W.W. Grainger, Inc. — Q3 2021 Form 10-Q
Business context 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, 2021. Reportable segments are High-Touch Solutions N.A. and Endless Assortment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,372 million | $3,018 million | $9,663 million | $8,856 million |
| Gross profit / margin | $1,250 million / 37.1% | $1,074 million / 35.6% | $3,467 million / 35.9% | $3,211 million / 36.3% |
| Operating earnings / margin | $438 million / 13.0% | $380 million / 12.6% | $1,130 million / 11.7% | $744 million / 8.4% |
| Net earnings attributable to Grainger | $297 million | $240 million | $760 million | $527 million |
| Diluted EPS | $5.65 | $4.41 | $14.40 | $9.70 |
| Operating cash flow | Not separately reported | Not separately reported | $724 million | $787 million |
Q3 sales rose 11.7%; Grainger-attributable earnings increased 23.7%. Nine-month sales rose 9.1% (9.7% per sales day), and attributable earnings increased 44.3%. Nine-month diluted EPS rose to $14.40 from $9.70. Nine-month reported results include a substantial comparison benefit from 2020 Fabory impairment and divestiture charges; excluding disclosed adjustments, nine-month operating earnings rose 10% and attributable earnings rose 12%.
Segments and operating drivers
- High-Touch Solutions N.A.: Q3 sales of $2,663 million, up 12.0%, and operating earnings of $387 million, up 16%. Nine-month sales were $7,558 million, up 9.1%, and operating earnings were $975 million, up 5%.
- Endless Assortment: Q3 sales of $646 million, up 12.7%, and operating earnings of $59 million, up 24%. Nine-month sales were $1,913 million, up 20.0%, and operating earnings were $172 million, up 38%. Growth reflected continued customer acquisition at Zoro and MonotaRO.
- Q3 consolidated gross margin improved 1.5 percentage points, driven by price realization and a shift toward higher-margin core, non-pandemic products. Nine-month gross margin declined 0.4 point, primarily due to U.S. pandemic-product inventory adjustments in the first half.
Cash, debt and liquidity
- Nine-month operating cash flow was $724 million, versus $787 million. Investing used $180 million, including $197 million of additions to property, equipment and intangibles. Financing used $790 million, including $525 million of treasury-stock purchases and $261 million of dividends.
- Cash was $328 million at September 30, 2021, down from $585 million at year-end 2020. Long-term debt, net of issuance costs and discounts, was $2,372 million; there was no short-term debt or current debt maturity reported.
- Management reported approximately $1.8 billion of available liquidity, a 2.6 current ratio and working capital of $2,350 million. Debt, including lease liabilities, was 55.1% of total capitalization. Management believes liquidity is sufficient for the next 12 months.
- Grainger repurchased $525 million of stock during the first nine months. The board declared a $1.62-per-share quarterly dividend on October 27, payable December 1, 2021.
Outlook, risks and unusual items
The filing provides no specific earnings or sales guidance. Management described improving demand and a recovery in core product sales, while pandemic-related demand continued to soften. It highlighted ongoing supply-chain, transportation, raw-material and labor constraints, inflation and higher wages, variable compensation, healthcare and marketing costs. COVID-19 effects, including variants and possible workforce mandates, remain uncertain.
Other key risks include inventory shortages or obsolescence, customer and supplier financial stress, cybersecurity incidents, foreign exchange and interest-rate exposure, and competitive or margin pressure. Legal matters include product-liability lawsuits relating to the 2019 KMCO refinery explosion, including claims by approximately 186 personal-injury plaintiffs and separate property-damage actions. Grainger says the claims are at an early stage, intends to contest them, and does not expect their resolution to materially adversely affect consolidated results or financial condition. The filing reports no material change in contractual obligations or critical accounting estimates.
Most important facts for investors to verify
- Whether sales growth and customer acquisition persist as pandemic-related demand and product mix continue to normalize.
- Whether price realization offsets inflation, supply-chain costs, labor expense and any further inventory adjustments.
- Cash conversion and working-capital trends, given lower year-to-date operating cash flow and increased investment and repurchases.
- The basis and availability of the reported $1.8 billion of liquidity, and debt and lease obligations.
- Developments in the KMCO litigation, cybersecurity risks and COVID-19-related operating disruptions.
- Comparability of reported growth with adjusted results, particularly the impact of 2020 Fabory impairment and divestiture items.