Grainger(GWW) - 2021 Q4 - Annual Report

Part I Business W.W. Grainger, Inc. is a broad-line B2B distributor of MRO products, operating primarily in North America, Japan, and the UK through High-Touch Solutions N.A. and Endless Assortment segments - Grainger is a B2B distributor of MRO products, operating primarily in North America, Japan, and the UK[14] - The company operates under two reportable segments effective January 1, 2021: High-Touch Solutions N.A. and Endless Assortment[17] - Grainger serves over 4.5 million customers worldwide, with no single customer representing more than 3% of total sales in 2021[23] - The company sources from approximately 5,000 suppliers, with no single supplier accounting for more than 5% of total purchases in 2021[29] - Private label products, bearing trademarks like DAYTON® and SPEEDAIRE®, constituted about 19% of 2021 sales[33] Business Segments Grainger's business is structured into High-Touch Solutions N.A. for complex MRO needs and Endless Assortment for online platforms - High-Touch Solutions N.A.: Serves customers with complex buying needs in the U.S., Canada, Mexico, and Puerto Rico through Grainger-branded businesses[19] - Endless Assortment: Includes Zoro (U.S., U.K.) and MonotaRO (Japan), offering millions of products via a streamlined online platform[20] - Other: Comprises smaller international high-touch businesses, primarily in the U.K., and businesses divested in 2020 (Fabory and China)[21] Human Capital Grainger employed approximately 24,200 team members as of December 31, 2021, emphasizing culture, diversity, and safety Team Member Profile (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Total Team Members | ~24,200 | | Full-time | ~22,700 | | Part-time/Temporary | ~1,500 | | Location - North America | ~86% | | Location - Asia | ~8% | | Location - Europe | ~6% | 2021 U.S. Safety Metrics | Metric | Rate | | :--- | :--- | | OSHA Total Recordable Incident Rate | 1.2 | | Lost Time Incident Rate | 0.3 | Diversity & Inclusion Statistics (as of Dec 31, 2021) | Group | Female Representation | Racially/Ethnically Diverse Representation | | :--- | :--- | :--- | | Board of Directors | ~31% | ~31% | | CEO's Leadership Team | ~43% | ~29% | | U.S. Workforce | ~39% | ~37% | Executive Officers This section details Grainger's executive officers as of January 31, 2022, including their positions and backgrounds Executive Officers (as of Jan 31, 2022) | Name | Age | Position | | :--- | :--- | :--- | | D.G. Macpherson | 54 | Chairman of the Board and Chief Executive Officer | | Deidra C. Merriwether | 53 | Senior Vice President and Chief Financial Officer | | Paige K. Robbins | 53 | Senior Vice President and President, Grainger Business Unit | | Kathleen S. Carroll | 53 | Senior Vice President and Chief Human Resources Officer | | John L. Howard | 64 | Senior Vice President and General Counsel | | Laurie R. Thomson | 48 | Vice President, Controller and principal accounting officer | Risk Factors Grainger faces significant risks from supply chain disruptions, inflation, cybersecurity, and its substantial $2.4 billion debt - Industry/Market Risks: The COVID-19 pandemic continues to pose risks through supply chain disruptions, shifts in product demand, and higher costs. Inflation could also negatively impact gross margins and net earnings[56][57][66] - Operational Risks: The company is vulnerable to interruptions in its information systems and cybersecurity incidents, which could be heightened by remote work arrangements. Failure to attract and retain key talent is also a significant risk[86][89][100] - Regulatory/Legal Risks: Grainger is subject to a wide array of domestic and foreign laws, with non-compliance potentially leading to fines and reputational damage. The company also faces risks from product liability litigation and government contract regulations[103][107][108] - Credit/Liquidity Risks: As of December 31, 2021, Grainger had approximately $2.4 billion in consolidated indebtedness, which could limit business flexibility. A downgrade in credit ratings could increase borrowing costs[112][113] Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - None[116] Properties Grainger owned and leased approximately 29.2 million square feet of facilities as of December 31, 2021, primarily in North America and Asia Material Facilities by