UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
|
| | |
Illinois | | 36-1150280 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
100 Grainger Parkway, Lake Forest, Illinois | | 60045-5201 |
(Address of principal executive offices) | | (Zip Code) |
(847) 535-1000 |
(Registrant’s telephone number including area code) |
|
Not Applicable |
(Former name, former address and former fiscal year; if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 56,983,18856,320,463 shares of the Company’s Common Stock, par value $0.50, outstanding as of September 30, 20172018.
|
| | |
| TABLE OF CONTENTS | |
| | Page No. |
| PART I | FINANCIAL INFORMATION | |
| | |
Item 1.1: | Financial Statements (Unaudited). | |
| | |
| Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 20172018 and 20162017 | |
| | |
| Condensed Consolidated Statements of Comprehensive Earnings for the Three and Nine Months Ended September 30, 20172018 and 20162017 | |
| | |
| Condensed Consolidated Balance Sheets as of September 30, 20172018 and December 31, 20162017 | |
| | |
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172018 and 20162017 | |
| | |
| Notes to Condensed Consolidated Financial Statements | |
| | |
Item 2.2: | Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations | |
| | |
Item 3.3: | Quantitative and Qualitative Disclosures About Market Risk.Risk | |
| | |
Item 4.4: | Controls and Procedures.Procedures | |
| | |
| PART II | OTHER INFORMATION | |
| | |
Item 1.1: | Legal Proceedings.Proceedings | |
| | |
Item 2.2: | Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds | |
| | |
Item 6.6: | Exhibits.Exhibits | |
| | |
Signatures | | |
| | |
EXHIBITS | | |
PART I – FINANCIAL INFORMATION
Item 1.1: Financial Statements.Statements
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 2,635,999 |
| | $ | 2,596,288 |
| | $ | 7,792,397 |
| | $ | 7,666,494 |
| $ | 2,831,429 |
| | $ | 2,635,999 |
| | $ | 8,458,042 |
|
| $ | 7,792,397 |
|
Cost of merchandise sold | 1,618,819 |
| | 1,556,536 |
| | 4,716,069 |
| | 4,541,629 |
| |
Cost of goods sold | | 1,752,194 |
| | 1,618,819 |
| | 5,176,107 |
|
| 4,716,069 |
|
Gross profit | 1,017,180 |
| | 1,039,752 |
| | 3,076,328 |
| | 3,124,865 |
| 1,079,235 |
| | 1,017,180 |
| | 3,281,935 |
| | 3,076,328 |
|
Warehousing, marketing and administrative expenses | 736,010 |
| | 717,165 |
| | 2,267,605 |
| | 2,179,596 |
| |
Selling, general and administrative expenses | | 890,113 |
| | 739,442 |
| | 2,413,997 |
|
| 2,277,009 |
|
Operating earnings | 281,170 |
| | 322,587 |
| | 808,723 |
| | 945,269 |
| 189,122 |
| | 277,738 |
| | 867,938 |
| | 799,319 |
|
Other income (expense): | |
| | |
| | | | | |
| | |
| | | | |
Interest income | 707 |
| | 147 |
| | 1,365 |
| | 474 |
| 2,003 |
| | 707 |
| | 3,645 |
| | 1,365 |
|
Interest expense | (21,765 | ) | | (18,024 | ) | | (58,649 | ) | | (48,556 | ) | (22,353 | ) | | (23,790 | ) | | (69,942 | ) | | (64,971 | ) |
Loss from equity method investment | (10,635 | ) | | (10,333 | ) | | (25,130 | ) | | (22,147 | ) | |
Other non-operating income (expense) | 521 |
| | (1,192 | ) | | 1,558 |
| | (1,291 | ) | |
Total other expense | (31,172 | ) | | (29,402 | ) | | (80,856 | ) | | (71,520 | ) | |
Losses from equity method investment | | (3,731 | ) | | (10,635 | ) | | (18,271 | ) | | (25,130 | ) |
Other, net | | 5,976 |
| | 5,978 |
| | 18,001 |
| | 17,284 |
|
Total other expense, net | | (18,105 | ) | | (27,740 | ) | | (66,567 | ) | | (71,452 | ) |
Earnings before income taxes | 249,998 |
| | 293,185 |
| | 727,867 |
| | 873,749 |
| 171,017 |
| | 249,998 |
| | 801,371 |
| | 727,867 |
|
Income taxes | 79,182 |
| | 99,776 |
| | 267,239 |
| | 309,251 |
| 55,972 |
| | 79,182 |
| | 197,798 |
| | 267,239 |
|
Net earnings | 170,816 |
| | 193,409 |
| | 460,628 |
| | 564,498 |
| 115,045 |
| | 170,816 |
| | 603,573 |
|
| 460,628 |
|
Less: Net earnings attributable to noncontrolling interest | 8,810 |
| | 7,536 |
| | 25,957 |
| | 19,236 |
| 10,668 |
| | 8,810 |
| | 30,680 |
| | 25,957 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 162,006 |
| | $ | 185,873 |
| | $ | 434,671 |
| | $ | 545,262 |
| $ | 104,377 |
| | $ | 162,006 |
| | $ | 572,893 |
|
| $ | 434,671 |
|
Earnings per share: | |
| | |
| | | | | |
| | |
| | | | |
Basic | $ | 2.80 |
| | $ | 3.07 |
| | $ | 7.43 |
| | $ | 8.88 |
| $ | 1.84 |
| | $ | 2.80 |
| | $ | 10.12 |
| | $ | 7.43 |
|
Diluted | $ | 2.79 |
| | $ | 3.05 |
| | $ | 7.39 |
| | $ | 8.82 |
| $ | 1.82 |
| | $ | 2.79 |
| | $ | 10.04 |
| | $ | 7.39 |
|
Weighted average number of shares outstanding: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Basic | 57,316,532 |
| | 60,016,550 |
| | 58,010,222 |
| | 60,854,548 |
| 56,339,630 |
| | 57,316,532 |
| | 56,172,277 |
| | 58,010,222 |
|
Diluted | 57,521,348 |
| | 60,416,151 |
| | 58,329,925 |
| | 61,268,119 |
| 56,803,857 |
| | 57,521,348 |
| | 56,588,530 |
| | 58,329,925 |
|
Cash dividends paid per share | $ | 1.28 |
| | $ | 1.22 |
| | $ | 3.78 |
| | $ | 3.61 |
| $ | 1.36 |
| | $ | 1.28 |
| | $ | 4.00 |
| | $ | 3.78 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
| | | Three Months Ended | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | September 30, | | September 30, |
| 2017 | | 2016 | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Net earnings | $ | 170,816 |
| | $ | 193,409 |
| $ | 460,628 |
| | $ | 564,498 |
| $ | 115,045 |
| | $ | 170,816 |
| | $ | 603,573 |
| | $ | 460,628 |
|
Other comprehensive earnings: | |
| | |
| |
| | |
| |
Foreign currency translation adjustments, net of reclassification (see Note 5) | 24,563 |
| | (12,866 | ) | 100,409 |
| | 31,709 |
| |
Postretirement benefit plan re-measurement, net of tax expense $29,172 (see Note 7) | 46,543 |
| | — |
| 46,543 |
| | — |
| |
Postretirement benefit plan reclassification, net of tax benefit of $962, $631, and $2,720, $1,893, respectively | (1,540 | ) | | (1,008 | ) | (4,338 | ) | | (3,026 | ) | |
Other comprehensive (losses) earnings: | | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | 213 |
| | 24,563 |
| | (25,142 | ) | | 100,409 |
|
Postretirement benefit plan re-measurement, net of tax expense $29,172 (see note 8)
| | — |
| | 46,543 |
| | — |
| | 46,543 |
|
Postretirement benefit plan reclassification, net of tax benefit of $825, $962, $2,475 and $2,720, respectively | | (2,440 | ) | | (1,540 | ) | | (7,317 | ) | | (4,338 | ) |
Other | 1 |
| | 188 |
| (11 | ) | | 844 |
| 1 |
| | 1 |
| | 23 |
| | (11 | ) |
Total other comprehensive (losses) earnings | | (2,226 | ) | | 69,567 |
| | (32,436 | ) | | 142,603 |
|
Comprehensive earnings, net of tax | 240,383 |
| | 179,723 |
| 603,231 |
| | 594,025 |
| 112,819 |
| | 240,383 |
| | 571,137 |
| | 603,231 |
|
Less: Comprehensive earnings attributable to noncontrolling interest | | | | | | |
Less: Comprehensive earnings (losses) attributable to noncontrolling interest | | | | | | | | |
Net earnings | 8,810 |
| | 7,536 |
| 25,957 |
| | 19,236 |
| 10,668 |
| | 8,810 |
| | 30,680 |
| | 25,957 |
|
Foreign currency translation adjustments | (8 | ) | | 2,188 |
| 4,338 |
| | 16,621 |
| (4,472 | ) | | (8 | ) | | (2,248 | ) | | 4,338 |
|
Comprehensive earnings attributable to noncontrolling interest | | 6,196 |
| | 8,802 |
| | 28,432 |
| | 30,295 |
|
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 231,581 |
| | $ | 169,999 |
| $ | 572,936 |
| | $ | 558,168 |
| $ | 106,623 |
| | $ | 231,581 |
| | $ | 542,705 |
| | $ | 572,936 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
|
| | | | | | | |
| (Unaudited) | | |
ASSETS | September 30, 2017 | | December 31, 2016 |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 284,575 |
| | $ | 274,146 |
|
Accounts receivable (less allowances for doubtful | |
| | |
|
accounts of $31,583 and $26,690, respectively) | 1,373,323 |
| | 1,223,096 |
|
Inventories – net | 1,391,993 |
| | 1,406,470 |
|
Prepaid expenses and other assets | 84,481 |
| | 81,766 |
|
Prepaid income taxes | 40,688 |
| | 34,751 |
|
Total current assets | 3,175,060 |
| | 3,020,229 |
|
PROPERTY, BUILDINGS AND EQUIPMENT | 3,441,802 |
| | 3,411,502 |
|
Less: Accumulated depreciation and amortization | 2,045,896 |
| | 1,990,611 |
|
Property, buildings and equipment – net | 1,395,906 |
| | 1,420,891 |
|
DEFERRED INCOME TAXES | 56,054 |
| | 64,775 |
|
GOODWILL | 543,248 |
| | 527,150 |
|
INTANGIBLES - NET | 582,274 |
| | 586,126 |
|
OTHER ASSETS | 72,518 |
| | 75,136 |
|
TOTAL ASSETS | $ | 5,825,060 |
| | $ | 5,694,307 |
|
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
| | | (Unaudited) | | | As of |
| | (Unaudited) | | |
ASSETS | | September 30, 2018 | | Dec 31, 2017 |
CURRENT ASSETS | | | | |
Cash and cash equivalents | | $ | 516,850 |
| | $ | 326,876 |
|
Accounts receivable (less allowances for doubtful | | |
| | |
|
accounts of $27,336 and $29,267, respectively) | | 1,481,300 |
| | 1,325,186 |
|
Inventories, net | | 1,473,117 |
| | 1,429,199 |
|
Prepaid expenses and other assets | | 93,586 |
| | 86,667 |
|
Prepaid income taxes | | 18,491 |
| | 38,061 |
|
Total current assets | | 3,583,344 |
| | 3,205,989 |
|
PROPERTY, BUILDINGS AND EQUIPMENT, NET | | 1,348,914 |
| | 1,391,967 |
|
DEFERRED INCOME TAXES | | 20,726 |
| | 22,362 |
|
GOODWILL | | 429,818 |
| | 543,903 |
|
INTANGIBLES, NET | | 479,521 |
| | 569,115 |
|
OTHER ASSETS | | 69,860 |
| | 70,918 |
|
TOTAL ASSETS | | $ | 5,932,183 |
| | $ | 5,804,254 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | September 30, 2017 | | December 31, 2016 | | | |
CURRENT LIABILITIES | | | | | | |
Short-term debt | $ | 11,348 |
| | $ | 386,140 |
| $ | 49,429 |
| | $ | 55,603 |
|
Current maturities of long-term debt | 41,836 |
| | 19,966 |
| 36,973 |
| | 38,709 |
|
Trade accounts payable | 713,453 |
| | 650,092 |
| 730,215 |
| | 731,582 |
|
Accrued compensation and benefits | 192,513 |
| | 212,525 |
| 215,727 |
| | 254,560 |
|
Accrued contributions to employees’ profit sharing plans | 65,988 |
| | 54,948 |
| |
Accrued contributions to employees' profit sharing plans | | 93,509 |
| | 92,682 |
|
Accrued expenses | 333,311 |
| | 290,207 |
| 302,263 |
| | 313,766 |
|
Income taxes payable | 34,074 |
| | 15,059 |
| 39,216 |
| | 19,759 |
|
Total current liabilities | 1,392,523 |
| | 1,628,937 |
| 1,467,332 |
| | 1,506,661 |
|
LONG-TERM DEBT (less current maturities) | 2,270,001 |
| | 1,840,946 |
| 2,148,399 |
| | 2,248,036 |
|
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES | 135,149 |
| | 126,101 |
| 115,644 |
| | 111,710 |
|
EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES | 126,302 |
| | 192,555 |
| 100,754 |
| | 110,114 |
|
SHAREHOLDERS' EQUITY | |
| | |
| |
| | |
|
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding | — |
| | — |
| |
Common Stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued | 54,830 |
| | 54,830 |
| |
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; 109,659,219 shares issued | | 54,830 |
| | 54,830 |
|
Additional contributed capital | 1,040,384 |
| | 1,030,256 |
| 1,124,831 |
| | 1,040,493 |
|
Retained earnings | 7,327,140 |
| | 7,113,559 |
| 7,751,677 |
| | 7,405,192 |
|
Accumulated other comprehensive losses | (134,029 | ) | | (272,294 | ) | (164,862 | ) | | (134,674 | ) |
Treasury stock, at cost – 52,676,031 and 50,854,905 shares, respectively | (6,520,828 | ) | | (6,128,416 | ) | |
Treasury stock, at cost – 53,338,756 and 53,330,356 shares, respectively | | (6,828,773 | ) | | (6,675,709 | ) |
Total W.W. Grainger, Inc. shareholders’ equity | 1,767,497 |
| | 1,797,935 |
| 1,937,703 |
| | 1,690,132 |
|
Noncontrolling interest | 133,588 |
| | 107,833 |
| 162,351 |
| | 137,601 |
|
Total shareholders' equity | 1,901,085 |
| | 1,905,768 |
| 2,100,054 |
| | 1,827,733 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 5,825,060 |
| | $ | 5,694,307 |
| $ | 5,932,183 |
| | $ | 5,804,254 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
| | | Nine Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2017 | | 2016 | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net earnings | $ | 460,628 |
| | $ | 564,498 |
| $ | 603,573 |
| | $ | 460,628 |
|
Provision for losses on accounts receivable | 15,187 |
| | 14,753 |
| 6,784 |
| | 15,187 |
|
Deferred income taxes and tax uncertainties | (15,261 | ) | | 24,259 |
| 10,004 |
| | (15,261 | ) |
Depreciation and amortization | 194,338 |
| | 177,395 |
| 191,602 |
| | 194,338 |
|
Net losses (gains) from sales of assets and divestitures | 11,296 |
| | (16,928 | ) | |
Net gains from sales of assets and divestitures | | (22,270 | ) | | (7,163 | ) |
Impairment of goodwill, intangible and other assets | | 142,155 |
| | 18,459 |
|
Stock-based compensation | 27,152 |
| | 27,545 |
| 36,241 |
| | 27,152 |
|
Losses from equity method investment | 25,130 |
| | 22,147 |
| 18,271 |
| | 25,130 |
|
Change in operating assets and liabilities – net of business acquisitions and divestitures: | |
| | |
| |
Change in operating assets and liabilities: | | |
| | |
|
Accounts receivable | (145,631 | ) | | (123,922 | ) | (171,829 | ) | | (145,631 | ) |
Inventories | 34,851 |
| | 41,938 |
| (53,270 | ) | | 34,851 |
|
Prepaid expenses and other assets | (4,206 | ) | | 3,478 |
| (12,920 | ) | | (4,206 | ) |
Trade accounts payable | 56,717 |
| | 36,594 |
| 4,419 |
| | 56,717 |
|
Other current liabilities | 29,643 |
| | (68,370 | ) | (36,377 | ) | | 29,643 |
|
Current income taxes payable | 18,015 |
| | (9,714 | ) | |
Income taxes payable, net
| | 38,666 |
| | 18,015 |
|
Accrued employment-related benefits cost | 4,306 |
| | 5,591 |
| (18,408 | ) | | 4,306 |
|
Other – net | 8,713 |
| | (10,340 | ) | |
Other, net | | 6,363 |
| | 8,713 |
|
Net cash provided by operating activities | 720,878 |
| | 688,924 |
| 743,004 |
| | 720,878 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| |
| | |
|
Additions to property, buildings and equipment | (191,183 | ) | | (213,622 | ) | |
Proceeds from sales of assets and divestitures | 110,421 |
| | 48,089 |
| |
Additions to property, buildings and equipment and intangibles | | (168,896 | ) | | (191,183 | ) |
Proceeds from sales of assets and business divestitures | | 75,558 |
| | 110,421 |
|
Equity method investment | (22,430 | ) | | (19,299 | ) | (11,875 | ) | | (22,430 | ) |
Other – net | 3,554 |
| | (564 | ) | |
Other, net | | — |
| | 3,554 |
|
Net cash used in investing activities | (99,638 | ) | | (185,396 | ) | (105,213 | ) | | (99,638 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| |
| | |
|
Net (decrease) increase in commercial paper | (369,748 | ) | | 39,887 |
| |
Net increase (decrease) in commercial paper | | 18 |
| | (369,748 | ) |
Borrowings under lines of credit | 33,931 |
| | 26,681 |
| 23,782 |
| | 33,931 |
|
Payments against lines of credit | (39,705 | ) | | (32,515 | ) | (27,899 | ) | | (39,705 | ) |
Proceeds from issuance of long-term debt | 424,020 |
| | 516,058 |
| 185 |
| | 424,020 |
|
Payments of long-term debt | (15,812 | ) | | (257,109 | ) | (89,408 | ) | | (15,812 | ) |
Proceeds from stock options exercised | 27,255 |
| | 29,553 |
| 179,549 |
