W.W. Grainger, Inc. — 2020 Form 10-K Summary
Business context and reporting period
Grainger distributes maintenance, repair and operating (MRO) products and services, primarily in North America, Japan and Europe, through high-touch and online “endless assortment” businesses. This 10-K covers the fiscal year ended December 31, 2020; it also reports unaudited fourth-quarter results. The reported segments for 2020 were the U.S. and Canada. Effective January 1, 2021, the company reorganized reporting into High Touch – North America and Endless Assortment.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $11.797 billion | $11.486 billion | +2.7% |
| Gross profit / margin | $4.238 billion / 35.9% | $4.397 billion / 38.3% | Profit down 3.6%; margin down 2.4 percentage points |
| Operating earnings / margin | $1.019 billion / 8.6% | $1.262 billion / 11.0% | Down 19.3% |
| Net earnings attributable to Grainger | $695 million | $849 million | Down 18.1% |
| Diluted EPS | $12.82 | $15.32 | Down 16% |
| Operating cash flow | $1.123 billion | $1.042 billion | Up $81 million |
Sales growth was driven largely by elevated COVID-19-related product demand, especially from U.S. government and healthcare customers, partly offset by weaker non-pandemic sales, international high-touch declines and divestitures. Lower-margin pandemic products and customer mix, inventory write-downs, and faster growth in lower-margin endless-assortment businesses pressured gross margin.
Fourth-quarter 2020 net sales were $2.941 billion versus $2.847 billion in fourth-quarter 2019. Operating earnings were $275 million versus $181 million, and net earnings attributable to Grainger were $168 million versus $103 million. Quarterly results include unusual items and should not be viewed as a standalone trend.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $585 million at year-end, compared with $360 million a year earlier. Management reported approximately $1.8 billion of available liquidity, including cash.
- Operating cash flow was $1.123 billion; capital expenditures were $197 million. Cash dividends paid were $338 million, and treasury-stock purchases were $601 million.
- Long-term debt, less current maturities, was $2.389 billion; contractual debt obligations totaled $2.4 billion. Total debt, defined by the company to include interest-bearing debt and lease liabilities, was 55.6% of total capitalization, up from 54.3%.
- The company issued $500 million of 1.85% senior notes due 2025 and used proceeds partly to repay foreign-currency term loans and a revolving facility. It reported no outstanding commercial paper or revolver borrowings at year-end and compliance with debt covenants.
- The current ratio was 2.6, unchanged from 2019. The company expects to continue dividends and share repurchases at the Board’s discretion.
Material changes, outlook and risks
- Reported 2020 earnings included approximately $182 million of after-tax net charges, mainly associated with Fabory impairments and divestiture, the Zoro Tools Europe wind-down, restructuring, and a gain on the China divestiture. Reported operating earnings also included $308 million of restructuring, impairment and divestiture items before tax; adjusted measures are non-GAAP.
- Grainger divested Fabory in June and its China business in August 2020, and began winding down Zoro Tools Europe in November. It cited strategic focus on broad-line MRO distribution in key markets.
- Management’s 2021 priorities emphasize market-share growth, customer service and experience, product assortment and customer acquisition, cost optimization, and investment in digital capabilities and supply chain. No specific 2021 sales or earnings guidance is provided in the filing. Planned 2021 capital spending is approximately $250 million, expected to be funded primarily from operating cash flow.
- Management said pandemic uncertainty would continue into 2021 and prioritized liquidity, employee safety and customer service. The company expects pandemic-related margin headwinds to ease as demand and product mix normalize, but timing is uncertain.
- Key risks include continuing COVID-19 effects on customer demand and supplier availability, product and freight cost inflation, price competition and margin pressure, supply-chain or facility disruptions, cybersecurity and IT risks, foreign-exchange exposure, regulatory and tax matters, and approximately $2.6 billion of consolidated indebtedness as described in the risk factors.
- Legal matters include product-liability litigation related to the 2019 KMCO refinery explosion and asbestos- or silica-related claims. The company said outcomes could not be predicted and did not expect resolution of the disclosed matters to materially adversely affect consolidated financial position or results.
- A change in depreciation methods and estimated useful lives reduced 2020 depreciation expense by $34 million. Management assessed internal control over financial reporting as effective, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of sales growth and subsequent comparisons depend on pandemic-related demand, and whether product/customer mix and gross margins normalize as management expects.
- The performance and profitability of the new Endless Assortment segment, including the effects of the 2021 segment reorganization and forthcoming restated segment information.
- The sustainability of operating cash flow and shareholder returns alongside the planned increase in 2021 capital expenditures and debt obligations.
- The assumptions supporting the Canadian reporting unit’s goodwill valuation: the filing says a roughly 3% higher pre-tax discount rate or 1.5% lower long-term revenue growth assumption could reduce estimated value to carrying value.
- Developments in KMCO-related litigation, tax uncertainties, supply-chain risks and cybersecurity exposure; the filing does not provide a clear estimate of potential losses for these matters.