W.W. GRAINGER, INC. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations GeneralW.W. Grainger, Inc. (Grainger or Company) 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 more than 5 million customers worldwide, which rely on Grainger for MRO products and services that enable them to run safe, sustainable and productive operations. EffectiveJanuary 1, 2021 , Grainger's two reportable segments are High-Touch Solutions (N.A.) and Endless Assortment. These reportable segments align with Grainger's go-to-market strategies and bifurcated business models (high-touch solutions and endless assortment). The High-Touch Solutions (N.A.) segment includes the Grainger-branded businesses inthe United States of America (U.S. ),Canada ,Mexico andPuerto Rico . The Endless Assortment segment includes the Company'sZoro Tools, Inc. (Zoro) and MonotaRO Co., Ltd. (MonotaRO) online channels which operate predominately in theU.S. ,U.K. andJapan . Strategic Priorities Amidst the COVID-19 PandemicThe Company's strategic priorities for 2021 have not changed from those stated in Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report for the year endedDecember 31, 2020 on Form 10-K (2020 Form 10-K), which are to "Keep the World Working" and relentlessly expand Grainger's leadership position in the MRO space by being the go-to-partner for people who build and run safe, sustainable and productive operations. However, the respective business plans to achieve these strategic priorities continue to be affected by the global outbreak of Coronavirus in 2019 (COVID-19 pandemic). The COVID-19 pandemic has caused significant disruptions in theU.S. and global markets, and economists expect the economic impact will continue to be significant. Grainger is an essential business and its major facilities have been allowed to remain operational during the pandemic as customers have depended on Grainger's products and services to keep their businesses up and running. As the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities continue to change, the Company's efforts and business plans have evolved accordingly. Grainger is currently focused on serving customers and communities well in addressing the pandemic and preparing for an ongoing recovery, supporting the needs and safety of employees and ensuring the Company continues to operate with a strong financial position.
Impact of the COVID-19 Pandemic to Grainger Businesses The COVID-19 pandemic has impacted and is likely to continue impacting Grainger's businesses and operations as well as the operations of its customers and suppliers.
From a customer perspective, business re-openings, production and related activity throughout the quarter varied based on geography, industry and COVID-19 pandemic conditions. For example, theU.S. geography began to see signs of economic recovery while other international geographies faced slower reopenings. In the high-touch solutions and endless assortment businesses, sales to essential businesses remained strong while sales to non-essential and disrupted industries are beginning to return to pre-COVID-19 pandemic levels. From an inventory and supply chain perspective, demand for pandemic-related inventory has started to decrease with excess supply in the marketplace, resulting in inventory adjustments during the quarter. The Company's major operational facilities and infrastructure (i.e., Distribution Centers, branches, e-commerce sites, and logistic partners) are remaining operational with limited disruptions, while adhering to strict safety and social-distancing protocols. In addition, the Company has prioritized maintaining all facilities safe for customers and employees to work and interact. To date, the Company has been able to absorb the pandemic impact with minimal workforce reductions or furloughs, which positions the Company for accelerated growth post-pandemic. Matters Affecting Comparability There were 63 sales days in the three months endedMarch 31, 2021 and 64 sales days in the three months endedMarch 31, 2020 . 16 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consistent with the Company's strategic focus on broad line MRO distribution in key markets, inJune 2020 Grainger divested the Fabory high-touch solutions business, inAugust 2020 divested theChina high-touch solutions business (China ) and inNovember 2020 commenced the liquidation of Zoro Tools Europe (ZTE) inGermany . Accordingly, the Company's operating results include Fabory,China and ZTE results through the respective dates of divestiture or liquidation. In addition, beginning inmid-February 2020 , the Company experienced elevated levels of COVID-19 pandemic-related product sales (e.g., personal protective equipment (PPE) and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales decreased. Conversely, as the COVID-19 pandemic progressed throughout 2020 and into 2021, the Company has seen levels of pandemic-related sales soften toward pre-pandemic levels and non-pandemic sales turning positive. This will have an impact on gross margin as pandemic-related product sales are generally lower-margin.
Results of Operations - Three Months Ended
Three Months Ended March 31,
As a Percent of Net Sales
2021 2020 Percent Increase/(Decrease) 2021 2020
Net sales $ 3,084 $ 3,001 2.8 % 100.0 % 100.0 %
Cost of goods sold 1,991 1,880 5.9 % 64.5 % 62.6 %
Gross profit 1,093 1,121 (2.5) % 35.5 % 37.4 %
Selling, general and administrative
expenses (SG&A) 735 962 (23.6) % 23.9 % 32.1 %
Operating earnings 358 159 125.5 % 11.6 % 5.3 %
Other expense, net 15 17 (10.8) % 0.5 % 0.6 %
Income tax provision (benefit) 88 (43) (304.6) % 2.9 % (1.4) %
Net earnings 255 185 37.5 % 8.3 % 6.2 %
Noncontrolling interest 17 12 36.6 % 0.6 % 0.4 %
Net earnings attributable to W.W.
