|
| | | | | | | | | | | | | | | |
| 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 |
|
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | | | | | | | | |
| | U.S. | | Canada | | Total Reportable Segments | | Other businesses | | Total |
| Total net sales | $ | 6,648 | | | $ | 400 | | | $ | 7,048 | | | $ | 1,969 | | | $ | 9,017 | |
| Intersegment net sales | (376) | | | 0 | | | (376) | | | (2) | | | (378) | |
| Net sales to external customers | $ | 6,272 | | | $ | 400 | | | $ | 6,672 | | | $ | 1,967 | | | $ | 8,639 | |
| Segment operating earnings | $ | 1,088 | | | $ | (4) | | | $ | 1,084 | | | $ | 87 | | | $ | 1,171 | |
Following are reconciliations of segment information with the consolidated totals per the financial statementsFinancial Statements (in thousandsmillions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Operating earnings: | | | | | | | |
Total operating earnings for reportable segments | $ | 356 | | | $ | 343 | | | $ | 1,008 | | | $ | 1,084 | |
Other businesses | 44 | | | 30 | | | (56) | | | 87 | |
Unallocated expenses | (20) | | | (35) | | | (208) | | | (90) | |
Total consolidated operating earnings | $ | 380 | | | $ | 338 | | | $ | 744 | | | $ | 1,081 | |
| | | | | | | |
| As of | | | | | | |
| September 30, 2020 | | December 31, 2019 | | | | |
Assets: | | | | | | | |
United States | $ | 3,044 | | | $ | 2,668 | | | | | |
Canada | 166 | | | 173 | | | | | |
Assets for reportable segments | 3,210 | | | 2,841 | | | | | |
Other current and noncurrent assets | 2,676 | | | 3,003 | | | | | |
Unallocated assets | 697 | | | 161 | | | | | |
Total consolidated assets | $ | 6,583 | | | $ | 6,005 | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked.
Unallocated amounts include corporate-level support and administrative expenses, corporate-level assets consisting primarily of cash, property, buildings and equipment, intersegment eliminations and other adjustments. Unallocated expenses and assets are not included in any reportable segment. |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Assets: | |
Total assets for operating segments | $ | 3,204,800 |
| | $ | 3,055,111 |
|
Other current and non-current assets | 2,455,538 |
| | 2,464,656 |
|
Unallocated assets | 164,722 |
| | 174,540 |
|
Total consolidated assets | $ | 5,825,060 |
| | $ | 5,694,307 |
|
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 include non-operating cash and cash equivalents, 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, compared 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 |
|
10.12. 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, safety or compliance, privacy and cybersecurity matters, general negligence, contract disputes, environmental issues, unclaimed property, wage and hour laws, intellectual property, advertising, consumer protection, pricing (including disaster or emergency declaration pricing statutes),
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
employment practices, regulatory compliance, anti-bribery and corruption or other matters and actions brought by employees, consumers, competitors, suppliers, orcustomers, governmental entities.entities and other third parties.
For example, as disclosed in the Company's 2019 Form 10-K, beginning in the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints seek recovery of compensatory and other damages and relief. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in the case KMCO, LLC, No. 20-60028. As a result of the Chapter 7 proceedings, the claims against KMCO in the Harris County lawsuits are currently stayed. Grainger is investigating the claims, which are at an early stage, and intends to contest these matters vigorously.
Also, as a government contractor selling to federal, state and local governmental entities, the Company is alsomay be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration or to pricing compliance. ItWhile the Company is unable to predict the outcome of any of these matters, it is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial positioncondition or results of operations.
From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition 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.)North America, Japan and Canada, with a presence in Europe, Asia and Latin America.Europe. More than 3.23.5 million businesses and institutionscustomers worldwide rely on Grainger for products such as safety, gloves, ladders, motors and janitorial supplies, along with services likeincluding inventory management and technical support. These customers represent a broad collection of industries including commercial, government, healthcare and manufacturing. They(see Note 4 in the Condensed Consolidated Financial Statements (Financial Statements)). Customers place orders online, on mobile devices, through sales representatives,digital channels, over the phone and at local branches. Approximately 5,000 suppliers provide Grainger with more thanapproximately 1.6 million products stocked in Grainger's distribution centers (DCs) and branches worldwide.
Business Environment
Given Grainger's large numbertwo reportable segments are the United States (U.S.) and Canada (Grainger Canada and its subsidiaries). These reportable segments reflect the results of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger's growth. Grainger’s salesCompany's high-touch businesses in those geographies. Other businesses include the endless assortment businesses, (Zoro in the U.S. and Canada tendMonotaRO in Japan), and smaller high-touch businesses in the United Kingdom (U.K.) and Mexico.
Business Divestiture
Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested the Fabory business in Europe (Fabory) on June 30, 2020 and the China business (China) on August 21, 2020. Accordingly, the Company’s operating results include Fabory and China results through the respective dates of divestiture. Grainger recognized a net loss of approximately $109 million and gain of $5 million (presented within Selling, general and administrative expenses (SG&A)) as a result of the Fabory and China divestitures, respectively.
Strategic Priorities Amidst the COVID-19 Pandemic
The Company’s strategic priorities for 2020 have not changed from those stated in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report for the year ended December 31, 2019 on Form 10-K (the 2019 Form 10-K), which are to positively correlate with Business Investment, Business Inventory, Exports"Keep the World Working" and Industrial Production. Inrelentlessly expand Grainger’s leadership position in the U.S., sales tendMRO space by being the go-to-partner for people who build and run safe, sustainable and productive operations. However, the respective business plans to positively correlate with Gross Domestic Product (GDP). In Canada, sales tendachieve these strategic priorities continue to positively correlate with oil prices. The table below provides these estimated indicators for 2017:be affected by the global outbreak of Coronavirus in 2019 (COVID-19 pandemic).
|
| | | | |
| United States | Canada |
| 2017 Forecast (October) | 2017 Forecast (July) | 2017 Forecast (October) | 2017 Forecast (July) |
Business Investment | 3.7% | 4.3% | 2.3% | 1.1% |
Business Inventory | 1.0% | 0.6% | —% | —% |
Exports | 3.1% | 2.7% | 2.2% | 1.2% |
Industrial Production | 1.8% | 2.0% | 6.1% | 3.9% |
GDP | 2.2% | 2.3% | 3.1% | 2.5% |
Oil Prices | | — | $50/barrel | $49/barrel |
Source: Global Insight (October & July 2017) | | | | |
In March 2020, the U.S., Business Investment and Exports are two major indicatorsWorld Health Organization characterized COVID-19 as a pandemic. The rapid spread of MRO spending. Per the Global Insight October 2017 forecast, Business Investment is forecast to continue to improveCOVID-19 pandemic has caused significant disruptions in 2017 compared to 2016 primarily through equipment-related spending. Export growth has improved, as exports have responded to improved economic growth among countries that the U.S. exports to.
