CURRENT LIABILITIES | | | |
Short-term debt | $ | 55 |
| | $ | 49 |
|
Current maturities of long-term debt | 246 |
| | 81 |
|
Trade accounts payable | 719 |
| | 678 |
|
Accrued compensation and benefits | 228 |
| | 262 |
|
Accrued contributions to employees’ profit-sharing plans | 85 |
| | 133 |
|
Accrued expenses | 318 |
| | 269 |
|
Income taxes payable | 27 |
| | 29 |
|
Total current liabilities | 1,678 |
| | 1,501 |
|
LONG-TERM DEBT (less current maturities) | 1,914 |
| | 2,090 |
|
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES | 106 |
| | 103 |
|
OTHER NON-CURRENT LIABILITIES | 247 |
| | 86 |
|
SHAREHOLDERS' EQUITY | |
| | |
|
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding | — |
| | — |
|
Common Stock – $0.50 par value –300,000,000 shares authorized; issued 109,659,219 shares | 55 |
| | 55 |
|
Additional contributed capital | 1,182 |
| | 1,134 |
|
Retained earnings | 8,405 |
| | 7,869 |
|
Accumulated other comprehensive losses | (154 | ) | | (171 | ) |
Treasury stock, at cost - 55,971,691 and 53,796,859 shares, respectively | (7,633 | ) | | (6,966 | ) |
Total W.W. Grainger, Inc. shareholders’ equity | 1,855 |
| | 1,921 |
|
Noncontrolling interest | 205 |
| | 172 |
|
Total shareholders' equity | 2,060 |
| | 2,093 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 6,005 |
| | $ | 5,873 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net earnings | $ | 895 |
| | $ | 823 |
| | $ | 623 |
|
| | | | | |
Provision for losses on accounts receivable | 12 |
| | 7 |
| | 16 |
|
Deferred income taxes and tax uncertainties | 4 |
| | 7 |
| | (5 | ) |
Depreciation and amortization | 229 |
| | 257 |
| | 264 |
|
Impairment of goodwill, intangible and other assets | 123 |
| | 156 |
| | 28 |
|
Net (gains) losses from sales of assets and business divestitures | (6 | ) | | (6 | ) | | 28 |
|
Stock-based compensation | 40 |
| | 47 |
| | 33 |
|
Subtotal | 402 |
| | 468 |
| | 364 |
|
Change in operating assets and liabilities | | | | | |
Accounts receivable | (42 | ) | | (79 | ) | | (103 | ) |
Inventories | (106 | ) | | (129 | ) | | (5 | ) |
Prepaid expenses and other assets | (33 | ) | | (2 | ) | | (5 | ) |
Trade accounts payable | 32 |
| | (51 | ) | | 72 |
|
Accrued liabilities | (84 | ) | | 18 |
| | 113 |
|
Income taxes – net | (3 | ) | | 36 |
| | 4 |
|
Other non-current liabilities | (19 | ) | | (27 | ) | | (6 | ) |
Net cash provided by operating activities | 1,042 |
| | 1,057 |
| | 1,057 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| | |
Additions to property, buildings, equipment and intangibles | (221 | ) | | (239 | ) | | (237 | ) |
Proceeds from sales of assets | 17 |
| | 86 |
| | 120 |
|
Equity method proceeds (investment) | 2 |
| | (13 | ) | | (35 | ) |
Other – net | — |
| | — |
| | 6 |
|
Net cash used in investing activities | (202 | ) | | (166 | ) | | (146 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| | |
Net decrease in commercial paper | — |
| | — |
| | (370 | ) |
Borrowings under lines of credit | 20 |
| | 26 |
| | 74 |
|
Payments against lines of credit | (15 | ) | | (31 | ) | | (43 | ) |
Proceeds from issuance of long-term debt | — |
| | — |
| | 401 |
|
Payments of long-term debt | (42 | ) | | (96 | ) | | (39 | ) |
Proceeds from stock options exercised | 49 |
| | 181 |
| | 47 |
|
Payments for employee taxes withheld from stock awards | (11 | ) | | (12 | ) | | (28 | ) |
Purchases of treasury stock | (700 | ) | | (425 | ) | | (605 | ) |
Cash dividends paid | (328 | ) | | (316 | ) | | (304 | ) |
Other – net | 4 |
| | 3 |
| | — |
|
Net cash used in financing activities | (1,023 | ) | | (670 | ) | | (867 | ) |
Exchange rate effect on cash and cash equivalents | 5 |
| | (10 | ) | | 9 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS: | (178 | ) | | 211 |
| | 53 |
|
Cash and cash equivalents at beginning of year | 538 |
| | 327 |
| | 274 |
|
Cash and cash equivalents at end of year | $ | 360 |
| | $ | 538 |
| | $ | 327 |
|
Supplemental cash flow information: | | | | | |
Cash payments for interest (net of amounts capitalized) | $ | 84 |
| | $ | 86 |
| | $ | 78 |
|
Cash payments for income taxes | $ | 322 |
| | $ | 229 |
| | $ | 335 |
|
The accompanying notes are an integral part of these consolidated financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
|
| | | | | | | |
| As of December 31, |
ASSETS | 2017 | | 2016 |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 326,876 |
| | $ | 274,146 |
|
Accounts receivable - net | 1,325,186 |
| | 1,223,096 |
|
Inventories – net | 1,429,199 |
| | 1,406,470 |
|
Prepaid expenses and other assets | 86,667 |
| | 81,766 |
|
Prepaid income taxes | 38,061 |
| | 34,751 |
|
Total current assets | 3,205,989 |
| | 3,020,229 |
|
PROPERTY, BUILDINGS AND EQUIPMENT | 3,444,660 |
| | 3,411,502 |
|
Less: Accumulated depreciation and amortization | 2,052,693 |
| | 1,990,611 |
|
Property, buildings and equipment – net | 1,391,967 |
| | 1,420,891 |
|
DEFERRED INCOME TAXES | 22,362 |
| | 64,775 |
|
GOODWILL | 543,903 |
| | 527,150 |
|
INTANGIBLES – NET | 569,115 |
| | 586,126 |
|
OTHER ASSETS | 70,918 |
| | 75,136 |
|
TOTAL ASSETS | $ | 5,804,254 |
| | $ | 5,694,307 |
|
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
CURRENT LIABILITIES | | | |
Short-term debt | $ | 55,603 |
| | $ | 386,140 |
|
Current maturities of long-term debt | 38,709 |
| | 19,966 |
|
Trade accounts payable | 731,582 |
| | 650,092 |
|
Accrued compensation and benefits | 254,560 |
| | 212,525 |
|
Accrued contributions to employees’ profit-sharing plans | 92,682 |
| | 54,948 |
|
Accrued expenses | 313,766 |
| | 290,207 |
|
Income taxes payable | 19,759 |
| | 15,059 |
|
Total current liabilities | 1,506,661 |
| | 1,628,937 |
|
LONG-TERM DEBT (less current maturities) | 2,248,036 |
| | 1,840,946 |
|
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES | 111,710 |
| | 126,101 |
|
EMPLOYMENT-RELATED AND OTHER NONCURRENT LIABILITIES | 110,114 |
| | 192,555 |
|
SHAREHOLDERS' EQUITY | |
| | |
|
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding | — |
| | — |
|
Common stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares | 54,830 |
| | 54,830 |
|
Additional contributed capital | 1,040,493 |
| | 1,030,256 |
|
Retained earnings | 7,405,192 |
| | 7,113,559 |
|
Accumulated other comprehensive losses | (134,674 | ) | | (272,294 | ) |
Treasury stock, at cost – 53,330,356 and 50,854,905 shares, respectively | (6,675,709 | ) | | (6,128,416 | ) |
Total W.W. Grainger, Inc. shareholders’ equity | 1,690,132 |
| | 1,797,935 |
|
Noncontrolling interest | 137,601 |
| | 107,833 |
|
Total shareholders' equity | 1,827,733 |
| | 1,905,768 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 5,804,254 |
| | $ | 5,694,307 |
|
The accompanying notes are an integral part of these consolidated financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars) |
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net earnings | $ | 622,443 |
| | $ | 632,838 |
| | $ | 785,174 |
|
Provision for losses on accounts receivable | 16,376 |
| | 16,216 |
| | 10,181 |
|
Deferred income taxes and tax uncertainties | (5,048 | ) | | (5,884 | ) | | 4,076 |
|
Depreciation and amortization | 264,064 |
| | 248,857 |
| | 227,967 |
|
Impairment of goodwill, intangible and other assets | 28,186 |
| | 52,318 |
| | — |
|
Net (gains) losses from sales of assets and business divestitures | (8,795 | ) | | (18,521 | ) | | 2,765 |
|
Stock-based compensation | 32,661 |
| | 35,735 |
| | 46,861 |
|
Losses from equity method investment | 37,771 |
| | 31,193 |
| | 11,740 |
|
Change in assets and liabilities – net of business acquisitions and divestitures: |
|
| |
|
| |
|
|
Accounts receivable | (103,126 | ) | | (45,600 | ) | | (3,085 | ) |
Inventories | (4,915 | ) | | (4,403 | ) | | (37,737 | ) |
Prepaid expenses and other assets | (5,024 | ) | | 18,641 |
| | 15,788 |
|
Trade accounts payable | 72,332 |
| | 72,882 |
| | 23,130 |
|
Other current liabilities | 112,445 |
| | (3,937 | ) | | (24,101 | ) |
Current income taxes payable | 3,967 |
| | (3,513 | ) | | 6,943 |
|
Accrued employment-related benefits cost | (6,380 | ) | | 7,542 |
| | (27,721 | ) |
Other – net | (400 | ) | | (10,281 | ) | | (5,872 | ) |
Net cash provided by operating activities | 1,056,557 |
| | 1,024,083 |
| | 1,036,109 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| | |
Additions to property, buildings and equipment and intangibles | (237,283 | ) | | (284,249 | ) | | (373,868 | ) |
Proceeds from sales of assets and business divestitures | 120,228 |
| | 55,023 |
| | 14,857 |
|
Equity method investment | (34,754 | ) | | (34,103 | ) | | (20,382 | ) |
Cash paid for business acquisitions | — |
| | (159 | ) | | (464,431 | ) |
Other – net | 5,726 |
| | 1,224 |
| | 466 |
|
Net cash used in investing activities | (146,083 | ) | | (262,264 | ) | | (843,358 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| | |
Net (decrease) increase in commercial paper | (369,766 | ) | | 39,748 |
| | 325,000 |
|
Borrowings under lines of credit | 73,781 |
| | 36,055 |
| | 54,770 |
|
Payments against lines of credit | (43,256 | ) | | (37,358 | ) | | (78,559 | ) |
Proceeds from issuance of long-term debt | 401,764 |
| | 515,985 |
| | 1,307,183 |
|
Payments of long-term debt | (39,301 | ) | | (262,248 | ) | | (52,838 | ) |
Proceeds from stock options exercised | 47,418 |
| | 34,125 |
| | 60,885 |
|
Payments for employee taxes withheld from stock awards | (27,884 | ) | | (21,107 | ) | | (46,205 | ) |
Excess tax benefits from stock-based compensation | — |
| | 11,905 |
| | 27,553 |
|
Purchase of treasury stock | (605,431 | ) | | (789,773 | ) | | (1,400,071 | ) |
Cash dividends paid | (304,473 | ) | | (302,971 | ) | | (306,474 | ) |
Net cash used in financing activities | (867,148 | ) | | (775,639 | ) | | (108,756 | ) |
Exchange rate effect on cash and cash equivalents | 9,404 |
| | (2,170 | ) | | (20,503 | ) |
NET CHANGE IN CASH AND CASH EQUIVALENTS: | 52,730 |
| | (15,990 | ) | | 63,492 |
|
Cash and cash equivalents at beginning of year | 274,146 |
| | 290,136 |
| | 226,644 |
|
Cash and cash equivalents at end of year | $ | 326,876 |
| | $ | 274,146 |
| | $ | 290,136 |
|
Supplemental cash flow information: | | | | | |
Cash payments for interest (net of amounts capitalized) | $ | 78,043 |
| | $ | 63,143 |
| | $ | 31,591 |
|
Cash payments for income taxes | $ | 334,647 |
| | $ | 359,506 |
| | $ | 442,486 |
|
The accompanying notes are an integral part of these consolidated financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousandsmillions of dollars, except for per share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock | | Noncontrolling Interest |
Balance at January 1, 2015 | $ | 54,830 |
| $ | 948,340 |
| $ | 6,335,990 |
| $ | (96,673 | ) | $ | (4,032,615 | ) | | $ | 74,229 |
|
Exercise, settlement and vesting of stock based compensation awards | — |
| (22,781 | ) | — |
| — |
| 62,835 |
| | 460 |
|
Stock based compensation expense | — |
| 42,643 |
| — |
| — |
| — |
| | 163 |
|
Tax benefits on stock-based compensation awards | — |
| 31,614 |
| — |
| — |
| — |
| | — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| (1,399,931 | ) | | (140 | ) |
Net earnings | — |
| — |
| 768,996 |
| — |
| — |
| | 16,178 |
|
Other comprehensive losses | — |
| — |
| — |
| (124,418 | ) | — |
| | (532 | ) |
Cash dividends paid ($4.59 per share) | — |
| 660 |
| (302,856 | ) | — |
| — |
| | (4,278 | ) |
Balance at December 31, 2015 | $ | 54,830 |
| $ | 1,000,476 |
| $ | 6,802,130 |
| $ | (221,091 | ) | $ | (5,369,711 | ) | | $ | 86,080 |
|
Exercise, settlement and vesting of stock based compensation awards | — |
| (18,137 | ) | — |
| — |
| 41,307 |
| | 58 |
|
Stock based compensation expense | — |
| 34,915 |
| — |
| — |
| — |
| | 441 |
|
Tax benefits on stock-based compensation awards | — |
| 12,284 |
| — |
| — |
| — |
| | — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| (800,012 | ) | | (130 | ) |
Net earnings | — |
| — |
| 605,928 |
| — |
| — |
| | 26,910 |
|
Other comprehensive (losses) earnings | — |
| — |
| — |
| (51,203 | ) | — |
| | 3,664 |
|
Cash dividends paid ($4.83 per share) | — |
| 718 |
| (294,499 | ) | — |
| — |
| | (9,190 | ) |
Balance at December 31, 2016 | $ | 54,830 |
| $ | 1,030,256 |
| $ | 7,113,559 |
| $ | (272,294 | ) | $ | (6,128,416 | ) | | $ | 107,833 |
|
Exercise, settlement and vesting of stock based compensation awards | — |
| (22,906 | ) | — |
| — |
| 60,273 |
| | 206 |
|
Stock based compensation expense | — |
| 32,514 |
| — |
| — |
| — |
| | 137 |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| (607,566 | ) | | (114 | ) |
Net earnings | — |
| — |
| 585,730 |
| — |
| — |
| | 36,713 |
|
Other comprehensive (losses) earnings | — |
| — |
| — |
| 137,620 |
| — |
| | 3,831 |
|
Cash dividends paid ($5.06 per share) | — |
| 629 |
| (294,097 | ) | — |
| — |
| | (11,005 | ) |
Balance at December 31, 2017 | $ | 54,830 |
| $ | 1,040,493 |
| $ | 7,405,192 |
| $ | (134,674 | ) | $ | (6,675,709 | ) | | $ | 137,601 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock | Noncontrolling Interest | Total |
Balance at January 1, 2017 | $ | 55 |
| $ | 1,030 |
| $ | 7,113 |
| $ | (273 | ) | $ | (6,128 | ) | $ | 108 |
| $ | 1,905 |
|
Stock based compensation | — |
| 10 |
| — |
| — |
| 60 |
| — |
| 70 |
|
Purchases of treasury stock | — |
| — |
| — |
| — |
| (608 | ) | — |
| (608 | ) |
Net earnings | — |
| — |
| 586 |
| — |
| — |
| 37 |
| 623 |
|
Other comprehensive earnings (losses) | — |
| — |
| — |
| 138 |
| — |
| 4 |
| 142 |
|
Capital contribution | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends paid ($5.06 per share) | — |
| 1 |
| (294 | ) | — |
| — |
| (11 | ) | (304 | ) |
Balance at December 31, 2017 | $ | 55 |
| $ | 1,041 |
| $ | 7,405 |
| $ | (135 | ) | $ | (6,676 | ) | $ | 138 |
| $ | 1,828 |
|
Stock based compensation | — |
| 92 |
| — |
| — |
| 122 |
| — |
| 214 |
|
Purchases of treasury stock | — |
| — |
| — |
| — |
| (412 | ) | — |
| (412 | ) |
Net earnings | — |
| — |
| 782 |
| — |
| — |
| 41 |
| 823 |
|
Other comprehensive earnings (losses) | — |
| — |
| — |
| (51 | ) | — |
| 3 |
| (48 | ) |
Capital contribution | — |
| — |
| — |
| — |
| — |
| 4 |
| 4 |
|
Reclassification due to the adoption of ASU 2018-02 | — |
| — |
| (15 | ) | 15 |
| — |
| — |
| — |
|
Cash dividends paid ($5.36 per share) | — |
| 1 |
| (303 | ) | — |
| — |
| (14 | ) | (316 | ) |
Balance at December 31, 2018 | $ | 55 |
| $ | 1,134 |
| $ | 7,869 |
| $ | (171 | ) | $ | (6,966 | ) | $ | 172 |
| $ | 2,093 |
|
Stock based compensation | — |
| 46 |
| — |
| — |
| 33 |
| — |
| 79 |
|
Purchases of treasury stock | — |
| — |
| — |
| — |
| (700 | ) | — |
| (700 | ) |
Net earnings | — |
| — |
| 849 |
| — |
| — |
| 46 |
| 895 |
|
Other comprehensive earnings (losses) | — |
| — |
| — |
| 17 |
| — |
| 3 |
| 20 |
|
Capital contribution | — |
| 2 |
| — |
| — |
| — |
| — |
| 2 |
|
Cash dividends paid ($5.68 per share) | — |
| — |
| (313 | ) | — |
| — |
| (16 | ) | (329 | ) |
Balance at December 31, 2019 | $ | 55 |
| $ | 1,182 |
| $ | 8,405 |
| $ | (154 | ) | $ | (7,633 | ) | $ | 205 |
| $ | 2,060 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies and other related products and services. W.W. Grainger, Inc.'sservices with operations are primarily in the United States (U.S.)North America, Japan and Canada, with a presence in Europe, Asia and Latin America.Europe. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements (Financial Statements) include the accounts of the Company and its subsidiaries over which the Company exercises control. All significant intercompany transactions are eliminated from the consolidated financial statements. The Company has a controlling ownership interest in MonotaRO Co., Ltd. (MonotaRO), the single channel onlineendless assortment business in Japan, with the residual representing the noncontrolling interest.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles requires management to make estimates and assumptions that affect theaffecting reported amounts of assetsin the consolidated financial statements and liabilities, revenues and expenses, and the disclosure of contingent liabilities.accompanying notes. Actual results couldmay differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the Company's reporting currency for all periods presented. The financial statements of the Company’s foreign operating subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of the Company’s foreign operating subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the period. Net exchangeTranslation gains or losses resulting from the translation of financial statements of foreign operations and related long-term debt are recorded as a separate component of other comprehensive earnings. See Note 13 to the Consolidated Financial Statements. Foreign currency transaction gains and losses are included in the Consolidated Statement of Earnings.earnings (losses).
