55 Pages Complete
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934For the period ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934For the transition period from
________to________
__________________
Commission file number 1-5684
I.R.S. Employer Identification Number 36-1150280
W.W. Grainger, Inc.(An Illinois Corporation)
100 Grainger ParkwayLake Forest, Illinois 60045-5201Telephone: (847) 535 -1000
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 94,425,822 shares of the Company's Common Stock were outstanding as of July 31, 2001.
The Exhibit Index appears on page 26 in the sequential numbering system.
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Part I-FINANCIAL INFORMATION
W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF EARNINGS(In thousands of dollars except for per share amounts)(Unaudited)
Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- --------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ ------------ Net sales ......................... $ 1,225,040 $ 1,271,651 $ 2,444,460 $ 2,494,100 Cost of merchandise sold .......... 830,124 880,463 1,654,633 1,720,464 ------------ ------------ ------------ ------------ Gross profit .................... 394,916 391,188 789,827 773,636 Warehousing, marketing, and administrative expenses ......... 301,228 318,287 612,450 625,958 Restructuring charges ............. 40,000 -- 40,000 -- ------------ ------------ ------------ ------------ Operating earnings .............. 53,688 72,901 137,377 147,678 Other income or (deductions) Interest income ................. 555 440 1,100 937 Interest expense ................ (2,967) (6,585) (6,968) (12,687) Equity in loss of unconsolidated entities ....... (212) -- (6,013) -- Loss on liquidation of equity in unconsolidated entity ...... (21,497) -- (21,497) -- Gain on investment securities ... -- 26,135 -- 26,135 Unclassified-net ................ (6,405) 658 (6,032) 749 ------------ ------------ ------------ ------------ (30,526) 20,648 (39,410) 15,134 ------------ ------------ ------------ ------------ Earnings before income taxes .... 23,162 93,549 97,967 162,812 Income taxes ...................... 8,342 37,887 40,972 65,939 ------------ ------------ ------------ ------------ Net earnings .................... $ 14,820 $ 55,662 $ 56,995 $ 96,873 ============ ============ ============ ============ Earnings per share: Basic ........................... $ 0.16 $ 0.60 $ 0.61 $ 1.04 ============ ============ ============ ============ Diluted ......................... $ 0.15 $ 0.59 $ 0.60 $ 1.03 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic ........................... 93,757,352 93,054,100 93,391,830 92,985,940 ============ ============ ============ ============ Diluted ......................... 95,252,754 94,447,965 94,775,060 94,432,170 ============ ============ ============ ============ Cash dividends paid per share ..... $ 0.175 $ 0.17 $ 0.345 $ 0.33 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS(In thousands of dollars)(Unaudited)
Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net earnings ........................... $ 14,820 $ 55,662 $ 56,995 $ 96,873 Other comprehensive earnings (loss), net of tax: Foreign currency translation adjustments ...................... 10,079 (4,882) (3,797) (5,972) Gain (loss) in investment securities: Unrealized holding gain (loss) ................. 5,299 (37,002) 923 (47,383) Reclassification adjustments for realized gains included in net earnings .................... -- (15,550) -- (15,550) ------------ ------------ ------------ ------------ Comprehensive earnings (loss) .......... $ 30,198 $ (1,772) $ 54,121 $ 27,968 ============ ============ ============ ============
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED BALANCE SHEETS(In thousands of dollars)(Unaudited)
ASSETS June 30, 2001 Dec. 31, 2000 - ----------------------------------------------------------------- ------------------ ------------------ CURRENT ASSETS Cash and cash equivalents ..................................... $ 66,281 $ 63,384 Accounts receivable, less allowance for doubtful accounts of $26,236 in 2001 and $23,436 in 2000 ............. 606,384 608,297 Inventories ................................................... 665,156 704,071 Prepaid expenses .............................................. 55,414 25,173 Deferred income tax benefits .................................. 98,204 82,077 ------------------ ------------------ Total current assets ........................................ 1,491,439 1,483,002 PROPERTY, BUILDINGS, AND EQUIPMENT .............................. 1,343,702 1,308,027 Less accumulated depreciation and amortization ................ 