General
W.W. Grainger, Inc. (Grainger or the Company) is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily inNorth America ,Japan andEurope . More than 3.5 million customers worldwide rely on Grainger for products such as safety, gloves, ladders, motors and janitorial supplies, along with services including inventory management and technical support. These customers represent a broad collection of industries (see Note 4 in the Condensed Consolidated Financial Statements (Financial Statements)). Customers place orders through digital channels, over the phone and at local branches. Approximately 5,000 suppliers provide Grainger with approximately 1.6 million products stocked in Grainger's distribution centers (DCs) and branches worldwide.
Grainger's two reportable segments are
Business Divestiture
Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested the Fabory business inEurope (Fabory) onJune 30, 2020 and the China business (China) onAugust 21, 2020 . Accordingly, the Company's operating results include Fabory and China results through the respective dates of divestiture. Grainger recognized a net loss of approximately$109 million and gain of$5 million (presented within Selling, general and administrative expenses (SG&A)) as a result of the Fabory and China divestitures, respectively.
Strategic Priorities Amidst the COVID-19 Pandemic
The Company's strategic priorities for 2020 have not changed from those stated in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report for the year endedDecember 31, 2019 on Form 10-K (the 2019 Form 10-K), which are to "Keep the World Working" and relentlessly expand Grainger's leadership position in the MRO space by being the go-to-partner for peoplewho build and run safe, sustainable and productive operations. However, the respective business plans to achieve these strategic priorities continue to be affected by the global outbreak of Coronavirus in 2019 (COVID-19 pandemic). InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. The rapid spread of the COVID-19 pandemic has caused significant disruptions in theU.S. and global markets, and economists expect the economic impact will continue to be significant. Grainger is an essential business and its major facilities have been allowed to remain operational during the pandemic as customers have depended on Grainger's products and services to keep their businesses up and running. As the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities change, the Company's efforts and business plans have evolved accordingly. Grainger is currently focused on remaining open and operational in order to serve customers and communities well through the pandemic, support the needs and safety of employees and ensure the Company continues to operate with a strong financial position.
Impact of the COVID-19 Pandemic to Grainger Businesses
The COVID-19 pandemic has impacted and is likely to continue impacting Grainger's businesses and operations as well as the operations of its customers and suppliers.
On the customer front, business re-openings and related activity during the third quarter of 2020 varied based on geography and industry. For example, in theU.S. and endless assortment businesses, sales to government, healthcare and other essential businesses remained strong through the quarter but sales to non-essential and disrupted industries were depressed compared to pre-COVID-19 pandemic levels. The Canada business and other international high-touch businesses have been severely impacted by pandemic-related slowdowns with each geography experiencing meaningful year-over-year declines. 21 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's major operational facilities and infrastructure (i.e., DCs, branches, e-commerce sites, and logistic partners) remained operational in the third quarter of 2020 with limited disruptions, while adhering to strict safety and social-distancing protocols.
From an inventory management and supply chain perspective, the Company has experienced elevated levels of demand for pandemic-related products, while demand for non-pandemic products has declined. The Company did not experience any material disruptions on its supply.
To date, the Company has been able to absorb the pandemic impact with minimal workforce reductions or furloughs, which positions the Company for accelerated growth once post-pandemic recovery commences. Also, the Company has prioritized maintaining all facilities safe for customers and employees to work and interact. With respect to the Company's financial position, during the third quarter of 2020 the Company maintained a tight focus on liquidity and continued to take actions to preserve cash to confront pandemic-related uncertainties, including deferring certain capital projects and pausing share repurchases. During the third quarter of 2020, the Company repaid its revolver drawdown. As ofSeptember 30, 2020 , the Company had approximately$2.1 billion in available liquidity, including$859 million in cash.
2020 Outlook in Consideration of the COVID-19 Pandemic
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and, due to numerous uncertainties, is currently unable to predict the continued impact that the COVID-19 pandemic will have on its business, financial position and operating results in future periods. While the Company is unable to accurately foresee these future impacts, it believes that its financial resources and liquidity levels, along with various contingency plans to protect employee and customer health, keep its operations running and reduce costs are sufficient to manage the impact anticipated from the COVID-19 pandemic.