| | 27,255 |
|
Payments for employee taxes withheld from stock awards | (17,546 | ) | | (18,541 | ) | (11,381 | ) | | (17,546 | ) |
Excess tax benefits from stock-based compensation | — |
| | 11,873 |
| |
Purchase of treasury stock | (435,983 | ) | | (613,198 | ) | (282,746 | ) | | (435,983 | ) |
Cash dividends paid | (225,504 | ) | | (221,131 | ) | (232,289 | ) | | (225,504 | ) |
Other, net | | 2,747 |
| | — |
|
Net cash used in financing activities | (619,092 | ) | | (518,442 | ) | (437,442 | ) | | (619,092 | ) |
Exchange rate effect on cash and cash equivalents | 8,281 |
| | 10,759 |
| (10,375 | ) | | 8,281 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS | 10,429 |
| | (4,155 | ) | 189,974 |
| | 10,429 |
|
Cash and cash equivalents at beginning of year | 274,146 |
| | 290,136 |
| 326,876 |
| | 274,146 |
|
Cash and cash equivalents at end of period | $ | 284,575 |
| | $ | 285,981 |
| $ | 516,850 |
| | $ | 284,575 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies, and other related products and services. W.W. Grainger, Inc.’s operations are primarily in the United States (U.S.) and Canada, with a presence in Europe, Asia and Latin America. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 20162017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). on February 26, 2018.
The Condensed Consolidated Balance Sheet as of December 31, 20162017 has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by U. S.accounting principles generally accepted accounting principles (U.S. GAAP)in the U.S. for complete financial statements.
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.in this report.
2. NEW ACCOUNTING STANDARDS
Certain amounts in the Condensed Consolidated Statements of Cash Flows, as previously reported, have been reclassified to conform to the 2017 presentation. In March 2016,2017, the Financial Accounting Standards Board (FASB) issued Accounting StandardsStandard Update (ASU) 2016-09,2017-07, Stock Based Compensation: Improvements to Employee Share-Based Payment Accounting,Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which became effective January 1, 2017.As a result, the Company reclassified $19 million of employee taxes paid from cash flows from operating activities to cash flows from financing activities in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016.
2. NEW ACCOUNTING STANDARDS
In January 2016, the FASB issued (ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities2017-07). This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under the fair value options andASU improves the presentation of net periodic pension cost and disclosure requirements for financial instruments.net periodic postretirement benefit cost. The effective date of this ASU iswas for fiscal years and interim periods beginning after December 15, 2017. Certain provisionsThe Company adopted this ASU as of January 1, 2018. This ASU was applied retrospectively for the newpresentation of the net periodic postretirement cost components in the Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2017 and prospectively, after the effective date. The guidance may be adopted early.limiting the capitalization of net periodic benefit cost in assets to the service cost component is applied prospectively. The Company is evaluating the impact of this ASU.the ASU for the three and nine months ended September 30, 2017 was an increase of $3.4 million and $9.4 million, respectively, in Selling, general and administrative expenses (SG&A) offset by a reduction in Total other expense, net of $3.4 million and $9.4 million, respectively, related to the reclassification of interest cost, expected return on plan assets and amortization of unrecognized gains and prior service credits. See Note 8 to the Financial Statements.
In February 2016,2018, the FASB issued ASU 2016-02,2018-02, Leases. Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU improves transparencyallows a reclassification from Accumulated other comprehensive earnings to Retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months.Jobs Act. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. The
Company is evaluatinghas evaluated the impactprovisions of this ASU.standard and is in the process of assessing the amount to reclassify from Accumulated other comprehensive losses to Retained earnings.
In August 2016,2018, the FASB issued ASU 2016-15,2018-14, Statement of Cash FlowsRetirement Benefits - Classification of Certain Cash Receipts and Cash Payments.Defined Benefit Plans - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU addresses eightremoves disclosures that are no longer considered cost beneficial, clarifies specific cash flow issues withrequirements of the objectivedisclosure and adds disclosure requirements identified as relevant to improve the effectiveness of reducing the existing diversity in practice.disclosures. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU2020 and early adoption is not expected to have a materialpermitted. The Company is evaluating the impact on the Company's Consolidated Financial Statements.of this ASU.
In January 2017,September 2018, the FASB issued ASU 2017-01, 2018-15, IBusiness Combinations (Topic 805): Clarifying the Definition ofntangibles - Goodwill and Other Internal Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Business.Cloud Computing Arrangement That is a Service Contract. This ASU clarifiesaligns the definition ofrequirements for capitalizing implementation costs incurred in a businesshosting arrangement that is a service contract with the objective of adding guidancerequirements for capitalizing implementation costs incurred to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assetsdevelop or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation.obtain internal-use software. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. Under the updates in ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments of this ASU are effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, and early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.permitted. The Company has elected to early adopted this ASU during the third quarter of 2017adopt prospectively and there was nodoes not expect a material impact to the financial statements.Company's Consolidated Financial Statements.
LEASE ACCOUNTING STANDARDS
In March 2017,February 2016, the FASB issued ASU 2017-07,2016-02, Compensation Retirement Benefits (Topic 715): ImprovingLeases as modified by subsequently issued ASUs 2018-01, 2018-10 and 2018-11. The core principle of the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU improves transparency and comparability related to the presentationaccounting and reporting of net periodic pension costleasing arrangements, including balance sheet recognition for assets and net periodic postretirement benefit cost. liabilities associated with rights and obligations created by leases with terms greater than twelve months, among other changes.
The amendments in this ASU are effective for public entitiesdate of these ASUs is for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied retrospectively for the presentation of the net periodic postretirement cost components in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is evaluating the impact of this ASU.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 20172018 and early adoption is permitted. The ASU should be applied prospectively on and after the effective date.Company has elected not to early adopt these ASUs. The Company is evaluatingplans to elect the modified retrospective application with practical expedient to adopt the new guidance effective January 1, 2019. Grainger will record the right of use assets and corresponding liabilities and does not expect a material impact of this ASU.to the Company's Consolidated Financial Statements.
3. REVENUE RECOGNITION STANDARDS
In July 2015, the FASB announced a one-year delay in the effective dateCompany revenue is primarily comprised of ASU 2014-09, Revenue from Contracts with Customers. This ASU will be effective for interimMRO product sales and fiscal years beginning after December 15, 2017. related activities, such as freight and services.
Recognition
The standard will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is that an entity should recognizeCompany recognizes revenue when it transfers promised goodsa sales arrangement with a customer exists (e.g., contract, purchase orders, others), transaction price is fixed or services to customers in an amountdeterminable and the Company has satisfied its performance obligation per the sales arrangement. The Company's sales arrangements generally have standard payment terms that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. do not exceed a year.
The ASU also requires additional disclosures about the nature, amount, timing and uncertaintymajority of Company revenue and cash flows arisingoriginates from contracts with customers.a single performance obligation to deliver products, whereby the Company’s 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. The Company’s performance obligations for services are satisfied when the services are rendered within the arranged service period. Total service revenue is not material and accounted for approximately 1% of total Company revenue for the three and nine months ended September 30, 2018.
In March 2016,The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the FASB issued ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU reducespassage of time. The Company also records a contract liability when customers prepay but the potential for diversity in practice arising from inconsistent applicationCompany has not yet satisfied its performance obligation. The Company did not have any material unsatisfied performance obligations, contract assets or liabilities as of principal versus agent guidance as well as reduce the costSeptember 30, 2018 and complexity during the transition and on an ongoing basis.December 31, 2017.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. This ASU clarifies the identification of performance obligations and the licensing implementation guidelines, while retaining the related principles of those areas.Measurement
In December 2016,The Company’s revenue is reported as Net sales and is measured at the FASB issued ASU 2016-20, Technical Correctionsdeterminable transaction price, net of any variable considerations (e.g., rights to return product, sales incentives, others) and Improvementsany taxes collected from customers and subsequently remitted to Topic 606, Revenue from Contracts with Customers. This ASU includes technical correctionsgovernmental authorities. The Company considers shipping and improvementshandling as activities to Topic 606fulfill its performance obligation. Billings for freight are accounted for as Net sales and other topics amended by Update 2014-09 to increase stakeholders’ awarenessshipping and handling costs are accounted for in Cost of the proposals and to expedite improvements to ASU 2014-09.goods sold.
In FebruaryThe Company offers customers rights to return product and sales incentives, which primarily consist of volume rebates. The Company’s rights of return and sales incentives generally do not exceed a year. The Company estimates sales returns and volume rebate accruals throughout the year based on various factors, including contract terms, historical experience and performance levels. Total accrued sales returns were approximately $28 million as of both September 30, 2018 and December 31, 2017, the FASB issued ASU 2017-05, Other Income - Gainrespectively, and Losses from the Derecognition of Nonfinancial Assets. This ASU clarifies the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $63 million and $55 million as of September 30, 2018 and December 31, 2017, respectively, and are reported as part of ASU 2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers.Accrued expenses.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The effective datesDisaggregation of ASU 2016-08, ASU 2016-10, ASU 2016-20 and ASU 2017-05 are consistent with ASU 2014-09. The Company has elected not to early adopt these ASUs. The standard permits the use of either the full retrospective or the modified retrospective adoption method. The Company is planning to elect the modified retrospective method and recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity as of January 1, 2018.Revenues
These ASUs require expanded qualitativeGrainger serves a large number of customers in diverse industries, which are subject to different economic and quantitative disclosuresmarket 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 emerging from contracts with customers.are affected by economic and market specific factors. The Company has evaluated the provisions of the new standard and assessed its impact on financial statement disclosures, information systems, business processes and internal controls. The standard is not expected to have a material impact on
following table presents the Company's Consolidated Financial Statements.percentage of revenue by reportable segment and by major customer industry for the three and nine months ended September 30, 2018:
|
| | | | | | | | |
| Three Months Ended September 30, 2018 |
| U.S. | | Canada | | Total Company (2) |
Government | 20 | % | | 5 | % | | 15 | % |
Heavy Manufacturing | 19 | % | | 20 | % | | 18 | % |
Light Manufacturing | 13 | % | | 6 | % | | 11 | % |
Transportation | 5 | % | | 8 | % | | 5 | % |
Commercial | 16 | % | | 9 | % | | 13 | % |
Retail/Wholesale | 8 | % | | 4 | % | | 7 | % |
Contractors | 9 | % | | 11 | % | | 8 | % |
Natural Resources | 3 | % | | 34 | % | | 4 | % |
Other (1) | 7 | % | | 3 | % | | 19 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % |
Percent of Total Company Revenue | 73 | % | | 5 | % | | 100 | % |
|
| | | | | | | | |
| Nine Months Ended September 30, 2018 |
| U.S. | | Canada | | Total Company (2) |
Government | 19 | % | | 6 | % | | 14 | % |
Heavy Manufacturing | 19 | % | | 20 | % | | 18 | % |
Light Manufacturing | 13 | % | | 6 | % | | 11 | % |
Transportation | 5 | % | | 7 | % | | 5 | % |
Commercial | 16 | % | | 10 | % | | 13 | % |
Retail/Wholesale | 8 | % | | 4 | % | | 7 | % |
Contractors | 10 | % | | 11 | % | | 8 | % |
Natural Resources | 3 | % | | 33 | % | | 4 | % |
Other (1) | 7 | % | | 3 | % | | 20 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % |
Percent of Total Company Revenue | 73 | % | | 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 single channel businesses and operations in Europe, Asia and Latin America and account for approximately 22% and 21% of revenue for the three and nine months ended September 30, 2018, respectively.
Cost of Goods Sold
Cost of goods sold includes products and product-related costs, vendor consideration, shipping and handling costs and service costs.
