W.W. GRAINGER, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition ofW.W. Grainger, Inc. (Grainger or Company) as it is viewed by the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year endedDecember 31, 2021 included in the Company's 2021 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
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily inNorth 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 and Recent Events
The Company continues to adhere to its purpose to keep the world working while using its core principles as the framework for expanding Grainger's leadership position and ensuring Grainger is the go-to-partner for building and running safe, sustainable and productive operations. For a discussion of the Company's strategic priorities for 2022, see Part 1, Item 1: Business and Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (Overview) in the Company's 2021 Form 10-K.Russia's Invasion ofUkraine InFebruary 2022 ,Russia invadedUkraine . In response to the conflict,the United States (U.S. ) and other countries have implemented economic and other sanctions. While Grainger has limited direct exposure inRussia andUkraine , the Company continues to monitor any broader impact on the global economy, including with respect to inflation, supply chains and fuel prices. The full impact of the conflict on the Company's business and financial results remains uncertain and will depend on the severity and duration of the conflict and its impact on global and regional economic conditions. The Company does not currently expect significant disruption to its overall business resulting from the conflict.
Inflationary Cost Environment
During fiscal 2021 and continuing into the first half of fiscal 2022, in combination with the economic recovery of the ongoing COVID-19 pandemic, the global economy continues to experience disruptions including to the commodity, labor and transportation markets. 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. As a result of continued inflation, the Company has implemented strategies designed to mitigate certain adverse effects of higher costs during the first half of fiscal 2022 while also remaining market price competitive. For further discussion of the Company's risks and uncertainties, see Part II, Item 1A: Risk Factors of the Company's Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2022 and Part I, Item 1A: Risk Factors in the Company's 2021 Form 10-K. 17
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations -Three Months Ended
The following table is included as an aid to understanding the changes in Grainger's Condensed Consolidated Statements of Earnings (in millions of dollars):
Three Months Ended June 30,
Percent Increase
from Prior Year As a Percent of Net Sales
2022 2021 2022 2021
Net sales (1) $ 3,837 $ 3,207 19.6 % 100.0 % 100.0 %
Cost of goods sold 2,396 2,083 15.0 62.4 65.0
Gross profit 1,441 1,124 28.3 37.6 35.0
SG&A 907 790 14.9 23.7 24.6
Operating earnings 534 334 60.0 13.9 10.4
Other expense - net 17 15 11.2 0.4 0.5
Income tax provision 128 76 70.6 3.4 2.3
Net earnings 389 243 59.8 10.1 7.6
Noncontrolling interest 18 18 0.1 0.4 0.6
Net earnings attributable to W.W. Grainger,
Inc. $ 371 $ 225 64.5 9.7 7.0
Diluted earnings per share: $ 7.19 $ 4.27 68.4 %
(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):
Three Months Ended
2022 2021
Net sales $ 3,837 $ 3,207
$ Change from prior-year period 630 370
% Change from prior-year period 19.6 % 13.1 %
Daily sales (1) $ 60.0 $ 50.1
$ Change from prior-year period 9.9 5.8
% Change from prior-year period 19.6 % 13.1 %
Daily sales impact of currency fluctuations (2.4) % 0.9 %
(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 64 sales days in both the three months ended June 30, 2022 and June 30,
2021 .
Net sales of $3,837 million for the three months ended June 30, 2022 increased
$630 million , or 19.6%, compared to the same period in 2021. The increase in net
sales was primarily due to growth in the High-Touch Solutions N.A. and Endless
Assortment segments. For further discussion on the Company's net sales, see the
Segment Analysis section below.
Gross profit of
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSlapping pandemic-related inventory adjustments in the second quarter of 2021 and improved product mix in the second quarter of 2022.
SG&A of
Operating earnings of
Income taxes of$128 million for the three months endedJune 30, 2022 increased$52 million or 71%, compared to the same period in 2021. The increase was primarily driven by higher taxable operating earnings in the second quarter of 2022. Grainger's effective tax rates were 24.8% and 23.6% for the three months endedJune 30, 2022 and 2021, respectively. Net earnings of$371 million attributable toW.W. Grainger, Inc. for the three months endedJune 30, 2022 increased$146 million , or 65%, compared to the same period in 2021.
