Grainger receives ratings from two independent credit ratings agencies: Moody's Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating agencies currently rate ourthe Company's corporate credit at investment grade.
Grainger has recorded a noncurrent liability of approximately $32 million for tax uncertainties and interest at December 31, 2019. This amount is excluded from the table above, as Grainger cannot predict the timing of these cash payments by period. See Note 13 to the Financial Statements.
Off-Balance Sheet Arrangements
Grainger does not have any material off-balance sheet arrangements.
Critical Accounting Estimates
The methods,preparation of Grainger’s Consolidated Financial Statements and accompanying notes are in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make assumptions and estimates that used in applyingaffect the Company’s accounting policies may require the application of judgments regarding matters that are inherently uncertain.reported amounts. The Company considers an accounting policy to be a critical estimate if: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on Grainger’s consolidated financial position and results. While the Company believes that estimates,the assumptions and judgmentsestimates used are reasonable, they are basedthe Company’s management bases its estimates on information available whenhistorical experience and on various other assumptions it believes to be reasonable under the estimate was made. Seecircumstances. Note 1 of the Notes to theConsolidated Financial Statements for further information onin Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s critical accounting estimates, whichConsolidated Financial Statements.
Inventories
Company inventories primarily consist of merchandise purchased for resale and are as follows:
Inventory: Inventory reflectedvalued at the lower of cost or net realizable value. The majority of the Company’s inventory is accounted for using the last-in, first-out (LIFO) method. Net realizable value considering futureis based on an analysis of inventory trends including, but not limited to, reviews of inventory levels, sales and cost information and on-hand quantities relative to the sales history for the product and shelf-life. The Company's methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, liquidation or disposition history values and market conditions such as inflation and liquidation values;other acquisition costs, including freight and duties. If business or economic conditions change, estimates and assumptions may be adjusted as deemed appropriate.
Goodwill and Other Intangible Assets Impairment:
The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually during the valuation methodsfourth quarter and more frequently if impairment indicators exist. 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. The Company’s indefinite-lived intangible assets 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 estimates used to calculate the fair values of reporting units and indefinite-lived intangible assets involve the use of significant assumptions, estimates and judgments and changes from year to year based on operating results, market conditions, macroeconomic developments and other factors. Changes in these estimates and assumptions used in assessingcould materially affect the determination of fair value and impairment offor each reporting unit and indefinite-lived intangible asset. For further information on the Company's goodwill and other intangible assets; and
Contingencies: the estimation of when a contingent loss is probable and reasonably estimable.
Forward-Looking Statements
From time to time, in this Annual Report on Form 10-K, as well as in other written reports, communications and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions.
Grainger cannot guarantee that any forward-looking statement will be realized and achievement of future results is subject to risks and uncertainties, many of which are beyond the Company's control, which could cause Grainger's results to differ materially from those that are presented.
Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: higher product costs or other expenses; a major loss of customers; loss or disruption of sources of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company's gross profit percentage; the Company's responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental,advertising, product liability, safety or compliance, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards; government contract matters; disruption of information technology or data security systems involving us or third parties on which we depend; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including volatility or price declinesassets, see Note 5 of the Company's common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptionsNotes to Consolidated Financial Statements in transportation services; pandemic diseases or viral contagions; naturalPart II, Item 8: Financial Statements and other catastrophes; unanticipated and/or extreme weather conditions; lossSupplementary Data of key members of management; the Company's ability to operate, integrate and leverage acquired businesses; changes in effective tax rates; changes in credit ratings or outlook; the Company's incurrence of indebtedness and other factors identified under Item 1A: Risk Factors and elsewhere in this Form 10-K.
Caution shouldContingencies and Legal Matters
The Company is subject to various claims and legal proceedings that arise in the ordinary course of business, the outcomes of which are inherently uncertain. 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 taken notreasonably estimated. A detailed summary of the Company’s contingencies and legal matters is included in Note 15 of the Notes to place undue reliance on Grainger's forward-looking statementsConsolidated Financial Statements in Part II, Item 8: Financial Statements and Grainger undertakes no obligation to update or revise anySupplementary Data of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.this Form 10-K.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Grainger's primary market risk exposures is as follows:
Foreign Currency Exchange Rates
Grainger’s financial results, including the value of assets and liabilities, are exposed to foreign currency exchange rate risk when the financial statements of the business units outside the U.S., as stated in their local currencies, are translated into U.S. dollars. Grainger'sFor the fiscal year ended December 31, 2022, approximately 18% of the Company's net sales were denominated in a currency other than the Company's functional U.S. dollar currency. Consequently, the Company is exposed to the impact of exchange rate volatility primarily between the U.S. dollar and the Japanese yen, Canadian dollar and the British pound sterling. In February 2020, Grainger entered into certain derivative instrument agreements to manage this risk. A hypothetical 10% change in the relative value of the U.S. dollar would not materially impact the Company's net earnings exposurefor 2022.
For derivative instrument information, see Note 12 of the Notes to foreign currency exchange rates was not material for 2019.Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
Interest Rate Risks
Grainger is exposed to interest rate risk on its variable-ratelong-term debt. In February 2020, Grainger entered into certain derivative instrument agreements to hedge a portion of its fixed-rate long-term debt used to fund international businesses (See Note 7 to the Financial Statements) and it does not currently use any derivative instruments to manage these exposures. As of December 31, 2019, thethis risk. The annualized effect of a 0.1hypothetical 1 percentage point increase in interest rates on Grainger’s variable-rate debt obligations would not have a material materially impact onthe Company's net earnings.earnings for 2022.
For debt and derivative instrument information, see Note 6 and Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
Commodity Price RiskRisks
Grainger’s transportation costs are exposed to fluctuations in the price of fuel and some sourced products contain commodity-priced materials. The Company regularly monitors commodity trends and, as a broadlinebroad line supplier, mitigates any material exposure to commodity price risk by having alternative sourcing plans in place that mitigate the risk of supplier concentration, passing commodity-related inflation to customers or suppliers and continuing to scale its distribution networks, including its transportation infrastructure.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 32 to 63. See the Index to Financial Statements and Supplementary Data on page 31.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger's disclosure controls and procedures were effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting
| |
(A) | Management's Annual Report on Internal Control Over Financial Reporting |
Management's report on Grainger's internal control over financial reporting is included on page 32 of this Report under the heading Management's Annual Report on Internal Control Over Financial Reporting.
| |
(B) | Attestation Report of the Registered Public Accounting Firm |
The report from Ernst & Young LLP on its audit of the effectiveness of Grainger's internal control over financial reporting as of
December 31, 2019, is included on page 33 of this Report under the heading Report of Independent Registered Public Accounting Firm.
| |
(C) | Changes in Internal Control Over Financial Reporting |
There have been no changes in Grainger's internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial reporting.
Item 9B: Other Information
None.
PART III
Item 10: Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2020, under the captions “Nominees and Director Experience and Qualifications,” "Annual Election of Directors,” “Candidates for Board Membership,” “Board Affairs and Nominating Committee,” “Audit Committee” and “Delinquent Section 16(a) Reports.” Information required by this item regarding executive officers of Grainger is set forth in Part I, Item 1, under the caption “Information about our Executive Officers.”
Grainger has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer and controller. This code of ethics is part of Grainger’s Business Conduct Guidelines for directors, officers and employees, which is available free of charge through Grainger’s website at www.invest.grainger.com. All Grainger employees are trained and certified yearly on these guidelines. A copy of the Business Conduct Guidelines is also available in print without charge to any person upon request to Grainger's Corporate Secretary. Grainger intends to disclose on its website any amendment to any provision of the Business Conduct Guidelines that relates to any element of the definition of “code of ethics” enumerated in Item 406(b) of Regulation S-K under the Exchange Act and any waiver from any such provision granted to Grainger’s principal executive officer, principal financial officer, principal accounting officer and controller or persons performing similar functions. Grainger has also adopted Operating Principles for the Board of Directors, which are available on its website and are available in print to any person who requests them.
Item 11: Executive Compensation
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2020, under the captions “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee,” “Report of the Compensation Committee of the Board” and "Fees for Independent Compensation Consultant."
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2020, under the captions “Ownership of Grainger Stock” and “Equity Compensation Plans.”
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2020, under the captions “Director Independence,” "Annual Election of Directors" and “Transactions with Related Persons.”
Item 14: Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2020, under the caption “Audit Fees and Audit Committee Pre-Approval Policies and Procedures.”
PART IV
Item 15: Exhibits and Financial Statements Schedules
(a) Documents filed as part of this Form 10-K
| |
(1) | Financial Statements: see "Item 8: Financial Statements and Supplementary Data," on page 31 hereof, for a list of financial statements. Management's Annual Report on Internal Control Over Financial Reporting. |
| |
(2) | Financial Statement Schedules: the schedules listed in Rule 5-04 of Regulation S-X have been omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto. |
| |
(3) | Exhibits Required by Item 601 of Regulation S-K: the information required by this Item 15(a)(3) of Form 10-K is set forth on the Exhibit Index that follows the Signatures page 64 of the Form 10-K. |
Item 16: Form 10-K Summary
None.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2019, 2018 and 2017
|
| |
Page |
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING | |
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
FINANCIAL STATEMENTS | |
CONSOLIDATED STATEMENTS OF EARNINGS | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS | |
CONSOLIDATED BALANCE SHEETS | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal control over financial reporting. Grainger's internal control system was designed to provide reasonable assurance to Grainger's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.
Grainger's management assessed the effectiveness of Grainger's internal control over financial reporting as of December 31, 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). Based on its assessment under that framework and the criteria established therein, Grainger's management concluded that Grainger's internal control over financial reporting was effective as of December 31, 2019.
Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over financial reporting as of December 31, 2019, as stated in their report, which is included herein.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
W.W. Grainger, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and subsidiariesSubsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 202021, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
|
| | | | |
| Valuation of Goodwill for the Canadian Reporting Unit |
| Description of the Matter | At December 31, 2019,2022, the Company’s Canadiangoodwill balance of the Canada business reporting unit goodwill balance was $126$121 million. As discusseddiscussed in Notes 1 and 45 of the financial statements, goodwill is tested at the reporting unit level annually during the fourth quarter and more frequently if impairment indicators exist. Auditing management’s annual goodwill impairment test wasanalysis is complex and highly judgmental due to certain assumptions that are significant to the significant estimation requiredanalysis. Management performed an annual impairment analysis in assessing the fair valuefourth quarter to evaluate changes in key assumptions and results since the last impairment test. The more subjective assumptions used in the analysis were projections of the Canadian reporting unit. The fair value estimate was sensitive to significant assumptions suchfuture revenue growth, operating expenditures, changes in working capital, as well as the revenue growth expectations, future expected cash flows, and operating earnings,discount rate used, which are all affected by expectations about future market or economic conditions. |
| How We Addressed the Matter in Our Audit | Our audit procedures included, among others obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment review process,analysis, including controls over management’s review of the significant assumptions described above. |
| To test the estimated fair valuemanagement’s annual goodwill impairment analysis of the Company’s CanadianCanada business reporting unit, we performed audit procedures that included, among others, assessing methodologies and involving our valuation specialists to assist in testingevaluating the significantkey assumptions and testingresults considering the completenessrelevant events and accuracy ofcircumstances identified since the underlying data used bydate the Company in its analysis.last fair value calculation. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix, and other relevant factors. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions.assumptions utilized in the last quantitative assessment. In addition, we reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company.Company and tested the completeness and accuracy of the underlying data used by management in its analysis. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2005.
