W.W. Grainger, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Grainger distributes maintenance, repair and operating products and services, primarily in North America, Japan and Europe. The filing discusses the substantial and uncertain effects of the COVID-19 pandemic.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2.837B | $2.893B | $5.838B | $5.692B |
| Gross profit / margin | $1.016B / 35.8% | $1.121B / 38.7% | $2.137B / 36.6% | $2.216B / 38.9% |
| Operating earnings | $205M | $380M | $364M | $743M |
| Net earnings attributable to Grainger | $114M | $260M | $287M | $513M |
| Diluted EPS | $2.10 | $4.67 | $5.29 | $9.14 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $476M | $450M |
Q2 reported operating margin was 7.2% versus 13.1%; attributable net margin was 4.0% versus 9.0%. Q2 sales declined 1.9% year over year. First-half sales rose 2.6% (1.8% on a per-sales-day basis), while attributable earnings declined 44%.
Liquidity, debt and capital
- Cash and cash equivalents were $1.603B at June 30, 2020, up from $360M at year-end 2019. Management reported approximately $1.9B of available liquidity, including cash.
- Long-term debt, less current maturities, was $3.301B; short-term debt was $15M and current maturities were $21M. Total debt, defined by the company to include lease liabilities, was 62.3% of total capitalization, up from 54.3% at year-end.
- The company issued $500M of 1.85% senior notes and drew $1B on its new $1.25B revolving credit facility during the first half. Debt covenants were met; the instruments have no financial performance covenants.
- Cash dividends were $1.44 per share in Q2. Grainger paused share repurchases as a capital-conservation measure.
Material changes and unusual items
- Grainger divested European business Fabory on June 30, recognizing an approximately $109M net loss in Q2 SG&A. It recorded $177M of impairment charges in the first half, including $58M against Fabory goodwill and tradenames and charges against other Fabory long-lived assets.
- Excluding restructuring, impairment and divestiture items, adjusted operating earnings were $315M in Q2, down 16%, and $658M for the first half, down 11%. Adjusted attributable earnings were $204M in Q2, down 21%, and $434M for the first half, down 15%. These are company-defined non-GAAP measures.
- Q2 gross margin fell 3.0 percentage points, primarily from lower-margin pandemic-related product sales and mix toward the lower-margin endless-assortment businesses. Lower sales and gross profit drove the decline in adjusted operating earnings.
- First-half SG&A included the Fabory-related charges; excluding the specified items, SG&A was approximately flat year over year. Reported first-half effective tax rate was 3.9%, affected by Fabory tax impacts.
- First-half cash from operations was $476M; investing used $82M and financing provided $864M. Financing inflows included the revolver draw and notes issuance.
Business trends, outlook and risks
- COVID-19 increased demand for PPE and other pandemic-related products, particularly from government, healthcare and essential customers, while demand from non-essential and disrupted industries weakened. Pandemic-product mix pressured margins; earlier supply shortages eased during Q2.
- U.S. Q2 segment sales declined 2.4%; Canada sales fell 21.7%, with market-share declines and oil-sector exposure among the pressures. Other-businesses sales grew 2.7%, led by endless-assortment businesses.
- Management said it could not reliably predict the continuing pandemic impact and provided no specific financial guidance in this filing. It cited cash, liquidity and contingency plans as resources to manage uncertainty, assuming operations are not significantly impaired for a prolonged period.
- Canada goodwill testing found no impairment, but estimated enterprise value exceeded carrying value by just over 25%; the filing says a roughly 3% increase in the pre-tax discount rate or 1.5% reduction in long-term revenue growth assumptions could eliminate that cushion.
- Risks include pandemic duration and economic recovery, customer and supplier solvency, product availability and mix, cybersecurity exposure from remote work, oil prices and Canadian demand, and currency, interest-rate and litigation exposures. Grainger said the disclosed legal matters were not expected to have a material adverse effect; the KMCO explosion-related claims were at an early stage and were being contested.
Important facts for investors to verify
- Whether pandemic-related demand and weaker non-pandemic customer activity persist, and how sales mix affects gross margin.
- Fabory divestiture and impairment effects, including the tax treatment and any further restructuring or portfolio charges.
- Liquidity and debt levels, including the revolver draw, repayment plans, and the effect of debt and lease liabilities on capitalization.
- Canada business performance, oil-sector exposure and goodwill valuation sensitivity.
- Customer credit quality, supply availability, and developments in the disclosed litigation and other contingencies.