Diluted earnings per share was
Segment Analysis
For further segment information, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A. The following table shows reported segment results (in millions of dollars): Three Months Ended June 30, 2022 2021 Percent Increase Net sales$ 3,053 $ 2,498 22.2 % Gross profit$ 1,211 $ 922 31.4 % SG&A $ 736$ 640 15.0 % Operating earnings $ 475$ 282 68.3 % Net sales of$3,053 million for the three months endedJune 30, 2022 increased$555 million , or 22.2%, compared to the same period in 2021. The increase in net sales was due to growth in all geographies and included increased volume, which includes product mix, of 11.8% and price, which includes customer mix, of 10.6%, partially offset by unfavorable foreign exchange of 0.2%. Gross profit of$1,211 million for the three months endedJune 30, 2022 increased$289 million , or 31%, compared to the same period in 2021. Gross profit margin of 39.7% increased 2.8 percentage points. The increase was due to lapping pandemic-related inventory adjustments in the second quarter of 2021 and improved product mix in the second quarter of 2022.
SG&A of
Operating earnings of
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSEndless Assortment
The following table shows reported segment results (in millions of dollars):
Three Months Ended June 30,
2022 2021 Percent Increase
Net sales $ 719 $ 645 11.4 %
Gross profit $ 209 $ 182 15.4 %
SG&A $ 147 $ 124 18.9 %
Operating earnings $ 62 $ 58 8.0 %
Net sales of $719 million for the three months ended June 30, 2022 , increased
$74 million , or 11.4%, compared to the same period in 2021. The increase was due
to sales growth of 21.1%, driven by continued customer acquisition and repeat
and enterprise customer growth at MonotaRO, partially offset by unfavorable
foreign exchange of 9.7% due to changes in the exchange rate between the U.S.
dollar and the Japanese yen.
Gross profit of $209 million for the three months ended June 30, 2022 increased
$27 million , or 15%, compared to the same period in 2021. Gross profit margin of
29.2% increased 1.0 percentage point compared to the same period in 2021. The
increase was driven by freight efficiencies at Zoro and MonotaRO.
SG&A of $147 million for the three months ended June 30, 2022 increased $23
million , or 19%, compared to the same period in 2021. The increase was primarily
driven by higher marketing, occupancy and payroll and benefits expenses in the
second quarter of 2022. SG&A leverage decreased by 1.3 percentage points.
Operating earnings of
Other
Net sales of$65 million for the three months endedJune 30, 2022 , increased$1 million , or 2.7%, compared to the same period in 2021. The increase was due to sales growth of 14.4%, partially offset by unfavorable foreign exchange of 11.7% due to changes in the exchange rate between theU.S. dollar and the British pound sterling.
Operating losses of
20
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Six Months Ended
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):
Six Months Ended June 30,
Percent Increase
from Prior Year As a Percent of Net Sales
2022 2021 2022 2021
Net sales (1) $ 7,484 $ 6,291 19.0 % 100.0 % 100.0 %
Cost of goods sold 4,660 4,074 14.4 62.3 64.8
Gross profit 2,824 2,217 27.4 37.7 35.2
SG&A 1,756 1,525 15.1 23.4 24.2
Operating earnings 1,068 692 54.4 14.3 11.0
Other expense - net 34 30 13.7 0.5 0.5
Income tax provision 260 164 59.0 3.5 2.6
Net earnings 774 498 55.4 10.3 7.9
Noncontrolling interest 37 35 6.1 0.4 0.5
Net earnings attributable to W.W. Grainger,
Inc. $ 737 $ 463 59.1 9.9 7.4
Diluted earnings per share: $ 14.26 $ 8.76 62.8 %
(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):
Six Months Ended June 30,
2022 2021
Net sales $ 7,484 $ 6,291
$ Change from prior-year period 1,193 453
% Change from prior-year period 19.0 % 7.8 %
Daily sales (1) $ 58.5 $ 49.5
$ Change from prior-year period 9.0 3.9
% Change from prior-year period 18.0 % 8.6 %
Daily sales impact of currency fluctuations (2.0) % 1.0 %
(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 128 and 127 sales days in the six months ended June 30, 2022 and June 30, 2021 ,
respectively.
