PR Newswire | Oct 22, 2020 08:01AM EDT

10/22 07:00 CDT

Grainger Reports Results For The Third Quarter 2020Company achieves strong revenue and share growth and expanded operating marginsThird Quarter Financial Highlights- Delivered sales of $3.0 billion, up 2.4%, and up 4.6% on an organic daily basis compared to the third quarter 2019 (excluding divestitures)- Expanded reported and adjusted operating margins by 110 and 90 basis points respectively- Generated $311 million in operating cash flow and returned $82 million to shareholders through dividends- Repaid revolving credit facility and increased the dividend in the third quarter 2020; intend to restart share repurchase program in the fourth quarter 2020 CHICAGO, Oct. 22, 2020

CHICAGO, Oct. 22, 2020 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the third quarter 2020 with sales of $3.0 billion, up 2.4% and up 4.6% on an organic daily basis compared to the third quarter 2019 driven by significant share gains in the U.S. segment and strong growth in the endless assortment businesses.

"I am extremely proud of the Grainger team for delivering strong results in both our U.S. high-touch and endless assortment businesses, as we continued to support new and existing customers, while prioritizing team member safety," said DG Macpherson, Chairman and Chief Executive Officer. "In the third quarter, we captured significant market share by delivering on our core growth initiatives. We also continued to prudently manage our costs and saw sequential margin improvement as non-pandemic volume improved in the quarter. These strong results and stabilizing trends show the value that Grainger brings to customers every day."

2020 Third Quarter Financial Summary

Q3 ($ in millions) Q3 2020 Q3 2019 Fav. (Unfav.) vs. Prior

ReportedAdjusted^ReportedAdjusted^Reported Adjusted^ 1 1 1

Net Sales $3,018 $3,018 $2,947 $2,947 2% 2%

Gross Profit $1,074 $1,074 $1,099 $1,099 (2)% (2)%

Operating Earnings $380 $374 $338 $339 12% 10%

Net Earnings $240 $246 $233 $233 3% 5%

Diluted Earnings Per Share$4.41 $4.52 $4.25 $4.26 4% 6%

Gross Profit % 35.6% 35.6% 37.3% 37.3% (170) bps(170) bps

Operating Margin 12.6% 12.4% 11.4% 11.5% 110 bps 90 bps

Tax Rate 29.3% 26.5% 24.2% 24.2% (510) bps(230) bps



Results exclude restructuring and income tax items as shown in the(1) supplemental information of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided in the supplemental information of this release.

Revenue

Daily sales for the quarter increased 2.4% as compared to the 2019 third quarter. Organic daily sales, which exclude revenues from the divested Fabory and China businesses from the prior year results, increased 4.6% as compared to the 2019 third quarter. These sales increases were fueled by share gains in the U.S. segment and significant growth in the endless assortment businesses which more than offset declines in the Canada segment.

U.S. Segment sales were up 3.1%, outgrowing the U.S. MRO market which declined an estimated 5% to 6%. This increase was driven largely by higher volume of pandemic-related products, partially offset by year-over-year decreases in non-pandemic product sales. The declines in non-pandemic product sales continued to moderate, while growth in pandemic product sales remained elevated, but began to ease from the levels experienced earlier in the year.

There was no material impact from foreign exchange rates during the 2020 third quarter and the third quarter of 2019 and 2020 had the same number of selling days.

Gross Profit Margin

Reported and adjusted gross profit margin for the third quarter of 2020 was 35.6%. This compares to reported and adjusted gross profit margin in the third quarter of 2019 of 37.3%. The unfavorable variance was driven by pandemic-related mix headwinds, particularly noticeable in our U.S. segment, and the continued business unit mix impact from the faster growth in our lower-margin endless assortment businesses.

Earnings

Reported operating earnings for the 2020 third quarter of $380 million were up 12% versus $338 million in the 2019 third quarter. On an adjusted basis, operating earnings for the quarter of $374 million were up 10% versus $339 million in the 2019 third quarter.

Reported operating margin of 12.6% increased 110 basis points in the third quarter of 2020 versus the prior year third quarter. Adjusted operating margin of 12.4% in this quarter increased 90 basis points versus the prior year third quarter. The increase in adjusted operating margin was due primarily to 260 basis points of SG&A leverage achieved in the third quarter due to cost reduction actions in our high-touch solutions model and leverage gains within our endless assortment businesses.

Reported earnings per share of $4.41 in the third quarter of 2020 were up 4% versus $4.25 in the 2019 third quarter. Adjusted earnings per share in this quarter of $4.52 increased 6% versus $4.26 in the 2019 third quarter. The increase in earnings per share was due primarily to higher operating earnings and lower average shares outstanding in the current period, partially offset by a higher tax rate.