Perand global markets, and economists expect the Global Insight October 2017 forecast, Canada economic growth, as measured by GDP, is forecast to grow to 3.1% in 2017. The 2017 forecast assumes that oil pricesimpact will continue to growbe significant. Grainger is an essential business and stabilizeits major facilities have been allowed to remain operational during the pandemic as customers have depended on Grainger's products and services to keep their businesses up and running. As the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities change, the Company’s efforts and business plans have evolved accordingly. Grainger is currently focused on remaining open and operational in order to serve customers and communities well through the pandemic, support the needs and safety of employees and ensure the Company continues to operate with a strong financial position.
Impact of the COVID-19 Pandemic to Grainger Businesses
The COVID-19 pandemic has impacted and is likely to continue impacting Grainger’s businesses and operations as well as the operations of its customers and suppliers.
On the customer front, business re-openings and related activity during the third quarter of 2020 varied based on geography and industry. For example, in the U.S. and endless assortment businesses, sales to government, healthcare and other essential businesses remained strong through the quarter but sales to non-essential and disrupted industries were depressed compared to 2016pre-COVID-19 pandemic levels. The Canada business 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.other international high-touch businesses have been severely impacted by pandemic-related slowdowns with each geography experiencing meaningful year-over-year declines.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL OutlookCONDITION AND RESULTS OF OPERATIONS
On October 17, 2017, Grainger narrowed its sales and earnings per share guidance for 2017. The Company now expects 2017 sales growth of 1.5 to 2.5 percent and earnings per share of $10.40 to $10.90.
The Company's previous 2017 guidance included sales growth of 1 to 4 percentmajor operational facilities and earnings per share of $10.00 to $11.30.
Matters Affecting Comparability
There were 63 sales daysinfrastructure (i.e., DCs, branches, e-commerce sites, and logistic partners) remained operational in the third quarter of 2017 compared2020 with limited disruptions, while adhering to strict safety and social-distancing protocols.
From an inventory management and supply chain perspective, the Company has experienced elevated levels of demand for pandemic-related products, while demand for non-pandemic products has declined. The Company did not experience any material disruptions on its supply.
To date, the Company has been able to absorb the pandemic impact with minimal workforce reductions or furloughs, which positions the Company for accelerated growth once post-pandemic recovery commences. Also, the Company has prioritized maintaining all facilities safe for customers and employees to work and interact.
With respect to the Company’s financial position, during the third quarter of 2020 the Company maintained a tight focus on liquidity and continued to take actions to preserve cash to confront pandemic-related uncertainties, including deferring certain capital projects and pausing share repurchases. During the third quarter of 2020, the Company repaid its revolver drawdown. As of September 30, 2020, the Company had approximately $2.1 billion in available liquidity, including $859 million in cash.
2020 Outlook in Consideration of the COVID-19 Pandemic
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and, due to numerous uncertainties, is currently unable to predict the continued impact that the COVID-19 pandemic will have on its business, financial position and operating results in future periods. While the Company is unable to accurately foresee these future impacts, it believes that its financial resources and liquidity levels, along with various contingency plans to protect employee and customer health, keep its operations running and reduce costs are sufficient to manage the impact anticipated from the COVID-19 pandemic.
Matters Affecting Comparability
There were 64 sales days in 2016.the three months ended September 30, 2020 and September 30, 2019. There were 192 sales days in the nine months ended September 30, 2020 and 191 sales days in the nine months ended September 30, 2019. Grainger completed two divestitures in the nine months ended September 30, 2020, which were immaterial individually and in the aggregate.
In addition, starting in March, the Company has experienced elevated levels of COVID-19 pandemic-related product sales (e.g., personal protective equipment (PPE) and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales have decreased. The incremental demand came primarily from customers in the front-lines of the pandemic, including government, healthcare and other essential businesses, while the demand from non-essential and disrupted industries has decreased over the same period due to business activity slowdown or temporary shutdowns. Conversely, the Company experienced adverse gross margin impacts from lower-margin COVID-19 pandemic-related product sales.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Three Months Ended September 30, 20172020
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, | | | | | | | |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales | | |
| 2020 | | 2019 | | | 2020 | | 2019 |
Net sales | $ | 3,018 | | | $ | 2,947 | | 2.4 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 1,944 | | | 1,848 | | 5.2 | % | | 64.4 | % | | 62.7 | % |
Gross profit | 1,074 | | | 1,099 | | (2.2) | % | | 35.6 | % | | 37.3 | % |
Selling, general and administrative expenses | 694 | | | 761 | | (8.7) | % | | 23.0 | % | | 25.9 | % |
Operating earnings | 380 | | | 338 | | 12.4 | % | | 12.6 | % | | 11.4 | % |
Other expense, net | 18 | | | 16 | | 15.2 | % | | 0.6 | % | | 0.5 | % |
Income taxes | 106 | | | 78 | | 36.2 | % | | 3.5 | % | | 2.6 | % |
Net earnings | 256 | | | 244 | | 4.6 | % | | 8.5 | % | | 8.3 | % |
Noncontrolling interest | 16 | | | 11 | | 37.1 | % | | 0.5 | % | | 0.4 | % |
Net earnings attributable to W.W. Grainger, Inc. | $ | 240 | | | $ | 233 | | 3.0 | % | | 8.0 | % | | 7.9 | % |
Grainger’s net sales of $3,018 million for the third quarter of 2020 increased $71 million, or 2.4%, compared to the same period in 2019. The increase in net sales was primarily driven by volume increases on pandemic-related product sales, partially offset by year over year decreases in non-pandemic related product sales and decreases due to business divestitures. Also, sales in the Canada business and other international high-touch businesses were down compared to 2019 due to COVID-19 related business slowdowns. See Note 4 to the Financial Statements for information related to disaggregated revenue. See the Segment Analysis below for further details related to segment revenue.
Gross profit of $1,074 million for the third quarter of 2020 decreased $25 million, or 2%, compared to the same quarter in 2019. The gross profit margin of 35.6% during the third quarter of 2020 decreased 1.7 percentage points when compared to the same quarter in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in the U.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit.