667,615 631,630 ------------------ ------------------ Property, buildings, and equipment-net ........................ 676,087 676,397 DEFERRED INCOME TAXES ........................................... 5,052 8,820 INVESTMENTS IN UNCONSOLIDATED ENTITIES .......................... 4,751 23,838 OTHER ASSETS .................................................... 260,491 267,544 ------------------ ------------------ TOTAL ASSETS .................................................... $ 2,437,820 $ 2,459,601 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Short-term debt ............................................... $ 96,548 $ 173,538 Current maturities of long-term debt .......................... 22,755 22,770 Trade accounts payable ........................................ 299,331 220,924 Accrued expenses .............................................. 279,950 300,740 Income taxes .................................................. (6,125) 29,352 ------------------ ------------------ Total current liabilities ................................... 692,459 747,324 LONG-TERM DEBT (less current maturities) ........................ 124,002 125,258 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ....................... 52,215 49,537 MINORITY INTEREST ............................................... 93 96 SHAREHOLDERS' EQUITY Cumulative Preferred Stock-$5 par value-authorized, 12,000,000 shares, issued and outstanding, none ............. -- -- Common Stock-$0.50 par value-authorized, 300,000,000 shares; issued 108,397,365 shares, 2001 and 108,037,082 shares, 2000 ................................ 54,199 54,017 Additional contributed capital ................................ 287,020 276,819 Retained earnings ............................................. 1,853,309 1,837,298 Unearned restricted stock compensation ........................ (22,103) (22,720) Accumulated other comprehensive (loss) ........................ (21,706) (18,832) Treasury stock, at cost-13,930,572 shares, 2001 and 14,104,212 shares, 2000 ................................. (581,668) (589,196) ------------------ ------------------ Total shareholders' equity ...................................... 1,569,051 1,537,386 ------------------ ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 2,437,820 $ 2,459,601 ================== ==================
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of dollars)(Unaudited)
Six Months Ended June 30, --------------------------------------------- 2001 2000 ------------------ ------------------ Cash flows from operating activities: Net earnings .................................................. $ 56,995 $ 96,873 Provision for losses on accounts receivable ................... 10,831 7,087 Depreciation and amortization: Property, buildings, and equipment .......................... 39,712 42,270 Intangibles and goodwill .................................... 2,911 6,190 Amortization of capitalized software ........................ 8,635 7,450 (Gain) on sales of investment securities ...................... -- (26,135) Non-cash restructuring charge ................................. 7,139 -- Asset write-downs ............................................. 6,000 -- Loss on unconsolidated entities ............................... 23,926 -- Change in operating assets and liabilities-- net of business acquisition and asset write-downs: (Increase) in accounts receivable ........................... (8,351) (87,598) Decrease (increase) in inventories .......................... 40,178 (10,808) (Increase) in prepaid expenses .............................. (29,627) (14,133) (Increase) in deferred income taxes ......................... (14,592) (8,980) Increase in trade accounts payable .......................... 77,290 75,475 (Decrease) in other current liabilities ..................... (22,004) (35,671) (Decrease) increase in current income taxes payable ......... (36,814) 28,564 Increase in accrued employment related benefits costs ............................................ 2,678 1,382 Other - net ................................................... 4,190 3,337 ------------------ ------------------ Net cash provided by operating activities ....................... 169,097 85,303 ------------------ ------------------ Cash flows from investing activities: Additions to property, buildings, and equipment-net of dispositions ............................... (36,827) (25,285) Expenditures for capitalized software ......................... (4,061) (23,373) Proceeds from sales of investment securities .................. -- 13,435 Purchases of investment securities ............................ -- (4,900) Net cash paid for business acquisition ........................ (14,407) -- Investments in unconsolidated entities ........................ (4,547) (881) Other-net ..................................................... 429 (2,706) ------------------ ------------------ Net cash (used in) investing activities ......................... $ (59,413) $ (43,710) ------------------ ------------------
