Business Environment
Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment and provide general insight into projecting Grainger's growth. Grainger’s sales in the United States (U.S.) and Canada tend to positively correlate with Business Investment, Business Inventory, Exports, Industrial Production and Gross Domestic Product (GDP). Sales in Canada also tend to positively correlate with oil prices. The table below provides these estimated indicators for 2019:
|
|
|
|
|
|
|
|
U.S.
|
|
Canada
|
|
Estimated 2018
|
Forecasted 2019
|
|
Estimated 2018
|
Forecasted 2019
|
Business Investment
|
7.4%
|
0.9%
|
|
1.2%
|
(0.6)%
|
Business Inventory
|
1.6%
|
3.0%
|
|
—
|
—
|
Exports
|
4.0%
|
2.5%
|
|
3.2%
|
0.8%
|
Industrial Production
|
3.9%
|
1.1%
|
|
3.0%
|
0.7%
|
GDP
|
2.9%
|
2.6%
|
|
1.9%
|
1.4%
|
Oil Prices
|
—
|
—
|
|
$65/barrel
|
$59/barrel
|
Source: Global Insight U.S. (July 2019), Global Insight Canada (June 2019)
|
In the U.S., Business Investment and Exports are two major indicators of MRO spending. Per the Global Insight July
2019
forecast, Business Inventory is forecast to improve while Business Investment, Industrial Production, Exports and GDP are forecast to soften, as a result of slowing global growth, trade tensions and associated uncertainty, diminishing support from fiscal stimulus and a decline in the pace of inventory accumulation.
Per the Global Insight June
2019
forecast, Canada's Business Investment, Exports, Industrial Production and GDP are expected to slow due to a reduction in spending, delayed investments, weakness in oil prices and slowing global oil demand.
Outlook
Each business in Grainger’s portfolio has a specific set of strategic imperatives focused on creating unique value for customers.
In the U.S. business, Grainger is focused on growing market share through the three pillars of its strategy: (i) building advantaged MRO solutions, which means being able to get customers the exact product they need to solve a problem quickly; (ii) offering differentiated sales and services; Grainger has an advantage in serving complex businesses at their place of business through its direct customer relationships and onsite services and (iii) delivering unparalleled customer service; Grainger is committed to providing the absolute best customer experience in the industry through its effort to deliver flawlessly on every customer transaction.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Matters Affecting Comparability
There were 64 sales days in the three months ended June 30, 2019 and 2018.
Results of Operations –
Three Months Ended June 30, 2019
The following table is included as an aid to understand the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
Percent Increase/(Decrease)
|
|
As a Percent of Net Sales
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
$
|
2,893
|
|
|
$
|
2,861
|
|
1
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
1,772
|
|
|
1,750
|
|
1
|
|
|
61.3
|
|
|
61.2
|
|
Gross profit
|
1,121
|
|
|
1,111
|
|
1
|
|
|
38.7
|
|
|
38.8
|
|
Selling, general and administrative expenses
|
741
|
|
|
767
|
|
(3
|
)
|
|
25.6
|
|
|
26.8
|
|
Operating earnings
|
380
|
|
|
344
|
|
11
|
|
|
13.1
|
|
|
12.0
|
|
Other expense, net
|
14
|
|
|
20
|
|
(30
|
)
|
|
0.5
|
|
|
0.7
|
|
Income taxes
|
94
|
|
|
76
|
|
24
|
|
|
3.2
|
|
|
2.6
|
|
Net earnings
|
272
|
|
|
248
|
|
|
|
|
|
|
Noncontrolling interest
|
12
|
|
|
11
|
|
9
|
|
|
0.4
|
|
|
0.4
|
|
Net earnings attributable to W.W. Grainger, Inc.
|
$
|
260
|
|
|
$
|
237
|
|
10
|
%
|
|
9.0
|
%
|
|
8.3
|
%
|
Grainger’s net sales of $
2,893 million
for the
second quarter of 2019
increased $32 million, or
1%
compared to the same period in 2018. On a daily basis, net sales increased 1.0% and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Volume
|
1.5%
|
Price
|
0.5
|
Foreign exchange
|
(1.0)
|
Total
|
1.0%
|
The increase in net sales was primarily driven by volume increases in the U.S. business and the endless assortment businesses, partially offset by lower sales in the Canada business and foreign exchange. See the
Segment Analysis
below for further details related to segment revenue.
