☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
Illinois
36-1150280
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Grainger Parkway,
Lake Forest,
Illinois
60045-5201
(Address of principal executive offices)
(Zip Code)
847
535-1000
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year; if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock
GWW
New York Stock Exchange
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.
Large Accelerated Filer☒ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
1
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 were 53,866,254 shares of the Company’s Common Stock, par value $0.50, outstanding as of September 30, 2019.
2
TABLE OF CONTENTS
Page No.
PART I FINANCIAL INFORMATION
Item 1:
Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2019 and 2018
(In millions of dollars, except for share and per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2019
2018
2019
2018
Net sales
$
2,947
$
2,831
$
8,639
$
8,458
Cost of goods sold
1,848
1,752
5,324
5,176
Gross profit
1,099
1,079
3,315
3,282
Selling, general and administrative expenses
761
890
2,234
2,414
Operating earnings
338
189
1,081
868
Other income (expense):
Interest income
1
2
4
4
Interest expense
(21
)
(22
)
(64
)
(70
)
Other, net
4
2
18
—
Total other expense, net
(16
)
(18
)
(42
)
(66
)
Earnings before income taxes
322
171
1,039
802
Income taxes
78
56
261
198
Net earnings
244
115
778
604
Less: Net earnings attributable to noncontrolling interest
11
11
32
31
Net earnings attributable to W.W. Grainger, Inc.
$
233
$
104
$
746
$
573
Earnings per share:
Basic
$
4.27
$
1.84
$
13.46
$
10.12
Diluted
$
4.25
$
1.82
$
13.40
$
10.04
Weighted average number of shares outstanding:
Basic
54,125,184
56,339,630
54,962,699
56,172,277
Diluted
54,354,904
56,803,857
55,220,266
56,588,530
Cash dividends paid per share
$
1.44
$
1.36
$
4.24
$
4.00
The accompanying notes are an integral part of these financial statements.
4
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,
2019
2018
2019
2018
Net earnings
$
244
$
115
778
604
Other comprehensive earnings (losses):
Foreign currency translation adjustments
(17
)
—
6
(25
)
Postretirement benefit plan reclassification, net of tax benefit of $1, $1, $3 and $2, respectively
(2
)
(2
)
(7
)
(8
)
Total other comprehensive earnings (losses)
(19
)
(2
)
(1
)
(33
)
Comprehensive earnings, net of tax
225
113
777
571
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings
11
11
32
31
Foreign currency translation adjustments
(1
)
(5
)
2
(3
)
Total comprehensive earnings (losses) attributable to noncontrolling interest
10
6
34
28
Comprehensive earnings attributable to W.W. Grainger, Inc.
$
215
$
107
$
743
$
543
The accompanying notes are an integral part of these financial statements.
5
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, 2019
December 31, 2018
CURRENT ASSETS
Cash and cash equivalents
$
286
$
538
Accounts receivable (less allowances for doubtful
accounts of $22 and $25, respectively)
1,495
1,385
Inventories
1,520
1,541
Prepaid expenses and other assets
86
83
Prepaid income taxes
9
10
Total current assets
3,396
3,557
PROPERTY, BUILDINGS AND EQUIPMENT, NET
1,384
1,352
DEFERRED INCOME TAXES
13
12
GOODWILL
425
424
INTANGIBLES, NET
422
460
OTHER ASSETS
282
68
TOTAL ASSETS
$
5,922
$
5,873
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt
$
51
$
49
Current maturities of long-term debt
219
81
Trade accounts payable
723
678
Accrued compensation and benefits
170
262
Accrued contributions to employees' profit sharing plans
70
133
Accrued expenses
327
269
Income taxes payable
12
29
Total current liabilities
1,572
1,501
LONG-TERM DEBT (less current maturities)
1,918
2,090
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
120
103
OTHER NON-CURRENT LIABILITIES
240
86
SHAREHOLDERS' EQUITY
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding
—
—
Common stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued
55
55
Additional contributed capital
1,161
1,134
Retained earnings
8,380
7,869
Accumulated other comprehensive losses
(174
)
(171
)
Treasury stock, at cost – 55,792,965 and 53,796,859 shares, respectively
(7,551
)
(6,966
)
Total W.W. Grainger, Inc. shareholders’ equity
1,871
1,921
Noncontrolling interest
201
172
Total shareholders' equity
2,072
2,093
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
5,922
$
5,873
The accompanying notes are an integral part of these financial statements.