Net sales of $7,484 million for the six months ended June 30, 2022 increased
$1,193 million , or 19.0%, and on a daily basis, net sales increased 18.0%
compared to the same period in 2021. The increase in net sales was primarily due
to sales growth in the High-Touch Solutions N.A. and Endless Assortment
segments. For further discussion on the Company's net sales, see the Segment
Analysis section below.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit of $2,824 million for the six months ended June 30, 2022 increased
$607 million , or 27%, compared to the same period in 2021. Gross profit margin
of 37.7% increased 2.5 percentage points. The increase was due to lapping
pandemic-related inventory adjustments in the first half of 2021 and improved
product mix in the first half of 2022.
SG&A of $1,756 million for the six months ended June 30, 2022 increased $231
million , or 15%, compared to the same period in 2021. The increase was primarily
due to higher marketing, payroll and variable compensation expenses.
Operating earnings of
Income taxes of$260 million for the six months endedJune 30, 2022 increased$96 million or 59%, compared to the same period in 2021. The increase was primarily driven by higher taxable operating earnings in the first half of 2022. Grainger's effective tax rates were 25.2% and 24.7% for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. Net earnings of$737 million attributable toW.W. Grainger, Inc. for the six months endedJune 30, 2022 increased$274 million , or 59%, compared to the same period in 2021.
Diluted earnings per share was
Segment Analysis
For further segment information, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.
High-Touch Solutions N.A. The following table shows reported segment results (in millions of dollars): Six Months Ended June 30, 2022 2021 Percent Increase Net sales$ 5,931 $ 4,895 21.2 % Gross profit$ 2,375 $ 1,817 30.7 % SG&A$ 1,419 $ 1,229 15.4 % Operating earnings $ 956$ 588 62.6 % Net sales of$5,931 million for the six months endedJune 30, 2022 increased$1,036 million , or 21.2%, compared to the same period in 2021. On a daily basis, net sales increased 20.2% due to increased volume, which includes product mix, of 10.9% and price, which includes customer mix, of 9.4%, driven by sales growth in all geographies, partially offset by unfavorable foreign exchange of 0.1%. Gross profit of$2,375 million for the six months endedJune 30, 2022 increased$558 million , or 31%, compared to the same period in 2021. Gross profit margin of 40.0% increased 2.9 percentage points. The increase was due to lapping pandemic-related inventory adjustments in the first half of 2021 and improved product mix in the first half of 2022. SG&A of$1,419 million for the six months endedJune 30, 2022 increased$190 million , or 15% compared to the same period in 2021. The increase was primarily due to higher marketing, payroll and variable compensation expenses. SG&A leverage improved by 1.2% percentage point.
Operating earnings of
22
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSEndless Assortment
The following table shows reported segment results (in millions of dollars):
Six Months Ended June 30,
2022 2021 Percent Increase
Net sales $ 1,416 $ 1,267 11.7 %
Gross profit $ 406 $ 357 14.0 %
SG&A $ 289 $ 244 18.6 %
Operating earnings $ 117 $ 113 4.0 %
Net sales of $1,416 million for the six months ended June 30, 2022 , increased
$149 million , or 11.7%, compared to the same period in 2021. On a daily basis,
net sales increased 10.9%. The increase was due to sales growth of 19.3%, driven
by continued customer acquisition at Zoro and repeat customer growth at
MonotaRO, partially offset by unfavorable foreign exchange of 8.4% due to
changes in the exchange rate between the U.S. dollar and the Japanese yen.
Gross profit of $406 million for the six months ended June 30, 2022 increased
$49 million , or 14% compared to the same period in 2021. Gross profit margin of
28.7% increased 0.6 percentage point compared to the same period in 2021. The
increase was driven by freight efficiencies at Zoro and MonotaRO.
SG&A of $289 million for the six months ended June 30, 2022 increased $45
million , or 19%, compared to the same period in 2021. The increase was primarily
driven by higher occupancy expenses at MonotaRO due to the DC placed into
service in the first quarter of 2022 and higher marketing and payroll and
benefits expenses compared to the first half of 2021. SG&A leverage decreased by
1.2 percentage points.
