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Washington, D.C. 20549

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (847) 535-1000             

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒  Accelerated Filer ☐   Non-accelerated Filer ☐   Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒ 

There were 50,000,883 shares of the Company’s Common Stock outstanding as of July 20, 2023.

(In millions of dollars and shares, except for per share amounts)

(Unaudited)

 

(Unaudited)

(In millions of dollars, except for share and per share amounts)

 

(Unaudited)

						Six Months Ended
						June 30,
						2023						2022
Cash flows from operating activities:
Net earnings						$	998					$	774
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for credit losses						9						8
Deferred income taxes and tax uncertainties						17						15
Depreciation and amortization						106						107
Net losses from sale of assets						—						2
Stock-based compensation						31						27
Change in operating assets and liabilities:
Accounts receivable						(303)						(398)
Inventories						28						(149)
Prepaid expenses and other assets						93						(50)
Trade accounts payable						147						263
Accrued liabilities						(177)						(8)
Income taxes – net						(28)						10
Other non-current liabilities						(17)						(8)
Net cash provided by operating activities						904						593
Cash flows from investing activities:
Capital expenditures						(193)						(163)
Proceeds from sale of assets						2						2
Other – net						—						(11)
Net cash used in investing activities						(191)						(172)
Cash flows from financing activities:
Proceeds from debt						6						—
Payments of debt						(18)						—
Proceeds from stock options exercised						28						15
Payments for employee taxes withheld from stock awards						(29)						(19)
Purchases of treasury stock						(313)						(199)
Cash dividends paid						(194)						(183)
Other – net						(1)						(2)
Net cash used in financing activities						(521)						(388)
Exchange rate effect on cash and cash equivalents						(2)						(12)
Net change in cash and cash equivalents						190						21
Cash and cash equivalents at beginning of year						325						241
Cash and cash equivalents at end of period						$	515					$	262

(Unaudited)

(Unaudited)

W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.

The Company's Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and therefore do not include all information and disclosures normally included in the annual Consolidated Financial Statements. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from these estimated amounts. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.

The Condensed Consolidated Balance Sheet at December 31, 2022, has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2023 (2022 Form 10-K).

There were no material changes to the Company’s significant accounting policies from those disclosed in Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K.

Grainger serves a large number of customers in diverse industries, which are subject to different economic and market-specific factors. The Company's revenue is primarily comprised of MRO product sales and related activities.

The Company's presentation of revenue by segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions N.A. segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from non-contractual purchases.

The following tables present the Company's percentage of revenue by reportable segment and by major customer industry:

Total accrued sales incentives are recorded in Accrued expenses and were approximately $111 million and $102 million as of June 30, 2023 and December 31, 2022, respectively.

The Company had no material unsatisfied performance obligations, contract assets or liabilities as of June 30, 2023 and December 31, 2022.

Property, buildings and equipment consisted of the following (in millions of dollars):

The Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators during the three and six months ended June 30, 2023. As such, quantitative assessments were not required.     

The balances and changes in the carrying amount of goodwill by segment are as follows (in millions of dollars):

The Company's cumulative goodwill impairments as of June 30, 2023 was $137 million. No goodwill impairments were recorded for the six months ended June 30, 2023 or the twelve months ended December 31, 2022.

The balances and changes in intangible assets – net are as follows (in millions of dollars):

Total debt, including long-term, current maturities and debt issuance costs and discounts – net, consisted of the following (in millions of dollars):

Between 2015 and 2020, Grainger issued $2.3 billion in unsecured long-term debt (Senior Notes) primarily to provide flexibility in funding general working capital needs, share repurchases and long-term cash requirements. The Senior Notes require no principal payments until maturity and interest is paid semi-annually.

The Company incurred debt issuance costs related to its Senior Notes of approximately $29 million, representing underwriting fees and other expenses, that were recorded as a contra-liability within Long-term debt and are being amortized over the term of the Senior Notes using the straight-line method to Interest expense – net.

The Company uses interest rate swaps to manage the risks associated with its 1.85% Senior Notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of June 30, 2023 and December 31, 2022, are presented within Other in the table above. For further discussion on the Company's hedge accounting policies, see Note 6.

In August 2020, MonotaRO entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of June 30, 2023 and December 31, 2022, the carrying amount of the term loan, including current maturities due within one year, was $52 million and $69 million, respectively. The term loan matures in August 2024, payable over four equal semi-annual principal installments in 2023 and 2024 and bears an average interest of 0.05%.

The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy.

For further information on the Company’s debt instruments, see Note 5 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company’s 2022 Form 10-K.

The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Grainger currently enters into certain derivatives or other financial instruments to hedge against these risks, and may continue to do so in the future.