RECLASSIFICATIONS
Certain amounts in the 2016 and 2015 financial statements, as previously reported, have been reclassified to conform to the 2017 presentation. In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Stock Based Compensation: Improvements to Employee Share-Based Payment Accounting, which became effective January 1, 2017. As a result, the Company reclassified $21 million in 2016 and $46 million in 2015 of employee taxes paid from cash flows from operating activities to cash flows from financing activities in the Consolidated Statements of Cash Flows. These changes did not have a material impact on the Consolidated Financial Statements.
REVENUE RECOGNITION
Revenues recognized include product sales, billings for freight and handling charges and fees earned for services provided. The Company recognizes revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable and the Company has satisfied its performance obligation per the sales arrangement.
The majority of Company revenue originates from contracts with a single performance obligation to deliver products, whereby performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms. Some Company contracts contain a combination of product sales and billings for freightservices, which are distinct and handling charges primarily on the date products are shipped to, or picked up by, the customer. In cases where the product is shipped directly to the customer, the Company recognizes revenue at the time of shipment primarily on a gross basis. The Company's standard shipping terms are FOB shipping point. On occasion, the Company will negotiate FOB destination terms. These sales are recognized upon delivery to the customer. eCommerce revenues, which accounted for 51% of total 2017 revenues,as separate performance obligations, and are recognized onsatisfied when the same terms as revenues through other channels. Service revenues, whichservices are rendered. Total service revenue is not material and accounted for approximately 1% of total 2017 revenues, are recognized after services are completed, including related service costs. TaxesCompany revenue for the twelve months ended December 31, 2019.
The Company’s revenue is measured at the determinable transaction price, net of any variable considerations granted to customers and any taxes collected from customers and subsequently remitted to governmental authorities are presented on a net basisauthorities. Variable considerations include rights to return product and are not included in revenue.
Grainger offers sales incentives, to customerswhich primarily consistingconsist of volume rebates. Volume rebatesThese variable considerations are generally based on annual targets and accruals are establishedestimated throughout the year based on various factors, including contract terms, Grainger’s historical payout experience and estimations of customer participation and performance levels. Sales incentivesTotal accrued sales returns were approximately $25 million and $29 million as of December 31, 2019 and 2018, respectively, and are primarily accounted forreported as a reduction of revenue. Contract terms for most of Grainger’s incentive arrangements do not exceed a year.Accounts receivable, net. Total accrued sales incentives were $45approximately $57 million and $36$62 million as of December 31, 20172019 and 2016,2018, respectively, and are reflected inreported as part of Accrued expenses inexpenses.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the Consolidated Balance Sheet.passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material unsatisfied performance obligations, contract assets or liabilities as of December 31, 2019 and 2018.
COST OF MERCHANDISEGOODS SOLD (COGS)
CostCOGS includes the purchase cost of merchandisegoods sold, includes product and product-related costs,net of vendor consideration, freightconsiderations, in-bound shipping and handling costs and service costs. The Company defines handling costsreceives vendor considerations, such as those costs incurred to fulfill a shipped sales order.
VENDOR CONSIDERATION
The Company receives rebates and allowances from its vendors to promote their products. The Company utilizes numerous advertising programs to promote its vendors' products, including catalogs and other printed media, Internet, radio and other marketing programs. Most of these programs relate to multiple vendors, which makes supporting the specific, identifiable and incremental criteria difficult, and would require numerous assumptions and judgments. Based on the inexact nature of trying to track reimbursements to the advertising expenditure for each vendor, the Company treats most vendor advertising allowancesare generally recorded as a reduction to product purchase price and is reflected in Cost of merchandise sold rather than a reduction of operating (advertising) expenses.
Vendor funds that are determined to be reimbursement of specific, incremental and identifiable costs incurred to promote vendors' products are recorded as an offset to the related expenses in Warehouse, marketing and administrative expenses.
COGS. Rebates earned from vendors that are based on product purchases are capitalized into inventory as part of product purchase price. Theseand rebates are credited to Cost of merchandise sold based on sales. Vendor rebates that are earned based on products sold are credited directly to Cost of merchandise sold.COGS.
ADVERTISING
Advertising costs, which includes online marketing, are generally expensed in the year the related advertisement is first presented. Advertising expense was $187 million, $180 million and $180 million for 2017, 2016 and 2015, respectively. Most vendor-provided allowances are classified as a reduction to product purchase price and are reflected in Cost of merchandise sold. For additional information see VENDOR CONSIDERATION above.
presented or when incurred. Catalog expense is amortized equally over the life of the catalog, generally one year, beginning in the month of its distribution. Advertising costs for catalogs that have not been distributed by year-end are capitalized as Prepaid expenses. Amountsdistribution and is included in Prepaid expenses at December 31,advertising expense. Total advertising expense was $316 million, $241 million and $187 million for 2019, 2018 and 2017, and 2016, were $10 millionand $12 million, respectively.
WAREHOUSING, MARKETINGSELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Included in this category areCompany SG&A is primarily comprised of compensation and benefit costs, indirect purchasing, supply chain and branch operations, information services and marketingtechnology, leases, restructuring, impairments, advertising and selling expenses, as well as other types of general and administrative costs.
STOCK INCENTIVE PLANS
The Company measures all share-based payments using fair-value-based methods and records compensation expense related to these paymentson a straight line basis over the vesting period. See Note 11 to the Consolidated Financial Statements.periods, net of estimated forfeitures.
INCOME TAXES
IncomeThe Company recognizes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized duringfor the year in which transactions enter into the determinationexpected future tax consequences of financial statement income, with deferred taxes being provided for temporary differences between the financial reporting and tax reporting. The Company recognizesbasis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the financial statements a provision foryears in which those tax uncertainties, resulting from application of complex tax regulations in multiple tax jurisdictions. Theassets are expected to be realized or settled. Also, the Company evaluates deferred income taxes to determine if valuation allowances are required using a “more likely than not” standard. This assessment considers the nature, frequency and amount of book and taxable income and losses, the duration of statutory carryback and forward periods, future reversals of existing taxable temporary differences and tax planning strategies, among other matters. On December 22, 2017, matters.
The Tax CutsCompany recognizes tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. The Company recognizes interest expense and Jobs Act of 2017 was enacted. See Note 14penalties to its tax uncertainties in the Consolidated Financial Statements.provision for income taxes.
OTHER COMPREHENSIVE EARNINGS (LOSSES)
The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments changes in fair value of derivatives designated as hedges and unrecognized gains (losses) on postretirement and other employment-related benefit plans. Accumulated other comprehensive earnings (losses) (AOCE) are presented separately as part of shareholders' equity. See Note 13 to the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid debt instruments, purchased with an original maturity of 90 days or less, to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount of credit exposure to any one institution.
The Also, the Company has a broad customer base representing many diverse industries doing business in all regions of the United States, Canada, Europe, Asiaacross North America, Japan and Latin America.Europe. Consequently, no significant concentration of credit risk is considered to exist.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are stated at their estimated net realizable value. The Company establishes reservesallowances for customer accounts that are potentially uncollectible. The method used to estimate the allowances isuncollectible and these are determined based on several factors, including the age of the receivables, and the historical ratio of actual write-offs to the age of the receivables. These analyses also take into considerationcollection trends, and economic conditions that may have an impact on a specific industry, group of customers or a specific customer. See Note 4 to the Consolidated Financial Statements.
INVENTORIES
InventoriesCompany inventories primarily consist of merchandise purchased for resale, and they are valued at the lower of cost or net realizable value. Cost is determined primarily byThe Company uses the last-in, first-out (LIFO) method which accountsto account for approximately 64%70% of total inventory. Grainger uses LIFO method to better match inventory cost and revenue. For the remaining inventory, cost is determined by the first-in, first-out (FIFO) method.
Graingermethod for the remaining inventory. The Company regularly reviews inventory to evaluate continued demand and identify any obsolete or excess quantities. Grainger records provisions for the difference between excess and obsolete inventory costinventories and its estimatednet realizable value. See Note 5Estimated realizable value consider various variables, including product demand, aging and shelf life, market conditions, and liquidation or disposition history and values.
If FIFO had been used for all of the Consolidated Financial Statements.Company’s inventories, they would have been $426 million and $394 million higher than reported at December 31, 2019 and December 31, 2018, respectively. Concurrently, net earnings would have increased by $24 million and $8 million, and decreased by $1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
PROPERTY, BUILDINGS AND EQUIPMENT
Property,Company property, buildings and equipment are valued at cost. For financial statement purposes, depreciation and amortization are recorded in amounts sufficient to relate the cost of depreciable assets to operations over theirDepreciation is estimated service lives, principally onusing the declining-balance, sum-of-the-years-digits and sum-of-the-years-digitsstraight-line depreciation methods. The Company's international businesses record depreciation expense primarily on a straight-line basis. The principal estimatedmethods over the assets' useful lives for determining depreciation are as follows:
|
| |
Buildings, structures and improvements | 10 to 30 years |
Furniture, fixtures, machinery and equipment | 3 to 10 years |
Depreciation expense was $170$150 million, $166$162 million and $162$170 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
Improvements to leased property are amortized over the initial terms of the respective leases or the estimated service lives of the improvements, whichever is shorter.
The Company capitalized interest costs of $2$9 million, $2$10 million and $4$2 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
LEASES
The Company leases certain properties and buildings (including branches, warehouses, distribution centers and office space) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists mainly of operating leases which expire at various dates through 2036.
Many of the property and building lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs (hereinafter referred to as non-lease components). Certain of the Company’s lease arrangements contain renewal provisions from 1 to 30 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with right of use (ROU) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in SG&A.
GOODWILL AND OTHER INTANGIBLE ASSETS
In a business acquisition, the Company recognizes goodwill as the excess purchase price of an acquired reporting unit over the net amount assigned to assets acquired including intangible assets, and liabilities assumed. Acquired intangibles include both: assets with indefinite lives and assets that are subject to amortization, which are amortized straight line over their estimated useful lives.
The Company tests goodwill and indefinite-lived intangibles for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The Company performs qualitative assessments of significant events and circumstances, such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors to determine the existence of impairment indicators and assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset is less than its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying value over fair value is recorded as an impairment charge, presented as part of SG&A.
The fair value of reporting units is calculated primarily using the discounted cash flow method and utilizing value indicators from a market approach to evaluate the reasonableness of the resulting fair values. Estimates of market-
participant risk-adjusted weighted average cost of capital are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.
The Company’s indefinite-lived intangibles are primarily trade names. The fair value of trade names is calculated primarily using the relief-from-royalty method, which estimates the expected royalty savings attributable to the ownership of the trade name asset. The key assumptions when valuing a trade name are the revenue base, the royalty rate, and the discount rate.
Additionally, the Company capitalizes certain costs related to the purchase and development of internal-use software, which are presented as intangible assets. Amortization of capitalized software is on a straight-line basis over three or five years.