Operating earnings of
Other
Net sales of$137 million for the six months endedJune 30, 2022 increased$8 million , or 6.2%, compared to the same period in 2021. On a daily basis, net sales increased 5.3%. The increase was due to sales growth of 12.6%, partially offset by unfavorable foreign exchange of 7.3% due to changes in the exchange rate between theU.S. dollar and the British pound sterling.
Operating losses of
23
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSFinancial Condition
Grainger believes its current balances of cash and cash equivalents, marketable securities and availability under its revolving credit facilities 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, Cash Equivalents and Liquidity
As of
Cash Flows
Net cash provided by operating activities was$593 million and$563 million for the six months endedJune 30, 2022 and 2021, respectively. The increase in cash provided by operating activities was primarily due to higher net earnings, partially offset by unfavorable working capital and increased tax payments compared to the same period in 2021. Net cash used in investing activities was$172 million and$130 million for the six months endedJune 30, 2022 and 2021, respectively. The change in net cash used in investing activities was primarily due to timing of Japanese supply chain investments. Net cash used in financing activities was$388 million and$463 million for the six months endedJune 30, 2022 and 2021, respectively. The decrease in net cash used in financing activities was due to lower volume of treasury stock repurchases in the first half of 2022.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures. Working capital as ofJune 30, 2022 , was$2,664 million , an increase of$209 million when compared to$2,455 million as ofDecember 31, 2021 . The increase was primarily driven by increased accounts receivable and inventory due to continued sales growth, partially offset by higher accounts payable. As ofJune 30, 2022 andDecember 31, 2021 , the ratio of current assets to current liabilities was 2.6 and 2.7, 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 52.3% and 56.2% as of
Grainger receives ratings from two independent credit rating agencies: Moody's
Investor Service (Moody's) and
The following table summarizes the Company's credit ratings atJune 30, 2022 : Corporate Senior Unsecured Short-term Moody's A3 A3 P2 S&P A+ A+ A1 24
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSCommitments and Other Contractual Obligations
There 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 2021 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 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 Condensed Consolidated Financial Statements in Part I,
Item 1: Financial Statements of this Form 10-Q and in Note 1 of the Notes to
Consolidated Financial Statements in Part II, Item 8: Financial Statements of
the Company's 2021 Form 10-K describes the significant accounting policies and
methods used in the preparation of the Company's Condensed Consolidated
Financial Statements.
There were no material changes to the Company's critical accounting estimates
from those disclosed in Part II, Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's 2021 Form 10-K.
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W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSForward-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, the Company 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 risks and uncertainties, many of which are beyond the Company's control, which could cause the Company's results to differ materially from those that are presented. Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 and its variants (COVID-19), as well as the impact of actions taken or contemplated by government authorities to mitigate the spread of COVID-19 (such as vaccine mandates for certain federal contractors, mask mandates, social distancing or other requirements) and to promote economic stability and recovery, on the Company's businesses, its employees, customers and suppliers, including disruption to the Company's operations resulting from employee illnesses, the development, availability and usage of effective treatment or vaccines, changes in customers' product needs, the acquisition of excess inventory leading to additional inventory carrying costs and inventory obsolescence, raw material, inventory and labor shortages, continued strain on global supply chains, and diminished transportation availability and efficiency, disruption caused by business responses to the COVID-19 pandemic, including remote working arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company's controls and procedures required by remote working arrangements, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the Company's products; inflation, higher product costs or other expenses, including operational expenses; the impact ofRussia's invasion ofUkraine on the global economy; a major loss of customers; loss or disruption of sources of supply; changes in customer or product mix; increased competitive pricing pressures; 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; 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, advertising and marketing, 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; 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; geopolitical events, including war or acts of terrorism; other pandemic diseases or viral contagions; natural or human induced disasters, extreme weather and other catastrophes or conditions; effects of climate change; competition for, or failure to attract, retain, train, motivate and develop 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 and other factors identified under Part I, Item 1A: Risk Factors in the Company's 2021 Form 10-K, as updated from time to time in the Company's Quarterly Reports on Form 10-Q.
Caution should be taken 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.
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