SG&A of $694 million for the third quarter of 2020 decreased $67 million, or 9%, compared to the third quarter of 2019. To better explain the changes to SG&A for the quarter, certain non-recurring or non-core items have been excluded.
The following tables reconcile 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 non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its 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 these measures with other companies' non-GAAP measures having the same or similar names. All tables below are in millions of dollars, except percentages:
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| September 30, 2020 | | | | |
| 2020 | | 2019 | | Fav/(Unfav)% |
SG&A reported | $ | 694 | | | $ | 761 | | | 9 | % |
| | | | | |
| | | | | |
Restructuring, net of branch gains (Canada) | (1) | | | 1 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Grainger China divestiture (Unallocated expense) | (5) | | | — | | | |
Total restructuring, net and business divestiture | (6) | | | 1 | | | |
SG&A adjusted | $ | 700 | | | $ | 760 | | | 8 | % |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | Fav/(Unfav) % |
Operating earnings reported | $ | 380 | | | $ | 338 | | | 12 | % |
Total restructuring, net, and business divestiture | (6) | | | 1 | | | |
Operating earnings adjusted | $ | 374 | | | $ | 339 | | | 10 | % |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | Fav/(Unfav)% |
Net earnings attributable to W.W. Grainger, Inc. reported | $ | 240 | | | $ | 233 | | | 3 | % |
| | | | | |
| | | | | |
| | | | | |
Total restructuring, net, business divestiture and tax (1) | 6 | | | — | | | |
Net earnings attributable to W.W. Grainger, Inc. adjusted | $ | 246 | | | $ | 233 | | | 5 | % |
(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.
Excluding restructuring, net and business divestiture in both periods as noted in the table above, SG&A decreased $60 million, or 8%. This decrease is primarily due to cost control actions across the high-touch businesses and leverage gains in the endless assortment businesses.
Operating earnings of $380 million for the third quarter of 2020 increased $42 million, or 12%, compared to the third quarter of 2019. Excluding restructuring, net and business divestiture in both periods as noted in the table above, operating earnings increased $35 million, or 10%, driven primarily by lower SG&A expenses partially offset by lower gross profit dollars.
Other expense, net was $18 million for the third quarter of 2020, an increase of $2 million, or 15%, compared to the third quarter of 2019. The increase was primarily related to interest expense on the $500 million in senior notes issued in February 2020.
Income taxes of $106 million for the third quarter of 2020 increased $28 million, or 36%, compared to $78 million in the third quarter of 2019. The increase in 2020 was primarily driven by higher taxable operating earnings for the quarter. Grainger's effective tax rates were 29.3% and 24.2% for the three months ended September 30, 2020 and 2019, respectively.
Net earnings attributable to W.W. Grainger, Inc. of $240 million for the third quarter of 2020 increased $7 million, or 3%, compared to the third quarter of 2019. Excluding restructuring, net, business divestiture and tax from both periods per the table above, net earnings increased $13 million or 5%.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Segment Analysis
The following results of the U.S. and Canada reportable segments and other businesses include external and intersegment net sales and operating earnings. See Note 11 to the Financial Statements.
United States
Net sales were $2,347 million for the third quarter of 2020, an increase of $70 million, or 3.1% compared to the same period in 2019 and consisted of the following:
| | | | | |
| Percent Increase |
Volume (including product mix) | 2.8% |
Price and customer mix | 0.3 |
| |
| |
Total | 3.1% |
Overall, revenue increases for the U.S. business were primarily driven by volume. During the quarter, the U.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other essential businesses; however, sales to non-essential and disrupted industries were down compared to 2019. See Note 4 to the Financial Statements for information related to disaggregated revenue. From a product perspective, the U.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of non-pandemic products.
Gross profit margin for the third quarter of 2020 decreased 1.6 percentage points compared to the same period in 2019. The decrease was primarily the result of product and customer mix. The U.S. business experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. The U.S. business expects these mix-related decreases to continue during the COVID-19 pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers.
SG&A of $501 million for the third quarter of 2020 decreased $22 million, or 4%, when compared to the third quarter of 2019. The decrease in SG&A was primarily driven by decreases in travel and employee related expenses as well as operating efficiencies. These decreases more than offset temporary pandemic pay increases for hourly branch and DC employees, as well as incremental operating costs to ensure the safety and health of employees and maintain safe facilities for customer and employee interactions.
Operating earnings of $354 million for the third quarter of 2020 increased $11 million, or 3%, from $343 million for the third quarter of 2019. This increase was driven by lower SG&A expenses partially offset by lower gross profit dollars.
Canada
Net sales were $116 million for the third quarter of 2020, a decrease of $13 million, or 9.9%, compared to the same period in 2019 and consisted of the following:
| | | | | |
| Percent Decrease |
Volume (including product mix) | (8.1)% |
Price and customer mix | (1.0) |
Foreign exchange | (0.8) |
Total | (9.9)% |
For the third quarter of 2020, overall sales volume was down 8.1 percentage points compared to the same period in 2019 primarily due to market share declines. During the third quarter of 2020, global oil prices remained flat as a result of market forces, including the impact of the COVID-19 pandemic. More than one fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively affected by the COVID-19 pandemic.
The gross profit margin decreased 0.5 percentage point in the third quarter of 2020 versus the third quarter of 2019. The decrease was driven by COVID-19 pandemic-related mix impacts partially offset by lower freight costs.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SG&A decreased 16% in the third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced advertising and employee related expenses.
Operating earnings were $2 million for the third quarter of 2020 compared to break even in the third quarter of 2019.
Other businesses
Net sales were $687 million for the third quarter of 2020, an increase of $14 million, or 1.9%, when compared to the same period in 2019.
| | | | | |
| Percent Increase/(Decrease) |
Price/volume | 12.3% |
Foreign exchange | 0.2 |
Business divestitures | (10.6) |
Total | 1.9% |
The increase in net sales was driven by continued strong customer acquisition in the endless assortment businesses partially offset by revenue declines in the international high-touch businesses as a result of pandemic-related slowdowns and the net impact of the Fabory and China business divestitures.
Gross profit margin decreased 1.8 percentage points in the third quarter of 2020 versus the third quarter of 2019, driven partially by higher freight costs and business unit mix.