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(In thousands of dollars)(Unaudited)
Six Months Ended June 30, --------------------------------------------- 2001 2000 ------------------ ------------------- Cash flows from financing activities: Net (decrease) in short-term debt ............................. $ (76,990) $ (20,698) Long-term debt payments ....................................... (15) (34) Stock incentive plan .......................................... 4,327 5,881 Proceeds from sale of treasury stock .......................... 24,366 -- Purchase of treasury stock-net ................................ (25,634) (458) Cash dividends paid ........................................... (32,573) (30,919) ------------------ ------------------ Net cash (used in) financing activities ......................... (106,519) (46,228) ------------------ ------------------ Exchange rate effect on cash and cash equivalents ............... (268) (909) ------------------ ------------------ Net increase (decrease) in cash and cash equivalents ................................................... 2,897 (5,544) Cash and cash equivalents at beginning of year .................. 63,384 62,683 ------------------ ------------------ Cash and cash equivalents at end of period ...................... $ 66,281 $ 57,139 ================== ==================
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W.W. Grainger, Inc., and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2000, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated.
Inventories are valued at the lower of cost or market. Cost is determined primarily by the last-in, first-out (LIFO) method.
The unaudited financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the statements contained herein.
2. DIVIDEND
On August 1, 2001, the Board of Directors declared a quarterly dividend of $0.175 per share, payable September 1, 2001, to shareholders of record on August 13, 2001.
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W.W. Grainger, Inc., and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Unaudited)
3. SEGMENT INFORMATION (In thousands of dollars)
Three Months Ended June 30, 2001 ------------------------------------------------------------------------- Lab Branch-based Safety Distribution Digital Supply Other Totals ---------------- ----------- ----------- ----------- -------------- (In thousands of dollars) Total net sales ......................... $ 1,099,083 $ 12,676 $ 83,513 $ 46,171 $ 1,241,443 Intersegment net sales .................. 3,510 12,591 302 -- 16,403 Net sales to external customers ......... 1,095,573 85 83,211 46,171 1,225,040 Segment operating earnings (loss) ....... 93,856 (40,000) 12,577 470 66,903 Three Months Ended June 30, 2000 -------------------------------------------------------------------------- Lab Branch-based Safety Distribution Digital Supply Other Totals ---------------- ----------- ----------- ----------- -------------- (In thousands of dollars) Total net sales ......................... $ 1,148,822 $ 14,182 $ 83,497 $ 44,471 $ 1,290,972 Intersegment net sales .................. 3,482 13,965 229 1,645 19,321 Net sales to external customers ......... 1,145,340 217 83,268 42,826 1,271,651 Segment operating earnings (loss) ....... 90,749 (16,221) 13,774 (3,216) 85,086 Six Months Ended June 30, 2001 -------------------------------------------------------------------------- Lab Branch-based Safety Distribution Digital Supply Other Totals ---------------- ----------- ----------- ----------- -------------- (In thousands of dollars) Total net sales ......................... $ 2,190,776 $ 29,979 $171,138 $ 88,327 $ 2,480,220 Intersegment net sales .................. 6,996 28,139 625 -- 35,760 Net sales to external customers ......... 2,183,780 1,840 170,513 88,327 2,444,460 Segment operating earnings (loss) ....... 183,935 (50,157) 28,711 841 163,330 Six Months Ended June 30, 2000 -------------------------------------------------------------------------- Lab Branch-based Safety Distribution Digital Supply Other Totals ---------------- ----------- ----------- ----------- -------------- (In thousands of dollars) Total net sales ........................ $ 2,247,445 $ 20,598 $170,362 $ 85,474 $ 2,523,879 Intersegment net sales ................. 6,136 20,174 452 3,017 29,779 Net sales to external customers ........ 2,241,309 424 169,910 82,457 2,494,100 Segment operating earnings (loss) ...... 175,257 (27,154) 28,382 (6,322) 170,163