Chicago, Illinois
February 20, 202021, 2023
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except for per share amounts)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Net sales | $ | 15,228 | | | $ | 13,022 | | | $ | 11,797 | |
| Cost of goods sold | 9,379 | | | 8,302 | | | 7,559 | |
| Gross profit | 5,849 | | | 4,720 | | | 4,238 | |
| Selling, general and administrative expenses | 3,634 | | | 3,173 | | | 3,219 | |
| Operating earnings | 2,215 | | | 1,547 | | | 1,019 | |
| Other (income) expense: | | | | | |
| Interest expense – net | 93 | | | 87 | | | 93 | |
| Other – net | (24) | | | (25) | | | (21) | |
| Total other expense – net | 69 | | | 62 | | | 72 | |
| Earnings before income taxes | 2,146 | | | 1,485 | | | 947 | |
| Income tax provision | 533 | | | 371 | | | 192 | |
| Net earnings | 1,613 | | | 1,114 | | | 755 | |
| Less net earnings attributable to noncontrolling interest | 66 | | | 71 | | | 60 | |
| Net earnings attributable to W.W. Grainger, Inc. | $ | 1,547 | | | $ | 1,043 | | | $ | 695 | |
| Earnings per share: | | | | | |
| Basic | $ | 30.22 | | | $ | 19.94 | | | $ | 12.88 | |
| Diluted | $ | 30.06 | | | $ | 19.84 | | | $ | 12.82 | |
| Weighted average number of shares outstanding: | | | | | |
| Basic | 50.9 | | | 51.9 | | | 53.5 | |
| Diluted | 51.1 | | | 52.2 | | | 53.7 | |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net earnings | $ | 1,613 | | | $ | 1,114 | | | $ | 755 | |
| Other comprehensive earnings (losses): | | | | | |
| Foreign currency translation adjustments – net of reclassification to earnings (see Note 2 and Note 11) | (101) | | | (64) | | | 83 | |
| | | | | |
| Postretirement benefit plan (losses) gains – net of tax benefit (expense) of $6, $—, and $(7), respectively (see Note 7 and Note 11) | (17) | | | — | | | 22 | |
| | | | | |
| Total other comprehensive earnings (losses) | (118) | | | (64) | | | 105 | |
| Comprehensive earnings – net of tax | 1,495 | | | 1,050 | | | 860 | |
| Less comprehensive earnings (losses) attributable to noncontrolling interest | | | | | |
| Net earnings | 66 | | | 71 | | | 60 | |
| Foreign currency translation adjustments | (34) | | | (29) | | | 12 | |
| Total comprehensive earnings (losses) attributable to noncontrolling interest | 32 | | | 42 | | | 72 | |
| Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 1,463 | | | $ | 1,008 | | | $ | 788 | |
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 | 2022 | | 2021 |
| Current assets | | | |
| Cash and cash equivalents | $ | 325 | | | $ | 241 | |
| Accounts receivable (less allowance for credit losses of $36 and $30, respectively) | 2,133 | | | 1,754 | |
| Inventories – net | 2,253 | | | 1,870 | |
| Prepaid expenses and other current assets | 266 | | | 146 | |
| Total current assets | 4,977 | | | 4,011 | |
| Property, buildings and equipment – net | 1,461 | | | 1,424 | |
| Goodwill | 371 | | | 384 | |
| Intangibles – net | 232 | | | 238 | |
| Operating lease right-of-use | 367 | | | 393 | |
| Other assets | 180 | | | 142 | |
| Total assets | $ | 7,588 | | | $ | 6,592 | |
| | | |
| Liabilities and shareholders' equity | |
| Current liabilities | | | |
| | | |
| Current maturities | 35 | | | — | |
| Trade accounts payable | 1,047 | | | 816 | |
| Accrued compensation and benefits | 334 | | | 319 | |
| Operating lease liability | 68 | | | 66 | |
| Accrued expenses | 474 | | | 290 | |
| Income taxes payable | 52 | | | 37 | |
| Total current liabilities | 2,010 | | | 1,528 | |
| Long-term debt | 2,284 | | | 2,362 | |
| Long-term operating lease liability | 318 | | | 334 | |
| Deferred income taxes and tax uncertainties | 121 | | | 121 | |
| Other non-current liabilities | 120 | | | 87 | |
| 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 | 1,310 | | | 1,270 | |
| Retained earnings | 10,700 | | | 9,500 | |
| Accumulated other comprehensive losses | (180) | | | (96) | |
| Treasury stock, at cost – 59,402,896 and 58,439,014 shares, respectively | (9,445) | | | (8,855) | |
| Total W.W. Grainger, Inc. shareholders’ equity | 2,440 | | | 1,874 | |
| Noncontrolling interest | 295 | | | 286 | |
| Total shareholders' equity | 2,735 | | | 2,160 | |
| Total liabilities and shareholders' equity | $ | 7,588 | | | $ | 6,592 | |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net earnings | $ | 1,613 | | | $ | 1,114 | | | $ | 755 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
| Provision for credit losses | 19 | | | 18 | | | 22 | |
| Deferred income taxes and tax uncertainties | 8 | | | 27 | | | (5) | |
| Depreciation and amortization | 217 | | | 185 | | | 182 | |
| Impairment of goodwill, intangible and other assets | 7 | | | — | | | 187 | |
| Net (gains) losses from sales of assets and business divestitures | (14) | | | (6) | | | 106 | |
| Stock-based compensation | 48 | | | 42 | | | 46 | |
| | | | | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | (436) | | | (324) | | | (121) | |
| Inventories | (412) | | | (152) | | | (158) | |
| Prepaid expenses and other assets | (158) | | | (15) | | | (23) | |
| Trade accounts payable | 225 | | | 54 | | | 80 | |
| Accrued liabilities | 200 | | | 43 | | | 15 | |
| Income taxes – net | 42 | | | (26) | | | 24 | |
| Other non-current liabilities | (26) | | | (23) | | | 13 | |
| | | | | |
| Net cash provided by operating activities | 1,333 | | | 937 | | | 1,123 | |
| Cash flows from investing activities: | | | | | |
| Additions to property, buildings, equipment and intangibles | (256) | | | (255) | | | (197) | |
| Proceeds from sale or redemption of assets | 28 | | | 29 | | | 20 | |
| Other – net | (35) | | | — | | | (2) | |
| | | | | |
| | | | | |
| Net cash used in investing activities | (263) | | | (226) | | | (179) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from short-term debt | 16 | | | — | | | 12 | |
| Payments of short-term debt | (15) | | | — | | | (65) | |
| Proceeds from long-term debt | — | | | — | | | 1,584 | |
| Payments of long-term debt | — | | | (8) | | | (1,370) | |
| Proceeds from stock options exercised | 26 | | | 48 | | | 70 | |
| | | | | |
| Payments for employee taxes withheld from stock awards | (23) | | | (30) | | | (18) | |
| Purchases of treasury stock | (603) | | | (695) | | | (601) | |
| Cash dividends paid | (370) | | | (357) | | | (338) | |
| Other – net | (3) | | | 3 | | | — | |
| Net cash used in financing activities | (972) | | | (1,039) | | | (726) | |
| Exchange rate effect on cash and cash equivalents | (14) | | | (16) | | | 7 | |
| Net change in cash and cash equivalents | 84 | | | (344) | | | 225 | |
| Cash and cash equivalents at beginning of year | 241 | | | 585 | | | 360 | |
| Cash and cash equivalents at end of period | $ | 325 | | | $ | 241 | | | $ | 585 | |
| Supplemental cash flow information: | | | | | |
Cash payments for interest (net of amounts capitalized) | $ | 91 | | | $ | 87 | | | $ | 94 | |
| Cash payments for income taxes | $ | 479 | | | $ | 377 | | | $ | 180 | |
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock | Noncontrolling
Interest | Total |
| Balance at January 1, 2020 | $ | 55 | | $ | 1,182 | | $ | 8,405 | | $ | (154) | | $ | (7,633) | | $ | 205 | | $ | 2,060 | |
| Stock-based compensation | — | | 49 | | — | | — | | 49 | | — | | 98 | |
| Purchases of treasury stock | — | | — | | — | | — | | (600) | | (1) | | (601) | |
| Net earnings | — | | — | | 695 | | — | | — | | 60 | | 755 | |
| Other comprehensive earnings (losses) | — | | — | | — | | 93 | | — | | 12 | | 105 | |
| Capital contribution | — | | 7 | | — | | — | | — | | 7 | | 14 | |
| | | | | | | |
| Cash dividends paid ($5.94 per share) | — | | 1 | | (321) | | — | | — | | (18) | | (338) | |
| Balance at December 31, 2020 | $ | 55 | | $ | 1,239 | | $ | 8,779 | | $ | (61) | | $ | (8,184) | | $ | 265 | | $ | 2,093 | |
| Stock-based compensation | — | | 31 | | — | | — | | 28 | | 1 | | 60 | |
| Purchases of treasury stock | — | | — | | — | | — | | (699) | | (1) | | (700) | |
| Net earnings | — | | — | | 1,043 | | — | | — | | 71 | | 1,114 | |
| Other comprehensive earnings (losses) | — | | — | | — | | (35) | | — | | (29) | | (64) | |
| Reclassification due to the adoption of ASU 2019-12 | — | | — | | 12 | | — | | — | | — | | 12 | |
| Capital contribution | — | | — | | — | | — | | — | | 2 | | 2 | |
| Cash dividends paid ($6.39 per share) | — | | — | | (334) | | — | | — | | (23) | | (357) | |
| Balance at December 31, 2021 | $ | 55 | | $ | 1,270 | | $ | 9,500 | | $ | (96) | | $ | (8,855) | | $ | 286 | | $ | 2,160 | |
| Stock-based compensation | — | | 40 | | — | | — | | 12 | | 1 | | 53 | |
| Purchases of treasury stock | — | | — | | — | | — | | (602) | | (1) | | (603) | |
| Net earnings | — | | — | | 1,547 | | — | | — | | 66 | | 1,613 | |
| Other comprehensive earnings (losses) | — | | — | | — | | (84) | | — | | (34) | | (118) | |
| | | | | | | |
| Cash dividends paid ($6.78 per share) | — | | — | | (347) | | — | | — | | (23) | | (370) | |
| Balance at December 31, 2022 | $ | 55 | | $ | 1,310 | | $ | 10,700 | | $ | (180) | | $ | (9,445) | | $ | 295 | | $ | 2,735 | |
The accompanying notes are an integral part of these financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
W.W. Grainger, Inc. is a broad line distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
Principles of Consolidation
The Consolidated 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, the endless assortment business in Japan, with the residual representing the noncontrolling interest.
The Company reports MonotaRO on a one-month calendar lag allowing for the timely preparation of financial statements. This one-month reporting lag is with the exception of significant transactions or events that occur during the intervening period.
Use of Estimates
The preparation of the Company's Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions affecting reported amounts in the Consolidated Financial Statements and accompanying notes. Actual results may 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. Translation gains or losses are recorded as a separate component of other comprehensive earnings (losses).
Revenue Recognition
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 services, which are distinct and accounted for as separate performance obligations and are satisfied when the services are rendered. Total service revenue is not material and accounted for approximately 1% of the Company's revenue for the years ended December 31, 2022, 2021 and 2020.
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. Variable considerations include rights to return products and sales incentives, which primarily consist of volume rebates. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels. Total accrued sales returns were approximately $38 million and $34 million as of December 31, 2022 and 2021, respectively, and are reported as a reduction of Accounts receivable – net. Total accrued sales incentives were approximately $102 million and $73 million as of December 31, 2022 and 2021, respectively, and are reported as part of Accrued expenses.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the 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, 2022 and 2021.
Cost of Goods Sold (COGS)
COGS, exclusive of depreciation and amortization, includes the purchase cost of goods sold net of vendor considerations, in-bound shipping costs, outbound shipping and handling costs and service costs. The Company receives vendor considerations, such as rebates to promote their products, which are generally recorded as a reduction to COGS. Rebates earned from vendors that are based on product purchases are capitalized into inventory and rebates earned based on products sold are credited directly to COGS.
Selling, General and Administrative Expenses (SG&A)
Company SG&A is primarily comprised of depreciation and amortization, compensation and benefit costs, indirect purchasing, supply chain and branch operations, technology, leases, restructuring, impairments, advertising and selling expenses, as well as other types of general and administrative costs.
Advertising
Advertising costs, which include online marketing, are generally expensed in the year the related advertisement is first presented or when incurred. Total advertising expense was $519 million, $402 million and $319 million for 2022, 2021 and 2020, respectively.
Stock Incentive Plans
The Company measures all share-based payments using fair-value-based methods and records compensation expense on a straight-line basis over the vesting periods, net of estimated forfeitures.
Income Taxes
The Company recognizes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis 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 years in which those tax assets 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.
The Company 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 penalties to its tax uncertainties in the provision for income taxes.
Other Comprehensive Earnings (Losses)
The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments 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.
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. Also, the Company has a broad customer base representing many diverse industries across North America, Japan and U.K. Consequently, no significant concentration of credit risk is considered to exist.
Accounts Receivable and Allowance for Credit Losses
The Company’s accounts receivable arises primarily from sales on credit to customers and are stated at their estimated net realizable value. The Company establishes allowances for credit losses on customer accounts that are potentially uncollectible. These allowances are determined based on several factors, including the age of the receivables, historical collection trends and economic conditions that may have an impact on a specific industry, group of customers or a specific customer.
The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.
Inventories
Company inventories primarily consist of merchandise purchased for resale, and they are valued at the lower of cost or net realizable value. The Company uses the last-in, first-out (LIFO) method to account for approximately 73% of total inventory and the first-in, first-out (FIFO) method for the remaining inventory. The Company regularly reviews inventory to evaluate continued demand and records excess and obsolete provisions representing the difference between excess and obsolete inventories and net realizable value. Estimated net realizable value considers 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 Company’s inventories, they would have been $693 million and $510 million higher than reported as of December 31, 2022 and December 31, 2021, respectively. Concurrently, net earnings would have increased by $139 million, $49 million and $15 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Property, Buildings and Equipment
Property, buildings and equipment are stated at cost, less accumulated depreciation. Depreciation is computed over the estimated useful lives of the asset classes using the straight-line method. Useful lives for buildings, structures and improvements range from 10 to 50 years and furniture, fixtures, machinery and equipment from three to 15 years. Amounts expended for maintenance and repairs are charged to expense as incurred.
Historically, Grainger had depreciated certain property, buildings and equipment using both the declining balance and sum-of-the-years’ digits methods as well as certain buildings over estimated useful lives of approximately thirty years. In accordance with its policy, the Company periodically reviews information impacting the pattern of consumption for its capital assets and useful lives to ensure that estimates of depreciation expenses are appropriate. The Company’s investment in its supply chain infrastructure and technology triggered the review of these patterns of consumption. Pursuant to the review and effective January 1, 2020, the method of estimating depreciation for certain assets was changed to the straight-line method and updated useful lives to forty and fifty years. The Company determined that these changes in depreciation method and useful lives were considered a change in accounting estimate effected by a change in accounting principle, and as such have been accounted for on a prospective basis. Grainger believes the changes to the straight-line method and useful lives are appropriate estimations of the Company's current patterns of economic consumption of its capital assets and appropriately match current revenues and costs over updated estimates of the assets' useful lives. The effect of these changes resulted in a decrease of $34 million to depreciation expense for the year ended December 2020.