3. DIVIDEND
On October 25, 2017,
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisting of the Company’s Boardfollowing (in thousands of Directors declared a quarterly dividend of $1.28 per share, payable December 1, 2017, to shareholders of record on November 13, 2017.dollars):
|
| | | | | | | |
| As of |
| September 30, 2018 |
| | December 31, 2017 |
|
Land | $ | 319,990 |
| | $ | 348,739 |
|
Building, structures and improvements | 1,339,754 |
| | 1,342,508 |
|
Furniture, fixtures, machinery and equipment | 1,781,459 |
| | 1,753,413 |
|
Property, buildings and equipment | $ | 3,441,203 |
| | $ | 3,444,660 |
|
Less: Accumulated depreciation and amortization | 2,092,289 |
| | 2,052,693 |
|
Property, buildings and equipment, net | $ | 1,348,914 |
| | $ | 1,391,967 |
|
4.5. GOODWILL AND OTHER INTANGIBLE ASSETS
The balances and changes in the carrying amount of Goodwill by segment, including cumulative goodwill impairment charges are as follows (in thousands of dollars):
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other businesses | | Total |
Balance at January 1, 2017 | | $ | 202,020 |
| | $ | 122,140 |
| | $ | 202,990 |
| | $ | 527,150 |
|
Divestiture | | (3,316 | ) | | — |
| | — |
| | (3,316 | ) |
Impairment | | (7,169 | ) | | — |
| | — |
| | (7,169 | ) |
Translation | | — |
| | 8,282 |
| | 18,956 |
| | 27,238 |
|
Balance at December 31, 2017 | | 191,535 |
| | 130,422 |
| | 221,946 |
| | 543,903 |
|
Divestiture | | — |
| | — |
| | — |
| | — |
|
Impairment | | — |
| | — |
| | (104,461 | ) | | (104,461 | ) |
Translation | | — |
| | (3,304 | ) | | (6,320 | ) | | (9,624 | ) |
Balance at September 30, 2018 | | $ | 191,535 |
| | $ | 127,118 |
| | $ | 111,165 |
| | $ | 429,818 |
|
|
| | | | | | | | | | | | | | | | |
Cumulative goodwill impairment charges, December 31, 2017 | | $ | 24,207 |
| | $ | 32,265 |
| | $ | 70,299 |
| | $ | 126,771 |
|
Impairment | | — |
| | — |
| | 104,461 |
| | 104,461 |
|
Cumulative goodwill impairment charges, September 30, 2018 | | $ | 24,207 |
| | $ | 32,265 |
| | $ | 174,760 |
| | $ | 231,232 |
|
W.W. Grainger, had approximately $1.1 billionInc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The balances and changes in Intangible assets, net are as follows (in thousands of goodwill and intangible assets as of September 30, 2017 and December 31, 2016, or 19% and 20% of total assets, respectively. Graingerdollars):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | December 31, 2017 |
| Weighted average life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Customer lists and relationships | 14.3 years | | $ | 413,216 |
| | $ | 199,645 |
| | $ | 213,571 |
| | $ | 430,026 |
| | $ | 195,842 |
| | $ | 234,184 |
|
Trademarks, trade names and other | 14.5 years | | 24,073 |
| | 14,945 |
| | 9,128 |
| | 25,886 |
| | 16,054 |
| | 9,832 |
|
Non-amortized trade names and other | | | 99,172 |
| | — |
| | 99,172 |
| | 137,491 |
| | — |
| | 137,491 |
|
Capitalized software | 4.2 years | | 652,501 |
| | 494,851 |
| | 157,650 |
| | 632,431 |
| | 444,823 |
| | 187,608 |
|
Total intangible assets | 8.2 years | | $ | 1,188,962 |
| | $ | 709,441 |
| | $ | 479,521 |
| | $ | 1,225,834 |
| | $ | 656,719 |
| | $ | 569,115 |
|
The Company tests reporting units’ goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Accordingly, Grainger periodically performs qualitativeQualitative assessments of significant events andor changes in circumstances such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factorsare performed quarterly to determine the existence of impairment indicators and assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of these assets may not be recoverable and determine if quantitative impairment tests are necessary. Factors evaluated include declines in stock price, market capitalization and reporting units' historical and projected results, deteriorations of industry growth assumptions, declining economic indicators and other structural variables.
For the quantitative impairment tests for goodwill, the Company compares reporting unit orunits’ carrying values with their fair values and records an indefinite-lived intangible asset with its fair value. Anyimpairment charge for any excess of the carrying value over fair value is recorded as an impairment charge.
Thevalue. Reporting unit fair value of reporting units is calculatedvalues are estimated primarily using the income-based discounted cash flow (DCF) method and utilizing valuemethod. Value indicators from a marketmarket-based approach are used to evaluate the reasonableness of the resulting fair values.overall reasonableness. The DCF method incorporates various assumptions including the amount and timing of reporting unit future expected cash flows, including revenues, gross margins, operating expenses, capital expenditures and working capital based on operationalreporting units’ budgets, long-range strategic plans and other estimates. Theestimates, plus a terminal value growth rate is used to calculatethat estimates the value of cash flows beyond the last projected period and reflects management’s best estimates for perpetual growth for the reporting units. Estimates of market-participant risk-adjusted weighted average cost of capital are used as a basis for determining theto discount rates to apply to the reporting units’ future expected cash flows and terminal value to net present value.
Grainger’sFor the quantitative tests for indefinite-lived intangiblesintangible assets, which are primarily trade names. Thenames, the Company compares the assets' carrying values with their fair values and records an impairment charge for any excess of carrying value of trade names is calculated primarilyover fair value. Trade name fair values are estimated 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 namenames are the revenue, base, the royalty rate and the discount rate.
For the quantitative tests for amortizable intangible assets, the Company first estimates the future undiscounted cash flows through the useful lives of the assets and compares them to the assets’ carrying value. If carrying values exceed future undiscounted cash flows, then a second step is performed whereas the assets’ fair value is estimated and an impairment charge is recorded for any excess of carrying value over fair value.
Third Quarter 2018 Qualitative Tests
During the quarter ended September 30, 2017,2018, the Company performed qualitative assessments of its reporting units’ goodwill and intangible assets. The operating performanceasset assessments. With the exception of two of itsthe Cromwell reporting units has been below expectations and resulted in lowered short-term forecasts. Accordingly,unit, the Company concludeddid not identify any significant events or changes in circumstances that further evaluation wasindicated the existence of impairment indicators, and as such quantitative impairment tests were not required. Based on the results of the quantitative tests, the Company concluded that there was no impairment of goodwill or indefinitely-lived intangible assets as of September 30, 2017. The fair values of the reporting units exceeded their carrying values by approximately 31 percent for the CanadaHowever, changes in assumptions, judgments and estimates regarding reporting unit performance and 15 percent for the reporting unit included in Other Businesses. Changes in assumptions regarding future performance as well as the ability to execute on growth initiatives and productivity improvementsstructural economic conditions may have a significant impact on the fair value of reporting units and intangible assets in the future. If future earnings and cash flows. Likewise,flow projections are not achieved or structural economic conditions are unfavorable, economic environment and changes in market conditions or other factors may result in future impairments of the goodwill and intangible assets.
Additionally, the Company performed an impairment test on theor intangible assets subject to amortization for the two reporting units. The first step of the impairment test is to compare the undiscounted cash flows of the reporting units to their carrying values. If the results of the test determine that the undiscounted cash flows of the reporting units are less than their carrying values, then an impairment risk exists and further testing is required. An impairment chargecould result.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cromwell Goodwill and Intangible Assets
The operating performance of the Cromwell reporting unit has deteriorated from the second quarter of 2018 and the Company lowered its short-term forecasts and long-term outlook projections. These factors, combined with sustained economic uncertainty in the U.K market and higher interest rates, led the Company to conclude that it was more likely than not requiredthat the carrying value of Cromwell’s goodwill and intangible assets may not be recoverable. Accordingly, quantitative tests were performed during the quarter ended September 30, 2018.
In the quantitative test for goodwill performed in 2017, the fair value of the Cromwell reporting unit exceeded its carrying value by 15%. During the third quarter 2018 test, the Company considered the impact of the prolonged softness and uncertainty in the U.K. market due to Brexit and other unfavorable structural economic conditions, as well as Cromwell’s underperformance compared to expectations, prior year quantitative test assumptions and future performance projections. The revised outlook and uncertainty beyond 2018 were factored into lower revenues, earnings and cash flow projections which, combined with an increase in the discount rate, resulted in the calculated fair value of the Cromwell reporting unit below its carrying value. Accordingly, during the quarter ended September 30, 2018, the Company recorded a full goodwill impairment charge of $105 million with no tax benefit due to the nondeductibility of goodwill in the relevant taxing jurisdictions.The revised revenue and gross margin projections also resulted in the reduction of royalty rate and value attributable to the Cromwell trade name for which the Company recorded a $34 million impairment charge during the same period. The cumulative indefinite-lived intangible impairment charge of $34 million was recorded in other businesses as of September 30, 2017 using this test.2018 and there were none as of December 31, 2017. The goodwill and intangible asset impairment charges were recorded in SG&A.
The balancesCompany also performed an impairment test on Cromwell’s intangible assets subject to amortization and changeslong-lived assets using the undiscounted cash flows method and no impairment charge was required during the quarter ended September 30, 2018.
6. RESTRUCTURING
The Company continues to execute on its previously announced restructuring actions to reduce costs in the carrying amount of Goodwill by segmentU.S. and at the Company level (Unallocated expense) and to focus on profitability in Canada and other businesses. Restructuring costs, net, for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands of dollars):
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other Businesses | | Total |
Balance at December 31, 2016 | | $ | 202,020 |
| | $ | 122,140 |
| | $ | 202,990 |
| | $ | 527,150 |
|
Divestiture | | (3,316 | ) | | — |
| | — |
| | (3,316 | ) |
Impairment | | (7,169 | ) | | — |
| | — |
| | (7,169 | ) |
Translation | | — |
| | 9,433 |
| | 17,150 |
| | 26,583 |
|
Balance at September 30, 2017 | | $ | 191,535 |
| | $ | 131,573 |
| | $ | 220,140 |
| | $ | 543,248 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| Cost of goods sold | | Selling, general and administrative expenses | | Total | | Cost of goods sold | | Selling, general and administrative expenses | | Total |
| | Involuntary employee termination costs | | Other charges (gains) | | | | Involuntary employee termination costs | | Other charges (gains) | |
U.S. | $ | 48 |
| | $ | 3,453 |
| | $ | (1 | ) | | $ | 3,500 |
| | $ | (100 | ) | | $ | 10,917 |
| | $ | (2,873 | ) | | $ | 7,944 |
|
Canada | (189 | ) | | 3,431 |
| | (4,123 | ) | | (881 | ) | | — |
| | 1,882 |
| | 3,055 |
| | 4,937 |
|
Other businesses | — |
| | — |
| | 1,115 |
| | 1,115 |
| | 581 |
| | 73 |
| | (864 | ) | | (210 | ) |
Total | $ | (141 | ) | | $ | 6,884 |
| | $ | (3,009 | ) | | $ | 3,734 |
| | $ | 481 |
| | $ | 12,872 |
| | $ | (682 | ) | | $ | 12,671 |
|
|
| | | | | | | | | | | | | | | | |
Cumulative goodwill impairment charges, December 31, 2016 | | $ | 17,038 |
| | $ | 32,265 |
| | $ | 70,299 |
| | $ | 119,602 |
|
Impairment charges | | 7,169 |
| | — |
| | — |
| | 7,169 |
|
Cumulative goodwill impairment charges, September 30, 2017 | | $ | 24,207 |
| | $ | 32,265 |
| | $ | 70,299 |
| | $ | 126,771 |
|
The balances and changes in Intangible assets - net are as follows (in thousands of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Weighted average life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Customer relationships | 13.8 years | | $ | 428,041 |
| | $ | 190,395 |
| | $ | 237,646 |
| | $ | 424,405 |
| | $ | 175,112 |
| | $ | 249,293 |
|
Trade names and other | 13.5 years | | 25,960 |
| | 15,611 |
| | $ | 10,349 |
| | 25,353 |
| | 14,262 |
| | 11,091 |
|
Non-amortized trade names and other | — |
| | 136,333 |
| | — |
| | $ | 136,333 |
| | 128,282 |
| | — |
| | 128,282 |
|
Capitalized software | 4.1 years | | 626,652 |
| | 428,706 |
| | $ | 197,946 |
| | 571,978 |
| | 374,518 |
| | 197,460 |
|
Total | 8.2 years | | $ | 1,216,986 |
| | $ | 634,712 |
| | $ | 582,274 |
| | $ | 1,150,018 |
| | $ | 563,892 |
| | $ | 586,126 |
|
For the nine months ended September 30, 2017 and the twelve months ended December 31, 2016, amortization expense recognized on intangible assets was $67 million and $82 million, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated statement of earnings.
5. RESTRUCTURING RESERVES
The Company continues to evaluate performance and take restructuring actions such as the consolidation of the contact center network in the U.S., branch closures in the U.S. and Canada, the disposition of under performing assets in the U.S. and Canada and the wind-down of operations in Colombia which is part of the Other businesses. The purpose of these initiatives is to reduce costs in the U.S. and to streamline and focus on profitability in Canada and Other Businesses.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| Cost of goods sold | | Selling, general and administrative expenses | | Total | | Cost of goods sold | | Selling, general and administrative expenses | | Total |
| | Involuntary employee termination costs | | Other charges (gains) | | | | Involuntary employee termination costs | | Other charges (gains) | |
U.S. | $ | 348 |
| | $ | 12,133 |
| | $ | (7,444 | ) | | $ | 5,037 |
| | $ | (100 | ) | | $ | 19,459 |
| | $ | (17,634 | ) | | $ | 1,725 |
|
Canada | (611 | ) | | 23,131 |
| | (463 | ) | | 22,057 |
| | 2,574 |
| | 9,842 |
| | 14,093 |
| | 26,509 |
|
Other businesses | 1,083 |
| | 1,564 |
| | 2,015 |
| | 4,662 |
| | 581 |
| | 3,595 |
| | 37,124 |
| | 41,300 |
|
Unallocated expense | — |
| | — |
| | (4,688 | ) | | (4,688 | ) | | — |
| | — |
| | — |
| | — |
|
Total | $ | 820 |
| | $ | 36,828 |
| | $ | (10,580 | ) | | $ | 27,068 |
| | $ | 3,055 |
| | $ | 32,896 |
| | $ | 33,583 |
| | $ | 69,534 |
|
The restructuringOther charges (gains) primarily include asset impairment charges in Canada and other exit-related costs, net of gains from the sales of branches in the U.S., Canada and corporate offices. Other charges (gains) in 2017 reflect charges related to the wind-down of the Colombia business, including $16 million of accumulated foreign currency translation losses reclassified from Accumulated other comprehensive losses to SG&A in Other businesses.