Gross profit of $
1,121 million
for the
second quarter of 2019
increased
$10 million
compared to the same quarter in 2018. The gross profit margin of
38.7%
during the
second quarter of 2019
decreased
0.1
percentage point when compared to the same quarter in 2018.
The table below reconciles reported Selling, general and administrative expenses (SG&A), operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. generally accepted accounting principles (GAAP) to adjusted SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc., which are all considered non-GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders 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. All tables below are in millions of dollars:
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
%
|
SG&A reported
|
$
|
741
|
|
|
$
|
767
|
|
|
(3
|
)%
|
Restructuring, net of branch gains (U.S.)
|
2
|
|
|
6
|
|
|
|
Restructuring (Canada)
|
(4
|
)
|
|
12
|
|
|
|
Restructuring (Other businesses)
|
—
|
|
|
1
|
|
|
|
Restructuring (Unallocated expense)
|
(1
|
)
|
|
(5
|
)
|
|
|
Total restructuring, net
|
(3
|
)
|
|
14
|
|
|
|
SG&A adjusted
|
$
|
744
|
|
|
$
|
753
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%
|
Operating earnings reported
|
$
|
380
|
|
|
$
|
344
|
|
|
11
|
%
|
Total restructuring, net
|
(3
|
)
|
|
15
|
|
|
|
Operating earnings adjusted
|
$
|
377
|
|
|
$
|
359
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%
|
Net earnings attributable to W.W. Grainger, Inc. reported
|
$
|
260
|
|
|
$
|
237
|
|
|
10
|
%
|
Total restructuring, net
|
(3
|
)
|
|
15
|
|
|
|
Tax effect (1)
|
1
|
|
|
(3
|
)
|
|
|
Total restructuring, net and tax
|
(2
|
)
|
|
12
|
|
|
|
Net earnings attributable to W.W. Grainger, Inc. adjusted
|
$
|
258
|
|
|
$
|
249
|
|
|
4
|
%
|
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
SG&A of $
741 million
for the
second quarter of 2019
decreased
$26 million
, or
3
% compared to the
second quarter of 2018
. Excluding restructuring, net in both periods as noted in the table above, SG&A decreased $9 million, or 1% primarily due to 2018 cost take-out actions in Canada and lower variable compensation in the U.S. business and at the corporate level.
Operating earnings of
$380 million
for the
second quarter of 2019
increased
$36 million
, or
11%
compared to the
second quarter of 2018
. Excluding restructuring, net in both periods as noted in the table above, operating earnings increased $18 million or 5%, driven primarily by cost take-out initiatives in the Canadian business and higher gross profit and lower variable compensation in the U.S. business and at the corporate level.
Other expense, net was
$14 million
for the
second quarter of 2019
, a decrease of $6 million, or
30%
compared to the
second quarter of 2018
. The decrease was primarily due to lower losses from the Company's clean energy investments which were concluded in the second half of 2018.
Income taxes of $
94 million
for the
second quarter of 2019
increased $18 million, or
24%
compared to the
second quarter of 2018
. Grainger's effective tax rates were 25.6% and 23.4% for the three months ended June 30, 2019 and 2018, respectively. The increase was primarily driven by lower tax benefit from stock-based compensation and the absence of the Company's clean energy tax benefits in 2019 as the Company concluded its investments in 2018.
Net earnings attributable to W.W. Grainger, Inc. of $
260 million
for the
second quarter of 2019
increased
$23 million
or
10%
compared to the
second quarter of 2018
. Excluding restructuring, net from both periods in the table above, net earnings increased $9 million, or 4%. The increase in net earnings primarily resulted from lower SG&A and lower other expense, net.
