UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016March 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
|
| | |
Illinois | | 36-1150280 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
100 Grainger Parkway, Lake Forest, Illinois | | 60045-5201 |
(Address of principal executive offices) | | (Zip Code) |
(847) 535-1000 |
(Registrant’s telephone number including area code) |
|
Not Applicable |
(Former name, former address and former fiscal year; if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 60,422,55658,405,698 shares of the Company’s Common Stock outstanding as of June 30, 2016March 31, 2017.
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| | |
| TABLE OF CONTENTS | |
| | Page No. |
PART I | FINANCIAL INFORMATION | |
| | |
Item 1. | Financial Statements (Unaudited). | |
| | |
| Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30,March 31, 2017 and 2016 and 2015 | |
| | |
| Condensed Consolidated Statements of Comprehensive Earnings for the Three and Six Months Ended June 30,March 31, 2017 and 2016 and 2015 | |
| | |
| Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 and December 31, 20152016 | |
| | |
| Condensed Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2017 and 2016 and 2015 | |
| | |
| Notes to Condensed Consolidated Financial Statements | |
| | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | |
| | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |
| | |
Item 4. | Controls and Procedures. | |
| | |
PART II | OTHER INFORMATION | |
| | |
Item 1. | Legal Proceedings. | |
| | |
Item 1A. | Risk Factors. | |
| | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |
| | |
Item 6. | Exhibits. | |
| | |
Signatures | | |
| | |
EXHIBITS | | |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| June 30, | | June 30, | March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Net sales | $ | 2,563,668 |
| | $ | 2,522,565 |
| | $ | 5,070,206 |
| | $ | 4,962,226 |
| $ | 2,541,129 |
| | $ | 2,506,538 |
|
Cost of merchandise sold | 1,523,609 |
| | 1,449,133 |
| | 2,985,094 |
| | 2,795,052 |
| 1,521,937 |
| | 1,461,485 |
|
Gross profit | 1,040,059 |
| | 1,073,432 |
| | 2,085,112 |
| | 2,167,174 |
| 1,019,192 |
| | 1,045,053 |
|
Warehousing, marketing and administrative expenses | 734,470 |
| | 716,715 |
| | 1,462,431 |
| | 1,459,209 |
| 723,704 |
| | 727,961 |
|
Operating earnings | 305,589 |
| | 356,717 |
| | 622,681 |
| | 707,965 |
| 295,488 |
| | 317,092 |
|
Other income and (expense): | |
| | |
| | | | | |
Other income (expense): | | |
| | |
|
Interest income | 162 |
| | 277 |
| | 327 |
| | 469 |
| 193 |
| | 165 |
|
Interest expense | (16,806 | ) | | (4,184 | ) | | (30,531 | ) | | (5,819 | ) | (16,979 | ) | | (13,725 | ) |
Loss from equity method investment | (5,427 | ) | | (4,302 | ) | | (11,815 | ) | | (4,302 | ) | (8,374 | ) | | (6,388 | ) |
Other non-operating income and (expense) | (538 | ) | | 178 |
| | (98 | ) | | (1,988 | ) | |
Total other expense | (22,609 | ) | | (8,031 | ) | | (42,117 | ) | | (11,640 | ) | |
Other non-operating income | | 345 |
| | 440 |
|
Total other expense, net | | (24,815 | ) | | (19,508 | ) |
Earnings before income taxes | 282,980 |
| | 348,686 |
| | 580,564 |
| | 696,325 |
| 270,673 |
| | 297,584 |
|
Income taxes | 103,535 |
| | 123,451 |
| | 209,475 |
| | 256,944 |
| 87,820 |
| | 105,940 |
|
Net earnings | 179,445 |
| | 225,235 |
| | 371,089 |
| | 439,381 |
| 182,853 |
| | 191,644 |
|
Less: Net earnings attributable to noncontrolling interest | 6,769 |
| | 4,687 |
| | 11,700 |
| | 7,818 |
| 8,109 |
| | 4,931 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 172,676 |
| | $ | 220,548 |
| | $ | 359,389 |
| | $ | 431,563 |
| $ | 174,744 |
| | $ | 186,713 |
|
Earnings per share: | |
| | |
| | | | | |
| | |
|
Basic | $ | 2.81 |
| | $ | 3.28 |
| | $ | 5.81 |
| | $ | 6.38 |
| $ | 2.95 |
| | $ | 3.00 |
|
Diluted | $ | 2.79 |
| | $ | 3.25 |
| | $ | 5.77 |
| | $ | 6.32 |
| $ | 2.93 |
| | $ | 2.98 |
|
Weighted average number of shares outstanding: | |
| | |
| | |
| | |
| |
| | |
|
Basic | 60,891,298 |
| | 66,652,130 |
| | 61,278,981 |
| | 66,939,110 |
| 58,720,066 |
| | 61,668,682 |
|
Diluted | 61,301,545 |
| | 67,317,131 |
| | 61,699,603 |
| | 67,647,689 |
| 59,202,882 |
| | 62,099,801 |
|
Cash dividends paid per share | $ | 1.22 |
| | $ | 1.17 |
| | $ | 2.39 |
| | $ | 2.25 |
| $ | 1.22 |
| | $ | 1.17 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
|
| | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended |
| June 30, | June 30, |
| 2016 | | 2015 | 2016 | | 2015 |
Net earnings | $ | 179,445 |
| | $ | 225,235 |
| $ | 371,089 |
| | $ | 439,381 |
|
Other comprehensive earnings (losses): | |
| | |
| |
| | |
|
Foreign currency translation gain (loss) | (6,915 | ) | | 9,061 |
| 44,575 |
| | (66,954 | ) |
Defined postretirement benefit plan: | | | | | | |
Reclassification adjustments related to amortization, net of tax benefit of $631, $512, and $1,262, $1,021, respectively | (1,009 | ) | | (810 | ) | (2,018 | ) | | (1,623 | ) |
Derivative instrument change in fair value of cash flow hedge | 352 |
| | 245 |
| 656 |
| | 727 |
|
Comprehensive earnings, net of tax | 171,873 |
| | 233,731 |
| 414,302 |
| | 371,531 |
|
Less: Comprehensive earnings (losses) attributable to noncontrolling interest | | | | | | |
Net earnings | 6,769 |
| | 4,687 |
| 11,700 |
| | 7,818 |
|
Foreign currency translation adjustments | 8,729 |
| | (1,509 | ) | 14,433 |
| | (1,802 | ) |
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 156,375 |
| | $ | 230,553 |
| $ | 388,169 |
| | $ | 365,515 |
|
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2017 | | 2016 |
Net earnings | $ | 182,853 |
| | $ | 191,644 |
|
Other comprehensive earnings: | |
| | |
|
Foreign currency translation adjustments | 29,303 |
| | 51,490 |
|
Postretirement benefit plan reclassification, net of tax benefit of $879 and $631, respectively | (1,398 | ) | | (1,009 | ) |
Other | (12 | ) | | 304 |
|
Comprehensive earnings, net of tax | 210,746 |
| | 242,429 |
|
Less: Comprehensive earnings attributable to noncontrolling interest | | | |
Net earnings | 8,109 |
| | 4,931 |
|
Foreign currency translation adjustments | 5,532 |
| | 5,704 |
|
Comprehensive earnings attributable to W.W. Grainger, Inc. | $ | 197,105 |
| | $ | 231,794 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
| | | (Unaudited) | | | (Unaudited) | | |
ASSETS | June 30, 2016 | | December 31, 2015 | March 31, 2017 | | Dec 31, 2016 |
CURRENT ASSETS | | | | | | |
Cash and cash equivalents | $ | 315,997 |
| | $ | 290,136 |
| $ | 238,801 |
| | $ | 274,146 |
|
Accounts receivable (less allowances for doubtful | |
| | |
| |
| | |
|
accounts of $26,403 and $22,288, respectively) | 1,310,382 |
| | 1,209,641 |
| |
accounts of $28,208 and $26,690, respectively) | | 1,325,218 |
| | 1,223,096 |
|
Inventories – net | 1,418,678 |
| | 1,414,177 |
| 1,388,091 |
| | 1,406,470 |
|
Prepaid expenses and other assets | 103,885 |
| | 85,670 |
| 110,427 |
| | 81,766 |
|
Prepaid income taxes | 41,320 |
| | 49,018 |
| 33,646 |
| | 34,751 |
|
Total current assets | 3,190,262 |
| | 3,048,642 |
| 3,096,183 |
| | 3,020,229 |
|
PROPERTY, BUILDINGS AND EQUIPMENT | 3,385,566 |
| | 3,370,313 |
| 3,396,242 |
| | 3,411,502 |
|
Less: Accumulated depreciation and amortization | 1,966,861 |
| | 1,939,072 |
| 1,985,930 |
| | 1,990,611 |
|
Property, buildings and equipment – net | 1,418,705 |
| | 1,431,241 |
| 1,410,312 |
| | 1,420,891 |
|
DEFERRED INCOME TAXES | 62,007 |
| | 83,996 |
| 79,664 |
| | 64,775 |
|
GOODWILL | 590,109 |
| | 582,336 |
| 533,012 |
| | 527,150 |
|
INTANGIBLES - NET | 437,521 |
| | 463,294 |
| 587,418 |
| | 586,126 |
|
OTHER ASSETS | 266,200 |
| | 248,246 |
| 75,960 |
| | 75,136 |
|
TOTAL ASSETS | $ | 5,964,804 |
| | $ | 5,857,755 |
| $ | 5,782,549 |
| | $ | 5,694,307 |
|
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
| | | (Unaudited) | | | (Unaudited) | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | June 30, 2016 | | December 31, 2015 | March 31, 2017 | | Dec 31, 2016 |
CURRENT LIABILITIES | | | | | | |
Short-term debt | $ | 372,854 |
| | $ | 353,072 |
| $ | 421,555 |
| | $ | 386,140 |
|
Current maturities of long-term debt | 132,620 |
| | 247,346 |
| 20,069 |
| | 19,966 |
|
Trade accounts payable | 628,659 |
| | 583,474 |
| 672,471 |
| | 650,092 |
|
Accrued compensation and benefits | 203,401 |
| | 196,667 |
| 145,037 |
| | 212,525 |
|
Accrued contributions to employees’ profit sharing plans | 35,950 |
| | 124,587 |
| 23,181 |
| | 54,948 |
|
Accrued expenses | 250,573 |
| | 266,702 |
| 317,243 |
| | 290,207 |
|
Income taxes payable | 17,287 |
| | 16,686 |
| 88,874 |
| | 15,059 |
|
Total current liabilities | 1,641,344 |
| | 1,788,534 |
| 1,688,430 |
| | 1,628,937 |
|
LONG-TERM DEBT (less current maturities) | 1,765,809 |
| | 1,388,414 |
| 1,847,717 |
| | 1,840,946 |
|
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES | 135,950 |
| | 154,352 |
| 133,984 |
| | 126,101 |
|
EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES | 179,127 |
| | 173,741 |
| 195,895 |
| | 192,555 |
|
SHAREHOLDERS' EQUITY | |
| | |
| |
| | |
|
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding | — |
| | — |
| — |
| | — |
|
Common Stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued | 54,830 |
| | 54,830 |
| 54,830 |
| | 54,830 |
|
Additional contributed capital | 1,016,044 |
| | 1,000,476 |
| 1,031,926 |
| | 1,030,256 |
|
Retained earnings | 7,013,688 |
| | 6,802,130 |
| 7,216,018 |
| | 7,113,559 |
|
Accumulated other comprehensive losses | (192,310 | ) | | (221,091 | ) | (249,933 | ) | | (272,294 | ) |
Treasury stock, at cost – 49,236,663 and 47,630,511 shares, respectively | (5,758,349 | ) | | (5,369,711 | ) | |
Treasury stock, at cost – 51,253,521 and 50,854,905 shares, respectively | | (6,258,039 | ) | | (6,128,416 | ) |
Total W.W. Grainger, Inc. shareholders’ equity | 2,133,903 |
| | 2,266,634 |
| 1,794,802 |
| | 1,797,935 |
|
Noncontrolling interest | 108,671 |
| | 86,080 |
| 121,721 |
| | 107,833 |
|
Total shareholders' equity | 2,242,574 |
| | 2,352,714 |
| 1,916,523 |
| | 1,905,768 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 5,964,804 |
| | $ | 5,857,755 |
| $ | 5,782,549 |
| | $ | 5,694,307 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
| | | Six Months Ended | Three Months Ended |