The following summarizes the restructuring activity for the three and nine months ended September 30, 20172018 (in thousands of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Current asset write-downs | | Property, buildings and equipment write-downs and disposals | | Current liabilities | | |
| | | Involuntary employee termination costs | | Lease termination costs | | Other costs | | Total |
Balances as of December 31, 2017 | $ | 13,101 |
| | $ | 741 |
| | 50,289 |
| | $ | 4,893 |
| | $ | 12,764 |
| | $ | 81,788 |
|
Restructuring costs, net of (gains) | 4,201 |
| | (17,847 | ) | | 36,828 |
| | 3,456 |
| | 430 |
| | 27,068 |
|
Cash (paid) received, net | (844 | ) | | 45,020 |
| | (45,056 | ) | | (3,886 | ) | | (1,632 | ) | | (6,398 | ) |
Non-cash, translation and other | (13,866 | ) | | (27,293 | ) | | (1,276 | ) | | (1,729 | ) | | (6,393 | ) | | (50,557 | ) |
Balances as of September 30, 2018 | $ | 2,592 |
| | $ | 621 |
| | $ | 40,785 |
| | $ | 2,734 |
| | $ | 5,169 |
| | $ | 51,901 |
|
The cumulative amounts incurred to date since the inception of the program and 2016expected through the end of 2019 (excluding results of sales of real estate) in connection with the Company's restructuring actions for active programs are as follows (in thousands of dollars):
| | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Cumulative amount incurred to date | | Additional amount expected |
| Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | | Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | |
| | Involuntary employee termination costs | | Other charges (gains) | | Involuntary employee termination costs | | Other charges (gains) | | |
United States | $ | (100 | ) | | $ | 10,917 |
| | $ | (2,873 | ) | | $ | 7,944 |
| | $ | — |
| | $ | 3,511 |
| | $ | 1,926 |
| | $ | 5,437 |
| |
U.S. | | $ | 67,435 |
| | $ | 2,339 |
|
Canada | — |
| | 1,882 |
| | 3,055 |
| | 4,937 |
| | 548 |
| | 3,119 |
| | 700 |
| | 4,367 |
| 80,525 |
| | 6,749 |
|
Other Businesses | 581 |
| | 73 |
| | (864 | ) | | (210 | ) | | — |
| | — |
| | — |
| | — |
| |
Other businesses | | 65,378 |
| | 545 |
|
Unallocated expense | | 14,852 |
| | — |
|
Total | $ | 481 |
| | $ | 12,872 |
| | $ | (682 | ) | | $ | 12,671 |
| | $ | 548 |
| | $ | 6,630 |
| | $ | 2,626 |
| | $ | 9,804 |
| $ | 228,190 |
| | $ | 9,633 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total | | Cost of merchandise sold | | Warehousing, marketing and administrative expenses | | Total |
| | Involuntary employee termination costs | | Other charges (gains) | | | | Involuntary employee termination costs | | Other charges (gains) | |
United States | $ | (100 | ) | | $ | 19,459 |
| | $ | (17,634 | ) | | $ | 1,725 |
| | $ | 3,100 |
| | $ | 18,342 |
| | $ | (8,949 | ) | | $ | 12,493 |
|
Canada | 2,574 |
| | 9,842 |
| | 14,093 |
| | 26,509 |
| | 11,452 |
| | 13,194 |
| | 700 |
| | 25,346 |
|
Other Businesses | 581 |
| | 3,595 |
| | 37,124 |
| | 41,300 |
| | — |
| | — |
| | — |
| | — |
|
Unallocated | — |
| | — |
| | | | — |
| | — |
| | — |
| | 8,947 |
| | 8,947 |
|
Total | $ | 3,055 |
| | $ | 32,896 |
| | $ | 33,583 |
| | $ | 69,534 |
| | $ | 14,552 |
| | $ | 31,536 |
| | $ | 698 |
| | $ | 46,786 |
|
Other charges (gains) primarily includes gains from the sales of branches partially offset by asset write-downs in the U. S., assets write-downs in Canada and $16 million of accumulated foreign currency translations losses from the wind-down of Colombia reclassified from Accumulated other comprehensive losses to earnings in Other Businesses.
The following summarizes the restructuring reserve activity (in thousands of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Current assets write-downs | | Fixed assets write - downs and disposals | | Involuntary employee termination costs | | Lease termination costs | | Other costs | | Total |
Reserves as of December 30, 2016 | $ | 167 |
| | $ | — |
| | $ | 24,541 |
| | $ | 3,125 |
| | $ | 511 |
| | $ | 28,344 |
|
Restructuring costs, net of (gains) | 9,775 |
| | (5,987 | ) | | 32,896 |
| | 2,512 |
| | 30,338 |
| | 69,534 |
|
Cash (paid) received | (865 | ) | | 18,793 |
| | (24,370 | ) | | (2,575 | ) | | (5,620 | ) | | (14,637 | ) |
Translation | (82 | ) | | 3 |
| | 843 |
| | (11 | ) | | (196 | ) | | 557 |
|
Other | — |
| | (12,809 | ) | | — |
| | — |
| | (17,230 | ) | | (30,039 | ) |
Reserves as of September 30, 2017 | $ | 8,995 |
| | $ | — |
| | $ | 33,910 |
| | $ | 3,051 |
| | $ | 7,803 |
| | $ | 53,759 |
|
| | | | | | | | | | |
|
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The amounts incurred net of gains in connection with the restructuring activities are as follows (in thousands of dollars):
|
| | | | | | | |
| Cumulative amount incurred to date | | Additional amount expected |
United States | $ | 61,814 |
| | $ | — |
|
Canada | 26,509 |
| | 11,270 |
|
Other Businesses | 41,300 |
| | — |
|
Total | $ | 129,623 |
| | $ | 11,270 |
|
6.7. SHORT-TERM AND LONG-TERM DEBT
The following summarizes information concerning short-termShort-term debt (in thousandsconsisted of dollars):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Outstanding lines of credit | $ | 11,348 |
| | $ | 16,392 |
|
Outstanding commercial paper | — |
| | 369,748 |
|
| $ | 11,348 |
| | $ | 386,140 |
|
Asoutstanding lines of September 30, 2017 and December 31, 2016, there was $0 million and $370 million, respectively, of commercial paper outstanding. A portion of the proceeds from the May 2017 bond issuance (see below) was used to redeem outstanding commercial paper.
credit. Long-term debt consisted of the following (in thousands of dollars):
| | | | | | | | | | As of September 30, 2018 | | As of December 31, 2017 |
| September 30, 2017 | | December 31, 2016 | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
4.60% senior notes due 2045 | $ | 1,000,000 |
| | $ | 1,000,000 |
| $ | 1,000,000 |
| | $ | 1,046,760 |
| | $ | 1,000,000 |
| | $ | 1,089,000 |
|
3.75% senior notes due 2046 | 400,000 |
| | 400,000 |
| 400,000 |
| | 364,980 |
| | 400,000 |
| | 384,200 |
|
4.20% senior notes due 2047 | 400,000 |
| | — |
| 400,000 |
| | 392,540 |
| | 400,000 |
| | 410,800 |
|
British pound term loan and revolving credit facility | 192,903 |
| | 187,506 |
| |
Euro term loan and revolving credit facility | 141,743 |
| | 120,900 |
| |
British pound term loan | | 177,180 |
| | 177,180 |
| | 194,574 |
| | 194,574 |
|
Euro term loan | | 127,689 |
| | 127,689 |
| | 131,956 |
| | 131,956 |
|
Canadian dollar revolving credit facility | 116,307 |
| | 100,521 |
| 54,247 |
| | 54,247 |
| | 99,388 |
| | 99,388 |
|
Other | 84,860 |
| | 71,109 |
| |
| 2,335,813 |
| | 1,880,036 |
| |
Capital lease obligations and other | | 48,867 |
| | 48,867 |
| | 84,274 |
| | 84,274 |
|
Subtotal | | 2,207,983 |
| | 2,212,263 |
| | 2,310,192 |
| | 2,394,192 |
|
Less current maturities | (41,836 | ) | | (19,966 | ) | (36,973 | ) | | (36,973 | ) | | (38,709 | ) | | (38,709 | ) |
Debt issuance costs and discounts | (23,976 | ) | | (19,124 | ) | (22,611 | ) | | (22,611 | ) | | (23,447 | ) | | (23,447 | ) |
| $ | 2,270,001 |
| | $ | 1,840,946 |
| |
Long-term debt (less current maturities) | | $ | 2,148,399 |
| | $ | 2,152,679 |
| | $ | 2,248,036 |
| | $ | 2,332,036 |
|
On May 22, 2017, the Company issued $400 million of unsecured 4.20% Senior Notes (4.20% Notes) that mature on May 15, 2047. The 4.20% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15 and November 15, beginning on November 15, 2017. Prior to November 15, 2046, the Company may redeem the 4.20% Notes in whole at any time or gradually at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.20% Notes plus 20 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 4.20% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. Costs and discounts of approximately $5.8 million associated with the issuance of the 4.20%
Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortized to interest expense over the term of the 4.20% Notes.
The estimated fair valuesvalue of the Company’s 4.20% Notes, 3.75% Senior Notes due 2046 (3.75% Notes) and 4.60% Senior Notes due 2045 (4.60% Notes) weresenior notes was based on available external pricing data and current market rates for
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The fair value of the 4.20% Notes was approximately $407 million as of September 30, 2017. The fair value of the 3.75% Notes was approximately $380 million and $371 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of the 4.60% Notes was approximately $1.1 billion as of September 30, 2017 and December 31, 2016, respectively. The carrying value of other long-term debt approximates fair value due to their variable interest rates.
On October 6, 2017, the Company replaced its $900 million unsecured revolving line of credit with a new five-year $750 million unsecured revolving line of credit, with the option to extend the line to up to $1.125 billion subject to customary conditions, to be used for general corporate purposes. The terms of the new line of credit are customary for transactions of this type (including the Company's guarantee of subsidiary borrower obligation) and do not contain any financial performance covenants. The primary purpose of this credit facility is to provide support to the Company's commercial paper program. There were no borrowings outstanding under the previous line of credit, which was scheduled to mature on August 22, 2018. The preceding summary of the credit facility does not purport to be complete and is qualified in its entirety by the reference to the full text of the credit facility, a copy of which has been filed as Exhibit 10.1 to the Company's Form 8-K, previously filed on October 10, 2017.
7.8. EMPLOYEE BENEFITS - POSTRETIREMENT
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its U.S. employees (and their dependents) hired prior to January 1, 2013, 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 2017,2013. Effective January 1, 2018, the Company implemented plan design changes, effective January 1, 2018 for the post-65 age group. This plan change will movewhich moved all post-65 Medicare eligible retirees to healthcare exchanges and provideprovides them a subsidy, to purchase insurance. The amount of the subsidy will be based on years of service. The plan obligation was re-measured as a result of this plan design change. At re-measurement, the Company decreased the discount rate from 4.00% at December 31, 2016service, to 3.55% and updated various actuarial assumptions and the fair value of plan assets. The plan re-measurement as of August 31, 2017 resulted in a decrease in the postretirement benefit obligation of $75.7 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $29.2 million. 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.purchase insurance.
The postretirement benefit obligation was $29.0 million and $101.5 million at September 30, 2017 and December 31, 2016, respectively. Net accumulated gains recognized in Accumulated other comprehensive losses were $67.5 million and $25.3 million at September 30, 2017 and December 31, 2016, respectively.
The net periodic (benefits) costs recorded in Warehousing, marketingbenefits for the Company's postretirement healthcare benefits plan, which are valued at the measurement date of January 1 for each year and administrative expensesrecognized evenly throughout the year, consisted of the following components (in thousands of dollars):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Selling, general and administrative expenses | | | | | | | | |
Service cost | $ | 1,856 |
| | $ | 2,059 |
| | $ | 5,649 |
| | $ | 6,178 |
| $ | 1,629 |
| | $ | 1,856 |
| | $ | 4,887 |
| | $ | 5,649 |
|
Other income (expense) | | | | | | | | |
Interest cost | 2,026 |
| | 2,464 |
| | 6,323 |
| | 7,391 |
| 1,712 |
| | 2,026 |
| | 5,136 |
| | 6,323 |
|
Expected return on assets | (2,957 | ) | | (2,528 | ) | | (8,670 | ) | | (7,584 | ) | (3,315 | ) | | (2,957 | ) | | (9,945 | ) | | (8,670 | ) |
Amortization of unrecognized (gains) losses | (609 | ) | | 32 |
| | (1,919 | ) | | 96 |
| |
Amortization of unrecognized gains | | (840 | ) | | (609 | ) | | (2,520 | ) | | (1,919 | ) |
Amortization of prior service credits | (1,893 | ) | | (1,672 | ) | | (5,139 | ) | | (5,016 | ) | (2,424 | ) | | (1,893 | ) | | (7,272 | ) | | (5,139 | ) |
Net periodic (benefits) costs | $ | (1,577 | ) | | $ | 355 |
| | $ | (3,756 | ) | | $ | 1,065 |
| |
Net periodic benefit | | $ | (3,238 | ) | | $ | (1,577 | ) | | $ | (9,714 | ) | | $ | (3,756 | ) |
The Company has established a Group Benefit Trust (Trust) to fund postretirement healthcare benefits plan obligations and process benefit payments. The funding of the Trust is an estimated amount which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There areCompany has no minimum funding requirementsrequirement and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC. The Company did not make a contribution to the Trust during the nine months ended September 30, 2017.2018.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. SEGMENT INFORMATION9. INCOME TAXES
The reconciliation of income tax expense with federal income taxes at statutory rate follows (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Federal income tax (21% in 2018 and 35% in 2017) | $ | 35,914 |
| | $ | 87,499 |
| | $ | 168,288 |
| | $ | 254,753 |
|
States income taxes, net of federal income tax benefit | 4,817 |
| | 5,996 |
| | 22,572 |
| | 17,458 |
|
Clean energy credit | (2,897 | ) | | (8,902 | ) | | (13,575 | ) | | (25,917 | ) |
Foreign rate difference | 1,895 |
| | 2,152 |
| | 8,880 |
| | 6,265 |
|
Impairment and other charges | 27,875 |
| | — |
| | 27,875 |
| | 19,188 |
|
Stock compensation benefit | (8,289 | ) | | (575 | ) | | (18,899 | ) | | (8,314 | ) |
Other, net | (3,343 | ) | | (6,988 | ) | | 2,657 |
| | 3,806 |
|
Income tax expense | $ | 55,972 |
| | $ | 79,182 |
| | $ | 197,798 |
| | $ | 267,239 |
|
Effective tax rate | 32.7 | % | | 31.7 | % | | 24.7 | % | | 36.7 | % |
The Tax Cut and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Company applied Staff Accounting Bulletin (SAB) 118 when accounting for the enactment-date effects of the Tax Act at December 31, 2017 and recorded estimates primarily related to the revaluation of deferred tax balances and the one-time transition tax. As of September 30, 2018, the Company had not completed the analysis for all of the tax effects of the Tax Act and had not recorded any additional adjustments to the amounts recorded at December 31, 2017. The Company expects to complete the Tax Act estimates in the fourth quarter of 2018 and does not expect a material impact to the Consolidated Financial Statements.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. EARNINGS PER SHARE
The Company hasfollowing table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net earnings attributable to W.W. Grainger, Inc. as reported | $ | 104,377 |
| | $ | 162,006 |
| | $ | 572,893 |
| | $ | 434,671 |
|
Distributed earnings available to participating securities | (640 | ) | | (603 | ) | | (1,596 | ) | | (1,576 | ) |
Undistributed earnings available to participating securities | (243 | ) | | (806 | ) | | (3,108 | ) | | (1,966 | ) |
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders | 103,494 |
| | 160,597 |
| | 568,189 |
| | 431,129 |
|
Undistributed earnings allocated to participating securities | 243 |
| | 806 |
| | 3,108 |
| | 1,966 |
|
Undistributed earnings reallocated to participating securities | (242 | ) | | (803 | ) | | (3,086 | ) | | (1,956 | ) |
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders | $ | 103,495 |
| | $ | 160,600 |
| | $ | 568,211 |
| | $ | 431,139 |
|
Denominator for basic earnings per share – weighted average shares | 56,339,630 |
| | 57,316,532 |
| | 56,172,277 |
| | 58,010,222 |
|
Effect of dilutive securities | 464,227 |
| | 204,816 |
| | 416,253 |
| | 319,703 |
|
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | 56,803,857 |
| | 57,521,348 |
| | 56,588,530 |
| | 58,329,925 |
|
Earnings per share two-class method | |
| | |
| | | | |
Basic | $ | 1.84 |
| | $ | 2.80 |
| | $ | 10.12 |
| | $ | 7.43 |
|
Diluted | $ | 1.82 |
| | $ | 2.79 |
| | $ | 10.04 |
| | $ | 7.39 |
|
11. DIVIDEND
On October 31, 2018, the Company’s Board of Directors declared a quarterly dividend of $1.36 per share, payable December 1, 2018, to shareholders of record on November 12, 2018.
