W.W. GRAINGER, INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
For the quarterly period ended
September 30, 2023
OR
For the transition period from ______ to _______
Commission file number
1-5684
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
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Registrant’s telephone number, including area code: (
847
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535-1000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No
☒
There we
re
49,634,150
shares of the Company’s Common Stock outstanding as of October 19, 2023
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1
| TABLE OF CONTENTS | ||||||||
| Page | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1: | Financial Statements (Unaudited) | |||||||
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Condensed Consolidated Statements of Earnings
for the Three and Nine Months Ended September 30, 2023 and 2022
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Condensed Consolidated Statements of Comprehensive Earnings
for the Three and Nine Months Ended September 30, 2023 and 2022
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Condensed Consolidated Balance Sheets
as of September 30, 2023 and December 31, 2022
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Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2023 and 2022
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Condensed Consolidated Statements of Shareholders' Equity
for the Three and Nine Months Ended September 30, 2023 and 2022
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| Notes to Condensed Consolidated Financial Statements | ||||||||
| Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4: | Controls and Procedures | |||||||
| PART II - OTHER INFORMATION |
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| Item 1: | Legal Proceedings | |||||||
| Item 1A: | Risk Factors | |||||||
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 5: | Other Information | |||||||
| Item 6: | Exhibits | |||||||
| Signatures | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1: Financial Statements
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of dollars and shares, except for per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of goods sold |
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| Gross profit |
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| Selling, general and administrative expenses |
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| Operating earnings |
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| Other (income) expense: | |||||||||||||||||||||||
| Interest expense – net |
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| Other – net |
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| Total other expense – net |
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Earnings before income taxes
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| Income tax provision |
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| Net earnings |
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| Less net earnings attributable to noncontrolling interest |
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| Net earnings attributable to W.W. Grainger, Inc. | $ |
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$ |
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$ |
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$ |
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| Earnings per share: | |||||||||||||||||||||||
| Basic | $ |
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$ |
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$ |
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$ |
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| Diluted | $ |
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$ |
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$ |
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$ |
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| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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The accompanying notes are an integral part of these financial statements.
3
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net earnings | $ |
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$ |
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$ |
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| Other comprehensive earnings (losses): | |||||||||||||||||||||||
| Foreign currency translation adjustments – net of reclassification to earnings |
(
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(
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(
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Postretirement benefit plan losses and other – net of tax benefit of $
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(
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| Total other comprehensive earnings (losses) |
(
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| Comprehensive earnings – net of tax |
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| Less comprehensive earnings (losses) attributable to noncontrolling interest | |||||||||||||||||||||||
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Net earnings
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Foreign currency translation adjustments
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| Total comprehensive earnings (losses) attributable to noncontrolling interest |
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Comprehensive earnings attributable to W.W. Grainger, Inc.
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
4
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
| As of | |||||||||||
| Assets |
(Unaudited) September 30, 2023
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December 31, 2022 | |||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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Accounts receivable (less allowances for credit losses of $
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| Inventories – net |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, buildings and equipment – net |
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| Goodwill |
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| Intangibles – net |
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| Operating lease right-of-use |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and shareholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Current maturities | $ |
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$ |
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| Trade accounts payable |
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| Accrued compensation and benefits |
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| Operating lease liability |
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| Accrued expenses |
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| Income taxes payable |
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| Total current liabilities |
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| Long-term debt |
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| Long-term operating lease liability |
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| Deferred income taxes and tax uncertainties |
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| Other non-current liabilities |
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| Shareholders' equity | |||||||||||
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Cumulative preferred stock – $
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Common Stock – $
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| Additional contributed capital |
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| Retained earnings |
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| Accumulated other comprehensive losses |
(
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Treasury stock, at cost –
shares, respectively
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(
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(
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| Total W.W. Grainger, Inc. shareholders’ equity |
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| Noncontrolling interest |
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| Total shareholders' equity |
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| Total liabilities and shareholders' equity | $ |
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$ |
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The accompanying notes are an integral part of these financial statements.
5
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ |
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$ |
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| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Provision for credit losses |
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| Deferred income taxes and tax uncertainties |
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| Depreciation and amortization |
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| Net (gains) losses from sale of assets |
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| Stock-based compensation |
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| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable |
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| Inventories |
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| Prepaid expenses and other assets |
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| Trade accounts payable |
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| Accrued liabilities |
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| Income taxes – net |
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| Other non-current liabilities |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | |||||||||||
| Capital expenditures |
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| Proceeds from sale of assets |
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| Other – net |
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| Net cash used in investing activities |
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| Cash flows from financing activities: | |||||||||||
| Proceeds from debt |
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| Payments of debt |
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| Proceeds from stock options exercised |
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| Payments for employee taxes withheld from stock awards |
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| Purchases of treasury stock |
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| Cash dividends paid |
(
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| Net cash used in financing activities |
(
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| Exchange rate effect on cash and cash equivalents |
(
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| Net change in cash and cash equivalents |
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| Cash and cash equivalents at beginning of year |
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| Cash and cash equivalents at end of period | $ |
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$ |
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The accompanying notes are an integral part of these financial statements.