6
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
$
778
$
604
Provision for losses on accounts receivable
7
7
Deferred income taxes and tax uncertainties
19
10
Depreciation and amortization
171
192
Net gains from sales of assets and divestitures
(5
)
(22
)
Impairment of goodwill, intangible and other assets
—
142
Stock-based compensation
32
36
Losses from equity method investment
—
18
Subtotal
224
383
Change in operating assets and liabilities:
Accounts receivable
(119
)
(172
)
Inventories
18
(53
)
Prepaid expenses and other assets
(15
)
(13
)
Trade accounts payable
50
4
Accrued liabilities
(137
)
(36
)
Income taxes, net
(16
)
39
Other non-current liabilities
(13
)
(13
)
Subtotal
(232
)
(244
)
Net cash provided by operating activities
770
743
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings, equipment and intangibles
(163
)
(169
)
Proceeds from sales of assets
16
76
Equity method proceeds (investment)
2
(12
)
Net cash used in investing activities
(145
)
(105
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit
22
24
Payments against lines of credit
(18
)
(28
)
Payments of long-term debt
(48
)
(89
)
Proceeds from stock options exercised
19
179
Payments for employee taxes withheld from stock awards
(10
)
(11
)
Purchases of treasury stock
(600
)
(283
)
Cash dividends paid
(242
)
(232
)
Other, net
2
3
Net cash used in financing activities
(875
)
(437
)
Exchange rate effect on cash and cash equivalents
(2
)
(11
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(252
)
190
Cash and cash equivalents at beginning of year
538
327
Cash and cash equivalents at end of period
$
286
$
517
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, 2018
$
55
$
1,041
$
7,405
$
(135
)
$
(6,676
)
$
138
$
1,828
Stock based compensation
—
24
—
—
44
—
68
Purchases of treasury stock
—
—
—
—
(160
)
—
(160
)
Net earnings
—
—
232
—
—
9
241
Other comprehensive earnings (losses)
—
—
—
12
—
9
21
Cash dividends paid ($1.28 per share)
—
—
(73
)
—
—
—
(73
)
Balance at March 31, 2018
$
55
$
1,065
$
7,564
$
(123
)
$
(6,792
)
$
156
$
1,925
Stock based compensation
—
14
—
—
23
—
37
Purchases of treasury stock
—
—
—
—
(28
)
—
(28
)
Net earnings
—
—
237
—
—
11
248
Other comprehensive earnings (losses)
—
—
—
(45
)
—
(7
)
(52
)
Capital contribution
—
—
—
—
—
2
2
Cash dividends paid ($1.36 per share)
—
—
(76
)
—
—
(6
)
(82
)
Balance at June 30, 2018
$
55
$
1,079
$
7,725
$
(168
)
$
(6,797
)
$
156
$
2,050
Stock based compensation
—
46
—
—
54
—
100
Purchases of treasury stock
—
—
—
—
(86
)
—
(86
)
Net earnings
—
—
104
—
—
11
115
Other comprehensive earnings (losses)
—
—
—
3
—
(5
)
(2
)
Cash dividends paid ($1.36 per share)
—
—
(77
)
—
—
—
(77
)
Balance at September 30, 2018
$
55
$
1,125
$
7,752
$
(165
)
$
(6,829
)
$
162
$
2,100
The accompanying notes are an integral part of these financial statements.
