W.W. GRAINGER, INC. Objective
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 included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K. Percentage figures included in this section have not in all cases 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 Consolidated Financial Statements or in the associated text. OverviewW.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 (N.A.),Japan and theUnited Kingdom (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. The Company's continued strategic priority for 2022 is to relentlessly expand Grainger's leadership position in the MRO space by being the go-to partner for people who build and run safe and productive operations. To achieve this, each Grainger business has a set of strategic objectives. The high-touch solutions businesses are focused on key initiatives that drive top-line revenue and MRO market outgrowth. Additionally, the high-touch solutions businesses are focused on growing through differentiated sales and services (e.g., direct customer relationships and onsite services), advantaged MRO solutions (e.g., get customers the exact products and services they need to solve a problem quickly) and unparalleled customer service (e.g., deliver flawlessly on every customer transaction). The endless assortment businesses are focused on product assortment expansion and innovative customer acquisition and retention. Additionally, all Grainger businesses are focused on continuously improving customer experience, optimizing and scaling cost structures and investing in digital marketing, technology and supply chain infrastructure to ultimately deliver long-term returns for shareholders.
Strategic Priorities and Impact of the COVID-19 Pandemic
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. However, the Company's business plans to achieve these strategic priorities continue to be affected by the impact of the COVID-19 pandemic. The COVID-19 pandemic caused significant disruptions in theU.S. and global markets, and the full extent of the impacts will depend on several uncertain and unpredictable developments including any continued spread of the virus and its variants, the availability and effectiveness of treatments and vaccines, imposition of protective public safety measures and the overall impact of government measures to combat the spread of the virus. While the ongoing recovery from the COVID-19 pandemic has fluctuated throughout the year, it has been accompanied by a resurgence in demand as industries return to regular operations, which continues to disrupt supply chains, transportation efficiency, raw materials and labor availability. Grainger's businesses and its major facilities have remained operational as customers rely on Grainger's products and services to keep their businesses up and running. The Company continues to monitor and refine its product assortment and inventory availability and remains committed to serving customers and supporting team members. As the pandemic continues to impact global markets and the needs of customers, team members, suppliers and communities continue to change, the Company's efforts and business plan will evolve accordingly. The Company continues to leverage a dedicated cross-functional task force to understand and implement guidance from government agencies and health officials to meet requirements from federal, state and local authorities and may take further actions in the best interests of its team members, customers, suppliers and shareholders. 23 -------------------------------------------------------------------------------- The Company qualified for certain government assistance programs that partially offset related expenses inCanada and theU.K. The amounts received were not material to the Consolidated Financial Statements for the year endedDecember 31, 2021 . The Company cannot reasonably estimate the full extent to which the COVID-19 pandemic will continue to impact its business and financial results. Grainger is focused on servicing customers and communities in addressing the pandemic and providing products to assist in the ongoing recovery, supporting the needs and safety of team members and ensuring the Company continues to operate with a strong financial position.
Further discussion of the risks and uncertainties posed by the COVID-19 pandemic, see Part I, Item 1A: Risk Factors of this Form 10-K.
Matters Affecting Comparability
There were 254 sales days in the full year 2021 versus 256 and 255 sales days in the full year of 2020 and 2019, respectively.