Depreciation expense was $139 million, $123 million and $116 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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, including disposition, are less than their carrying value. Impairment is measured as the amount by which the asset's carrying amount exceeds the fair value.
Leases
The Company leases certain properties, buildings and equipment (including branches, warehouses, DCs and office space) under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company determines if an arrangement contains a lease at inception. Leases with an initial term of more than 12 months are recorded on the balance sheet as right-of-use (ROU) assets representing the right to use the underlying asset for the lease term and the corresponding current and long-term lease liabilities representing the obligation to make lease payments arising from the lease.
ROU assets and lease liabilities are recognized at the lease commencement or possession 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 using the incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate, the ROU asset and the lease liability are re-evaluated upon a lease modification.
Certain lease agreements include variable lease payments that primarily include payments for non-lease components including pass-through operating expenses such as certain maintenance costs and utilities, and payments for non-components such as real estate taxes and insurance. Lease agreements with fixed lease and non-lease components are generally accounted for as a single lease component for all underlying classes of assets. Certain of the Company’s lease arrangements contain renewal provisions from one 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’soperating 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 that would necessitate a quantitative impairment test. 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.
Accounting for Derivative Instruments
The Company recognizes all derivative instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.
To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability or forecasted transaction, type of risk to be hedged, and how the effectiveness of the derivative is assessed prospectively and retrospectively. To assess effectiveness, the Company uses statistical methods and qualitative comparisons of critical terms. The extent to which a derivative has been and is expected to continue to be highly effective at offsetting changes in the fair value or cash flows of the hedged item is assessed and documented periodically. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. For those derivative instruments that are designated and qualify as hedging instruments, the Company classifies them as fair value hedges or cash flow hedges.
Contingencies
The Company records a liability when a particular contingency is both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect.
For further discussion on the Company's contingencies, see Notes 15 and 16.
New Accounting Standards
Accounting Pronouncements Recently Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting as modified by subsequently issued ASU 2021-01. This update provides optional expedients and exceptions for applying GAAP to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied prospectively to contract modifications made and hedging relationships entered or evaluated on or before December 31, 2022. In October 2022, the FASB amended Topic 848, updating the sunset date from December 31, 2022 to December 31, 2024. The Company adopted this ASU on July 1, 2022 on a prospective basis and it did not have a material impact on the Consolidated Financial Statements. For further discussion on the credit agreement modifications made to the revolving credit facility, see Note 6.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update provides increased transparency of government assistance, including the disclosure of the types of assistance an entity receives, an entity's method of accounting for government assistance and the effect of the assistance on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021 and should be applied prospectively or retrospectively. Early adoption is permitted. The Company adopted this ASU on January 1, 2022 on a prospective basis and it did not have a material impact on the Consolidated Financial Statements and related disclosures.
NOTE 2 - BUSINESS DIVESTITURES AND LIQUIDATIONS
Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested Cromwell's wholly owned software business in the U.K. (Cromwell subsidiary) on October 21, 2022, the China business (China) on August 21, 2020, the Fabory business in Europe (Fabory) on June 30, 2020 and commenced the liquidation of Zoro Tools Europe (ZTE) in the fourth quarter of 2020. Accordingly, the Company's Consolidated Statements of Earnings, Comprehensive Earnings and Cash Flows and related notes include these business results in Other businesses through the respective dates of divestiture and liquidation. The proceeds from the divestitures were used to fund general business and corporate needs. The Company does not expect these business exits to have a future material impact on its Consolidated Financial Statements.
In the fourth quarter of 2022, the Company recorded a gain of $21 million in SG&A as a result of the Cromwell subsidiary divestiture. In 2020, Grainger recorded a gain of $5 million and a loss of approximately $109 million in SG&A as a result of the China and Fabory business divestitures, respectively, which included net accumulated foreign currency translation losses of $45 million, that were reclassified from Accumulated other comprehensive earnings (losses) (AOCE) to SG&A. Additionally in 2020, the Company recorded $9 million in expense in SG&A associated with the wind down of ZTE.
NOTE 3 - REVENUE
The Company's revenue is primarily comprised of MRO product sales and related activities, such as freight and services.
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market-specific factors. The Company's presentation of revenue by segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions N.A. segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from non-contractual purchases.
The following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | High-Touch Solutions N.A. | | Endless Assortment | | Total Company (2) | | High-Touch Solutions N.A. | | Endless Assortment | | Total Company (2) | | High-Touch Solutions N.A. | | Endless Assortment | | Total Company (2) |
| Contractors | 9 | % | | 15 | % | | 10 | % | | 9 | % | | 16 | % | | 10 | % | | 9 | % | | 15 | % | | 10 | % |
| Commercial | 9 | | | 15 | | | 10 | | | 9 | | | 15 | | | 10 | | | 8 | | | 15 | | | 9 | |
| Government | 17 | | | 3 | | | 14 | | | 18 | | | 3 | | | 15 | | | 20 | | | 3 | | | 16 | |
| Healthcare | 7 | | | 2 | | | 6 | | | 7 | | | 2 | | | 6 | | | 9 | | | 2 | | | 7 | |
| Manufacturing | 31 | | | 30 | | | 31 | | | 30 | | | 29 | | | 30 | | | 29 | | | 29 | | | 30 | |
| Retail/Wholesale | 9 | | | 15 | | | 10 | | | 10 | | | 10 | | | 10 | | | 9 | | | 10 | | | 9 | |
| Transportation | 6 | | | 3 | | | 5 | | | 5 | | | 3 | | | 5 | | | 5 | | | 3 | | | 5 | |
Other(1) | 12 | | | 17 | | | 14 | | | 12 | | | 22 | | | 14 | | | 11 | | | 23 | | | 14 | |
| Total net sales | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Percent of total company revenue | 80 | % | | 18 | % | | 100 | % | | 78 | % | | 20 | % | | 100 | % | | 78 | % | | 18 | % | | 100 | % |
| | | | | | | | | | | | |
(1) Other primarily includes revenue from industries and customers that are not material individually, including agriculture, mining, natural resources and resellers not aligned to a major industry segment. |
(2) Total Company includes other businesses, which includes the Cromwell business, as well as Grainger's divested businesses in the periods prior to their divestitures. Other businesses account for approximately 2%, 2% and 4% of revenue for the twelve months ended December 31, 2022, 2021 and 2020, respectively. |
NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT
Grainger's property, buildings and equipment consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| | As of |
| | December 31, 2022 | | December 31, 2021 |
| Land | $ | 318 | | | $ | 329 | |
| Building, structures and improvements | 1,463 | | | 1,431 | |
| Furniture, fixtures, machinery and equipment | 1,662 | | | 1,567 | |
| Property, buildings and equipment | $ | 3,443 | | | $ | 3,327 | |
| Less accumulated depreciation and amortization | 1,982 | | | 1,903 | |
| Property, buildings and equipment – net | $ | 1,461 | | | $ | 1,424 | |
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Grainger completed its annual impairment testing of goodwill and intangible assets during the fourth quarter of 2022 and 2021. Based on the results of that testing, the Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators and concluded that it was more likely than not that the fair value of the reporting units exceeded their carrying amounts at each respective period.
High-Touch Solutions N.A. – Canada Business
As of December 31, 2022 and 2021, the Canada business reporting unit had goodwill of $121 million and $129 million, respectively. As part of our annual impairment testing, the Company performed evaluations of changes in key assumptions, notably projections of revenue growth, operating expenditures, changes in working capital, and factors that could impact the discount rate used in the analysis. In doing so, we compared the current results to forecasted expectations of the most recent quantitative analysis, along with analyzing macroeconomic conditions, current industry trends and transactions, and other market data of industry peers. The Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators for its Canada business and concluded that it was more likely than not that the fair value of the Canada business reporting unit exceeded its carrying amount.
The Company's balances and changes in the carrying amount of Goodwill by segment are as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | High-Touch Solutions N.A. | | Endless Assortment | | Other | | Total |
| Balance at January 1, 2021 | | $ | 321 | | | $ | 70 | | | $ | — | | | $ | 391 | |
| | | | | | | | |
| | | | | | | | |
| Translation | | — | | | (7) | | | — | | | (7) | |
| Balance at December 31, 2021 | | 321 | | | 63 | | | — | | | 384 | |
| | | | | | | | |
| | | | | | | | |
| Translation | | (8) | | | (5) | | | — | | | (13) | |
| Balance at December 31, 2022 | | $ | 313 | | | $ | 58 | | | $ | — | | | $ | 371 | |
The aggregate cumulative goodwill impairments as of December 31, 2022, was $137 million and consisted of $32 million in High-Touch Solutions N.A. and $105 million in Other.
The balances and changes in intangible assets – net are as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2022 | | 2021 |
| Weighted average life | | Gross carrying amount | | Accumulated amortization/ impairment | | Net carrying amount | | Gross carrying amount | | Accumulated amortization/impairment | | Net carrying amount |
| Customer lists and relationships | 11.7 years | | $ | 217 | | | $ | 181 | | | $ | 36 | | | $ | 221 | | | $ | 176 | | | $ | 45 | |
| Trademarks, trade names and other | 14.4 years | | 32 | | | 22 | | | 10 | | | 36 | | | 24 | | | 12 | |
| Non-amortized trade names and other | Indefinite | | 22 | | | — | | | 22 | | | 25 | | | — | | | 25 | |
| Capitalized software | 4.2 years | | 580 | | | 416 | | | 164 | | | 525 | | | 369 | | | 156 | |
| Total intangible assets | 6.9 years | | $ | 851 | | | $ | 619 | | | $ | 232 | | | $ | 807 | | | $ | 569 | | | $ | 238 | |
Amortization expense of intangible assets recorded in SG&A was $61 million, $63 million, and $60 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Estimated amortization expense for future periods is as follows (in millions of dollars):
| | | | | | | | |
| Year | | Expense |
| 2023 | | $ | 61 | |
| 2024 | | 53 | |
| 2025 | | 44 | |
| 2026 | | 31 | |
| 2027 | | 16 | |
| Thereafter | | 5 | |
| Total | | $ | 210 | |
NOTE 6 - DEBT
Total debt, including long-term, current maturities and debt issuance costs and discounts – net, consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| | 2022 | | 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| 4.60% senior notes due 2045 | $ | 1,000 | | | $ | 916 | | | $ | 1,000 | | | $ | 1,284 | |
| 1.85% senior notes due 2025 | 500 | | | 470 | | | 500 | | | 509 | |
| 4.20% senior notes due 2047 | 400 | | | 338 | | | 400 | | | 492 | |
| 3.75% senior notes due 2046 | 400 | | | 317 | | | 400 | | | 459 | |
| | | | | | | |
| | | | | | | |
| Japanese yen term loan | 69 | | | 69 | | | 78 | | | 78 | |
| | | | | | | |
| Other | (29) | | | (29) | | | 7 | | | 7 | |
| Subtotal | 2,340 | | | 2,081 | | | 2,385 | | | 2,829 | |
| Less current maturities | (35) | | | (35) | | | — | | | — | |
| Debt issuance costs and discounts – net of amortization | (21) | | | (21) | | | (23) | | | (23) | |
| Long-term debt | $ | 2,284 | | | $ | 2,025 | | | $ | 2,362 | | | $ | 2,806 | |
Revolving Credit Facility
In February 2020, the Company entered into a five-year unsecured credit agreement. Grainger may obtain loans in various currencies on a revolving basis in an aggregate amount not exceeding $1.25 billion (revolving credit facility), which may be increased up to $1.875 billion at the request of the Company, subject to approval from lenders and other customary conditions. The primary purpose of the revolving credit facility is to support the Company's commercial paper program and for general corporate purposes. The revolving credit facility replaced the Company's former $750 million unsecured revolving credit facility, which originated in October 2017 and was scheduled to mature in October 2022.
In August 2022, the Company entered into a First Amendment (the Amendment) to its revolving credit facility. The Amendment changes the benchmark rate for borrowings denominated in U.S. and foreign currencies from LIBOR to certain alternative benchmark rates. This includes benchmark rates based on the Euro Interbank Offered Rate (EURIBOR) for borrowings denominated in Euros, the Canadian Dollar Offer Rate (CDOR) for borrowings denominated in Canadian dollars, the Sterling Overnight Index Average (SONIA) for borrowings denominated in sterling and Secured Overnight Financing Rate (SOFR) for borrowings denominated in U.S. dollars. The Amendment also updates certain other provisions regarding successor interest rates to LIBOR.
There were no borrowings outstanding under the revolving credit facility as of December 31, 2022 and 2021.
The Company's foreign subsidiaries utilize various financing sources for working capital purposes and other operating needs. These financing sources in aggregate were not material as of December 31, 2022 and 2021.
Commercial Paper
The Company issues commercial paper from time to time for general working capital needs. As of December 31, 2022 and 2021, there was none outstanding.
Senior Notes
In the years 2015-2020, Grainger issued $2.3 billion in unsecured long-term debt (senior notes) primarily to provide flexibility in funding general working capital needs, share repurchases and long-term cash requirements. The senior notes require no principal payments until maturity and interest is paid semi-annually.
The Company may redeem the senior notes in whole at any time or in part from time to time at a make-whole redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the senior notes plus 10-25 basis points, together with accrued and unpaid interest, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the senior notes at 101% of their principal amount plus accrued and unpaid interest, at the date of purchase. Within one year of the maturity date, the Company may redeem the senior notes in whole at any time or in part at 100% of their principal amount, together with accrued and unpaid interest, at the redemption date.
