Grainger(GWW) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements This section presents W.W. Grainger, Inc.'s unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2024, and 2023, including Statements of Earnings, Balance Sheets, Cash Flows, and Shareholders' Equity, along with essential accompanying notes Condensed Consolidated Statements of Earnings For Q2 2024, net sales increased to $4,312 million, but operating earnings slightly decreased to $649 million, with net earnings attributable to W.W. Grainger, Inc. remaining flat at $470 million Consolidated Statements of Earnings (in millions) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,312 | $4,182 | $8,547 | $8,273 | | Gross profit | $1,694 | $1,644 | $3,362 | $3,278 | | Operating earnings | $649 | $661 | $1,318 | $1,341 | | Net earnings attributable to W.W. Grainger, Inc. | $470 | $470 | $948 | $958 | | Diluted EPS | $9.51 | $9.28 | $19.13 | $18.89 | Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased to $8,352 million, driven by higher cash and accounts receivable, while total liabilities also rose, primarily due to current maturities of debt and trade accounts payable, with total shareholders' equity growing to $3,587 million Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | $5,521 | $5,274 | | Total assets | $8,352 | $8,147 | | Total current liabilities | $2,397 | $1,831 | | Long-term debt | $1,783 | $2,266 | | Total liabilities | $4,765 | $4,706 | | Total shareholders' equity | $3,587 | $3,441 | Condensed Consolidated Statements of Cash Flows For the first half of 2024, net cash provided by operating activities increased to $1,072 million due to favorable working capital changes, while net cash used in financing activities significantly rose to $763 million, driven by increased treasury stock purchases Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,072 | $904 | | Net cash used in investing activities | $(177) | $(191) | | Net cash used in financing activities | $(763) | $(521) | | Net change in cash and cash equivalents | $109 | $190 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, revenue disaggregation by segment and customer industry, debt instruments, segment financial results, and legal contingencies, highlighting Manufacturing and Government as key revenue contributors and the settlement of KMCO lawsuits with no financial impact Total Company Revenue by Customer Industry (Q2) | Customer Industry | % of Revenue 2024 | % of Revenue 2023 | | :--- | :--- | :--- | | Manufacturing | 31% | 30% | | Government | 16% | 18% | | Wholesale | 9% | 8% | | Commercial Services | 8% | 8% | Segment Operating Earnings (in millions) | Segment | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | High-Touch Solutions N.A. | $591 | $600 | $1,201 | $1,221 | | Endless Assortment | $61 | $65 | $120 | $123 | | Other | $(3) | $(4) | $(3) | $(3) | | Total Company | $649 | $661 | $1,318 | $1,341 | - The company settled several personal injury lawsuits related to KMCO, LLC, which had no effect on net earnings or cash flows. The company continues to contest the remaining KMCO-related lawsuits[47] - On July 31, 2024, the Board of Directors declared a quarterly dividend of $2.05 per share, payable on September 1, 2024[48] Management's Discussion and Analysis (MD&A) Management analyzes the company's financial performance, noting a 3.1% increase in Q2 2024 net sales offset by a 1.8% decline in operating earnings due to rising SG&A expenses, while maintaining strong liquidity and monitoring macroeconomic volatility - The company continues to monitor global economic volatility, including changes in interest rates, currency fluctuations, and inflation. Management believes its broad customer base and the non-discretionary nature of its MRO products help insulate it from recessionary periods[54][55] Results of Operations – Q2 2024 In Q2 2024, net sales increased 3.1% to $4,312 million, but operating earnings decreased 1.8% to $649 million due to a 6.3% rise in SG&A expenses, despite a 2.5% increase in diluted EPS Q2 2024 vs Q2 2023 Performance (in millions) | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $4,312 | $4,182 | 3.1% | | Gross profit | $1,694 | $1,644 | 3.0% | | Operating earnings | $649 | $661 | (1.8)% | | Diluted EPS | $9.51 | $9.28 | 2.5% | - SG&A expenses increased by $62 million (6.3%) compared to Q2 2023, driven by higher marketing, payroll, and benefit expenses[60] Segment Analysis - Q2 2024 In Q2, High-Touch Solutions N.A. net sales grew 3.1% to $3,458 million, but operating earnings fell 1.5%, while Endless Assortment net sales increased 3.3% to $776 million, with operating earnings