EffectiveJanuary 1, 2021 , Grainger's two reportable segments areHigh-Touch Solutions N.A. and Endless Assortment. OnMarch 8, 2021 , Grainger provided investors with segment summary historical financial information and segment historical data that is consistent with its new reportable segment structure and reflective of its updated intersegment accounting policies. For further segment information, see Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K. InNovember 2020 , consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger commenced the liquidation of Zoro Tools Europe (ZTE) inGermany . InAugust 2020 , Grainger divested theChina high-touch solutions business (China ) and inJune 2020 , divested the Fabory high-touch solutions business. Accordingly, the Company's operating results include Fabory,China and ZTE through the respective dates of divestiture or liquidation. For further business divestitures and liquidation information, see Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Data and Supplementary Data of this Form 10-K. Inmid-February 2020 , the Company began experiencing elevated levels of COVID-19 pandemic-related product sales (e.g., PPE and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales decreased. Conversely, as the COVID-19 pandemic progressed throughout 2020 and through 2021, the Company has seen pandemic-related sales soften and non-pandemic sales grow, as mix returns to more normalized levels. This shift between pandemic and core, non-pandemic product mix impacted gross margin as pandemic-related product sales are generally lower-margin. 24 -------------------------------------------------------------------------------- Results of Operations The following table is included as an aid to understanding changes in Grainger's Consolidated Statements of Earnings (in millions of dollars). For the Years Ended December 31, Percent Increase/(Decrease) from Prior Year As a Percent of Net Sales 2021 2020 2019 2021 2021 2020 2019 Net sales (1)$ 13,022 $ 11,797 $ 11,486 10.4 % 100.0 % 100.0 % 100.0 % Cost of goods sold 8,302 7,559 7,089 9.8 63.8 64.1 61.7 Gross profit 4,720 4,238 4,397 11.4 36.2 35.9 38.3 SG&A 3,173 3,219 3,135 (1.4) 24.4 27.3 27.3 Operating earnings 1,547 1,019 1,262 51.8 11.9 8.6 11.0 Other expense - net 62 72 53 (12.8) 0.5 0.6 0.5 Income tax provision 371 192 314 92.7 2.8 1.6 2.7 Net earnings 1,114 755 895 47.5 8.6 6.4 7.8 Noncontrolling interest 71 60 46 19.0 0.5 0.5 0.4 Net earnings attributable to W.W. Grainger, Inc. $ 1,043$ 695 $ 849 50.0 8.0 5.9 7.4 Diluted earnings per share: $ 19.84$ 12.82 $ 15.32 54.8 %
(1) For further information regarding the Company's disaggregated revenue, see Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
2021 Compared to 2020 Net sales of$13,022 million for the year endedDecember 31, 2021 increased$1,225 million , or 10.4%, compared to the same period in 2020. On a daily basis, net sales increased 11.3%, primarily driven by improved core, non-pandemic related product sales volume as product mix continued to revert to more normalized levels in the year endedDecember 31, 2021 . This consisted of increased volume, which includes product mix, of 10.1%, price, which includes customer mix, of 2.3% and foreign exchange of 0.3%, partially offset by the impact of the business divestitures in the prior year of 1.4%. Gross profit of$4,720 million for the year endedDecember 31, 2021 increased$482 million , or 11%, compared to the same period in 2020. Gross profit margin of 36.2% increased 0.3 percentage point compared to the same period in 2020. The increase was primarily driven by price realization and favorable product mix, partially offset by unfavorable pandemic-related inventory adjustments and product cost inflation in the year endedDecember 31, 2021 . SG&A of$3,173 million for the year endedDecember 31, 2021 decreased$46 million , or 1%, compared to the same period in 2020. The decrease was the result of impairment charges and losses related to the divested Fabory business in the first half of 2020, partially offset by increased SG&A due to higher wages, variable compensation and marketing expenses in 2021.
Operating earnings of
Other expense, net of$62 million for the year endedDecember 31, 2021 decreased$10 million , or 13%, compared to the same period in 2020. The decrease was primarily driven by lower interest expense in 2021 due to the increase in indebtedness as a proactive measure to preserve financial flexibility during pandemic uncertainty in the first half of 2020. 25 -------------------------------------------------------------------------------- Income taxes of$371 million for the year endedDecember 31, 2021 increased$179 million , or 93%, compared to the same period in 2020. The increase was primarily driven by higher taxable operating earnings in 2021 and the absence of the tax impacts from the Company's investment in Fabory. In the first quarter of 2020, the Company impaired and reorganized its holdings in Fabory. In the second quarter of 2020, the Company divested its interest in Fabory. Grainger's effective tax rates were 25.0% and 20.3% for the twelve months endedDecember 31, 2021 and 2020, respectively. Net earnings of$1,043 million attributable toW.W. Grainger, Inc. for the year endedDecember 31, 2021 increased$348 million , or 50%, compared to the same period in 2020. Diluted earnings per share was$19.84 for the year endedDecember 31, 2021 , an increase of 55% compared to$12.82 for the same period in 2020. The increase was primarily due to higher net earnings in 2021.
