W.W. Grainger, Inc. — Q3 2020 Form 10-Q
Business context and period. Grainger distributes maintenance, repair and operating products and services. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. The U.S. and Canada are reportable segments; other businesses include Zoro, MonotaRO and smaller international operations. Grainger divested Fabory on June 30 and its China business on August 21, 2020.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3.018 billion | $2.947 billion | $8.856 billion | $8.639 billion |
| Gross profit / margin | $1.074 billion / 35.6% | $1.099 billion / 37.3% | $3.211 billion / 36.3% | $3.315 billion / 38.4% |
| Operating earnings | $380 million | $338 million | $744 million | $1.081 billion |
| Net earnings attributable to Grainger | $240 million | $233 million | $527 million | $746 million |
| Diluted EPS | $4.41 | $4.25 | $9.70 | $13.40 |
| Cash dividends per share | $1.53 | $1.44 | $4.41 | $4.24 |
- Q3 sales rose 2.4% year over year; operating earnings increased 12% and diluted EPS increased 4%. Gross margin fell 1.7 percentage points. Management attributed sales growth largely to pandemic-related product demand, while lower-margin product and business mix pressured gross profit.
- For the first nine months, sales increased 2.5%, but operating earnings declined 31% and diluted EPS declined 28%. Gross margin contracted 2.1 percentage points. Excluding specified restructuring, impairment, divestiture and tax items, adjusted operating earnings declined 5% and adjusted net earnings attributable to Grainger declined 9%.
- Cash from operations was $787 million for the nine months, versus $770 million in 2019. Investing activities used $132 million; financing activities used $147 million. Ending cash was $859 million, up from $360 million at December 31, 2019.
- At September 30, current assets were $4.273 billion and current liabilities $1.441 billion; the current ratio was 2.7. Management reported approximately $2.1 billion of available liquidity, including cash.
- Balance-sheet debt was approximately $2.4 billion, compared with approximately $2.2 billion at year-end 2019. Debt, including lease liabilities, was 52.5% of total capitalization, versus 54.3%. The company reported compliance with debt covenants. It issued $500 million of 1.85% notes, drew approximately $1 billion on its revolver in March as a precaution, and repaid that draw in Q3.
Material changes, outlook and risks
- COVID-19 effects: Demand for PPE, safety and other pandemic-related products was strong, especially from government, healthcare and essential customers; demand from many non-essential or disrupted industries remained depressed. Grainger reported no material supply disruption and said its major facilities remained operational. Lower-margin pandemic sales and growth in lower-margin endless-assortment businesses weighed on margins.
- Divestitures and unusual items: Grainger recorded a net Fabory divestiture loss of approximately $109 million and a $5 million gain on the China divestiture. It also recorded $177 million of impairment charges, primarily related to Fabory. These and other specified items materially affected reported year-to-date results. Fabory and China results are included through their respective divestiture dates.
- Segment trends: Q3 U.S. segment sales increased 3.1%, while Canada sales declined 9.9%. Canada faces continued pandemic-related weakness, market-share declines and oil-market exposure; more than one-fifth of its sales are tied to oil or ancillary sectors. Other businesses’ sales increased 1.9%, with endless-assortment growth offset by international weakness and divestitures.
- Outlook: No quantified earnings or sales guidance is provided. Management said pandemic impacts remain difficult to predict and that it believes liquidity, financial resources and contingency plans are sufficient for anticipated impacts, while noting this depends on operations not being significantly affected for a prolonged period. The company deferred certain capital projects and paused share repurchases during Q3.
- Risks and contingencies: COVID-19 may affect customer demand and creditworthiness, supplier capacity, operations, liquidity and access to capital; remote work also raises cybersecurity and internal-control risks. Canada goodwill impairment remains sensitive to assumptions: management said a roughly 3% increase in the pretax discount rate or 1.5% reduction in long-term revenue growth would bring estimated enterprise value to carrying value. The filing describes product-liability suits related to the 2019 KMCO refinery explosion and asbestos/silica litigation; management did not expect pending matters to have a material adverse effect.
- Other accounting item: A prospective change to depreciation methods and useful lives reduced depreciation expense by $7 million in Q3 and $22 million year to date.
Important facts for investors to verify
- Whether pandemic-related demand and the lower-margin product mix persist, and how they affect gross margin and earnings.
- Whether the reported and adjusted year-to-date results are compared consistently, given Fabory impairments, divestiture losses and related tax effects.
- How quickly Canada sales and market share recover, including the impact of oil prices, and whether Canada goodwill assumptions remain supportable.
- Cash conversion and working-capital needs, particularly inventory and receivables, alongside the company’s liquidity and debt levels.
- Further developments in COVID-19 exposure, customer credit losses, supply availability, cybersecurity and the disclosed litigation.