Operating earnings of $44 million for the third quarter of 2020 increased $14 million compared to $30 million for the third quarter of 2019. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Nine Months Ended September 30, 2020
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, | | | | | | | |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales | | |
| 2020 | | 2019 | | | 2020 | | 2019 |
Net sales | $ | 8,856 | | | $ | 8,639 | | 2.5 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 5,645 | | | 5,324 | | 6.0 | % | | 63.7 | % | | 61.6 | % |
Gross profit | 3,211 | | | 3,315 | | (3.1) | % | | 36.3 | % | | 38.4 | % |
Selling, general and administrative expenses | 2,467 | | | 2,234 | | 10.4 | % | | 27.9 | % | | 25.9 | % |
Operating earnings | 744 | | | 1,081 | | (31.2) | % | | 8.4 | % | | 12.5 | % |
Other expense, net | 56 | | | 42 | | 34.7 | % | | 0.6 | % | | 0.5 | % |
Income taxes | 118 | | | 261 | | (54.5) | % | | 1.3 | % | | 3.0 | % |
Net earnings | 570 | | | 778 | | (26.9) | % | | 6.4 | % | | 9.0 | % |
Noncontrolling interest | 43 | | | 32 | | 30.8 | % | | 0.5 | % | | 0.4 | % |
Net earnings attributable to W.W. Grainger, Inc. | $ | 527 | | | $ | 746 | | (29.4) | % | | 6.0 | % | | 8.6 | % |
Grainger’s net sales of $8,856 million for the nine months ended September 30, 2020 increased $217 million, or 2.5% compared to the same period in 2019. On a daily basis, net sales increased 2%. The increase in net sales was primarily driven by volume, partially offset by price and mix and the impact of business divestitures. The Company estimates that COVID-19 pandemic-related product sales represented approximately half of the sales growth, primarily in the U.S. and endless assortment businesses, which during the second and third quarters of 2020 experienced strong pandemic-related volume from government, healthcare and other essential businesses. See Note 4 to the Financial Statements for information related to disaggregated revenue. This pandemic-related elevated volume was partially offset by declining demand from non-essential and disrupted industries along with declining non-pandemic product sales across most industries. Also, sales in the Canada business and other international high-touch businesses are down compared to 2019 due to COVID-19 business slowdowns. See Segment Analysis below for further details related to segment revenue.
Gross profit of $3,211 million for the nine months ended September 30, 2020 decreased $104 million, or 3%, compared to the same period in 2019. The gross profit margin of 36.3% decreased 2.1 percentage points when compared to the same period in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in the U.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit.
SG&A of $2,467 million for the nine months ended September 30, 2020 increased $233 million, or 10.4%, compared to the same period in 2019. To better explain the changes to SG&A, certain non-recurring or non-core items have been excluded.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2017 (A) | | 2016 (A) | | 2017 | | 2016 |
Net sales | $ | 2,636 |
| | $ | 2,596 |
| 2 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 1,619 |
| | 1,557 |
| 4 | % | | 61.4 |
| | 60.0 |
|
Gross profit | 1,017 |
| | 1,040 |
| (2 | )% | | 38.6 |
| | 40.0 |
|
Operating expenses | 736 |
| | 717 |
| 3 | % | | 27.9 |
| | 27.6 |
|
Operating earnings | 281 |
| | 323 |
| (13 | )% | | 10.7 |
| | 12.4 |
|
Other expense | 31 |
| | 29 |
| 6 | % | | 1.2 |
| | 1.1 |
|
Income taxes | 79 |
| | 100 |
| (21 | )% | | 3.0 |
| | 3.8 |
|
Noncontrolling interest | 9 |
| | 8 |
| 17 | % | | 0.3 |
| | 0.3 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 162 |
| | $ | 186 |
| (13 | )% | | 6.1 | % | | 7.2 | % |
(A) May not sum due to rounding
Grainger’s net sales of $2,636 million for the third quarter of 2017 increased 2% compared with sales of $2,596 million for the comparable 2016 quarter. On a daily basis, sales increased 3% and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 8 |
Hurricane impact | 1 |
Seasonal sales | (1) |
Divestiture | (1) |
Price | (4) |
Total | 3% |
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 of the pricing actions. Refer to the Segment Analysistable 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 million for the third quarter of 2017 decreased $23 million or 2% compared to the same quarter in 2016. The gross profit margin of 38.6% during the third quarter of 2017 decreased 1.4 percentage points when compared to the same period in 2016, driven primarily by the pricing actions in the U.S. business.
Operating expenses of $736 million for the third quarter of 2017 increased 3% from $717 million 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 for the third quarter of 2017 were $281 million, a decrease of 13% compared to the third quarter of 2016. The decrease inreconciles reported SG&A, operating earnings was driven primarily by lower gross profit from the pricing actions in the U.S. business and increased employee related costs.
Netnet 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)GAAP to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted. 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 millions of dollars, except percentages:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| | | | | Fav/(Unfav)% |
| 2020 | | 2019 | | |
SG&A reported | $ | 2,467 | | | $ | 2,234 | | | (10) | % |
Restructuring, net of branch gains (U.S.) | 6 | | | — | | | |
| | | | | |
Restructuring, net of branch gains (Canada) | 1 | | | (1) | | | |
| | | | | |
| | | | | |
Impairment charges (Other businesses) | 177 | | | — | | | |
Fabory divestiture (Other businesses) | (7) | | | — | | | |
Fabory divestiture (Unallocated expense) | 116 | | | — | | | |
Grainger China divestiture (Unallocated expense) | (5) | | | — | | | |
Total restructuring, net, impairment charges and business divestitures | 288 | | | (1) | | | |
SG&A adjusted | $ | 2,179 | | | $ | 2,235 | | | 3 | % |
|
| | | | | | | | | |
| Three Months Ended | |
| September 30, | |
| 2017 | | 2016 | % |
Operating earnings reported | $ | 281,170 |
| | $ | 322,587 |
| (13 | )% |
Restructuring (U.S.) | 13,151 |
| | 6,600 |
| |
Branch gains (U.S.) | (5,207 | ) | | (1,163 | ) | |
Other charges (U.S.) | (3,023 | ) | | — |
| |
Restructuring (Canada) | 4,937 |
| | 4,367 |
| |
Restructuring (Other Businesses) | (210 | ) | | — |
| |
Subtotal | 9,648 |
| | 9,804 |
| |
Operating earnings adjusted | $ | 290,818 |
| | $ | 332,391 |
| (13 | )% |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | Fav/(Unfav)% |
Operating earnings reported | $ | 744 | | | $ | 1,081 | | | (31) | % |
Total restructuring, net, impairment charges and business divestitures | 288 | | | — | | | |
Operating earnings adjusted | $ | 1,032 | | | $ | 1,081 | | | (5) | % |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | Fav/(Unfav) % |
Net earnings attributable to W.W. Grainger, Inc. reported | $ | 527 | | | $ | 746 | | | (29) | % |
| | | | | |
| | | | | |
| | | | | |
Total restructuring, net, impairment charges, business divestitures and tax (1) | 153 | | | — | | | |
Net earnings attributable to W.W. Grainger, Inc. adjusted | $ | 680 | | | $ | 746 | | | (9) | % |
For(1) The tax impact of adjustments is calculated based on the threeincome tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
As noted in the table above, a large portion of the Company's SG&A increase for the nine months ended September 30, 20172020 is due to the $177 million impairment of Fabory in the first quarter of 2020 and 2016 the non-GAAP measure presentedloss on the divestiture of Fabory of approximately $109 million during the second quarter of 2020. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, did not have a material impact on the financial results.SG&A decreased $56 million primarily due to reduced travel, depreciation and employee related expenses across all businesses.