The Company incurred debt issuance costs related to the senior notes of approximately $29 million, representing underwriting fees and other expenses. These costs were recorded as a contra-liability in Long-term debt and are being amortized over the term of the senior notes using the straight-line method to Interest expense – net.
Grainger uses interest rate swaps to manage the risks associated with the 1.85% senior notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of December 31, 2022 and 2021, are presented in Other in the table above. For further discussion on the Company's hedge accounting policies and derivative instruments, see Note 12.
Term Loan
In August 2020, MonotaRO entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of December 31, 2022 and 2021, the carrying amount of the term loan, including current maturities due within one year, was $69 million and $78 million, respectively. The term loan matures in 2024, payable over four equal semi-annual principal installments in 2023 and 2024 and bears an average interest rate of 0.05%.
Fair Value
The estimated fair value of the Company’s senior notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy.
The Company's debt instruments include affirmative and negative 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 December 31, 2022 and 2021.
The scheduled aggregate principal payments required on the Company's indebtedness, based on the maturity dates defined within the debt arrangements, for the succeeding five years, excluding debt issuance costs and the impact of derivatives, are due as follows (in millions of dollars):
| | | | | | | | |
| Year | | Payment Amount |
| 2023 | | $ | 35 | |
| 2024 | | 34 | |
| 2025 | | 500 | |
| 2026 | | 5 | |
| 2027 | | — | |
| Thereafter | | 1,800 | |
| Total | | $ | 2,374 | |
NOTE 7 - EMPLOYEE BENEFITS
The Company provides various retirement benefits to eligible team members, 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 team member location. Various foreign benefit plans cover team members in accordance with local legal requirements.
Defined Contribution Plans
A majority of the Company's U.S. team members are covered by a retirement savings plan, adopted as of January 1, 2021. The new plan amended and restated the prior noncontributory profit-sharing plan, which previously aligned Company contributions to Company performance and included two components, a variable annual contribution based on the Company's rate of return on invested capital and an automatic contribution equal to 3% of the eligible team member's total eligible compensation. As part of the amendment, beginning in 2021, the profit-sharing contribution was removed and the Company's automatic contribution increased from 3% to 6% of total eligible participants’ compensation. In addition, team members covered by the plan are also able to make personal contributions.
The total retirement savings plan expense was $87 million, $78 million, and $99 million for 2022, 2021 and 2020, respectively.
The Company sponsors additional defined contribution plans available to certain U.S. and foreign team members for which contributions are made by the Company and participating team members. The expense associated with these defined contribution plans totaled $11 million, $16 million and $16 million for 2022, 2021 and 2020, respectively.
Postretirement Healthcare Benefits Plans
The Company has a postretirement healthcare benefit plan that provides coverage for a majority of its U.S. team members hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered team members 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.
The net periodic benefits costs were valued with a measurement date of January 1 for each year and consisted of the following components (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| SG&A | | | | | |
| Service cost | $ | 4 | | | $ | 5 | | | $ | 5 | |
| Other (income) expense | | | | | |
| Interest cost | 4 | | | 3 | | | 6 | |
| Expected return on assets | (8) | | (8) | | | (8) | |
| Amortization of prior service credit | (10) | | (9) | | | (10) | |
| | | | | |
| Amortization of unrecognized gains | (9) | | (8) | | | (5) | |
| Net periodic benefits | $ | (19) | | | $ | (17) | | | $ | (12) | |
Reconciliations of the beginning and ending balances of the postretirement benefit asset (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 asset (obligation) follow (in millions of dollars):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Benefit obligation at beginning of year | $ | 153 | | | $ | 167 | |
| Service cost | 4 | | | 5 | |
| Interest cost | 4 | | | 3 | |
| Plan participants' contributions | 3 | | | 3 | |
| | | |
| Actuarial gains | (40) | | | (14) | |
| Benefits paid | (12) | | | (11) | |
| | | |
| | | |
| Benefit obligation at end of year | $ | 112 | | | $ | 153 | |
| | | |
| Plan assets available for benefits at beginning of year | $ | 207 | | | $ | 206 | |
| Actual returns on plan assets | (36) | | | 9 | |
| | | |
| Plan participants' contributions | 3 | | | 3 | |
| | | |
| Benefits paid | (12) | | | (11) | |
| Plan assets available for benefits at end of year | 162 | | | 207 | |
| | | |
| Noncurrent postretirement benefit asset | $ | 50 | | | $ | 54 | |
The amounts recognized in AOCE consisted of the following (in millions of dollars):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Prior service credit | $ | 33 | | | $ | 42 | |
| | | |
| Unrecognized gains | 77 | | | 90 | |
| Deferred tax liability | (28) | | | (33) | |
| Net accumulated gains | $ | 82 | | | $ | 99 | |
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 10 years for 2022.
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 actuarial gains recognized during the plan year are primarily related to
changes in assumptions related to certain retiree coverage elections, health reimbursement arrangement (HRA) subsidy and changes to the discount rate.
The following assumptions were used to determine net periodic benefit costs at January 1 of each year:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Discount rate | 2.57 | % | | 2.17 | % | | 3.01 | % |
| Long-term rate of return on plan assets – net of tax | 4.04 | % | | 4.04 | % | | 4.04 | % |
| Initial healthcare cost trend rate | | | | | |
| Pre age 65 | 6.50 | % | | 5.81 | % | | 6.06 | % |
| Post age 65 | NA | | NA | | NA |
| Catastrophic drug benefit | NA | | NA | | NA |
| Ultimate healthcare cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year ultimate healthcare cost trend rate reached | 2030 | | 2026 | | 2026 |
| HRA credit inflation index for grandfathered retirees | — | % | | — | % | | 2.50 | % |
The following assumptions were used to determine benefit obligations as of December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Discount rate | 4.92 | % | | 2.57 | % | | 2.17 | % |
| Expected long-term rate of return on plan assets – net of tax | 4.04 | % | | 4.04 | % | | 4.04 | % |
| Initial healthcare cost trend rate | | | | | |
| Pre age 65 | 7.50 | % | | 6.50 | % | | 5.81 | % |
| Post age 65 | NA | | NA | | NA |
| Catastrophic drug benefit | NA | | NA | | NA |
| Ultimate healthcare cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year ultimate healthcare cost trend rate reached | 2033 | | 2030 | | 2026 |
| HRA credit inflation index for grandfathered retirees | — | % | | — | % | | — | % |
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, 2022, the Company increased the discount rate from 2.57% to 4.92% to reflect the increase in the market interest rates as of December 31, 2022.
The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2022, the initial healthcare cost trend rate was 7.50% for pre age 65. The healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%. 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 for grandfathered team members.
The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. In 2019, the Company liquidated previously held index funds and temporarily invested all assets of the Trust in money market funds. In 2020, the Company transitioned the Trust assets from money market funds into a liability-driven investment solution which enhances the Trust's after-tax returns and de-risks the Company's exposure by more closely match-funding the underlying liability. This investment strategy reflects the long-term nature of the plan obligation and seeks to reach a balanced allocation between Fixed Income securities and Equities of 65% and 35%, respectively. 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) or at significant other observable inputs (Level 2 input).
The plan assets available for benefits are net of Trust liabilities, primarily related to deferred income taxes and taxes payable as of December 31 (in millions of dollars):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Asset class: | | | |
| Level 1 inputs: | | | |
| Mutual funds: | | | |
| Funds – municipal/provincial bonds | $ | 8 | | | $ | 12 | |
| Funds – corporate bonds fund | 3 | | | 5 | |
| Federal Money Market Fund | — | | | 4 | |
| Level 2 inputs: | | | |
| Fixed income: | | | |
| Corporate bonds | 57 | | | 89 | |
| Government/municipal bonds | 12 | | | 14 | |
| Equity funds | 73 | | | 85 | |
| Plan assets | 153 | | | 209 | |
| Less trust assets (liabilities) | 9 | | | (2) | |
| Plan assets available for benefits | $ | 162 | | | $ | 207 | |
Consistent with the new investment strategy, the after-tax expected long-term rates of return on plan assets of 4.04% as of December 31, 2022 is based on the historical average of long-term rates of return and an estimated tax rate. The required use of an expected long-term rate of return on plan assets may result in recognition of income that is greater or lower than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the team members.
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 Company forecasts the following benefit payments related to postretirement (which include a projection for expected future team member service) for the next ten years (in millions of dollars):
| | | | | | | | |
| Year | | Estimated Gross Benefit Payments |
| 2023 | | $ | 9 | |
| 2024 | | 9 | |
| 2025 | | 9 | |
| 2026 | | 9 | |
| 2027 | | 9 | |
| 2028-2032 | | 41 | |
| Total | | $ | 86 | |
NOTE 8 - LEASES
The Company leases certain properties, buildings and equipment (including branches, warehouses, DCs and office space) 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 that expire at various dates through 2037.
Information related to operating leases is as follows (in millions of dollars):
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| Right-of-use assets | | | | |
| Operating lease right-of-use | | $ | 367 | | | $ | 393 | |
| | | | |
| | | | |
| | | | |
| Operating lease liabilities | | | | |
| Operating lease liability | | 68 | | | 66 | |
| Long-term operating lease liability | | 318 | | | 334 | |
| Total operating lease liabilities | | $ | 386 | | | $ | 400 | |
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| Weighted average remaining lease term | | 7 years | | 7 years |
| Weighted average incremental borrowing rate | | 1.46 | % | | 0.81 | % |
| Cash paid for operating leases | | $ | 76 | | | $ | 68 | |
| Right-of-use assets obtained in exchange for operating lease obligations | | $ | 96 | | | $ | 244 | |
Rent expense was $93 million, $74 million and $76 million for 2022, 2021 and 2020, respectively. These amounts are net of sublease income of $2 million for 2022, 2021 and 2020.
Remaining maturity of existing lease liabilities as of December 31, 2022 are as follows (in millions of dollars):
| | | | | | | | |
| Year | | Operating Leases |
| 2023 | | $ | 77 | |
| 2024 | | 68 | |
| 2025 | | 62 | |
| 2026 | | 50 | |
| 2027 | | 40 | |
| Thereafter | | 108 | |
| Total lease payments | | 405 | |
| Less interest | | (19) | |
| Present value of lease liabilities | | $ | 386 | |
As of December 31, 2022 and 2021, the Company's finance leases and service contracts with lease arrangements were not material. Finance leases are reported in Property, buildings and equipment – net, and as a short and long-term finance lease liability in Accrued Expenses and Other non-current liabilities.
As of December 31, 2022 and 2021, Grainger's future lease obligations that have not yet commenced were $65 million and $18 million, respectively.
NOTE 9 - STOCK INCENTIVE PLANS
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to team members and executives, which include restricted stock units (RSUs), performance shares and deferred stock units. As of December 31, 2022, there were 1.5 million shares available for grant under the plans. When awards are exercised or settled, shares of the Company’s treasury stock are issued.
Pretax stock-based compensation expense included in SG&A was $48 million, $42 million, and $46 million in 2022, 2021 and 2020, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $19 million, $21 million, and $16 million in 2022, 2021 and 2020, respectively.
Restricted Stock Units
The Company awards RSUs to certain team members and executives. RSUs vest generally over periods from one to seven years from issuance. The RSU grant date fair value is based on the closing price of the Company's common stock on the last trading day preceding the date of the grant. RSU expense for the years ended December 31, 2022, 2021 and 2020 was approximately $34 million, $30 million and $32 million, respectively.
The following table summarizes RSU activity (in millions of dollars, except for share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Shares | Weighted
Average Price Per Share | | Shares | Weighted
Average Price Per Share | | Shares | Weighted
Average Price Per Share |
| Beginning nonvested units | 202,321 | | $ | 318.40 | | | 317,414 | | $ | 259.67 | | | 326,124 | | $ | 259.88 | |
| Issued | 96,940 | | $ | 520.67 | | | 105,866 | | $ | 406.17 | | | 140,815 | | $ | 252.11 | |
| Canceled | (17,038) | | $ | 345.30 | | | (36,134) | | $ | 274.74 | | | (26,254) | | $ | 257.56 | |
| Vested | (91,191) | | $ | 336.99 | | | (184,825) | | $ | 276.34 | | | (123,271) | | $ | 252.05 | |
| Ending nonvested units | 191,032 | | $ | 409.77 | | | 202,321 | | $ | 318.40 | | | 317,414 | | $ | 259.67 | |
| Fair value of shares vested | $ | 31 | | | | $ | 51 | | | | $ | 31 | | |
As of December 31, 2022, there was $55 million of total unrecognized compensation expense related to nonvested RSUs the Company expects to recognize over a weighted average period of 2.1 years.