LONG-LIVED ASSETS
The carrying value of long-lived assets, primarily property, buildings and equipment and amortizable intangibles, is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset group may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows resulting from use of the asset group, including disposition, are less than thetheir carrying value of the asset.value. Impairment is measured as the amount by which the asset'sasset group's carrying amount exceeds the fair value.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the carrying value of a reporting unit exceeds its fair value. See Note 3 to the Consolidated Financial Statements.
The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives (approximately 7 to 22 years) unless the estimated useful life is determined to be indefinite. The straight-line method of amortization is used as it has been determined to approximate the use pattern of the asset. The Company also maintains intangible assets with indefinite lives that are not amortized. These intangibles are tested for impairment on an annual basis and more often if circumstances require. An impairment loss is recognized whenever the estimated fair value of the asset is less than its carrying value. See Note 3 to the Consolidated Financial Statements.
The Company capitalizes certain costs related to the purchase and development of internal-use software. Amortization of capitalized software is on a straight-line basis over three or five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term nature of these financial instruments. See Note 8 to the Consolidated Financial Statements for fair value of long-term debt.
WARRANTY RESERVES
The Company generally warrants the products it sells against defects for one year. For a significant portion of warranty claims, the manufacturer of the product is responsible for expenses. For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based primarily on historical experience. Warranty reserves were $2 million and $3 million at December 31, 2017 and 2016, respectively.
CONTINGENCIES
The Company accrues for costs relating to litigation claims and other contingent matters, when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
NEW ACCOUNTING STANDARDS
In January 2016,July 2019, the FASB issued ASU 2016-01, 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). This ASU clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning with the SEC's regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU was
effective immediately upon issuance and did not have a material impact on the Company's Financial Instruments: RecognitionStatements and related disclosures.
On January 1, 2019, the Company adopted ASU 2016-02, Leases as modified subsequently by ASUs 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01(Topic 842). The Company utilized the simplified modified retrospective transition method that allowed for a cumulative-effect adjustment in the period of adoption, and did not restate prior periods. Additionally, the Company elected the practical expedients package permitted under the transition guidance. Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $208 million and $205 million, respectively, as of January 1, 2019 related to operating and finance leases.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial AssetsInstruments as modified by subsequently issued ASUs 2018-19, 2019-04, 2019-05 and Financial Liabilities.2019-11. This change toASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the financial instrument model primarily affectsreporting date based on historical experience, current conditions and reasonable and supportable forecasts. Per the accounting for equity investments, financial liabilities underpermitted effective dates, the fair value options andCompany will adopt this ASU effective January 1, 2020. The Company does not expect the presentation and disclosure requirements for financial instruments. The effective dateadoption of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In February 2016,December 2019, the FASB issued ASU 2016-02, Leases. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU improves transparencyclarifies and comparability related tosimplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the accountingmethodology for calculating income tax rates in an interim period, and reportingrecognition of leasing arrangements. The guidancedeferred taxes for outside basis differences in an investment, among other updates. Per the permitted effective dates, the Company will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The effective date ofadopt this ASU is for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted.effective January 1, 2021. The Company is evaluating the impact of this ASU.
In August 2016, the FASB issued ASU 2016-15, Statement
NOTE 2 - REVENUE
Company revenue is primarily comprised of Cash Flows - ClassificationMRO product sales and related activities, such as freight and services.
Grainger serves a large number of Certain Cash Receiptscustomers in diverse industries, which are subject to different economic and Cash Payments. This ASU addresses eightmarket specific cash flow issues with the objective of reducing the existing diversity in practice.factors. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments of this ASU are effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, and early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company early adopted this ASU during the third quarter of 2017 and there was no impact to the financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 2017. The amendments in this ASU should be applied retrospectively for the presentation of the net periodic postretirement cost components in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is evaluating the impact of this ASU.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 2017. The ASU should be applied prospectively on and after the effective date. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
REVENUE RECOGNITION STANDARDS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as modifiedrevenue by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively “new revenue standard”). The core principle of the ASU, among other changes, is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company has elected the modified retrospective method and will adopt the new revenue guidance effective January 1, 2018, with an immaterial impact to the opening retained earnings.
The analysis of contracts with customers under the new revenue recognition standard was consistent with the Company’s current revenue recognition model, whereby revenue is recognized primarily on the date products are shipped to, or picked up by, the customer.
Adoption of the new standard will primarily result in reclassification of certain service related costs from Warehousing, marketing and administrative expenses to Cost of merchandise sold. The ASU also requires expanded qualitative and quantitative disclosures aboutindustry most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows arising from contracts with customers, significant judgmentsare affected by economic and accounting policy.market specific factors. The
following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
|
| | | | | | | | |
| Twelve Months Ended December 31, 2019 |
| U.S. | | Canada | | Total Company (2) |
Government | 18 | % | | 6 | % | | 14 | % |
Heavy Manufacturing | 19 | % | | 20 | % | | 17 | % |
Light Manufacturing | 12 | % | | 6 | % | | 10 | % |
Transportation | 6 | % | | 8 | % | | 5 | % |
Healthcare | 7 | % | | — | % | | 6 | % |
Commercial | 10 | % | | 9 | % | | 8 | % |
Retail/Wholesale | 9 | % | | 4 | % | | 7 | % |
Contractors | 10 | % | | 10 | % | | 8 | % |
Natural Resources | 3 | % | | 33 | % | | 4 | % |
Other (1) | 6 | % | | 4 | % | | 21 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % |
Percent of Total Company Revenue | 72 | % | | 5 | % | | 100 | % |
|
(1) Other category primarily includes revenue from individual customers not aligned to major industry segment, including small businesses and consumers, and intersegment net sales. |
(2) Total Company includes other businesses, which include the Company's endless assortment businesses and operations in Europe and Mexico and account for approximately 23% of revenue for the twelve months ended December 31, 2019. |
|
| | | | | | | | |
| Twelve Months Ended December 31, 2018 |
| U.S. | | Canada | | Total Company (2) |
Government | 18 | % | | 6 | % | | 14 | % |
Heavy Manufacturing | 19 | % | | 20 | % | | 18 | % |
Light Manufacturing | 13 | % | | 6 | % | | 11 | % |
Transportation | 6 | % | | 7 | % | | 5 | % |
Healthcare | 7 | % | | — | % | | 5 | % |
Commercial | 9 | % | | 10 | % | | 8 | % |
Retail/Wholesale | 8 | % | | 4 | % | | 7 | % |
Contractors | 10 | % | | 11 | % | | 8 | % |
Natural Resources | 3 | % | | 32 | % | | 4 | % |
Other (1) | 7 | % | | 4 | % | | 20 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % |
Percent of Total Company Revenue | 72 | % | | 6 | % | | 100 | % |
|
(1) Other category primarily includes revenue from individual customers not aligned to major industry segment, including small businesses and consumers, and intersegment net sales. |
(2) Total Company includes other businesses, which include the Company's endless assortment businesses and operations in Europe and Mexico and account for approximately 22% of revenue for the twelve months ended December 31, 2018. |
Adoption
NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the new standard will not have an ongoing material impact on the Company's Consolidated Financial Statements.following (in millions of dollars):
|
| | | | | | | | | |
| As of |
| December 31, 2019 | | | | December 31, 2018 | | |
Land | $ | 332 |
| | | $ | 318 |
| |
Building, structures and improvements | 1,329 | | | | 1,338 | | |
Furniture, fixtures, machinery and equipment | 1,832 | | | | 1,785 | | |
Property, buildings and equipment | $ | 3,493 |
| | | $ | 3,441 |
| |
Less: Accumulated depreciation and amortization | 2,093 | | | | 2,089 | | |
Property, buildings and equipment, net | $ | 1,400 |
| | | $ | 1,352 |
| |
NOTE 2 - BUSINESS ACQUISITIONS
On September 1, 2015, the Company acquired all of the issued share capital of Cromwell Group (Holdings) Limited (Cromwell). With sales of £285 million ($437 million) for fiscal year ending August 31, 2015, prior to the acquisition, Cromwell was the largest independent MRO distributor in the United Kingdom. This acquisition brought together Cromwell's product strength and customer relationships with Grainger's expertise in supply chain and eCommerce to accelerate growth in the core and online Cromwell business. The Company paid £310 million ($464 million), subject to customary adjustments, for the Cromwell acquisition. The acquisition was partially funded with newly issued debt in the United Kingdom. The goodwill recorded in the acquisition totaled approximately $123 million. The goodwill is not deductible for tax purposes. The intangibles recorded in the acquisition consisted primarily of trade name (approximately $84 million) and customer relationships (approximately $132 million). The trade name is deemed to have an indefinite life and the customer relationship are amortized over 15 years. The purchase price allocation was finalized in 2016 and the impact to the consolidated financial statements was not material. Disclosure of pro forma results was not required.
NOTE 34 - GOODWILL AND OTHER INTANGIBLE ASSETS
Grainger had approximately $1.1 billion of goodwill and intangible assets as of December 31, 2017 and 2016, or 19% and 20% of total assets, respectively. Grainger tests reporting units’ goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Grainger periodically performs qualitative assessments of significant events and circumstances such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors to determine the existence of impairment indicators and assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying value over fair value is recorded as an impairment charge.
The fair value of reporting units is calculated primarily using the discounted cash flow (DCF) method and utilizing value indicators from a market approach to evaluate the reasonableness of the resulting fair values. The DCF method incorporates various assumptions including the amount and timing of future expected cash flows, including revenues, gross margins, operating expenses, capital expenditures and working capital based on operational budgets, long-range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period and reflects management’s best estimates for perpetual growth for the reporting units. Estimates of market-participant risk-adjusted weighted average cost of capital are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.
Grainger’s indefinite-lived intangibles are primarily trade names. The fair value of trade names is calculated primarily using the relief from royalty method, which estimates the expected royalty savings attributable to the ownership of the trade name asset. The key assumptions when valuing a trade name are the revenue base, the royalty rate and the discount rate.
During the quarter ended September 30, 2017, the Company performed qualitative assessments of its reporting units’ goodwill and intangible assets. Quantitative tests on two of its reporting units were performed due to lower than expected operating performance and lowered short-term forecasts. Based on the results of the quantitative tests performed, the Company concluded that there was no impairment of goodwill or indefinite-lived intangible assets for the two reporting units as of September 30, 2017. The fair values of the reporting units exceeded their carrying values by approximately 31 percent for the Canada reporting unit and 15 percent for the Cromwell reporting unit included in other businesses.
Grainger completed its annual goodwill impairment testing in the fourth quarter. The testing included qualitative assessment of each reporting units’ goodwill and intangible assets. The Company concluded that for each of its reporting units, including the two reporting units for which quantitative tests were performed during the third quarter, it was not more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than their carrying value.
The risk of potential failure of future impairment tests is highly dependent upon a number of assumptions. Changes in assumptions regarding discount rate and future performance, as well as the ability to execute on growth initiatives and productivity improvements, may have a significant impact on future cash flows. Likewise, unfavorable economic environment and changes in market conditions or other factors may result in future impairments of the goodwill and intangible assets.
The balances and changes in the carrying amount of Goodwill by segment are as follows (in thousandsmillions of dollars):
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other businesses | | Total |
Balance at January 1, 2018 |
| $ | 192 |
|
| $ | 130 |
|
| $ | 222 |
|
| $ | 544 |
|
Impairment | | — |
| | — |
| | (105 | ) | | (105 | ) |
Translation | | — |
| | (10 | ) | | (5 | ) | | (15 | ) |
Balance at December 31, 2018 | | 192 |
| | 120 |
| | 112 |
| | 424 |
|
Translation | | — |
| | 6 |
| | (1 | ) | | 5 |
|
Balance at December 31, 2019 | | $ | 192 |
| | $ | 126 |
| | $ | 111 |
| | $ | 429 |
|
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other businesses | | Total |
Balance at January 1, 2016 |
| $ | 202,020 |
|
| $ | 118,529 |
|
| $ | 261,787 |
|
| $ | 582,336 |
|
Purchase Price Adjustments | | — |
| | — |
| | 8,362 |
| | 8,362 |
|
Impairment | | — |
| | — |
| | (47,244 | ) | | (47,244 | ) |
Translation | | — |
| | 3,611 |
| | (19,915 | ) | | (16,304 | ) |
Balance at December 31, 2016 | | 202,020 |
| | 122,140 |
| | 202,990 |
| | 527,150 |
|
Divestiture | | (3,316 | ) | | — |
| | — |
| | (3,316 | ) |
Impairment | | (7,169 | ) | | — |
| | — |
| | (7,169 | ) |
Translation | | — |
| | 8,282 |
| | 18,956 |
| | 27,238 |
|
Balance at December 31, 2017 | | $ | 191,535 |
| | $ | 130,422 |
| | $ | 221,946 |
| | $ | 543,903 |
|
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other businesses | | Total |
Cumulative goodwill impairment charges, December 31, 2019 (1) | | $ | — |
| | $ | 32 |
| | $ | 152 |
| | $ | 184 |
|
|
| | | | | | | | | | | | | | | | |
Cumulative goodwill impairment charges, January 1, 2017 | | $ | 17,038 |
| | $ | 32,265 |
| | $ | 70,299 |
| | $ | 119,602 |
|
Impairment | | 7,169 |
| | — |
| | — |
| | 7,169 |
|
Cumulative goodwill impairment charges, December 31, 2017 | | $ | 24,207 |
| | $ | 32,265 |
| | $ | 70,299 |
| | $ | 126,771 |
|
(1) Restated to include only impairments related to current businesses in Grainger's portfolio.
There were no impairments to goodwill for the years ended December 31, 2019 and 2017. In 2018, there was a $105 million goodwill impairment recorded in SG&A at the Cromwell business in the U.K.
The balances and changes in Intangible assets - net are as follows (in thousandsmillions of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Weighted average life | | Gross carrying amount | | Accumulated amortization/ impairment | | Net carrying amount | | Gross carrying amount | | Accumulated amortization/impairment | | Net carrying amount |
Customer lists and relationships | 13.2 years | | $ | 401 |
| | $ | 301 |
| | $ | 100 |
| | $ | 410 |
| | $ | 204 |
| | $ | 206 |
|
Trademarks, trade names and other | 14.1 years | | 36 |
| | 20 |
| | 16 |
| | 24 |
| | 15 |
| | 9 |
|
Non-amortized trade names and other | — | | 100 |
| | 38 |
| | 62 |
| | 133 |
| | 34 |
| | 99 |
|
Capitalized software | 4.2 years | | 626 |
| | 500 |
| | 126 |
| | 657 |
| | 511 |
| | 146 |
|
Total intangible assets | 8.2 years | | $ | 1,163 |
| | $ | 859 |
| | $ | 304 |
| | $ | 1,224 |
| | $ | 764 |
| | $ | 460 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2017 | | 2016 |
| Weighted average life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Customer lists and relationships | 13.8 years | | $ | 430,026 |
| | $ | 195,842 |
| | $ | 234,184 |
| | $ | 424,405 |
| | $ | 175,112 |
| | $ | 249,293 |
|
Trademarks, trade names and other | 13.5 years | | 25,886 |
| | 16,054 |
| | 9,832 |
| | 25,353 |
| | 14,262 |
| | 11,091 |
|
Non-amortized trade names and other | | | 137,491 |
| | — |
| | 137,491 |
| | 128,282 |
| | — |
| | 128,282 |
|
Capitalized software | 4.1 years | | 632,431 |
| | 444,823 |
| | 187,608 |
| | 571,978 |
| | 374,518 |
| | 197,460 |
|
Total intangible assets | 8.2 years | | $ | 1,225,834 |
| | $ | 656,719 |
| | $ | 569,115 |
| | $ | 1,150,018 |
| | $ | 563,892 |
| | $ | 586,126 |
|
Amortization expense recognized onof intangible assets presented within SG&A, excluding impairment charges was $89$78 million, $8292 million, and $6589 million for the years ended December 31, 20172019, 20162018 and 20152017, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated Statement of Earnings.
respectively. Estimated amortization expense for future periods is as follows (in thousandsmillions of dollars):
|
| | | | | | | |
Year | | Expense |
2020 | | $ | 72 | |
2021 | | 55 | |
2022 | | 38 | |
2023 | | 13 | |
2024 | | 12 | |
Thereafter | | 52 | |
Total | | $ | 242 | |
|
| | | | | | | |
Year | | Expense |
2018 | | $ | 91,178 | |
2019 | | 73,995 | |
2020 | | 52,409 | |
2021 | | 40,315 | |
2022 | | 28,468 | |
Thereafter | | 145,259 | |
Grainger completed its annual impairment testing during the fourth quarter of 2019. Qualitative tests for the quarter indicated the existence of impairment indicators for the Canada business and Cromwell (included in other businesses). As such, quantitative tests were performed.