12. SEGMENT INFORMATION
Grainger's two reportable segments:segments are the U.S. and Canada. The U.S. operating segment reflectsThese reportable segments reflect the results of the Company's U.S. businesses. The Canada operating segment reflectsbusinesses in those geographies, except for Zoro Tools, Inc. (Zoro), which is in the results for Acklands – Grainger Inc. and its subsidiaries.U.S. Other businesses include Zoro in the U.S,Company's single channel businesses (Zoro and MonotaRO in JapanJapan) and small operations in Europe, Asia and Latin America. OtherThese businesses individually do not meet the definitioncriteria of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of MRO supplies, as service revenues account for less than 1% of total revenues for each operating segment. Following is a summary of segment results (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 2,015,968 |
| | $ | 188,216 |
| | $ | 536,927 |
| | $ | 2,741,111 |
|
Intersegment net sales | (103,667 | ) | | (13 | ) | | (1,432 | ) | | (105,112 | ) |
Net sales to external customers | $ | 1,912,301 |
| | $ | 188,203 |
| | $ | 535,495 |
| | $ | 2,635,999 |
|
Segment operating earnings (losses) | $ | 297,855 |
| | $ | (14,972 | ) | | $ | 26,892 |
| | $ | 309,775 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 2,028,235 |
| | $ | 179,281 |
| | $ | 481,929 |
| | $ | 2,689,445 |
|
Intersegment net sales | (92,160 | ) | | (23 | ) | | (974 | ) | | (93,157 | ) |
Net sales to external customers | $ | 1,936,075 |
| | $ | 179,258 |
| | $ | 480,955 |
| | $ | 2,596,288 |
|
Segment operating earnings (losses) | $ | 342,524 |
| | $ | (15,118 | ) | | $ | 24,835 |
| | $ | 352,241 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 5,968,565 |
| | $ | 563,470 |
| | $ | 1,560,894 |
| | $ | 8,092,929 |
|
Intersegment net sales | (297,247 | ) | | (15 | ) | | (3,270 | ) | | (300,532 | ) |
Net sales to external customers | $ | 5,671,318 |
| | $ | 563,455 |
| | $ | 1,557,624 |
| | $ | 7,792,397 |
|
Segment operating earnings (losses) | $ | 922,614 |
| | $ | (59,428 | ) | | $ | 44,177 |
| | $ | 907,363 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 5,973,044 |
| | $ | 552,470 |
| | $ | 1,401,429 |
| | $ | 7,926,943 |
|
Intersegment net sales | (257,101 | ) | | (109 | ) | | (3,239 | ) | | (260,449 | ) |
Net sales to external customers | $ | 5,715,943 |
| | $ | 552,361 |
| | $ | 1,398,190 |
| | $ | 7,666,494 |
|
Segment operating earnings (losses) | $ | 1,023,318 |
| | $ | (55,207 | ) | | $ | 76,343 |
| | $ | 1,044,454 |
|
|
| | | | | | | | | | | | | | | |
| United States | | Canada | | Other Businesses | | Total |
Segment assets: | | | | | | | |
September 30, 2017 | $ | 2,316,683 |
| | $ | 298,553 |
| | $ | 589,564 |
| | $ | 3,204,800 |
|
December 31, 2016 | $ | 2,275,009 |
| | $ | 286,035 |
| | $ | 494,067 |
| | $ | 3,055,111 |
|
16
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following is a summary of segment results (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| U.S. | | Canada | | Other businesses | | Total |
Total net sales | $ | 2,188,324 |
| | $ | 149,782 |
| | $ | 609,317 |
| | $ | 2,947,423 |
|
Intersegment net sales | (115,007 | ) | | (22 | ) | | (965 | ) | | (115,994 | ) |
Net sales to external customers | $ | 2,073,317 |
| | $ | 149,760 |
| | $ | 608,352 |
| | $ | 2,831,429 |
|
Segment operating earnings | $ | 326,273 |
| | $ | (4,051 | ) | | $ | (99,831 | ) | | $ | 222,391 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| U.S. | | Canada | | Other businesses | | Total |
Total net sales | $ | 2,015,968 |
| | $ | 188,216 |
| | $ | 536,927 |
| | $ | 2,741,111 |
|
Intersegment net sales | (103,667 | ) | | (13 | ) | | (1,432 | ) | | (105,112 | ) |
Net sales to external customers | $ | 1,912,301 |
| | $ | 188,203 |
| | $ | 535,495 |
| | $ | 2,635,999 |
|
Segment operating earnings | $ | 294,603 |
| | $ | (14,972 | ) | | $ | 26,892 |
| | $ | 306,523 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| U.S. | | Canada | | Other businesses | | Total |
Total net sales | $ | 6,471,116 |
| | $ | 508,414 |
| | $ | 1,819,562 |
| | $ | 8,799,092 |
|
Intersegment net sales | (337,912 | ) | | (55 | ) | | (3,083 | ) | | (341,050 | ) |
Net sales to external customers | $ | 6,133,204 |
| | $ | 508,359 |
| | $ | 1,816,479 |
| | $ | 8,458,042 |
|
Segment operating earnings | $ | 1,032,491 |
| | $ | (37,875 | ) | | $ | (22,509 | ) | | $ | 972,107 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| U.S. | | Canada | | Other businesses | | Total |
Total net sales | $ | 5,968,565 |
| | $ | 563,470 |
| | $ | 1,560,894 |
| | $ | 8,092,929 |
|
Intersegment net sales | (297,247 | ) | | (15 | ) | | (3,270 | ) | | (300,532 | ) |
Net sales to external customers | $ | 5,671,318 |
| | $ | 563,455 |
| | $ | 1,557,624 |
| | $ | 7,792,397 |
|
Segment operating earnings | $ | 913,705 |
| | $ | (59,428 | ) | | $ | 44,177 |
| | $ | 898,454 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Operating earnings: | | | |
Segment operating earnings | $ | 222,391 |
| | $ | 306,523 |
| | $ | 972,107 |
| | $ | 898,454 |
|
Unallocated expenses and eliminations | (33,269 | ) | | (28,785 | ) | | (104,169 | ) | | (99,135 | ) |
Total consolidated operating earnings | $ | 189,122 |
| | $ | 277,738 |
| | $ | 867,938 |
| | $ | 799,319 |
|
Segment and total consolidated operating earnings for the three and nine months ended September 30, 2017 were restated for the implementation of ASU 2017-07. See Note 2 to the Financial Statements.
Unallocated expenses and eliminations primarily relate to the Company's headquarters support services and intercompany eliminations, which are not part of any reportable segment. Unallocated expenses are primarily comprised of employee compensation costs, depreciation and other administrative costs.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company is a broad-line distributor of MRO supplies, and other related products. 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.
Following are reconciliations of segment informationassets with the total consolidated totalsassets per the financial statements (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Operating earnings: | | | |
Total operating earnings for operating segments | $ | 309,775 |
| | $ | 352,241 |
| | $ | 907,363 |
| | $ | 1,044,454 |
|
Unallocated expenses and eliminations | (28,605 | ) | | (29,654 | ) | | (98,640 | ) | | (99,185 | ) |
Total consolidated operating earnings | $ | 281,170 |
| | $ | 322,587 |
| | $ | 808,723 |
| | $ | 945,269 |
|
|
| | | | | | | | | | | | | | | |
| U.S. | | Canada | | Other businesses | | Total |
Segment assets: | | | | | | | |
September 30, 2018 | $ | 2,515,137 |
| | $ | 213,525 |
| | $ | 672,854 |
| | $ | 3,401,516 |
|
December 31, 2017 | $ | 2,309,734 |
| | $ | 278,633 |
| | $ | 605,452 |
| | $ | 3,193,819 |
|
| | | September 30, 2017 | | December 31, 2016 | As of |
Assets: | | |
Total assets for operating segments | $ | 3,204,800 |
| | $ | 3,055,111 |
| |
Total assets: | | September 30, 2018 | | December 31, 2017 |
Assets for reportable segments | | 3,401,516 |
| | 3,193,819 |
|
Other current and non-current assets | 2,455,538 |
| | 2,464,656 |
| 2,251,555 |
| | 2,428,074 |
|
Unallocated assets | 164,722 |
| | 174,540 |
| 279,112 |
| | 182,361 |
|
Total consolidated assets | $ | 5,825,060 |
| | $ | 5,694,307 |
| $ | 5,932,183 |
| | $ | 5,804,254 |
|
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. Other current and non-current assets include all other assets of the reportable segments.
Unallocated expenses and unallocated assets primarily relate to the Company headquarter's support services, which are not part of any business segment, as well as intercompany eliminations. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets includeare primarily comprised of non-operating cash and cash equivalents, property, buildings and equipment, net, and certain prepaid expenses and property, buildings and equipment-net.
Intersegment net sales for the U.S. segment increased by $12 million and $40 million for the three and nine months ended September 30, 2017, respectively, comparedrelated to the prior year, driven by increased sales from the U.S. business to Zoro. Zoro's primary source of inventory is the U.S. business' supply chain network.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net earnings attributable to W.W. Grainger, Inc. as reported | $ | 162,006 |
| | $ | 185,873 |
| | $ | 434,671 |
| | $ | 545,262 |
|
Distributed earnings available to participating securities | (603 | ) | | (547 | ) | | (1,576 | ) | | (1,749 | ) |
Undistributed earnings available to participating securities | (806 | ) | | (1,085 | ) | | (1,966 | ) | | (3,179 | ) |
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders | 160,597 |
| | 184,241 |
| | 431,129 |
| | 540,334 |
|
Undistributed earnings allocated to participating securities | 806 |
| | 1,085 |
| | 1,966 |
| | 3,179 |
|
Undistributed earnings reallocated to participating securities | (803 | ) | | (1,078 | ) | | (1,956 | ) | | (3,157 | ) |
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders | $ | 160,600 |
| | $ | 184,248 |
| | $ | 431,139 |
| | $ | 540,356 |
|
Denominator for basic earnings per share – weighted average shares | 57,316,532 |
| | 60,016,550 |
| | 58,010,222 |
| | 60,854,548 |
|
Effect of dilutive securities | 204,816 |
| | 399,601 |
| | 319,703 |
| | 413,571 |
|
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | 57,521,348 |
| | 60,416,151 |
| | 58,329,925 |
| | 61,268,119 |
|
Earnings per share two-class method | |
| | |
| | | | |
Basic | $ | 2.80 |
| | $ | 3.07 |
| | $ | 7.43 |
| | $ | 8.88 |
|
Diluted | $ | 2.79 |
| | $ | 3.05 |
| | $ | 7.39 |
| | $ | 8.82 |
|
Company's headquarters support services.
10.13. 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, cybersecurity incidents, privacy matters, environmental issues, wage and hour laws, intellectual property, employment practices, advertising laws, regulatory compliance, orand other matters and actions brought by employees, consumers,customers, competitors, suppliers orand governmental entities. As a government contractor selling to federal, state and local governmental entities, the Company is also subject to governmental orand regulatory inquiries, or audits orand other proceedings, including those related to contract administration and pricing compliance. 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.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.2: Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations
General
W.W. Grainger, Inc. (Grainger)(Grainger or the Company) is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies and other related products and services with operations primarily in the United States (U.S.) and Canada, with a presence in Europe, Asia and Latin America. More than 3.23 million businesses and institutionscustomers worldwide rely on Grainger for products such as safety gloves, ladders, motors and janitorial supplies, along with services like inventory management and technical support. These customers represent a broad collection of industries including commercial, government, healthcare and manufacturing.(see Note 3 in the Condensed Consolidated Financial Statements (Financial Statements)). They place orders online, on mobile devices, through sales representatives, over the phone and at local branches. Approximately 5,0005,200 suppliers provide Grainger with more than 1.6approximately 1.7 million products stocked in Grainger's distribution centers (DCs) and branches worldwide.
Grainger's two reportable segments are the U.S. and Canada (Acklands - Grainger Inc. and its subsidiaries). These reportable segments reflect the results of the Company's businesses in those geographies, except for Zoro Tools, Inc. (Zoro) which is in the U.S. Other businesses include the Company's single channel businesses (Zoro and MonotaRO in Japan) and operations in Europe, Asia and Latin America.