8
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, 2019
$
55
$
1,134
$
7,869
$
(171
)
$
(6,966
)
$
172
$
2,093
Stock based compensation
—
3
—
—
3
—
6
Purchases of treasury stock
—
—
—
—
(135
)
—
(135
)
Net earnings
—
—
253
—
—
9
262
Other comprehensive earnings (losses)
—
—
—
3
—
(2
)
1
Capital contribution
—
—
—
—
—
2
2
Cash dividends paid ($1.36 per share)
—
—
(77
)
—
—
—
(77
)
Balance at March 31, 2019
$
55
$
1,137
$
8,045
$
(168
)
$
(7,098
)
$
181
$
2,152
Stock based compensation
—
15
—
—
9
—
24
Purchases of treasury stock
—
—
—
—
(265
)
—
(265
)
Net earnings
—
—
260
—
—
12
272
Other comprehensive earnings (losses)
—
—
—
12
—
5
17
Cash dividends paid ($1.44 per share)
—
—
(79
)
—
—
(7
)
(86
)
Balance at June 30, 2019
$
55
$
1,152
$
8,226
$
(156
)
$
(7,354
)
$
191
$
2,114
Stock based compensation
—
9
—
—
3
—
12
Purchases of treasury stock
—
—
—
—
(200
)
—
(200
)
Net earnings
—
—
233
—
—
11
244
Other comprehensive earnings (losses)
—
—
—
(18
)
—
(1
)
(19
)
Cash dividends paid ($1.44 per share)
—
—
(79
)
—
—
—
(79
)
Balance at September 30, 2019
$
55
$
1,161
$
8,380
$
(174
)
$
(7,551
)
$
201
$
2,072
The accompanying notes are an integral part of these financial statements.
9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America, Europe and Japan. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
The Condensed Consolidated Financial Statements (Financial Statements) of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2019.
The Condensed Consolidated Balance Sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (U.S.) for complete financial statements.
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained in this report.
2. NEW ACCOUNTING STANDARDS
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASUs 2018-19, 2019-04 and 2019-05. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2019 and the Company plans to adopt this ASU prospectively. The Company is evaluating the impact of this ASU and does not expect a material impact to the Company's Financial Statements.
On January 1, 2019, the Company adopted ASU 2016-02, Leases as modified subsequently by ASUs 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01(Topic 842). The core principle of these ASUs is to improve transparency and comparability related to the accounting and reporting of leasing arrangements, including balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months, among other changes.
The Company utilized the simplified modified retrospective transition method that allowed for a cumulative-effect adjustment in the period of adoption, and did not restate prior periods. Additionally, the Company elected the practical expedients package permitted under the transition guidance. Adoption of the new standard resulted in the recording of right of use (ROU) assets and lease liabilities of approximately $208 million and $205 million, respectively as of January 1, 2019 related to operating and finance leases. Adoption of the standard did not materially impact the Company’s Financial Statements. See Note 5 to the Financial Statements.
In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). This ASU clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning with the SEC's regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU was effective immediately upon issuance and did not have a material impact on the Company's Financial Statements and related disclosures.
10
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. REVENUE
Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services. Total service revenue is not material and accounted for approximately 1% of the Company's revenue for the three and nine months ended September 30, 2019 and 2018, respectively.
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market specific factors. The Company's presentation of revenue by industry most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and market specific factors. The following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
Three Months Ended September 30,
2019
2018
U.S.
Canada
Total Company (2)
U.S.
Canada
Total Company (2)
Government
20
%
5
%
15
%
20
%
5
%
15
%
Heavy Manufacturing
18
%
20
%
17
%
19
%
20
%
18
%
Light Manufacturing
12
%
6
%
10
%
13
%
6
%
11
%
Transportation
6
%
8
%
5
%
5
%
8
%
5
%
Commercial
17
%
9
%
13
%
16
%
9
%
13
%
Retail/Wholesale
9
%
4
%
7
%
8
%
4
%
7
%
Contractors
9
%
11
%
8
%
9
%
11
%
8
%
Natural Resources
3
%
33
%
4
%
3
%
34
%
4
%
Other (1)
6
%
4
%
21
%
7
%
3
%
19
%
Total net sales to external customers
100
%
100
%
100
%
100
%
100
%
100
%
Percent of Total Company Revenue
73
%
4
%
100
%
73
%
5
%
100
%
Nine Months Ended September 30,
2019
2018
U.S.