Based on the result of the quantitative tests performed for the Canada business, the Company concluded that there was no impairment of goodwill. The risk of impairment for the Canada business is dependent upon key assumptions included in the determination of the reporting unit's fair value, particularly revenue growth expectations, future expected cash flows and operating earnings performance. Changes in assumptions regarding future performance and unfavorable economic environment in Canada may have a significant impact on future cash flows expectations and require the recording of future impairment charges. The carrying value of the Canada businesses goodwill was $126 million as of December 31, 2019.
The quantitative test for Cromwell indicated the existence of impairment of the reporting unit’s intangible assets. Cromwell’s declining operating performance and accelerated customer attrition resulted in lowered outlook projections. As a result, the Company concluded that Cromwell’s trade name was fully impaired. Concurrently, as a result of the circumstances leading to trade name impairment, the Company performed a recoverability and fair value test of Cromwell’s customer relationships intangible asset and concluded to impair the asset. The aggregate impairment charge for Cromwell’s intangibles in 2019 amounted to approximately $120 million.
Previously, during the third quarter of 2018 the Company recorded impairment charges totaling $139 million attributable to all of Cromwell’s goodwill and a portion of its trade name assets. This impairment was driven by the deterioration
NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table showsof Cromwell’s operating performance at the activitytime combined with prolonged softness and uncertainty in the allowance for doubtful accounts (in thousands of dollars):U.K. market due to Brexit and other unfavorable economic conditions.
|
| | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 26,690 |
| | $ | 22,288 |
|
Provision for uncollectible accounts | 16,376 |
| | 16,216 |
|
Write-off of uncollectible accounts, net of recoveries | (16,597 | ) | | (11,248 | ) |
Foreign currency and other | 2,798 |
| | (566 | ) |
Balance at end of period | $ | 29,267 |
| | $ | 26,690 |
|
NOTE 5 - INVENTORIESRESTRUCTURING
Inventories primarily consist of merchandise purchased for resale. Inventories would have been $382 million higher than reported at December 31, 2017 and December 31, 2016, if the FIFO method of inventory accounting had been used for all the Company inventories. Net earnings would have decreased by $1 million, $3 million and $1 millionRestructuring activity for the years ended December 31, 2017, 2016 and 2015, respectively, using the FIFO method of accounting. Inventory values using the FIFO method of accounting approximate replacement cost. The Company records provisions for the difference between excess and obsolete inventory cost and its estimated realizable value.
The following table shows the activity in the reserves for excess and obsolete inventory (in thousands of dollars):
|
| | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | (191,514 | ) | | $ | (168,105 | ) |
Provision for excess and obsolete inventory | (24,829 | ) | | (58,485 | ) |
Disposal of unsaleable inventory | 29,442 |
| | 30,161 |
|
Other | (6,547 | ) | | 4,915 |
|
Balance at end of period | $ | (193,448 | ) | | $ | (191,514 | ) |
NOTE 6 - RESTRUCTURING RESERVES
The Company continues to evaluate performance and take restructuring actions such as the consolidation of the contact center network in the U.S. business, branch closures in the U.S. and Canada businesses and disposition of underperforming assets and businesses in the U.S., Canada and other businesses. The purpose of these initiatives is to reduce costs in the U.S. business and at the Company level (unallocated expense) and streamline and focus on profitability in the Canada and other businesses.
Restructuring costs, net of gains, for the yearstwelve months ended December 31, 2019 was not material. In the twelve months ended December 31, 2018 and 2017, 2016the Company recorded restructuring charges of approximately $47 million and 2015 are as follows (in thousands$116 million, respectively. These charges primarily consisted of dollars):
|
| | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2017 | |
| Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | |
| | Involuntary employee termination costs | | Other charges (gains) | | |
United States | $ | 1,379 |
| | $ | 32,134 |
| | $ | (22,255 | ) | | $ | 11,258 |
| |
Canada | 8,310 |
| | 15,001 |
| | 15,976 |
| | 39,287 |
| |
Other businesses | 3,861 |
| | 11,724 |
| | 39,435 |
| | 55,020 |
| |
Unallocated expense | — |
| | — |
| | 10,593 |
| | 10,593 |
| |
Total | $ | 13,550 |
| | $ | 58,859 |
| | $ | 43,749 |
| | $ | 116,158 |
| |
|
| | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2016 | |
| Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | |
| | Involuntary employee termination costs | | Other charges (gains) | | |
United States | $ | 3,100 |
| | $ | 21,151 |
| | $ | (8,583 | ) | | $ | 15,668 |
| |
Canada | 1,605 |
| | 12,536 |
| | 857 |
| | 14,998 |
| |
Unallocated expense | — |
| | — |
| | 8,947 |
| | 8,947 |
| |
Total | $ | 4,705 |
| | $ | 33,687 |
| | $ | 1,221 |
| | $ | 39,613 |
| |
|
| | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2015 | |
| Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | |
| | Involuntary employee termination costs | | Other charges (gains) | | |
United States | $ | 1,194 |
| | $ | 21,524 |
| | $ | 12,754 |
| | $ | 35,472 |
| |
Canada | — |
| | 4,183 |
| | — |
| | 4,183 |
| |
Other businesses | — |
| | — |
| | 5,696 |
| | 5,696 |
| |
Total | $ | 1,194 |
| | $ | 25,707 |
| | $ | 18,450 |
| | $ | 45,351 |
| |
Other charges (gains) for all three years primarily includeinvoluntary employee termination costs across the business, asset impairments, and write-down losses in the U.S., Canada and at the Company level (unallocated expense) and other exit-related costs.costs and are included in SG&A. The charges in the U.S. and Canada businesses arewere partially offset by gains from the sales of branchesreal estate. The reserve balance as of December 31, 2019 and December 31, 2018 was approximately $10 million and $47 million, respectively, and is primarily included in those segments. Included in other charges (gains) is also approximately $18 million of accumulated foreign currency translations losses reclassified from Accumulated other comprehensive losses to earnings in other businesses primarily related to the wind-down of Colombia during 2017.
Restructuring reserves are primarily recorded as part of Accrued compensation and benefits and Accrued expenses.benefits. The following summarizes the restructuring reserve activity for the years ended December 31, 2017 and 2016 (in thousands of dollars):remaining reserves are expected to be paid through 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Current assets write-downs | | Fixed assets write-downs and disposals | | Involuntary employee termination costs | | Lease termination costs | | Other costs | | Total |
Reserves as of January 1, 2016 | $ | — |
| | $ | — |
| | $ | 29,516 |
| | $ | 5,070 |
| | $ | — |
| | $ | 34,586 |
|
Restructuring costs, net of (gains) | 4,684 |
| | (9,289 | ) | | 33,687 |
| | 3,432 |
| | 7,099 |
| | 39,613 |
|
Cash (paid) received | (2,933 | ) | | 18,235 |
| | (38,193 | ) | | (5,377 | ) | | (5,710 | ) | | (33,978 | ) |
Non-cash, translation and others | $ | (1,584 | ) | | $ | (8,946 | ) | | $ | (469 | ) | | $ | — |
| | $ | (878 | ) | | $ | (11,877 | ) |
Reserves as of December 31, 2016 | $ | 167 |
| | $ | — |
| | $ | 24,541 |
| | $ | 3,125 |
| | $ | 511 |
| | $ | 28,344 |
|
Restructuring costs, net of (gains) | 13,892 |
| | 511 |
| | 58,859 |
| | 5,572 |
| | 37,324 |
| | 116,158 |
|
Cash (paid) received | (898 | ) | | 23,624 |
| | (34,066 | ) | | (3,770 | ) | | (7,639 | ) | | (22,749 | ) |
Non-cash, translation and others | (60 | ) | | (23,394 | ) | | 955 |
| | (34 | ) | | (17,432 | ) | | (39,965 | ) |
Reserves as of December 31, 2017 | $ | 13,101 |
| | $ | 741 |
| | $ | 50,289 |
| | $ | 4,893 |
| | $ | 12,764 |
| | $ | 81,788 |
|
The cumulative amounts incurred to date and expected (excluding results of sales of real estate) in connection with the Company's restructuring actions for active programs are as follows (in thousands of dollars):
|
| | | | | | | |
| Cumulative amount incurred to date | | Additional amount expected |
United States | $ | 62,398 |
| | $ | 5,075 |
|
Canada | 58,468 |
| | 11,428 |
|
Other businesses | 60,716 |
| | 135 |
|
Unallocated expense | 19,540 |
| | — |
|
Total | $ | 201,122 |
| | $ | 16,638 |
|
NOTE 76 - SHORT-TERM DEBT
Short-term debt consisted of the following (in thousandsmillions of dollars):
|
| | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
Lines of Credit | | | |
Outstanding at December 31 | $ | 55 |
| | $ | 49 |
|
Maximum month-end balance during the year | $ | 56 |
| | $ | 138 |
|
Weighted average interest rate during the year | 2.32 | % | | 2.29 | % |
Weighted average interest rate at December 31 | 2.44 | % | | 2.35 | % |
| | | |
Commercial Paper | | | |
Outstanding at December 31 | $ | — |
| | $ | — |
|
Maximum month-end balance during the year | $ | — |
| | $ | 90 |
|
Weighted average interest rate during the year | — | % | | 1.80 | % |
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Lines of Credit | | | |
Outstanding at December 31 | $ | 55,603 |
| | $ | 16,392 |
|
Maximum month-end balance during the year | $ | 55,621 |
| | $ | 24,722 |
|
Weighted average interest rate during the year | 2.41 | % | | 4.04 | % |
Weighted average interest rate at December 31 | 2.01 | % | | 5.13 | % |
| | | |
Commercial Paper | | | |
Outstanding at December 31 | $ | — |
| | $ | 369,748 |
|
Maximum month-end balance during the year | $ | 454,696 |
| | $ | 629,712 |
|
Weighted average interest rate during the year | 0.83 | % | | 0.50 | % |
Weighted average interest rate at December 31 | — | % | | 0.69 | % |
Lines of Credit
In October 2017, the Company replaced itsThe Company's U.S. $900 million unsecured revolving line of credit withbusiness has a new five-year $750 million unsecured revolving line of credit, withmaturing in 2022. There were 0 borrowings outstanding under the option to extend the line to up to $1.1 billion. The terms of the new line of credit are customary for transactionsas of this typeDecember 31, 2019 and do not contain any financial performance covenants.2018. The primary purpose of this credit facility is to provide support to the Company's commercial paper program and for general corporate purposes. There were no borrowings outstanding under these lines of credit as of December 31, 2017 and 2016. The Company paid a commitment fee of 0.06% and 0.07% in 2017 and 2016, respectively.
Foreign subsidiaries utilize lines of credit for working capital purposes and other operating needs, primarily British Pound (£) and Euro (€) revolvingneeds. These foreign lines of credit facilities with £20in aggregate were $55 million and €12.5$49 million outstanding at December 31, 2017, respectively, and no outstanding balance at December 31, 2016. The British Pound revolving credit facility bears interest at London Interbank Offered Rate (LIBOR) plus a margin of 75 basis points (1.22% at December 31, 2017) and a commitment fee of 0.26% as of December 31, 2017. The Euro revolving credit facility bears interest at Euro Interbank Offered Rate (EURIBOR) plus a margin of 35 basis points (0.35% at December 31, 2017)2019 and a commitment fee of 0.12% as of December 31, 2017.2018, respectively.
Uncommitted Lines of Credit
The Company had $71 million and $88 million of uncommitted lines of credit at December 31, 2017 and 2016, respectively.
Commercial Paper
The Company issuedissues commercial paper from time to time for general working capital needs. A portion of the proceeds from the May 2017 bond issuance (see Note 8 to the Consolidated Financial Statements) was used to pay outstanding commercial paper. At December 31, 2017,2019, there was none0ne outstanding.
Letters of Credit
The Company's U.S. business had $33 millionshort-term debt instruments include affirmative and $30 millionnegative covenants that are usual and customary for companies with similar credit ratings and do not contain any financial performance covenants.The Company was in compliance with all debt covenants as of letters of credit at December 31, 2017 and 2016, respectively, primarily related to the Company's insurance program. Letters of credit were also issued to facilitate purchases of products. These issued amounts were $1 million and $5 million at December 31, 2017 and 2016, respectively. Letters of credit issued by the Company's international businesses were immaterial.2019.
NOTE 87 - LONG-TERM DEBT
Long-term debt consisted of the following (in thousandsmillions of dollars):
|
| | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
| Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) |
4.60% senior notes due 2045 | $ | 1,000 |
| | $ | 1,194 |
| | $ | 1,000 |
| | $ | 1,026 |
|
3.75% senior notes due 2046 | 400 |
| | 416 |
| | 400 |
| | 357 |
|
4.20% senior notes due 2047 | 400 |
| | 449 |
| | 400 |
| | 383 |
|
British pound term loan | 170 |
| | 170 |
| | 174 |
| | 174 |
|
Euro term loan | 123 |
| | 123 |
| | 126 |
| | 126 |
|
Canadian dollar revolving credit facility | 46 |
| | 46 |
| | 44 |
| | 44 |
|
Other | 42 |
| | 42 |
| | 49 |
| | 49 |
|
Subtotal | 2,181 |
| | 2,440 |
| | 2,193 |
| | 2,159 |
|
Less current maturities | (246 | ) | | (246 | ) | | (81 | ) | | (81 | ) |
Debt issuance costs and discounts, net of amortization | (21 | ) | | (21 | ) | | (22 | ) | | (22 | ) |
Long-term debt (less current maturities) | $ | 1,914 |
| | $ | 2,173 |
| | $ | 2,090 |
| | $ | 2,056 |
|
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
4.60% senior notes due 2045 | $ | 1,000,000 |
| | $ | 1,000,000 |
|
3.75% senior notes due 2046 | 400,000 |
| | 400,000 |
|
4.20% senior notes due 2047 | 400,000 |
| | — |
|
British pound term loan | 194,574 |
| | 187,506 |
|
Euro term loan | 131,956 |
| | 120,900 |
|
Canadian dollar revolving credit facility | 99,388 |
| | 100,521 |
|
Capital lease obligations and other | 84,274 |
| | 71,109 |
|
| 2,310,192 |
| | 1,880,036 |
|
Less current maturities | (38,709 | ) | | (19,966 | ) |
Debt issuance costs and discounts | (23,447 | ) | | (19,124 | ) |
| $ | 2,248,036 |
| | $ | 1,840,946 |
|
(1) The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The carrying value of other long-term debt approximates fair value due to their variable interest rates.