Tax Rate

Third quarter 2020 reported tax rate was 29.3% versus 24.2% in the 2019 third quarter. The difference was primarily related to the divestiture of the Fabory business. Excluding net restructuring and non-recurring income tax items, the adjusted tax rates were 26.5% and 24.2% for the three months ended September 30, 2020 and September 30, 2019, respectively.

Cash Flow

Operating cash flow was $311 million in the 2020 third quarter compared to $320 million in the 2019 third quarter. The decrease in operating cash flow was primarily driven by investments in working capital, primarily inventory, enabling us to better serve our customers. These investments more than offset higher net earnings. During the third quarter of 2020, Grainger announced a dividend increase, marking its 49th consecutive annual increase, and returned $82 million in the form of dividends to shareholders. The company fully repaid its revolving credit facility in the third quarter and intends to restart its share repurchase program in the fourth quarter of 2020.

Webcast

Grainger will conduct a live conference call and webcast at 11:00 a.m. ET on October 22, 2020 to discuss the third quarter results. The webcast will be hosted by DG Macpherson, Chairman and CEO, and Tom Okray, Senior Vice President and CFO, and can be accessed at invest.grainger.com. For those unable to participate in the live event, a webcast replay will be available for 90 days at invest.grainger.com.

About Grainger

W.W. Grainger, Inc., with 2019 sales of $11.5 billion, is North America's leading broad line supplier of maintenance, repair and operating (MRO) products, with operations primarily in North America, Japan and Europe.

Visit invest.grainger.com to view information about the company, including a supplement regarding 2020 third quarter results. Additional company information can be found on the Grainger Investor Relations website which includes our Fact Book and Corporate Social Responsibility report.

Safe Harbor Statement

All statements in this communication, other than those relating to historical facts, are "forward-looking statements." Forward-looking statements can generally be identified by their use of terms such as "anticipate," "estimate," "believe," "expect," "could," "forecast," "may," "intend," "plan," "predict," "project" "will" or "would" and similar terms and phrases, including references to assumptions. Forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. Forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from those presented or implied in the forward- looking statements include, without limitation: the unknown duration and the health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 ("COVID-19") as well as the impact of actions taken or contemplated by governmental authorities or others in connection with the COVID-19 pandemic, in each case, on the company's businesses, its employees, customers and suppliers, including disruption to our operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, any mandated facility closures of non-essential businesses, stay in shelter health orders or other similar restrictions for customers and suppliers, changes in customers' product needs, suppliers' inability to meet unprecedented demand for COVID-19 related products, the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company's controls and procedures, including financial reporting processes, required by working remote arrangements, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the company's products or limit the company's ability to access capital markets on terms that are attractive or at all; higher product costs or other expenses; a major loss of customers; loss or disruption of sources of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the company's gross profit percentage; the company's 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, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, safety or compliance, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards; government contract matters; disruption of information technology or data security systems involving the company or third parties on which the company depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including volatility or price declines of the company's common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; other pandemic diseases or viral contagions; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the company's ability to operate, integrate and leverage acquired businesses; changes in effective tax rates; changes in credit ratings or outlook; the company's incurrence of indebtedness and other factors that can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (Unaudited)

(In millions of dollars, except for share and per share amounts)

Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 2020 2019

Net sales $ 3,018 $ 2,947 $ 8,856 $ 8,639

Cost of goods sold 1,944 1,848 5,645 5,324

Gross profit 1,074 1,099 3,211 3,315

Selling, general and administrative expenses 694 761 2,467 2,234

Operating earnings 380 338 744 1,081

Other (income) expense:

Interest expense, net 23 20 72 60

Other, net (5) (4) (16) (18)

Total other expense, net 18 16 56 42

Earnings before income taxes 362 322 688 1,039

Income tax provision 106 78 118 261

Net earnings 256 244 570 778

Less: Net earnings attributable to noncontrolling

interest 16 11 43 32

Net earnings attributable to W.W. Grainger, Inc. $ 240 $ 233 $ 527 $ 746

Earnings per share:

Basic $ 4.43 $ 4.27 $ 9.74 $ 13.46

Diluted $ 4.41 $ 4.25 $ 9.70 $ 13.40

Weighted average number of shares outstanding:

Basic 53.6 54.1 53.6 55.0

Diluted 53.9 54.4 53.8 55.2

Diluted Earnings Per Share

Net earnings as reported $ 240 $ 233 $ 527 $ 746

Earnings allocated to participating securities (2) (2) (5) (6)