Matters Affecting Comparability
There were 64 sales days in the three months endedSeptember 30, 2020 andSeptember 30, 2019 . There were 192 sales days in the nine months endedSeptember 30, 2020 and 191 sales days in the nine months endedSeptember 30, 2019 . Grainger completed two divestitures in the nine months endedSeptember 30, 2020 , which were immaterial individually and in the aggregate. In addition, starting in March, the Company has experienced elevated levels of COVID-19 pandemic-related product sales (e.g., personal protective equipment (PPE) and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales have decreased. The incremental demand came primarily from customers in the front-lines of the pandemic, including government, healthcare and other essential businesses, while the demand from non-essential and disrupted industries has decreased over the same period due to business activity slowdown or temporary shutdowns. Conversely, the Company experienced adverse gross margin impacts from lower-margin COVID-19 pandemic-related product sales. 22 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three Months Ended
The following table is included as an aid to understand the changes in Grainger's Condensed Consolidated Statements of Earnings (in millions of dollars):
Three Months Ended
As a Percent of Net Sales 2020 2019 Percent Increase/(Decrease) 2020 2019 Net sales$ 3,018 $ 2,947 2.4 % 100.0 % 100.0 % Cost of goods sold 1,944 1,848 5.2 % 64.4 % 62.7 % Gross profit 1,074 1,099 (2.2) % 35.6 % 37.3 % Selling, general and administrative expenses 694 761 (8.7) % 23.0 % 25.9 % Operating earnings 380 338 12.4 % 12.6 % 11.4 % Other expense, net 18 16 15.2 % 0.6 % 0.5 % Income taxes 106 78 36.2 % 3.5 % 2.6 % Net earnings 256 244 4.6 % 8.5 % 8.3 % Noncontrolling interest 16 11 37.1 % 0.5 % 0.4 % Net earnings attributable to W.W. Grainger, Inc.$ 240 $ 233 3.0 % 8.0 % 7.9 % Grainger's net sales of$3,018 million for the third quarter of 2020 increased$71 million , or 2.4%, compared to the same period in 2019. The increase in net sales was primarily driven by volume increases on pandemic-related product sales, partially offset by year over year decreases in non-pandemic related product sales and decreases due to business divestitures. Also, sales in the Canada business and other international high-touch businesses were down compared to 2019 due to COVID-19 related business slowdowns. See Note 4 to the Financial Statements for information related to disaggregated revenue. See the Segment Analysis below for further details related to segment revenue. Gross profit of$1,074 million for the third quarter of 2020 decreased$25 million , or 2%, compared to the same quarter in 2019. The gross profit margin of 35.6% during the third quarter of 2020 decreased 1.7 percentage points when compared to the same quarter in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in theU.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit. SG&A of$694 million for the third quarter of 2020 decreased$67 million , or 9%, compared to the third quarter of 2019. To better explain the changes to SG&A for the quarter, certain non-recurring or non-core items have been excluded. The following tables reconcile reported SG&A, operating earnings and net earnings attributable toW.W. Grainger, Inc. determined in accordance withU.S. generally accepted accounting principles (GAAP) to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable toW.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names. All tables below are in millions of dollars, except percentages: 23 --------------------------------------------------------------------------------
W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended September 30, 2020 2020 2019 Fav/(Unfav)% SG&A reported$ 694 $ 761 9 % Restructuring, net of branch gains (Canada) (1) 1 Grainger China divestiture (Unallocated expense) (5) - Total restructuring, net and business divestiture (6) 1 SG&A adjusted$ 700 $ 760 8 % 2020 2019 Fav/(Unfav) % Operating earnings reported$ 380 $ 338 12 % Total restructuring, net, and business divestiture (6) 1 Operating earnings adjusted$ 374 $ 339 10 % 2020
2019 Fav/(Unfav)%
Net earnings attributable to
3 %
Total restructuring, net, business divestiture and tax (1)
6 -
Net earnings attributable to
5 %
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
Excluding restructuring, net and business divestiture in both periods as noted