| June 30, | March 31, |
| 2016 | | 2015 | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net earnings | $ | 371,089 |
| | $ | 439,381 |
| $ | 182,853 |
| | $ | 191,644 |
|
Provision for losses on accounts receivable | 8,282 |
| | 4,630 |
| 3,918 |
| | 3,454 |
|
Deferred income taxes and tax uncertainties | 4,565 |
| | 1,995 |
| (7,632 | ) | | 21,035 |
|
Depreciation and amortization | 113,496 |
| | 106,937 |
| 62,249 |
| | 56,294 |
|
(Gains) from sales of assets, net of asset impairment | (15,564 | ) | | (51 | ) | |
Gains from sales of assets and write-offs | | (10,966 | ) | | (7,465 | ) |
Stock-based compensation | 21,135 |
| | 27,043 |
| 6,757 |
| | 7,456 |
|
Losses from equity method investment | 11,815 |
| | 4,302 |
| 8,374 |
| | 6,388 |
|
Change in operating assets and liabilities – net of business acquisitions: | |
| | |
| |
| | |
|
Accounts receivable | (98,394 | ) | | (50,586 | ) | (95,419 | ) | | (84,435 | ) |
Inventories | 8,733 |
| | 26,075 |
| 27,826 |
| | 10,831 |
|
Prepaid expenses and other assets | (6,143 | ) | | 6,929 |
| (25,943 | ) | | 4,370 |
|
Trade accounts payable | 43,338 |
| | (29,144 | ) | 18,051 |
| | 30,827 |
|
Other current liabilities | (128,960 | ) | | (169,123 | ) | (64,171 | ) | | (104,552 | ) |
Current income taxes payable | (1,368 | ) | | (847 | ) | 73,227 |
| | 32,757 |
|
Accrued employment-related benefits cost | 3,877 |
| | 4,231 |
| 1,520 |
| | 323 |
|
Other – net | (9,512 | ) | | (2,267 | ) | 302 |
| | (8,290 | ) |
Net cash provided by operating activities | 326,389 |
| | 369,505 |
| 180,946 |
| | 160,637 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| |
| | |
|
Additions to property, buildings and equipment | (105,717 | ) | | (170,873 | ) | (78,768 | ) | | (51,797 | ) |
Proceeds from sales of assets | 43,119 |
| | 10,119 |
| 48,306 |
| | 13,817 |
|
Equity method investment | (10,340 | ) | | (10,190 | ) | (7,067 | ) | | (7,199 | ) |
Net cash received for business divestiture | — |
| | 1,114 |
| |
Other – net | (597 | ) | | (567 | ) | — |
| | (206 | ) |
Net cash used in investing activities | (73,535 | ) | | (170,397 | ) | (37,529 | ) | | (45,385 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| |
| | |
|
Net increase in commercial paper | 19,888 |
| | (4,967 | ) | 34,946 |
| | 214,645 |
|
Borrowings under lines of credit | 18,501 |
| | 26,842 |
| 9,883 |
| | 12,028 |
|
Payments against lines of credit | (19,306 | ) | | (46,649 | ) | (9,167 | ) | | (11,060 | ) |
Proceeds from issuance of long-term debt | 393,284 |
| | 995,880 |
| 3,917 |
| | 245 |
|
Payments of long-term debt | (129,981 | ) | | (25,630 | ) | (6,235 | ) | | (125,014 | ) |
Proceeds from stock options exercised | 26,191 |
| | 35,549 |
| 26,345 |
| | 5,206 |
|
Excess tax benefits from stock-based compensation | 9,770 |
| | 17,106 |
| — |
| | 17,287 |
|
Payment for employee taxes withheld from stock awards | | (11,625 | ) | | (6,906 | ) |
Purchase of treasury stock | (412,647 | ) | | (442,595 | ) | (159,146 | ) | | (172,047 | ) |
Cash dividends paid | (147,480 | ) | | (153,906 | ) | (72,118 | ) | | (72,632 | ) |
Net cash (used in) provided by financing activities | (241,780 | ) | | 401,630 |
| |
Net cash used in financing activities | | (183,200 | ) | | (138,248 | ) |
Exchange rate effect on cash and cash equivalents | 14,787 |
| | (7,596 | ) | 4,438 |
| | 12,766 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS | 25,861 |
| | 593,142 |
| (35,345 | ) | | (10,230 | ) |
Cash and cash equivalents at beginning of year | 290,136 |
| | 226,644 |
| 274,146 |
| | 290,136 |
|
Cash and cash equivalents at end of period | $ | 315,997 |
| | $ | 819,786 |
| $ | 238,801 |
| | $ | 279,906 |
|
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
W.W. Grainger, Inc. is a broad-line distributor of maintenance, repair and operating (MRO) supplies, and other related products and services used by businesses and institutions. W.W. Grainger, Inc.’s operations are primarily in the United States (U.S.) and Canada, with a presence in Europe, Asia and Latin America. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.
The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 20152016 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
The Condensed Consolidated Balance Sheet as of December 31, 20152016 has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.
Certain amounts in the 2016 first quarter Condensed Consolidated Statements of Cash Flows, as previously reported, have been reclassified within the cash flows from financing activities section. These changes did not have a material impact on the statements of cash flows.
2. NEW ACCOUNTING STANDARDS
In July 2015, the Financial Accounting Standards Board (FASB) announced a one-year delay in the effective date ofissued Accounting Standards UpdateBoard (ASU) 2014-09, Revenue from Contracts with Customers. The standard will now be effective for interim and annual periods beginning after December 15, 2017. The standard also permits adoption as early as the original effective date, which was for interim and annual periods beginning after December 15, 2016. The Company is evaluating the impact of this ASU but does not expect it to have a material impact on the Company's consolidated financial statements.
In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (NRV) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. This pronouncementASU is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2016, and prospective adoption is required. TheAs of January 1, 2017, the Company is evaluatingadopted the ASU and it did not have a material impact of this ASU.on the Company's Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under the fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions forof the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of the standard is to improveThis ASU improves transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The effective date for the standard is for fiscal yearyears and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of this ASU.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures;Ventures: Simplifying the Transition to the Equity Method of Accounting. This updateASU eliminates the requirement to retroactively adjust the
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
investment, results of operations and retained earnings when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The amendment requires that the investor add the cost of acquiring the additional interest to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The effective date forof the standard is for fiscal years and interim periods within those years beginning after December 15, 2016. The amendment should be applied prospectively and early application is permitted. ThisAs of January 1, 2017, the Company adopted the ASU isand it did not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendment is meant to reduce the potential for diversity in practice arising from inconsistent application of the principal versus agent guidance as well as reduce the cost and complexity during the transition and on an ongoing basis. The effective date for the amendment to the standard is consistent with ASU 2014-09, Revenue from Contracts with Customers, which is interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact of this ASU.Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Stock Based Compensation: Improvements to Employee Share-Based Payment Accounting. The standardThis ASU simplifies several aspects of the accounting for employee share-based payment
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
transactions, including accounting for income taxes, forfeitures and statutory tax withholdings requirements, as well as classification in the statement of cash flows. The effective date for the standard is for fiscal years and interim periods withwithin those years beginning after December 15, 2016. As of January 1, 2017, the Company adopted the ASU and it resulted in the following:
|
| | |
Topic | Method of Adoption | Impact on Consolidated Financial Statements |
Recognize all excess tax benefits and tax deficiencies as income tax benefit or expense | Prospective | The Company recognized $7.6 million of excess tax benefits in income taxes in the three months ended March 31, 2017, contributing to the lower effective tax rate for the quarter. |
Excess tax benefits on the statement of cash flows are classified as an operating activity
| Prospective | The Company recognized $7.6 million of excess tax benefits in the three months ended March 31, 2017 as an operating activity. Prior to the adoption of the ASU 2016-09, the excess tax benefit in the three months ended March 31, 2016 was $17.3 million recognized as a financing activity. |
Employee taxes paid when an employer withholds shares for tax-withholding purposes on the statement of cash flows are classified as a financing activity | Retrospective | The Company reclassified $6.9 million of employee taxes paid from cash flows from operating activities to cash flows from financing activities on the Consolidated Statements of Cash Flows in the three months ended March 31, 2016. |
Accounting for forfeitures and tax withholding elections | Prospective | The company has not changed its accounting policy for forfeitures. There is no significant impact on Consolidated Financial Statements. |
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. This ASU eliminates the existing exception in U.S. GAAP that prohibits the recognition of income tax consequences for most intra-entity asset transfers. The effective date of this ASU is fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and early adoption is permitted. As of January 1, 2017, the Company elected to early adopt the ASU and it had no impact on the opening balance of retained earnings as of the date of adoption.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and early adoption is permitted. The Company is evaluating the impact of this ASU.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In February 2017, the FASB issued ASU 2017-05, Other Income - Gain and Losses from the Derecognition of Nonfinancial Assets. The FASB issued this ASU to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets.
