W.W. Grainger, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Grainger is a business-to-business distributor of maintenance, repair and operating products and services, with operations primarily in North America, Japan and the U.K.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $3.647 billion | $3.084 billion | +18.2% |
| Gross profit / margin | $1.383 billion / 37.9% | $1.093 billion / 35.5% | +26.5%; margin +2.5 pts |
| Operating earnings / margin | $534 million / 14.6% | $358 million / 11.6% | +49.2% |
| Net earnings attributable to Grainger | $366 million | $238 million | +53.9% |
| Diluted EPS | $7.07 | $4.48 | +57.8% |
| Operating cash flow | $343 million | $294 million | +$49 million |
Sales grew 16.4% on a daily basis: volume and mix contributed 11.5%, price and customer mix 6.4%, and foreign exchange reduced growth by 1.5%. There were 64 sales days versus 63 in Q1 2021. Gross-margin improvement reflected favorable product and customer mix and comparison with pandemic-related inventory adjustments in the prior-year quarter. SG&A increased 15.4%, mainly from higher marketing, payroll and benefits costs. The effective tax rate was 25.5%, versus 25.8%.
Segments
- High-Touch Solutions N.A.: Sales of $2.878 billion, up 20.1%; operating earnings of $481 million, up 57.3%. Daily sales growth was 18.2%. Gross margin rose 3.1 points to 40.4%, while price realization was largely offset by product-cost inflation and higher transportation costs.
- Endless Assortment: Sales of $697 million, up 12.1%; operating earnings were $55 million, essentially unchanged. Daily sales growth was 10.4%; reported sales growth was affected by a 7.0% unfavorable foreign-exchange impact, primarily yen. Higher occupancy, marketing, payroll and benefits expenses weighed on earnings.
- Other: Sales of $72 million, up 9.5%; operating loss was $2 million, versus a $3 million loss.
Liquidity, cash flow and capital
- Cash and equivalents were $364 million at March 31, 2022, versus $241 million at year-end. Management reported approximately $1.6 billion of available liquidity and believes resources are sufficient for needs over the next 12 months.
- Operating cash flow was $343 million. Investing cash outflow was $57 million, including $57 million of additions to property, equipment and intangibles. Financing cash outflow was $159 million, including $79 million of treasury-stock purchases and $84 million of dividends.
- Working capital was $2.550 billion, up $95 million from year-end; the current ratio was 2.5, versus 2.7. Receivables and inventory increased with sales growth, partly offset by higher payables.
- Long-term debt was $2.338 billion. Debt including lease liabilities as a percentage of total capitalization was 53.6%, down from 55.4% at year-end. The company reported investment-grade ratings from Moody’s and S&P.
- The company paid a $1.62-per-share quarterly dividend and declared a subsequent $1.72-per-share dividend, payable June 1, 2022. It repurchased approximately 151,992 shares during the quarter.
Outlook, risks and notable matters
The filing provides no specific earnings or revenue guidance. Management plans continued business investment and shareholder returns, funded primarily by operating cash flow. It said inflation and supply-chain pressures persisted, including product, labor, transportation and fuel costs; strategies mitigated some cost pressures while maintaining price competitiveness. The company also cited continuing COVID-19-related supply-chain, transportation, raw-material and labor disruptions. Russia’s invasion of Ukraine had limited direct exposure for Grainger, but broader effects on inflation, fuel prices, supply chains and the global economy remained uncertain.
Key risks include inability to pass cost increases through to customers, supply-chain and delivery disruption, changing demand and inventory availability, currency fluctuations, cybersecurity incidents, and legal or regulatory proceedings. The filing describes product-liability litigation related to the 2019 KMCO refinery explosion, including claims involving approximately 186 plaintiffs, as well as property-damage claims. Potential losses are not quantified; Grainger intends to contest the matters and believes their resolution will not materially adversely affect consolidated financial condition or results of operations. The company also faces asbestos and silica litigation and other proceedings.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company adopted a government-assistance disclosure standard; it had no material financial-statement impact.
Important facts for investors to verify
- Whether sales growth, pricing and favorable mix continue to offset product, labor, freight and other inflationary costs.
- Whether working-capital investment, especially receivables and inventory, affects cash conversion in subsequent quarters.
- How foreign-exchange movements, particularly the Japanese yen, affect Endless Assortment results.
- Developments in supply availability, delivery performance, COVID-19 disruptions and geopolitical impacts.
- Updates on KMCO-related litigation, other contingencies and any potential financial exposure; the filing does not provide a clear loss estimate.
- Progress on liquidity, debt and shareholder returns, including the declared dividend and share repurchases.