Business Environment
Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industrymarket specific trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger's growth. Grainger’s sales in the U.S. and Canada tend to positively correlate with Business Investment, Business Inventory, Exports and Industrial Production. InSales in the U.S., sales also tend to positively correlate with Gross Domestic Product (GDP). InSales in Canada salesalso tend to positively correlate with oil prices. The table below provides these estimated indicators for 2017:2018:
| | | United States | Canada | U.S. 2018 Forecast | | Canada 2018 Forecast |
| 2017 Forecast (October) | 2017 Forecast (July) | 2017 Forecast (October) | 2017 Forecast (July) | October | July | | September | June |
Business Investment | 3.7% | 4.3% | 2.3% | 1.1% | 7.0% | | 4.6% | 5.8% |
Business Inventory | 1.0% | 0.6% | —% | 1.1% | 2.0% | | — |
Exports | 3.1% | 2.7% | 2.2% | 1.2% | 4.0% | 5.1% | | 2.8% | 1.7% |
Industrial Production | 1.8% | 2.0% | 6.1% | 3.9% | 3.7% | 3.5% | | 3.1% | 2.0% |
GDP | 2.2% | 2.3% | 3.1% | 2.5% | 2.9% | 3.0% | | 2.2% |
Oil Prices | | — | $50/barrel | $49/barrel | — | | $69/barrel | $66/barrel |
Source: Global Insight (October & July 2017) | | |
Source: Global Insight U.S. (October 2018 and July 2018), Global Insight Canada (September 2018 and June 2018) | | Source: Global Insight U.S. (October 2018 and July 2018), Global Insight Canada (September 2018 and June 2018) |
In the U.S., Business InvestmentInventory and Exports are two majorforecast to slow from the July forecast but all indicators of MRO spending. Per the Global Insight October 2017 forecast,are expected to remain strong during 2018, supported by expanding domestic and global markets, stable GDP and Exports, low capital costs and a stable regulatory climate. In Canada, Exports and Industrial Production are expected to improve, while Business Investment remains strong. Oil prices have signaled a recovery as the price per barrel has trended upward.
In the third quarter of 2018, the office of the United States Trade Representative enacted tariffs on a significant number of Chinese imports which may affect the Company’s business environment, product availability, gross margins and results of operations. Grainger is forecastcurrently validating tariff increases, working with suppliers to continue to improve in 2017 compared to 2016 primarily through equipment-related spending. Export growth has improved, as exports have responded to improved economic growth among countriesminimize the cost impact, identifying alternative suppliers and evaluating pricing actions while ensuring the that the U.S. exports to.
Per the Global Insight October 2017 forecast, Canada economic growth, as measured by GDP,Company’s pricing is forecastmarket based to grow to 3.1% in 2017. The 2017 forecast assumes that oil prices will continue to grow and stabilize as compared to 2016 and that business nonresidential investment (a component of Business Investment) will begin to increase. The latest forecast is for the Canadian dollar to strengthen against the U.S. dollar over the next two quarters.
mitigate tariff impact.
Outlook
On October 17, 2017, Grainger narrowedGrainger’s portfolio consists of its U.S. business, its Canada business and other businesses. Grainger’s imperative to create unique value for customers is focused on: (i) continuing to grow its share of business with large and mid-size customers in the U.S. by executing its high-value sales and earnings per share guidance for 2017. The Company now expects 2017 salesservice model and building advantaged MRO solutions by leveraging its product and customer expertise; (ii) completing the business model reset in Canada; (iii) driving profitable growth in its international portfolio and (iv) continuing the strong growth of 1.5 to 2.5 percentits single channel businesses by expanding their assortment and earnings per share of $10.40 to $10.90. The Company's previous 2017 guidance included sales growth of 1 to 4 percentinnovating around customer acquisition. Grainger is also focused on improving the end-to-end customer experience by making investments in its eCommerce and earnings per share of $10.00 to $11.30.digital capabilities and executing continuous improvement initiatives within its supply chain and order-to-cash processes.
Matters Affecting Comparability
There were 63 sales days in the third quarter of 2017 compared to 64 sales days in 2016.
Results of Operations – Three Months Ended September 30, 2017
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Matters Affecting Comparability
There were 63 sales days in the three months ended September 30, 2018 and 2017.
Results of Operations – Three Months Ended September 30, 2018
The following table is included as an aid to understand the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
| | | Three Months Ended September 30, | Three Months Ended September 30, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales | | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2017 (A) | | 2016 (A) | | 2017 | | 2016 | 2018 (A) | | 2017 (A) | | 2018 | | 2017 |
Net sales | $ | 2,636 |
| | $ | 2,596 |
| 2 | % | | 100.0 | % | | 100.0 | % | $ | 2,831 |
| | $ | 2,636 |
| 7 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 1,619 |
| | 1,557 |
| 4 | % | | 61.4 |
| | 60.0 |
| |
Cost of goods sold | | 1,752 |
| | 1,619 |
| 8 | % | | 61.9 |
| | 61.4 |
|
Gross profit | 1,017 |
| | 1,040 |
| (2 | )% | | 38.6 |
| | 40.0 |
| 1,079 |
| | 1,017 |
| 6 | % | | 38.1 |
| | 38.6 |
|
Operating expenses | 736 |
| | 717 |
| 3 | % | | 27.9 |
| | 27.6 |
| |
Selling, general and administrative expenses | | 890 |
| | 739 |
| 20 | % | | 31.4 |
| | 28.1 |
|
Operating earnings | 281 |
| | 323 |
| (13 | )% | | 10.7 |
| | 12.4 |
| 189 |
| | 278 |
| (32 | )% | | 6.7 |
| | 10.5 |
|
Other expense | 31 |
| | 29 |
| 6 | % | | 1.2 |
| | 1.1 |
| |
Other expense, net | | 18 |
| | 28 |
| (35 | )% | | 0.6 |
| | 1.1 |
|
Income taxes | 79 |
| | 100 |
| (21 | )% | | 3.0 |
| | 3.8 |
| 56 |
| | 79 |
| (29 | )% | | 2.0 |
| | 3.0 |
|
Net earnings | | 115 |
| | 171 |
| | | | | |
Noncontrolling interest | 9 |
| | 8 |
| 17 | % | | 0.3 |
| | 0.3 |
| 11 |
| | 9 |
| 21 | % | | 0.4 |
| | 0.3 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 162 |
| | $ | 186 |
| (13 | )% | | 6.1 | % | | 7.2 | % | $ | 104 |
| | $ | 162 |
| (36 | )% | | 3.7 | % | | 6.1 | % |
(A) May not sum due to rounding
Grainger’s net sales of $2,636$2,831 million for the third quarter of 2018 increased $195 million, or 7% compared to the same period in 2017, increased 2% compared with sales of $2,596 million for the comparable 2016 quarter. On a daily basis, sales increased 3% and consistedconsisting of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 87 |
Hurricane impactPrice | 1 |
Seasonal salesForeign exchange | (1) |
Divestiture | (1) |
Price | (4) |
Total | 3%7% |
The increase in net sales was primarily driven by the single channel online businesses in the U.S. and Japan, as well as volume increases in the U.S. business as a result ofdue to market share gain, an improved demand environment and continued double digit growth in the pricing actions. Refersingle channel businesses, partially offset by lower sales in the Canada business. See Note 3 to the Financial Statements and refer to the Segment Analysis below for further details.
The U.S. business pricing actions were primarily implemented in the first and third quarters of 2017. The actions included adjusting list price and introducing new lower web prices on the entire business assortment. These actions are expected to enable faster growth through share gains with existing customers and acquisition of new customers. Herein referred to as pricing actions.
In the three months ended September 30, 2017, eCommerce sales for Grainger were $1,387 million, an increase of 12% over the prior year. Total eCommerce sales represented 53% and 48% of total sales for the three months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.com and other electronic purchasing platforms in the U.S. business and the single channel online businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 54% of total sales for the three months ended September 30, 2017 and 2016, respectively.
Gross profit of $1,017$1,079 million for the third quarter of 2017 decreased $232018 increased $62 million, or 2%6% compared to the same quarter in 2016.2017, primarily due to higher sales during the period. The gross profit margin of 38.6%38.1% during the third quarter of 20172018 decreased 1.40.5 percentage pointspoint when compared to the same periodquarter in 2016, driven2017. The lower gross profit margin includes a 0.5 percentage point decline from the implementation of the Financial Accounting Standards Board (FASB) new revenue recognition standard that primarily byreclassifies certain costs related to KeepStock® services from Selling, general and administrative expenses (SG&A) to Cost of goods sold. Excluding this impact, gross profit margin would have been flat compared to the pricing actions in the U.S. business.prior year.
Operating expenses of $736 millionThe table below reconciles reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. generally accepted accounting principles (GAAP) to adjusted SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc., which are all considered non-GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for the third quarter of 2017 increased 3% from $717 millionfuture performance as they provide a better baseline for the comparable 2016 quarter, driven primarily by increased employee related costs.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating earnings foranalyzing the third quarterongoing performance of 2017 were $281 million, a decrease of 13% compared to the third quarter of 2016. The decrease in operating earnings was driven primarilyits businesses by lower gross profit from the pricing actions in the U.S. business and increased employee related costs.
Net earnings attributable to W.W. Grainger, Inc. for the third quarter of 2017 decreased 13% to $162 million from $186 million in the third quarter of 2016, primarily related to lower gross profit and higher operating expenses.
Diluted earnings per share of $2.79 in the third quarter of 2017 were down 9% versus the $3.05 for the third quarter of 2016 due to lower earnings, partially offset by lower average shares outstanding.
The table below reconciles reported operating earnings determined in accordance with U.S. generally accepted accounting principles (GAAP) to adjusted operating earnings, a non-GAAP measure. Management believes adjusted operating earnings is an important indicator of operations because it excludesexcluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measurethese measures with other companies' non-GAAP financial measures having the same or similar names. All tables below are in thousands of dollars:
| | | Three Months Ended | | Three Months Ended | | |
| September 30, | | September 30, | | |
| 2017 | | 2016 | % | 2018 | | 2017 | | % |
Operating earnings reported | $ | 281,170 |
| | $ | 322,587 |
| (13 | )% | |
Selling, general and administrative expenses reported | | $ | 890,113 |
| | $ | 739,442 |
| | 20 | % |
Restructuring (U.S.) | 13,151 |
| | 6,600 |
| | 3,452 |
| | 13,251 |
| | |
Branch gains (U.S.) | (5,207 | ) | | (1,163 | ) | | — |
| | (5,207 | ) | | |
Other charges (U.S.) | (3,023 | ) | | — |
| | — |
| | (3,023 | ) | | |
Restructuring (Canada) | 4,937 |
| | 4,367 |
| | (692 | ) | | 4,937 |
| | |
Restructuring (Other Businesses) | (210 | ) | | — |
| | |
Restructuring (Other businesses) | | 1,115 |
| | (791 | ) | | |
Impairment charges (Other businesses) | | 138,750 |
| | — |
| | |
Subtotal | 9,648 |
| | 9,804 |
| | 142,625 |
| | 9,167 |
| | |
Operating earnings adjusted | $ | 290,818 |
| | $ | 332,391 |
| (13 | )% | |
Selling, general and administrative expenses adjusted | | $ | 747,488 |
| | $ | 730,275 |
| | 2 | % |
|
| | | | | | | | | | |
| 2018 | | 2017 | | % |
Operating earnings reported | $ | 189,122 |
| | $ | 277,738 |
| | (32 | )% |
Total restructuring and impairments charges, net of branch gains and other charges | 142,484 |
| | 9,648 |
| | |
Operating earnings adjusted | $ | 331,606 |
| | $ | 287,386 |
| | 15 | % |
|
| | | | | | | | | | |
| 2018 | | 2017 | | % |
Net earnings attributable to W.W. Grainger, Inc. reported | $ | 104,377 |
| | $ | 162,006 |
| | (36 | )% |
Total restructuring and impairment charges, net of branch gains and other charges | 142,484 |
| | 9,648 |
| | |
Tax effect of impairment | (5,829 | ) | | — |
| | |
Tax effect (1) | (626 | ) | | (3,129 | ) | | |
Total restructuring and impairment charges, net of branch gains and other charges and tax | 136,029 |
| | 6,519 |
| | |
Net earnings attributable to W.W. Grainger, Inc. adjusted | $ | 240,406 |
| | $ | 168,525 |
| | 43 | % |
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
ForSG&A of $890 million for the third quarter of 2018 increased $151 million, or 20% compared to the third quarter of 2017. During the quarter ended September 30, 2018, the Company recorded $139 million of impairment charges related to goodwill and tradename intangible asset at the Cromwell business. See Note 5 to the Financial Statements. Excluding restructuring and impairment charges net of branch gains and other charges in both periods as noted in the table above, SG&A increased $17 million, or 2% primarily due to higher variable costs in connection with higher sales, primarily payroll and variable compensation.
Operating earnings of $189 million for the third quarter of 2018 decreased $89 million, or 32% compared to the third quarter of 2017. Excluding restructuring and impairment charges net of branch gains and other charges in both periods as noted in the table above, operating earnings increased $45 million or 15%, driven primarily by higher sales, higher gross profit dollars and improved SG&A leverage.
Other expense, net was $18 million for the third quarter of 2018, a decrease of 35% compared to the third quarter of 2017. The decrease was primarily due to lower losses from the Company's clean energy investments.
Income taxes of $56 million for the third quarter of 2018 decreased $23 million, or 29% compared to the third quarter of 2017. Grainger's effective tax rates were 32.7% and 31.7% for the three months ended September 30, 20172018 and 2016 the non-GAAP measure presented in the table above did not have a material impact on the financial results.
Segment Analysis
Grainger’s two reportable segments are the U.S. and Canada. The U.S. operating segment reflects the results of Grainger’s U.S. businesses. The Canada operating segment reflects the results for Acklands – Grainger Inc. and its subsidiaries. Other businesses include the single channel online businesses (Zoro in the U.S. and MonotaRO in Japan) and operations in Europe, Asia and Latin America.
The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 8 to the Condensed Consolidated Financial Statements.
United States
Net sales were $2,016 million for the third quarter of 2017, a decrease of 1% when compared with net sales of $2,028 million for the same period in 2016. On a daily basis, sales increased 1% and consisted of the following:
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2017, respectively. The higher effective tax rate in 2018 is primarily due to the impact of Cromwell impairment charges that lowered reported earnings and were not tax deductible, net of the benefit from the Tax Cut and Jobs Act (the Tax Act) and the excess tax benefits from stock-based awards.
Net earnings attributable to W.W. Grainger, Inc. of $104 million for the third quarter of 2018 decreased $58 million or 36% compared to the third quarter of 2017. Excluding restructuring and impairment charges net of branch gains and other charges from both periods in the table above, net earnings increased $71 million, or 43%. The increase in net earnings primarily resulted from higher gross profit, lower SG&A and lower income taxes.
Diluted earnings per share of $1.82 in the third quarter of 2018 was down 35% versus the $2.79 for the third quarter of 2017, primarily due to lower net earnings. Excluding restructuring and impairment charges net of branch gains and other charges from both periods in the table above, diluted earnings per share of $4.19 in the third quarter 2018 increased 44% from $2.90 for the third quarter 2017.
Segment Analysis
The following comments at the U.S. and Canada segments and Other businesses level include external and intersegment net sales and operating earnings. See Note 12 to the Financial Statements.