Subtopic 610-20, which was issued in May 2014 as a part of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The amendments in this ASU are effective at the same time as the amendments in ASU 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is evaluating the impact of this ASU.
In March 2017, the FASB issued ASU 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The FASB issued this ASU primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. If early adoption is elected, allpermitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this ASU should be applied retrospectively for the presentation of the net periodic postretirement cost components in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is evaluating the impact of this ASU.
REVENUE RECOGNITION STANDARDS
In July 2015, FASB announced a one-year delay in the effective date of ASU 2014-09, Revenue from Contracts with Customers. This ASU will now be effective for interim and annual periods beginning after December 15, 2017. The standard will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is that apply mustan entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be adoptedentitled in exchange for those goods or services. The ASU also requires additional disclosures about the same period.nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company has elected notstandard permits adoption as early as the original effective date, which was for interim and annual periods beginning after December 15, 2016.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU is meant to early adopt this ASU. The newreduce the potential for diversity in practice arising from inconsistent application of principal versus agent guidance is expected to impact tax expenseas well as reduce the cost and dilutive shares outstanding calculation, with a potentially dilutive impactcomplexity during the transition and on future earnings per share and increased period to period variability of net earnings.an ongoing basis.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. The amendmentThis ASU is meant to clarify the identification of performance obligations and the licensing implementation guidelines, while retaining the related principles of those areas. The effective date of the amendment to the standard is consistent with ASU 2014-09, Revenue from Contracts with Customers, which is for interim and annual periods beginning after December 15, 2017. The company is evaluating the impact of this ASU.
In JuneDecember 2016, the FASB issued ASU 2016-13,2016-20, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this update affect an entityThis ASU includes technical corrections and improvements to varying degrees depending on the credit qualityTopic 606 and other Topics amended by Update 2014-09 to increase stakeholders’ awareness of the assets held by the entity, their duration,proposals and how the entity applies current GAAP. to expedite improvements to ASU 2014-09.
The effective datedates of ASU 2016-08, ASU 2016-10 and ASU 2016-20 are consistent with ASU 2014-09. The Company has elected not to early adopt these ASUs. The standard permits the use of either the full retrospective or the modified retrospective adoption method. The Company is planning to elect the modified retrospective method and recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity as of January 1, 2018. These ASUs require expanded qualitative and quantitative disclosures of revenue and cash flows emerging from contracts with customers.
The Company has evaluated the provisions of the amendment tonew standard and is in the process of assessing its impact on financial statements, information systems, business processes and financial statement disclosures. Based on initial reviews, the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is evaluatingnot expected to have a material impact on the impact of this ASU.Company's Consolidated Financial Statements.
3. DIVIDEND
On July 27, 2016, the Company’s Board of Directors declared a quarterly dividend of $1.22 per share, payable September 1, 2016, to shareholders of record on August 8, 2016.
4. ACQUISITION
On September 1, 2015, the Company acquired all of the issued share capital of Cromwell Group (Holdings) Limited (Cromwell). With sales of approximately £285 million ($437 million) for fiscal year ending August 31, 2015, prior to the acquisition, Cromwell was the largest independent MRO distributor in the United Kingdom, serving more than 35,000 industrial and manufacturing customers worldwide. The Company paid £310 million ($464 million), subject to customary adjustments, for the Cromwell acquisition. The acquisition was partially funded with newly issued debt in the United Kingdom. Goodwill and intangibles recorded totaled approximately $357 million. The goodwill is not deductible for tax purposes. The purchase price allocation has not been finalized and is subject to change as the Company obtains additional information during the measurement period related to the valuation of the acquired assets and liabilities. Disclosure of pro forma results was not required.
5. RESTRUCTURING RESERVES
The Company recorded employee termination benefits with the majority expected to be paid in 2016 related to the reorganization of the business. Severance costs of approximately $9 million and $25 million were recorded in the three and six months ended June 30, 2016, respectively, and are included in Warehousing, marketing and administrative expenses. The reserve balance as of June 30, 2016 and December 31, 2015 was approximately $35 million and $24 million, respectively, and is included in Accrued compensation and benefits.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On April 26, 2017, the Company’s Board of Directors declared a quarterly dividend of $1.28 per share, payable June 1, 2017, to shareholders of record on May 8, 2017.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Grainger had approximately $1.1 billion of goodwill and intangible assets as of March 31, 2017 and December 31, 2016, respectively, or 19% and 20% of total assets. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. To detect these events, Grainger periodically performs qualitative assessments of factors such as a reporting units' historical and current performance, overall economic factors and assumptions regarding future performance, to determine if it is more likely than not that the goodwill and intangible assets might be impaired and whether it is necessary to perform the two-step quantitative goodwill impairment test.
As previously reported, Grainger completed the annual goodwill and intangible assets impairment testing during the fourth quarter of 2016. The estimated fair values substantially exceeded the carrying values for all of the Company’s reporting units, except for Fabory, which resulted in a $47 million goodwill impairment charge per the two-step quantitative goodwill impairment test.
Grainger monitors the operating performance of its reporting units and the quarterly assessment did not indicate the presence of goodwill impairment triggering events as of March 31, 2017. Changes in assumptions regarding future performance, unfavorable economic environment and changes in market conditions or other factors may have a significant impact on reporting units' cash flows in the future and Grainger may be required to recognize an impairment for goodwill.
5. RESTRUCTURING RESERVES
The Company recorded severance costs of approximately $4 million and $16 million in the three months ended March 31, 2017 and March 31, 2016, respectively, and is included in Warehousing, marketing and administrative expenses. The reserve balance as of March 31, 2017 and December 31, 2016 was approximately $19 million and $23 million, respectively, and is included in Accrued compensation and benefits. The majority of the reserve is expected to be paid through 2017.
6. SHORT-TERM AND LONG-TERM DEBT
The following summarizes information concerning short-term debt (in thousands of dollars):
| | | June 30, 2016 | | December 31, 2015 | March 31, 2017 |
| | December 31, 2016 |
|
Outstanding lines of credit | $ | 22,966 |
| | $ | 23,072 |
| $ | 16,861 |
| | $ | 16,392 |
|
Outstanding commercial paper | 349,888 |
| | 330,000 |
| 404,694 |
| | 369,748 |
|
| $ | 372,854 |
| | $ | 353,072 |
| $ | 421,555 |
| | $ | 386,140 |
|
The increase in commercial paper from December 31, 2016 was used to fund general working capital needs and share repurchase.
Long-term debt consisted of the following (in thousands of dollars):
W.W. Grainger, Inc. and Subsidiaries |
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
4.60% senior notes | $ | 1,000,000 |
| | $ | 1,000,000 |
|
3.75% senior notes | 400,000 |
| | — |
|
U.S. dollar term loan | — |
| | 114,614 |
|
British pound denominated term loan | 207,574 |
| | 235,808 |
|
Euro denominated term loan | 113,816 |
| | 114,030 |
|
Japanese yen denominated term loans | 56,907 |
| | 49,875 |
|
Canadian dollar revolving credit facility | 112,203 |
| | 108,389 |
|
Other | 27,194 |
| | 25,991 |
|
Debt issuance costs and discounts | (19,265 | ) | | (12,947 | ) |
Less current maturities | (132,620 | ) | | (247,346 | ) |
| $ | 1,765,809 |
| | $ | 1,388,414 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited)
On May 16, 2016, the Company issued $400 million of unsecured 3.75% Senior Notes (3.75% Notes) that mature on May 15, 2046. The 3.75% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15 and November 15, beginning on November 15, 2016. Prior to November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 3.75% Notes plus 20 basis points, together with accrued and unpaid interest, if any, to the redemption date. On or after November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs of approximately $4 million associated with the issuance of the 3.75% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortized to interest expense over the term of the 3.75% Notes. The fair value of the 3.75% Notes was approximately $420 million as of June 30, 2016.
On June 11, 2015, the Company issued $1 billion of unsecured 4.60% Senior Notes (4.60% Notes) that mature on June 15, 2045. The 4.60% Notes require no principal payments until the maturity date and interest is payable semi-annually on June 15 and December 15, beginning on December 31, 2015. Prior to December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.60% Notes plus 25 basis points, together with accrued and unpaid interest, if any, to the redemption date. On or after December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs of approximately $10 million associated with the issuance of the 4.60% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortized to interest expense over the term of the 4.60% Notes. The fair value of the 4.60% Notes was approximately $1.2 billion and $1 billion as of June 30, 2016 and December 31, 2015, respectively. |
| | | | | | | |
| March 31, 2017 |
| | December 31, 2016 |
|
4.60% senior notes due 2045 | $ | 1,000,000 |
| | $ | 1,000,000 |
|
3.75% senior notes due 2046 | 400,000 |
| | 400,000 |
|
British pound term loan and revolving credit facility | 185,666 |
| | 187,506 |
|
Euro term loan and revolving credit facility | 122,463 |
| | 120,900 |
|
Canadian dollar revolving credit facility | 105,176 |
| | 100,521 |
|
Other | 73,309 |
| | 71,109 |
|
| 1,886,614 |
| | 1,880,036 |
|
Less current maturities | (20,069 | ) | | (19,966 | ) |
Debt issuance costs and discounts | (18,828 | ) | | (19,124 | ) |
| $ | 1,847,717 |
| | $ | 1,840,946 |
|
The estimated fair value of the Company’s 3.75% Senior Notes due 2046 (3.75% Notes) and 4.60% Senior Notes due 2045 (4.60% Notes) was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The fair value of the 3.75% Notes was approximately $380 million and $371 million as of March 31, 2017 and December 31, 2016, respectively. The fair value of the 4.60% Notes was approximately $1.1 billion as of March 31, 2017 and December 31, 2016, respectively. The carrying value of other long-term debt approximates fair value due to thetheir variable interest rates.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage a portion of exposures to fluctuations in interest rates and foreign currency exchange rates. The Company does not enter into derivative financial instruments for trading or speculative purposes. The fair values of these instruments are determined by using quoted market forward rates (level 2 inputs) and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. These instruments qualify for hedge accounting and the changes in fair value are reported as a component of other comprehensive earnings (losses) net of tax effects.