Grainger, Inc. $ 238 $ 173 37.5 % 7.7 % 5.8 %
Grainger's net sales of $3,084 million for the first quarter of 2021 increased
$83 million , or 2.8%, compared to the same quarter in 2020. On a daily basis net
sales increased 4.4%. The increase in net sales was primarily driven by volume
increases in the high-touch solutions and endless assortment businesses. Also,
non-pandemic related product sales continue to improve while demand for
pandemic-related product sales remain higher than their pre-pandemic level. See
Note 3 to the Financial Statements for information related to disaggregated
revenue. See the Segment Analysis below for further details related to segment
revenue.
Gross profit of $1,093 million for the first quarter of 2021 decreased $28
million , or 2%, compared to the same quarter in 2020. The gross profit margin of
35.5% during the first quarter of 2021 decreased 1.9 percentage points when
compared to the same quarter in 2020. This decrease was primarily driven by
non-core pandemic-related inventory adjustments in the U.S. business (part of
High-Touch Solutions (N.A.)). See Segment Analysis below for further details
related to segment gross profit.
SG&A of $735 million for the first quarter of 2021 decreased $227 million , or
24%, compared to the first quarter of 2020. This decrease is primarily a result
of higher net restructuring charges in the U.S. and Canada businesses (part of
High-Touch Solutions (N.A.)) and impairment charges for the divested Fabory
business (part of Other) in the first quarter of 2020.
The following tables (in millions of dollars, except percentages) reconcile
reported SG&A, operating earnings and net earnings attributable to
17
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
attributable to W.W. Grainger, Inc. adjusted. The Company believes that these
non-GAAP measures provide meaningful information to assist investors in
understanding financial results and assessing prospects for future performance
as they provide a better baseline for analyzing the ongoing performance of its
businesses by excluding items that may not be indicative of core operating
results. Because non-GAAP financial measures are not standardized, it may not be
possible to compare these measures with other companies' non-GAAP measures
having the same or similar names.
Three Months Ended
March 31, 2021
2021 2020 %
SG&A reported $ 735 $ 962 (24) %
Restructuring, net (High-Touch Solutions (N.A.)) - 7
Fabory impairment charges (Other) -
177
Total restructuring, net and impairment charges - 184
SG&A adjusted $ 735 $ 778 (6) %
2021 2020 %
Operating earnings reported $ 358 $ 159 126 %
Total restructuring, net, and impairment charges - 184
Operating earnings adjusted $ 358 $ 343 4 %
2021 2020 %
Net earnings attributable to
Total restructuring, net, impairment charges and tax¹ -
57
Net earnings attributable to
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. Excluding restructuring, net and impairment charges in both periods as noted in the table above, SG&A decreased$43 million , or 6%. This decrease is primarily due to cost control actions across the high-touch solutions businesses. SG&A leverage improved 2.1 percentage points when compared to the first quarter of 2020. Operating earnings of$358 million for the first quarter of 2021 increased$199 million , or 126%, compared to the first quarter of 2020. Excluding restructuring, net and impairment charges in both periods as noted in the table above, operating earnings increased$15 million , or 4%, driven primarily by lower SG&A expenses partially offset by lower gross profit dollars.
Other expense, net was
The Company recorded an income tax expense of$88 million for the first quarter of 2021, which increased$131 million , or 305%, compared to an income tax benefit of$43 million in the first quarter of 2020. This change is primarily related to a tax benefit related to the Fabory business recorded in the first quarter of 2020. Grainger's effective tax rates were 25.8% and negative 30.4% for the three months endedMarch 31, 2021 and 2020, respectively. Excluding this tax benefit, as well as the restructuring, net and impairment charges in both periods as noted in the table above, the effective tax rates were 25.8% and 25.6% for the three months endedMarch 31, 2021 and 2020, respectively. The reconciliation of the effective tax rate is as follows:
Three Months Ended
2021 2020
Effective tax rate reported 25.8 % (30.4) %
Tax benefit related to the Fabory business - 61.2
Tax impact of restructuring, net and impairment charges - (5.2)
Effective tax rate adjusted 25.8 % 25.6 %
18
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net earnings attributable to W.W. Grainger, Inc. of $238 million for the first
quarter of 2021 increased $65 million , or 38%, compared to the first quarter of
2020. Excluding restructuring, net, impairment charges and tax from both periods
per the table above, net earnings increased $8 million or 3%.