6
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock |
Noncontrolling
Interest |
Total | |||||||||||||||||
| Balance at January 1, 2022 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | — |
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— | — |
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— |
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| Purchases of treasury stock | — | — | — | — |
(
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— |
(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
(
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— |
(
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(
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Cash dividends paid ($
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— | — |
(
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— | — | — |
(
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| Balance at March 31, 2022 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | — |
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— | — |
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| Purchases of treasury stock | — | — | — | — |
(
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(
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(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
(
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— |
(
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(
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Cash dividends paid ($
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— | — |
(
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— | — |
(
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(
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| Balance at June 30, 2022 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | $ | — | $ |
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$ | — | $ | — | $ |
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$ | — | $ |
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| Purchases of treasury stock | — | — | — | — |
(
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— |
(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
(
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— |
(
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(
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Cash dividends paid ($
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— | — |
(
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— | — |
(
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(
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| Balance at September 30, 2022 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
7
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
| Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings (Losses) | Treasury Stock |
Noncontrolling
Interest |
Total | |||||||||||||||||
| Balance at January 1, 2023 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | — |
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— | — |
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— |
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| Purchases of treasury stock | — | — | — | — |
(
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— |
(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
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— |
(
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(
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Cash dividends paid ($
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— | — |
(
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— | — | — |
(
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| Balance at March 31, 2023 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | — |
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— | — |
(
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| Purchases of treasury stock | — | — | — | — |
(
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(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
(
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— |
(
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(
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Cash dividends paid ($
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— | — |
(
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— | — |
(
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(
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| Balance at June 30, 2023 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Stock-based compensation | — |
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— | — |
(
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— |
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| Purchases of treasury stock | — | — | — | — |
(
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(
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(
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| Net earnings | — | — |
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— | — |
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| Other comprehensive earnings (losses) | — | — | — |
(
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— |
(
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(
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| Capital contribution | — |
(
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— | — | — |
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Cash dividends paid ($
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— | — |
(
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— | — |
(
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(
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| Balance at September 30, 2023 | $ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
8
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
Basis of Presentation
The Company's Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and therefore do not include all information and disclosures normally included in the annual Consolidated Financial Statements. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from these estimated amounts. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
The Condensed Consolidated Balance Sheet at December 31, 2022, has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2023 (2022 Form 10-K).
There w
ere no mater
ial changes to the Company’s significant accounting policies from those disclosed in Note 1 of
the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K.
NOTE 2 -
REVENUE
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market-specific factors.
The Company's revenue is primarily comprised of M
RO product sales and related activities.
The Company's presentation of revenue by segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors.
In the High-Touch Solutions N.A. segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from non-contractual purchases.
9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
|
2023
|
2022
(1)
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| High-Touch Solutions N.A. | Endless Assortment |
Total Company
(2)
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High-Touch Solutions N.A. | Endless Assortment |
Total Company
(2)
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| Commercial Services |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Contractors |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Government |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Healthcare |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Manufacturing |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Retail |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Transportation |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Utilities |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Warehousing |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
| Wholesale |
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% |
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% |
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% |
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% |
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% |
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% | |||||||||||||||||||||||
|
Other
(3)
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|
% |
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% |
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% |
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% |
|
% |
|
% | |||||||||||||||||||||||
| Total net sales |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Percent of total company revenue |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
(1)
Customer industry results for the three months ended September 30, 2022 were reclassified to reflect the Company's current year classifications, which primarily uses the North American Industry Classification System (NAICS) beginning January 1, 2023.
|
|||||||||||||||||||||||||||||||||||
|
(2)
Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately
|
|||||||||||||||||||||||||||||||||||
|
(3)
Other primarily includes revenue from industries and customers that are not material individually, including hospitality, restaurants, property management and natural resources.
|
|||||||||||||||||||||||||||||||||||
10
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
|
2023
|
2022
(1)
|
||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | Endless Assortment |
Total Company
(2)
|
High-Touch Solutions N.A. | Endless Assortment |
Total Company
(2)
|
||||||||||||||||||||||||||||||
| Commercial Services |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Contractors |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Government |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Healthcare |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Manufacturing |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Retail |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Transportation |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Utilities |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Warehousing |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Wholesale |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
Other
(3)
|
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Total net sales |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Percent of total company revenue |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
|
(1)
Customer industry results for the nine months ended September 30, 2022 were reclassified to reflect the Company's current year classifications, which primarily uses the North American Industry Classification System (NAICS) beginning January 1, 2023.
|
|||||||||||||||||||||||||||||||||||
|
(2)
Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately
|
|||||||||||||||||||||||||||||||||||
|
(3)
Other primarily includes revenue from industries and customers that are not material individually, including hospitality, restaurants, property management and natural resources.
|
|||||||||||||||||||||||||||||||||||
Total accrued sales incentives are recorded in Accrued expenses and were approximately $
116
million and $
102
million as of September 30, 2023 and December 31, 2022, respectively.
The Compa
ny h
ad no material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2023 and December 31, 2022.