The fair value of the Company's interest rate swap was approximately $0.3 million and $1 million as of June 30, 2016 and December 31, 2015, respectively, and was included on the balance sheet as a liability under Accrued expenses. The purpose of the interest rate swap is to partially hedge the future interest expense of the euro-denominated term loan entered into to fund a portion of the Fabory acquisition in 2011. The swap matures in August 2016. All remaining derivative instruments were immaterial individually and in the aggregate as of June 30, 2016 and December 31, 2015.
8. EQUITY METHOD INVESTMENT
In addition to the investment made in 2015, in January 2016, the Company invested in a second limited liability company established to produce refined coal, which is then sold to a utility to produce electricity. The production and sale of refined coal is eligible for renewable energy tax credits under Section 45 of the Internal Revenue Code. Under the terms of the investment, effective control lies with a co-investor who manages the day-to-day operations of the entity, and as such the investments are accounted for under the equity method of accounting.
As of June 30, 2016 and December 31, 2015, the balance of the combined refined coal investments was $7 million million and $9 million, respectively, and is included on the balance sheet under Other assets. During the three and six months ended June 30, 2016, the Company recorded $5 million and $12 million, respectively, in equity losses. The total tax benefit of $14 million including energy tax credits, is reflected in the Company’s effective tax rate for the six months ended June 30, 2016. The investments contributed $1.7 million to net earnings for six months ended June 30, 2016.
9. EMPLOYEE BENEFITS - POSTRETIREMENT
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its United StatesU.S. employees hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company. Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.
The net periodic benefit costs charged to operating expenses, which are valued at the measurement date of January 1 and recognized evenly throughout the year, consisted of the following components (in thousands of dollars):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Service cost | $ | 2,060 |
| | $ | 2,532 |
| | $ | 4,119 |
| | $ | 5,064 |
| $ | 1,897 |
| | $ | 2,059 |
|
Interest cost | 2,463 |
| | 2,412 |
| | 4,927 |
| | 4,824 |
| 2,149 |
| | 2,464 |
|
Expected return on assets | (2,528 | ) | | (2,594 | ) | | (5,056 | ) | | (5,188 | ) | (2,857 | ) | | (2,528 | ) |
Amortization of unrecognized losses | 32 |
| | 378 |
| | 64 |
| | 756 |
| (655 | ) | | 32 |
|
Amortization of prior service credits | (1,672 | ) | | (1,700 | ) | | (3,344 | ) | | (3,400 | ) | (1,622 | ) | | (1,672 | ) |
Net periodic benefit costs | $ | 355 |
| | $ | 1,028 |
| | $ | 710 |
| | $ | 2,056 |
| $ | (1,088 | ) | | $ | 355 |
|
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The funding of the trust is an estimated amount which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are nozero minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC. The Company did not make a contribution to the trust during the three and six months ended June 30, 2016.March 31, 2017.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10.8. SEGMENT INFORMATION
The Company has two reportable segments: the United StatesU.S. and Canada. The United StatesU.S. operating segment reflects the results of the Company's U.S. business. The Canada operating segment primarily reflects the results for Acklands – Grainger Inc. (Acklands-Grainger), the Company’s Canadian business. Other businesses include MonotaRO in Japan, Zoro the single channel business in the United States,U.S. and business unitsoperations in Europe, Asia and Latin America. OtherThese businesses individually do not meet the definition of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of maintenance, repair and operatingMRO supplies, as service revenues account for less thanapproximately 1% of total revenues for each operating segment. Following is a summary of segment results (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2016 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 1,978,542 |
| | $ | 194,418 |
| | $ | 474,166 |
| | $ | 2,647,126 |
|
Intersegment net sales | (82,442 | ) | | (50 | ) | | (966 | ) | | (83,458 | ) |
Net sales to external customers | $ | 1,896,100 |
| | $ | 194,368 |
| | $ | 473,200 |
| | $ | 2,563,668 |
|
Segment operating earnings | $ | 348,938 |
| | $ | (27,741 | ) | | $ | 29,724 |
| | $ | 350,921 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 2,030,633 |
| | $ | 239,466 |
| | $ | 318,898 |
| | $ | 2,588,997 |
|
Intersegment net sales | (65,394 | ) | | (17 | ) | | (1,021 | ) | | (66,432 | ) |
Net sales to external customers | $ | 1,965,239 |
| | $ | 239,449 |
| | $ | 317,877 |
| | $ | 2,522,565 |
|
Segment operating earnings | $ | 369,533 |
| | $ | 9,499 |
| | $ | 15,158 |
| | $ | 394,190 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2016 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 3,944,809 |
| | $ | 373,189 |
| | $ | 919,500 |
| | $ | 5,237,498 |
|
Intersegment net sales | (164,941 | ) | | (86 | ) | | (2,265 | ) | | (167,292 | ) |
Net sales to external customers | $ | 3,779,868 |
| | $ | 373,103 |
| | $ | 917,235 |
| | $ | 5,070,206 |
|
Segment operating earnings | $ | 680,795 |
| | $ | (40,088 | ) | | $ | 51,508 |
| | $ | 692,215 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 4,002,088 |
| | $ | 473,996 |
| | $ | 616,697 |
| | $ | 5,092,781 |
|
Intersegment net sales | (128,585 | ) | | (53 | ) | | (1,917 | ) | | (130,555 | ) |
Net sales to external customers | $ | 3,873,503 |
| | $ | 473,943 |
| | $ | 614,780 |
| | $ | 4,962,226 |
|
Segment operating earnings | $ | 735,622 |
| | $ | 18,886 |
| | $ | 24,684 |
| | $ | 779,192 |
|
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following is a summary of segment results (in thousands of dollars):
|
| | | | | | | | | | | | | | | |
| United States | | Canada | | Other Businesses | | Total |
Segment assets: | | | | | | | |
June 30, 2016 | $ | 2,280,207 |
| | $ | 315,742 |
| | $ | 525,142 |
| | $ | 3,121,091 |
|
December 31, 2015 | $ | 2,191,045 |
| | $ | 317,504 |
| | $ | 507,116 |
| | $ | 3,015,665 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 1,953,444 |
| | $ | 186,141 |
| | $ | 497,407 |
| | $ | 2,636,992 |
|
Intersegment net sales | (95,073 | ) | | (12 | ) | | (778 | ) | | (95,863 | ) |
Net sales to external customers | $ | 1,858,371 |
| | $ | 186,129 |
| | $ | 496,629 |
| | $ | 2,541,129 |
|
Segment operating earnings | $ | 312,470 |
| | $ | (16,729 | ) | | $ | 31,507 |
| | $ | 327,248 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 |
| United States | | Canada | | Other Businesses | | Total |
Total net sales | $ | 1,966,267 |
| | $ | 178,771 |
| | $ | 445,333 |
| | $ | 2,590,371 |
|
Intersegment net sales | (82,499 | ) | | (36 | ) | | (1,298 | ) | | (83,833 | ) |
Net sales to external customers | $ | 1,883,768 |
| | $ | 178,735 |
| | $ | 444,035 |
| | $ | 2,506,538 |
|
Segment operating earnings | $ | 331,857 |
| | $ | (12,347 | ) | | $ | 21,783 |
| | $ | 341,293 |
|
|
| | | | | | | | | | | | | | | |
| United States | | Canada | | Other Businesses | | Total |
Segment assets: | | | | | | | |
March 31, 2017 | $ | 2,311,281 |
| | $ | 287,552 |
| | $ | 535,343 |
| | $ | 3,134,176 |
|
December 31, 2016 | $ | 2,275,009 |
| | $ | 286,035 |
| | $ | 494,067 |
| | $ | 3,055,111 |
|
Following are reconciliations of segment information with the consolidated totals per the financial statements (in thousands of dollars):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Operating earnings: | | | | |
Total operating earnings for operating segments | $ | 350,921 |
| | $ | 394,190 |
| | $ | 692,215 |
| | $ | 779,192 |
| $ | 327,248 |
| | $ | 341,293 |
|
Unallocated expenses and eliminations | (45,332 | ) | | (37,473 | ) | | (69,534 | ) | | (71,227 | ) | (31,760 | ) | | (24,201 | ) |
Total consolidated operating earnings | $ | 305,589 |
| | $ | 356,717 |
| | $ | 622,681 |
| | $ | 707,965 |
| $ | 295,488 |
| | $ | 317,092 |
|
| | | June 30, 2016 | | December 31, 2015 | March 31, 2017 | | Dec 31, 2016 |
Assets: | | |
Total assets for operating segments | $ | 3,121,091 |
| | $ | 3,015,665 |
| $ | 3,134,176 |
| | $ | 3,055,111 |
|
Other current and non-current assets | 2,690,398 |
| | 2,624,966 |
| 2,484,117 |
| | 2,464,656 |
|
Unallocated assets | 153,315 |
| | 217,124 |
| 164,256 |
| | 174,540 |
|
Total consolidated assets | $ | 5,964,804 |
| | $ | 5,857,755 |
| $ | 5,782,549 |
| | $ | 5,694,307 |
|
Assets for operatingreportable segments include net accounts receivable and first-in, first-out inventory which are reported to the Company's Chief Operating Decision Maker. Other current and non-current assets include all other asset balances for the operatingreportable segments.
Unallocated expenses and unallocated assets primarily relate to the Company headquarter's support services, which are not part of any business segment, as well as intercompany eliminations. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
include non-operating cash and cash equivalents, certain prepaid expenses and property, buildings and equipment-net. Unallocated expenses of $45 million increased 22% in the three months ended June 30, 2016 versus $37 million in the prior year quarter. The increase was driven primarily by a $9 million write-down of a corporate aircraft that the Company plans to sell in connection with the outsourcing of the aviation department.