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 millionOperating earnings for the third quarter of 2017,nine months ended September 30, 2020 were $744 million, a decrease of 1% when$337 million, or 31%, compared with net sales of $2,028 million forto the same period in 2016. On a daily basis, sales increased 1%2019. Excluding restructuring, net, impairment charges and consistedbusiness divestitures in both periods as noted in the table above, operating earnings decreased $49 million or 5%, driven by lower gross profit dollars partially offset by lower SG&A.
Other expense, net was $56 million for the nine months ended September 30, 2020, an increase of $14 million, or 35%, compared to the following:nine months ended September 30, 2019. The increase was primarily related to interest expense on the $500 million in senior notes issued in February 2020.
Income taxes of $118 million for the nine months ended September 30, 2020decreased $143 million, or 55%, compared with $261 million for the comparable 2019 period. This decrease was primarily driven by lower taxable operating earnings for the nine-month period, tax losses in the Company's investment in Fabory per the impairment
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
and internal reorganization of the Company's holdings in Fabory in the first quarter of 2020 and tax impacts of the Fabory divestiture. Grainger's effective tax rates were 17.3% and 25.1% for the nine months ended September 30, 2020 and 2019, respectively, and this decrease is primarily due to the Fabory tax impacts.
Net earnings attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2020decreased $219 million or 29% to $527 million from $746 million for the nine months ended September 30, 2019. Excluding restructuring, net, impairment charges, business divestitures and tax from both periods in the table above, net earnings decreased $66 million, or 9%. The decrease in net earnings primarily resulted from lower gross profit dollars partially offset by lower SG&A.
Segment Analysis
The following comments at the segment and other businesses level include external and intersegment net sales and operating earnings. See Note 11 to the Financial Statements.
United States
Net sales were $6,823 million for the nine months ended September 30, 2020, an increase of $175 million, or 2.6%, compared to the same period in 2019. On a daily basis, net sales increased 2.1% and consisted of the following:
| | | | | |
| Percent Increase/(Decrease) |
Volume (including product mix) | 2.9% |
Price and customer mix | (0.8) |
| |
| |
Total | Percent Increase/(Decrease) |
Volume | 7 |
Intercompany sales to Zoro | 1 |
Hurricane impact | 1 |
Holiday timing | (1) |
Seasonal sales | (1) |
Divestiture | (1) |
Price | (5) |
Total | 1%2.1% |
Sales to customers in natural resources increased high single digits. Resellers, transportation and retail end markets increased mid-single digits, while heavy manufacturing and government increased low single digits.
In the three months ended September 30, 2017, eCommerce salesOverall, revenue increases for the U.S. business were $1,039 million, an increase of 8% over the prior year. Total eCommerce sales represented 52% and 47% of total sales for the three months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.comCOVID-19 pandemic-related sales, which accounted for the majority of the sales growth beginning in March 2020. As a result of the COVID-19 pandemic, the U.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other electronic purchasing platforms. Ifessential businesses; however, sales to non-essential and disrupted industries are down compared to 2019. See Note 4 to the Company included KeepStock®,Financial Statements for information related to disaggregated revenue. From a product perspective, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 54%U.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of total sales for the three months ended September 30, 2017 and 2016, respectively.non-pandemic products.
The grossGross profit margin for thethird quarter of 2017 decreased 1.92.3 percentage points compared to the same period in 2016 largely due to2019. The decrease was the pricing actions.
Operating expenses 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.product and customer mix. The business also experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. The Company expects these mix-related decreases to continue during the pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers.
Operating earnings of $298 millionSG&A for the third quarter of 2017nine months ended September 30, 2020 decreased 13% from $343$13 million for the third quarter of 2016 , primarily driven by the pricing actions.
Canada
Net sales were $188 million for the third quarter of 2017, an increase of $9 million, or 5%, when compared with $179 million forto the same period in 2016. On a daily basis, sales increased 7%2019, which is primarily driven by reduced travel and consisteddepreciation expenses partially offset by incremental operating costs to support the U.S. business response to the COVID-19 pandemic and related activities.
Operating earnings of $1,012 million for the following:
|
| |
| Percent Increase |
Foreign exchange | 5 |
Volume | 2 |
Total | 7% |
In the threenine months ended September 30, 20172020decreased $76 million, eCommerce sales in the Canadian business were $33or 7%, from $1,088 million an increase of 41% over the prior year. Total eCommerce sales represented 17% and 13% of total sales for the threenine 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.
The2019. This decrease was driven primarily by lower 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.dollars.
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 BusinessesCanada
Net sales for other businesses were $537 million for the third quarter of 2017, an increase of $55 million, or 11%, when compared with net sales of $482 million for the same period in 2016. On a daily basis, sales increased 13% and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Price/volume | 15 |
Foreign exchange | (2) |
Total | 13% |
Operating earnings were $27 million for the third quarter of 2017 up $2 million compared to the third quarter of 2016. The operating earnings included strong results 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 and higher foreign tax credits.
Matters Affecting Comparability
There were 191 sales days in the nine months ended September 30, 2017 compared to 192 sales days in 2016.