NOTE 3 -
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Land and land improvements | $ |
|
$ |
|
|||||||
| Building, structures and improvements |
|
|
|||||||||
| Furniture, fixtures, machinery and equipment |
|
|
|||||||||
| Property, buildings and equipment | $ |
|
$ |
|
|||||||
| Less accumulated depreciation |
|
|
|||||||||
| Property, buildings and equipment – net | $ |
|
$ |
|
|||||||
11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company did not
identify any significant events or changes in circumstances that indicated the existence of impairment indicators during the three and nine
months ended September 30, 2023. As such, quantitative assessments were not required.
The balances and changes in the carrying amount of goodwill by segment are as follows (in millions of dollars):
| High-Touch Solutions N.A. | Endless Assortment | Total | ||||||||||||||||||
| Balance at January 1, 2022 | $ |
|
$ |
|
$ |
|
||||||||||||||
| Translation |
(
|
(
|
(
|
|||||||||||||||||
| Balance at December 31, 2022 |
|
|
|
|||||||||||||||||
| Translation |
(
|
(
|
(
|
|||||||||||||||||
|
Balance at September 30, 2023
|
$ |
|
$ |
|
$ |
|
||||||||||||||
The Company's cumulative goodwill impairments as of September 30, 2023 were
$
137
m
illion.
No g
oodwill impairments were recorded for the nine months ended September 30, 2023 or the twelve months ended December 31, 2022
.
The balances and changes in intangible assets
–
net are as follows (in millions of dollars):
| As of | |||||||||||||||||||||||||||||||||||||||||
|
|
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Weighted average life | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||
| Trademarks, trade names and other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Non-amortized trade names and other | Indefinite |
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Capitalized software |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total intangible assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||
12
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 -
DEBT
Total debt, including
long-term, cur
rent maturities and debt issuance costs and discounts – net, consisted of the following (in millions of dollars):
| As of | |||||||||||||||||||||||
|
|
December 31, 2022
|
||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
| MonotaRO term loan |
|
|
|
|
|||||||||||||||||||
| Other |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Subtotal |
|
|
|
|
|||||||||||||||||||
| Less current maturities |
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Debt issuance costs and discounts – net of amortization
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Long-term debt | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Senior Notes
Between 2015 and 2020, Grainger issue
d $
2.3
billion in unsecured long-term debt (Senior Notes) primarily to provide flexibility in funding general working capital needs, share repurchases a
nd long-term cash requirements. The Senior Notes require no principal payments until maturity and interest is paid semi-annually.
The Company incurred debt issuance costs related to its Senior Notes of approxima
tely $
29
million, representing underwriting fees and other expenses, that were recorded as a contra-liability within Long-term debt and are being amortized over the term of the Senior Notes using the straight-line method to Interest expense – net.
The Company uses interest rate swaps to manage the risks associated with its
1.85
% Senior Notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of September 30, 2023 and December 31, 2022, are presented within Other in the table above. F
or further discussion on the Company's hedge accounting policies, see Note 6.
MonotaRO Term Loan
In August 2020, MonotaRO entered into
a ¥
9
billion te
rm loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of September 30, 2023 and December 31, 2022, the carrying amount of the term loan, including current maturities due within one year, was $
34
million and $
69
million, respectively. The term loan matures i
n August 2024, payable over
four
equal semi-annual principal installments in 2023 and 2024 and bears an average interest of
0.05
%.
Fair Value
The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current
market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair v
alue hierarchy.
For further information on the Company’s debt instruments, see Note 5 of the Notes to Consolidated Financia
l Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company’s 2022 Form 10-K.
13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 -
DERIVATIVE INSTRUMENTS
The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Grainger currently enters into certain derivatives or other financial instruments to hedge against these risks, and may continue to do so in the future.
Fair Value Hedges
The Company uses interest rate swaps to
hedge a portion of its fixed-rate long-term debt. These swaps are treated as fair value hedges and consequently the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item, are recognized in the Consolidated Statements of Earnings in Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of September 30, 2023 and December 31, 2022 wa
s $
450
million and $
500
million, respectively.
The liability hedged by the interest rate swaps is recorded on the Condensed Consolidated Balance Sheets in Long-term debt. As of September 30, 2023 and December 31, 2022, the carrying amount of the hedged item, including the cumulative amount of fair value hedging adjustments was
$
424
million and $
466
million, respectively.
The effect of the Company's fair value hedges on the Condensed Consolidated Statements of Earnings in Interest expense
–
net for the three and nine months ended September 30, 2023 and 2022, are shown in the following table (in millions of dollars):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Gain or (loss): | |||||||||||||||||||||||
| Interest rate swaps: | |||||||||||||||||||||||
| Hedged item | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Derivatives designated as hedging instrument | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, are shown in the following table (in millions of dollars):
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Interest rate swaps reported in Other non-current liabilities | $ |
|
$ |
|
||||||||||
Fair Value
NOTE 7 -
SEGMENT INFORMATION
Grainger's
two
reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining businesses, which include the Company's Cromwell business, are classified as Other to reconcile to consolidated results. These remaining businesses individually and in the aggregate do not meet the criteria of a reportable segment.
The Company's corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for
14
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
intersegment sales are included in each segment's selling, general and administrative expenses and are also eliminated in the Company's Consolidated Financial Statements.
Following is a summary of segment results (in millions of dollars):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | Net sales | Operating earnings (losses) | ||||||||||||||||||||||||||||||||||||||||
| High-Touch Solutions N.A. | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| Endless Assortment |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Other |
|
|
|
(
|
|
(
|
|
(
|
|||||||||||||||||||||||||||||||||||||||
| Total Company | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked. Assets for reportable segments are not disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.