The Company uses interest rate swaps to hedge a portion of its fixed-rate long-term debt. These swaps are treated as fair value hedges and consequently the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item, are recognized in the Consolidated Statements of Earnings in Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of June 30, 2023 and December 31, 2022 was $450 million and $500 million, respectively.

The liability hedged by the interest rate swaps is recorded on the Condensed Consolidated Balance Sheets in Long-term debt. As of June 30, 2023 and December 31, 2022, the carrying amount of the hedged item, including the cumulative amount of fair value hedging adjustments was $422 million and $466 million, respectively.

The effect of the Company's fair value hedges on the Condensed Consolidated Statements of Earnings in Interest expense – net is as follows (in millions of dollars):

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2023, are shown in the following table (in millions of dollars):

The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 inputs within the fair value hierarchy and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments were required during the current period to reflect the counterparty’s credit risk or the Company’s own nonperformance risk.

Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining businesses, which include the Company's Cromwell business, are classified as Other to reconcile to consolidated results. These remaining businesses individually and in the aggregate do not meet the criteria of a reportable segment.

The Company's corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for intersegment sales are included in each segment's selling, general and administrative expenses and are also eliminated in the Company's Consolidated Financial Statements.

Following is a summary of segment results (in millions of dollars):

The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked. Assets for reportable segments are not disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.

From time to time the Company is involved in various legal and administrative proceedings, including claims related to: product liability, safety or compliance; privacy and cybersecurity matters; negligence; contract disputes; environmental issues; unclaimed property; wage and hour laws; intellectual property; advertising and marketing; consumer protection; pricing (including disaster or emergency declaration pricing statutes); employment practices; regulatory compliance, including trade and export matters; anti-bribery and corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.

There have been no material changes to the contingencies and legal matters from those disclosed in Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K and the Company's Form 10-Q for the quarterly period ended March 31, 2023. Although the Company is unable to determine the probability of the outcome of these matters or the estimate of potential loss or range of loss, the Company anticipates that any potential liability, which may arise of or with respect to these matters, will not have, either individually or in the aggregate, a material adverse effect on the Company's financial position, results of operations or cash flows.

On July 6, 2023, the Company purchased 48 acres of land in Oregon for the construction of a new 500,000 square foot DC in accordance with its strategic plan to expand its distribution network. The Company expects to begin operations in 2025.

On July 26, 2023, the Company’s Board of Directors declared a quarterly dividend of $1.86 per share, payable September 1, 2023, to shareholders of record on August 14, 2023.

The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of W.W. Grainger, Inc. (Grainger or Company) as it is viewed by management of the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company's 2022 Form 10-K and the Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1: Financial Statements of this Form 10-Q.

Grainger is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America, Japan and the U.K. Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its customers worldwide, which rely on Grainger for products and services that enable them to run safe, sustainable and productive operations.

For a discussion of the Company’s strategic priorities for 2023, see Part 1, Item 1: Business and Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2022 Form 10-K.

In combination with the economic recovery from the pandemic and repercussions from geopolitical events, including the war in Ukraine, the global economy continues to experience volatile 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.

The Company continues to monitor economic conditions in the U.S. and globally, and the impact of macroeconomic pressures, including repercussions from the recent banking crisis, rising interest rates, fluctuating currency exchange rates, inflation and recession fears on the Company’s business, customers, suppliers and other third parties. As a result of continued inflation, the Company has implemented strategies designed to mitigate certain adverse effects of higher costs while also remaining market price competitive. Historically, the Company’s broad and diverse customer base and the nondiscretionary nature of the Company’s products to its customers has helped to insulate it from the effects of recessionary periods in the industrial MRO market. The full extent and impact of these conditions are uncertain and cannot be predicted at this time.

For further discussion of the Company's risks and uncertainties, see Part I, Item 1A: Risk Factors in the Company’s 2022 Form 10-K.

The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars except per share amounts):

Net sales of $4,182 million for the three months ended June 30, 2023 increased $345 million, or 9%, compared to the same period in 2022. For further discussion on the Company's net sales, see the Segment Analysis section below.

Gross profit of $1,644 million for the three months ended June 30, 2023 increased $203 million, or 14%, compared to the same period in 2022. Gross profit margin of 39.3% for the three months ended June 30, 2023 increased 170 basis points compared to the same period in 2022. For further discussion on the Company's gross profit, see the Segment Analysis section below.

SG&A of $983 million for the three months ended June 30, 2023 increased $76 million, or 8%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll expenses.

Operating earnings of $661 million for the three months ended June 30, 2023 increased $127 million, or 24%, compared to the same period in 2022.