Senior Notes
In May 2017, the Companyyears 2015-2017, Grainger issued $400 million$1.8 billion in long-term debt (Senior Notes) to partially fund the repurchase of unsecured 4.20%Senior Notes (4.20% Notes) that mature on May 15, 2047.$2.8 billion in shares of the total $3 billion previously announced. The 4.20% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15 and November 15, beginning on November 15, 2017. Prior to November 15, 2046, theremaining share repurchases were funded from internally generated cash. Debt was issued as follows:
| |
• | In May 2017, $400 million payable in 30 years and carries a 4.20% interest rate, payable semiannually. |
| |
• | In May 2016, $400 million payable in 30 years and carries a 3.75% interest rate, payable semiannually. |
| |
• | In June 2015, $1 billion payable in 30 years and carries a 4.60% interest rate, payable semiannually. |
The Company may redeem the 4.20%Senior Notes in whole at any time or in part from time to time at a “make-whole” redemption price. Thisprice prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.20%Senior Notes plus 2020-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 4.20%Senior Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. On or after November 15, 2046,Within one year of the maturity date, the Company may redeem the 4.20%Senior Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date.
Costs and discounts of approximately $5.8$24 million associated with the issuance of the 4.20%Senior Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and isare being amortized to interest expense over the term of the 4.20%Senior Notes. The fair value of the 4.20% Notes was approximately $411 million as of December 31, 2017.
In May 2016, the Company issued $400 million of unsecured 3.75% Senior Notes (3.75% Notes) that mature on May 15, 2046. The 3.75% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15 and November 15, beginning on November 15, 2016. Prior to November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 3.75% Notes plus 20 basis points, together with accrued and unpaid interest, if any, to the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 3.75% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase. On or after November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs and discounts of approximately $7 million associated with the issuance of the 3.75% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and is being amortized to interest expense over the term of the 3.75% Notes. The fair value of the 3.75% Notes was approximately $384 million and $371 million as of December 31, 2017 and 2016, respectively.
In June 2015, the Company issued $1 billion of unsecured 4.60% Senior Notes (4.60% Notes) that mature on June 15, 2045. The 4.60% Notes require no principal payments until the maturity date and interest is payable semi-annually on June 15 and December 15, beginning on December 31, 2015. Prior to December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.60% Notes plus 25 basis points, together with accrued and unpaid interest, if any, to the
redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 4.60% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase. On or after December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs and discounts of approximately $11 million associated with the issuance of the 4.60% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and is beingamortized to interest expense over the term of the 4.60% Notes. The fair value of the 4.60% Notes was approximately $1.1 billion as of December 31, 2017 and 2016.
The estimated fair values of the Company’s Senior Notes were based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy.
British Pound Term Loan
In August 2015, the Company entered into an unsecured credit facilities agreement providing for a five-year term loan of £160 million and revolving credit facility of up to £20 million (see Note 76 to the Consolidated Financial Statements). Proceeds of the term loan were used to partially fund the acquisition of Cromwell and to pay certain costs related to the acquisition. Under the agreement, the principal amount of the term loan will be repaid semiannually in installments of £4 million beginning February 2016 through February 2020 with the remaining outstanding amount due August 2020.2020 and accordingly, the amount outstanding is included in Current maturities of long-term debt as of December 31, 2019. At the election of the Company, the term loan bears interest at the LIBOR Rate plus a margin of 75 basis points, as defined within the term loan agreement. At December 31, 2017,2019 , the Company had elected a one-month LIBOR interest period. The weighted average interest rate was 1.04%1.47% and 1.17%1.34% for the years ended December 31, 20172019 and 2016,2018, respectively. The carrying value of the British Pound term loan approximates fair value due to the variable interest rate.
Euro Term Loan
OnIn August 31, 2016, the Company entered into an agreement for a five-year term loan of €110 million and a revolving credit facility of up to €20 million (see Note 76 to the Consolidated Financial Statements). The proceeds from the term loan were used to pay in full €102.5 million of a term loan that matured in August 2016. Under the agreement, no principal amount of the loan will be required to be paid until the loan becomes due on August 31, 2021, at which time the loan will be required to be paid in full. The Company, at its option, may prepay this term loan in whole or in part at the end of any interest period without penalty. The loan bears interest at the EURIBOR plus a margin of 45 basis points, as defined within the term loan agreement. If EURIBOR is less than zero, then EURIBOR will be deemed to be zero. The interest rate at both December 31, 2017,2019 and 2018 was 0.45%. The carrying value of the Euro term loan approximates fair value due to the variable interest rate.
Canadian Dollar Revolving Credit Facility
In September 2014, the Company entered into an unsecured revolving credit facility with a maximum availability of C$175 million. Pursuant to the credit agreement, there is a commitment fee of 0.07% as of December 31, 2017, and the facility matures on September 24, 2019. The amounts outstanding were C$125 million and C$135 million as of December 31, 2017 and 2016, respectively. The loan bears interest at the Canadian Dollar Offered Rate (CDOR) plus a margin of 7080 basis points, as defined within the loan agreement. The weighted average interest rate during the year on this outstanding amount was 1.78%2.82%. No principal payments are required on the credit facility until the maturity date. Accordingly,In July 2019, the facility was amended to mature in 2020 and accordingly, the amount outstanding is included in Current maturities of long-term debt as of December 31, 2017. The carrying value of the Canadian Dollar revolving credit facility approximates fair value due to the variable interest rate.2019.
The scheduled aggregate principal payments related to capital lease obligations and long-term debt, excluding debt issuance costs, are due as follows (in thousandsmillions of dollars):
|
| | | | |
Year | | Payment Amount |
|
2020 | | $ | 246 |
|
2021 | | 129 |
|
2022 | | — |
|
2023 | | — |
|
2024 | | 6 |
|
Thereafter | | 1,800 |
|
Total | | $ | 2,181 |
|
|
| | | | |
Year | | Payment Amount |
|
2018 | | $ | 38,709 |
|
2019 | | 144,156 |
|
2020 | | 190,774 |
|
2021 | | 136,543 |
|
2022 | | 10 |
|
Thereafter | | 1,800,000 |
|
Total | | $ | 2,310,192 |
|
The Company's long-term debt instruments include affirmative and negative covenants that are usual and customary for companies with similar credit ratings.ratings and do not contain any financial performance covenants.The Company was in compliance with all debt covenants as of December 31, 20172019.
NOTE 98 - EMPLOYEE BENEFITS
The Company provides various retirement benefits to eligible employees, including contributions to defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and other benefits. Eligibility requirements and benefit levels vary depending on employee location. Various foreign benefit plans cover employees in accordance with local legal requirements.
Defined Contribution Plans
A majority of the Company's U.S. employees are covered by a noncontributory profit-sharing plan. Effective January 1, 2016, theThe plan was amended to better alignaligns Company contributions to Company performance and now includes two components, a variable annual contribution based on athe Company's rate of return on invested capital and an automatic contribution equal to 3% of the eligible employee's total eligible compensation. In addition, employees covered by the plan are also able to make personal contributions. The total Company contribution will be maintained at a minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees. The total profit-sharing plan expense was $113 million, $164 million, and $120 million $84 millionfor 2019, 2018 and $121 million for 2017, 2016 and 2015, respectively.
The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which contributions are paidmade by the Company and participating employees. The expense associated with these defined contribution plans totaled $19 million, $13 million, and $18 million $12 millionfor 2019, 2018 and $11 million for 2017, 2016 and 2015, respectively.
Defined Benefit Plans and Other Retirement Plans
The Company sponsors defined benefit plans available to certain foreign employees. The cost of these programs is not significant to the Company. In certain countries, pension contributions are made to government-sponsored social security pension plans in accordance with local legal requirements. For these plans, the Company has no continuing obligations other than the payment of contributions.
Postretirement Healthcare Benefits Plans
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its U.S. employees hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company.
Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.
During the third quarter of 2017, the Company implemented plan design changes effective January 1, 2018, for the post-65 age group. This plan change will movemoved all post-65 Medicare eligible retirees to healthcare exchanges and provideprovided them a subsidy to purchase insurance. The amount of the subsidy will beis based on years of service. As of August 31, 2017, as a result of the plan change, the plan obligation was remeasured.remeasured as of August 31, 2017. The remeasurement resulted in a decrease in the postretirement benefit obligation of $75.7$76 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $29.2$29 million.
Certain amounts in the 2017 financial statements, as previously reported, have been reclassified to conform to the 2018 presentation. In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07),which became effective January 1, 2018.
The net periodic benefits costs charged to operating expenses, which were valued with a measurement date of January 1 for each year and August 31, 2017 remeasurement date and consisted of the following components (in thousandsmillions of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 |
| 2018 |
| 2017 |
SG&A | | | | | |
Service cost | $ | 4 |
| | $ | 6 |
| | $ | 7 |
|
Other income (expense) |
| | | | |
Interest cost | 7 |
| | 7 |
| | 8 |
|
Expected return on assets | (12) | | (13 | ) | | (12 | ) |
Amortization of prior service credit | (10) | | (10 | ) | | (7 | ) |
Amortization of unrecognized gains | (4) | | (3 | ) | | (2 | ) |
Net periodic (benefits) costs | $ | (15 | ) | | $ | (13 | ) | | $ | (6 | ) |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
Service cost | $ | 7,423 |
| | $ | 8,238 |
| | $ | 10,128 |
|
Interest cost | 8,103 |
| | 9,855 |
| | 9,649 |
|
Expected return on assets | (11,826 | ) | | (10,113 | ) | | (10,375 | ) |
Amortization of prior service credit | (7,570 | ) | | (6,688 | ) | | (6,801 | ) |
Amortization of unrecognized (gains) losses | (2,437 | ) | | 129 |
| | 1,512 |
|
Net periodic (benefits) costs | $ | (6,307 | ) | | $ | 1,421 |
| | $ | 4,113 |
|
Reconciliations of the beginning and ending balances of the postretirement benefit obligation, which is calculated as of December 31 measurement date, the fair value of plan assets available for benefits and the funded status of the benefit obligation follow (in thousandsmillions of dollars):
|
| | | | | | | |
| 2019 |
| 2018 |
Benefit obligation at beginning of year | $ | 190 |
| | $ | 208 |
|
Service cost | 4 |
| | 6 |
|
Interest cost | 7 |
| | 7 |
|
Plan participants' contributions | 3 |
| | 3 |
|
Actuarial (gains) | 5 |
| | (26 | ) |
Benefits paid | (9 | ) | | (9 | ) |
Prescription drug rebates | — |
| | 1 |
|
Benefit obligation at end of year | $ | 200 |
| | $ | 190 |
|
| | | |
Plan assets available for benefits at beginning of year | $ | 176 |
| | $ | 189 |
|
Actual (losses) returns on plan assets | 28 |
| | (8 | ) |
Plan participants' contributions | 3 |
| | 3 |
|
Prescription drug rebates | — |
| | 1 |
|
Benefits paid | (9 | ) | | (9 | ) |
Plan assets available for benefits at end of year | 198 |
| | 176 |
|
Noncurrent postretirement benefit obligation | $ | 2 |
| | $ | 14 |
|
|
| | | | | | | |
| 2017 |
| 2016 |
Benefit obligation at beginning of year | $ | 265,028 |
| | $ | 239,348 |
|
Service cost | 7,423 |
| | 8,238 |
|
Interest cost | 8,103 |
| | 9,855 |
|
Plan participants' contributions | 3,346 |
| | 2,943 |
|
Actuarial (gains) losses | (34,236 | ) | | 13,218 |
|
Plan amendment | (34,182 | ) | | — |
|
Benefits paid | (8,631 | ) | | (9,439 | ) |
Prescription drug rebates | 1,499 |
| | 865 |
|
Benefit obligation at end of year | 208,350 |
| | 265,028 |
|
|
|
| |
|
|
Plan assets available for benefits at beginning of year | 163,545 |
| | 155,611 |
|
Actual returns on plan assets | 29,477 |
| | 13,557 |
|
Plan participants' contributions | 3,266 |
| | 2,774 |
|
Benefits paid | (8,295 | ) | | (9,262 | ) |
Prescription drug rebates | 1,499 |
| | 865 |
|
Plan assets available for benefits at end of year | 189,492 |
| | 163,545 |
|
Noncurrent postretirement benefit obligation | $ | 18,858 |
| | $ | 101,483 |
|
The amounts recognized in Accumulated other comprehensive earnings (AOCE)AOCE consisted of the following (in thousandsmillions of dollars):
|
| | | | | | | |
| As of December 31, |
| 2019 |
| 2018 |
Prior service credit | $ | 61 |
| | $ | 71 |
|
Unrecognized gains | 44 |
| | 37 |
|
Deferred tax (liability) | (26 | ) | | (26 | ) |
Net accumulated gains | $ | 79 |
| | $ | 82 |
|
|
| | | | | | | |
| As of December 31, |
| 2017 |
| 2016 |
Prior service credit | $ | 80,426 |
| | $ | 53,814 |
|
Unrecognized gains (losses) | 36,794 |
| | (12,656 | ) |
Deferred tax (liability) | (43,793 | ) | | (15,861 | ) |
Net accumulated gains | $ | 73,427 |
| | $ | 25,297 |
|
The $49 million increase in unrecognized gain was primarily driven by the plan amendment and a change in census, claims costs and other actuarial assumptions offset by a decrease in the discount rate.
The components of AOCE related to unrecognized gains that will be amortized into net periodic postretirement benefit costs in 2018 are estimated as follows (in thousands of dollars):
|
| | | |
| 2018 |
Amortization of prior service credit | $ | (9,696 | ) |
Amortization of unrecognized gains | (2,787 | ) |
Estimated amount to be amortized from AOCE into net periodic postretirement benefit costs | $ | (12,483 | ) |
The Company has elected to amortize the amount of net unrecognized gains over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 13.211.1 years for 20172019.
The postretirement benefit obligation was determined by applying the terms of the plan and actuarial models. These models include various actuarial assumptions, including discount rates, long-term rates of return on plan assets, healthcare cost trend rate and cost-sharing between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and historical experience.
