W.W. Grainger, Inc. — Q3 2022 Form 10-Q
Business and period: Grainger distributes maintenance, repair and operating products and services, primarily in North America, Japan and the U.K. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3.942 billion | $3.372 billion | $11.426 billion | $9.663 billion |
| Gross profit / margin | $1.519 billion / 38.5% | $1.250 billion / 37.1% | $4.343 billion / 38.0% | $3.467 billion / 35.9% |
| Operating earnings / margin | $603 million / 15.3% | $438 million / 13.0% | $1.671 billion / 14.6% | $1.130 billion / 11.7% |
| Net earnings attributable to Grainger | $426 million | $297 million | $1.163 billion | $760 million |
| Diluted EPS | $8.27 | $5.65 | $22.52 | $14.40 |
- Growth and margins: Q3 sales rose 16.9%, operating earnings 37.6%, and diluted EPS 46.4%. For the first nine months, sales rose 18.2%, operating earnings 47.9%, and diluted EPS 56.4%. Gross margin expanded 1.4 percentage points in Q3 and 2.1 points year to date.
- Segments, Q3: High-Touch Solutions N.A. sales increased 19.4% to $3.180 billion and operating earnings rose 42.1% to $550 million. Endless Assortment sales increased 8.6% to $701 million, but operating earnings fell 3.0% to $58 million. Its reported sales growth was 23.7% before a 15.1% adverse foreign-exchange impact.
- Cash flow, nine months: Operating cash flow was $973 million, versus $724 million; capital additions were $208 million, versus $197 million. Cash at period-end was $315 million. Operating cash flow benefited from higher earnings, partly offset by working-capital changes and higher tax payments. Receivables and inventory used $487 million and $253 million of cash, respectively.
- Liquidity and debt: Working capital was $2.726 billion; the current ratio was 2.6. Grainger reported approximately $1.6 billion of available liquidity and said current resources should meet needs for the next 12 months. Long-term debt was $2.294 billion, with $16 million of current maturities; the company’s debt ratio, including lease liabilities as a percentage of total capitalization, was 51.4%, down from 56.2% at year-end 2021.
- Capital returns: Cash dividends paid in the first nine months totaled $285 million; treasury-stock purchases totaled $383 million. The board declared a $1.72-per-share quarterly dividend payable December 1, 2022.
Material changes and management commentary
- High-Touch growth reflected Q3 price, including customer mix, of 12.1% and volume, including product mix, of 7.5%. Management cited improved product mix and favorable price-cost timing for its margin improvement.
- Endless Assortment benefited from customer acquisition, repeat business and enterprise-customer growth, but foreign-exchange headwinds and higher payroll, marketing and occupancy costs constrained earnings. SG&A grew faster than sales in that segment.
- Management cited inflation in product, labor and transportation markets and said it was using strategies to mitigate higher costs while remaining price-competitive. It noted rising interest rates, currency fluctuations and recession concerns, while stating that its broad customer base and the nondiscretionary nature of MRO products have historically supported performance in recessions.
- Grainger reported limited direct exposure to Russia and Ukraine and did not expect significant direct business disruption, but said broader economic, inflation, supply-chain and fuel-price effects remained uncertain. The company did not provide a quantified earnings or sales forecast in the supplied filing text.
Risks, contingencies and unusual items
- Key risks include inflation and inability to pass through higher costs, supply-chain and transportation disruptions, product shortages, labor constraints, economic weakness, foreign-exchange movements, cybersecurity incidents, and COVID-19-related disruption.
- Grainger is a defendant in litigation related to the 2019 KMCO refinery explosion. Claims include approximately 186 plaintiffs in personal-injury lawsuits; the first six-plaintiff bellwether trial was scheduled for mid-January 2023. Related property-damage and insurance-reimbursement suits also seek unspecified damages. The company intends to contest the claims and said it could not predict outcomes, while believing resolution would not materially adversely affect consolidated financial condition or results.
- The filing also describes asbestos- and silica-related cases and other routine legal and regulatory matters. The company stated its view that these matters would not have a material adverse effect, but outcomes remain uncertain.
- Grainger amended its revolving credit agreement to replace LIBOR benchmarks with alternative rates. It adopted reference-rate reform guidance prospectively; the filing says adoption did not materially affect the financial statements. The company did not anticipate a material financial-statement impact from the Inflation Reduction Act based on its current analysis.
- Foreign-currency translation reduced other comprehensive earnings by $71 million in Q3 and $180 million year to date. No goodwill impairment indicators were identified during the periods.
Important facts for investors to verify
- Whether sales and gross-margin gains persist as pricing, product costs, mix and inflation change, and how much of growth reflects price versus volume.
- Whether Endless Assortment can convert reported sales growth into operating-earnings growth amid SG&A growth and yen weakness.
- Working-capital needs and cash conversion, particularly the growth in receivables and inventory.
- Developments and potential exposure in the KMCO litigation, including trial outcomes and insurance coverage.
- The impact of foreign exchange, interest rates and macroeconomic or supply-chain conditions on future results; the filing provides no quantified guidance.