NOTE 8 -
CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings, including claims related to: product liability, safety or compliance; privacy and cybersecurity matters; negligence; contract disputes; environmental issues; unclaimed property; wage and hour laws; intellectual property; advertising and marketing; consumer protection; pricing (including disaster or emergency declaration pricing statutes); employment practices; regulatory compliance, including trade and export matters; anti-bribery and corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.
There have been no material changes to the contingencies and legal matters from those disclosed in Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K and the Company's Form 10-Q for the quarterly period ended March 31, 2023. Although the Company is unable to determine the probability of the outcome of these matters or the estimate of potential loss or range of loss, the Company anticipates that any potential liability, which may arise of or with respect to these matters, will not have, either individually or in the aggregate, a material adverse effect on the Company's financial position, results of operations or cash flows.
NOTE 9 -
SUBSEQUENT EVENTS
Revolving Credit Facility
On October 11, 2023, the Company entered into a
-year syndicated $
1.25
billion revolving credit facility (the 2023 Credit Facility). The 2023 Credit Facility is unsecured and subject to
two
-year extensions if sufficient lenders agree. The 2023 Credit Facility replaced the Company's previous revolving credit facility entered into in February 2020.
Dividend
On October 25, 2023, the Company’s Board of Directors declared a quarterly dividend of $
1.86
per share, payable December 1, 2023, to shareholders of record on November 13, 2023.
15
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of W.W. Grainger, Inc. (Grainger or Company) as it is viewed by management of the Company. The following discussion should be read in conjunction
with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company's 2022 Form 10-K
and the Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1: Financial Statements of this Form 10-Q.
Percentage figures included in this section have not been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in the Company's Condensed Consolidated Financial Statements or in the associated text.
General
Grainger is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America, Japan and the U.K. Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its customers worldwide, which rely on Grainger for products and services that enable them to run safe, sustainable and productive operations.
Strategic Priorities
For a discussion of the Company’s strategic priorities for 2023, see Part 1, Item 1: Business and Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2022 Form 10-K.
Recent Events
Inflationary Cost Environment and Macroeconomic Pressures
The global economy continues to experience volatile disruptions including to the commodity, labor and transportation markets, arising from a combination of geopolitical events and various economic and financial factors. These disruptions have contributed to an inflationary environment which has affected, and may continue to affect, the price and availability of certain products and services necessary for the Company's operations. Such disruptions have impacted, and may continue to impact, the Company's business, financial condition and results of operations.
The Company continues to monitor economic conditions in the U.S. and globally, and the impact of macroeconomic pressur
es, including repercussions from
rising interest rates, fluctuating currency exchange rates, inflation and a potential recession on the Company’s business, customers, suppliers and other third parties. As a result of continued inflation, the Company has implemented strategies designed to mitigate certain adverse effects of higher costs while also remaining market price competitive. Historically, the Company’s broad and diverse customer base and the nondiscretionary nature of the Company’s products to its customers has helped to insulate it from the effects of recessionary periods in the industrial MRO market. The full extent and impact of these conditions are uncertain and cannot be predicted at this time.
For further discussion of the Company's risks and uncertainties, see Part I, Item 1A: Risk Factors in the Company’s 2022 Form 10-K.
16
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, 2023
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars except per share amounts):
|
Three Months Ended September 30,
|
|||||||||||||||||||||||||||||
|
Percent Increase/(Decrease) from Prior Year
|
As a Percent of Net Sales | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
|
Net sales
(1)
|
$ | 4,208 | $ | 3,942 | 6.7 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 2,553 | 2,423 | 5.3 | 60.7 | 61.5 | ||||||||||||||||||||||||
| Gross profit | 1,655 | 1,519 | 9.1 | 39.3 | 38.5 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 988 | 916 | 7.9 | 23.4 | 23.2 | ||||||||||||||||||||||||
| Operating earnings | 667 | 603 | 10.7 | 15.9 | 15.3 | ||||||||||||||||||||||||
| Other expense – net | 15 | 16 | (4.1) | 0.4 | 0.4 | ||||||||||||||||||||||||
| Income tax provision | 159 | 145 | 9.6 | 3.8 | 3.7 | ||||||||||||||||||||||||
| Net earnings | 493 | 442 | 11.7 | 11.7 | 11.2 | ||||||||||||||||||||||||
| Noncontrolling interest | 17 | 16 | 6.4 | 0.4 | 0.4 | ||||||||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | 476 | $ | 426 | 11.9 | 11.3 | 10.8 | ||||||||||||||||||||||
| Diluted earnings per share: | $ | 9.43 | $ | 8.27 | 14.1 | % | |||||||||||||||||||||||
|
(1)
For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.
|
|||||||||||||||||||||||||||||
The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior-year period to the most recent period (in millions of dollars):
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net sales | $ | 4,208 | $ | 3,942 | |||||||
| $ Change from prior-year period | 266 | 570 | |||||||||
| % Change from prior-year period | 6.7 | % | 16.9 | % | |||||||
|
Daily sales
(1)
|
$ | 66.8 | $ | 61.6 | |||||||
| $ Change from prior-year period | 5.2 | 8.9 | |||||||||
| % Change from prior-year period | 8.4 | % | 16.9 | % | |||||||
| Daily sales impact of currency fluctuations | (0.3) | % | (3.4) | % | |||||||
|
(1)
Daily sales are defined as the total net sales for the period divided by the number of U.S. selling days in the period. There were 63 and 64 sales days in the three months ended September 30, 2023 and 2022, respectively.
|
|||||||||||
Net sales of $4,208 million for the three months ended September 30, 2023 increased $266 million, or 7%, and on a daily basis, net sales increased 8% compared to the same period in 2022. For further discussion on the Company's net sales, see the Segment Analysis section below.