Net earnings available to common shareholders $ 238 $ 231 $ 522 $ 740

Weighted average shares adjusted for dilutive 53.9 54.4 53.8 55.2 securities

Diluted earnings per share $ 4.41 $ 4.25 $ 9.70 $ 13.40

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions of dollars)

(Unaudited)

Assets September 30, 2020 (1) December 31, 2019

Cash and cash equivalents (7) $ 859 $ 360

Accounts receivable - net 1,485 1,425

Inventories - net 1,780 1,655

Prepaid expenses and other current assets 120 104

Prepaid income taxes 29 11

Total current assets 4,273 3,555

Property, buildings and equipment - net 1,394 1,400

Deferred income taxes 11 11

Goodwill (2) 369 429

Intangibles - net (3) 224 304

Other assets 312 306

Total assets $ 6,583 $ 6,005

Liabilities and Shareholders' Equity

Short-term debt (4) $ - $ 55

Current maturities of long-term debt (5) 12 246

Trade accounts payable 836 719

Accrued compensation and benefits 201 228

Accrued contributions to employees' profit-sharing plans (6) 48 85

Accrued expenses 324 318

Income taxes payable 20 27

Total current liabilities 1,441 1,678

Long-term debt - less current maturities (7) 2,388 1,914

Deferred income taxes and tax uncertainties 112 106

Other non-current liabilities 267 247

Shareholders' equity (8) 2,375 2,060

Total liabilities and shareholders' equity $ 6,583 $ 6,005

(1) Does not include results of the Fabory business (divested on 6/30/2020) orthe Grainger China business (divested on 8/21/2020).

(2) Goodwill decreased $60 million primarily due to a $58 million impairment ofFabory goodwill recorded in the first quarter of 2020.

(3) Intangibles - net decreased $80 million primarily due to a $74 millionimpairment of Fabory intangibles recorded in the first quarter of 2020.

(4) Short-term debt decreased $55 million primarily due to the repayment of theCompany's foreign lines of credit.

(5) Current maturities of long-term debt decreased $234 million primarily dueto the repayment of the British pound term loan and the Canadian dollarrevolving credit facility.

(6) Accrued contributions to employees' profit-sharing plans decreased $37million primarily due to the timing of annual cash contributions and thereduction of the contribution rate in 2020.

(7) Long-term debt increased $474 million primarily due to the issuance of $500million in unsecured senior notes in February 2020, partially offset by therepayments of international debt.

(8) Common stock outstanding as of September 30, 2020 was 53,668,050 comparedwith 53,687,528 shares at December 31, 2019, primarily due to share repurchasesin the first quarter of 2020.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions of dollars)

Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 2020 2019

Cash flows from operating activities:

Net earnings $ 256 $ 244 $ 570 $ 778

Provision for credit losses 4 1 18 7

Deferred income taxes and tax uncertainties 9 7 9 19

Depreciation and amortization 42 58 137 171

Net (gains) losses from sales of assets and business

divestitures (6) - 104 (5)

Impairment of goodwill, intangible and long-lived

assets - - 177 -

Stock-based compensation 10 9 36 32

Subtotal 59 75 481 224

Change in operating assets and liabilities:

Accounts receivable (32) (1) (145) (119)

Inventories (78) 6 (222) 18

Prepaid expenses and other assets 8 7 (29) (15)

Trade accounts payable 66 (50) 145 50

Accrued liabilities 19 50 (13) (137)

Income taxes, net (1) (9) (19) (16)

Other non-current liabilities 14 (2) 19 (13)

Subtotal (4) 1 (264) (232)

Net cash provided by operating activities 311 320 787 770

Cash flows from investing activities:

Additions to property, buildings, equipment and (59) (56) (152) (163)intangibles

Proceeds from sale of assets and business 9 2 22 16divestitures

Other - net - - (2) 2

Net cash used in investing activities (50) (54) (132) (145)

Cash flows from financing activities:

Net (decrease) increase in lines of credit (15) 1 (53) 4

Net (decrease) increase in long-term debt (931) (14) 222 (48)

Proceeds from stock options exercised 19 3 47 19

Payments for employee taxes withheld from stock

awards (2) - (16) (10)

Purchases of treasury stock - (200) (101) (600)

Cash dividends paid (82) (79) (246) (242)

Other - net - - - 2

Net cash used in financing activities (1,011) (289) (147) (875)

Exchange rate effect on cash and cash equivalents 6 (6) (9) (2)

Net change in cash and cash equivalents (744) (29) 499 (252)