in the table above, SG&A decreased
Operating earnings of$380 million for the third quarter of 2020 increased$42 million , or 12%, compared to the third quarter of 2019. Excluding restructuring, net and business divestiture in both periods as noted in the table above, operating earnings increased$35 million , or 10%, driven primarily by lower SG&A expenses partially offset by lower gross profit dollars. Other expense, net was$18 million for the third quarter of 2020, an increase of$2 million , or 15%, compared to the third quarter of 2019. The increase was primarily related to interest expense on the$500 million in senior notes issued inFebruary 2020 . Income taxes of$106 million for the third quarter of 2020 increased$28 million , or 36%, compared to$78 million in the third quarter of 2019. The increase in 2020 was primarily driven by higher taxable operating earnings for the quarter. Grainger's effective tax rates were 29.3% and 24.2% for the three months endedSeptember 30, 2020 and 2019, respectively. Net earnings attributable toW.W. Grainger, Inc. of$240 million for the third quarter of 2020 increased$7 million , or 3%, compared to the third quarter of 2019. Excluding restructuring, net, business divestiture and tax from both periods per the table above, net earnings increased$13 million or 5%. 24 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Analysis
The following results of the
United States Net sales were$2,347 million for the third quarter of 2020, an increase of$70 million , or 3.1% compared to the same period in 2019 and consisted of the following: Percent Increase Volume (including product mix) 2.8% Price and customer mix 0.3 Total 3.1% Overall, revenue increases for theU.S. business were primarily driven by volume. During the quarter, theU.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other essential businesses; however, sales to non-essential and disrupted industries were down compared to 2019. See Note 4 to the Financial Statements for information related to disaggregated revenue. From a product perspective, theU.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of non-pandemic products. Gross profit margin for the third quarter of 2020 decreased 1.6 percentage points compared to the same period in 2019. The decrease was primarily the result of product and customer mix. TheU.S. business experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. TheU.S. business expects these mix-related decreases to continue during the COVID-19 pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers. SG&A of$501 million for the third quarter of 2020 decreased$22 million , or 4%, when compared to the third quarter of 2019. The decrease in SG&A was primarily driven by decreases in travel and employee related expenses as well as operating efficiencies. These decreases more than offset temporary pandemic pay increases for hourly branch and DC employees, as well as incremental operating costs to ensure the safety and health of employees and maintain safe facilities for customer and employee interactions. Operating earnings of$354 million for the third quarter of 2020 increased$11 million , or 3%, from$343 million for the third quarter of 2019. This increase was driven by lower SG&A expenses partially offset by lower gross profit dollars.
Canada
Net sales were$116 million for the third quarter of 2020, a decrease of$13 million , or 9.9%, compared to the same period in 2019 and consisted of the following: Percent Decrease Volume (including product mix) (8.1)% Price and customer mix (1.0) Foreign exchange (0.8) Total (9.9)% For the third quarter of 2020, overall sales volume was down 8.1 percentage points compared to the same period in 2019 primarily due to market share declines. During the third quarter of 2020, global oil prices remained flat as a result of market forces, including the impact of the COVID-19 pandemic. More than one fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively affected by the COVID-19 pandemic.
The gross profit margin decreased 0.5 percentage point in the third quarter of 2020 versus the third quarter of 2019. The decrease was driven by COVID-19 pandemic-related mix impacts partially offset by lower freight costs.
25 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SG&A decreased 16% in the third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced advertising and employee related expenses.