Intersegment net sales for the U.S. segment increased by $17 million and $36$12 million for the three and six months ended June 30, 2016, respectively,of 2017 compared to the prior year, driven by increased sales from the U.S. business to Zoro. The U.S. business' supply chain network is Zoro's primary source of inventory.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11.9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):
| | | Three Months Ended | | Six Months Ended | Three Months Ended |
| June 30, | | June 30, | March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Net earnings attributable to W.W. Grainger, Inc. as reported | $ | 172,676 |
| | $ | 220,548 |
| | $ | 359,389 |
| | $ | 431,563 |
| $ | 174,744 |
| | $ | 186,713 |
|
Distributed earnings available to participating securities | (576 | ) | | (742 | ) | | (1,202 | ) | | (1,510 | ) | (546 | ) | | (626 | ) |
Undistributed earnings available to participating securities | (970 | ) | | (1,418 | ) | | (2,092 | ) | | (2,879 | ) | (932 | ) | | (1,121 | ) |
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders | 171,130 |
| | 218,388 |
| | 356,095 |
| | 427,174 |
| 173,266 |
| | 184,966 |
|
Undistributed earnings allocated to participating securities | 970 |
| | 1,418 |
| | 2,092 |
| | 2,879 |
| 932 |
| | 1,121 |
|
Undistributed earnings reallocated to participating securities | (964 | ) | | (1,404 | ) | | (2,078 | ) | | (2,850 | ) | (924 | ) | | (1,114 | ) |
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders | $ | 171,136 |
| | $ | 218,402 |
| | $ | 356,109 |
| | $ | 427,203 |
| $ | 173,274 |
| | $ | 184,973 |
|
Denominator for basic earnings per share – weighted average shares | 60,891,298 |
| | 66,652,130 |
| | 61,278,981 |
| | 66,939,110 |
| 58,720,066 |
| | 61,668,682 |
|
Effect of dilutive securities | 410,247 |
| | 665,001 |
| | 420,622 |
| | 708,579 |
| 482,816 |
| | 431,119 |
|
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | 61,301,545 |
| | 67,317,131 |
| | 61,699,603 |
| | 67,647,689 |
| 59,202,882 |
| | 62,099,801 |
|
Earnings per share two-class method | |
| | |
| | | | | |
| | |
|
Basic | $ | 2.81 |
| | $ | 3.28 |
| | $ | 5.81 |
| | $ | 6.38 |
| $ | 2.95 |
| | $ | 3.00 |
|
Diluted | $ | 2.79 |
| | $ | 3.25 |
| | $ | 5.77 |
| | $ | 6.32 |
| $ | 2.93 |
| | $ | 2.98 |
|
12.10. CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings that are incidental to its business, including claims related to product liability, general negligence, contract disputes, environmental issues, wage and hour laws, intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees, consumers, competitors, suppliers or governmental entities. As a government contractor selling to federal, state and local governmental entities, the Company is also subject to governmental or regulatory inquiries or audits or other proceedings, including those related to pricing compliance. It is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position or results of operations.
TCPA Matter
On April 5, 2013, David Davies filed a putative class action lawsuit in the Circuit Court of Cook County, Illinois on behalf of all those who received faxes in connection with a 2009 marketing campaign. The complaint alleges, among other things, that the Company violated the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (the “TCPA”), by sending fax advertisements that either were unsolicited and/or did not contain a valid opt-out notice. The TCPA provides for penalties of $500 to $1,500 for each non-compliant individual fax.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 13, 2013, the Company removed the case to the Federal District Court for the Northern District of Illinois (the “District Court”). On June 27, 2014, the District Court granted the Company’s motion for a determination that the court should not certify a class, finding that Davies was not an adequate class representative. On October 2, 2014, the United States Court of Appeals for the Seventh Circuit denied Davies’ petition for immediate review of the June 27, 2014 ruling. Davies may seek to pursue an appeal of the June 27, 2014 ruling at the conclusion of the District Court proceedings.
The Company subsequently moved to dismissDavies’ individual claims based on the position that he had suffered no injury relating to his notice-related claims on account of the single fax he received, or otherwise. On April 4, 2016, the District Court issued an opinion denying the Company’s motion.
The parties have filed cross-motions for summary judgment and are in the process of completing briefing on their motions.
We believe we have strong legal and factual defenses and intend to continue defending the Company vigorously in the pending lawsuit. While the Company is unable to predict the outcome of this proceeding, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Grainger is a broad-line distributor of maintenance, repair and operating (MRO) supplies, and other related products and services used by businesses and institutions. Grainger’s operations are primarily in the United States (U.S.) and Canada, with a presence in Europe, Asia and Latin America. Grainger uses a combination of multichannel and single channel business models to provide customers with a range of options for finding and purchasing products utilizing sales representatives, catalogs, direct marketing materials and eCommerce. Grainger serves approximately 3 million customers worldwide through a network of highly integrated branches, distribution centers and websites.
Grainger’s two reportable segments are the U.S. and Canada. The U.S. operating segment reflects the results of Grainger’s U.S. business. The Canada operating segment reflects the results for Acklands - Grainger Inc., Grainger’s Canadian business. Other Businesses include single channel online businesses such as MonotaRO in Japan, Zoro in the U.S. and business units in Europe, Asia and Latin America.
Business Environment
Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger's growth. Grainger’s sales in the United StatesU.S. and Canada tend to positively correlate with Business Investment, Business Inventory, Exports and Industrial Production. In the United States,U.S., sales tend to positively correlate with Gross Domestic Product (GDP). In Canada, sales tend to positively correlate with oil prices. The table below provides these estimated indicators for 2016:2017:
| | | United States | Canada | 2017 Forecasted Growth |
| 2016 Forecast (April) | 2016 Forecast (July) | 2016 Forecast (April) | 2016 Forecast (July) | United States | Canada |
Business Investment | 1.8% | —% | (3.3)% | (3.9)% | 4.4% | 0.7% |
Business Inventory | 1.8% | 1.3% | —% | 1.5% | — |
Exports | 1.4% | 0.9% | 2.2% | 2.4% | 3.0% | 1.9% |
Industrial Production | (0.8)% | (1.6)% | (1.1)% | (2.0)% | 2.3% |
GDP | 2.1% | 1.9% | 1.3% | 2.4% | 2.3% |
Oil Prices | — | $40/barrel | $44/barrel | — | $53/barrel |
Source: Global Insight (April & July 2016) | | |
Source: Global Insight (April 2017) | | |
In the United States,U.S., Business Investment and Exports are two major indicators of MRO spending. Per the Global Insight April 2017 forecast, Business Investment is forecast to remain weak into 2017 primarily due to four factors: declines in oil and gas drilling, excess global capacity, a stronger U.S. dollar and slower growth in export markets. Capital spending should begin to have moderate growthimprove in 2017 through equipment-related spending as the influence from slow growth abroad and 2018 as domestic demand strengthens and oil prices recover.in the U.S. fades. Export growth is expected to to be less than 1% for 2016, which is lower than the performance experienced in 2015. Export growth is expected to grow slightlyhas improved over the remainder of the yearlast 18 months, as the global economy stabilizes and the uncertainty of the Brexit vote fades. As a result of the strong U.S. dollar and slower growth abroad, U.S.exports have responded to improved economic growth , as measured by GDP, isamong countries that the United States exports to.
Per the Global Insight April 2017 forecast, to remain below 2.0% for the year.
For Canada economic growth in 2016 is forecast to continue to remain low. For the second quarter, GDP is forecast to have contracted, largely due to the negative impact of the Alberta wildfires, which are estimated by the Bank of Canada to have subtracted approximately 1 percentage point from GDP growth in the second quarter. A rebound is forecast by the Bank to occur in the third quarter as oil production has resumed and rebuilding efforts in the affected region get underway, combined with growth driven by improving U.S. domestic demand and federal infrastructure spending announced by the government earlier this year. For the year, the Canadian economy, as measured by GDP, is forecast to grow 1.3%to 2.3% in 2016 compared to 1.1% in the prior year. Over the near term,2017. The 2017 forecast assumes that oil prices will continue a key factor contributing to the low level of economic growth will be nonresidentialslow but steady rise and that business nonresidental investment (a component of Business Investment) which iswill begin to increase. The latest forecast to be negative for the remainder ofCanadian dollar includes further downward adjustments and weakness over the year.
next two years compared to the U.S. dollar.
Outlook
On July 19, 2016,April 18, 2017, Grainger revised the 2016lowered its 2017 sales growth guidance from a range of 02 to 6 percent to a range of 1 to 4 percent and also revisedlowered the 20162017 earnings per share guidance from a range of $11.00$11.30 to $12.80$12.40 to a range of $11.20$10.00 to $12.20.$11.30. The revisednew guidance reflectsincorporates the impact of pricing initiatives and a 1 percent reduction in sales from foreign exchange. The pricing actions establish more market competitive prices, including lower thanweb pricing available to Grainger customers. The decision to accelerate the pricing actions is expected volumeto enable faster growth through share gain with existing customers and acquisition of new customers.
Matters Affecting Comparability
There were 64 sales days in the U.S.first quarter of 2017 and Canada, partially offset by improved gross profit and operating expense leverage in the second half of the year. In addition, the Company is now expecting a higher effective tax rate for the year due to an increased concentration of earnings in higher tax rate jurisdictions and lower benefit from the clean energy investments.2016.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Matters Affecting Comparability
There were 64 sales days in the second quarter of 2016 and 2015. Grainger completed the Cromwell Group (Holdings) Limited acquisition in the third quarter of 2015 and operating results of Cromwell have been included in the results of the Company since the acquisition date.