2020 Compared to 2019
Net sales of$11,797 million for the year endedDecember 31, 2020 increased$311 million , or 2.7%, compared to the same period in 2019. On a daily basis, net sales increased 2.3%, primarily due to strong pandemic-related sales volume mainly to large government and healthcare customers, partially offset by volume declines of non-pandemic related products across most industries. This consisted of increased volume, which includes product mix, of 3.7% and foreign exchange of 0.1%, partially offset by the impact of the business divestitures and price, including customer mix, of 1.3% and 0.2%, respectively. Gross profit of$4,238 million for the year endedDecember 31, 2020 decreased$159 million , or 4%, compared to the same period in 2019. Gross profit margin of 35.9% decreased 2.4 percentage points compared to the same period in 2019. The decrease was primarily driven by lower margins from COVID-19 pandemic-related product sales in the high-touch solutions businesses and business unit mix due to growth in the lower margin endless assortment businesses. SG&A of$3,219 million for the year endedDecember 31, 2020 increased$84 million , or 3%, compared to the same period in 2019. The increase was primarily due to a$177 million write-down of goodwill, intangibles and long-lived assets for the Fabory business and a$109 million pretax loss from the sale of the Fabory business in the first and second quarters of 2020, respectively. These charges were partially offset by reduced travel and entertainment expenses in 2020 and an aggregate intangible asset impairment charge of$120 million for the Cromwell business in the fourth quarter of 2019. Operating earnings of$1,019 million for the year endedDecember 31, 2020 decreased$243 million , or 19%, compared to$1,262 million for the same period in 2019. The decrease was primarily a result of impairment charges and losses for the divested Fabory business in the first half of 2020. Other expense, net of$72 million for the year endedDecember 31, 2020 increased$19 million , or 35%, compared to the same period in 2019. The increase was primarily from costs related to an increase in indebtedness as a proactive measure to preserve financial flexibility during pandemic uncertainty during 2020. Income taxes of$192 million for the year endedDecember 31, 2020 decreased$122 million , or 39%, compared to the same period in 2019. The decrease was driven by lower taxable operating earnings for the year, tax losses from the Company's investment in Fabory due to the impairment and internal reorganization of the Company's holdings in Fabory in the first quarter of 2020 and tax impacts of the Fabory divestiture. Net earnings of$695 million attributable toW.W. Grainger, Inc. for the year endedDecember 31, 2020 decreased$154 million , or 18%, compared to the same period in 2019.
Diluted earnings per share of
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--------------------------------------------------------------------------------Non-GAAP Measures
The following tables reconcile reported SG&A expenses, operating earnings, net earnings attributable toW.W. Grainger, Inc. and diluted earnings per share determined in accordance withU.S. generally accepted accounting principles (GAAP) to non-GAAP measures including adjusted SG&A, adjusted operating earnings, adjusted net earnings attributable toW.W. Grainger, Inc. and adjusted diluted earnings per share. The Company believes that these non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names. The following tables provide a reconciliation of GAAP to non-GAAP measures (dollars in millions): For the Years Ended December 31, 2021 2020 2019 % SG&A reported$ 3,173 $ 3,219 $ 3,135 (1) % Restructuring - net (High-Touch Solutions N.A.) - 18 4 Restructuring - net (Endless Assortment) - 9 - Restructuring - net (Other) - - 2 Fabory impairment charges (Other) - 177 - Cromwell impairment charges (Other) - - 120 Fabory divestiture (Other) - 109 - Grainger China divestiture (Other) - (5) - SG&A adjusted$ 3,173 $ 2,911 $ 3,009 9 % Operating earnings reported$ 1,547 $ 1,019 $ 1,262 52 % Total restructuring - net, impairment charges and business divestiture - 308 126 Operating earnings adjusted$ 1,547 $ 1,327 $ 1,388 17 % Net earnings attributable toW.W. Grainger, Inc. reported$ 1,043 $ 695 $ 849 50 % Total restructuring - net, impairment charges and business divestiture - 308 126 Tax effect (1) - (126) (17) Total restructuring - net, impairment charges and business divestiture, net of tax - 182 109 Net earnings