Diluted earnings per share of
$4.67
in the
second quarter of 2019
was up
12%
versus the
$4.16
for the
second quarter of 2018
, primarily due to higher net earnings and lower average shares outstanding. Excluding restructuring, net from
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
both periods in the table above, diluted earnings per share of $4.64 in the
second quarter of 2019
increased 6% from $4.37 for the
second quarter of 2018
.
Segment Analysis
The following results at the U.S. and Canada segments and Other businesses level include external and intersegment net sales and operating earnings. See Note 9 to the Financial Statements.
United States
Net sales were $
2,222 million
for the
second quarter of 2019
, an increase of
$47 million
, or
2%
compared to the same period in 2018 and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Volume
|
1.5%
|
Price
|
0.5
|
Intercompany sales to Zoro (included in other businesses)
|
0.5
|
Other
|
(0.5)
|
Total
|
2.0%
|
Sales to customers in the retail end markets increased high single digits. Government and commercial increased mid-single digits and contractors and light manufacturing end markets increased low-single digits. Heavy manufacturing was down low single digits and natural resources was down mid-single digits when compared to the prior year. See Note 3 to the Financial Statements for information related to disaggregated revenue. Overall, revenue increases were primarily driven by market share gains.
The gross profit margin for the
second quarter of 2019
increased
0.35
percentage point compared to the same period in 2018, as a result of stable price cost spread.
SG&A decreased
1%
in the
second quarter of 2019
compared to the
second quarter of 2018
. The decrease was primarily driven by lower variable compensation versus the prior year.
Operating earnings of $
381 million
for the
second quarter of 2019
increased
$32 million
, or
9%
from $
349 million
for the
second quarter of 2018
. This increase was driven primarily by higher gross profit from higher sales.
Canada
Net sales were $
135 million
for the
second quarter of 2019
, a decrease of
$42 million
, or
23%
compared to the same period in 2018 and consisted of the following:
|
|
|
|
Percent (Decrease)/Increase
|
Volume
|
(23.0)%
|
Foreign exchange
|
(3.0)
|
Price
|
3.0
|
Total
|
(23.0)%
|
For the
second quarter of 2019
, volume was down 23.0 percentage points compared to the same period in 2018 due to customer disruption as a result of actions taken to reduce the branch footprint and sales coverage optimization activities.
The gross profit margin decreased
1.4
percentage points in the
second quarter of 2019
versus the
second quarter of 2018
, primarily due to negative price-cost spread as a result of a more competitive pricing dynamic in the region.
SG&A decreased
42%
in the
second quarter of 2019
compared to the
second quarter of 2018
. Excluding restructuring costs in both periods (as noted in the table above and Note 7 to the Financial Statements), SG&A would have decreased
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
26%. This decrease was primarily due to 2018 cost take-out actions and lower variable expense due to lower sales volume.
Operating earnings were
$1 million
for the
second quarter of 2019
compared to operating losses of
$14 million
in the
second quarter of 2018
. Excluding restructuring, net in both periods as noted in the table above, operating losses would have been $3 million compared to $2 million in the prior period primarily due to lower sales volume.
Other businesses
Net sales were $
663 million
for the
second quarter of 2019
, an increase of
$41 million
, or
6.5%
when compared to the same period in 2018 and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Price/volume
|
9.5%
|
Foreign exchange
|
(3.0)
|
Total
|
6.5%
|
The increase in net sales was primarily due to customer acquisition growth from the endless assortment businesses, partially offset by foreign exchange headwinds from the yen, euro and pound sterling.
Operating earnings of $
27 million
for the
second quarter of 2019
were down
$14 million
compared to operating earnings of $41 million the
second quarter of 2018
. This decrease is primarily due to the endless assortment businesses' investments to drive long-term growth and performance in the high-touch solutions businesses.