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Lab Branch-based Safety Distribution Digital Supply Other Totals ---------------- ------------ ----------- ----------- ------------ (In thousands of dollars) Segment assets At June 30, 2001 ........................ $ 2,004,373 $ -- $ 131,576 $ 42,059 $ 2,178,008 ================ ============ =========== =========== ============ At December 31, 2000 .................... $ 2,016,220 $ 9,933 $ 111,961 $ 54,095 $ 2,192,209 ================ ============ =========== =========== ============
A reconciliation of segment information to consolidated information is as follows (In thousands of dollars):
Three Months Ended June 30, --------------------------------------------- 2001 2000 ------------------ ------------------ Total operating earnings for reportable segments ................ $ 66,903 $ 85,086 Unallocated expenses ............................................ (13,215) (12,185) Elimination of intersegment profits ............................. -- -- ------------------ ------------------ Total consolidated operating earnings ......................... $ 53,688 $ 72,901 ================== ================== Six Months Ended June 30, --------------------------------------------- 2001 2000 ------------------ ------------------ Total operating earnings for reportable segments ................ $ 163,330 $ 170,163 Unallocated expenses ............................................ (25,953) (22,485) Elimination of intersegment profits ............................. -- -- ------------------ ------------------ Total consolidated operating earnings ......................... $ 137,377 $ 147,678 ================== ================== June 30, December 31, 2001 2000 ------------------ ------------------ Assets: Total assets for reportable segments ............................ $ 2,178,008 $ 2,192,209 Unallocated assets .............................................. 259,812 267,392 ------------------ ------------------ Total consolidated assets ..................................... $ 2,437,820 $ 2,459,601 ================== ==================
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4. ADOPTION OF ACCOUNTING STANDARDS AND NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Certain Derivative Instruments and Hedging Activities," effective January 1, 2001. The Company uses non-derivative financial instruments to help hedge its exposure for certain investments in foreign subsidiaries in which the net assets are exposed to currency exchange rate volatility. Adoption of SFAS No. 133 requires the Company to report the net amounts of gains and losses that arise from qualifying non-derivative hedging instruments in the cumulative translation adjustment during the reporting period. The Company's accounting treatment of SFAS No. 133 is consistent with the method previously used under Statement of Financial Accounting Standards No. 52 (SFAS No. 52), "Foreign Currency Translation."
Currency exposure related to the Company's investment in the net assets of its Canadian subsidiary, Acklands-Grainger Inc. (AGI), is partially mitigated by a foreign currency denominated debt obligation of the parent. Gains and losses associated with the debt obligation offset gains and losses in the net investment in AGI.
For the six month period ended June 30, 2001, $1,256,000 of gain related to the foreign currency denominated debt obligation and was included in the cumulative translation adjustment. For the same period of 2000, $2,980,000 of gain related to the obligation and was included in the cumulative translation adjustment.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.141 (SFAS No. 141), "Business Combinations," and Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Intangible Assets." SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS No. 142. Major provisions of these Statements and their effective dates for the Company are as follows:
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Goodwill (using current exchange rates) is currently being amortized at approximately $5 million annually and is projected to have a net carrying value of approximately $157 million at the date of adoption of this standard. The Company is currently evaluating the provisions of SFAS No. 142 and has not yet determined the effect that adoption of this standard will have on its financial statements.