NOTE 10 - CAPITAL STOCK
The Company had no shares of preferred stock outstanding as of December 31, 2022 and 2021. The activity related to outstanding common stock and common stock held in treasury was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock | | Outstanding Common Stock | Treasury Stock |
| Balance at beginning of period | 51,220,205 | | 58,439,014 | | | 52,524,391 | | 57,134,828 | | | 53,687,528 | | 55,971,691 | |
| Exercise of stock options | 101,802 | | (101,802) | | | 188,444 | | (188,444) | | | 311,374 | | (311,374) | |
| Settlement of restricted stock units – net of 31,132, 61,377 and 41,019 shares retained, respectively | 64,649 | | (64,649) | | | 127,969 | | (127,969) | | | 82,241 | | (82,241) | |
| Settlement of performance share units – net of 10,359, 9,746 and 16,830 shares retained, respectively | 13,890 | | (13,890) | | | 12,507 | | (12,507) | | | 28,098 | | (28,098) | |
| Purchase of treasury shares | (1,144,223) | | 1,144,223 | | | (1,633,106) | | 1,633,106 | | | (1,584,850) | | 1,584,850 | |
| Balance at end of period | 50,256,323 | | 59,402,896 | | | 51,220,205 | | 58,439,014 | | | 52,524,391 | | 57,134,828 | |
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSSES) (AOCE)
The components of AOCE consisted of the following (in millions 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, 2020 – net of tax | $ | (238) | | $ | 79 | | $ | (8) | | | $ | (167) | | $ | (13) | | $ | (154) | |
| Other comprehensive earnings (loss) before reclassifications – net of tax | 36 | | 33 | | — | | | 69 | | 12 | | 57 | |
| Amounts reclassified to net earnings | 47 | | (11) | | — | | | 36 | | — | | 36 | |
| | | | | | | |
| Net current period activity | $ | 83 | | $ | 22 | | $ | — | | | $ | 105 | | $ | 12 | | $ | 93 | |
| Balance at December 31, 2020 – net of tax | $ | (155) | | $ | 101 | | $ | (8) | | | $ | (62) | | $ | (1) | | $ | (61) | |
| Other comprehensive earnings (loss) before reclassifications – net of tax | (64) | | 12 | | 2 | | | (50) | | (29) | | (21) | |
| Amounts reclassified to net earnings | — | | (14) | | — | | | (14) | | — | | (14) | |
| | | | | | | |
| Net current period activity | (64) | | (2) | | 2 | | | (64) | | (29) | | (35) | |
| Balance at December 31, 2021 – net of tax | $ | (219) | | $ | 99 | | $ | (6) | | | $ | (126) | | $ | (30) | | $ | (96) | |
| Other comprehensive earnings (loss) before reclassifications – net of tax | $ | (101) | | $ | (4) | | $ | — | | | $ | (105) | | $ | (34) | | $ | (71) | |
| Amounts reclassified to net earnings | $ | — | | $ | (13) | | $ | — | | | $ | (13) | | $ | — | | $ | (13) | |
| | | | | | | |
| Net current period activity | $ | (101) | | $ | (17) | | $ | — | | | $ | (118) | | $ | (34) | | $ | (84) | |
| Balance at December 31, 2022 – net of tax | $ | (320) | | $ | 82 | | $ | (6) | | | $ | (244) | | $ | (64) | | $ | (180) | |
NOTE 12 - DERIVATIVE INSTRUMENTS
The Company maintains various agreements with bank counterparties that permit the Company to enter into "over-the-counter" derivative instrument agreements to manage its risk associated with interest rates and foreign currency fluctuations. In February 2020, the Company entered into certain derivative instrument agreements to manage its risk associated with interest rates of its 1.85% Notes and foreign currency fluctuations in connection with its foreign currency-denominated intercompany borrowings. The Company did not enter into these agreements for trading or speculative purposes.
Cash Flow Hedges
The Company uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from foreign currency-denominated intercompany borrowings via cross-currency swaps. Gains or losses on the cross-currency swaps are reported as a component of Accumulated other comprehensive earnings (losses) (AOCE) and reclassified into earnings in the same period during which the hedged transaction affects earnings. The notional amount of the Company’s outstanding cash flow hedges as of December 31, 2022 and 2021 was approximately $34 million.
The effect of the Company’s cash flow hedges on AOCE for the twelve months ended December 31, 2022 and 2021 was not material.
Fair Value Hedges
The Company uses fair value hedges primarily to hedge a portion of its fixed-rate long-term debt via interest rate swaps. Changes in the fair value of the interest rate swaps, along with the gain or loss on the hedged item, is recorded in earnings under the same line item, Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of December 31, 2022 and 2021 was $500 million.
The effect of the Company's fair value hedges on the Consolidated Statement of Earnings in Interest expense – net for the twelve months ended December 31, 2022 and 2021, respectively, were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | |
| | | | | 2022 | | 2021 | | |
| Gain or (loss): | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | |
| Hedged item | | | | | $ | 35 | | | $ | 20 | | | |
| Derivatives designated as hedging instrument | | | | | $ | (35) | | | $ | (20) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The fair value and carrying amounts of outstanding derivative instruments in the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively, were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2022 | | 2021 |
| Balance Sheet Classification | | Fair Value and Carrying Amounts |
| | | | | |
| | | | | |
| Cross-currency swap | Other non-current liabilities | | $ | — | | | $ | 2 | |
| | | | | |
| Interest rate swaps | Other assets | | $ | — | | | $ | 1 | |
| Other non-current liabilities | | $ | 34 | | | $ | — | |
| | | | | |
The carrying amount of the liability hedged by the interest rate swaps recorded in Long-term debt, including the cumulative amount of fair value hedging adjustments, as of December 31, 2022 and 2021 totaled $466 millionand $501 million, respectively.
Fair Value
The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 inputs within the fair value hierarchy and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments were required during the current period to reflect the counterparty’s credit risk or the Company’s own nonperformance risk.
NOTE 13 - INCOME TAXES
Earnings (losses) before income taxes by geographical area consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| U.S. | $ | 1,903 | | | $ | 1,267 | | | $ | 1,015 | |
| Foreign | 243 | | | 218 | | | (68) | |
| Total | $ | 2,146 | | | $ | 1,485 | | | $ | 947 | |
Income tax expense consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current income tax expense: | | | | | |
| U.S. Federal | $ | 374 | | | $ | 221 | | | $ | 119 | |
| U.S. State | 77 | | | 46 | | | 28 | |
| Foreign | 78 | | | 81 | | | 65 | |
| Total current | 529 | | | 348 | | | 212 | |
| Deferred income tax expense (benefit) | 4 | | | 23 | | | (20) | |
| Total income tax expense | $ | 533 | | | $ | 371 | | | $ | 192 | |
The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2022 and 2021 were as follows (in millions of dollars):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| | | |
| Accrued expenses | 150 | | | 152 | |
| Foreign loss carryforwards | 62 | | | 59 | |
| Accrued employment-related benefits | 51 | | | 50 | |
| Tax credit carryforward | 26 | | | 27 | |
| Other | 23 | | | 17 | |
| | | |
| Deferred tax assets | 312 | | | 305 | |
| Less valuation allowance | (71) | | | (70) | |
| Deferred tax assets – net of valuation allowance | $ | 241 | | | $ | 235 | |
| Deferred tax liabilities: | | | |
| Property, buildings, equipment and other capital assets | (212) | | | (217) | |
| Intangibles | (64) | | | (67) | |
| Inventory | (18) | | | (9) | |
| Other | (11) | | | (8) | |
| | | |
| Deferred tax liabilities | (305) | | | (301) | |
| Net deferred tax liability | $ | (64) | | | $ | (66) | |
| | | |
| The net deferred tax asset (liability) is classified as follows: | | | |
| | | |
| Noncurrent assets | $ | 12 | | | $ | 14 | |
| Noncurrent liabilities (foreign) | (76) | | | (80) | |
| Net deferred tax liability | $ | (64) | | | $ | (66) | |
As of December 31, 2022 and 2021, the Company had $248 million and $238 million, respectively, of gross loss carryforwards related to foreign operations. Some of the loss carryforwards may expire at various dates through 2042. 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 millions of dollars):
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | (70) | | | $ | (53) | |
| Increases primarily related to foreign NOLs | (10) | | | (8) | |
| Releases primarily related to foreign NOLs | 1 | | | 2 | |
| Foreign subsidiaries tax impacts due to divestiture | — | | | 2 | |
| Tax rate changes | — | | | (7) | |
| Foreign exchange rate changes | 4 | | | 1 | |
| Increase related to U.S. foreign tax credits | 1 | | | (3) | |
| Other changes – net | 3 | | | (4) | |
| Balance at end of period | $ | (71) | | | $ | (70) | |
A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Federal income tax | $ | 451 | | | $ | 312 | | | $ | 199 | |
| State income taxes – net of federal income tax benefit | 64 | | | 41 | | | 33 | |
| | | | | |
| Foreign rate difference | 26 | | | 26 | | | 23 | |
| Foreign subsidiaries tax impacts due to divestiture | — | | | — | | | (61) | |
| Change in valuation allowance | 7 | | | 7 | | | 16 | |
| Other – net | (15) | | | (15) | | | (18) | |
| | | | | |
| Income tax expense | $ | 533 | | | $ | 371 | | | $ | 192 | |
| Effective tax rate | 24.8 | % | | 25.0 | % | | 20.3 | % |
The changes to the Company's effective tax rate for the year ended December 31, 2022 was primarily driven by favorable mix of U.S. earnings versus foreign earnings taxed at a higher rate. The changes to the Company's effective tax rate for the year ending December 31, 2021 was primarily driven by the absence of tax losses in the Company's investment in Fabory due to the impairment and internal reorganization of the Company's holdings of Fabory in the first quarter of 2020. The Company divested Fabory during the second quarter of 2020.
Foreign Undistributed Earnings
Estimated gross undistributed earnings of foreign subsidiaries as of December 31, 2022 and 2021, totaled $530 million and $544 million, respectively. 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. 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 millions of dollars):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Balance at beginning of year | $ | 38 | | | $ | 39 | | | $ | 28 | |
| Additions for tax positions related to the current year | 4 | | | 3 | | | 23 | |
| Additions for tax positions of prior years | 2 | | | — | | | — | |
| Reductions for tax positions of prior years | — | | | (1) | | | (2) | |
| Reductions due to statute lapse | (2) | | | (3) | | | (10) | |
| Settlements, audit payments, refunds – net | (1) | | | — | | | — | |
| Balance at end of year | $ | 41 | | | $ | 38 | | | $ | 39 | |
The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in
this amount is $5 million and $4 million at December 31, 2022 and 2021, 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. In 2022 and 2021, the changes to tax positions were primarily related to the impact of expiring statutes and current year state and local reserves. In 2020, the changes to tax positions were related generally to the tax losses on the Company’s investment in Fabory along with the impact of expiring statutes, the conclusion of audits and audit settlements. Estimated interest and penalties were not material.
The Company is regularly subject to examination of its federal income tax returns by the Internal Revenue Service. The statute of limitations expired for the Company's 2018 federal tax return while tax years 2019 through 2021 remain open. The Company is also subject to audit by state, local and foreign taxing authorities.Tax years 2012 through 2021 remain subject to state and local audits and 2017 through 2021 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.
NOTE 14 - SEGMENT INFORMATION
Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining businesses, which includes the Company's Cromwell business, are classified as Other to reconcile to consolidated results. These businesses individually and in the aggregate do not meet the criteria of a reportable segment.
The Company's corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for intersegment sales are included in each segment's SG&A and are also eliminated in the Company's Consolidated Financial Statements.
Following is a summary of segment results (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020(1) |
| Net sales | | Operating earnings (losses) | | Net sales | | Operating earnings (losses) | | Net sales | | Operating earnings (losses) |
| High-Touch Solutions N.A. | $ | 12,182 | | | $ | 1,983 | | | $ | 10,186 | | | $ | 1,334 | | | $ | 9,221 | | | $ | 1,182 | |
| Endless Assortment | 2,787 | | 223 | | | 2,576 | | | 232 | | | 2,178 | | | 166 | |
| Other | 259 | | 9 | | | 260 | | | (19) | | | 398 | | | (329) | |
| Total Company | $ | 15,228 | | | $ | 2,215 | | | $ | 13,022 | | | $ | 1,547 | | | $ | 11,797 | | | $ | 1,019 | |
| | | | | | | | | | | |
(1) Segment results for the year ended December 31, 2020 were recast to reflect the Company's 2021 re-segmentation. |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020(1) |
| Depreciation and amortization: | | | | | |
| High-Touch Solutions N.A. | $ | 168 | | | $ | 148 | | | $ | 143 | |
| Endless Assortment | 35 | | | 22 | | | 17 | |
| Other | 3 | | | 3 | | | 9 | |
| Total consolidated depreciation and amortization | $ | 206 | | | $ | 173 | | | $ | 169 | |
| | | | | |
(1) Segment results for the year ended December 31, 2020 were recast to reflect the Company's 2021 re-segmentation. |
Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of capitalized software and ROU assets. Long-lived assets consist of property, buildings and equipment.
Following is revenue by geographic location (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Revenue by geographic location: | | | | | |
| United States | $ | 12,325 | | | $ | 10,236 | | | $ | 9,200 | |
| Japan | 1,719 | | | 1,705 | | | 1,436 | |
| Canada | 621 | | | 560 | | | 494 | |
| Other foreign countries | 563 | | | 521 | | | 667 | |
| $ | 15,228 | | | $ | 13,022 | | | $ | 11,797 | |
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked. Assets for reportable segments are not disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.
NOTE 15 - CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings, including claims related to: product liability, safety or compliance; privacy and cybersecurity matters; negligence; contract disputes; environmental issues; unclaimed property; wage and hour laws; intellectual property; advertising and marketing; consumer protection; pricing (including disaster or emergency declaration pricing statutes); employment practices; regulatory compliance, including trade and export matters; anti-bribery and corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.
