W.W. Grainger, Inc. — Q2 2021 Form 10-Q
Business context and period. Grainger distributes maintenance, repair and operating (MRO) products and services, primarily in North America, Japan and the U.K. This unaudited filing covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Effective January 1, 2021, the company reports High-Touch Solutions N.A. and Endless Assortment as its two segments.
Financial performance
- Q2 revenue: $3.207 billion, up 13.1% year over year. Net sales growth reflected higher volume, improving non-pandemic demand and continued growth in online businesses.
- Q2 earnings and margins: Gross profit was $1.124 billion; gross margin was 35.0%, down 0.8 percentage point. Operating earnings were $334 million, or 10.4% of sales, versus $205 million and 7.2%. Net earnings attributable to Grainger were $225 million versus $114 million; diluted EPS was $4.27 versus $2.10.
- First-half results: Revenue was $6.291 billion, up 7.8% (up 8.6% per sales day). Gross profit was $2.217 billion and gross margin was 35.2%, down 1.4 percentage points. Operating earnings were $692 million versus $364 million; Grainger-attributable net earnings were $463 million versus $287 million; diluted EPS was $8.76 versus $5.29.
- Cash flow and investment: First-half operating cash flow was $563 million versus $476 million. Investing used $130 million, including $147 million of property, equipment and intangible additions. Financing used $463 million, including $283 million of treasury-stock purchases and $176 million of dividends. Cash declined to $547 million from $585 million at year-end 2020.
- Debt and liquidity: Long-term debt, net of issuance costs and discounts, was $2.375 billion; no short-term debt was outstanding. Available liquidity was approximately $1.8 billion. The current ratio was 2.4 versus 2.6 at year-end, and debt plus lease liabilities as a percentage of total capitalization was 54.9% versus 55.6%.
Comparisons, segments and notable items
- High-Touch Solutions N.A.: Q2 sales rose 13.7% to $2.498 billion, while operating earnings slipped 1% to $282 million. First-half sales rose 7.5% to $4.895 billion, while operating earnings declined 2% to $588 million. Management cited higher wages, variable compensation and marketing costs, and pandemic-product inventory adjustments that pressured margins.
- Endless Assortment: Q2 sales grew 23.0% to $645 million and operating earnings rose 37% to $58 million. First-half sales increased 24.2% to $1.267 billion and operating earnings rose 47% to $113 million, driven mainly by customer acquisition.
- Reported earnings comparisons are affected by 2020 items: 2020 included $177 million of Fabory impairment charges and a $109 million Fabory divestiture loss, among other restructuring items. On the company’s non-GAAP adjusted basis, Q2 operating earnings rose 6% and first-half operating earnings rose 5%; adjusted first-half Grainger-attributable net earnings increased 7%. These are company-defined measures and may not be comparable across issuers.
- First-half 2021 effective tax rate was 24.7%, compared with 3.9% in 2020, primarily because the prior year included a tax benefit related to Fabory. The company divested Fabory in June 2020 and its China business in August 2020; Zoro Tools Europe liquidation began in November 2020.
- The board declared a quarterly dividend of $1.62 per share on July 28, payable September 1, 2021. A new authorization announced April 28 permits repurchase of up to 5 million shares, replacing the prior program.
Outlook, risks and contingencies
The filing gives no specific earnings, revenue or margin guidance. Management said available cash, marketable securities and revolving-credit availability should cover liquidity needs for the next 12 months; it expects to invest in the business and return excess cash through dividends and repurchases. Management described recovering demand alongside strained global supply chains, raw-material and labor availability, and transportation efficiency. It noted that the duration and effects of COVID-19 and its variants remain uncertain. Other identified risks include customer and product mix, cost and pricing pressures, supply disruption, cybersecurity and IT risks, foreign exchange and interest rates, and litigation and regulatory matters.
Legal matters include product-liability suits related to the 2019 KMCO refinery explosion. Grainger reported 16 lawsuits involving approximately 186 plaintiffs, along with related claims, and said the matters were at an early stage and would be contested. The company could not predict their outcomes but did not expect the ultimate resolution of disclosed proceedings, individually or in aggregate, to materially adversely affect consolidated financial condition or results.
Important facts for investors to verify
- Whether sales growth and online customer acquisition persist, and how demand normalizes between pandemic-related and other products.
- Whether gross-margin pressure from inventory adjustments and supply-chain costs continues, particularly in High-Touch Solutions N.A.
- The underlying trend after adjusting for 2020 Fabory impairment, divestiture and tax effects; review the company’s non-GAAP reconciliations.
- How capital expenditures, share repurchases and dividends affect cash, liquidity and leverage.
- Developments in the KMCO litigation and the operational, economic and cybersecurity risks associated with COVID-19 and supply constraints.