Canada
Total Company (2)
U.S.
Canada
Total Company (2)
Government
19
%
6
%
14
%
19
%
6
%
14
%
Heavy Manufacturing
19
%
20
%
17
%
19
%
20
%
18
%
Light Manufacturing
13
%
6
%
11
%
13
%
6
%
11
%
Transportation
5
%
8
%
5
%
5
%
7
%
5
%
Commercial
17
%
9
%
13
%
16
%
10
%
13
%
Retail/Wholesale
8
%
4
%
7
%
8
%
4
%
7
%
Contractors
10
%
11
%
8
%
10
%
11
%
8
%
Natural Resources
3
%
32
%
4
%
3
%
33
%
4
%
Other (1)
6
%
4
%
21
%
7
%
3
%
20
%
Total net sales to external customers
100
%
100
%
100
%
100
%
100
%
100
%
Percent of Total Company Revenue
73
%
5
%
100
%
73
%
6
%
100
%
(1) Other category primarily includes revenue from individual customers not aligned to major industry segment, including small businesses and consumers and intersegment net sales.
(2) Total Company includes other businesses, which include the Company's endless assortment businesses and operations in Europe, Asia and Latin America and accounts for approximately 23% and 22% of revenue for the three months ended September 30, 2019 and 2018, respectively, and accounts for 22% and 21% of revenue for the nine months ended September 30, 2019 and 2018, respectively.
11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total accrued sales returns were approximately $26 million and $29 million as of September 30, 2019 and December 31, 2018, respectively and are reported as a reduction of Accounts receivable. Total accrued sales incentives were approximately $58 million and $62 million as of September 30, 2019 and December 31, 2018, respectively and are reported as part of Accrued expenses. The Company did not have any material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2019 and December 31, 2018.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
As of
September 30, 2019
December 31, 2018
Land
$
323
$
318
Building, structures and improvements
1,329
1,338
Furniture, fixtures, machinery and equipment
1,799
1,785
Property, buildings and equipment
$
3,451
$
3,441
Less: Accumulated depreciation and amortization
2,067
2,089
Property, buildings and equipment, net
$
1,384
$
1,352
5. LEASES
The Company leases certain properties and buildings (including branches, warehouses, distribution centers and office space) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists mainly of operating leases which expire at various dates through 2036. Finance leases and service contracts with lease arrangements are not material and the following disclosures pertain to the Company’s operating leases.
Many of the property and building lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs (hereinafter referred to as non-lease components). Certain of the Company’s lease arrangements contain renewal provisions from 1 to 30 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with ROU assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in Selling, general and administrative expenses (SG&A).
12
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Information related to operating leases is as follows (in millions of dollars):
As of September 30, 2019
ROU Assets
Other assets
$
207
Operating lease liabilities
Accrued expenses
54
Other non-current liabilities
159
Total operating lease liabilities
$
213
Nine Months Ended September 30, 2019
Weighted average remaining lease term
6 years
Weighted average incremental borrowing rate
2.3
%
Cash paid for operating leases
$
49
ROU assets obtained in exchange for operating lease obligations
15
Rent expense related to operating leases included in SG&A for the three and nine months ended September 30, 2019, was $19 million and $54 million, respectively.
Maturities of operating lease liabilities as of September 30, 2019 (in millions of dollars) are as follows:
Year
Maturity of operating lease liabilities
2019 (remaining 3 months)
$
15
2020
57
2021
48
2022
37
2023
25
Thereafter
42
Total lease payments
224
Less interest
(11
)
Present value of lease liabilities
$
213
As of September 30, 2019, the Company's future lease obligations that have not yet commenced are immaterial.
13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. GOODWILL AND INTANGIBLE ASSETS
The balances and changes in the carrying amount of Goodwill by segment are as follows (in millions of dollars):