The following assumptions were used to determine net periodic benefit costs at January 1 of each year (excluding the August 31, 2017 remeasurement date):
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2017 |
| 2016 |
| 2015 | 2019 |
| 2018 |
| 2017 |
Discount rate | 4.00 | % | | 4.20 | % | | 3.89 | % | 4.08 | % | | 3.44 | % | | 4.00 | % |
Long-term rate of return on plan assets, net of tax | 7.13 | % | | 6.65 | % | | 6.65 | % | 7.13 | % | | 7.13 | % | | 7.13 | % |
Initial healthcare cost trend rate - pre age 65 | 6.81 | % | | 7.00 | % | | 7.25 | % | |
Initial healthcare cost trend rate - post age 65 | 9.36 | % | | 7.00 | % | | 7.25 | % | |
Initial healthcare cost trend rate | | | | | | |
Pre age 65 | | 6.31 | % | | 6.56 | % | | 6.81 | % |
Post age 65 | | NA |
| | NA |
| | 9.36 | % |
Catastrophic drug benefit | | NA |
| | 12.50 | % | | NA |
|
Ultimate healthcare cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % | 4.50 | % | | 4.50 | % | | 4.50 | % |
Year ultimate healthcare cost trend rate reached | 2026 |
| | 2026 |
| | 2026 |
| 2026 |
| | 2026 |
| | 2026 |
|
HRA credit inflation index for grandfathered retirees | | 2.50 | % | | 2.50 | % | | NA |
|
The following assumptions were used to determine benefit obligations at December 31:
The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date of each year. These rates have been selected due to their similarity to the duration of the projected cash flows of the postretirement healthcare benefit plan. As of December 31, 2017,2019, the Company decreased the discount rate from 4.00%4.08% to 3.44%3.01% to reflect the decrease in the market interest rates which offset the unrealized actuarial gain at December 31, 2017. As of December 31, 2017, the Company changed the mortality improvement table used to project mortality rates into the future from Mortality Table RPH-2014 with Mortality Improvement Scale MP 2016 to Mortality Table RPH-2014 with Mortality Improvement Scale MP 2017, which was published by the Society of Actuaries and reflects the most recent updates to life expectancies. RPH-2014 Table is a headcount weighted table, which is also more appropriate for a postretirement healthcare benefit plan. 2019.
The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2016, Grainger adopted a new healthcare trend rate to include a pre and post age 65 trend rates. Post age 65, prescription drug costs, primarily specialty drugs, are expected to increase the cost of healthcare more significantly than medical expenses. The alternative trend rates allow for a better estimate of expected costs for this plan. As of December 31, 2017,2019, the initial healthcare cost trend rate was 6.56%6.06% for pre age 65. The
healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%2.50%. The plan amendment adopted in 2017 moves all post age 65 Medicare eligible retirees to an exchange and provides a subsidy to those retirees to purchase insurance. The amount of the subsidy is based on years of service and is indexed at 2.50% for grandfathered employees. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A 1 percentage point change in assumed healthcare cost trend rates would have the following effects on 2017 results (in thousands of dollars):
The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. AllIn 2019, the Company liquidated previously held index funds and has temporarily invested all assets of the Trust are invested in equity funds designed to track to either the Standard & Poor's 500 Index (S&P 500) or the Total International Composite Index.money market funds. The Total International Composite Index tracks non-U.S. stocks within developed and emerging market economies. This investment strategy reflects the long-term nature of the plan obligation and seeks to take advantage of the earnings potential of equity securitiesCompany is in the global marketsprocess of transitioning the Trust assets from money market funds into a liability driven investment solution composed of growth assets and intends to reach a balanced allocation between U.S. and non-U.S. equities.fixed income. The plan's assets are stated at fair value, which represents
the net asset value of shares held by the plan in the registered investment companies at the quoted market prices (Level 1 input). The plan assets available for benefits are net of Trust liabilities, primarily related to deferred income taxes and taxes payable at December 31 (in thousandsmillions of dollars):
The Company's investment policies include periodic reviews by management and trustees at least annually concerning: (1) the allocation of assets among various asset classes (e.g., domestic stocks, international stocks, short-term bonds, long-term bonds, etc.); (2) the investment performance of the assets, including performance comparisons with appropriate benchmarks; (3) investment guidelines and other matters of investment policy and (4) the hiring, dismissal or retention of investment managers.
The funding of the Trust is an estimated amount that is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.
The Company forecasts the following benefit payments related to postretirement (which include a projection for expected future employee service) for the next ten years (in thousandsmillions of dollars):
|
| | | | |
Year | | Estimated Gross Benefit Payments |
2020 | | $ | 9 |
|
2021 | | 10 |
|
2022 | | 11 |
|
2023 | | 12 |
|
2024 | | 12 |
|
2025-2029 | | 62 |
|
Total | | $ | 116 |
|
|
| | | | |
Year | | Estimated Gross Benefit Payments |
2018 | | $ | 7,365 |
|
2019 | | 8,956 |
|
2020 | | 10,029 |
|
2021 | | 11,025 |
|
2022 | | 12,077 |
|
2023-2027 | | 67,760 |
|
NOTE 109 - LEASES
The Company leases certain land,properties and buildings (including branches, warehouses, distribution centers and office space) and equipment under various arrangements which provide the right to use the underlying asset and vehicles under noncancelablerequire lease payments for the lease term. The Company’s lease portfolio consists mainly of operating leases thatwhich expire at various dates through 2036. Many ofFinance leases and service contracts with lease arrangements are not material and the building leases obligatefollowing disclosures pertain to the CompanyCompany’s operating leases.
Information related to pay real estate taxes, insurance and certain maintenance costs and contain multiple renewal provisions, exercisable at the Company's option. Leases that contain predetermined fixed escalations of the minimum rentals are recognized in rental expense on a straight-line basis over the lease term. Cash or rent abatements received upon entering into certain operating leases are also recognized on a straight-line basis over the lease term.
At December 31, 2017, the approximate future minimum lease payments for operating leases wereis as follows (in thousandsmillions of dollars):
|
| | | | |
| | As of December 31, 2019 |
ROU Assets | | |
Other assets | | $ | 223 |
|
| | |
Operating lease liabilities | | |
Accrued expenses | | 58 |
|
Other non-current liabilities | | 171 |
|
Total operating lease liabilities | | $ | 229 |
|
|
| | | | |
Year | | Future Minimum Lease Payments |
2018 | | $ | 63,625 |
|
2019 | | 50,610 |
|
2020 | | 31,984 |
|
2021 | | 20,891 |
|
2022 | | 13,555 |
|
Thereafter | | 15,879 |
|
Total minimum payments required | | 196,544 |
|
Less amounts representing sublease income | | (4,125 | ) |
| | $ | 192,419 |
|
|
| | | | |
| | Twelve Months Ended December 31, 2019 |
Weighted average remaining lease term | | 5 years |
|
Weighted average incremental borrowing rate | | 2.3 | % |
Cash paid for operating leases | | $ | 67 |
|
ROU assets obtained in exchange for operating lease obligations | | $ | 88 |
|
The expected reduction of future minimum lease payments is the result of the decreasing branch network across the U.S. and Canada business.
Rent expense was $76 million $81 millionfor 2019, 2018 and $77 million for 2017, 2016 and 2015, respectively.. These amounts are net of sublease income of $3 million, $3 million and $2 million for each 2017, 20162019, 2018 and 2015.2017.
Maturities of operating lease liabilities as of December 31, 2019 (in millions of dollars) are as follows:
|
| | | | |
| | Maturity of operating lease liabilities |
2020 | | $ | 63 |
|
2021 | | 55 |
|
2022 | | 45 |
|
2023 | | 30 |
|
2024 | | 16 |
|
Thereafter | | 30 |
|
Total lease payments | | 239 |
|
Less interest | | (10 | ) |
Present value of lease liabilities | | $ | 229 |
|
Capital leases as of December 31, 2017 are2019 and 2018 were not considered material. Capital lease obligations are reported in long-termLong-term debt.
As of December 31, 2019, the Company's future lease obligations that have not yet commenced are immaterial.
NOTE 1110 - STOCK INCENTIVE PLANS
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees and directors. Non-qualifiedexecutives, which include restricted stock units (RSUs), non-qualified stock options, performance shares restricted stock units and deferred stock units have been granted and are outstanding under these plans. In 2015, the Company approved the 2015 Incentive Plan, which replaced all prior active plans. units. As of December 31, 20172019, there were 2.72.3 million shares available for grant under the plans. When optionsawards are exercised or settled, shares of the Company’s treasury stock are issued.
Pretax stock-based compensation expense included in SG&A was $31$40 million, $35$47 million, and $4333 million in 2017, 20162019, 2018 and 20152017, respectively, and is included in Warehousing, marketing and administrative expenses.was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $25$15 million, $11$26 million, and $13$26 million in 2019, 2018 and 2017, 2016respectively.
Restricted Stock Units
The Company awards RSUs to certain employees and 2015,executives. RSUs vest generally over periods from one to seven years from issuance. RSU expense for the years ended December 31, 2019, 2018 and 2017 was approximately $27 million, $23 million and $17 million, respectively. The following table summarizes RSU activity (in millions, except for share and per share amounts):
|
| | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Shares | Weighted Average Price Per Share | | Shares | Weighted Average Price Per Share | | Shares | Weighted Average Price Per Share |
Beginning nonvested units | 343,814 |
| $ | 245.38 |
| | 352,919 |
| $ | 226.31 |
| | 373,403 |
| $ | 221.77 |
|
Issued | 96,823 |
| $ | 299.25 |
| | 141,775 |
| $ | 284.98 |
| | 129,378 |
| $ | 222.53 |
|
Canceled | (36,224 | ) | $ | 253.22 |
| | (56,393 | ) | $ | 245.08 |
| | (47,488 | ) | $ | 229.36 |
|
Vested | (78,289 | ) | $ | 247.96 |
| | (94,487 | ) | $ | 233.75 |
| | (102,374 | ) | $ | 203.51 |
|
Ending nonvested units | 326,124 |
| $ | 259.88 |
| | 343,814 |
| $ | 245.38 |
| | 352,919 |
| $ | 226.31 |
|
Fair value of shares vested | $ | 19 |
| | | $ | 22 |
| | | $ | 21 |
| |
| | | | | | | | |
At December 31, 2019 there was $45 million of total unrecognized compensation expense related to nonvested RSUs that the Company expects to recognize over a weighted average period of 2.1 years.
Stock Options
The Company issues stock option grantsoptions to certain employees as part of their incentive compensation. Option awardsand executives. Stock options are granted with an exercise price equal to the closing market price of the Company's stock on the day of the grant. The options generally vest over three years, although accelerated vesting is provided in certain circumstances. Awards generally expire 10 years from the grant date. Transactions involving stock options are summarized as follows:
|
| | | | | | | | | |
| Shares Subject to Option | | Weighted Average Price Per Share | | Options Exercisable |
Outstanding at January 1, 2015 | 2,582,804 |
| | $ | 149.01 |
| | 1,647,903 |
|
Granted | 294,522 |
| | $ | 232.20 |
| |
|
|
Exercised | (587,441 | ) | | $ | 105.08 |
| |
|
|
Canceled or expired | (63,599 | ) | | $ | 216.76 |
| |
|
|
Outstanding at December 31, 2015 | 2,226,286 |
| | $ | 169.96 |
| | 1,411,460 |
|
Granted | 294,874 |
| | $ | 234.25 |
| |
|
|
Exercised | (317,110 | ) | | $ | 108.28 |
| |
|
|
Canceled or expired | (80,014 | ) | | $ | 210.01 |
| |
|
|
Outstanding at December 31, 2016 | 2,124,036 |
| | $ | 186.59 |
| | 1,346,707 |
|
Granted | 306,206 |
| | $ | 230.97 |
| |
|
|
Exercised | (409,269 | ) | | $ | 115.35 |
| |
|
|
Canceled or expired | (87,260 | ) | | $ | 222.00 |
| |
|
|
Outstanding at December 31, 2017 | 1,933,713 |
| | $ | 207.10 |
| | 1,375,844 |
|
Stock option expense for the years ended December 31, 2019, 2018 and 2017 was approximately $8 million, $9 million and $13 million, respectively. At December 31, 2017,2019 there was $8.9$10.5 million of total unrecognized compensation expense related to nonvested option awards, which the Company expects to recognize over a weighted average period of 1.8 years.
The following table summarizes information about stock options (in thousands of dollars):
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Fair value of options exercised | | $ | 10,816 |
| | $ | 8,086 |
| | $ | 14,423 |
|
Total intrinsic value of options exercised | | 47,332 |
| | 35,800 |
| | 73,671 |
|
Fair value of options vested | | 23,503 |
| | 14,535 |
| | 16,047 |
|
Settlements of options exercised | | 47,181 |
| | 34,573 |
| | 61,863 |
|
Information about stock options outstanding and exercisable as of December 31, 2017, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | | | Weighted Average | | | | | Weighted Average | |
Range of Exercise Prices | | Number | | Remaining Contractual Life | | Exercise Price | | Intrinsic Value (000s) | | Number | | Remaining Contractual Life | | Exercise Price | | Intrinsic Value (000s) |
$72.14 - $85.82 | | 84,831 |
| | 0.87 years | | $ | 80.11 |
| | $ | 13,246 |
| | 84,831 |
| | 0.87 years | | $ | 80.11 |
| | $ | 13,246 |
|
$102.26 - $196.31 | | 363,820 |
| | 2.96 years | | $ | 133.79 |
| | 37,275 |
| | 362,677 |
| | 2.94 years | | $ | 133.68 |
| | 37,199 |
|
$204.01 - $262.14 | | 1,485,062 |
| | 6.96 years | | $ | 232.31 |
| | 5,853 |
| | 928,336 |
| | 6.16 years | | $ | 232.16 |
| | 3,797 |
|
| | 1,933,713 |
| | 5.94 years | | $ | 207.10 |
| | $ | 56,374 |
| | 1,375,844 |
| | 4.98 years | | $ | 196.83 |
| | $ | 54,242 |
|
The Company uses a binomial lattice option pricing model for the valuation of stock options. The weighted average fair value of options granted in 2017, 2016 and 2015 was $45.09, $44.94 and $46.67, respectively. The fair value of options granted in 2017, 2016 and 2015 used the following assumptions:
|
| | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Risk-free interest rate | | 2.0% | | 1.4% | | 1.5% |
Expected life | | 6 years | | 6 years | | 6 years |
Expected volatility | | 23.9% | | 24.5% | | 24.9% |
Expected dividend yield | | 2.1% | | 2.0% | | 1.9% |
The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected term of the options being valued. The expected life selected for options granted during each year presented represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior. Expected volatility is based upon implied and historical volatility of the Company's closing stock price over a period equal to the expected life of each option grant. Historical Company information is the primary basis for selection of expected dividend yield assumptions.
Performance Shares
The Company awards performance-based shares to certain executives. Receipt of Company stock is contingent upon the Company meeting sales growth and/or return on invested capital (ROIC) goals. Each participant is granted a target number of shares; however the number of shares actually awarded at the end of the performance period can fluctuate from the target award, based upon achievement of the sales or ROIC goals.
Performance share value is based upon closing market prices on the last trading day preceding the date of award and is charged to earnings on a ratable basis over the vesting period, primarily three, and up to seven years for certain awards, based on the number of shares expected to vest. Holders of performance share awards are not entitled to receive cash payments equivalent to cash dividends. If the performance shares vest, they will be settled by the Company's issuance of common stock in exchange for the performance shares on a one-for-one basis.