attributable toW.W. Grainger, Inc. adjusted$ 1,043 $ 877 $ 958 19 % Diluted earnings per share reported$ 19.84 $ 12.82 $ 15.32 55 % Restructuring - net (High-Touch Solutions N.A.) - 0.33 0.08 Restructuring - net (Endless Assortment) - 0.16 - Restructuring - net (Other) - - 0.03 Fabory impairment charges (Other) - 3.26 - Cromwell impairment charges (Other) - - 2.15 Fabory divestiture (Other) - 2.02 - Grainger China divestiture (Other) - (0.09) - Total pretax adjustments - 5.68 2.26 Tax effect (1) - (2.32) (0.29) Total - net of tax - 3.36 1.97 Diluted earnings per share adjusted$ 19.84 $ 16.18 $ 17.29 23 % (1) The tax impact of adjustments and non-cash impairments are calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility and the Company's ability to realize the associated tax benefits. 27
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2021 Compared to 2020
Noted in the table above for the twelve months ended
Excluding restructuring, net, impairment charges and business divestitures for the twelve months endedDecember 31, 2020 , adjusted SG&A and operating earnings for the full year 2021 were$3,173 and$1,547 , an increase of$262 million and$220 million , or 9% and 17%, respectively, compared to the same period in 2020. Excluding the tax benefit related to Fabory, as well as the restructuring, net, impairment charges and business divestitures for the twelve months endedDecember 31, 2020 , Grainger's adjusted effective tax rates were 25.0% and 25.3% for the twelve months endedDecember 31, 2021 and 2020, respectively. The Company's adjusted net earnings attributable toW.W. Grainger Inc. for the full year 2021 was$1,043 million , an increase of$166 million , or 19%, compared to the same period in 2020. Adjusted diluted earnings per share of$19.84 increased 23% compared to$16.18 for the twelve months endedDecember 31, 2020 .
2020 Compared to 2019
Noted in the table above for the twelve months ended
Excluding restructuring, net, impairment charges and business divestitures for the twelve months endedDecember 31, 2020 andDecember 31, 2019 , adjusted SG&A and operating earnings for the full year 2020 were$2,911 and$1,327 , a decrease of$98 million and$61 million , or 3% and 4%, respectively, compared to the same period in 2019. Excluding restructuring, net, impairment charges, business divestitures and income taxes for the twelve months endedDecember 31, 2020 , andDecember 31, 2019 , Grainger's adjusted effective tax rates were 25.3% and 24.8% for the twelve months endedDecember 31, 2020 and 2019, respectively. The Company's adjusted net earnings attributable toW.W. Grainger, Inc. for the full year 2020 was$877 million , a decrease of$81 million , or 8%, compared to the same period in 2019. Adjusted diluted earnings per share of$16.18 decreased 6% compared to$17.29 for the twelve months endedDecember 31, 2019 . 28 --------------------------------------------------------------------------------
Segment Analysis
The following comments at the reportable segment and other business unit levels include external net sales and operating earnings. For further segment information, see Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
The following table shows reported segment results (dollars in millions):
For the Years Ended December 31,
Percent Increase/
Percent Increase (Decrease) from
2021 from Prior Year 2020 (1) Prior Year 2019 (1)
Net sales $ 10,186 10.5 % $ 9,221 2.0 % $ 9,036
Gross profit $ 3,906 10.9 % $ 3,524 (4.4) % $ 3,684
SG&A $ 2,572 9.8 % $ 2,342 (2.7) % $ 2,406
Operating earnings $ 1,334 12.9 % $ 1,182 (7.6) % $ 1,278 (1) Effective
2021 Compared to 2020 Net sales of$10,186 million for the year endedDecember 31, 2021 increased$965 million , or 10.5%, compared to the same period in 2020. On a daily basis, net sales increased 11.3%, primarily driven by improved core, non-pandemic related product sales volume as product mix continued to revert to more normalized levels in the year endedDecember 31, 2021 . This consisted of increased volume, price and foreign exchange of 7.8%, 3.0% and 0.5%, respectively. Gross profit of$3,906 million for the year endedDecember 31, 2021 increased$382 million , or 11%, compared to the same period in 2020. Gross profit margin of 38.3% increased 0.1 percentage point compared to the same period in 2020. The increase was primarily the result of price realization and product mix in the second half of 2021, partially offset by unfavorable pandemic-related inventory adjustments and product cost inflation in the year endedDecember 31, 2021 .