Gross profit of $1,655 million for the three months ended September 30, 2023 increased $136 million, or 9%, compared to the same period in 2022. Gross profit margin of 39.3% increased 80 basis points compared to the same period in 2022. For further discussion on the Company's gross profit, see the Segment Analysis section below.
17
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SG&A of $988 million for the three months ended September 30, 2023 increased $72 million, or 8%, compared to the same period in 2022. The increase was primarily due to higher marketing expenses.
Operating earnings of $667 million for the three months ended September 30, 2023 increased $64 million, or 11%, compared to the same period in 2022.
Income taxes of $159 million for the three months ended September 30, 2023 increased $14 million, or 10%, compared to the same period in 2022. The increase in tax expense was driven by higher taxable operating earnings for the third quarter of 2023. Grainger's effective tax rates were 24.4% and 24.7% for the three months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to favorable tax impacts related to mix of foreign earnings.
Net earnings of $476 million attributable to W.W. Grainger, Inc. for the three months ended September 30, 2023 increased $50 million, or 12%, compared to the same period in 2022.
Diluted earnings per share was $9.43 for the three months ended September 30, 2023, an increase of 14% compared to $8.27 for the same period in 2022.
Segment Analysis
For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
| Three Months Ended September 30, | |||||||||||||||||
| 2023 | 2022 | Percent Increase | |||||||||||||||
| Net sales | $ | 3,403 | $ | 3,180 | 7.0 | % | |||||||||||
| Gross profit | $ | 1,418 | $ | 1,291 | 9.8 | % | |||||||||||
| Selling, general and administrative expenses | $ | 806 | $ | 741 | 8.6 | % | |||||||||||
| Operating earnings | $ | 612 | $ | 550 | 11.4 | % | |||||||||||
Net sales of $3,403 million for the three months ended September 30, 2023 increased $223 million, or 7%, and on a daily basis, increased 9% compared to the same period in 2022. The increase was due to price, which includes customer mix, of 3% and volume, which includes product mix of 6%.
Gross profit of $1,418 million for the three months ended September 30, 2023 increased $127 million, or 10%, compared to the same period in 2022. Gross profit margin of 41.7% increased 110 basis points compared to the same period in 2022. The increase was driven by freight and supply chain efficiencies as well as improved product mix in the third quarter of 2023.
SG&A of $806 million for the three months ended September 30, 2023 increased $65 million, or 9%, compared to the same period in 2022. The increase was primarily due to higher marketing expenses. SG&A leverage decreased 40 basis points compared to the same period in 2022.
Operating earnings of $612 million for the three months ended September 30, 2023 increased $62 million, or 11%, compared to the same period in 2022.
18
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Endless Assortment
The following table sho
ws reported segment results (in millions of dollars):
| Three Months Ended September 30, | |||||||||||||||||
| 2023 | 2022 | Percent Increase/(Decrease) | |||||||||||||||
| Net sales | $ | 732 | $ | 701 | 4.3 | % | |||||||||||
| Gross profit | $ | 216 | $ | 209 | 3.5 | % | |||||||||||
| Selling, general and administrative expenses | $ | 161 | $ | 152 | 6.4 | % | |||||||||||
| Operating earnings | $ | 55 | $ | 58 | (4.3) | % | |||||||||||
Net sales of $732 million for the three months ended September 30, 2023 increased $31 million, or 4%, and on a daily basis, increased 6% compared to the same period in 2022. The increase was due to sales growth of 9% driven by customer acquisition for the segment and enterprise growth at MonotaRO, partially offset by declining sales to non-core, consumer-like customers and slower overall market demand at Zoro. Sales growth was offset by unfavorable foreign exchange of 3% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.
Gross profit of $216 million for the three months ended September 30, 2023 increased $7 million, or 4%, compared to the same period in 2022. Gross profit margin of 29.6% decreased 20 basis points compared to the same period in 2022. The decrease was driven by unfavorable Zoro product mix partially offset by price realization and freight efficiencies at MonotaRO in the third quarter of 2023.
SG&A of $161 million for the three months ended September 30, 2023 increased $9 million, or 6%, compared to the same period in 2022. The increase was primarily driven by higher marketing expenses. SG&A leverage decreased 50 basis points compared to the same period in 2022.
Operating earnings of $55 million for the three months ended September 30, 2023 decreased $3 million, or 4%, compared to the same period in 2022.