Location (as of Dec 31, 2021) | Location | Facility Type | Size (in thousands sq. ft.) | Segment | | :--- | :--- | :--- | :--- | | U.S. | DCs | 9,132 | High-Touch Solutions N.A. | | U.S. | Branch Locations | 6,407 | High-Touch Solutions N.A. | | U.S. | Other Facilities | 4,805 | High-Touch Solutions N.A. | | Japan | DCs | 3,718 | Endless Assortment | - Total owned and leased facilities amounted to approximately 29.2 million square feet as of year-end 2021[118] Legal Proceedings Grainger is involved in legal proceedings, including product liability lawsuits from a 2019 refinery explosion and asbestos exposure - The company is a defendant in 16 lawsuits with approximately 186 plaintiffs concerning a 2019 chemical refinery explosion in Texas[367] - Grainger is also a defendant in various lawsuits related to asbestos and/or silica exposure, for which it believes it has strong defenses and insurance coverage[370] - The company states that information on legal proceedings is further detailed in Note 15 of the financial statements[119] Mine Safety Disclosures This section is not applicable to the company - Not applicable[120] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Grainger's common stock trades on the NYSE under GWW, with the company repurchasing shares and paying quarterly dividends - Grainger's common stock is traded on the NYSE under the symbol GWW[123] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | Oct. 1 – Oct. 31 | 138,985 | $423.80 | 138,890 | | Nov. 1 – Nov. 30 | 101,244 | $484.93 | 101,043 | | Dec. 1 – Dec. 31 | 134,893 | $502.16 | 134,359 | | Total | 375,122 | | 374,292 | - The company has a share repurchase program authorized on April 28, 2021, for up to five million shares with no expiration date. As of December 31, 2021, 3,886,189 shares remained available for repurchase under this program[126] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Grainger's 2021 net sales grew 10.4% to $13.0 billion, with operating earnings up 51.8% and diluted EPS rising 54.8% Results of Operations In 2021, net sales increased 10.4% to $13.0 billion, operating earnings surged 51.8%, and diluted EPS rose 54.8% Consolidated Statement of Earnings Summary (in millions, except EPS) | Metric | 2021 | 2020 | 2019 | % Change (2021 vs 2020) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $13,022 | $11,797 | $11,486 | 10.4% | | Gross profit | $4,720 | $4,238 | $4,397 | 11.4% | | Operating earnings | $1,547 | $1,019 | $1,262 | 51.8% | | Net earnings attributable to W.W. Grainger, Inc. | $1,043 | $695 | $849 | 50.0% | | Diluted EPS | $19.84 | $12.82 | $15.32 | 54.8% | - The 11.3% daily sales increase in 2021 was driven by a 10.1% increase in volume/product mix and a 2.3% increase in price/customer mix, reflecting a recovery in core, non-pandemic product sales[147] - Adjusted diluted EPS for 2021 was $19.84, a 23% increase from the adjusted $16.18 in 2020, which excluded items like restructuring and divestiture charges[164][167] Segment Analysis In 2021, High-Touch Solutions N.A. sales grew 10.5% to $10.2 billion, and Endless Assortment sales increased 18.3% to $2.6 billion High-Touch Solutions N.A. Performance (2021 vs 2020) | Metric | 2021 (in millions) | % Change from 2020 | | :--- | :--- | :--- | | Net sales | $10,186 | 10.5% | | Gross profit | $3,906 | 10.9% | | Operating earnings | $1,334 | 12.9% | Endless Assortment Performance (2021 vs 2020) | Metric | 2021 (in millions) | % Change from 2020 | | :--- | :--- | :--- | | Net sales | $2,576 | 18.3% | | Gross profit | $729 | 21.3% | | Operating earnings | $232 | 39.3% | - The 'Other' segment's operating loss decreased 94% to $19 million in 2021, primarily due to the absence of impairment charges and losses related to the divested Fabory business that were recorded in 2020[193] Financial Condition and Liquidity Grainger maintained strong liquidity with $1.5 billion available as of December 31, 2021, despite decreased cash and increased capital expenditures - As of December 31, 2021, the company had cash and cash equivalents of $241 million and available liquidity of approximately $1.5 billion[201] Cash Flow Summary (in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $937 | $1,123 | | Net cash used in investing activities | ($226) | ($179) | | Net cash used in financing activities | ($1,039) | ($726) | - Capital expenditures