SG&A of
Operating earnings of
2020 Compared to 2019 Net sales of$9,221 million for the year endedDecember 31, 2020 increased$185 million , or 2.0%, compared to the same period in 2019. On a daily basis, net sales increased 1.7%, primarily driven by COVID-19 pandemic-related sales, partially offset by volume declines of non-pandemic related products. This consisted of increased volume of 2.2%, partially offset by price and foreign exchange of 0.3% and 0.2%, respectively. Gross profit of$3,524 million for the year endedDecember 31, 2020 decreased$160 million , or 4%, compared to the same period in 2019. Gross profit margin of 38.2% decreased 2.6 percentage points compared to the same period in 2019. The decrease was primarily the result of COVID-19 pandemic-related headwinds, including product, customer mix and inventory write-downs in 2020. SG&A of$2,342 million for the year endedDecember 31, 2020 decreased$64 million , or 3%, compared to the same period in 2019. The decrease was primarily driven by reduced travel and depreciation expense, partially offset by incremental operating costs to support the response to the COVID-19 pandemic and related activities. 29 --------------------------------------------------------------------------------
Operating earnings of
Endless Assortment
The following table shows reported segment results (dollars in millions):
For the Years Ended December 31,
Percent Increase Percent Increase
2021 from Prior Year 2020 (1) from Prior Year 2019 (1)
Net sales $ 2,576 18.3 % $ 2,178 18.7 % $ 1,836
Gross profit $ 729 21.3 % $ 601 18.2 % $ 509
SG&A $ 497 14.4 % $ 435 12.2 % $ 387
Operating earnings $ 232 39.3 % $ 166 37.2 % $ 122 (1) Effective
2021 Compared to 2020 Net sales of$2,576 million for the year endedDecember 31, 2021 increased$398 million , or 18.3%, compared to the same period in 2020. On a daily basis, net sales increased 19.2%, primarily driven by strong customer acquisition and continued growth with enterprise customers at MonotaRO. This consisted of increased volume of 20.5%, partially offset by decreased foreign exchange of 1.3%. Gross profit of$729 million for the year endedDecember 31, 2021 increased$128 million , or 21%, compared to the same period in 2020. Gross profit margin of 28.3% increased 0.7 percentage point compared to the same period in 2020. The increase in gross profit margin was primarily driven by pricing actions at Zoro and freight efficiencies at Zoro and MonotaRO, partially offset by unfavorable product mix at MonotaRO. SG&A of$497 million for the year endedDecember 31, 2021 increased$62 million , or 14%, compared to the same period in 2020. The increase was primarily driven by higher marketing and payroll expenses due to an increase in team members to support the continued growth of the segment. SG&A leverage improved 0.7 percentage point compared to the same period in 2020 due to sales revenue outpacing SG&A.
Operating earnings of
2020 Compared to 2019
Net sales of$2,178 million for the year endedDecember 31, 2020 increased$342 million , or 18.7%, compared to the same period in 2019. On a daily basis, net sales increased 18.2%, primarily driven by higher sales volume due to COVID-19 pandemic-related sales and strong customer acquisitions during the year endedDecember 31, 2020 . This consisted of increased volume of 16.6% and foreign exchange of 1.6%. Gross profit of$601 million for the year endedDecember 31, 2020 increased$92 million , or 18%, compared to the same period in 2019. Gross profit margin of 27.6% decreased 0.1 percentage point compared to the same period in 2019. The decrease was primarily driven by unfavorable supply chain costs. SG&A of$435 million for the year endedDecember 31, 2020 increased$48 million , or 12%, compared to the same period in 2019. The increase was primarily driven by higher payroll and benefits expenses and the liquidation of the ZTE business in the fourth quarter of 2020. SG&A leverage improved 1.1 percentage points compared to the same period in 2019 due to sales revenue outpacing SG&A.
Operating earnings of
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2021 Compared to 2020
Net sales of$260 million for the year endedDecember 31, 2021 decreased$138 million , or 34.7%, compared to the same period in 2020. On a daily basis, net sales decreased 34.2%, primarily driven by the net impact of the Fabory andChina business divestitures, partially offset by volume increases and favorable changes in the exchange rate between theU.S. dollar and the British pound sterling for the Cromwell business. This consisted of a decrease in business divestitures of 39.9%, partially offset by favorable foreign exchange and volume of 4.4% and 1.3%, respectively. Gross profit of$85 million for the year endedDecember 31, 2021 decreased$28 million , or 25%, compared to the same period in 2020. Gross profit margin of 32.7% increased 4.2 percentage points compared to the same period in 2020. The increase in gross profit margin was primarily due to the impact of the business divestitures in the prior year and improved customer mix for the Cromwell business. SG&A of$104 million for the year endedDecember 31, 2021 decreased$338 million , or 77%, compared to the same period in 2020. The decrease was primarily due to impairment charges and losses related to the divested Fabory business in the first half of 2020.