As previously disclosed, since the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints in which Grainger has been named, which to date encompass approximately 186 plaintiffs, seek recovery of compensatory and other damages and relief in relation to personal injury, including one death and various other alleged injuries. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in the case KMCO, LLC, No. 20-60028. As a result of the Chapter 7 proceedings, the claims against KMCO in the Harris County lawsuits were stayed. Effective January 1, 2021, the Bankruptcy Court lifted the stay with respect to KMCO.
In the product liability cases, the Harris County District Court decided to schedule bellwether trials involving a subset of plaintiffs the Court believes are representative of the parties' claims and defenses, and the first of such trials involving six plaintiffs (the First Scheduled Trial) was scheduled to commence in mid-January 2023. Prior to the start of the First Scheduled Trial, the Company and 27 plaintiffs engaged in mediation and reached settlements in principle with respect to such plaintiffs' claims against the Company. Those 27 plaintiffs include the plaintiffs who alleged the most serious injuries, as well as five of the six plaintiffs from the First Scheduled Trial. The Company has executed final settlement agreements with those 27 plaintiffs. Grainger believes the payment of these settlements is probable through available insurance. The Company recorded a contingent liability related to these settlements in Accrued expenses and a corresponding recoverable asset in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of December 31, 2022, which resulted in no effect to the Company's Consolidated Statement of Earnings for the year ended December 31, 2022.
Whether trials involving any or all of the remaining plaintiffs will proceed is uncertain and the timing or outcome of any such trials cannot currently be predicted, nor is it currently possible to make any additional estimate of potential loss or range of loss.
On December 16, 2020, KMCO, the trustee of its estate and ORG Chemical Holdings, LLC, KMCO’s parent company (ORG), filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, which seeks unspecified damages (the KMCO Case). On April 1, 2021, 24 individual plaintiffs filed a petition in intervention seeking to be added as plaintiffs in the KMCO Case and seeking unspecified damages. On March 24, 2021, Indian Harbor Insurance Company, together with other insurance companies and underwriters, filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, seeking reimbursement of insurance payments made to or on behalf of KMCO and ORG, the insured parties under their respective policies, and other damages. The Company is currently unable to predict the timing, outcome or any estimate of possible loss or range of loss of the ORG and the Indian Harbor Insurance Company lawsuits.
Grainger continues to investigate each of the various remaining claims against the Company relating to the KMCO chemical refinery incident and intends to contest these matters vigorously.
Also, as a government contractor selling to federal, state and local governmental entities, the Company may be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration, pricing and product compliance.
From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims
are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits.
While the Company is unable to predict the outcome of any of these proceedings and other matters, it believes that their ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition or results of operations.
NOTE 16 - SUBSEQUENT EVENTS
Subsequent to December 31, 2022, the Company reached a settlement agreement related to the First Scheduled Trial as described in Note 15.
On January 25, 2023, Grainger's Board of Directors declared a quarterly cash dividend of $1.72 per share of common stock, payable March 1, 2023 to shareholders of record on February 13, 2023.
Grainger evaluated all subsequent event activity and concluded that no other subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to Consolidated Financial Statements.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Evaluation of Disclosures and Controls
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of Grainger's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger's disclosure controls and procedures were effective as of the end of the period covered by this report.
Management's Annual Report on Internal Control Over Financial Reporting
The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal control over financial reporting. Grainger's internal control system was designed to provide reasonable assurance to Grainger's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.
Grainger's management assessed the effectiveness of Grainger's internal control over financial reporting as of December 31, 2022, 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). Based on its assessment under that framework and the criteria established therein, Grainger's management concluded that Grainger's internal control over financial reporting was effective as of December 31, 2022.
Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over financial reporting as of December 31, 2022, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes to Grainger's internal control over financial reporting for the quarter ending December 31, 2022 that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
W.W. Grainger, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited W.W. Grainger, Inc. and subsidiaries’Subsidiaries’ internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework)framework) (the COSO Criteria)criteria). In our opinion, W.W Grainger, Inc. and subsidiariesSubsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, 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, 20192022 and 2018, and2021, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 20182022, and the related notes and our report dateddated February 20, 202021, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Chicago, Illinois
February 20, 202021, 2023
W.W. Grainger, Inc. and SubsidiariesItem 9B: Other Information
CONSOLIDATED STATEMENTS OF EARNINGSNone.
(In millions, except for per share amounts)
Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net sales | $ | 11,486 |
| | $ | 11,221 |
| | $ | 10,425 |
|
| Cost of goods sold | 7,089 |
| | 6,873 |
| | 6,327 |
|
| Gross profit | 4,397 |
| | 4,348 |
| | 4,098 |
|
| Selling, general and administrative expenses | 3,135 |
| | 3,190 |
| | 3,063 |
|
| Operating earnings | 1,262 |
| | 1,158 |
| | 1,035 |
|
| Other (income) expense: | |
| | |
| | |
| Interest expense, net | 79 |
| | 82 |
| | 86 |
|
| Other, net | (26 | ) | | (5 | ) | | 13 |
|
| Total other expense, net | 53 |
| | 77 |
| | 99 |
|
| Earnings before income taxes | 1,209 |
| | 1,081 |
|
| 936 |
|
| Income taxes | 314 |
| | 258 |
| | 313 |
|
| Net earnings | 895 |
| | 823 |
| | 623 |
|
| Less: Net earnings attributable to noncontrolling interest | 46 |
| | 41 |
| | 37 |
|
| Net earnings attributable to W.W. Grainger, Inc. | $ | 849 |
| | $ | 782 |
| | $ | 586 |
|
| Earnings per share: | |
| | |
| | |
| Basic | $ | 15.39 |
| | $ | 13.82 |
| | $ | 10.07 |
|
| Diluted | $ | 15.32 |
| | $ | 13.73 |
| | $ | 10.02 |
|
| Weighted average number of shares outstanding: | |
| | |
| | |
|
| Basic | 54.7 |
| | 56.1 |
| | 57.7 |
|
| Diluted | 54.9 |
| | 56.5 |
| | 58.0 |
|
PART III
Item 10: Directors, Executive Officers and Corporate Governance
The accompanying notes are an integralinformation required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 26, 2023, under the captions “Board Qualifications, Attributes, Skills and Background,” “Annual Election of Directors,” “Candidates for Board Membership,” “Director Nominees’ Experience and Qualifications,” “Audit Committee,” and “Board Affairs and Nominating Committee,” and "Delinquent Section 16(a) Reports." Information required by this item regarding executive officers of Grainger is set forth in Part I, Item 1, under the caption “Information about our Executive Officers.”
Grainger has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer and controller. This code of ethics is part of theseGrainger’s Business Conduct Guidelines for directors, officers and employees, which is available free of charge through Grainger’s website at invest.grainger.com. A copy of the Business Conduct Guidelines is also available in print without charge to any person upon request to Grainger's Corporate Secretary. Grainger intends to disclose on its website any amendment to any provision of the Business Conduct Guidelines that relates to any element of the definition of “code of ethics” enumerated in Item 406(b) of Regulation S-K under the Exchange Act and any waiver from any such provision granted to Grainger’s principal executive officer, principal financial statements.officer, principal accounting officer and controller or persons performing similar functions. Grainger has also adopted Operating Principles for the Board of Directors, which are available on its website and are available in print to any person who requests them.
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
|
| | | | | | | | | | | |
| | 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 integralinformation required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 26, 2023, under the captions “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee,” “Report of the Compensation Committee of the Board,” “CEO Pay Ratio,” and “Pay Versus Performance Disclosure.”
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 26, 2023, under the captions “Ownership of Grainger Stock” and “Equity Compensation Plans.”
Item 13: Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 26, 2023, under the captions “Director Independence,” “Annual Election of Directors” and “Transactions with Related Persons.”
Item 14: Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 26, 2023, under the caption “Audit Fees and Audit Committee Pre-Approval Policies and Procedures.”
PART IV
Item 15: Exhibits and Financial Statements Schedules
(a) Documents filed as part of these financial statements.this Form 10-K
(1) All Financial Statements
INDEX TO CONSOLIDATED 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 |
|
| | | | | | | | |
| Page |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PCAOB ID: | 42 | |
| CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 | | |
| CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021 | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 | | |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 | | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | |
The accompanying notes
(2) Financial Statement Schedules: the schedules listed in Rule 5-04 of Regulation S-X have been omitted because they 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 STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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 financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
W.W. Grainger, Inc.either not applicable or the required information is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarilyshown in North America, Japan and 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 endless assortment business in Japan, with the residual representing the noncontrolling interest.or notes thereto.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may 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. Translation gains or losses are recorded as a separate component of other comprehensive earnings (losses).
REVENUE RECOGNITION
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 services, which are distinct and accounted for as separate performance obligations, and are satisfied when the services are rendered. Total service revenue is not material and accounted for approximately 1% of total Company 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. Variable considerations include rights to return product and sales incentives, which primarily consist of volume rebates. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels. Total accrued sales returns were approximately $25 million and $29 million as of December 31, 2019 and 2018, respectively, and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $57 million and $62 million as of December 31, 2019 and 2018, respectively, and are reported as part of Accrued expenses.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the 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 GOODS SOLD (COGS)
COGS includes the purchase cost of goods sold, net of vendor considerations, in-bound shipping and handling costs and service costs. The Company receives vendor considerations, such as rebates to promote their products, which are generally recorded as a reduction to COGS. Rebates earned from vendors that are based on product purchases are capitalized into inventory and rebates earned based on products sold are credited directly to COGS.
ADVERTISING
Advertising costs, which includes online marketing, are generally expensed in the year the related advertisement is first presented or when incurred. Catalog expense is amortized over the life of the catalog, generally one year, beginning in the month of its distribution and is included in advertising expense. Total advertising expense was $316 million, $241 million and $187 million for 2019, 2018 and 2017, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Company SG&A is primarily comprised of compensation and benefit costs, indirect purchasing, supply chain and branch operations, technology, 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 on a straight line basis over the vesting periods, net of estimated forfeitures.
INCOME TAXES
The Company recognizes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis 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 years in which those tax assets 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.
The Company 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 penalties to its tax uncertainties in the provision for income taxes.
OTHER COMPREHENSIVE EARNINGS (LOSSES)
The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments 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.
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. Also, the Company has a broad customer base representing many diverse industries across North America, Japan and 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 allowances for customer accounts that are potentially uncollectible and these are determined based on several factors, including the age of the receivables, historical collection trends, and economic conditions that may have an impact on a specific industry, group of customers or a specific customer.
INVENTORIES
Company inventories primarily consist of merchandise purchased for resale, and they are valued at the lower of cost or net realizable value. The Company uses the last-in, first-out (LIFO) method to account for approximately 70% of total inventory and the first-in, first-out (FIFO) method for the remaining inventory. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between excess and obsolete inventories and net realizable value. Estimated 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 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
Company property, buildings and equipment are valued at cost. Depreciation is estimated using the declining-balance, sum-of-the-years-digits and straight-line depreciation methods over the assets' useful lives as follows:
|
| |
Buildings, structures and improvements | 10 to 30 years |
Furniture, fixtures, machinery and equipment | 3 to 10 years |
Depreciation expense was $150 million, $162 million and $170 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company capitalized interest costs of $9 million, $10 million and $2 million for the years ended December 31, 2019, 2018 and 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 their carrying value. Impairment is measured as the amount by which the asset group's carrying amount exceeds the fair value.
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 July 2019, the FASB issued ASU 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 Statements 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 Instruments as modified by subsequently issued ASUs 2018-19, 2019-04, 2019-05 and 2019-11. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Per the permitted effective dates, the Company will adopt this ASU effective January 1, 2020. The Company does not expect the adoption of this ASU to have a material impact on the Company's Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. Per the permitted effective dates, the Company will adopt this ASU effective January 1, 2021. The Company is evaluating the impact of this ASU.
NOTE 2 - REVENUE
Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services.
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market specific factors. The Company's presentation of revenue by industry most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and market specific factors. 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. |
NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the 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 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The balances and changes in the carrying amount of Goodwill by segment are as follows (in millions 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 |
| Cumulative goodwill impairment charges, December 31, 2019 (1) | | $ | — |
| | $ | 32 |
| | $ | 152 |
| | $ | 184 |
|
(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 millions 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 |
|
Amortization expense of intangible assets presented within SG&A, excluding impairment charges was $78 million, $92 million, and $89 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated amortization expense for future periods is as follows (in millions of dollars):
|
| | | | | | | |
| Year | | Expense |
| 2020 | | $ | 72 | |
| 2021 | | 55 | |
| 2022 | | 38 | |
| 2023 | | 13 | |
| 2024 | | 12 | |
| Thereafter | | 52 | |
| Total | | $ | 242 | |
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
of Cromwell’s operating performance at the time combined with prolonged softness and uncertainty in the U.K. market due to Brexit and other unfavorable economic conditions.
NOTE 5 - RESTRUCTURING
Restructuring activity for the twelve months ended December 31, 2019 was not material. In the twelve months ended December 31, 2018 and 2017, the Company recorded restructuring charges of approximately $47 million and $116 million, respectively. These charges primarily consisted of involuntary employee termination costs across the business, asset impairments, write-down losses and other exit-related costs and are included in SG&A. The charges in the U.S. and Canada businesses were partially offset by gains from the sales of real 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 Accrued compensation and benefits. The remaining reserves are expected to be paid through 2020.