Results of Operations – Three Months Ended June 30, 2016March 31, 2017
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
| | | Three Months Ended June 30, | Three Months Ended March 31, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales | | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2016 (A) | | 2015 (A) | | 2016 | | 2015 | 2017 (A) | | 2016 (A) | | 2017 | | 2016 |
Net sales | $ | 2,564 |
| | $ | 2,523 |
| 2 | % | | 100.0 | % | | 100.0 | % | $ | 2,541 |
| | $ | 2,507 |
| 1 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 1,524 |
| | 1,449 |
| 5 | % | | 59.4 |
| | 57.4 |
| 1,522 |
| | 1,461 |
| 4 | % | | 59.9 |
| | 58.3 |
|
Gross profit | 1,040 |
| | 1,073 |
| (3 | )% | | 40.6 |
| | 42.6 |
| 1,019 |
| | 1,045 |
| (2 | )% | | 40.1 |
| | 41.7 |
|
Operating expenses | 734 |
| | 717 |
| 2 | % | | 28.7 |
| | 28.5 |
| 724 |
| | 728 |
| (1 | )% | | 28.5 |
| | 29.0 |
|
Operating earnings | 306 |
| | 357 |
| (14 | )% | | 11.9 |
| | 14.1 |
| 295 |
| | 317 |
| (7 | )% | | 11.6 |
| | 12.7 |
|
Other expense | 23 |
| | 8 |
| NM |
| | 0.9 |
| | 0.3 |
| (25 | ) | | (20 | ) | NM |
| | (1.0 | ) | | (0.8 | ) |
Income taxes | 104 |
| | 123 |
| (16 | )% | | 4.0 |
| | 4.9 |
| 88 |
| | 106 |
| (17 | )% | | 3.5 |
| | 4.2 |
|
Noncontrolling interest | 7 |
| | 5 |
| 44 | % | | 0.3 |
| | 0.2 |
| 8 |
| | 5 |
| 64 | % | | 0.3 |
| | 0.2 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 173 |
| | $ | 221 |
| (22 | )% | | 6.7 | % | | 8.7 | % | $ | 175 |
| | $ | 187 |
| (6 | )% | | 6.9 | % | | 7.4 | % |
(A) May not sum due to rounding
Grainger’s net sales of $2,564$2,541 million for the secondfirst quarter of 20162017 increased 2%1% compared with sales of $2,5232,507 million for the comparable 20152016 quarter. On a daily basis, salesSales increased 2%. The 2% daily increase1% for the quarter and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Business acquisitionVolume | 45 |
Seasonal | (1) |
Price | (1) |
Volume | (1)(3) |
Total | 2%1% |
The increase in net sales was primarily driven by the acquisition of Cromwell in September 2015 and single channel online businesses in the U.S. and Japan. Refer to the Segment Analysis below for further details.
In the three months ended June 30 2016, March 31, 2017, eCommerce sales for Grainger were $1,183$1,293 million, an increase of 14%15% over the prior yearyear. Total eCommerce sales represented 51% and represented 46%45% of total sales.sales for the three months ended March 31, 2017 and 2016, respectively. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms in the United States.U.S. and Japan businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 57% and 51% of total sales for the three months ended March 31, 2017 and 2016, respectively.
Gross profit of $1,040$1,019 million for the secondfirst quarter of 20162017 decreased 3%2%. The gross profit margin of 40.6%40.1% during the secondfirst quarter of 20162017 decreased 2.01.6 percentage points when compared to the same period in 2015, due primarily to2016, driven by the strategic price deflation exceeding cost deflation, negative customer selling mix, as well as an inventory reserves adjustment in Canada.initiatives.
Operating expenses of $724 million for the first quarter of 2017 decreased 1% from $728 million for the comparable 2016 quarter. Operating expenses in 2017 included a $9 million benefit from the gain on sale of branches in the U.S. and $4 million of restructuring costs in the U.S. and Canada business. Excluding these items, operating expenses increased 2%, driven by the unfavorable comparison to the 2016 gain from the sale of the former Toronto distribution center.
Operating earnings for the first quarter of 2017 were $295 million, a decrease of 7% compared to the first quarter of 2016. Excluding restructuring costs and the gain on the sale of assets mentioned above in both periods, operating earnings decreased 14%, driven by primarily by lower gross profit from strategic pricing initiatives in the U.S. business.
17
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating expenses of $734 million for the second quarter of 2016 increased 2% from $717 million for the comparable 2015 quarter primarily due to the acquisition of Cromwell. Restructuring related expenses contributed 0.6 percentage point to the increase.
Operating earnings for the second quarter of 2016 were $306 million, a decrease of 14% compared to the second quarter of 2015. The decline was driven by lower gross profit margins and higher operating expenses.
Net earnings attributable to W.W. Grainger, Inc. for the secondfirst quarter of 20162017 decreased 22%6% to $173$175 million from $221$187 million in the secondfirst quarter of 2015.
2016. Diluted earnings per share of $2.79$2.93 in the secondfirst quarter of 20162017 were down 14%2% versus the $3.25$2.98 for the secondfirst quarter of 2015,2016, due to lower earnings, partially offset by lower average shares outstanding. Also, included in the diluted earnings per share of $2.98 in the first quarter of 2017 was a $0.13 benefit due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standings Update (ASU) 2016-09, which recognizes the excess tax benefits of stock-based awards as a reduction to income tax expense instead of the previous methodology which recorded the benefit directly to equity.
The table below reconciles reported diluted earnings per share determined in accordance with United StatesU.S. generally accepted accounting principles (GAAP) to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
|
| | | | | |
| Three Months Ended | |
| June 30, | |
| 2016 | | 2015 | % |
Diluted earnings per share reported | $2.79 | | $3.25 | (14 | )% |
Restructuring (United States) | (0.09) | | — | |
Inventory reserve adjustment (Canada) | 0.12 | | — | |
Restructuring (Canada) | 0.09 | | — | |
Restructuring (Unallocated expense) | 0.09 | | — | |
Discrete tax item | (0.11) | | — | |
Restructuring (Other Businesses) | — | | 0.02 | |
Subtotal | $0.10 | | 0.02 | |
Diluted earnings per share adjusted | $2.89 | | $3.27 | (12 | )% |
|
| | | | | |
| Three Months Ended | |
| March 31, | |
| 2017 | | 2016 | % |
Diluted earnings per share reported | $2.93 | | $2.98 | (2 | )% |
Pretax adjustments: | | | | |
Restructuring (United States) | (0.11) | | 0.26 | |
Restructuring (Canada) | 0.02 | | 0.05 | |
Total pretax adjustments | $(0.09) | | 0.31 | |
Tax effect (1) | $0.04 | | (0.11) | |
Total, net of tax | (0.05) | | 0.20 | |
Diluted earnings per share adjusted | $2.88 | | $3.18 | (9 | )% |
(1) The tax impact of adjustments is calculated on the income tax rate in each applicable jurisdiction.
Segment Analysis
Grainger’s two reportable segments are the United StatesU.S. and Canada. The United StatesU.S. operating segment reflects the results of Grainger’sthe Company's U.S. business. The Canada operating segment primarily reflects the results for Acklands – Grainger Inc., Grainger’s Canadian business. Other businesses include MonotaRO in Japan, Zoro in the U.S. and business unitsoperations in Europe, Asia and Latin America.
The following comments at the segment and business unitother businesses level include external and intersegment net sales and operating earnings. See Note 108 to the Condensed Consolidated Financial Statements.
United States
Net sales were $1,979$1,953 million for the secondfirst quarter of 2016,2017, a decrease of 3%$13 million, or 1%, when compared with net sales of $2,031$1,966 million for the same period in 2015. On a daily basis, sales2016. Sales decreased 3%. The 3% daily decrease1% for the quarter and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Intercompany sales to ZoroVolume | 14 |
Seasonal | (1) |
Price | (2) |
Volume | (2)(4) |
Total | (3)(1)% |
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales to natural resource customers and resellers were down in the mid-teens. Contractor customers were down in the high single digitsgovernment and heavy manufacturing was down inend markets led the mid-single digits. Commercial customers were down in the low single digits and light manufacturing was flat. Low oil prices negatively impacted the performance of the heavy manufacturing and natural resources customers. These decreases were slightly offset by low single digit growth in government and retail.sales performance. Sales to Zoro continue to contribute to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.
In the three months ended June 30, 2016,March 31, 2017, eCommerce sales for the United StatesU.S. business were $916$976 million, an increase of 11% over the prior yearyear. Total eCommerce sales represented 50% and represented 46%45% of total sales.sales for the three months ended March 31, 2017 and 2016, respectively. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
purchasing platforms. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 56% and 52% of total sales for the three months ended March 31, 2017 and 2016, respectively.
The gross profit margin for thesecond first quarter of 20162017 decreased 0.91.7 percentage pointpoints compared to the same period in 2015,2016, driven by unfavorable customer mix andthe strategic price deflation outpacing cost deflation.initiatives. Excluding sales to Zoro, the gross profit margin decreased 0.61.5 percentage pointpoints versus prior year.
Operating expenses of $487$494 million in the secondfirst quarter of 20162017 were down $21$19 million, or 4% versus the secondfirst quarter of 2015.2016. Operating expenses in 20162017 included $6a $9 million inbenefit from the gain on sale of branches and $3 million of restructuring costs. Excluding restructuring costs for the previously announced branch closures and the offshoring of some IT support functions. These charges were more than offset by $15 million in gainsgain on the sale of branch real estateassets for a net restructuring benefit of $9 million. Excluding the restructuring impact,both quarters, operating expenses decreased 2%.were flat.
Operating earnings of $349$312 million for the secondfirst quarter of 20162017 decreased 6% from $370$332 million for the secondfirst quarter of 2015 driven by lower sales and lower gross profit margins, partially offset by lower operating expenses.2016. Excluding the restructuring gainscharges and gain on the sale of assets mentioned above, operating earnings decreased 8%.12%, driven by the strategic price initiatives.
Canada
Net sales were $194$186 million for the secondfirst quarter of 2016, a decrease2017, an increase of $45$7 million, or 19%4%, when compared with $239$179 million for the same period in 2015.2016. In local currency, sales decreased 16%increased 1%. On a daily sales basis, sales decreased 19%Sales increased 4% for the quarter and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Wildfire impactVolume | (2)4 |
Foreign exchange | (3)3 |
VolumeHoliday timing | (14)(1) |
Price | (2) |
Total | (19)%4% |
Sales performanceThe business in Canada continues to be affected by a weak economic environment, resulting in lower sales to most customer end markets. The Alberta region, which represents about one-thirdstabilize based on the improved economy and recovery from the implementation of the salescommon ERP platform in North America system in 2016. The business also increased prices to offset foreign exchange-related costs of goods sold inflation in the Canadian business, decreased 28% versus prior year, on a daily basis, as it was negatively impacted by wildfiresfirst quarter, but most customers are under contract and oil prices. Sales growth forwill not experience price increases until later in the remaining regions in aggregate was down 11% in local currency.year.
In the three months ended June 30, 2016,March 31, 2017, eCommerce sales in Canada were $25$31 million, a decreasean increase of 7%38% over the prior yearyear. Total eCommerce represented 17% and represented 13% of total sales.sales for the three months ended March 31, 2017 and 2016, respectively. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 30% and 25% of total sales for the three months ended March 2017 and 2016, respectively.
The gross profit margin decreased 11.92.7 percentage points in the secondfirst quarter of 2017 versus the first quarter of 2016 versus the second quarter of 2015 due largely to an inventory adjustment, along with cost of goods inflation exceeding price inflation due to unfavorable foreign exchange.price deflation versus cost inflation and higher freight costs from an increase in shipping directly to customers.