19
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, 2023
The following table is included as an aid to understanding the changes in Grainger's Condensed Consolidated Statements of Earnings (in millions of dollars except per share amounts):
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||
|
Percent Increase/(Decrease) from Prior Year
|
As a Percent of Net Sales | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
|
Net sales
(1)
|
$ | 12,481 | $ | 11,426 | 9.2 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 7,548 | 7,083 | 6.6 | 60.5 | 62.0 | ||||||||||||||||||||||||
| Gross profit | 4,933 | 4,343 | 13.6 | 39.5 | 38.0 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 2,925 | 2,672 | 9.5 | 23.4 | 23.4 | ||||||||||||||||||||||||
| Operating earnings | 2,008 | 1,671 | 20.2 | 16.1 | 14.6 | ||||||||||||||||||||||||
| Other expense – net | 49 | 50 | (1.6) | 0.4 | 0.4 | ||||||||||||||||||||||||
| Income tax provision | 468 | 405 | 15.4 | 3.7 | 3.5 | ||||||||||||||||||||||||
| Net earnings | 1,491 | 1,216 | 22.6 | 11.9 | 10.7 | ||||||||||||||||||||||||
| Noncontrolling interest | 57 | 53 | 7.5 | 0.5 | 0.5 | ||||||||||||||||||||||||
| Net earnings attributable to W.W. Grainger, Inc. | $ | 1,434 | $ | 1,163 | 23.3 | 11.5 | 10.2 | ||||||||||||||||||||||
| Diluted earnings per share: | $ | 28.32 | $ | 22.52 | 25.7 | % | |||||||||||||||||||||||
|
(1)
For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.
|
|||||||||||||||||||||||||||||
The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior period to the most recent period (in millions of dollars):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net sales | $ | 12,481 | $ | 11,426 | |||||||
| $ Change from prior-year period | 1,055 | 1,763 | |||||||||
| % Change from prior-year period | 9.2 | % | 18.2 | % | |||||||
|
Daily sales
(1)
|
$ | 65.3 | $ | 59.5 | |||||||
| $ Change from prior-year period | 5.8 | 8.9 | |||||||||
| % Change from prior-year period | 9.8 | % | 17.6 | % | |||||||
| Daily sales impact of currency fluctuations | (1.3) | % | (2.5) | % | |||||||
|
(1)
Daily sales are defined as the total net sales for the period divided by the number U.S. selling days in the period. There were 191 and 192 sales days in the nine months ended September 30, 2023 and 2022, respectively.
|
|||||||||||
Net sales
of $12,481 million for the nine months ended September 30, 2023 increased $1,055 million, or 9%, and on a daily basis, increased 10%
compared to the same period in 2022.
For further discussion on the Company's net sales, see the Segment Analysis section below.
Gross profit of $4,933 million for the nine months ended September 30, 2023 increased $590 million, or 14%, compared to the same period in 2022.
Gross profit margin
of 39.5% increased 150 basis points compared to the
20
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
same period in 2022.
F
or further
discussion on the Company's gross profit, see the Segment Analysis section below.
SG&A
of $2,925 million for the nine months ended September 30, 2023 increased $253 million, or 9%, compa
red to t
he same period in 2022. The increase was primarily due to higher marketing and payroll expenses.
Operatin
g earnings of $2,008 million for the nine months ended September 30, 2023 increased $337 million, or 20%, compared to the same period in 2022.
Income taxes of $468 million for the nine months ended September 30, 2023 increased $63 million or 15%, compared to the same period in 2022. The increase in tax expense was driven by higher taxable operating earnings for the nine months ended September 30, 2023. Grainger's effective tax rates were 23.9% and 25.0% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to increased stock compensation tax benefit compared to the same period in 2022.
Net e
arnings of $1,434 million attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2023 increased $271 million, or 23%, compared to the same period i
n 2022.
Diluted earnings per s
hare was $28.32 for the nine months ended September 30, 2023, an increase of 26% compared to $22.52 for the same period in 2022.
Segment Analysis
For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
| Nine Months Ended September 30, | |||||||||||||||||
| 2023 | 2022 | Percent Increase | |||||||||||||||
| Net sales | $ | 10,052 | $ | 9,111 | 10.3 | % | |||||||||||
| Gross profit | $ | 4,213 | $ | 3,666 | 14.9 | % | |||||||||||
| Selling, general and administrative expenses | $ | 2,380 | $ | 2,160 | 10.2 | % | |||||||||||
| Operating earnings | $ | 1,833 | $ | 1,506 | 21.7 | % | |||||||||||
Net sales o
f $10,052 million for the nine months ended September 30, 2023 increased $941 million, or 10%, and on a daily basis, increased 11% compared to the same period in 2022. The increase was due to price, which includes customer mix, of 5% and volume, which includes product mix, of 6%.
Gross profit of $4,213 million for the nine months ended September 30, 2023 increased $547 million, or 15%, compared to the same period in 2022. Gro
ss profit
margin of 41.9% increased 170 basis points compared to the same period in 2022. The increase was driven by freight efficiencies and improved product mix in 2023.
SG&A of $2,380 million for the nine months ended September 30, 2023 increased $220 million, or 10%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll expenses. SG&A leverage remained consistent compared to the same period in 2022.