Results of Operations – Nine 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):
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2017 (A) | | 2016 (A) | | 2017 | | 2016 |
Net sales | $ | 7,792 |
| | $ | 7,666 |
| 2 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 4,716 |
| | 4,542 |
| 4 | % | | 60.5 |
| | 59.2 |
|
Gross profit | 3,076 |
| | 3,125 |
| (2 | )% | | 39.5 |
| | 40.8 |
|
Operating expenses | 2,268 |
| | 2,180 |
| 4 | % | | 29.1 |
| | 28.4 |
|
Operating earnings | 809 |
| | 945 |
| (14 | )% | | 10.4 |
| | 12.3 |
|
Other expense | 81 |
| | 72 |
| 13 | % | | 1.0 |
| | 0.9 |
|
Income taxes | 267 |
| | 309 |
| (14 | )% | | 3.4 |
| | 4.0 |
|
Noncontrolling interest | 26 |
| | 19 |
| 35 | % | | 0.3 |
| | 0.3 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 435 |
| | $ | 545 |
| (20 | )% | | 5.6 | % | | 7.1 | % |
(A) May not sum due to rounding
Grainger’s net sales of $7,792$352 million for the nine months ended September 30, 2017 increased 2%2020, a decrease of $48 million, or 12.1%, compared with sales of $7,666 million forto the comparable 2016 period.same period in 2019. On a daily basis, net sales increased 2%decreased 12.5% and consisted of the following:
| | | | | |
| Percent Decrease |
Volume (including product mix) | (10.0)% |
Foreign exchange | (1.6) |
Price and customer mix | (0.9) |
Total | (12.5)% |
For the nine months ended September 30, 2020, volume was down 10.0 percentage points compared to the same period in 2019 primarily due to market share declines partially offset by COVID-19 pandemic-related product sales. During the first half of 2020, global oil prices declined sharply as a result of market forces. More than a fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively impacted by the COVID-19 pandemic.
The gross profit margin decreased 0.5 percentage point in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to negative price cost spread and COVID-19 pandemic-related mix impact.
SG&A decreased $17 million, or 13% in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was primarily due to lower variable costs from lower sales and cost management actions to improve SG&A leverage.
Operating losses were $4 million for both the nine months ended September 30, 2020 and 2019.
Other businesses
Net sales for other businesses were $2,065 million for the nine months ended September 30, 2020 an increase of $96 million, or 4.8% compared to the same period in 2019. On a daily basis, net sales increased 4.3% and consisted of the following:
| | | | | |
| Percent Increase/(Decrease) |
Price/volume | 7.7% |
Business divestitures | (3.4) |
Total | 4.3% |
The increase in net sales was driven by the endless assortment businesses, partially offset by lower performance in other international high-touch businesses, which were heavily impacted by pandemic-related slowdowns and the net impact of Fabory and China business divestitures. The endless assortments businesses benefited from COVID-19 pandemic-related sales and otherwise continued to see strong new customer acquisition during the nine months ended September 20, 2020.
Gross profit margin decreased 1.3 percentage points compared to the same period in 2019, driven by business unit mix from the faster growing endless assortment businesses as well as higher freight costs.
Operating losses of $56 million for the nine months ended September 30, 2020 decreased $143 million from operating earnings of $87 million in the comparable period from the prior year. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, operating earnings would have increased $27 million or 32%. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
|
| |
| Percent Increase/(Decrease) |
Volume | 7 |
Seasonal sales | (1) |
Price | (4) |
Total | 2% |
Cash, Cash Equivalents and Liquidity
TheAs of September 30, 2020 and December 31, 2019, Grainger had cash and cash equivalents of $859 million and $360 million, respectively. This increase in net sales wascash is primarily drivendue to cash flows from operations, delayed capital investments and the pause of the share repurchase program. (See part II, Item A: “Risk Factors”, below, for an update to the Company’s risk factors in connection with the COVID-19 pandemic).
Grainger believes that, assuming its operations are not significantly impacted by the single channel online businesses, as well as volume increases in the U.S. business asCOVID-19 pandemic for a resultprolonged period, its current level of the pricing actions. Refercash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to the Segment Analysis below for further details.meet its liquidity needs.
Cash Flows
In the nine months ended September 30, 2017, eCommerce sales for Grainger were $4,029Net cash provided by operating activities was $787 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$770 million for the nine months ended September 30, 2017 decreased 2% compared with $3,1252020 and 2019, respectively. The increase in cash provided by operating activities is primarily the result of lower net payments related to employee variable compensation and benefits paid under annual incentive plans and higher trade payables partially offset by investments in inventory.
Net cash used in investing activities was $132 million in the same period in 2016. The gross profit margin during the nine months ended September 30, 2017 decreased 1.3 percentage points when compared to the same period in 2016, driven primarily by the pricing actions in the U.S. business.
Operating expenses of $2,268and $145 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,2020 and 2019, respectively. This decrease in net in restructuring in the U.S., primarily related to the costs incurred 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.
The table below reconciles reported operating earning determined in accordance with generally accepted accounting principles in the U.S. to adjusted operating earnings, a non-GAAP measure. Management believes adjusted operating earnings is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | |
| Nine Months Ended | |
| September 30, | |
| 2017 | | 2016 | % |
Operating earnings reported | $ | 808,723 |
| | $ | 945,269 |
| (14 | )% |
Restructuring (U.S.) | 29,757 |
| | 29,035 |
| |
Branch gains (U.S.) | (28,032 | ) | | (16,543 | ) | |
Other charges (U.S.) | (3,023 | ) | | — |
| |
Restructuring (Canada) | 26,509 |
| | 15,499 |
| |
Inventory reserve adjustment (Canada) | — |
| | 9,847 |
| |
Restructuring (Other Businesses) | 41,300 |
| | — |
| |
Restructuring (Unallocated expense) | — |
| | 8,947 |
| |
Subtotal | 66,511 |
| | 46,785 |
| |
Operating earnings adjusted | $ | 875,234 |
| | $ | 992,054 |
| (12 | )% |
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 $5,969 million for the nine months ended September 30, 2017 and were relatively flat when compared with net sales of $5,973 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 $3,024 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, 2017 and 2016, respectively. 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 57% and 53% of total sales for the nine months ended September 30, 2017 and 2016, respectively.
The gross profit margin for the nine months ended September 30, 2017 decreased 1.6 percentage points compared to the same period in 2016, primarily driven by the pricing actions.