The Company maintains reserves for obsolete and excess inventory. The reserve methodology and estimates are regularly reviewed based on experience and continued demand to identify obsolete or excess quantities. During the quarter ended June 30, 2016, the Canadian business recorded an additional reserve of $10 million, as a result of additional visibility to inventory performance provided by the recent conversion to the U.S. SAP system.
Operating expenses decreasedincreased 3% in the secondfirst quarter of 2017 versus the first quarter of 2016, versusdriven by the second quarterre-establishment of 2015, benefitingthe annual national sales meeting and the unfavorable comparison to the 2016 gain from lower SAP project costs and lower advertising costs,the sale of the former Toronto distribution center, partially offset by restructuring costs of $7 million.lower IT expenses.
Operating losses were $17 million for the first quarter of 2017 versus losses of $12 million in the first quarter of 2016. In local currency, operating losses increased $7 million. The increase in operating losses was primarily driven by a lower gross profit margin.
19
Other Businesses
Net sales for other businesses, which include MonotaRo in Japan, Zoro in the U.S. and business units in Europe, Asia and Latin America were $497 million for the first quarter of 2017, an increase of $52 million, or 12%, when compared
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating losses were $28 million for the second quarter of 2016 versus operating earnings of $9 million in the second quarter of 2015. Excluding the restructuring costs and the inventory adjustment mentioned above, the operating losses would have been $10 million driven by the sales decline, lower gross profit margin and expenses declining at a slower rate than sales.
Other Businesses
Net sales for other businesses, which include Zoro U.S., business units in Europe, Asia, Latin America, and the newly acquired Cromwell, were $474 million for the second quarter of 2016, an increase of $155 million when compared with net sales of $319$445 million for the same period in 2015, primarily due to the acquisition of Cromwell.2016. On a daily sales basis, sales were up 49%12%. The drivers of the increase in daily sales for the quarter consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Business acquisition | 31 |
Price/volume | 1715 |
Foreign exchange | 1(3) |
Total | 49%12% |
Operating earnings of $30$32 million for the secondfirst quarter of 20162017 were up $15$10 million compared to the secondfirst quarter of 2015.2016. The earnings performance for the quarter versus prior year was primarily driven by strong resultsperformance from the online businesses Zoro in the U.S. and the businessMonotaRO in Japan as well as the acquisition of Cromwell, which reported modest profit as expected.Japan.
Other Income and Expense
Other income and expense was $23$25 million of expense in the secondfirst quarter of 20162017 compared to $8$20 million of expense in the secondfirst quarter of 2015.2016. The increase in expense was primarily due todriven by higher interest expense from the $1 billion of debt the Company issued in June 2015 andadditional $400 million of debt issued in May 2016, as well as expected losses from the Company's investments in clean energy.
Income Taxes
For the quarter, the effective tax rate in 2016 was 36.6% versus 35.4% in 2015. The 2016 second quarter included a $7 million benefit from the effective settlement of certain federal income tax issues under audit for the years 2009 through 2012. Excluding this discrete benefit, the Company’s effective tax rate was 39.1%. The effective tax rate for the 2015 second quarter, excluding a year-to-date adjustment for the benefit from the Company’s first clean energy investment, was 36.9%. The year-over-year increase in the tax rate, excluding the settlement benefit, was primarily due to a larger proportion of earnings from higher tax rate jurisdictions and lower benefit from the clean energy investments in the quarter. Grainger is expecting an effective tax rate, excluding the settlement benefit, of approximately 36.8% to 37.8% for the full year 2016.
Matters Affecting Comparability
There were 128 sales days in the six months ended June 30, 2016 compared to 127 sales days in 2015.
Results of Operations – Six Months Ended June 30, 2016
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | Percent Increase/(Decrease) | | As a Percent of Net Sales |
| 2016 (A) | | 2015 (A) | | 2016 | | 2015 |
Net sales | $ | 5,070 |
| | $ | 4,962 |
| 2 | % | | 100.0 | % | | 100.0 | % |
Cost of merchandise sold | 2,985 |
| | 2,795 |
| 7 | % | | 58.9 |
| | 56.3 |
|
Gross profit | 2,085 |
| | 2,167 |
| (4 | )% | | 41.1 |
| | 43.7 |
|
Operating expenses | 1,462 |
| | 1,459 |
| — | % | | 28.8 |
| | 29.4 |
|
Operating earnings | 623 |
| | 708 |
| (12 | )% | | 12.3 |
| | 14.3 |
|
Other expense | 42 |
| | 12 |
| NM |
| | 0.8 |
| | 0.2 |
|
Income taxes | 209 |
| | 257 |
| (18 | )% | | 4.1 |
| | 5.2 |
|
Noncontrolling interest | 12 |
| | 8 |
| 50 | % | | 0.2 |
| | 0.2 |
|
Net earnings attributable to W.W. Grainger, Inc. | $ | 359 |
| | $ | 432 |
| (17 | )% | | 7.1 | % | | 8.7 | % |
(A) May not sum due to rounding
Grainger’s net sales of $5,070 million for the six months ended June 30, 2016 increased 2% compared with sales of $4,962 million for the comparable 2015 period. On a daily sales basis, sales increased 1% for the quarter and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Business acquisition | 4 |
Volume | 1 |
Seasonal sales | (1) |
Foreign exchange | (1) |
Price | (2) |
Total | 1% |
The increase in net sales for the six months ended June 30, 2016 was led by the contribution from Cromwell and growth in sales to retail, government, and light manufacturing. The sales growth was partially offset by declines in the natural resources, reseller and contractors. Refer to the Segment Analysis below for further details.
In the six months ended June 30 2016, eCommerce sales for Grainger were $2,308 million, as increase of 15% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms in the United States.
Gross profit of $2,085 million for the six months ended June 30, 2016 decreased 4% compared with $2,167 million in the same period in 2015. The gross profit margin during the six months ended June 30, 2016 decreased 2.6 percentage points when compared to the same period in 2015, primarily due to price deflation exceeding product cost deflation and increased sales to lower margin customers.
Operating expenses of $1,462 million for the six months ended June 30, 2016 were flat relative to $1,459 million for the comparable 2015 period. Excluding restructuring related expenses, operating expenses decreased 1 percentage point.
Operating earnings for the six months ended June 30, 2016 were $623 million, a decrease of $85 million or 12%, compared to the six months ended June 30, 2015, driven by lower gross profit margins.
Net earnings attributable to W.W. Grainger, Inc. for the six months ended June 30, 2016 decreased 17% to $359 million from $432 million in the six months ended June 30, 2015.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Diluted earnings per share of $5.77 in the six months ended June 30, 2016 were 9% lower than the $6.32 for the six months ended June 30, 2015, due to lower earnings, partially offset by lower average shares outstanding.
The table below reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
|
| | | | | |
| Six Months Ended | |
| June 30, | |
| 2016 | | 2015 | % |
Diluted Earnings Per Share reported | $5.77 | | $6.32 | (9 | )% |
Restructuring (United States) | 0.07 | | — | |
Inventory reserve adjustment (Canada) | 0.12 | | — | |
Restructuring (Canada) | 0.13 | | — | |
Restructuring (Unallocated expense) | 0.09 | | — | |
Discrete tax items | (0.11) | | — | |
Restructuring (Other Businesses) | — | | 0.05 | |
Subtotal | 0.30 | | 0.05 | |
Diluted earnings per share adjusted | $6.07 | | $6.37 | (5 | )% |
Segment Analysis
Grainger’s two reportable segments are the United States and Canada. The United States segment reflects the results of Grainger’s U.S. operating segment. The Canada segment reflects the results for Acklands – Grainger Inc., Grainger’s Canadian operating segment. Other businesses include Zoro U.S. and operations in Europe, Asia and Latin America.
The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 10 to the Condensed Consolidated Financial Statements.
United States
Net sales were $3,945 million for the six months ended June 30, 2016, a decrease of 1%, when compared with net sales of $4,002 million for the same period in 2015. On a daily basis, sales decreased 2% for the period and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Intercompany sales to Zoro | 1 |
Seasonal sales | (1) |
Price | (2) |
Total | (2)% |
Sales to natural resource customers and resellers were down in the mid-teens. Contractor customers were down in the high single digits and heavy manufacturing and commercial services were down in the mid-single digits. Hospitality, wholesale and healthcare markets were down in the low single digits. Low oil prices negatively impacted the performance of the heavy manufacturing and natural resources customers. These decreases were offset by mid-single digit growth in government and retail and low single digit growth in light manufacturing and transportation. Sales to Zoro continue to contribute to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the six months ended June 30, 2016, eCommerce sales were $1,800 million, an increase of 12% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms.
The gross profit margin for the six months ended June 30, 2016 decreased 1.8 percentage points compared to the same period in 2015, driven by unfavorable customer mix and price deflation outpacing cost deflation. Excluding sales to Zoro, gross profit margin decreased 1.5 percentage points versus the prior year.
Operating expenses were down 4% in the six months ended June 30, 2016 versus the six months ended June 30, 2015. Operating expenses in 2016 included $19 million in restructuring costs for the previously announced branch closures and the offshoring of some IT support functions. These charges were partially offset by $15 million in net gains on the sale of branch real estate for a net restructuring impact of $4 million. Excluding restructuring costs, operating expenses decreased 4%.
Operating earnings of $681 million for the six months ended June 30, 2016 decreased 7% from $736 million for the six months ended June 30, 2015, driven by lower sales and lower gross profit margins, partially offset by expenses declining faster than sales.
Canada
Net sales were $373 million for the six months ended June 30, 2016, a decrease of $101 million, or 21%, when compared with $474 million for the same period in 2015. In local currency, sales decreased 16%. On a daily basis, sales decreased 22% for the period and consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Volume | (13) |
Foreign exchange | (6) |
SAP implementation | (3) |
Wildfire impact | (1) |
Price | 1 |
Total | (22)% |
Sales performance in Canada was primarily driven by declines within the oil and gas sector in Alberta, combined with declines in all other end markets across the country. In addition, the Canadian business implemented the U.S. SAP system in February 2016, which negatively impacted sales as employees transitioned to operating with the new system.
In the six months ended June 30, 2016, eCommerce sales were $48 million, as decrease of 12% over the prior year and represented 13% of total sales. The decrease was primarily driven by lower sales volume.