Segment Analysis See Note 10 to the Financial Statements for further detail on segment information.
High-Touch Solutions (N.A.) Net sales were$2,397 million for the first quarter of 2021, an increase of$42 million , or 1.8% compared to the same period in 2020. On a daily basis, net sales increased 3.4% and consisted of the following: Percent Increase Price and customer mix 2.0% Volume (including product mix) 1.1 Foreign exchange 0.3 Total 3.4% Overall, revenue increases for the high-touch solutions businesses were primarily driven by price and customer mix. During the first quarter of 2021, theU.S. business experienced some continuation of elevated sales volume of pandemic-related products from the government and other essential businesses with sales to non-essential and disrupted industries beginning to return to their pre-pandemic levels. See Note 3 to the Financial Statements for information related to disaggregated revenue. From a product perspective, the high-touch solutions business experienced continued demand for COVID-19 pandemic-related products, as well as increasing demand for non-pandemic products as the economy improves.
Gross profit margin for the first quarter of 2021 decreased 2.3 percentage
points compared to the same period in 2020. The decrease was primarily the
result of
SG&A of$589 million for the first quarter of 2021 decreased$31 million , or 5%, when compared to the first quarter of 2020, which is primarily driven by reduced travel and general operating efficiencies. Operating earnings of$306 million for the first quarter of 2021 decreased$8 million , or 3%, from$314 million for the first quarter of 2020. This decrease was driven by lower gross profit dollars partially offset by lower SG&A expenses. Endless Assortment Net sales were$622 million for the first quarter of 2021, an increase of$126 million , or 25.4%, compared to the same period in 2020. On a daily basis, net sales increased 27.4% and consisted of the following: Percent Increase Volume/price/mix 23.3% Foreign exchange 4.1 Total 27.4%
The increase in net sales was driven by continued strong customer acquisition in the endless assortment businesses.
Gross profit margin increased 0.3 percentage points in the first quarter of 2021 compared to the first quarter of 2020. The increase was driven by Zoro's improved discounting strategies.
SG&A leverage decreased 1.5 percentage points compared with the same period in
2020 due to sales revenue outpacing SG&A expenses related to increased sales
volume.
19
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating earnings of $55 million for the first quarter of 2021 increased $20
million , or 58% from $35 million for the first quarter of 2020. The increase was
driven primarily by higher sales primarily due to continued customer
acquisitions.
Other
Net sales were$65 million for the first quarter of 2021, an decrease of$85 million , or 56.5%, when compared to the same quarter in 2020. On a daily basis, net sales decreased 55.8% and consisted of the following: Percent (Decrease)/ Increase Business divestitures (43.3)% Volume/price/mix (15.8) Foreign exchange 3.3 Total (55.8)%
The decrease in net sales was driven by revenue declines in the Cromwell
business as a result of pandemic-related slowdowns and the net impact of the
Fabory and
Gross profit margin increased 2.8 percentage points in the first quarter of 2021 compared to the first quarter of 2020 primarily due to business unit mix.
SG&A decreased 89% in the first quarter of 2021 compared to the first quarter of 2020 primarily due to the impairment charges for the divested Fabory business in the first quarter of 2020.
Operating losses of
20
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Grainger believes that, assuming its operations are not significantly impacted
by the COVID-19 pandemic for a prolonged period, its current level 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. Grainger 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 total available liquidity and 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 March 31, 2021 and December 31, 2020 , Grainger had cash and cash
equivalents of $562 million and $585 million , respectively. This decrease in
cash is primarily due to resuming capital investments and the share repurchase
program, which were paused in 2020 due to the COVID-19 pandemic. As of March 31,
2021 , the Company had approximately $1.8 billion in available liquidity.
Cash Flows
Net cash provided by operating activities was $294 million and $244 million for
the three months ended March 31, 2021 and 2020, respectively. The increase in
cash provided by operating activities is primarily the result of higher net
earnings and favorable working capital, including strong accounts receivable
collections, partially offset by the net impacts from the now divested Fabory
business.
Net cash used in investing activities was $58 million and $52 million for the
three months ended March 31, 2021 and 2020, respectively. This increase in net
cash used in investing activities was primarily driven by higher additions to
the Company's supply chain infrastructure slightly offset by sales and
redemption of assets.