United States
Net sales were $2,188 million for the third quarter of 2018, an increase of $172 million, or 9% compared to the same period in 2017, and consisting of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 78 |
Intercompany sales to ZoroPrice | 1 |
Hurricane impact | 1 |
Holiday timing | (1) |
Seasonal sales | (1) |
Divestiture | (1) |
Price | (5) |
Total | 1%9% |
Sales to customers in natural resources increased high single digits. Resellers, transportationthe heavy manufacturing, government and retail end markets increased high single digits. Natural resources and contractors increased mid-single digits while heavyand light manufacturing end markets increased low-single digits. Overall, revenue increases were primarily driven by market share gains and government increased low single digits.improved demand in all industries. See Note 3 to the Financial Statements.
In the three months ended September 30, 2017, eCommerce salesThe gross profit margin for the U.S. business were $1,039 million, anthird quarter of 2018 decreased 0.4 percentage point compared to the same period in 2017. The decline was primarily driven by a 0.6 percentage point decrease due to the implementation of the FASB's new revenue recognition standard. Excluding the impact of the implementation of the revenue recognition standard, gross profit margin would have shown a favorable 0.2 percentage point increase due to sales volume growth.
SG&A increased 6% in the third quarter of 8% over2018 compared to the prior year. Total eCommerce sales represented 52% and 47% of total sales for the three months ended September 30, 2017 and 2016, respectively.third quarter 2017. The increase was primarily driven by Grainger.com and other electronic purchasing platforms. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 54% of total sales for the three months ended September 30, 2017 and 2016, respectively.
The gross profit margin for thethird quarter of 2017 decreased 1.9 percentage points compared to the same period in 2016 largelyhigher variable compensation due to stronger than anticipated performance, partially offset by the pricing actions.
Operating expensesimplementation of $493 million in the third quarter of 2017 were flat versus the third quarter of 2016 demonstrating leverage on volume growth as a result of pricing actions.FASB's new revenue recognition standard.
Operating earnings of $298$326 million for the third quarter of 2017 decreased 13%2018 increased $31 million, or 11% from $343$295 million for the third quarter of 2016 ,2017. This increase was driven primarily driven by the pricing actions.higher sales, higher gross profit dollars and improved SG&A leverage.
Canada
Net sales were $188$150 million for the third quarter of 2017, an increase2018, a decrease of $9$38 million, or 5%, when20% compared with $179 million forto the same period in 2016. On a daily basis, sales increased 7%2017 and consistedconsisting of the following:
|
| |
| Percent (Decrease)/Increase |
Volume | (27) |
Foreign exchange | 5(3) |
VolumePrice | 210 |
Total | 7%(20)% |
In the three months ended September 30, 2017, eCommerce sales in the Canadian business were $33 million, an increase of 41% over the prior year. Total eCommerce sales represented 17% and 13% of total sales for the three months ended September 30, 2017 and 2016, respectively. If the Canadian business included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 32% and 26% of total sales for the three months ended September 30, 2017 and 2016, respectively.
The gross profit margin improved 0.8 percentage points in the third quarter of 2017 versus the third quarter of 2016 primarily due to improved management and disposition of obsolete or discontinued inventory and thus lower inventory reserve requirements in 2017 and incremental vendor rebates.
Operating expenses increased $4 million, or 6% in the third quarter of 2017 versus the third quarter of 2016, primarily related to foreign exchange and higher employee related costs.
Operating losses of $15 million for the third quarter of 2017 were flat versus the third quarter of 2016.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other BusinessesFor the third quarter of 2018, volume was down 27 percentage points compared to the same period in 2017 due to branch closures and sales coverage optimization activities, partially offset by price increases and continued contract negotiations of 10 percentage points for the third quarter of 2018.
Net
The gross profit margin decreased 0.3 percentage point in the third quarter of 2018 versus the third quarter of 2017, primarily related to prior year adjustments related to excess and obsolete inventory, vendor rebates not repeating in 2018 and the implementation of the FASB's new revenue recognition standard.
SG&A decreased 31% in the third quarter of 2018 compared to the third quarter of 2017. Excluding restructuring costs in both periods (as noted in the table above and Note 6 to the Financial Statements), SG&A would have decreased 26%. This decrease was primarily due to cost reduction actions and lower variable expense due to lower sales for other businessesvolume.
Operating losses were $537$4 million for the third quarter of 2017,2018 compared to $15 million in the third quarter of 2017. Excluding restructuring costs in both periods (as noted in the table above and Note 6 to the Financial Statements), operating losses would have been $5 million compared to $10 million in the prior period due to lower SG&A and lower sales volume.
Other businesses
Net sales were $609 million for the third quarter of 2018, an increase of $55$72 million, or 11%,13% when compared with net sales of $482 million forto the same period in 2016. On a daily basis, sales increased 13%2017 and consistedconsisting of the following:
|
| |
| Percent Increase/(Decrease)Increase |
Price/volume | 1514 |
Foreign exchange | (2)(1) |
Total | 13% |
The net sales increase was primarily due to continued growth in the single channel businesses as a result of increased customer acquisition and improved sales growth in the international businesses.
Operating earnings were $27losses of $100 million for the third quarter of 2017 up $22018 were down $127 million compared to operating earnings of $27 million the third quarter of 2016. The2017. Other businesses included impairment charges relating to the Cromwell business in the U.K. See Note 5 to the Financial Statements. Excluding restructuring and impairment charges in both periods, operating earnings includedincreased $13 million or 50%, primarily due to strong resultsperformance from the single channel online businesses.
Other Income and Expense
Other income and expense was $31 million of expense in the third quarter of 2017 compared to $29 million of expense in the third quarter of 2016. The increase in expense was primarily due to interest expense from the additional $400 million in long-term debt issued in May 2017.
Income Taxes
For the quarter, the effective tax rate was 31.7% versus 34.0% in 2016. The decrease is primarily due to higher benefits primarily from the Company's investments in clean energy along with solar energy
W.W. Grainger, Inc. and higher foreign tax credits. Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Matters Affecting Comparability
There were 191 sales days in the nine months ended September 30, 2017 compared to 192 sales days in 2016.2018 and 2017.
Results of Operations – Nine Months Ended September 30, 20172018
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales | | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2017 (A) | | 2016 (A) | | 2017 | | 2016 | 2018 (A) | | 2017 (A) | | 2018 | | 2017 |
Net sales | $ | 7,792 |
| | $ | 7,666 |
| 2 | % | | 100.0 | % | | 100.0 | % | $ | 8,458 |
|
| $ | 7,792 |
| 9 |
| | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 4,716 |
| | 4,542 |
| 4 | % | | 60.5 |
| | 59.2 |
| |
Cost of goods sold | | 5,176 |
|
| 4,716 |
| 10 |
| | 61.2 |
| | 60.5 |
|
Gross profit | 3,076 |
| | 3,125 |
| (2 | )% | | 39.5 |
| | 40.8 |
| 3,282 |
| | 3,076 |
| 7 |
| | 38.8 |
| | 39.5 |
|
Operating expenses | 2,268 |
| | 2,180 |
| 4 | % | | 29.1 |
| | 28.4 |
| |
Selling, general and administrative expenses | | 2,414 |
|
| 2,277 |
| 6 |
| | 28.5 |
| | 29.2 |
|
Operating earnings | 809 |
| | 945 |
| (14 | )% | | 10.4 |
| | 12.3 |
| 868 |
| | 799 |
| 9 |
| | 10.3 |
| | 10.3 |
|
Other expense | 81 |
| | 72 |
| 13 | % | | 1.0 |
| | 0.9 |
| |
Other expense, net | | 67 |
| | 71 |
| (7 | ) | | 0.8 |
| | 1.0 |
|
Income taxes | 267 |
| | 309 |
| (14 | )% | | 3.4 |
| | 4.0 |
| 198 |
| | 267 |
| (26 | ) | | 2.3 |
| | 3.4 |
|
Net earnings | | 604 |
|
| 461 |
| | | | | |
Noncontrolling interest | 26 |
| | 19 |
| 35 | % | | 0.3 |
| | 0.3 |
| 31 |
| | 26 |
| 18 |
| | 0.4 |
| | 0.3 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 435 |
| | $ | 545 |
| (20 | )% | | 5.6 | % | | 7.1 | % | $ | 573 |
|
| $ | 435 |
| 32 | % | | 6.8 | % | | 5.6 | % |
(A) May not sum due to rounding
Grainger’s net sales of $7,792$8,458 million for the nine months ended September 30, 2018 increased $666 million, or 9% compared to the same period in 2017, increased 2% compared with sales of $7,666 million for the comparable 2016 period. On a daily basis, sales increased 2% and consistedconsisting of the following:
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
| |
| Percent Increase/(Decrease) |
Volume | 78 |
Seasonal salesForeign exchange | (1) |
Price | (4)1 |
Total | 2%9% |
The increase in net sales was primarily driven by the single channel online businesses, as well as volume increases in the U.S. business as a result ofdue to market share gain and an improved demand environment and continued double digit growth in the pricing actions. Refersingle channel businesses, offset by lower sales in the Canada business. See Note 3 to the Financial Statements and refer to the Segment Analysis below for further details.
In the nine months ended September 30, 2017, eCommerce sales for Grainger were $4,029 million, an increase of 14% over the prior year. Total eCommerce sales represented 52% and 46% of total sales for the nine months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.com and other electronic purchasing platforms in the U.S. and the single channel online businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 52% of total sales for the nine months ended September 30, 2017 and 2016, respectively.
Gross profit of $3,076$3,282 million for the nine months ended September 30, 2017 decreased 2%2018 increased $206 million, or 7% compared with $3,125 million into the same period in 2016.2017. The gross profit margin during the nine months ended September 30, 2017of 38.8% decreased 1.30.7 percentage pointspoint when compared to the same period in 2016,2017. The lower gross profit margin includes a 0.5 percentage point decline from the implementation of the FASB's new revenue recognition standard. Excluding this impact, gross profit margin would have decreased 0.2 percentage point compared to the prior year, driven primarily by the strategic pricing actions in the U.S. business.
Operating expenses of $2,268 million for the nine months ended September 30, 2017 increased 4% compared with $2,180 million for the comparable 2016 period. The increase was primarily due to the following:
$2 million, net in restructuringbusiness, partially offset by positive customer mix in the U.S., primarily related to the costs incurred business and improved performance in the consolidation of the contact center network and asset write-downs, offset by gains on the sales of branches compared to $12 million, net in 2016. These costs primarily related to involuntary employee termination costs offset by gains on the sales of branches.
$27 million in restructuring due to branch closures and asset write-downs in Canada compared to $15 million in 2016.
$41 million in restructuring in other businesses, primarily related to the wind-down of operations in Colombia.
Excluding restructuring costs, gains on the sale of assets and other charges in both periods, operating expenses increased 3%, driven primarily by higher employee related costs.
Operating earnings for the nine months ended September 30, 2017 were $809 million, a decrease of $137 million or 14%, compared to the nine months ended September 30, 2016. Excluding restructuring costs, gains on the sale of assets and other charges in both periods, operating earnings decreased $117 million or 12%, driven primarily by lower gross profit and higher operating expenses.
Net earnings attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2017 decreased 20% to $435 million from $545 million in the nine months ended September 30, 2016.
Diluted earnings per share of $7.39 in the nine months ended September 30, 2017 were 16% lower than the $8.82 for the nine months ended September 30, 2016, due to lower earnings partially offset by lower average shares outstanding.business.
The table below reconciles reported SG&A, operating earningearnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with generally accepted accounting principles in the U.S. GAAP to adjusted SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc., which are all considered non-GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance as they provide a non-GAAP measure. Management believes adjusted operating earnings is an important indicatorbetter baseline for analyzing the ongoing performance of operations because it excludesits businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measurethese measures with other companies' non-GAAP financial measures having the same or similar names. All tables below are in thousands of dollars:
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| | | Nine Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2017 | | 2016 | % | 2018 | | 2017 | % |
Operating earnings reported | $ | 808,723 |
| | $ | 945,269 |
| (14 | )% | |
Selling, general and administrative expenses reported | | $ | 2,413,997 |
| | $ | 2,277,009 |
| 6 | % |
Restructuring (U.S.) | 29,757 |
| | 29,035 |
| | 13,602 |
| | 29,857 |
| |
Branch gains (U.S.) | (28,032 | ) | | (16,543 | ) | | (8,913 | ) | | (28,032 | ) | |
Other charges (U.S.) | (3,023 | ) | | — |
| | — |
| | (3,023 | ) | |
Restructuring (Canada) | 26,509 |
| | 15,499 |
| | 22,668 |
| | 23,935 |
| |
Inventory reserve adjustment (Canada) | — |
| | 9,847 |
| | |
Restructuring (Other Businesses) | 41,300 |
| | — |
| | |
Restructuring (Other businesses) | | 3,579 |
| | 40,719 |
| |
Impairment charges (Other businesses) | | 138,750 |
| | — |
| |
Restructuring (Unallocated expense) | — |
| | 8,947 |
| | (4,688 | ) | | — |
| |
Subtotal | 66,511 |
| | 46,785 |
| | 164,998 |
| | 63,456 |
| |
Operating earnings adjusted | $ | 875,234 |
| | $ | 992,054 |
| (12 | )% | |
Selling, general and administrative expenses adjusted | | $ | 2,248,999 |
| | $ | 2,213,553 |
| 2 | % |
|
| | | | | | | | | |
| 2018 | | 2017 | % |
Operating earnings reported | $ | 867,938 |
| | $ | 799,319 |
| 9 | % |
Total restructuring and impairment charges, net of branch gains and other charges | 165,818 |
| | 66,511 |
| |
Operating earnings adjusted | $ | 1,033,756 |
| | $ | 865,830 |
| 19 | % |
|
| | | | | | | | | |
| 2018 | | 2017 | % |
Net earnings attributable to W.W. Grainger, Inc. reported | $ | 572,893 |
| | $ | 434,671 |
| 32 | % |
Total restructuring and impairment charges, net of branch gains and other charges | 165,818 |
| | 66,511 |
| |
Tax effect of impairment | (5,829 | ) | | — |
| |
Tax effect (1) | (5,923 | ) | | 65 |
| |
Total restructuring and impairment charges, net of branch gains and other charges and tax | 154,066 |
| | 66,576 |
| |
Net earnings attributable to W.W. Grainger, Inc. adjusted | $ | 726,959 |
| | $ | 501,247 |
| 45 | % |
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
Segment Analysis
The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 8 to the Condensed Consolidated Financial Statements.
United States
Net sales were $5,969SG&A of $2,414 million for the nine months ended September 30, 2017 and were relatively flat when compared with net sales of $5,9732018 increased $137 million, for the same period in 2016. On a daily basis, sales were flat and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 5 |
Intercompany sales to Zoro | 1 |
Seasonal sales | (1) |
Price | (5) |
Total | 0% |
Sales to customers in natural resources and retail end markets increased mid-single digits, while heavy manufacturing and government increased low single digits. The sales growth was partially offset by declines in contractors and commercial services. Volume increased year over year primarily driven by the pricing actions.