The following table summarizes the transactions involving performance-based share awards:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Shares | | Weighted Average Price Per Share | | Shares | | Weighted Average Price Per Share | | Shares | | Weighted Average Price Per Share |
Beginning nonvested shares outstanding | 98,340 |
| | $ | 203.91 |
| | 73,160 |
| | $ | 232.72 |
| | 57,236 |
| | $ | 220.00 |
|
Issued | 52,371 |
| | $ | 216.99 |
| | 60,414 |
| | $ | 191.38 |
| | 47,264 |
| | $ | 227.26 |
|
Canceled | (66,579 | ) | | $ | 201.84 |
| | (11,724 | ) | | $ | 241.41 |
| | (13,108 | ) | | $ | 215.01 |
|
Vested | — |
| | $ | — |
| | (23,510 | ) | | $ | 242.65 |
| | (18,232 | ) | | $ | 191.36 |
|
Ending nonvested shares outstanding | 84,132 |
| | $ | 213.69 |
| | 98,340 |
| | $ | 203.91 |
| | 73,160 |
| | $ | 232.72 |
|
At December 31, 2017, there was $11.4 million of total unrecognized compensation expense related to performance-based share awards that the Company expects to recognize over a weighted average period of 2.7 years.
Restricted Stock Units (RSUs)
The Company awards restricted stock units (RSUs) to certain employees and executives. RSUs granted vest over periods from three to seven years from issuance, although accelerated vesting is provided in certain instances. Holders of RSUs are entitled to receive nonforfeitable cash payments equivalent to cash dividends and other distributions paid with respect to common stock. RSUs are settled by the issuance of the Company's common stock on a one-for-one basis. Compensation expense related to RSUs is based upon the closing market price on the last trading day preceding the date of award and is charged to earnings on a straight-line basis over the vesting period. The following table summarizes RSU activity:
|
| | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Shares | Weighted Average Price Per Share | | Shares | Weighted Average Price Per Share | | Shares | Weighted Average Price Per Share |
Beginning nonvested units | 373,403 |
| $ | 221.77 |
| | 432,783 |
| $ | 213.45 |
| | 560,351 |
| $ | 182.40 |
|
Issued | 129,378 |
| $ | 222.53 |
| | 113,909 |
| $ | 230.36 |
| | 104,220 |
| $ | 234.21 |
|
Canceled | (47,488 | ) | $ | 229.36 |
| | (62,869 | ) | $ | 229.70 |
| | (38,124 | ) | $ | 219.74 |
|
Vested | (102,374 | ) | $ | 203.51 |
| | (110,420 | ) | $ | 193.51 |
| | (193,664 | ) | $ | 133.56 |
|
Ending nonvested units | 352,919 |
| $ | 226.31 |
| | 373,403 |
| $ | 221.77 |
| | 432,783 |
| $ | 213.45 |
|
Fair value of shares vested | $20,834 | | | $21,367 | | | $25,865 | |
| | | | | | | | |
At December 31, 2017, there was $45 million of total unrecognized compensation expense related to nonvested RSUs that the Company expects to recognize over a weighted average period of 3.0 years.
NOTE 1211 - CAPITAL STOCK
The Company had no shares of preferred stock outstanding as of December 31, 20172019 and 20162018. The activity related to outstanding common stock and common stock held in treasury was as follows:
|
| | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock |
Balance at beginning of period | 55,862,360 |
| 53,796,859 |
| | 56,328,863 |
| 53,330,356 |
| | 58,804,314 |
| 50,854,905 |
|
Exercise of stock options | 232,052 |
| (232,052 | ) | | 930,258 |
| (930,258 | ) | | 407,542 |
| (407,542 | ) |
Settlement of restricted stock units, net of 26,107, 39,075 and 36,585 shares retained, respectively | 52,182 |
| (52,182 | ) | | 80,988 |
| (80,988 | ) | | 103,331 |
| (103,331 | ) |
Settlement of performance share units, net of 6,737, 1,027 and 9,334 shares retained, respectively | 14,027 |
| (14,027 | ) | | 1,911 |
| (1,911 | ) | | 13,978 |
| (13,978 | ) |
Purchase of treasury shares | (2,473,093 | ) | 2,473,093 |
| | (1,479,660 | ) | 1,479,660 |
| | (3,000,302 | ) | 3,000,302 |
|
Balance at end of period | 53,687,528 |
| 55,971,691 |
| | 55,862,360 |
| 53,796,859 |
| | 56,328,863 |
| 53,330,356 |
|
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock |
Balance at beginning of period | 58,804,314 |
| 50,854,905 |
| | 62,028,708 |
| 47,630,511 |
| | 67,432,041 |
| 42,227,178 |
|
Exercise of stock options | 407,542 |
| (407,542 | ) | | 315,171 |
| (315,171 | ) | | 580,947 |
| (580,947 | ) |
Settlement of restricted stock units, net of 36,585, 41,128 and 73,496 shares retained, respectively | 103,331 |
| (103,331 | ) | | 78,310 |
| (78,310 | ) | | 145,757 |
| (145,757 | ) |
Settlement of performance share units, net of 9,334, 6,765 and 9,971 shares retained, respectively | 13,978 |
| (13,978 | ) | | 11,806 |
| (11,806 | ) | | 15,956 |
| (15,956 | ) |
Purchase of treasury shares | (3,000,302 | ) | 3,000,302 |
| | (3,629,681 | ) | 3,629,681 |
| | (6,145,993 | ) | 6,145,993 |
|
Balance at end of period | 56,328,863 |
| 53,330,356 |
| | 58,804,314 |
| 50,854,905 |
| | 62,028,708 |
| 47,630,511 |
|
NOTE 1312 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSSES) (AOCE)
The components of AOCE consisted of the following (in thousandsmillions of dollars):
|
| | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation and Other | Defined Postretirement Benefit Plan | Other Employment-related Benefit Plans | Total | Foreign Currency Translation Attributable to Noncontrolling Interests | AOCE Attributable to W.W. Grainger, Inc. |
Balance at January 1, 2017, net of tax | $ | (316 | ) | $ | 25 |
| $ | (5 | ) | $ | (296 | ) | $ | (23 | ) | $ | (273 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | 75 |
| 86 |
| 1 |
| 162 |
| 4 |
| 158 |
|
Amounts reclassified to Net earnings | 18 |
| (38 | ) | — |
| (20 | ) | — |
| (20 | ) |
Net current period activity | $ | 93 |
| $ | 48 |
| $ | 1 |
| $ | 142 |
| $ | 4 |
| $ | 138 |
|
Balance at December 31, 2017, net of tax | $ | (223 | ) | $ | 73 |
| $ | (4 | ) | $ | (154 | ) | $ | (19 | ) | $ | (135 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | (43 | ) | 4 |
| (1 | ) | (40 | ) | 3 |
| (43 | ) |
Amounts reclassified to Net earnings | 2 |
| (10 | ) | — |
| (8 | ) | — |
| (8 | ) |
Amounts reclassified to Retained earnings | — |
| 15 |
| — |
| 15 |
| — |
| 15 |
|
Net current period activity | $ | (41 | ) | $ | 9 |
| $ | (1 | ) | $ | (33 | ) | $ | 3 |
| $ | (36 | ) |
Balance at December 31, 2018, net of tax | $ | (264 | ) | $ | 82 |
| $ | (5 | ) | $ | (187 | ) | $ | (16 | ) | $ | (171 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | 25 |
| 8 |
| (3 | ) | 30 |
| 3 |
| 27 |
|
Amounts reclassified to Net earnings | 1 |
| (11 | ) | — |
| (10 | ) | — |
| (10 | ) |
Net current period activity | 26 |
| (3 | ) | (3 | ) | 20 |
| 3 |
| 17 |
|
Balance at December 31, 2019, net of tax | $ | (238 | ) | $ | 79 |
| $ | (8 | ) | $ | (167 | ) | $ | (13 | ) | $ | (154 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | Defined Postretirement Benefit Plan | Other Employment-related Benefit Plans | Other | Total | Foreign Currency Translation Attributable to Noncontrolling Interests | AOCE Attributable to W.W. Grainger, Inc. |
Balance at January 1, 2015, net of tax | $ | (122,320 | ) | $ | 8,148 |
| $ | (3,302 | ) | $ | (2,185 | ) | $ | (119,659 | ) | $ | (22,986 | ) | $ | (96,673 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | (154,096 | ) | 30,451 |
| 641 |
| 1,300 |
| (121,704 | ) | (532 | ) | (121,172 | ) |
Amounts reclassified to Warehousing, marketing and administrative expenses | — |
| (5,289 | ) | — |
| — |
| (5,289 | ) | — |
| (5,289 | ) |
Amounts reclassified to Income Taxes | — |
| 2,043 |
| — |
| — |
| 2,043 |
| — |
| 2,043 |
|
Net current period activity | $ | (154,096 | ) | $ | 27,205 |
| $ | 641 |
| $ | 1,300 |
| $ | (124,950 | ) | $ | (532 | ) | $ | (124,418 | ) |
Balance at December 31, 2015, net of tax | $ | (276,416 | ) | $ | 35,353 |
| $ | (2,661 | ) | $ | (885 | ) | $ | (244,609 | ) | $ | (23,518 | ) | $ | (221,091 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | (38,729 | ) | (6,022 | ) | (2,397 | ) | 885 |
| (46,263 | ) | 906 |
| (47,169 | ) |
Amounts reclassified to Warehousing, marketing and administrative expenses | — |
| (6,559 | ) | — |
| — |
| (6,559 | ) | — |
| (6,559 | ) |
Amounts reclassified to Income Taxes | — |
| 2,525 |
| — |
| — |
| 2,525 |
| — |
| 2,525 |
|
Net current period activity | $ | (38,729 | ) | $ | (10,056 | ) | $ | (2,397 | ) | $ | 885 |
| $ | (50,297 | ) | $ | 906 |
| $ | (51,203 | ) |
Balance at December 31, 2016, net of tax | $ | (315,145 | ) | $ | 25,297 |
| $ | (5,058 | ) | $ | — |
| $ | (294,906 | ) | $ | (22,612 | ) | $ | (272,294 | ) |
Other comprehensive earnings (loss) before reclassifications, net of tax | 75,193 |
| 86,069 |
| 456 |
| — |
| 161,718 |
| 3,677 |
| 158,041 |
|
Amounts reclassified to Warehousing, marketing and administrative expenses | 17,518 |
| (10,007 | ) | — |
| — |
| 7,511 |
| — |
| 7,511 |
|
Amounts reclassified to Income Taxes | — |
| (27,932 | ) | — |
| — |
| (27,932 | ) | — |
| (27,932 | ) |
Net current period activity | 92,711 |
| 48,130 |
| 456 |
| — |
| 141,297 |
| 3,677 |
| 137,620 |
|
Balance at December 31, 2017, net of tax | $ | (222,434 | ) | $ | 73,427 |
| $ | (4,602 | ) | $ | — |
| $ | (153,609 | ) | $ | (18,935 | ) | $ | (134,674 | ) |
NOTE 1413 - INCOME TAXES
Income tax expense (benefit) consisted of the following (in thousands of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current provision: | | | | | |
U.S. Federal | $ | 248,090 |
|
| $ | 310,582 |
|
| $ | 412,545 |
|
U.S. State | 28,693 |
|
| 38,249 |
|
| 49,894 |
|
Foreign | 22,057 |
|
| 25,076 |
|
| 24,087 |
|
Total current | 298,840 |
| | 373,907 |
| | 486,526 |
|
Deferred tax provision (benefit) | 14,041 |
| | 12,313 |
| | (20,995 | ) |
Total provision | $ | 312,881 |
| | $ | 386,220 |
| | $ | 465,531 |
|
Earnings (losses) before income taxes by geographical area consisted of the following (in thousandsmillions of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
U.S. | $ | 1,226 |
| | $ | 1,163 |
| | $ | 971 |
|
Foreign | (17 | ) | | (82 | ) | | (35 | ) |
Total | $ | 1,209 |
| | $ | 1,081 |
| | $ | 936 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | 970,892 |
|
| $ | 1,073,879 |
|
| $ | 1,203,880 |
|
Foreign | (35,568 | ) |
| (54,821 | ) |
| 46,825 |
|
| $ | 935,324 |
| | $ | 1,019,058 |
| | $ | 1,250,705 |
|
Income tax expense consisted of the following (in millions of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Current income tax expense: | | | | | |
U.S. Federal | $ | 199 |
| | $ | 166 |
| | $ | 248 |
|
U.S. State | 44 |
| | 32 |
| | 29 |
|
Foreign | 58 |
| | 47 |
| | 22 |
|
Total current | 301 |
| | 245 |
| | 299 |
|
Deferred income tax expense | 13 |
| | 13 |
| | 14 |
|
Total income tax expense | $ | 314 |
| | $ | 258 |
| | $ | 313 |
|
The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) asset as of December 31, 20172019 and 20162018 were as follows (in thousandsmillions of dollars):
|
| | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
Deferred tax assets: | | | |
Accrued expenses | $ | 86 |
| | $ | 35 |
|
Foreign operating loss carryforwards | 67 |
| | 64 |
|
Accrued employment-related benefits | 49 |
| | 49 |
|
Tax credit carryforward | 22 |
| | 22 |
|
Other | 12 |
| | 11 |
|
Deferred tax assets | 236 |
| | 181 |
|
Less valuation allowance | (72 | ) | | (72 | ) |
Deferred tax assets, net of valuation allowance | $ | 164 |
| | $ | 109 |
|
Deferred tax liabilities: | | | |
Property, buildings and equipment | (134 | ) | | (44 | ) |
Intangibles | (83 | ) | | (105 | ) |
Prepaids | (6 | ) | | (6 | ) |
Other | (6 | ) | | (8 | ) |
Deferred tax liabilities | (229 | ) | | (163 | ) |
Net deferred tax liability | $ | (65 | ) | | $ | (54 | ) |
| | | |
The net deferred tax asset (liability) is classified as follows: | | | |
Noncurrent assets | $ | 11 |
| | $ | 12 |
|
Noncurrent liabilities | (76 | ) | | (66 | ) |
Net deferred tax liability | $ | (65 | ) | | $ | (54 | ) |
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Inventory | $ | 13,641 |
| | $ | 30,030 |
|
Accrued expenses | 43,889 |
| | 70,021 |
|
Accrued employment-related benefits | 63,029 |
| | 124,556 |
|
Foreign operating loss carryforwards | 72,197 |
| | 67,350 |
|
Tax credit carryforward | 20,201 |
| | 8,625 |
|
Other | 8,350 |
| | 13,631 |
|
Deferred tax assets | 221,307 |
| | 314,213 |
|
Less valuation allowance | (83,847 | ) | | (72,705 | ) |
Deferred tax assets, net of valuation allowance | $ | 137,460 |
| | $ | 241,508 |
|
Deferred tax liabilities: | | | |
Property, buildings and equipment | (33,342 | ) | | (75,690 | ) |
Intangibles | (119,302 | ) | | (127,292 | ) |
Software | (19,903 | ) | | (25,431 | ) |
Prepaids | (6,109 | ) | | (11,959 | ) |
Other | (3,521 | ) | | (1,067 | ) |
Deferred tax liabilities | (182,177 | ) | | (241,439 | ) |
Net deferred tax (liability) asset | $ | (44,717 | ) | | $ | 69 |
|
| | | |
The net deferred tax (liability) asset is classified as follows: | | | |
Noncurrent assets | $ | 22,362 |
| | $ | 64,775 |
|
Noncurrent liabilities (foreign) | (67,079 | ) | | (64,706 | ) |
Net deferred tax (liability) asset | $ | (44,717 | ) | | $ | 69 |
|
At December 31, 2017,2019 the Company had $285$286 million of net operating loss (NOLs) carryforwards related primarily to foreign operations. Some of the operating loss carryforwards may expire at various dates through 2037.2039. The Company
has recorded a valuation allowance, which represents a provision for uncertainty as to the realization of the tax benefits of these carryforwards and deferred tax assets that may not be realized. The Company's valuation allowance changed as follows (in thousandsmillions of dollars):
|
| | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 |
Balance at beginning of period | $ | (72 | ) | | $ | (84 | ) |
Increases primarily related to foreign NOLs | (9 | ) | | (3 | ) |
Releases related to foreign NOLs | 10 |
| | 16 |
|
Increase related to U.S. foreign tax credits | (1 | ) | | (1 | ) |
Balance at end of period | $ | (72 | ) | | $ | (72 | ) |
|
| | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 72,705 |
| | $ | 62,333 |
|
Increases primarily related to foreign NOLs | 12,861 |
| | 12,174 |
|
Releases related to foreign NOLs | (8,035 | ) | | (3,870 | ) |
Other changes, net | (4,703 | ) | | (6,557 | ) |
Increase related to U.S. foreign tax credits | 11,019 |
| | 8,625 |
|
Balance at end of period | $ | 83,847 |
| | $ | 72,705 |
|
A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in thousandsmillions of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Federal income tax | $ | 254 |
| | $ | 227 |
| | $ | 327 |
|
State income taxes, net of federal income tax benefit | 36 |
| | 32 |
| | 20 |
|
Clean energy credit | — |
| | (20 | ) | | (38 | ) |
Foreign rate difference | 25 |
| | 20 |
| | 10 |
|
Goodwill impairment | — |
| | 20 |
| | — |
|
U.S. tax legislation impact | — |
| | — |
| | (3 | ) |
Excess tax benefits from stock-based compensation | (2 | ) | | (15 | ) | | (14 | ) |
Other - net | 1 |
| | (6 | ) | | 11 |
|
Income tax expense | $ | 314 |
| | $ | 258 |
| | $ | 313 |
|
Effective tax rate | 26.0 | % | | 23.9 | % | | 33.5 | % |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal income tax | $ | 327,363 |
|
| $ | 356,670 |
|
| $ | 437,746 |
|
State income taxes, net of federal income tax benefit | 19,850 |
|
| 25,993 |
|
| 29,507 |
|
Clean energy credit | (37,138 | ) | | (28,670 | ) | | (13,358 | ) |
Foreign rate difference | 9,371 |
| | 21,077 |
| | 12,041 |
|
U.S. tax legislation impact (see note below) | (3,164 | ) | | — |
| | — |
|
Other - net | (3,401 | ) |
| 11,150 |
|
| (405 | ) |
Income tax expense | $ | 312,881 |
| | $ | 386,220 |
| | $ | 465,531 |
|
Effective tax rate | 33.5 | % |
| 37.9 | % |
| 37.2 | % |
Clean Energy Credit
In 2015 and 2016, the Company acquired noncontrolling interests in limited liability companies established to produce refined coal. The production and sale of refined coal that results in required emission reductions is eligible for tax credits under Section 45 of the Internal Revenue Code. The Company receives tax credits in proportion to its equity interest. The income tax credits from the investment resulted in a 4.0, 2.8 and a 1.0 percentage point reduction to the overall effective tax rate for 2017, 2016 and 2015, respectively.