Income taxes of $155 million for the three months ended June 30, 2023 increased $27 million, or 20%, compared to the same period in 2022. The increase in tax expense was driven by higher taxable operating earnings for the second quarter of 2023. Grainger's effective tax rates were 24.0% and 24.8% for the three months ended June 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to increased stock compensation tax benefit.

Net earnings of $470 million attributable to W.W. Grainger, Inc. for the three months ended June 30, 2023 increased $99 million, or 27%, compared to the same period in 2022.

Diluted earnings per share was $9.28 for the three months ended June 30, 2023, an increase of 29% compared to $7.19 for the same period in 2022.

Net sales of $3,355 million for the three months ended June 30, 2023 increased $302 million, or 10%, compared to the same period in 2022. The increase was due to price, which includes customer mix of 5%, and volume, which includes product mix of 5%.

Gross profit of $1,398 million for the three months ended June 30, 2023 increased $187 million, or 16%, compared to the same period in 2022. Gross profit margin of 41.7% increased 200 basis points compared to the same period in 2022. The increase was driven by freight and supply chain efficiencies, as well as improved product mix in the second quarter of 2023.

SG&A of $798 million for the three months ended June 30, 2023 increased $62 million, or 9%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll expenses. SG&A leverage improved 30 basis points compared to the same period in 2022.

Operating earnings of $600 million for the three months ended June 30, 2023 increased $125 million, or 26%, compared to the same period in 2022.

Net sales of $751 million for the three months ended June 30, 2023 increased $32 million, or 5%, compared to the same period in 2022. The increase was due to sales growth of 10%, driven by customer acquisition at MonotaRO and Zoro, as well as enterprise growth at MonotaRO, partially offset by unfavorable foreign exchange of 5% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.

Gross profit of $224 million for the three months ended June 30, 2023 increased $15 million, or 7%, compared to the same period in 2022. Gross profit margin of 29.7% increased 50 basis points compared to the same period in 2022. The increase was driven by price realization and continued freight efficiencies at MonotaRO, partially offset by unfavorable product mix at Zoro in the second quarter of 2023.

SG&A of $159 million for the three months ended June 30, 2023 increased $12 million, or 8%, compared to the same period in 2022. The increase was primarily driven by higher marketing and payroll and benefits expenses. SG&A leverage decreased 60 basis points.

Operating earnings of $65 million for the three months ended June 30, 2023 increased $3 million, or 4%, compared to the same period in 2022.

Net sales of $8,273 million for the six months ended June 30, 2023 increased $789 million, or 11%, compared to the same period in 2022. For further discussion on the Company's net sales, see the Segment Analysis section below.

Gross profit of $3,278 million for the six months ended June 30, 2023 increased $454 million, or 16%, compared to the same period in 2022. Gross profit margin of 39.6% increased 190 basis points compared to the same period in 2022. For further discussion on the Company's gross profit, see the Segment Analysis section below.

SG&A of $1,937 million for the six months ended June 30, 2023 increased $181 million, or 10%, compared to the same period in 2022. The increase was primarily due to payroll and marketing expenses.

Operating earnings of $1,341 million for the six months ended June 30, 2023 increased $273 million, or 26%, compared to the same period in 2022.

Income taxes of $309 million for the six months ended June 30, 2023 increased $49 million or 19%, compared to the same period in 2022. The increase was driven by higher taxable operating earnings for the six months ended June 30, 2023. Grainger's effective tax rates were 23.6% and 25.2% for the six months ended June 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to increased stock compensation tax benefit.

Net earnings of $958 million attributable to W.W. Grainger, Inc. for the six months ended June 30, 2023 increased $221 million, or 30%, compared to the same period in 2022.

Diluted earnings per share was $18.89 for the six months ended June 30, 2023, an increase of 33% compared to $14.26 for the same period in 2022.

Net sales of $6,649 million for the six months ended June 30, 2023 increased $718 million, or 12%, compared to the same period in 2022. The increase in net sales was due to price, which includes customer mix of 6%, and volume, which includes product mix of 6%.

Gross profit of $2,795 million for the six months ended June 30, 2023 increased $420 million, or 18%, compared to the same period in 2022. Gross profit margin of 42.0% increased 200 basis points compared to the same period in 2022. The increase was driven by freight efficiencies and improved product mix in the first half of 2023.

SG&A of $1,574 million for the six months ended June 30, 2023 increased $155 million, or 11%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll expenses. SG&A leverage improved 20 basis points compared to the same period in 2022.

Operating earnings of $1,221 million for the six months ended June 30, 2023 increased $265 million, or 28%, compared to the same period in 2022.