decreasing 6.2% due to currency impacts and higher marketing - High-Touch Solutions N.A.: Net sales increased 3.1% to $3,458 million, primarily due to volume. Operating earnings decreased 1.5% to $591 million[62] - Endless Assortment: Net sales increased 3.3% to $776 million. On a daily constant currency basis, sales grew 12%, driven by customer acquisition at MonotaRO. This was partially offset by a 9% unfavorable currency impact. Operating earnings decreased 6.2% to $61 million[64] Results of Operations – H1 2024 For the first half of 2024, net sales increased 3.3% to $8,547 million, but operating earnings decreased 1.7% to $1,318 million due to a 5.5% rise in SG&A, despite a 1.3% increase in diluted EPS H1 2024 vs H1 2023 Performance (in millions) | Metric | H1 2024 | H1 2023 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $8,547 | $8,273 | 3.3% | | Gross profit | $3,362 | $3,278 | 2.6% | | Operating earnings | $1,318 | $1,341 | (1.7)% | | Diluted EPS | $19.13 | $18.89 | 1.3% | - Gross profit margin for the six-month period decreased by 30 basis points to 39.3% compared to the same period in 2023[69] Liquidity and Capital Resources The company maintains strong liquidity with $769 million in cash and $2.0 billion available, driven by a significant increase in operating cash flow to $1,072 million due to improved working capital management, while debt-to-capitalization improved to 38.9% and investment-grade credit ratings were maintained Cash Flow Summary (in millions) | Cash Flow Activity | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Operating activities | $1,072 | $904 | | Investing activities | $(177) | $(191) | | Financing activities | $(763) | $(521) | - The increase in cash from operations was driven by favorable changes in working capital and inventory management combined with supply chain efficiencies[90] - Total debt as a percent of total capitalization was 38.9% as of June 30, 2024, down from 40.1% at year-end 2023. The company maintains investment-grade credit ratings of A2 from Moody's and A+ from S&P[93][94] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its primary market risk exposures, which continue to be foreign currency exchange and interest rates, since the disclosures in its 2023 Form 10-K - There were no material changes to the Company's market risk from those described in the 2023 Form 10-K. Primary exposures remain changes in foreign currency exchange and interest rates[104] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that Grainger's disclosure controls and procedures were effective as of the end of the period covered by this report[105] - There were no changes in Grainger's internal control over financial reporting for the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, its internal controls[106] PART II – OTHER INFORMATION Legal Proceedings The company refers to Note 8 of the financial statements for an update on legal proceedings, indicating that several personal injury lawsuits involving KMCO, LLC have been settled with no material impact on net earnings or cash flows - The company has settled several personal injury lawsuits related to KMCO, LLC. These settlements had no effect on net earnings or cash flows. The company continues to contest remaining KMCO-related lawsuits[47][108] Risk Factors The company states that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - There have been no material changes from the risk factors previously disclosed in the Company's 2023 Form 10-K[109] Issuer Purchases of Equity Securities In Q2 2024, Grainger repurchased 257,679 shares, and the Board authorized a new share repurchase program for up to five million shares, replacing the prior 2021 program, with 4,815,829 shares remaining available under the new authorization Share Repurchases in Q2 2024 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Apr. 1 – Apr. 30 | 90,304 | $965.74 | | May 1 – May 31 | 87,326 | $936.66 | | Jun. 1 – Jun. 30 | 80,049 | $901.23 | | Total | 257,679 | | - On April 24, 2024, Grainger's Board of Directors authorized a new program to repurchase up to five million shares and terminated the prior 2021 program[111] Other Information This section discloses that CFO Deidra C. Merriwether and CEO D.G. Macpherson adopted Rule 10b5-1 trading plans in June 2024 for the future sale of company shares - CFO Deidra C. Merriwether and CEO D.G. Macpherson adopted Rule 10b5-1 trading plans in June 2024 for the future sale of company shares[112] Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002, and XBRL data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, as well as various XBRL data files[113]