Operating earnings were
Other businesses Net sales were$687 million for the third quarter of 2020, an increase of$14 million , or 1.9%, when compared to the same period in 2019. Percent Increase/(Decrease) Price/volume 12.3% Foreign exchange 0.2 Business divestitures (10.6) Total 1.9% The increase in net sales was driven by continued strong customer acquisition in the endless assortment businesses partially offset by revenue declines in the international high-touch businesses as a result of pandemic-related slowdowns and the net impact of the Fabory and China business divestitures. Gross profit margin decreased 1.8 percentage points in the third quarter of 2020 versus the third quarter of 2019, driven partially by higher freight costs and business unit mix. Operating earnings of$44 million for the third quarter of 2020 increased$14 million compared to$30 million for the third quarter of 2019. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage. 26 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Nine Months Ended
Nine Months Ended
As a Percent of Net Sales 2020 2019 Percent Increase/(Decrease) 2020 2019 Net sales$ 8,856 $ 8,639 2.5 % 100.0 % 100.0 % Cost of goods sold 5,645 5,324 6.0 % 63.7 % 61.6 % Gross profit 3,211 3,315 (3.1) % 36.3 % 38.4 % Selling, general and administrative expenses 2,467 2,234 10.4 % 27.9 % 25.9 % Operating earnings 744 1,081 (31.2) % 8.4 % 12.5 % Other expense, net 56 42 34.7 % 0.6 % 0.5 % Income taxes 118 261 (54.5) % 1.3 % 3.0 % Net earnings 570 778 (26.9) % 6.4 % 9.0 % Noncontrolling interest 43 32 30.8 % 0.5 % 0.4 % Net earnings attributable to W.W. Grainger, Inc. $ 527$ 746 (29.4) % 6.0 % 8.6 % Grainger's net sales of$8,856 million for the nine months endedSeptember 30, 2020 increased$217 million , or 2.5% compared to the same period in 2019. On a daily basis, net sales increased 2%. The increase in net sales was primarily driven by volume, partially offset by price and mix and the impact of business divestitures. The Company estimates that COVID-19 pandemic-related product sales represented approximately half of the sales growth, primarily in theU.S. and endless assortment businesses, which during the second and third quarters of 2020 experienced strong pandemic-related volume from government, healthcare and other essential businesses. See Note 4 to the Financial Statements for information related to disaggregated revenue. This pandemic-related elevated volume was partially offset by declining demand from non-essential and disrupted industries along with declining non-pandemic product sales across most industries. Also, sales in the Canada business and other international high-touch businesses are down compared to 2019 due to COVID-19 business slowdowns. See Segment Analysis below for further details related to segment revenue. Gross profit of$3,211 million for the nine months endedSeptember 30, 2020 decreased$104 million , or 3%, compared to the same period in 2019. The gross profit margin of 36.3% decreased 2.1 percentage points when compared to the same period in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in theU.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit. SG&A of$2,467 million for the nine months endedSeptember 30, 2020 increased$233 million , or 10.4%, compared to the same period in 2019. To better explain the changes to SG&A, certain non-recurring or non-core items have been excluded. 27 -------------------------------------------------------------------------------- W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The table below reconciles reported SG&A, operating earnings and net earnings attributable toW.W. Grainger, Inc. determined in accordance withU.S. GAAP to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable toW.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names. All tables below are in millions of dollars, except percentages: Nine Months Ended September 30, 2020 2019 Fav/(Unfav)% SG&A reported$ 2,467 $ 2,234 (10) %
Restructuring, net of branch gains
(U.S.) 6 -
Restructuring, net of branch gains
(Canada) 1 (1) Impairment charges (Other businesses) 177 - Fabory divestiture (Other businesses) (7) -
Fabory divestiture (Unallocated
expense) 116 -
(Unallocated expense) (5) -
Total restructuring, net, impairment
charges and business divestitures 288 (1) SG&A adjusted$ 2,179 $ 2,235 3 % 2020 2019 Fav/(Unfav)% Operating earnings reported$ 744 $ 1,081 (31) % Total restructuring, net, impairment charges and business divestitures 288 - Operating earnings adjusted$ 1,032 $ 1,081 (5) % 2020 2019 Fav/(Unfav) % Net earnings attributable to W.W. Grainger, Inc. reported$ 527 $ 746 (29) %
Total restructuring, net, impairment charges, business divestitures and tax (1)
153 -
Net earnings attributable to
(9) %
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.