Matters Affecting Comparability
There were 127 sales days in the
six months ended June 30, 2019
and 128 sales days in the six months ended June 30, 2018.
Results of Operations –
Six Months Ended June 30, 2019
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
Percent Increase/(Decrease)
|
|
As a Percent of Net Sales
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
$
|
5,692
|
|
|
$
|
5,627
|
|
1
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
3,476
|
|
|
3,424
|
|
2
|
|
|
61.1
|
|
|
60.9
|
|
Gross profit
|
2,216
|
|
|
2,203
|
|
1
|
|
|
38.9
|
|
|
39.1
|
|
Selling, general and administrative expenses
|
1,473
|
|
|
1,524
|
|
(3
|
)
|
|
25.9
|
|
|
27.1
|
|
Operating earnings
|
743
|
|
|
679
|
|
9
|
|
|
13.1
|
|
|
12.1
|
|
Other expense, net
|
26
|
|
|
48
|
|
(46
|
)
|
|
0.5
|
|
|
0.9
|
|
Income taxes
|
183
|
|
|
142
|
|
29
|
|
|
3.2
|
|
|
2.5
|
|
Net earnings
|
534
|
|
|
489
|
|
|
|
|
|
|
Noncontrolling interest
|
21
|
|
|
20
|
|
5
|
|
|
0.4
|
|
|
0.4
|
|
Net earnings attributable to W.W. Grainger, Inc.
|
$
|
513
|
|
|
$
|
469
|
|
10
|
%
|
|
9.0
|
%
|
|
8.3
|
%
|
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Grainger’s net sales of
$5,692 million
for the six months ended June 30, 2019 increased
$65 million
, or
1%
compared to the same period in
2018
. On a daily basis, net sales increased 2.0% and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Volume
|
2.0%
|
Price
|
1.0
|
Foreign exchange
|
(1.0)
|
Total
|
2.0%
|
The increase in net sales was primarily driven by volume increases in the U.S. business due to market share gain and an improved demand environment and continued double digit growth in the endless assortments businesses, offset by lower sales in the Canada business and other businesses. See the
Segment Analysis
below for further details related to segment revenue.
Gross profit of
$2,216 million
for the six months ended June 30, 2019 increased
$13 million
, or
1%
compared to the same period in 2018. The gross profit margin of
38.9%
decreased
0.2
percentage point when compared to the same period in 2018.
The table below reconciles reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. GAAP to adjusted SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc., which are all considered non-GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders 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. All tables below are in millions of dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
%
|
SG&A reported
|
$
|
1,473
|
|
|
$
|
1,524
|
|
|
(3
|
)%
|
Restructuring, net of branch gains (U.S.)
|
2
|
|
|
1
|
|
|
|
Restructuring (Canada)
|
(3
|
)
|
|
23
|
|
|
|
Restructuring (Other businesses)
|
—
|
|
|
3
|
|
|
|
Restructuring (Unallocated expense)
|
(1
|
)
|
|
(5
|
)
|
|
|
Total restructuring, net
|
(2
|
)
|
|
22
|
|
|
|
SG&A adjusted
|
$
|
1,475
|
|
|
$
|
1,502
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%
|
Operating earnings reported
|
$
|
743
|
|
|
$
|
679
|
|
|
9
|
%
|
Total restructuring, net
|
(1
|
)
|
|
23
|
|
|
|
Operating earnings adjusted
|
$
|
742
|
|
|
$
|
702
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%
|
Net earnings attributable to W.W. Grainger, Inc. reported
|
$
|
513
|
|
|
$
|
469
|
|
|
9
|
%
|
Total restructuring, net
|
(1
|
)
|
|
23
|
|
|
|
Tax effect (1)
|
1
|
|
|
(5
|
)
|
|
|
Total restructuring, net and tax
|
—
|
|
|
18
|
|
|
|
Net earnings attributable to W.W. Grainger, Inc. adjusted
|
$
|
513
|
|
|
$
|
487
|
|
|
5
|
%
|
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SG&A of
$1,473 million
for the six months ended June 30, 2019 decreased
$51 million
, or
3%
from
$1,524 million
for the six months ended June 30, 2018. Excluding restructuring, net in both periods as noted in the table above, SG&A decreased $27 million, or 2% primarily due to 2018 cost take-out actions in Canada and lower variable compensation in the U.S. business and at the corporate level.