5. ACQUISITION
On February 26, 2001, Lab Safety Supply, Inc., the Company’s wholly owned subsidiary, acquired The Ben Meadows Co., Inc. (Ben Meadows), of Canton, Georgia, for approximately $14.4 million, including costs associated with the acquisition. Ben Meadows, a privately held corporation with annual sales of more than $20,000,000, is a business-to-business direct marketer specializing in equipment for the environmental and forestry management markets. The acquisition was accounted for under the purchase method of accounting. Results for Ben Meadows are included in the Company’s results since the date of its acquisition. Given the size of the acquisition, no accretion or dilution of the Company’s earnings per share was projected.
6. EXECUTIVE STOCK PURCHASE PROGRAM
On March 26, 2001, a group of 83 executives bought approximately 787,000 treasury shares from the Company. Cash proceeds from the sale, which amounted to $24,366,000, were used by the Company to repurchase shares of the Company’s stock on the open market. Executives who met a threshold purchase requirement of one times their annual base salary received a grant of restricted stock that will vest if they remain with the Company and hold their purchased shares for a minimum of two years. The grant totaled approximately 192,000 shares of restricted stock.
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7. NON-RECURRING CHARGES
On April 23, 2001, the Company announced its plans to shut down the operations of Material Logic and write down its investment in other digital activities. Material Logic was the digital unit the Company formed to seek other equity participants. As a result of this action, the Company has shut down all of Material Logic’s branded e-commerce sites except FindMRO.com, which will remain an integrated sourcing service for the Company’s customers.
In connection with the closing of Material Logic, the Company has taken a non-recurring, pre-tax charge of $40 million (after-tax $24 million) in the second quarter of 2001. The charge included a provision for the planned elimination of approximately 178 jobs at Material Logic. The Company provided a comprehensive separation package, including outplacement services, to the employees whose jobs have been eliminated. As of June 30, 2001, approximately 163 employees have been severed. Severance payments for most terminated employees begin July 1, 2001.
In addition, the Company wrote down its investment in other digital enterprises and took a pre-tax charge of $26.5 million (after-tax $14 million). This included divestiture of the Company’s 40 percent investment in Works.com, Inc. The Company acquired its ownership in Works.com, Inc. an unrelated third party, on August 1, 2000, when OrderZone.com was combined with Works.com.
The total effect of both non-recurring charges amounted to an after-tax cost of $38 million, or $0.40 per share, in the 2001 second quarter.
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The following table displays the activity and balance of the Material Logic restructuring reserve as of June 30, 2001:
(In thousands of dollars) Original Provision Deductions Balance -------------------------------------------------- Restructuring Reserve (Operating expenses): - -------------------------------------------------- Workforce reductions ............................. $ 17,300 $ (2,285) $ 15,015 Asset and equipment write-offs and disposals ..... 5,800 (3,000) 2,800 Contractual obligations .......................... 4,900 (2,288) 2,612 Other shut-down costs ............................ 12,000 (9,162) 2,838 ------------- -------------- ------------- $ 40,000 $ (16,735) $ 23,265 ============= =============== =============
Deductions reflect cash payments of $9,596,000 and non-cash utilization of $7,139,000.
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W.W. Grainger, Inc., and SubsidiariesMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2000:
Company Net Sales
The Company’s net sales of $1,225,040,000 in the 2001 second quarter were down 4% compared with sales of $1,271,651,000 for the comparable 2000 period. Sales performance in the second quarter of 2001 was affected by the continuing general weakness in the North American economy.
There were 64 sales days in both the 2001 and 2000 second quarters. The full year 2001 will have 255 sales days, the same number of sales days as the year 2000.
Sales processed through the Company's Internet sites were $110 million, up 37% from the $80 million achieved in the second quarter of 2000.
Segment Net Sales
The following comments at the segment level include external and intersegment net sales; those comments at the business unit level include external and inter- and intrasegment net sales. For segment information see Note 3 to the Consolidated Financial Statements included in this report.
Branch-based Distribution Businesses
Net sales of $1,099,083,000 for the second quarter of 2001 decreased 4.3% when compared with net sales of $1,148,822,000 in the second quarter of 2000.