As noted in the table above, a large portion of the Company's SG&A increase for the nine months endedSeptember 30, 2020 is due to the$177 million impairment of Fabory in the first quarter of 2020 and the loss on the divestiture of Fabory of approximately$109 million during the second quarter of 2020. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, SG&A decreased$56 million primarily due to reduced travel, depreciation and employee related expenses across all businesses. Operating earnings for the nine months endedSeptember 30, 2020 were$744 million , a decrease of$337 million , or 31%, compared to the same period in 2019. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, operating earnings decreased$49 million or 5%, driven by lower gross profit dollars partially offset by lower SG&A. Other expense, net was$56 million for the nine months endedSeptember 30, 2020 , an increase of$14 million , or 35%, compared to the nine months endedSeptember 30, 2019 . The increase was primarily related to interest expense on the$500 million in senior notes issued inFebruary 2020 . Income taxes of$118 million for the nine months endedSeptember 30, 2020 decreased$143 million , or 55%, compared with$261 million for the comparable 2019 period. This decrease was primarily driven by lower taxable operating earnings for the nine-month period, tax losses in the Company's investment in Fabory per the impairment 28 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and internal reorganization of the Company's holdings in Fabory in the first quarter of 2020 and tax impacts of the Fabory divestiture. Grainger's effective tax rates were 17.3% and 25.1% for the nine months endedSeptember 30, 2020 and 2019, respectively, and this decrease is primarily due to the Fabory tax impacts. Net earnings attributable toW.W. Grainger, Inc. for the nine months endedSeptember 30, 2020 decreased$219 million or 29% to$527 million from$746 million for the nine months endedSeptember 30, 2019 . Excluding restructuring, net, impairment charges, business divestitures and tax from both periods in the table above, net earnings decreased$66 million , or 9%. The decrease in net earnings primarily resulted from lower gross profit dollars partially offset by lower SG&A. Segment Analysis The following comments at the segment and other businesses level include external and intersegment net sales and operating earnings. See Note 11 to the Financial Statements.United States Net sales were$6,823 million for the nine months endedSeptember 30, 2020 , an increase of$175 million , or 2.6%, compared to the same period in 2019. On a daily basis, net sales increased 2.1% and consisted of the following: Percent Increase/(Decrease) Volume (including product mix) 2.9% Price and customer mix (0.8) Total 2.1% Overall, revenue increases for theU.S. business were primarily driven by COVID-19 pandemic-related sales, which accounted for the majority of the sales growth beginning inMarch 2020 . As a result of the COVID-19 pandemic, theU.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other essential businesses; however, sales to non-essential and disrupted industries are down compared to 2019. See Note 4 to the Financial Statements for information related to disaggregated revenue. From a product perspective, theU.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of non-pandemic products. Gross profit margin decreased 2.3 percentage points compared to the same period in 2019. The decrease was the result of product and customer mix. The business also experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. The Company expects these mix-related decreases to continue during the pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers. SG&A for the nine months endedSeptember 30, 2020 decreased$13 million compared to the same period in 2019, which is primarily driven by reduced travel and depreciation expenses partially offset by incremental operating costs to support theU.S. business response to the COVID-19 pandemic and related activities. Operating earnings of$1,012 million for the nine months endedSeptember 30, 2020 decreased$76 million , or 7%, from$1,088 million for the nine months endedSeptember 30, 2019 . This decrease was driven primarily by lower gross profit dollars. 29 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Canada
Net sales were
Percent Decrease Volume (including product mix) (10.0)% Foreign exchange (1.6) Price and customer mix (0.9) Total (12.5)% For the nine months endedSeptember 30, 2020 , volume was down 10.0 percentage points compared to the same period in 2019 primarily due to market share declines partially offset by COVID-19 pandemic-related product sales. During the first half of 2020, global oil prices declined sharply as a result of market forces. More than a fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively impacted by the COVID-19 pandemic. The gross profit margin decreased 0.5 percentage point in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to negative price cost spread and COVID-19 pandemic-related mix impact.