were $255 million in 2021 and are projected to be between $275 million and $325 million in 2022[206][207] Credit Ratings (as of Dec 31, 2021) | Agency | Corporate | Senior Unsecured | Short-term | | :--- | :--- | :--- | :--- | | Moody's | A3 | A3 | P2 | | S&P | A+ | A+ | A1 | Quantitative and Qualitative Disclosures About Market Risk Grainger is exposed to foreign currency, interest rate, and commodity price risks, which it manages through various strategies and derivative instruments - The company is exposed to foreign currency exchange rate volatility, primarily between the U.S. dollar and the Japanese yen, Canadian dollar, and British pound sterling[224] - Grainger uses derivative instruments, including interest rate swaps and cross-currency swaps, to manage risks associated with its fixed-rate long-term debt and foreign currency-denominated borrowings[226][224] - The company is exposed to commodity price risk through fuel costs and materials in sourced products, which it mitigates through sourcing strategies and operational scale[228] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, an unqualified auditor's report, and detailed notes on financial policies Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on Grainger's financial statements and internal controls, identifying Canadian goodwill valuation as a critical audit matter - The auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting[231][232] - A Critical Audit Matter was identified concerning the valuation of goodwill for the Canadian reporting unit, which had a balance of $129 million at year-end[235][237] Notes to Consolidated Financial Statements The notes detail business re-segmentation, divestitures, revenue breakdown, $2.4 billion long-term debt, leases, goodwill, and legal contingencies - Revenue Breakdown: In 2021, the High-Touch Solutions N.A. segment accounted for 78% of total revenue, while the Endless Assortment segment accounted for 20%. The Manufacturing industry was the largest customer segment at 30% of total revenue[305] - Goodwill: The company performed its annual goodwill impairment test in Q4 2021 and concluded that the fair value of its reporting units exceeded their carrying amounts. The goodwill balance for the Canada business was $129 million as of December 31, 2021[308][310] - Debt: As of December 31, 2021, total long-term debt obligations were approximately $2.4 billion, primarily consisting of senior notes with maturities ranging from 2025 to 2047[319][322] - Taxes: The effective tax rate for 2021 was 25.0%, up from 20.3% in 2020. The increase was primarily due to the absence of tax losses from the divested Fabory business that were present in the prior year[356] Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[373] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, an assessment audited and confirmed by Ernst & Young LLP[376][377] - There were no material changes to internal control over financial reporting during the fourth quarter of 2021[378] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 proxy statement[393] Executive Compensation Executive and director compensation details are incorporated by reference from the company's 2022 proxy statement - Details on executive compensation are incorporated by reference from the company's 2022 proxy statement[394] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's 2022 proxy statement - Information on security ownership and equity compensation plans is incorporated by reference from the company's 2022 proxy statement[394] Certain Relationships and Related Transactions, and Director Independence Details on related party transactions and director independence are incorporated by reference from the 2022 proxy statement - Details on related transactions and director independence are incorporated by reference from the company's 2022 proxy statement[395] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2022 proxy statement - Information on principal accountant fees and services is incorporated by reference from the company's 2022 proxy statement[395] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements, exhibits, and required certifications - This item provides an index of all financial statements and exhibits filed with the Form 10-K[398] Form 10-K Summary The company reports no Form 10-K summary - None[406]