In the nine months ended September 30 2017, eCommerce sales for the U.S. business were $3,024or 6% from $2,277 million an increase of 10% over the prior year. Total eCommerce sales represented 51% and 46% of total sales for the nine months ended September 30, 20172017. During the quarter ended September 30, 2018, the Company recorded $139 million of impairment charges related to goodwill and 2016, respectively. The increase was primarily driven by Grainger.comtradename intangible asset at the Cromwell business. Excluding restructuring and impairment charges net of branch gains and other electronic purchasing platforms. Ifcharges in both periods as noted in the Company included KeepStock®table above, SG&A increased $35 million or 2%, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 57% and 53% of total salesdriven primarily by higher variable costs in connection with higher sales.
Operating earnings for the nine months ended September 30, 20172018 were $868 million, an increase of $69 million, or 9% compared to the same period in 2017. Excluding restructuring and 2016, respectively.impairment charges net of branch gains and other charges in both periods as noted in the table above, operating earnings increased $168 million or 19%, driven primarily by higher sales and improved SG&A leverage.
The gross profit marginOther expense, net was $67 million for the nine months ended September 30, 2017 decreased 1.6 percentage points2018, a decrease of $4 million, or 7% compared to the same periodnine months ended September 30, 2017. The decrease in 2016,expense was primarily driven bydue to lower losses from the pricing actions.Company's clean energy investments.
Operating expenses were flatIncome taxes of $198 million for the nine months ended September 30, 2018decreased $69 million, or 26% compared with $267 million for the comparable 2017 versusperiod. Grainger's effective tax rates were 24.7% and 36.7% for the nine months ended September 30, 2016. Excluding restructuring costs, net gains on2018 and 2017, respectively. The lower effective tax rate in 2018 is primarily due to the sale of assets and divestiture and other charges in both periods mentioned above, operating expenses increased 1%.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operatingimpact of the U.S. Tax Act and excess tax benefits from stock-based awards, partially offset by the impact of non-deductible goodwill impairment. The 2017 effective tax rate was impacted by the wind-down of the Colombia business and the inability to realize the associated tax benefit. The Company is currently projecting an effective tax rate of 23% to 26% for the year 2018. Future excess tax benefits from stock based awards are not estimated in the full year projection.
Net earnings of $923attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2018increased $138 million or 32% to $573 million from $435 million for the nine months ended September 30, 2017. The increase in net earnings primarily resulted from higher operating earnings and lower income taxes. Excluding restructuring and impairment charges net of branch gains and other charges from both periods mentioned above, net earnings increased $226 million or 45%.
Diluted earnings per share of $10.04 in the nine months ended September 30, 2018was up 36% versus the $7.39 for the same period in 2017, decreased 10%due to higher earnings and lower average shares outstanding. Excluding restructuring and impairment charges, net of branch gains and other charges from $1,023both periods in the table above, diluted earnings per share would have been $12.74 compared to $8.52 in 2017, an increase of 50%.
Segment Analysis
The following comments at the segment and other businesses level include external and intersegment net sales and operating earnings. See Note 12 to the Financial Statements.
United States
Net sales were $6,471 million for the nine months ended September 30, 2016. Excluding restructuring costs, gains on the sale of assets and divestiture and other charges in both periods, operating earnings decreased 11%, driven primarily by the pricing actions.
Canada
Net sales of $563 million for the nine months ended September 30, 20172018, an increase of 2% when$502 million, or 8%, compared with $552 million forto the same period in 2016. On a daily basis, sales increased 3%2017, and consistedconsisting of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 39 |
Wildfire impact | 1 |
Foreign exchange | 1 |
Holiday timing | (1) |
PriceDivestiture | (1) |
Total | 3%8% |
InSales to customers in the nine months ended September 30,government end market increased in the low teens. Retail/wholesale, commercial, contractors and natural resources increased in the high single digits and light manufacturing end markets increased in the mid-single digits. Overall, revenue increases were primarily driven by market share gains and improved demand in all industries, partially offset by the Company's pricing actions and the July 2017, eCommerce sales for divestiture of a specialty business in the Canadian business were $96 million, an increaseU.S. business. See Note 3 to the Financial Statements.
The gross profit margin decreased 0.9 percentage point compared to the same period in 2017. This decrease is primarily driven by a 0.6 percentage point decline from the adoption of 35% over the prior year. Total eCommerce sales represented 17%FASB's new revenue recognition standard and 13% of total salespricing actions.
SG&A for the nine months ended September 30, 2017 and 2016, respectively. If2018 increased 2% compared to the Canadian business included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 31% and 25% of total sales for the nine months ended September 30, 2017 and 2016, respectively.
The gross profit margin increased 0.9 percentage pointssame period in the nine months ended September 30, 2017 versus the nine months ended September 30, 2016, largely2017. This increase was primarily driven by higher variable compensation due to a favorable comparison to an inventory adjustment in the second quarter of 2016 that did not repeat in 2017,stronger than anticipated performance, partially offset by price deflation, cost inflation and higher freight costs from an increase in shipping directly to customers in 2017.the implementation of the FASB's new revenue recognition standard.
Operating expenses in the nine months ended September 30, 2017 were $229 million compared to $216earnings of $1,032 million for the nine months ended September 30, 2016. Excluding restructuring costs in both periods, operating expenses would have 2018increased 1%.
Operating losses were $59$118 million, or 13% from $914 million for the nine months ended September 30, 2017 versus $55 million in the nine months ended September 30, 2016. Excluding the restructuring costs and the inventory adjustment, operating losses would have been $33 million compared to $30 million in the prior year. The higher loss2017. This increase was driven primarily driven by higher operating expenses.sales, higher gross profit dollars and improved SG&A leverage.
Other Businesses
Net sales for other businesses, were $1,561 million for the nine months ended September 30, 2017, an increase of $160 million or 11% when compared with net sales of $1,401 million for the same period in 2016. On a daily basis, sales increased 12% and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 15 |
Foreign exchange | (3) |
Total | 12% |
Operating earnings of $44 million in the nine months ended September 30, 2017 decreased by $32 million compared to $76 million in the nine months ended September 30, 2016. Operating earnings in 2017 included a $41 million charge primarily for the wind-down of the business in Colombia partially offset by strong performance from the single channel online businesses.
Other Income and Expense
Other income and expense was $81 million of expense in the nine months ended September 30, 2017 compared to $72 million of expense in the nine months ended September 30, 2016. The increase in expense was primarily due to
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
interest expense from the $400Canada
Net sales were $508 million of additional long-term debt issued in May 2017, as well as increased losses from the Company's investments in clean energy.
Income Taxes
Grainger’s effective tax rates were 36.7% and 35.4% for the nine months ended September 30, 2018, a decrease of $55 million, or 10% compared to the same period in 2017 consisting of the following:
|
| |
| Percent (Decrease)/Increase |
Volume | (20) |
Foreign exchange | 1 |
Price | 9 |
Total | (10)% |
For the nine months ended September 30, 2018, volume was down 20 percentage points compared to the same period in 2017 due to branch closures and sales coverage optimization activities, partially offset by price increases and continued contract negotiations of 9 percentage points for the nine months ended September 30, 2018.
The gross profit margin increased 2.7 percentage points in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to price increases that began in late 2017 and 2016, respectively. improved customer mix.
SG&A decreased $25 million, or 11% in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This decrease was primarily due to cost reduction actions and lower variable expense due to lower sales volume.
Operating losses were $38 million for the nine months ended September 30, 2018 compared to losses of $59 million in the nine months ended September 30, 2017. Excluding restructuring costs in both periods (as noted in the table above and Note 6 to the Financial Statements), operating losses would have been $16 million compared to $33 million in the prior period primarily due to lower SG&A and lower sales volume.
Other businesses
Net sales for other businesses were $1,820 million for the nine months ended September 30, 2018 an increase of $259 million, or 17% compared to the same period in 2017, and consisting of the following:
|
| |
| Percent Increase |
Price/volume | 14 |
Foreign exchange | 3 |
Total | 17% |
The net sales increase was primarily due to growth in the wind-downsingle channel businesses as a result of increased customer acquisition and incremental sales in other international businesses. Foreign currencies strengthened in the countries where the Company operates. These currencies primarily include the Euro, Pound and Yen.
Operating losses of $23 million for the nine months ended September 30, 2018 decreased $67 million from operating earnings of $44 million in the comparable period from the prior year. Other businesses included impairment charges relating to the Cromwell business in Colombiathe U.K. See Note 5 to the Financial Statements. Excluding restructuring and the inabilityimpairment charges in both periods, operating earnings increased $36 million or 41%, primarily due to realize the associated tax benefits, partially offset by incremental tax creditsstrong performance from the Company's investment in clean energy and the benefit of stock awards. The 2016 tax rate also included a benefit from the federal income tax audit resolution for the tax years 2009 through 2012 and other discrete items.single channel businesses.
Financial Condition
Cash Flow
Net cash provided by operating activities was $721$743 million and $689$721 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. The increase in cash provided by operating activities is primarily the result of lower payments related to employee benefits,higher net earnings, partially offset by lower earnings and higher working capital. Net cash provided had been reported as $670 million in the prior year. The $689 million is based on the adoption of ASU 2016-09, which required retrospective reclassification of $19 million from operating activitiescapital investments to financing activities. The reclassification relates to employee taxes paid as part of the exercise of stock options.support growth. See Working Capital below for details.
Net cash used in investing activities was $105 million and $100 million and $185 million infor the nine months ended September 30, 2018 and 2017, and 2016, respectively. The decreaseThis increase in net cash used in investing activities was primarily driven by lower additions
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to property, buildings and equipment compared to the prior year and higherpartially offset by lower proceeds from the sales of branch real estate assets and the U.S. specialty business divestiture when compared to the prior year.
Net cash used in financing activities was $619$437 million compared to $518and $619 million in the nine months ended September 30, 20172018 and 2016,2017, respectively. The increasedecrease in net cash used in financing activities of $101 million was primarily driven by lowerhigher proceeds of long-term debtfrom stock options exercised and higher net payments of commercial paper, offset by lower stock repurchases in 20172018 compared to 2016 and lower payments of long-term debt.2017.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures. Grainger's working capital is not impacted by significant seasonality trends throughout the year.
Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt and current maturities of long-term debt).
Working capital at September 30, 20172018, was $1,740$1,913 million, an increase of $18$244 million when compared to $1,722$1,669 million at December 31, 2016,2017. The increase was primarily due todriven by an increase in accounts receivable partially offset by increases inand inventory. At these dates, the ratio of current liabilities. The working capital assets to working capitalcurrent liabilities ratio decreased to 2.3 at September 30, 2017, fromwas 2.4 at December 31, 2016.and 2.2, respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provideprovides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) as a percent of total capitalization was 55.0%51.6% at September 30, 20172018, and 54.1%56.2% at December 31, 20162017.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expensesreported in the financial statements. Management bases its estimates on historical experiencestatements and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.accompanying notes.
Accounting policiesestimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of Grainger’s financial condition,
W.W. Grainger, Inc.statements and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
changes in financial condition or results of operations.accompanying notes. For a description of Grainger’s critical accounting policiesestimates, see Grainger's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and with the Company's independent registered public accounting firm.
Forward-Looking Statements
From time to time in this Quarterly Report on Form 10-Q, as well as in other written reports, communications and verbal statements, 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. Such forward-looking statements are identified by words such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” and similar terms and expressions.
Grainger cannot guarantee that any forward-looking statement will be realized although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievementand 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 athe forward-looking statementstatements include, without limitation: higher product costs or other expenses; a major loss of customers; loss or disruption of sourcesources of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the implementation, timing and results of the Company's strategic pricing actions and other 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, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businesses; changes in credit ratings; changes in effective tax rates; and other factors identified under Item 1A: Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2017, as updated in the Company's Quarterly Reports on Form 10-Q.
Caution should be taken to not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to publicly update any of its forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, except as required by law.
W.W. Grainger, Inc. and Subsidiaries
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk.Risk |
For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.
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Item 4. | Controls and Procedures.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 Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There werehave been no changes in Grainger's internal control over financial reporting that occurred duringfor the third quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, Grainger'sGrainger’s internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings.Proceedings |
As previously disclosed, on April 5, 2013, David Davies filedFor a putative class action lawsuit indescription of the Circuit Court of Cook County, Illinois under the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005,Company’s legal proceedings, see Note 13 - Contingencies and sought certification of a class of persons who may have received one or more faxes the Company sent in connection with a 2009 marketing campaign. The Company removed the suitLegal Matters - to the Federal District Court for the Northern DistrictCondensed Consolidated Financial Statements included under Item 1 - Financial Statements, of Illinois (the “District Court”). On June 27, 2014, the District Court refused to certify the class. The United States CourtPart I of Appeals for the Seventh Circuit denied Davies’ petition for immediate review of that ruling. The Company has now entered into an individual settlement with Davies resolving all of his claims on terms not material to the Company. The case was dismissed with prejudice on September 28, 2017.this report.
W.W. Grainger, Inc. and Subsidiaries
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds |
Issuer Purchases of Equity Securities – third quarterThird Quarter
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| | | | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
July 1 – July 31 | 245,081 | $170.24 | 245,081 | 4,187,194 |
Aug. 1 – Aug. 31 | 342,665 | $163.10 | 342,665 | 3,844,529 |
Sept. 1 – Sept. 30 | 131,462 | $170.47 | 131,462 | 3,713,067 |
Total | 719,208 | $166.88 | 719,208 | |
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| | | | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
July 1 - July 31 | 33,029 | $323.40 | 33,029 | 2,060,529 |
Aug 1 - Aug 31 | 103,188 | $355.48 | 103,188 | 1,957,341 |
Sept 1 - Sept 30 | 107,529 | $354.10 | 107,529 | 1,849,812 |
Total | 243,746 |
| 243,746 | |
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(A) | There were no shares withheld to satisfy tax withholding obligations. |
| |
(B) | Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs. |
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(C) | Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors on April 6, 2015. The program has2015, up to 15 million shares with no specified expiration date. Activity is reported on a trade date basis. |
W.W. Grainger, Inc. and Subsidiaries
Item 6. Exhibits.Exhibits
A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 3234 of this report.
W.W. Grainger, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | | W.W. Grainger, Inc. |
| | | (Registrant)GRAINGER, INC. |
Date: | October 26, 2017November 1, 2018 | By: | /s/ R. L. JadinThomas B. Okray |
| | | R. L. Jadin,Thomas B. Okray, Senior Vice President
and Chief Financial Officer |
| | | (Principal Financial Officer) |
Date: | October 26, 2017November 1, 2018 | By: | /s/ E.Eric R. Tapia |
| | | E.Eric R. Tapia, Vice President
and Controller |
| | | (Principal Accounting Officer) |
EXHIBIT INDEX
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| | |
EXHIBIT NO. | | DESCRIPTION |
| | Credit Agreement, dated as of October 6, 2017 by and among W.W. Grainger, Inc., the lenders party thereto 2015 Incentive Plan as Amended and U.S. Bank National Association, As Administrative Agent. (filed as Exhibit 10.1 to W. W. Grainger, Inc.'s Current Report on Form 8-K onRestated Effective October 6, 2017, and incorporated herein by reference.31, 2018. |
| | 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. |
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. |