Operating expenses were flat for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016. Excluding restructuring costs, net gains on 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
Operating earnings of $923 million for the nine months ended September 30, 2017 decreased 10% from $1,023 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, 2017 an increase of 2% when compared with $552 million for the same period in 2016. On a daily basis, sales increased 3% and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | 3 |
Wildfire impact | 1 |
Foreign exchange | 1 |
Holiday timing | (1) |
Price | (1) |
Total | 3% |
In the nine months ended September 30, 2017, eCommerce sales for the Canadian business were $96 million, an increase of 35% over the prior year. Total eCommerce sales represented 17% and 13% of total sales for the nine 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 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 points in the nine months ended September 30, 2017 versus the nine months ended September 30, 2016, largely due to a favorable comparison to an inventory adjustment in the second quarter of 2016 that did not repeat in 2017, partially offset by price deflation, cost inflation and higher freight costs from an increase in shipping directly to customers in 2017.
Operating expenses in the nine months ended September 30, 2017 were $229 million compared to $216 million for the nine months ended September 30, 2016. Excluding restructuring costs in both periods, operating expenses would have increased 1%.
Operating losses were $59 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 loss was primarily driven by higher operating expenses.
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 $400 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, 2017 and 2016, respectively. The increase was primarily due to the wind-down of the business in Colombia and the inability to realize the associated tax benefits, partially offset by incremental tax credits 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.
Financial Condition
Cash Flow
Net cash provided by operating activities was $721 million and $689 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in cash provided is primarily the result of lower payments related to employee benefits, 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 activities to financing activities. The reclassification relates to employee taxes paid as part of the exercise of stock options.
Net cash used in investing activities was $100 million and $185 million in the nine months ended September 30, 2017 and 2016, respectively. The decrease in net cash used wasprimarily driven by lower additions to property, buildings and equipment compared to the prior year and higher proceeds from the sales of branch real estate assets and the U.S. specialty business divestiture when compared to the prior year.intangibles.
Net cash used in financing activities was $619 million compared to $518$147 million in the nine months ended September 30, 2017 and 2016, respectively.2020 compared to $875 million in the nine months ended September 30, 2019. The increasedecrease in net cash used in financing activities of $101 million was primarily driven by lower proceeds of long-term debt and higher net payments of commercial paper, offset by lowertreasury stock repurchases in 2017 compared to 2016 and lower payments of long-term debt.repurchases.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures.
Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt, and current maturities of long-term debt)debt and lease liabilities).
Working capital at as of September 30, 20172020, was $1,740$2,278 million, an increase of $18$186 million when compared to $1,722$2,092 million atas of December 31, 2016,2019. 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 was 2.7 and 2.6 for September 30, 2017, from 2.4 at 2020 and December 31, 2016.2019, 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.revolving credit facilities. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) and lease liabilities as a percent of total capitalization was 55.0%52.5% at September 30, 20172020, and 54.1%54.3% at December 31, 2016.2019.
Grainger receives ratings from two independent credit rating agencies: Moody's Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade. The following table summarizes the Company's credit ratings at September 30, 2020: Critical Accounting Policies | | | | | | | | | | | | | | | | | |
| Corporate | | Senior Unsecured | | Short-term |
Moody's | A3 | | A3 | | P2 |
S&P | A+ | | A+ | | A1 |
Commitments and EstimatesOther Contractual Obligations
The preparationThere were no material changes to the Company’s commitments and other contractual obligations from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of financial statements, in conformity with accounting principles generally acceptedFinancial Condition and Results of Operations” in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience 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.Company’s 2019 Form 10-K.
Accounting policies are considered critical when they require management to make 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. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Estimates
The methods, assumptions, and estimates used in applying the Company’s accounting policies may require the application of judgments regarding matters that are inherently uncertain. The Company considers an accounting policy to be a critical estimate if: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on Grainger’s consolidated financial condition or results of operations. For aposition and results. While the Company believes that estimates, assumptions, and judgments used are reasonable, they are based on information available when the estimate was made.
A description of Grainger’sthe Company’s critical accounting estimates is described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Form 10-K. The following critical accounting policy is being added to the policies set forth in the 2019 Form 10-K.
Allowance for Credit Losses
Pursuant to the January 1, 2020 implementation of the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the Company establishes an allowance for credit losses using estimations of loss rates based upon historical loss experience and adjusted for factors that are relevant to determining the expected collectability of accounts receivables. These estimations and factors require assumptions and judgments regarding matters that are inherently uncertain, including the impact that the COVID-19 pandemic may have on the liquidity, credit and solvency status of customers or individual industries. For further discussion on the Company’s allowances for credit losses, see Grainger's Annual Report on Form 10-K for the year ended December 31, 2016.in Note 5 contained within Part I, Item 1, “Notes to Condensed Consolidated Financial Statements”.
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-lookingForward-looking statements arecan generally be identified by wordstheir use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project”“project,” “will” or “would” and similar terms and expressions.phrases, including references to assumptions.
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: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 ("COVID-19") as well as the impact of the actions taken or contemplated by governmental authorities or others in connection with the COVID-19 pandemic on the Company’s businesses, its employees, customers and suppliers, including disruption to Grainger's operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, any mandated facility closures of non-essential businesses, stay in shelter health orders or other similar restrictions for customers and suppliers, changes in customers' product needs, suppliers' inability to meet unprecedented demand for COVID-19 related products, the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company's controls and procedures required by working remote arrangements, including financial reporting processes, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the Company's products or limit the Company's ability to access capital markets on terms that are attractive or at all; 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 technologiestechnology initiatives or business strategies; the implementation, timingfailure to adequately
W.W. Grainger, Inc. and results ofSubsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company's strategic pricing actions and othergross profit percentage; the Company's responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, safety or compliance, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards; government contract matters; disruption of information technology or data security systems;systems involving the Company or third parties on which the Company depends; general industry, economic, market or marketpolitical conditions; general global economic conditions;conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility;volatility, including volatility or price declines of the Company's common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; other pandemic diseases or viral contagions; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businesses; changes in credit ratings;effective tax rates; changes in effective tax rates;credit ratings or outlook; the Company's incurrence of indebtedness and other factors identified under Part II, Item 1A: Risk Factors“Risk Factors” in the Company's Annual Report onCompany’s 2019 Form 10-K, for the year ended December 31, 2016, as updated in the Company'sCompany’s Quarterly Reports on Form 10-Q.
Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to publicly update or revise 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. |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see “Item 7A: QuantitativeAs disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report onthe Company's 2019 Form 10-K, Grainger’s primary market risk exposures include changes in foreign currency exchange and interest rates. In February 2020, the Company entered into certain derivative instruments to manage portions of these risks. A discussion of the Company’s accounting policies for derivative instruments and further disclosures are provided in Note 9 contained within Part I, Item 1, "Notes to Condensed Consolidated Financial Statements”.