U.S. Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law, which significantly revised the U.S. corporate income tax system by lowering corporate income tax rates from 35% to 21% effective January 1, 2018, allowing accelerated expensing of qualified capital investments for a specific period, limiting net interest expense deductions and transitioning the U.S. international taxation from a worldwide to a territorial tax system that requires a one-time transition tax on unremitted earnings of certain foreign subsidiaries that were previously tax deferred, among other changes.
As of December 31, 2017, the Company has not fully completed the accounting for the impact from the Tax Act. However, the Company determined a reasonable estimate of such impact per the guidance in Staff Accounting Bulletin (SAB) 118 issued by the Securities and Exchange Commission (SEC) on December 22, 2017 and recognized a net provisional benefit amount of $3.2 million included as a component of income tax expense for the year ended December 31, 2017 and primarily related to deferred tax balances revaluations and one-time transition tax.
The Company remeasured deferred assets and liabilities based on the rates at which they are expected to reverse in the future in consideration of the reduced income tax rates and recognized a net provisional benefit of $5.2 million for the year ended December 31, 2017. Certain aspects of the Tax Act cannot be fully completed at this time, mainly the full determination of assets placed in service in September 2017 or after for tax expensing purposes, the comprehensive evaluation of executive compensation contracts for tax deductibility purposes and the understanding of state tax implications. The Company expects to complete this analysis in 2018, which may potentially affect the remeasurement of the related deferred tax amounts.
The Company estimated the one-time transition tax and recognized a net provisional expense of $2 million for the year ended December 31, 2017. The one-time transition tax calculation includes a $47 million estimated tax obligation related to the Company’s estimated total gross post-1986 earnings and profits (E&P) of $472 million that were previously deferred from U.S. income taxes, net of estimated foreign tax credits of $45 million. As of December 31, 2017, the Company has not completed its final calculation of the total post-1986 E&P for all foreign subsidiaries and any state tax impact. The amounts may change when the Company finalizes these calculations in 2018.
Foreign Undistributed Earnings
Estimated gross undistributed earnings of foreign subsidiaries at December 31, 2017,2019, amounted to $472$402 million. These gross earnings are included in the U.S. one-time transition tax calculation in 2017 as aforementioned. The Company considers these undistributed earnings permanently reinvested in its foreign operations and is not recording a deferred tax liability for any foreign withholding taxes on such amounts. The Company's permanent reinvestment assertion has not changed following the enactment of the 2017 Tax Cuts and Jobs Act. If at some future date the Company ceases to be
permanently reinvested in its foreign subsidiaries, the Company may be subject to foreign withholding and other taxes on these undistributed earnings and may need to record a deferred tax liability for any outside basis difference in its investments in its foreign subsidiaries.
Tax Uncertainties
The Company recognizes in the financial statements a provision for tax uncertainties, resulting from application of complex tax regulations in multiple tax jurisdictions. The changes in the liability for tax uncertainties, excluding interest, are as follows (in thousandsmillions of dollars):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Balance at beginning of year | $ | 37 |
| | $ | 45 |
| | $ | 59 |
|
Additions for tax positions related to the current year | 3 |
| | 4 |
| | 4 |
|
Additions for tax positions of prior years | 1 |
| | 3 |
| | 5 |
|
Reductions for tax positions of prior years | (1 | ) | | (5 | ) | | (13 | ) |
Reductions due to statute lapse | (10 | ) | | (9 | ) | | (5 | ) |
Settlements, audit payments, refunds - net | (2 | ) | | (1 | ) | | (5 | ) |
Balance at end of year | $ | 28 |
| | $ | 37 |
| | $ | 45 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 58,681 |
| | $ | 60,576 |
| | $ | 45,126 |
|
Additions for tax positions related to the current year | 3,930 |
| | 14,119 |
| | 14,916 |
|
Additions for tax positions of prior years | 4,786 |
| | 13,215 |
| | 2,653 |
|
Reductions for tax positions of prior years | (12,417 | ) | | (14,774 | ) | | (1,616 | ) |
Reductions due to statute lapse | (5,098 | ) | | (1,527 | ) | | (402 | ) |
Settlements, audit payments, refunds - net | (5,215 | ) | | (12,928 | ) | | (101 | ) |
Balance at end of year | $ | 44,667 |
| | $ | 58,681 |
| | $ | 60,576 |
|
The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in
this amount are $21$8 million and $22$13 million at December 31, 20172019 and 2016,2018, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Any
changes in the timing of deductibility of these items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period. Excluding the timing items, the remaining amounts would affect the annual tax rate. TheIn 2019, the changes to tax positions of prior years in 2017 related generally to the impact of expiring statutes, conclusion of audits and audit settlements. The changes to tax positions of prior years in 2016 related generally to the impact of conclusion of auditsEstimated interest and audit settlements.penalties were not material.
The Company regularly undergoes examination of its federal income tax returns by the Internal Revenue Service (IRS). In 2017, the Company settled the 2011 and 2012 federal audits with the IRS Appeals Office.Service. The statute of limitations expired for the Company's 20132015 federal tax return. Thereturn while tax years 20142016 through 20172019 are open. The Company is also subject to audit by state, local and foreign taxing authorities.Tax years 2002-20172012-2019 remain subject to state and local audits and 2006-20172007-2019 remain subject to foreign audits.The amount of liability associated with the Company's tax uncertainties may change within the next 12 months due to the pending audit activity, expiring statutes or tax payments. A reasonable estimate of such change cannot be made.
The Company recognizes interest expense and penalties related to its tax uncertainties in the provision for income taxes. For the years ended December 31, 2017, 2016 and 2015, the Company recognized an expense of approximately $1 million for each year. Total accrued interest and penalties related to tax uncertainties as of December 31, 2017, 2016 and 2015, were approximately $5 million, $4 million and $5 million, respectively.
NOTE 15 - EARNINGS PER SHARE
Certain of the Company’s stock incentive plans grant stock awards that contain nonforfeitable rights to dividends meet the criteria of a participating security. Under the two-class method, earnings are allocated between common stock and participating securities. The presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities. As such, the Company presents basic and diluted earnings per share for its one class of common stock.
The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. The Company’s reported net earnings are reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.
The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. The Company has determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Net earnings attributable to W.W. Grainger, Inc. as reported | $ | 585,730 |
| | $ | 605,928 |
| | $ | 768,996 |
|
Distributed earnings available to participating securities | (2,005 | ) | | (2,383 | ) | | (2,823 | ) |
Undistributed earnings available to participating securities | (2,678 | ) | | (3,044 | ) | | (4,735 | ) |
Numerator for basic earnings per share - Undistributed and distributed earnings available to common shareholders | 581,047 |
| | 600,501 |
| | 761,438 |
|
Undistributed earnings allocated to participating securities | 2,678 |
| | 3,044 |
| | 4,735 |
|
Undistributed earnings reallocated to participating securities | (2,663 | ) | | (3,023 | ) | | (4,692 | ) |
Numerator for diluted earnings per share - Undistributed and distributed earnings available to common shareholders | $ | 581,062 |
| | $ | 600,522 |
| | $ | 761,481 |
|
| | | | | |
Denominator for basic earnings per share – weighted average shares | 57,674,977 |
| | 60,430,892 |
| | 65,156,864 |
|
Effect of dilutive securities | 308,190 |
| | 409,038 |
| | 608,257 |
|
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | 57,983,167 |
| | 60,839,930 |
| | 65,765,121 |
|
Earnings per share two-class method | |
| | |
| | |
Basic | $ | 10.07 |
| | $ | 9.94 |
| | $ | 11.69 |
|
Diluted | $ | 10.02 |
| | $ | 9.87 |
| | $ | 11.58 |
|
NOTE 1614 - SEGMENT INFORMATION
Grainger’s two2 reportable segments are the U.S. and Canada. The U.S. operating segment reflectsThese reportable segments reflect the results of Grainger's U.S. businesses. The Canada operating segment reflects the results for Acklands-Grainger, Inc. and its subsidiaries.Company's high-touch solutions businesses in those geographies. 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 high-tough solutions businesses in Europe Asia and Latin America.Mexico. These businesses individually do not meet the criteria of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of MRO supplies, as service revenues account for approximately 1% of total revenues for each operating segment.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to a related party sale. The segment results include certain centrally incurred costs for shared services that are charged to the segments based upon the relative level of service used by each operating segment.
Following is a summary of segment results (in thousandsmillions of dollars):
| | | 2017 | 2019 |
| United States | | Canada | | Other businesses | | Total | United States | | Canada | | Total Reportable Segments | | Other businesses | | Total |
Total net sales | $ | 7,960,075 |
|
| $ | 752,900 |
|
| $ | 2,120,303 |
| | $ | 10,833,278 |
| $ | 8,815 |
| | $ | 529 |
| | $ | 9,344 |
| | $ | 2,651 |
| | $ | 11,995 |
|
Intersegment net sales | (403,824 | ) |
| (35 | ) |
| (4,561 | ) | | (408,420 | ) | (505 | ) | | — |
| | (505 | ) | | (4 | ) | | (509 | ) |
Net sales to external customers | 7,556,251 |
| | 752,865 |
| | 2,115,742 |
| | 10,424,858 |
| $ | 8,310 |
| | $ | 529 |
| | $ | 8,839 |
| | $ | 2,647 |
| | 11,486 |
|
| | | | | | | | | | | | | | | | |
Segment operating earnings | 1,213,138 |
|
| (76,538 | ) |
| 55,633 |
| | 1,192,233 |
| $ | 1,391 |
| | $ | 3 |
| | $ | 1,394 |
| | $ | (9 | ) | | $ | 1,385 |
|
|
|
|
|
|
|
|
|
| | | |
Segment assets | 2,309,734 |
|
| 278,633 |
|
| 605,452 |
| | 3,193,819 |
| |
Depreciation and amortization | 168,862 |
|
| 18,965 |
|
| 31,016 |
| | 218,843 |
| |
Additions to long-lived assets | $ | 187,384 |
|
| $ | 7,594 |
|
| $ | 61,735 |
| | $ | 256,713 |
| |
| | | 2016 | 2018 |
| United States | | Canada | | Other businesses | | Total | United States | | Canada | | Total Reportable Segments | | Other businesses | | Total |
Total net sales | $ | 7,870,105 |
|
| $ | 733,829 |
|
| $ | 1,884,963 |
|
| $ | 10,488,897 |
| $ | 8,588 |
| | $ | 653 |
| | $ | 9,241 |
| | $ | 2,441 |
| | $ | 11,682 |
|
Intersegment net sales | (347,468 | ) |
| (110 | ) |
| (4,115 | ) |
| (351,693 | ) | (457 | ) | | — |
| | (457 | ) | | (4 | ) | | (461 | ) |
Net sales to external customers | 7,522,637 |
|
| 733,719 |
|
| 1,880,848 |
|
| 10,137,204 |
| $ | 8,131 |
| | $ | 653 |
| | $ | 8,784 |
| | $ | 2,437 |
| | $ | 11,221 |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | |
Segment operating earnings | 1,274,851 |
|
| (65,362 | ) |
| 40,684 |
|
| 1,250,173 |
| $ | 1,338 |
| | $ | (49 | ) | | $ | 1,289 |
| | $ | 8 |
| | $ | 1,297 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Segment assets | 2,275,009 |
|
| 286,035 |
|
| 494,067 |
|
| 3,055,111 |
| |
Depreciation and amortization | 159,334 |
|
| 18,050 |
|
| 23,792 |
|
| 201,176 |
| |
Additions to long-lived assets | $ | 153,556 |
|
| $ | 12,275 |
|
| $ | 95,288 |
|
| $ | 261,119 |
| |