Opera
ting earnings of $1,833 million for the nine months ended September 30, 2023 increased $327 million, or 22%, compared to the same period in 2022.
21
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Endless Assortment
The following table sho
ws reported segment results (in millions of dollars):
| Nine Months Ended September 30, | |||||||||||||||||
| 2023 | 2022 | Percent Increase | |||||||||||||||
| Net sales | $ | 2,207 | $ | 2,117 | 4.2 | % | |||||||||||
| Gross profit | $ | 654 | $ | 615 | 6.3 | % | |||||||||||
| Selling, general and administrative expenses | $ | 476 | $ | 441 | 8.1 | % | |||||||||||
| Operating earnings | $ | 178 | $ | 175 | 1.9 | % | |||||||||||
Net sales of $2,207 million for the nine months ended September 30, 2023 increased $90 million, or 4%, and on a daily basis, increased 5% compared to the same period in 2022. The increase was due to sales growth of 11% driven by customer acquisition for the segment and enterprise growth at MonotaRO, partially offset by unfavorable foreign exchange of 6% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.
Gross profit of $654 million for the nine months ended September 30, 2023 increased $39 million, or 6%, compared to the same period in 2022. Gross profit margin of 29.6% increased 50 basis points compared to the same period in 2022. The increase was driven by freight efficiencies at MonotaRO in 2023.
S
G&A of $476 million for the nine months ended September 30, 2023 increased $35 million, or 8%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll and benefit expenses. SG&A leverage decreased 80 basis points compared to the same period in 2022.
Operating earnings of $178 million for the nine months ended September 30, 2023 increased $3 million, or 2%, compared to the same period in 2022.
22
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Grainger believes its current balances of cash and cash equivalents, marketable securities and availability under its revolving credit facility will be sufficient to meet its liquidity needs for the next twelve months. The Company expects to continue to invest in its business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through cash flows generated from operations. Grainger also maintains access to capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity.
Cash and Cash Equivalents
As of September 30, 2023 and December 31, 2022, Grainger had cash and cash equivalents of $601 million and $325 million, respectively. The Company had approximately $1.9 billion in available liquidity as of September 30, 2023.
Cash Flows
The following table shows the Company's cash flow activity for the periods presented (in millions of dollars):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,427 | $ | 973 | |||||||
| Investing activities | (307) | (212) | |||||||||
| Financing activities | (839) | (668) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (5) | (19) | |||||||||
| Increase in cash and cash equivalents | $ | 276 | $ | 74 | |||||||
Net cash provided by operating activities was $1,427 million and $973 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was driven by higher net earnings and favorable year-over-year working capital primarily due to sales growth and inflation.
Net cash used in investing activities was $307 million and $212 million for the nine months ended September 30, 2023 and 2022, respectively. The change was driven by increased U.S. supply chain investments.
Net cash used in financing activities was $839 million and $668 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily due to higher treasury stock repurchases.
Working Capital
Working capital as of September 30, 2023 was $3,129 million, an increase of $265 million compared to $2,864 million as of December 31, 2022. The increase was driven by increased accounts receivable due to continued sales growth and lower accrued current liabilities. As of September 30, 2023 and December 31, 2022, the ratio of current assets to current liabilities was 2.7 and 2.5, respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit.
Total debt, which is defined as total interest-bearing debt and lease liabilities, as a percent of total capitalization was 44.9% and 49.9% as of September 30, 2023 and December 31, 2022, respectively.
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.
23
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the Company's credit ratings as of September 30, 2023:
| Corporate | Senior Unsecured | Short-term | |||||||||||||||
| Moody's | A2 | A2 | P1 | ||||||||||||||
| S&P | A+ | A+ | A1 | ||||||||||||||
Commitments and Other Contractual Obligations
Th
ere 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 Condition and Results of Operations in the Company’s 2022 Form 10-K.
Critical Accounting Estimates
The preparation of Grainger’s Condensed Consolidated Financial Statements and accompanying notes are in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results of operations require the Company’s management to make assumptions and estimates that affect the reported amounts. The Company considers an accounting policy to be a critical estimate if: (i) it involves assumptions that are uncertain when judgment was applied, and (ii) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on Grainger’s consolidated financial position and results. While the Company believes the assumptions and estimates used are reasonable, the Company’s
management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances.
Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements of the Company's 2022 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s Condensed Consolidated Financial Statements.
T
here were no material changes to the Company's critical accounting estimates from those disclosed in Part II, Item 7: Management's Disc
ussion and Analysis of Financial Condition and Results of Operations in the Company's 2022 Form 10-K.
24
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project,” “will,” or “would,” and similar terms and phrases, including references to assumptions.
The Company cannot guarantee that any forward-looking statement will be realized and achievement of future results is subject to assumptions, risks and uncertainties, many of which are beyond the Company’s control, which could cause the Company’s actual results to differ materially from those that are presented.
Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: inflation, higher product costs or other expenses, including operational and administrative expenses; the impact of macroeconomic pressures and geopolitical trends, changes and events; a major loss of customers; loss or disruption of sources of supply; changes in customer or product mix; increased competitive pricing pressures; changes in third party practices regarding digital advertising; failure to enter into or sustain contractual arrangements on a satisfactory basis with group purchasing organizations; failure to develop, manage or implement new technology initiatives or business strategies, including with respect to the Company’s eCommerce platforms; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company's gross profit margin; 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, regulations related to advertising, marketing and the Internet, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, compliance or safety, trade and export compliance, general commercial disputes, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards, including new or stricter environmental laws or regulations; government contract matters; the impact of any government shutdown; disruption or breaches of information technology or data security systems involving the Company or third parties on which the Company depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including price and trading volume volatility or price declines of the Company’s common stock; commodity price volatility; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; outbreaks of pandemic disease or viral contagions such as the COVID-19 pandemic; natural or human induced disasters, extreme weather and other catastrophes or conditions; effects of climate change; failure to execute on our efforts and programs related to environmental, social and governance matters; competition for, or failure to attract, retain, train, motivate and develop executives and key employees; loss of key members of management or key employees; changes in effective tax rates; changes in credit ratings or outlook; the Company’s incurrence of indebtedness or failure to comply with restrictions and obligations under its debt agreements and instruments; and other factors identified under Part I, Item 1A: Risk Factors in the Company's latest Form 10-K, as updated from time to time in the Company's Quarterly Form 10-Q.
The preceding list is not intended to be an exhaustive list of all of the factors that could impact the Company's forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on the Company’s forward-looking statements and the Company undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
25
W.W. Grainger, Inc. and Subsidiaries
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Grainger’s primary market risk exposures include changes in foreign currency exchange and interest rates.
There were no material changes to the Company’s market risk from those described in Part II, Item 7A: Quantitative and Qualitative Disclosures About Market Risk in the Company's 2022 Form 10-K.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of 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 quarterly 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 disclosures.
Changes in Internal Control Over Financial Reporting
There
were no changes in Grainger's internal control over financial reporting for the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.
26
PART II – OTHER INFORMATION
Item 1: Legal Proceedings
For a
description of the Company’s legal proceedings, see
Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K and the Company's Form 10-Q for the quarterly period ended March 31, 2023.
Item 1A: Risk Factors
There have been no material changes from the risk factors previously disclosed in Part 1, Item 1A: Risk Factors in the Company's 2022 Form 10-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – Third Quarter 2023
| Period |
Total Number of Shares Purchased
(A)(B)
|
Average Price Paid per Share
(C)
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(D)
|
Maximum Number of
Shares That May Yet be Purchased Under the Plans or Programs |
|||||||||||||
| Jul. 1 – Jul. 31 | 15,915 | $732.26 | 15,915 | 2,257,170 | |||||||||||||
| Aug. 1 – Aug. 31 | 143,643 | $714.07 | 143,643 | 2,113,527 | |||||||||||||
| Sep. 1 – Sep. 30 | 126,007 | $693.55 | 125,583 | 1,987,944 | |||||||||||||
| Total | 285,565 | 285,141 | |||||||||||||||
A.
There were
no
shares withheld to satisfy tax withholding obligations.
B.
The difference of 424 shares between the Total Number of Shares Purchased and the Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs represents shares purchased by the administrator and record keeper of the W.W. Grainger, Inc. Retirement Saving Plan for the benefit of the employees who participate in the plan.
C.
Average price paid per share excludes commissions of $0.01 per share paid.
D.
Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors and announced on April 28, 2021 (2021 Program). The 2021 Program authorized the repurchase of up to 5 million shares with no expiration date.
Item 5: Other Information
27
W.W. Grainger, Inc. and Subsidiaries
Item 6: Exhibits
| EXHIBIT NO. | DESCRIPTION | |||||||
| Transition Agreement and General Release by and between W.W. Grainger, Inc. and John L. Howard, dated July 6, 2023.* | ||||||||
| Credit Agreement dated as of October 11, 2023, by and among W.W. Grainger, Inc., the lenders party thereto, and JP Morgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K filed on October 12, 2023. | ||||||||
| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||
| (*) Management contract or compensatory plan or arrangement. | ||||||||
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| W.W. GRAINGER, INC. | |||||||||||
| Date: | October 26, 2023 |
By:
|
/s/ Deidra C. Merriwether
|
||||||||
| Deidra C. Merriwether | |||||||||||
| Senior Vice President | |||||||||||
| and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| Date: | October 26, 2023 |
By:
|
/s/ Laurie R. Thomson
|
||||||||
| Laurie R. Thomson | |||||||||||
| Vice President and Controller | |||||||||||
| (Principal Accounting Officer) | |||||||||||
29
TABLE OF CONTENTS
Part I Financial InformationprintItem 1: Financial StatementsprintNote 1 - Summary Of Significant Accounting PoliciesprintNote 2 - RevenueprintNote 3 - Property, Buildings and EquipmentprintNote 4 - Goodwill and Other Intangible AssetsprintNote 5 - DebtprintNote 6 - Derivative InstrumentsprintNote 7 - Segment InformationprintNote 8 - Contingencies and Legal MattersprintNote 9 - Subsequent EventsprintItem 2: Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3: Quantitative and Qualitative Disclosures About Market RiskprintItem 4: Controls and ProceduresprintPart II Other InformationprintItem 1: Legal ProceedingsprintItem 1A: Risk FactorsprintItem 2: Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5: Other InformationprintItem 6: Exhibitsprint