Operating losses of
2020 Compared to 2019
Net sales of$398 million for the year endedDecember 31, 2020 decreased$216 million , or 35.3%, compared to the same period in 2019. On a daily basis, net sales decreased 35.5%, primarily driven by the net impact of the Fabory andChina business divestitures and lower volume due to COVID-19 pandemic-related slowdown. This consisted of a decrease in business divestitures of 18.3%, volume of 16.7% and foreign exchange of 0.5%. Gross profit of$113 million for the year endedDecember 30, 2020 decreased$91 million , or 45%, compared to the same period in 2019. Gross profit margin of 28.4% decreased 4.8 percentage points compared to the same period in 2019. The decrease was primarily driven by the Fabory divestiture and lower margins for the Cromwell business. SG&A of$442 million for the year endedDecember 30, 2020 increased$101 million , or 29%, compared to the same period in 2019 to support the continued growth of the segment. The increase was primarily driven by impairment charges and losses related to the divested Fabory business in 2020, partially offset by an intangible asset impairment charge for the Cromwell business in the year endedDecember 31, 2019 . Operating losses of$329 million for the year endedDecember 31, 2020 increased$191 million , or 140%, compared to the same period in 2019. The increase was primarily due to the Fabory business divestiture. 31 --------------------------------------------------------------------------------
Financial 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. For a full discussion related to the financial condition for the fiscal year endedDecember 31, 2019 , including a year-to-year comparison between 2020 and 2019, see Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations in Grainger's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Cash, Cash Equivalents and Liquidity
AtDecember 31, 2021 and 2020, Grainger had cash and cash equivalents of$241 million and$585 million , respectively. The decrease in cash was primarily due to increased investment in capital expenditures and higher inventory purchases to meet customer demand. As ofDecember 31, 2021 , the Company had approximately$1.5 billion in available liquidity.
Cash Flows
Net cash provided by operating activities was$937 million and$1,123 million for the years endedDecember 31, 2021 and 2020, respectively. The decrease in cash provided by operating activities was driven by working capital, primarily related to an increase in accounts receivable due to strong sales growth and inventory purchases to meet customer demand. Net cash used in investing activities was$226 million and$179 million for the years endedDecember 31, 2021 and 2020, respectively. This increase in net cash used in investing activities was primarily driven by investments in the Company's supply chain infrastructure. Net cash used in financing activities was$1,039 million and$726 million for the years endedDecember 31, 2021 and 2020, respectively. The increase in net cash used in financing activities was primarily driven by higher stock repurchases in the current year and prior year borrowings of long-term debt.
Working Capital
Internally generated funds are the primary source of working capital and growth initiatives including capital expenditures. Working capital was$2,455 million atDecember 31, 2021 , compared to$2,220 million atDecember 31, 2020 . The increase was primarily driven by an increase in accounts receivable due to strong sales growth, partially offset by an increase in accounts payable due to higher inventory purchases to meet customer demand. At these dates, the ratio of current assets to current liabilities was 2.7 and 2.6, respectively.
Capital Expenditures
For the year endingDecember 31, 2021 and 2020, capital expenditures were$255 million and$197 million , respectively. The increase was due to the Company's investment in the North American and Japanese distribution networks. In addition, the Company invested in the development of inventory management and technology enhancements.
Project spending for 2022 is expected to be in the range of
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.
32
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Total debt, which is defined as total interest-bearing debt and lease
liabilities as a percent of total capitalization, was 55.4% and 55.6%, as of
Grainger receives ratings from two independent credit ratings agencies: Moody's Investor Service (Moody's) andStandard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade. The following table summarizes the Company's credit ratings atDecember 31, 2021 : Corporate Senior Unsecured Short-term Moody's A3 A3 P2 S&P A+ A+ A1
Commitments and Other Contractual Obligations
AtDecember 31, 2021 , the Company's material cash requirements for commitments and other contractual obligations, included outstanding debt obligations (Senior Notes) with varying maturities for an aggregate principal amount of$2,384 million , with no amount payable within 12 months. Future interest payments associated with the Senior Notes total$1,921 million , with$87 million payable within 12 months. Additionally, as ofDecember 31, 2021 , the Company had purchase obligations of$1,505 million , which includes$1,361 million payable within 12 months. Grainger's purchase obligations primarily include commitments to purchase inventory and other goods and services and uncompleted additions to property, buildings and equipment. Purchase obligations are made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and non-inventory purchases are generally cancellable without penalty, certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract. 33
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Critical Accounting Estimates
The preparation of Grainger's 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: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on Grainger's consolidated financial 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 and Supplementary Data of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements.
