Grainger(GWW) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1: Financial Statements This section presents W.W. Grainger, Inc.'s unaudited condensed consolidated financial statements for Q2 and H1 2022 and 2021, including earnings, balance sheets, cash flows, and notes Condensed Consolidated Statements of Earnings The company reported significant growth in net sales, net earnings, and diluted EPS for Q2 and H1 2022, reflecting strong operational performance Consolidated Earnings Summary (in millions, except per share data) | Metric | Q2 2022 | Q2 2021 | YoY Change | H1 2022 | H1 2021 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $3,837 | $3,207 | +19.6% | $7,484 | $6,291 | +19.0% | | Gross Profit | $1,441 | $1,124 | +28.2% | $2,824 | $2,217 | +27.4% | | Operating Earnings | $534 | $334 | +60.0% | $1,068 | $692 | +54.3% | | Net Earnings Attributable to W.W. Grainger, Inc. | $371 | $225 | +64.9% | $737 | $463 | +59.2% | | Diluted EPS | $7.19 | $4.27 | +68.4% | $14.26 | $8.76 | +62.8% | Condensed Consolidated Balance Sheets Total assets increased to $7.05 billion from $6.59 billion at year-end 2021, driven by receivables and inventories, with shareholders' equity reaching $2.47 billion Balance Sheet Highlights (in millions) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $4,513 | $4,011 | | Total Assets | $7,049 | $6,592 | | Liabilities & Equity | | | | Total Current Liabilities | $1,750 | $1,528 | | Long-term Debt | $2,309 | $2,362 | | Total Shareholders' Equity | $2,465 | $2,160 | | Total Liabilities & Shareholders' Equity | $7,049 | $6,592 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $593 million in H1 2022, while cash was used for investing ($172 million) and financing ($388 million) activities Cash Flow Summary for Six Months Ended June 30 (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $593 | $563 | | Net cash used in investing activities | ($172) | ($130) | | Net cash used in financing activities | ($388) | ($463) | | Net change in cash and cash equivalents | $21 | ($38) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue recognition, segment data, debt, and legal contingencies, including revenue breakdown and product liability litigation - Revenue is primarily derived from MRO product sales. The High-Touch Solutions N.A. segment accounts for 79% of total company revenue, while the Endless Assortment segment accounts for 19% for the six months ended June 30, 2022[35][39] - The company's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The High-Touch Solutions N.A. segment generated operating earnings of $956 million, and the Endless Assortment segment generated $117 million for the first six months of 2022[63][65] - The company is involved in product liability lawsuits related to a 2019 chemical refinery explosion in Texas. The first bellwether trial is scheduled for early 2023. The company believes the ultimate resolution will not have a material adverse effect[68][69][73] Item 2: MD&A of Financial Condition and Results of Operations Management discusses the company's strong financial performance for Q2 and H1 2022, highlighting sales growth, margin expansion, operating earnings, liquidity, and cash flows - The company is monitoring the broader impact of the Russia-Ukraine conflict on the global economy but does not currently expect significant disruption to its overall business[81] - The company has implemented strategies to mitigate the adverse effects of the inflationary environment on product and service costs while remaining price competitive[82] Results of Operations – Q2 2022 Q2 2022 net sales increased 19.6% to $3.84 billion, with gross profit margin improving to 37.6% and operating earnings surging 60.0% to $534 million Q2 2022 Performance vs. Q2 2021 | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,837M | $3,207M | +19.6% | | Gross Profit | $1,441M | $1,124M | +28.3% | | Operating Earnings | $534M | $334M | +60.0% | | Diluted EPS | $7.19 | $4.27 | +68.4% | - Gross profit margin expansion was attributed to lapping prior-year pandemic-related inventory adjustments and an improved product mix[86][88] - High-Touch Solutions N.A. sales growth of 22.2% was driven by volume/mix (+11.8%) and price/customer mix (+10.6%)[92] - Endless Assortment sales growth of 11.4% was driven by 21.1% operational growth, partially offset by a 9.7% unfavorable foreign exchange impact[96] Results of Operations – H1 2022 H1 2022 net sales grew 19.0% to $7.48 billion, with gross profit margin at 37.7%, operating earnings up 54.4% to $1.07 billion, and diluted EPS increasing 62.8% H1 2022 Performance vs. H1 2021 | Metric | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $7,484M | $6,291M | +19.0% | | Gross Profit | $2,824M | $2,217M | +27.4% | | Operating Earnings | $1,068M | $692M | +54.4% | | Diluted EPS | $14.26 | $8.76 | +62.8% | - High-Touch Solutions N.A. daily sales increased 20.2%, driven by volume/mix (+10.9%) and price/customer mix (+9.4%)[108] - Endless Assortment daily sales increased 10.9%, reflecting 19.3% operational growth offset by an 8.4% unfavorable foreign exchange impact[112] Financial Condition As of June 30, 2022, the company held $262 million in cash and $1.5 billion in liquidity, with operating cash flow at $593 million and an improved debt-to-capitalization ratio of 52.3% - Cash and cash equivalents stood at $262 million with approximately $1.5 billion in available liquidity as of June 30, 2022[121] - Net cash from operations increased to $593 million in H1 2022 from $563 million in H1 2021, primarily due to higher net earnings[122] - The ratio of current assets to current liabilities was 2.6 as of June 30, 2022[125] - The company maintains investment-grade credit ratings of A3 from Moody's and A+ from S&P[127][128] Item 3: Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency exchange and interest rates, with no material changes from the 2021 Form 10-K disclosures - There were no material changes to the Company's market risk from those described in the 2021 Form 10-K[141] Item 4: Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of June 30, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[142] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[143] PART II - OTHER INFORMATION Item 1: Legal Proceedings This section refers to Note 9 of the financial statements for details on ongoing legal matters, including product liability lawsuits - For a description of the Company's legal proceedings, refer to Note 9 of the Notes to Condensed Consolidated Financial Statements[146] Item 1A: Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2021 Form 10-K and Q1 2022 Form 10-Q - There have been no material changes from the risk factors previously disclosed in the Company's 2021 Form 10-K and Q1 2022 Form 10-Q[147] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, the company repurchased 241,924 shares of common stock under a board-approved program announced in April 2021 Issuer Purchases of Equity Securities – Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | 78,309 | $510.71 | | May 2022 | 103,261 | $474.04 | | June 2022 | 60,354 | $468.97 | | Total | 241,924 | | - As of June 30, 2022, 3,493,442 shares may yet be purchased under the existing repurchase program[148] Item 6: Exhibits This section lists exhibits filed with the Form 10-Q, including incentive plan award agreements and Sarbanes-Oxley Act certifications - Exhibits filed include forms of Restricted Stock Unit and Performance Stock Unit award agreements, and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[150]