Cash and cash equivalents at beginning of period 1,603 315 360 538

Cash and cash equivalents at end of period $ 859 $ 286 $ 859 $ 286

SUPPLEMENTAL INFORMATION - CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)(In millions of dollars, except for per share amounts)

The company supplemented the reporting of financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial measures, which the company refers to as "adjusted" measures, including sales on an organic daily basis, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted tax rate and adjusted diluted earnings per share. Adjusted measures exclude items that may not be indicative of core operating results. The company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance. Management believes sales on an organic daily basis, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted tax rate and adjusted diluted earnings per share are important indicators of operations because they exclude items that may not be indicative of our core operating results, and provide a better baseline for analyzing trends in our underlying businesses. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported results. These non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. The company strongly encourages investors and shareholders to review company financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

This press release also includes certain non-GAAP forward-looking information. The company believes that a quantitative reconciliation of such forward-looking information to the most comparable financial measure calculated and presented in accordance with GAAP cannot be made available without unreasonable efforts. A reconciliation of these non-GAAP financial measures would require the company to predict the timing and likelihood of future restructurings, asset impairments, and other charges. Neither of these forward-looking measures, nor their probable significance, can be quantified with a reasonable degree of accuracy. Accordingly, the most directly comparable forward-looking GAAP measures are not provided.

The reconciliations provided below reconcile GAAP financial measures to the non-GAAP financial measures: sales on an organic daily basis, adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted tax rate and adjusted diluted earnings per share:

Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 2020 2019

Daily sales reported 2.4 % 2.5 % 2.0 % 2.1 %

Business divestitures (1) 2.2 - 0.7 -

Organic daily sales 4.6 % 2.5 % 2.7 % 2.1 %

(1) Represents the results of the Fabory business (divested on 6/30/2020) andthe Grainger China business (divested on 8/21/2020).

In millions Three Months Ended September 30, Nine Months Ended September 30,

2020 Gross 2019 Gross 2020 Gross 2019 Gross Profit % Profit % Profit % Profit %

Gross profit reported $ 1,074 35.6 % $ 1,099 37.3 % $ 3,211 36.3 % $ 3,315 38.4 %

Restructuring, net - - - - - - 1 -

Gross profit adjusted $ 1,074 35.6 % $ 1,099 37.3 % $ 3,211 36.3 % $ 3,316 38.4 %

SUPPLEMENTAL INFORMATION - CONDENSED CONSOLIDATED STATEMENTS OF EARNINGSRECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)

(In millions of dollars, except for per share amounts)

In millions Three Months Ended September 30, Nine Months Ended September 30,

2020 Operating 2019 Operating 2020 Operating 2019 Operating Margin % Margin % Margin % Margin %

Operating earnings reported $ 380 12.6 % $ 338 11.4 % $ 744 8.4 % $ 1,081 12.5 %

Restructuring, net, impairment charges, and (6) (0.2) 1 0.1 288 3.2 -business divestiture (gains) -losses

Operating earnings adjusted $ 374 12.4 % $ 339 11.5 % $ 1,032 11.6 % $ 1,081 12.5 %

In millions Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 % 2020 2019 %

Net earnings reported $ 240 $ 233 3 % $ 527 $ 746 (29)%

Restructuring, net, impairmentcharges, and business divestiture 6 - 153 -(gains) losses

Net earnings adjusted $ 246 $ 233 5 % $ 680 $ 746 (9)%

Diluted earnings per share reported $4.41 $4.25 4 % $ 9.70 $ 13.40 (28)%

Pretax restructuring, net, impairment charges, and business divestiture (gains) losses (0.10) 0.01 5.29 -

Tax effect (1) 0.21 - (2.47) -

Total, net of tax 0.11 0.01 2.82 -

Diluted earnings per share adjusted $ 4.52 $ 4.26 6 % $ 12.52 $ 13.40 (7)%

(1) The tax impact of adjustments is calculated based on the income tax rate ineach applicable jurisdiction, subject to deductibility limitations and thecompany's ability to realize the associated tax benefits. The lower tax rateeffect in the current year quarter was primarily driven by tax impacts relatedto the Fabory divestiture.

Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 Bps 2020 2019 Bps impact impact

Effective tax rate reported 29.3 % 24.2 % 510 17.3 % 25.1 % (780)

Fabory Tax Impact, non-operating (3.3) - 8.7 -

Tax impact of other restructuring 0.5 - - -

Effective tax rate adjusted 26.5 % 24.2 % 230 26.0 % 25.1 % 90

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SOURCE W.W. Grainger, Inc.