For a discussion of current market conditions resulting from the fiscal year ended December 31, 2016.COVID-19 pandemic, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.
| |
Item 4. | Controls and Procedures. |
Item 4.Controls and Procedures
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of 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, 2020, 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. |
Item 1.Legal Proceedings
As previously disclosed, on April 5, 2013, David Davies filed
For a putative class action lawsuitdescription of the Company’s legal proceedings, see Note 12 - Contingencies and Legal Matters - to the Condensed Consolidated Financial Statements included under Part 1, Item 1, "Financial Statements".
Item 1A. Risk Factors
The Company’s business, results of operations, and financial condition are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in the Circuit Court of Cook County, Illinois underCompany’s 2019 Annual Report on Form 10-K filed with the Telephone Consumer Protection Act of 1991, as amendedSecurities and Exchange Commission on February 20, 2020 (the 2019 Form 10-K). The following risk factor is being provided to supplement and update the risk factors set forth in the 2019 Form 10-K.
Grainger’s business and operations have been and may continue to be adversely affected by the Junk Fax Prevention Actglobal outbreak of 2005,the Coronavirus (COVID-19) and sought certificationmay be adversely affected by other global outbreaks of pandemic disease.
Any global outbreaks of pandemic disease, such as the COVID-19 pandemic, could have a classmaterial adverse effect on the Company’s business, results of persons who may have received oneoperations, and financial condition, including liquidity, capital and financing resources.
The COVID-19 pandemic has disrupted and adversely affected the Company’s business to date. The impact of the COVID-19 pandemic on the Company's results of operations and financial condition, including liquidity, capital and financing resources, will depend on numerous evolving factors that Grainger is unable to accurately predict, including the duration of the pandemic. Some of the effects include restrictions on the Company’s employees' ability to travel, including to visit customers, and many employees' ability to work in offices or more faxesat facilities, and supply chain interruptions, as well as disruptions or temporary closures of the Company’s facilities, including distribution centers, branches, and support buildings. The effects of the COVID-19 pandemic also include disruptions or closures of customer and/or suppliers’ facilities and supply chains in China and other locations, which can materially impact the demand for the Company’s products, the ability for the Company sentto obtain or deliver inventory, and the ability for the Company to collect its accounts receivable as customers face higher liquidity and solvency risks. The ultimate adverse impact on the Company and the duration of these disruptions or closures are unknown.
Moreover, the COVID-19 pandemic may continue to materially adversely affect many of the Company's customers' and suppliers' ability to continue to operate as a going concern in connection withthe future or their ability to purchase Company products, may affect suppliers' ability to meet unprecedented demand for COVID-19-related products, may delay customers’ purchasing decisions, result in a 2009 marketing campaign. Theshift to lower-priced products or away from discretionary products, result in longer payment terms or discounting, or affect customer loyalty or retention rates, and may affect customers’ and suppliers’ ability or willingness to attend Company removedevents in the suitfuture, all of which could materially adversely affect the Company's future sales and results of operations.
Some actions that Grainger has taken in response to the Federal District CourtCOVID-19 pandemic, such as enabling working remote arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage Grainger's reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card association, employees and others. In addition, the working remote arrangements have required the Company to make adaptions to its controls and procedures, including to its financial reporting processes, that could impact the design or operating effectiveness of such controls or procedures. Grainger may also be required by government authorities to curtail or cease certain operations, or Grainger may determine to take these actions because they are in the best interests of the Company's employees, customers, or suppliers, any of which could have a material adverse effect on the Company's business, results of operations, and financial condition.
In addition, global outbreaks such as the COVID-19 pandemic have resulted in a widespread health crisis that has adversely affected and could continue to adversely affect the economies of many countries, resulting in a global or regional economic downturn or recession. Any such recession could result in a significant decline in demand for the Northern District of Illinois (the “District Court”). On June 27, 2014, the District Court refusedCompany's products or limit Grainger's ability to certify the class. The United States Court 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 claimsaccess capital markets on terms not materialthat are attractive or at all, any of which could materially adversely affect the Company's business, results of operations and financial condition.
The extent to which the COVID-19 pandemic will continue to impact the Company’s business, results of operations, and financial condition will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be predicted at this time. Such factors and developments may include the geographic spread, severity and duration of the COVID-19 pandemic, including whether there are periods of increased COVID-19 cases, disruption to our operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, the extent and duration of the impact on the U.S. or global economy, including the pace and extent of recovery when the pandemic subsides, and the actions that have been and may be taken by various governmental authorities in response to the Company. outbreak, including mandatory facility closures of non-essential businesses, stay in shelter health orders or similar restrictions, social distancing mandates, face mask measures, travel bans, import and export restrictions, pricing mandates, including disaster or emergency declaration pricing statutes, and mandatory directives that certain products be allocated or provided to certain customers which could disrupt the Company's relationship with other customers, among other actions. Certain jurisdictions have begun lifting stay in shelter mandates only to impose further restrictions in the wake of increases in new COVID-19 cases. As such, there is considerable uncertainty regarding how current and future health and safety measures implemented in response to the COVID-19 pandemic will impact Grainger's business.
The case was dismissed with prejudice on September 28, 2017.extent of any disruptions the COVID-19 pandemic has caused or may cause to the Company's customers or suppliers is unknown and cannot be predicted. If the Company is unable to respond to and manage the impact of these events, the Company's business and results of operations may continue to be adversely affected.
W.W. Grainger, Inc. and Subsidiaries
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – third quarterThird Quarter
| | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs | |
July 1 - July 31 | 180 | $341.05 | — | 2,742,555 | |
August 1 - August 31 | — | | — | 2,742,555 | |
September 1 - September 30 | 770 | $361.75 | — | 2,742,555 | |
Total | 950 (D) | | — | | |
(A)There were no shares withheld to satisfy tax withholding obligations.
(B)Average price paid per share includes any commissions paid.
(C)Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors and announced April 24, 2019 (2019 Program). The 2019 Program authorizes the repurchase of up to 5 million shares with no expiration date.
(D)The difference of 950 shares between the Total Number of Shares Purchased and the Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs represents shares purchased by the
administrator and record keeper of the W.W. Grainger, Inc. Employees Profit Sharing Plan for the benefit
of the employees who participate in the plan.
A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 3238 of this report.
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.