Operating earnings for the six months ended June 30, 2019 were
$743 million
, an increase of
$64 million
, or
9%
compared to the same period in 2018. Excluding restructuring, net in both periods as noted in the table above, operating earnings increased $40 million or 6%, driven primarily by cost take-out actions in the Canadian business and higher gross profit and lower variable compensation in the U.S. business and at a corporate level.
Other expense, net was
$26 million
for the six months ended June 30, 2019, a decrease of $22 million, or
46%
compared to the six months ended June 30, 2018. The decrease was primarily due to lower losses from the Company's clean energy investments which were concluded in the second half of 2018.
Income taxes of
$183 million
for the six months ended June 30, 2019
increased
$41 million
, or
29%
compared with
$142 million
for the comparable 2018 period. Grainger's effective tax rates were 25.5% and 22.5% for the six months ended June 30, 2019 and 2018, respectively. The increase was primarily driven by lower tax benefit from stock-based compensation and the absence of the Company's clean energy tax benefits in 2019 as the Company concluded its investments in 2018.
Net earnings attributable to W.W. Grainger, Inc. for the six months ended June 30, 2019
increased
$44 million
or
10%
to
$513 million
from
$469 million
for the six months ended June 30, 2018. Excluding restructuring, net from both periods in the table above, net earnings increased $26 million, or 5%. The increase in net earnings primarily resulted from lower SG&A and lower other expense, net.
Diluted earnings per share of
$9.14
in the six months ended June 30, 2019
was up
11%
versus the
$8.23
for the same period in 2018, due to higher earnings and lower average shares outstanding. Excluding restructuring, net from both periods in the table above, diluted earnings per share would have been $9.14 compared to $8.55 in 2018, an increase of 7%.
Segment Analysis
The following comments at the segment and other businesses level include external and intersegment net sales and operating earnings. See Note 9 to the Financial Statements.
United States
Net sales were
$4,371 million
for the six months ended June 30, 2019, an increase of
$88 million
, or
2%
, compared to the same period in 2018. On a daily basis, net sales increased 3.0% and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Volume
|
2.0%
|
Price
|
1.0
|
Intercompany sales to Zoro (included in other businesses)
|
0.5
|
Other
|
(0.5)
|
Total
|
3.0%
|
Sales to customers in the commercial, retail and government end markets increased mid-single digits and contractors, light manufacturing and heavy manufacturing end markets increased low-single digits. See Note 3 to the Financial Statements for information related to disaggregated revenue. Overall, revenue increases were primarily driven by market share gains and pricing.
The gross profit margin increased
0.2
percentage point compared to the same period in 2018.
SG&A for the six months ended June 30, 2019 increased $7 million, or
1%
compared to the same period in 2018. The increase was primarily driven by digital marketing, partially offset by lower variable compensation versus the prior year.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating earnings of
$745 million
for the six months ended June 30, 2019
increased
$39 million
,
or
5%
from
$706 million
for the six months ended June 30, 2018. This increase was driven primarily by higher sales, higher gross profit dollars and improved SG&A leverage.
Canada
Net sales were
$271 million
for the six months ended June 30, 2019, a decrease of
$88 million
, or
24%
compared to the same period in 2018. On a daily basis, net sales decreased 24.0% and consisting of the following:
|
|
|
|
Percent (Decrease)/Increase
|
Volume
|
(24.0)%
|
Foreign exchange
|
(3.5)
|
Price
|
3.5
|
Total
|
(24.0)%
|
For the six months ended June 30, 2019, volume was down 24.0 percentage points compared to the same period in 2018 due to customer disruption as a result of actions taken to reduce the branch footprint and sales coverage optimization activities.