Net cash used in financing activities was $250 million in the three months ended
March 31, 2021 compared to net cash provided by $955 million in the three months
ended March 31, 2020 . The change in net cash (used in) provided by financing
activities was primarily driven by prior year borrowings of long-term debt
partially offset by higher treasury stock repurchases in the current year.
Working Capital
Internally generated funds are the primary source of working capital and funds
used for growth initiatives and capital expenditures.
Working capital consists of current assets (less non-operating cash) and current
liabilities (less short-term debt, current maturities of long-term debt and
lease liabilities). Working capital as of March 31, 2021 , was $2,080 million , a
decrease of $140 million when compared to $2,220 million as of December 31,
2020 . The decrease was primarily driven by a decrease in inventory and an
increase in trade accounts payable. At these dates, the ratio of current assets
to current liabilities was 2.4 and 2.6 for March 31, 2021 and December 31, 2020 ,
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 revolving credit facilities. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) and lease liabilities as a percent of total capitalization was 55.5% atMarch 31, 2021 , and 55.6% atDecember 31, 2020 . Grainger receives ratings from two independent credit rating 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 atMarch 31, 2021 : Corporate Senior Unsecured Short-term Moody's A3 A3 P2 S&P A+ A+ A1 21
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Commitments 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 2020 Form 10-K.
Critical Accounting Estimates
The methods, assumptions, and estimates used in applying the Company's
accounting policies may require the application of judgments regarding matters
that are inherently uncertain. The Company considers an accounting policy to be
a critical estimate if: (1) it involves assumptions that are uncertain when
judgment was applied, and (2) changes in the estimate assumptions, or selection
of a different estimate methodology could have a significant impact on
Grainger's consolidated financial position and results. While the Company
believes that estimates, assumptions, and judgments used are reasonable, they
are based on information available when the estimate was made.
A description of the Company's critical accounting estimates is described in
Part II, Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 2020 Form 10-K.
Forward-Looking Statements
From time to time in this Quarterly Report on Form 10-Q as well as in other
written reports, communications and verbal statements, Grainger makes
forward-looking statements that are not historical in nature but concern
forecasts of future results, business plans, analyses, prospects, strategies,
objectives and other matters that may be deemed to be "forward-looking
statements" under the federal securities laws. Forward-looking statements can
generally be identified by their use of terms such as "anticipate," "estimate,"
"believe," "expect," "could," "forecast," "may," "intend," "plan," "predict,"
"project," "will" or "would" and similar terms and phrases, including references
to assumptions.
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 (COVID-19) as
well as the duration, extent and impact of the actions taken or contemplated by
governmental authorities or others in connection with the COVID-19 pandemic on
the Company's businesses, its employees, customers and suppliers, including
disruption to Grainger's operations resulting from employee illnesses, the
development and availability of effective treatment or vaccines, any mandated
facility closures of non-essential businesses, stay in shelter health orders or
other similar restrictions for customers and suppliers, changes in customers'
product needs, suppliers' inability to meet unprecedented demand for COVID-19
related products, inventory shortages, the potential for government action to
allocate or direct products to certain customers which may cause disruption in
relationships with other customers, disruption caused by business responses to
the COVID-19 pandemic, including working remote arrangements, which may create
increased vulnerability to cybersecurity incidents, including breaches of
information systems security, adaptions to the Company's controls and procedures
required by working remote arrangements, including financial reporting
processes, which could impact the design or operating effectiveness of such
controls or procedures, and global or regional economic downturns or recessions,
which could result in a decline in demand for the Company's products or limit
the Company's ability to access capital markets on terms that are attractive or
at all; higher product costs or other expenses; a major loss of customers; loss
or disruption of sources of supply; changes in customer or product mix;
increased competitive pricing pressures; failure to develop 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 percentage; the Company's
responses to market pressures; the outcome of pending and future litigation or
governmental or regulatory proceedings, including with respect to wage and hour,
anti-bribery and corruption, environmental, advertising, consumer protection,
pricing (including disaster or emergency declaration pricing statutes), product
liability, general commercial disputes, safety or compliance, or privacy and
cybersecurity matters; investigations, inquiries, audits and changes in laws and
regulations; failure to comply with laws, regulations and standards; government
contract matters; disruption of information technology or data security systems
involving the Company or third parties on which the Company
22
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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; labor shortages; 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; failure to attract,
retain, train, motivate, develop and transition 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 II, Item 1A: "Risk Factors" in the Company's 2020
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 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.
23
--------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries© Edgar Online, source