Inventories
Company inventories primarily consist of merchandise purchased for resale and are valued at the lower of cost or net realizable value. The majority of the Company's inventory is accounted for using the last-in, first-out (LIFO) method. Net realizable value is based on an analysis of inventory trends including, but not limited to, reviews of inventory levels, sales and cost information and on-hand quantities relative to the sales history for the product and shelf-life. The Company's methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, liquidation or disposition history values and market conditions such as inflation and other acquisition costs, including freight and duties. If business or economic conditions change, estimates and assumptions may be adjusted as deemed appropriate.
The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The fair value of reporting units is calculated primarily using the discounted cash flow method and utilizing value indicators from a market approach to evaluate the reasonableness of the resulting fair values. The Company's indefinite-lived intangible assets are primarily trade names. The fair value of trade names is calculated primarily using the relief-from-royalty method, which estimates the expected royalty savings attributable to the ownership of the trade name asset. The estimates used to calculate the fair values of reporting units and indefinite-lived intangible assets involve the use of significant assumptions, estimates and judgments and changes from year to year based on operating results, market conditions, macroeconomic developments and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and impairment for each reporting unit and indefinite-lived intangible asset. For further information on the Company's goodwill and other intangible assets, see Note 5 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
Contingencies and Legal Matters
The Company is subject to various claims and legal proceedings that arise in the
ordinary course of business, the outcomes of which are inherently uncertain. The
Company accrues for costs relating to litigation claims and other contingent
matters when it is probable that a liability has been incurred and the amount of
the assessment can be reasonably estimated. A detailed summary of the Company's
contingencies and legal matters is included in Note 15 of the Notes to
Consolidated Financial Statements in Part II, Item 8: Financial Statements and
Supplementary Data of this Form 10-K.
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--------------------------------------------------------------------------------Forward-Looking Statements
From time to time in this Annual Report on Form 10-K 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. Grainger 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 Grainger's results to differ materially from those that are presented. Important factors that could cause actual results to differ materially from those presented or implied in 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 Grainger'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 working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company's controls and procedures required by working remote arrangements, 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; 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 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; 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 and elsewhere in this Form 10-K.
Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger 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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Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Grainger's primary market risk exposures is as follows:
Foreign Currency Exchange Rates
Grainger's financial results, including the value of assets and liabilities, are exposed to foreign currency exchange rate risk when the financial statements of the business units outside theU.S. , as stated in their local currencies, are translated intoU.S. dollars. For the fiscal year endedDecember 31, 2021 , approximately 21% of the Company's net sales were denominated in a currency other than the Company's functionalU.S. dollar currency. Consequently, the Company is exposed to the impact of exchange rate volatility primarily between theU.S. dollar and the Japanese yen, Canadian dollar and the British pound sterling. InFebruary 2020 , Grainger entered into certain derivative instrument agreements to manage this risk. A hypothetical 10% change in the relative value of theU.S. dollar would not materially impact the Company's net earnings for 2021. For derivative instrument information, see Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K. Interest Rate Risks Grainger is exposed to interest rate risk on its long-term debt. InFebruary 2020 , Grainger entered into certain derivative instrument agreements to hedge a portion of its fixed-rate long-term debt to manage this risk. The annualized effect of a 0.1 percentage point increase in interest rates on Grainger's variable-rate debt obligations did not have a material impact on the Company's net earnings for 2021. For long-term debt and derivative instrument information, see Note 6 and Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.
Commodity Price Risk
Grainger's transportation costs are exposed to fluctuations in the price of fuel
and some sourced products contain commodity-priced materials. The Company
regularly monitors commodity trends and, as a broad line supplier, mitigates any
material exposure to commodity price risk by having alternative sourcing plans
in place that mitigate the risk of supplier concentration, passing
commodity-related inflation to customers or suppliers and continuing to scale
its distribution networks, including its transportation infrastructure.
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