The gross profit margin decreased
1.7
percentage points in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to negative price-cost spread as a result of a more competitive pricing dynamic in the region.
SG&A decreased
$64 million
, or
42%
in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Excluding restructuring, net in both periods (as noted in the table above and Note 7 to the Financial Statements), SG&A would have decreased $38 million, or 29% compared to the prior period. This decrease was primarily due to cost reduction actions and lower sales volume.
Operating losses were
$4 million
for the six months ended June 30, 2019 compared to losses of
$34 million
in the six months ended June 30, 2018. Excluding restructuring, net in both periods (as noted in the table above and Note 7 to the Financial Statements), operating losses would have been $6 million compared to $11 million in the prior period primarily due to lower sales volume, partially offset by lower SG&A.
Other businesses
Net sales for other businesses were
$1,296 million
for the six months ended June 30, 2019 an increase of
$86 million
, or
7%
compared to the same period in 2018. On a daily basis, net sales increased 8.0% and consisted of the following:
|
|
|
|
Percent Increase/(Decrease)
|
Price/volume
|
10.5%
|
Foreign exchange
|
(2.5)
|
Total
|
8.0%
|
The net sales increase was primarily due to customer acquisition growth from the endless assortment businesses, partially offset by foreign exchange headwinds from the yen, euro and pound sterling.
Operating earnings of
$57 million
for the six months ended June 30, 2019 decreased
$20 million
from operating earnings of
$77 million
in the comparable period from the prior year. This decrease is primarily due to the endless assortment businesses' investments to drive long-term growth and performance in the high-touch solutions businesses.
Financial Condition
Cash Flow
Net cash provided by operating activities was $
450 million
and $
395 million
for the
six months ended June 30, 2019
and 2018, respectively. The increase in cash provided by operating activities is primarily the result of higher net earnings
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
and favorable changes in working capital, partially offset by higher income tax payments and higher net payments related to employee variable compensation and benefits paid under annual incentive plans.
Net cash used in investing activities was $
91 million
and $
74 million
for the
six months ended June 30, 2019
and 2018, respectively. This increase in net cash used in investing activities was primarily driven by higher additions to property, buildings and equipment and lower proceeds from the sales of assets when compared to the prior year.
Net cash used in financing activities was $
586 million
and $
331 million
in the
six months ended June 30, 2019
and 2018, respectively. The increase in net cash used in financing activities was primarily driven by higher stock repurchases in 2019 compared to 2018.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures. Grainger's working capital is not impacted by significant seasonality trends throughout the year.
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 at
June 30, 2019
, was $
2,109 million
,
an increase
of $
211 million
when compared to $
1,898 million
at December 31, 2018. The increase was primarily driven by an increase in accounts receivable and a decrease in accrued contributions to employees profit-sharing plans due to the annual cash contribution. At these dates, the ratio of current assets to current liabilities was
2.7
and
2.4
, respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) and lease liabilities as a percent of total capitalization was
53.3%
at
June 30, 2019
, and
51.5%
at
December 31, 2018
.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.
Accounting estimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that have a material impact on the presentation of Grainger’s financial statements and accompanying notes. For a description of Grainger’s critical accounting estimates, see Grainger's Annual Report on Form 10-K for the fiscal year ended December 31,
2018
.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and with the Company's independent registered public accounting firm.
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: higher product costs or other expenses; a major loss of customers; loss or disruption of sources of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
against infringement claims; the implementation, timing and results of the Company’s strategic pricing initiatives and other 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, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry, economic, market or political conditions; general global economic conditions; currency exchange rate fluctuations; market volatility, including 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; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the Company’s ability to operate, integrate and leverage acquired businesses; changes in effective tax rates and other factors identified under Item 1A: Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as updated 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.
W.W. Grainger, Inc. and Subsidiaries
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
.
|
|
Item 4.
|
Controls and Procedures
|
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in Grainger's internal control over financial reporting for the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.