SG&A decreased
Operating losses were
Other businesses Net sales for other businesses were$2,065 million for the nine months endedSeptember 30, 2020 an increase of$96 million , or 4.8% compared to the same period in 2019. On a daily basis, net sales increased 4.3% and consisted of the following: Percent Increase/(Decrease) Price/volume 7.7% Business divestitures (3.4) Total 4.3% The increase in net sales was driven by the endless assortment businesses, partially offset by lower performance in other international high-touch businesses, which were heavily impacted by pandemic-related slowdowns and the net impact of Fabory and China business divestitures. The endless assortments businesses benefited from COVID-19 pandemic-related sales and otherwise continued to see strong new customer acquisition during the nine months endedSeptember 20, 2020 . Gross profit margin decreased 1.3 percentage points compared to the same period in 2019, driven by business unit mix from the faster growing endless assortment businesses as well as higher freight costs. Operating losses of$56 million for the nine months endedSeptember 30, 2020 decreased$143 million from operating earnings of$87 million in the comparable period from the prior year. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, operating earnings would have increased$27 million or 32%. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage. 30 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Cash, Cash Equivalents and Liquidity As ofSeptember 30, 2020 andDecember 31, 2019 , Grainger had cash and cash equivalents of$859 million and$360 million , respectively. This increase in cash is primarily due to cash flows from operations, delayed capital investments and the pause of the share repurchase program. (See part II, Item A: "Risk Factors", below, for an update to the Company's risk factors in connection with the COVID-19 pandemic). Grainger believes that, assuming its operations are not significantly impacted by the COVID-19 pandemic for a prolonged period, its current level of cash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to meet its liquidity needs. Cash Flows Net cash provided by operating activities was$787 million and$770 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in cash provided by operating activities is primarily the result of lower net payments related to employee variable compensation and benefits paid under annual incentive plans and higher trade payables partially offset by investments in inventory. Net cash used in investing activities was$132 million and$145 million for the nine months endedSeptember 30, 2020 and 2019, respectively. This decrease in net cash used in investing activities was primarily driven by lower additions to property, buildings and equipment and intangibles. Net cash used in financing activities was$147 million in the nine months endedSeptember 30, 2020 compared to$875 million in the nine months endedSeptember 30, 2019 . The decrease in net cash used in financing activities was primarily driven by lower treasury stock repurchases. Working Capital Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures. Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt, current maturities of long-term debt and lease liabilities). Working capital as ofSeptember 30, 2020 , was$2,278 million , an increase of$186 million when compared to$2,092 million as ofDecember 31, 2019 . The increase was primarily driven by an increase in accounts receivable and inventory. At these dates, the ratio of current assets to current liabilities was 2.7 and 2.6 forSeptember 30, 2020 andDecember 31, 2019 , respectively.
Debt
Grainger maintains a debt ratio and liquidity position that provides 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 revolving credit facilities. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) and lease liabilities as a percent of total capitalization was 52.5% atSeptember 30, 2020 , and 54.3% atDecember 31, 2019 . Grainger receives ratings from two independent credit rating agencies: Moody's Investor Service (Moody's) andStandard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade. The following table summarizes the Company's credit ratings atSeptember 30, 2020 : Corporate Senior Unsecured Short-term Moody's A3 A3 P2 S&P A+ A+ A1 Commitments and Other Contractual Obligations There were no material changes to the Company's commitments and other contractual obligations from those disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Form 10-K. 31 -------------------------------------------------------------------------------- W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Estimates
The methods, assumptions, and estimates used in applying the Company's accounting policies may require the application of judgments regarding matters that are inherently uncertain. The Company considers an accounting policy to be a critical estimate if: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on Grainger's consolidated financial position and results. While the Company believes that estimates, assumptions, and judgments used are reasonable, they are based on information available when the estimate was made. A description of the Company's critical accounting estimates is described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Form 10-K. The following critical accounting policy is being added to the policies set forth in the 2019 Form 10-K. Allowance for Credit Losses Pursuant to theJanuary 1, 2020 implementation of theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the Company establishes an allowance for credit losses using estimations of loss rates based upon historical loss experience and adjusted for factors that are relevant to determining the expected collectability of accounts receivables. These estimations and factors require assumptions and judgments regarding matters that are inherently uncertain, including the impact that the COVID-19 pandemic may have on the liquidity, credit and solvency status of customers or individual industries. For further discussion on the Company's allowances for credit losses, see in Note 5 contained within Part I, Item 1, "Notes to Condensed Consolidated Financial Statements".
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. 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. Grainger cannot guarantee that any forward-looking statement will be realized and 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 that are presented. 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 health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 ("COVID-19") as well as the impact of the actions taken or contemplated by governmental authorities or others in connection with the COVID-19 pandemic on the Company's businesses, its employees, customers and suppliers, including disruption to Grainger's 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 required by working remote arrangements, including financial reporting processes, 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 32 --------------------------------------------------------------------------------W.W. Grainger, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 identified under Part II, Item 1A: "Risk Factors" in the Company's 2019 Form 10-K, as updated in the 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 update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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