The gross profit margin decreased 9.4 percentage points in the six months ended June 30, 2016 versus the six months ended June 30, 2015, primarily due to an inventory adjustment in the second quarter of 2016, along with cost of goods inflation exceeding price inflation primarily due to unfavorable foreign exchange.
Operating expenses in the six months ended June 30, 2016 were $145 million compared to $159 million for the six months ended June 30, 2015. The decrease was due to the benefit of a $7 million gain from the sale of property, lower advertising costs and SAP project costs, partially offset by restructuring costs of $10 million.
Operating losses were $40 million for the six months ended June 30, 2016 versus operating earnings of $19 million in the six months ended June 30, 2015. Excluding the restructuring costs and the inventory adjustment mentioned above, the operating losses would have been $19 million driven by the sales decline, lower gross profit margin and expenses declining at a slower rate than sales.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other Businesses
Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia and Latin America, were $920 million for the six months ended June 30, 2016, an increase of $303 million, when compared with net sales of $617 million for the same period in 2015. The drivers of net sales for the period consisted of the following:
|
| |
| Percent Increase/(Decrease) |
Business acquisition | 32 |
Volume | 17 |
Foreign exchange | (1) |
Total | 48% |
Operating earnings of $52 million in the six months ended June 30, 2016 increased $27 million compared to the six months ended June 30, 2015. Operating earnings in 2016 included strong performance from Zoro U.S. and Japan and the earnings contribution of Cromwell.
Other Income and Expense
Other income and expense was $42 million of expense in the six months ended June 30, 2016 compared to $12 million of expense in the six months ended June 30, 2015. The increase in expense was primarily due to interest expense from the $1 billion of debt the Company issued in June 2015 and $400 million oflong-term debt issued in May 2016, as well as expected losses from the Company's investments in clean energy.
Income Taxes
Grainger’s effective tax rates were 36.1%32.4% and 36.9%35.6% for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. The decrease was primarily due to the adoption of ASU 2016-09, which recognizes the excess tax benefits of stock options as a reduction to income tax expense instead of the previous methodology which recorded the benefit directly to equity. The adoption of this standard generated a $0.13 benefit to earnings per share in the tax rate was due to a discrete benefit arising from the effective settlement of certain federal income tax issues under audit for the years 2009 through 2012, offset by a larger proportion of earnings from higher tax rate jurisdictions. Grainger is expecting an effective tax rate, excluding the settlement benefit, of approximately 36.8% to 37.8% for the full year 2016.quarter.
Financial Condition
Cash Flow
Net cash provided by operating activities was $326181 million and $370161 million for the sixthree months ended June 30,March 31, 2017 and 2016, respectively. Net cash provided had been reported as $154 million in the prior year. The $161 million is based on the adoption of ASU 2016-09, which retrospectively reclassified $7 million from operating activities to financing activities. The reclassification relates to employee taxes paid as part of the exercise of stock options. The increase in cash provided is the result of lower payments related to employee benefits and 2015, respectively.timing of tax payments.
Net cash used in investing activities was $74$38 million and $170$45 million for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. The lower use of cash was driven by lowerthe higher proceeds from the sales of assets net of higher additions to property, buildings and equipment compared to the prior year and higher proceeds from the sales of branch real estate assets.year.
Net cash used in financing activities was $242$183 million compared to net cash provided by financing activities of $402and $138 million in the sixthree months ended June 30,March 31, 2017 and 2016,and 2015, respectively. The change in financing activities was primarily driven by a decrease in the issuance of $400 millionnet proceeds from commercial paper partially offset by a decrease in long-term debt in May 2016 compared to the issuance of $1 billion in long-term debt in June 2015.payments and treasury stock repurchases.
Working Capital
Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt and current maturities of long-term debt).
Working capital at June 30, 2016March 31, 2017, was $1,936$1,795 million, an increase of $142$73 million when compared to $1,794$1,722 million at December 31, 20152016, primarily duethe result of the annual cash contribution to an increase in accounts receivable and lowerthe employees' profit sharing accruals due to the timing ofplan and annual payments.incentive plan. The working capital assets to working capital liabilities ratio increased towas 2.72.4 at June 30,March 31, 2017 and December 31, 2016, from 2.5 at December 31, 2015.respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provide flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit. Total debt as a percent of total capitalization was 54.4% at March 31, 2017, and 54.1% at December 31, 2016.
24
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
including bank borrowings under lines of credit. Total interest-bearing debt as a percent of total capitalization was 50.3% at June 30, 2016, and 45.8% at December 31, 2015.
Critical Accounting Policies and Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of Grainger’s financial condition, changes in financial condition or results of operations. For a description of Grainger’s critical accounting policies see Grainger's Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Forward-Looking Statements
From time to time, in this Quarterly Report on Form 10-Q, as well as in other written reports, communications and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Such forward-looking statements are identified by words such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” and similar terms and expressions.
Grainger cannot guarantee that any forward-looking statement will be realized, although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievement of future results is subject to risks and uncertainties, many of which are beyond the Company's control, which could cause Grainger's results to differ materially from those whichthat are presented.
Important factors that could cause actual results to differ materially from those presented or implied in a forward-looking statement include, without limitation: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the implementation, timing and results of the Company's strategic pricing actions and other responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businessesbusinesses; changes in credit ratings; changes in effective tax rates; and theother factors identified under Item 1A: Risk Factors in the Company's Annual Report on Form 10-K for the year-endedyear ended December 31, 2015 and other filings with2016, as updated in the SEC.Company's Quarterly Reports on Form 10-Q.
Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to publicly update theany of its forward-looking statements, whether as a result of new information, future events or otherwise.
W.W. Grainger, Inc. and Subsidiaries
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016.
| |
Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There werehave been no changes in Grainger's internal control over financial reporting that occurred duringfor the second quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, Grainger'sGrainger’s internal control over financial reporting.
PART II – OTHER INFORMATION
| |
Item 1. | Legal Proceedings. |
Other Matters
For a description of certain of the Company's legal proceedings, see below.
TCPA Matter
As previously disclosed, on April 5, 2013, David Davies filed a putative class action lawsuit in the Circuit Court of Cook County, Illinois under the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (the “TCPA”), and sought certification of a class of persons who may have received one or more of approximately 400,000 faxes Grainger sent in connection with a 2009 marketing campaign. The TCPA provides for penalties of $500 to $1,500 for each noncompliant individual fax.
On May 13, 2013, the Company removed the case to the Federal District Court for the Northern District of Illinois (the “District Court”). On June 27, 2014, the District Court found that Davies was not an adequate class representative. The United States Court of Appeals for the Seventh Circuit denied Davies’ petition for immediate review of the ruling. Davies subsequently moved the District Court for reconsideration of its ruling and his motion was denied on September 28, 2016. Davies may seek to pursue an appeal of the ruling at the conclusion of the District Court proceeding.
On April 4, 2016, the District Court denied the Company’s motion to dismiss Davies’ individual claims and subsequently the parties filed cross-motions for summary judgment. The District Court entered judgment for Grainger on Davies’ common law claim for conversion while granting partial summary judgment for Grainger on Davies’ TCPA claim. On November 21, 2016, the District Court denied Grainger’s motion for summary judgment which argued that Davies lacks standing to bring his TCPA claim and held that the issue of whether Grainger’s opt-out notice is clear and conspicuous was a contested issue of fact to be resolved by a jury at trial. Trial is currently set for February 5, 2018.
The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in the pending lawsuit. While the Company is unable to predict the outcome of this proceeding, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Other Matters
For a description of certain of the Company’s other legal proceedings, see Note 1210 - Contingencies and Legal Matters - to the Condensed Consolidated Financial Statements included under Item 1 - Financial Statements, of Part I of this report.
Item 1A. Risk Factors.
The facilities maintenance industry is highly fragmented, and material changes in competition or our response to these changes could materially affect Grainger’s sales and profitability.
There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and online businesses that compete with price transparency.
26
To remain competitive, the Company must be willing and able to respond to market pressures, including pricing, whether widely available or negotiated under a contract. These pressures, and the implementation, timing and results of our strategic pricing and other responses, could have a material effect on Grainger’s sales and profitability. If the Company is unable to grow sales or reduce costs, among other actions, to wholly or partially offset the effect on profitability of our pricing actions, the Company’s results of operations and financial condition may be adversely affected.
The industry is also consolidating as customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. This consolidation could cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are able to operate with lower prices.
W.W. Grainger, Inc. and Subsidiaries
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Issuer Purchases of Equity Securities – secondFirst quarter
|
| | | | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
Apr. 1 – Apr. 30 | 367,604 | $231.54 | 367,604 | 8,227,680 |
May 1 – May 31 | 337,104 | $227.19 | 337,104 | 7,890,576 |
June 1 – June 30 | 328,898 | $221.92 | 328,898 | 7,561,678 |
Total | 1,033,606 | $227.06 | 1,033,606 | |
|
| | | | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
Jan 1 - Jan 31 | 133,571 | $237.45 | 133,571 | 5,725,136 |
Feb 1 - Feb 29 | 189,334 | $251.93 | 189,334 | 5,535,802 |
Mar 1 - Mar 31 | 323,319 | $243.52 | 323,319 | 5,212,483 |
Total | 646,224 | $244.73 | 646,224 | |
| |
(A) | There were no shares withheld to satisfy tax withholding obligations. |
| |
(B) | Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs. |
| |
(C) | Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors on April 6, 2015. The program has no specified expiration date. Activity is reported on a trade date basis. |
Item 6. Exhibits.
A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 2924 of this report.
W.W. Grainger, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | W.W. Grainger, Inc. |
| | | (Registrant)GRAINGER, INC. |
Date: | July 28, 2016April 27, 2017 | By: | /s/ R. L. Jadin |
| | | R. L. Jadin, Senior Vice President and Chief Financial Officer |
Date: | July 28, 2016April 27, 2017 | By: | /s/ W. LomaxE. R. Tapia |
| | | W. Lomax,E. R. Tapia, Vice President
and Controller |
EXHIBIT INDEX
|
| | |
EXHIBIT NO. | | DESCRIPTION |
10.1 | | First Amendment to the W.W. Grainger, Inc. 2015 Incentive Plan.* |
10.2 | | Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
|
10.210.3 | | Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* |
10.310.4 | | Form of 20162017 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.* |
31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document. |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
(*) Management contract or compensatory plan or arrangement.