NOTE 6 - SHORT-TERM DEBT
Short-term debt consisted of the following (in millions 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 | % |
Lines of Credit
The Company's U.S. business has a five-year $750 million unsecured revolving line of credit, maturing in 2022. There were 0 borrowings outstanding under the line of credit as of December 31, 2019 and 2018. The primary purpose of this credit facility is to support the Company's commercial paper program and for general corporate purposes.
Foreign subsidiaries utilize lines of credit for working capital purposes and other operating needs. These foreign lines of credit in aggregate were $55 million and $49 million as of December 31, 2019 and 2018, respectively.
Commercial Paper
The Company issues commercial paper from time to time for general working capital needs. At December 31, 2019, there was 0ne outstanding.
The Company's short-term debt instruments include affirmative and negative 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 December 31, 2019.
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following (in millions 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 |
|
(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 the years 2015-2017, Grainger issued $1.8 billion in long-term debt (Senior Notes) to partially fund the repurchase of $2.8 billion in shares of the total $3 billion previously announced. The remaining 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 Senior Notes in whole at any time or in part from time to time at a “make-whole” redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the Senior Notes plus 20-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the Senior Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. Within one year of the maturity date, the Company may redeem the Senior Notes in whole at any time or in part at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date.
Costs and discounts of approximately $24 million associated with the issuance of the Senior Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and are being amortized to interest expense over the term of the Senior Notes.
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 6 to the Financial Statements). 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 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, 2019 , the Company had elected a one-month LIBOR interest period. The weighted average interest rate was 1.47% and 1.34% for the years ended December 31, 2019 and 2018, respectively.
Euro Term Loan
In August 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 6 to the Financial Statements). 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, 2019 and 2018 was 0.45%.
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. The loan bears interest at the Canadian Dollar Offered Rate (CDOR) plus a margin of 80 basis points, as defined within the loan agreement. The weighted average interest rate during the year on this outstanding amount was 2.82%. No principal payments are required on the credit facility until the maturity date. 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, 2019.
The scheduled aggregate principal payments related to long-term debt, excluding debt issuance costs, are due as follows (in millions of dollars):
|
| | | | |
| Year | | Payment Amount |
|
| 2020 | | $ | 246 |
|
| 2021 | | 129 |
|
| 2022 | | — |
|
| 2023 | | — |
|
| 2024 | | 6 |
|
| Thereafter | | 1,800 |
|
| Total | | $ | 2,181 |
|
The Company's long-term debt instruments include affirmative and negative 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 December 31, 2019.
NOTE 8 - 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. The plan aligns Company contributions to Company performance and includes two components, a variable annual contribution based on the 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 for 2019, 2018 and 2017, respectively.
The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which contributions are made by the Company and participating employees. The expense associated with these defined contribution plans totaled $19 million, $13 million, and $18 million for 2019, 2018 and 2017, respectively.
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 moved all post-65 Medicare eligible retirees to healthcare exchanges and provided them a subsidy to purchase insurance. The amount of the subsidy is based on years of service. As a result of the plan change, the plan obligation was remeasured as of August 31, 2017. The remeasurement resulted in a decrease in the postretirement benefit obligation of $76 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $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 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 millions 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 | ) |
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 millions 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 |
|
The amounts recognized in AOCE consisted of the following (in millions 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 |
|
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 11.1 years for 2019.
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, |
| | 2019 |
| 2018 |
| 2017 |
| Discount rate | 4.08 | % | | 3.44 | % | | 4.00 | % |
| Long-term rate of return on plan assets, net of tax | 7.13 | % | | 7.13 | % | | 7.13 | % |
| 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 | % |
| Year ultimate healthcare cost trend rate reached | 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:
|
| | | | | | | | |
| | 2019 |
| 2018 |
| 2017 |
| Discount rate | 3.01 | % | | 4.08 | % | | 3.44 | % |
| Expected long-term rate of return on plan assets, net of tax | 4.00 | % | | 7.13 | % | | 7.13 | % |
| Initial healthcare cost trend rate | | | | | |
| Pre age 65 | 6.06 | % | | 6.31 | % | | 6.56 | % |
| Post age 65 | NA |
| | NA |
| | NA |
|
| Catastrophic drug benefit | NA |
| | 11.50 | % | | 12.50 | % |
| Ultimate healthcare cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year ultimate healthcare cost trend rate reached | 2026 |
| | 2026 |
| | 2026 |
|
| HRA credit inflation index for grandfathered retirees | 2.50 | % | | 2.50 | % | | 2.50 | % |
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, 2019, the Company decreased the discount rate from 4.08% to 3.01% to reflect the decrease in the market interest rates at December 31, 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, 2019, the initial healthcare cost trend rate was 6.06% for pre age 65. The
healthcare costs trend rates decline each year until reaching the ultimate trend rate of 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.
The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. In 2019, the Company liquidated previously held index funds and has temporarily invested all assets of the Trust in money market funds. The Company is in the process of transitioning the Trust assets from money market funds into a liability driven investment solution composed of growth assets and 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 millions of dollars):
|
| | | | | | | |
| | 2019 |
| 2018 |
| Registered investment companies: | | | |
| Vanguard Federal Money Market Fund | $ | 109 |
| | $ | — |
|
| Fidelity Government Money Market Fund | 95 |
| | — |
|
| Fidelity Spartan U.S. Equity Index Fund | — |
| | 80 |
|
| Vanguard 500 Index Fund | — |
| | 93 |
|
| Vanguard Total International Stock | — |
| | 26 |
|
| Plan Assets | 204 |
| | 199 |
|
| Less: trust liabilities | (6 | ) | | (23 | ) |
| Plan assets available for benefits | $ | 198 |
| | $ | 176 |
|
Consistent with the new investment strategy, the after-tax expected long-term rates of return on plan assets of 4.00% at December 31, 2019 is based on the historical average of long-term rates of return and an estimated tax rate. The required use of an expected long-term rate of return on plan assets may result in recognition of income that is greater or lower than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees.
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 millions of dollars):
|
| | | | |
| Year | | Estimated Gross Benefit Payments |
| 2020 | | $ | 9 |
|
| 2021 | | 10 |
|
| 2022 | | 11 |
|
| 2023 | | 12 |
|
| 2024 | | 12 |
|
| 2025-2029 | | 62 |
|
| Total | | $ | 116 |
|
NOTE 9 - 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. Finance leases and service contracts with lease arrangements are not material and the following disclosures pertain to the Company’s operating leases.
Information related to operating leases is as follows (in millions 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 |
|
|
| | | | |
| | | 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 |
|
Rent expense was $76 million for 2019, 2018 and 2017. These amounts are net of sublease income of $3 million, $3 million and $2 million for 2019, 2018 and 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, 2019 and 2018 were not considered material. Capital lease obligations are reported in Long-term debt.
As of December 31, 2019, the Company's future lease obligations that have not yet commenced are immaterial.
NOTE 10 - STOCK INCENTIVE PLANS
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees and executives, which include restricted stock units (RSUs), non-qualified stock options, performance shares and deferred stock units. As of December 31, 2019, there were 2.3 million shares available for grant under the plans. When awards are exercised or settled, shares of the Company’s treasury stock are issued.
Pretax stock-based compensation expense included in SG&A was $40 million, $47 million, and $33 million in 2019, 2018 and 2017, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $15 million, $26 million, and $26 million in 2019, 2018 and 2017, respectively.
Restricted Stock Units
The Company awards RSUs to certain employees and 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 options to certain employees and 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 expire 10 years from the grant date. 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, 2019 there was $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.
NOTE 11 - CAPITAL STOCK
The Company had no shares of preferred stock outstanding as of December 31, 2019 and 2018. 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 |
|
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSSES) (AOCE)
The components of AOCE consisted of the following (in millions 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 | ) |
NOTE 13 - INCOME TAXES
Earnings (losses) before income taxes by geographical area consisted of the following (in millions 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 |
|
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) as of December 31, 2019 and 2018 were as follows (in millions 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 | ) |
At December 31, 2019 the Company had $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 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 millions 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 | ) |
A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in millions 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 | % |
Foreign Undistributed Earnings
Estimated gross undistributed earnings of foreign subsidiaries at December 31, 2019, amounted to $402 million. 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 millions 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 |
|
The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in
this amount are $8 million and $13 million at December 31, 2019 and 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. In 2019, the changes to tax positions related generally to the impact of expiring statutes, conclusion of audits and audit settlements. Estimated interest and penalties were not material.
The Company regularly undergoes examination of its federal income tax returns by the Internal Revenue Service. The statute of limitations expired for the Company's 2015 federal tax return while tax years 2016 through 2019 are open. The Company is also subject to audit by state, local and foreign taxing authorities.Tax years 2012-2019 remain subject to state and local audits and 2007-2019 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.
NOTE 14 - SEGMENT INFORMATION
Grainger’s 2 reportable segments are the U.S. and Canada. These reportable segments reflect the results of the Company's high-touch solutions businesses in those geographies. Other businesses include the endless assortment businesses, Zoro Tools, Inc. (Zoro) and MonotaRO Co. (MonotaRO), and smaller high-tough solutions businesses in Europe and 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 millions of dollars):
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 |
| | United States | | Canada | | Total Reportable Segments | | Other businesses | | Total |
| Total net sales | $ | 8,815 |
| | $ | 529 |
| | $ | 9,344 |
| | $ | 2,651 |
| | $ | 11,995 |
|
| Intersegment net sales | (505 | ) | | — |
| | (505 | ) | | (4 | ) | | (509 | ) |
| Net sales to external customers | $ | 8,310 |
| | $ | 529 |
| | $ | 8,839 |
| | $ | 2,647 |
| | 11,486 |
|
| | | | | | | | | | |
| Segment operating earnings | $ | 1,391 |
| | $ | 3 |
| | $ | 1,394 |
| | $ | (9 | ) | | $ | 1,385 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 |
| | United States | | Canada | | Total Reportable Segments | | Other businesses | | Total |
| Total net sales | $ | 8,588 |
| | $ | 653 |
| | $ | 9,241 |
| | $ | 2,441 |
| | $ | 11,682 |
|
| Intersegment net sales | (457 | ) | | — |
| | (457 | ) | | (4 | ) | | (461 | ) |
| Net sales to external customers | $ | 8,131 |
| | $ | 653 |
| | $ | 8,784 |
| | $ | 2,437 |
| | $ | 11,221 |
|
| | | | | | | | | | |
| Segment operating earnings | $ | 1,338 |
| | $ | (49 | ) | | $ | 1,289 |
| | $ | 8 |
| | $ | 1,297 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 |
| | United States | | Canada | | Total Reportable Segments | | Other businesses | | Total |
| Total net sales | $ | 7,960 |
| | $ | 753 |
| | $ | 8,713 |
| | $ | 2,120 |
| | $ | 10,833 |
|
| Intersegment net sales | (404 | ) | | — |
| | (404 | ) | | (4 | ) | | (408 | ) |
| Net sales to external customers | $ | 7,556 |
| | $ | 753 |
| | $ | 8,309 |
| | $ | 2,116 |
| | $ | 10,425 |
|
| | | | | | | | | | |
| Segment operating earnings | $ | 1,200 |
| | $ | (77 | ) | | $ | 1,123 |
| | $ | 56 |
| | $ | 1,179 |
|
Following are reconciliations of the segment information with the consolidated totals per the Financial Statements (in millions of dollars): |
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Operating earnings: | | | | | |
| Total operating earnings for reportable segments | $ | 1,394 |
| | $ | 1,289 |
| | $ | 1,123 |
|
| Other businesses | (9 | ) | | 8 |
| | 56 |
|
| Unallocated expenses | (123 | ) | | (139 | ) | | (144 | ) |
| Total consolidated operating earnings | $ | 1,262 |
| | $ | 1,158 |
| | $ | 1,035 |
|
| | | | | | |
| Assets: | | | | | |
| United States | $ | 2,668 |
| | $ | 2,496 |
| | $ | 2,310 |
|
| Canada | 173 |
| | 188 |
| | 279 |
|
| Assets for reportable segments | $ | 2,841 |
| | $ | 2,684 |
| | $ | 2,589 |
|
| Other current and noncurrent assets | 3,003 |
| | 2,879 |
| | 3,033 |
|
| Unallocated assets | 161 |
| | 310 |
| | 182 |
|
| Total consolidated assets | $ | 6,005 |
| | $ | 5,873 |
| | $ | 5,804 |
|
| | | | | | |
| Depreciation and amortization: | | | | | |
| United States | $ | 148 |
| | $ | 166 |
| | $ | 169 |
|
| Canada | 17 |
| | 19 |
| | 19 |
|
| Depreciation and amortization for reportable segments | $ | 165 |
| | $ | 185 |
| | $ | 188 |
|
| Other businesses and unallocated | 45 |
| | 49 |
| | 53 |
|
| Total consolidated depreciation and amortization | $ | 210 |
| | $ | 234 |
| | $ | 241 |
|
| | | | | | |
| Additions to long-lived assets | | | | | |
| United States | $ | 168 |
| | $ | 200 |
| | $ | 187 |
|
| Canada | 9 |
| | 7 |
| | 8 |
|
| Additions to long-lived assets for reportable segments | $ | 177 |
| | $ | 207 |
| | $ | 195 |
|
| Other businesses and unallocated | 72 |
| | 39 |
| | 67 |
|
| Total consolidated additions to long-lived assets | $ | 249 |
| | $ | 246 |
| | $ | 262 |
|
Following are revenue and long-lived assets by geographic location (in millions of dollars):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Revenue by geographic location: | | | | | |
| United States | $ | 8,865 |
| | $ | 8,613 |
| | $ | 7,948 |
|
| Canada | 539 |
| | 658 |
| | 761 |
|
| Other foreign countries | 2,082 |
| | 1,950 |
| | 1,716 |
|
| | $ | 11,486 |
| | $ | 11,221 |
| | $ | 10,425 |
|
| | | | | | |
| Long-lived segment assets by geographic location: | | | | | |
| United States | $ | 1,268 |
| | $ | 1,140 |
| | $ | 1,098 |
|
| Canada | 152 |
| | 136 |
| | 199 |
|
| Other foreign countries | 327 |
| | 202 |
| | 247 |
|
| | $ | 1,747 |
| | $ | 1,478 |
| | $ | 1,544 |
|
The Company is a broad-line distributor of MRO products and services. Products are regularly added and deleted from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed.
Unallocated amounts include corporate-level support and administrative expenses, corporate-level assets consisting primarily of cash, property, buildings and equipment and intersegment eliminations and other adjustments. Unallocated expenses and assets are not included in any reportable segment.
Assets for reportable segments include net accounts receivable and first-in, first-out inventory, which are reported to the Company's Chief Operating Decision Maker. Long-lived assets consist of property, buildings, equipment, capitalized software and ROU assets of $223 million as of December 31, 2019.
Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of capitalized software.
NOTE 15 - CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings that are incidental to its business, including claims related to product liability, general negligence, contract disputes, environmental issues, unclaimed property, wage and hour laws, intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties. For example, beginning in the fourth quarter of 2019, Grainger has been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO, LLC chemical refinery located in Harris County. The complaints seek recovery of compensatory and other damages and relief. Grainger is investigating the claims, which are at an early stage, and intends to contest these matters vigorously. Also, as a government contractor selling to federal, state and local governmental entities, the Company may be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration or to pricing compliance. While the Company is unable to predict the outcome of any of these matters, it is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position or results of operations.
From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope and coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable
to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position or results of operations.
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 2019 and 2018 is as follows (in millions of dollars, except for per share amounts):
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2019 Quarter Ended |
| | | March 31 | | June 30 | | September 30 |
| December 31 |
| Total |
| Net sales | | $ | 2,799 |
| | $ | 2,893 |
| | $ | 2,947 |
| | $ | 2,847 |
| | $ | 11,486 |
|
| COGS | | 1,704 |
| | 1,772 |
| | 1,848 |
| | 1,765 |
| | 7,089 |
|
| Gross profit | | 1,095 |
| | 1,121 |
| | 1,099 |
| | 1,082 |
| | 4,397 |
|
| SG&A | | 732 |
| | 741 |
| | 761 |
| | 901 |
| | 3,135 |
|
| Operating earnings | | 363 |
| | 380 |
| | 338 |
| | 181 |
| | 1,262 |
|
| Net earnings attributable to W.W. Grainger, Inc. | | $ | 253 |
| | $ | 260 |
| | $ | 233 |
| | $ | 103 |
| | $ | 849 |
|
| Earnings per share - basic | | $ | 4.50 |
| | $ | 4.69 |
| | $ | 4.27 |
| | $ | 1.89 |
| | $ | 15.39 |
|
| Earnings per share - diluted | | $ | 4.48 |
| | $ | 4.67 |
| | $ | 4.25 |
| | $ | 1.88 |
| | $ | 15.32 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2018 Quarter Ended |
| | | March 31 | | June 30 | | September 30 | | December 31 | | Total |
| Net sales | | $ | 2,766 |
| | $ | 2,861 |
| | $ | 2,831 |
| | $ | 2,763 |
| | $ | 11,221 |
|
| COGS | | 1,674 |
| | 1,750 |
| | 1,752 |
| | 1,697 |
| | 6,873 |
|
| Gross profit | | 1,092 |
| | 1,111 |
| | 1,079 |
| | 1,066 |
| | 4,348 |
|
| SG&A | | 757 |
| | 767 |
| | 890 |
| | 776 |
| | 3,190 |
|
| Operating earnings | | 335 |
| | 344 |
| | 189 |
| | 290 |
| | 1,158 |
|
| Net earnings attributable to W.W. Grainger, Inc. | | $ | 232 |
| | $ | 237 |
| | $ | 104 |
| | $ | 209 |
| | $ | 782 |
|
| Earnings per share - basic | | $ | 4.09 |
| | $ | 4.19 |
| | $ | 1.84 |
| | $ | 3.71 |
| | $ | 13.82 |
|
| Earnings per share - diluted | | $ | 4.07 |
| | $ | 4.16 |
| | $ | 1.82 |
| | $ | 3.68 |
| | $ | 13.73 |
|
NOTE 17 - SUBSEQUENT EVENT
In February 2020, the Company entered into a five-year syndicated $1.25 billion revolving credit facility (2020 Credit Facility). The 2020 Credit Facility is unsecured and repayable at maturity in February 2025, subject to 2 one-year extensions if sufficient lenders agree. This revolving credit facility replaced the Company's 2017 Credit Facility.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: February 20, 2020
|
| |
W.W. GRAINGER, INC. |
| |
By: | /s/ D.G. Macpherson |
| D.G. Macpherson |
| Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Grainger on February 20, 2020, in the capacities indicated.
|
| | |
| | EXHIBIT INDEX(1) |
/s/ D.G. Macpherson | | /s/ Brian P. Anderson |
D.G. Macpherson | | Brian P. Anderson |
Chairman and Chief Executive Officer, Director | | Director |
(Principal Executive Officer) | | |
| | /s/ V. Ann Hailey |
/s/ Thomas B. Okray | | V. Ann Hailey |
Thomas B. Okray | | Director |
Senior Vice President | | |
and Chief Financial Officer | | /s/ Neil S. Novich |
(Principal Financial Officer) | | Neil S. Novich |
| | Director |
/s/ Eric R. Tapia | | |
Eric R. Tapia | | /s/ E. Scott Santi |
Vice President and Controller | | E. Scott Santi |
(Principal Accounting Officer) | | Director |
| | |
| | /s/ Lucas E. Watson |
| | Lucas E. Watson |
| | Director |
| | |
| | |
|
| EXHIBIT NO. | | |
EXHIBIT INDEX (1) |
EXHIBIT NO. | | DESCRIPTION |
| | Share Purchase Agreement, dated as of July 30, 2015, by and among Grainger, GWW UK Holdings Limited, Gregory Family Office Limited and Michael Gregory, incorporated by reference to Exhibit 2.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated July 31, 2015. |
| | Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
|
| | By-laws, as amended on March 9, 2017, incorporated by reference to Exhibit 3.1.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated March 9, 2017.
|
4.1 | | No instruments which define the rights of holders of W.W. Grainger, Inc.’s Industrial Development Revenue Bonds are filed herewith, pursuant to the exemption contained in Regulation S-K, Item 601(b)(4)(iii). W.W. Grainger, Inc. hereby agrees to furnish to the SEC, upon request, a copy of any such instrument. |
| | Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated June 11, 2015. |
| | First Supplemental Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S. Bank National Association, as trustee, and Form of 4.60% Senior Notes due 2045, incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated June 11, 2015. |
| | Second Supplemental Indenture, dated as of May 16, 2016, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016. |
| | Third Supplemental Indenture, dated as of May 22, 2017, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017. |
| | Form of 3.75% Senior Notes due 2046 (included in Exhibit 4.4)4.3), incorporated by reference to Exhibit 4.24.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016. |
| | Form of 4.20% Senior Notes due 2047 (included in Exhibit 4.5)4.4), incorporated by reference to Exhibit 4.24.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017. |
| | Description of Registrant's Securities Pursuant to Section 12 of the Securities Exchange Act of 1934. |
| | Fourth Supplemental Indenture, dated as of February 26, 2020, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020. |
| | | | | | | | |
| | Form of 1.85% Senior Notes due 2025 (included in Exhibit 4.8), incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020. |
| | 1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(a) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.*
|
| | Form of Indemnification Agreement between W.W. Grainger, Inc. and each of its directors and certain of its executive officers, incorporated by reference to Exhibit 10(b)(i) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.* |
| | Frozen Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(b)(v) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.* |
| | First amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(v)(1) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008.* |
| | Second amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(iv)(2) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.* |
| | Supplemental Profit Sharing Plan, as amended, incorporated by reference to Exhibit 10(viii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.* |
| | Supplemental Profit Sharing Plan II, as amended, incorporated by reference to Exhibit 10(b)(ix) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.* |
| | Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit 10(b)(xi) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.* |
| | Summary Description of the 2019 Directors Compensation Program.* |
| | 2005 Incentive Plan, as amended, incorporated by reference to Exhibit 10(d) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.* |
|
| | |
| | 2010 Incentive Plan, incorporated by reference to ExhibitAppendix B of W.W. Grainger, Inc.’s Proxy Statement dated March 12, 2010.* |
| | Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvi) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.* |
| | Form of Stock Option Award and Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.* |
| | Form of Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xviii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010.* |
| | Form of 2012 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xix) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012.* |
| | Summary Description of the 2020Company Management Incentive Program.* |
| | Incentive Program Recoupment Agreement, incorporated by reference to Exhibit 10(b)(xxv) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.* |
| | Form of Change in Control Employment Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxvii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010.* |
| | Form of 2013 Performance Share Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxiii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2013.* |
| | Form of 2014 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxiv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2014.* |
| | Form of 2015 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.28 to W.W. Grainger, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2015.* |
| | W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to Exhibit B of W.W. Grainger, Inc.’s Proxy Statement dated March 13, 2015.* |
| | First Amendment to the W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to 10.1 of W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.* |
| | W.W. Grainger, Inc. 2015 Incentive Plan as Amended and Restated Effective October 31, 2018, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.* |
| | £180,000,000 Facilities Agreement, dated as of August 26, 2015, by and among GWW UK Holdings Ltd, W.W. Grainger, Inc., the lender parties thereto, Lloyds Bank PLC and Lloyds Securities Inc., as Arrangers, and Lloyds Bank PLC, as Agent, incorporated by reference to W.W. Grainger, Inc.’s Current Report on Form 8-K dated September 1, 2015. |
| | Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* |
| | Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* |
| | Form of 2016 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* |
| | | | | | | | |
| | Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.* |
| | Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.* |
| | Form of 2017 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.4 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.* |
| | Separation Agreement and General Release by and between W.W. Grainger, Inc. and Ronald L. Jadin dated April 2, 2018, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.* |
|
| | |
| | Form of Separation Agreement and General Release by and between W.W. Grainger, Inc. and Joseph C. High, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.* |
| | Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Stock Option Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.* |
| | Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.4 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.* |
| | Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Performance Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.5 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.* |
| | Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Stock Option Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.* |
| | Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.* |
| | Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Performance Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.* |
| | Credit Agreement dated as of February 14, 2020, by and among W.W. Grainger, Inc., the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 14, 2020. |
| | First Amendment to Credit Agreement, dated as of August 29, 2022, by and among W.W. Grainger, Inc., the lenders party thereto and JPMorgan Chase, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Current Report on Form 8 K dated August 30, 2022. |
| | Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.* |
| | Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Performance Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.* |
| | 2022 Form of W.W. Grainger, Inc. 2015 Incentive Plan Performance Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers incorporated by reference to Exhibit 10.35 to W.W. Grainger, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021.* |
| | 2022 Form of W.W. Grainger, Inc. 2022 Incentive Plan Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.* |
| | 2022 Form of W.W. Grainger, Inc. 2022 Incentive Plan Performance Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.* |
| | W.W. Grainger, Inc. 2022 Incentive Plan, incorporated by reference to Appendix C of the Company's Definitive Proxy Statement on Schedule 14A filed on March 17, 2022.* |
| | | | | | | | |
| | Compensation Continuation - Severance Policy Guidance, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.* |
| | 2023 Form of W.W. Grainger, Inc. 2022 Incentive Plan Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* |
| | 2023 Form of W.W. Grainger, Inc. 2022 Incentive Plan Performance Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* |
| | Shareholder Agreement, Dated as of February 17, 2023, by and among W.W. Grainger, Inc. and MonotaRO Co., Ltd. |
| | Subsidiaries of Grainger. |
| | Consent of Independent Registered Public Accounting Firm.
|
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| 101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
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(*)Management contract or compensatory plan or arrangement. |
(1) Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments. |
Item 16: Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: February 21, 2023
| | | | | |
| W.W. GRAINGER, INC. |
| |
| By: | /s/ D.G. Macpherson |
| D.G. Macpherson |
| Chairman of the Board |
| and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on February 21, 2023, in the capacities indicated.
| | | | | | | | |
| | |
| /s/ D.G. Macpherson | | /s/ V. Ann Hailey |
| D.G. Macpherson | | V. Ann Hailey |
| Chairman of the Board | | Director |
| and Chief Executive Officer, Director | | |
| (Principal Executive Officer) | | /s/ Katherine D. Jaspon |
| | Katherine D. Jaspon |
| /s/ Deidra C. Merriwether | | Director |
| Deidra C. Merriwether | | |
| Senior Vice President | | /s/ Stuart L. Levenick |
| and Chief Financial Officer | | Stuart L. Levenick |
| (Principal Financial Officer) | | Director |
| | |
| /s/ Laurie R. Thomson | | /s/ Neil S. Novich |
| Laurie R. Thomson | | Neil S. Novich |
| Vice President and Controller | | Director |
| (Principal Accounting Officer) | | |
| | /s/ E. Scott Santi |
| | E. Scott Santi |
| | Director |
| | |
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