Daily sales in the United States declined approximately 4% primarily due to a slowdown in the U.S. economy. Sales to government accounts increased while sales to other customer categories declined. Sales processed through Grainger.com were $85 million, a 31% increase over second quarter 2000 sales of $65 million.
Daily sales in Canada decreased 0.7% during the second quarter of 2001 due to an unfavorable Canadian exchange rate. In local currency, this business experienced an increase of 3.3% driven by the oil and gas and selected forestry sectors of the Canadian economy, along with improved sales to large accounts. This growth was partially offset by a continued slowdown in the manufacturing sector in Eastern Canada.
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W.W. Grainger, Inc., and SubsidiariesMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS (Continued)
The Mexican operation experienced an 18% decline in net sales. This decrease was attributable to weakness in the automotive and electronics manufacturing industries and a slowdown in the Mexican economy.
Digital Businesses
Net sales for the second quarter of 2001 were $12,676,000 compared with $14,182,000 for the same period in 2000. Net sales for this segment primarily represents product sales for FindMRO.com (through May 2001) and service fee revenues for the rest of Material Logic.
On April 23, 2001, the Company announced that it would shut down the operations of Material Logic with the exception of FindMRO.com. In connection with this announcement, the Company took a pre-tax non-recurring charge of $40 million. FindMRO.com was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO.com was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital segment will cease operations.
Lab Safety Supply
Second quarter 2001 net sales for Lab Safety Supply were $83,513,000, essentially flat compared with $83,497,000 for the same period in 2000. Net sales for the second quarter of 2001 includes Ben Meadows, a direct marketer specializing in equipment for the environmental and forestry management markets, acquired on February 26, 2001. Excluding these acquired sales, second quarter 2001 sales for Lab Safety Supply decreased for both safety and industrial products, primarily as a consequence of the continued slowing of the industrial economy.
Other Businesses
Net sales for the second quarter of 2001 were $46,171,000, an increase of 3.8% compared with $44,471,000 for the same period in 2000. Sales growth for this segment is primarily attributable to increased sales at Grainger Integrated Supply. Sales for this business unit include product sales and management fees.
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Company Net Earnings
The Company’s net earnings of $14,820,000 in the second quarter of 2001 decreased 73 percent compared with the net earnings of $55,662,000 for the comparable 2000 period. The second quarter of 2001 included previously announced, non-recurring, after-tax charges of $38 million, or $0.40 per share. The second quarter of 2000 included an after-tax gain related to sales of an investment security for $15.5 million or $0.16 per share. Excluding these unusual items from both the 2001 and 2000 second quarters, net earnings increased 32 percent to $52.8 million from $40.1 million and earnings per share increased 28 percent to $0.55 from $0.43. The increase in net earnings (excluding unusual items) resulted primarily from the elimination of losses of the Digital businesses, improved operating earnings of the Branch-based Distribution Businesses and the Other Businesses, and from lower interest expense.
Segment Operating Earnings
The following comments at the segment level include external and intersegment operating earnings; those comments at the business unit level include external and inter- and intrasegment operating earnings. For segment information see Note 3 to the Consolidated Financial Statements included in this report.
Operating earnings of $93,856,000 for the second quarter increased 3.4% compared with operating earnings of $90,749,000 in the second quarter of 2000. This improvement resulted from higher gross profit margins partially offset by slightly higher operating expenses.
Gross profit margins increased 1.8 percentage points from the comparable 2000 quarter. The improvement in gross profit margins was primarily attributable to selected pricing actions intended to cover freight and supplier cost increases. Partially offsetting this improvement was higher sales of sourced product (not inventoried) which, in general, carry lower gross profit margins.
Operating expenses increased 0.6% for the quarter versus a 4.3% decline in net sales. The increase in operating expenses was primarily related to employee benefits costs. Other operating expenses declined approximately 1% versus the 2000 quarter.
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The Digital Businesses incurred operating losses of $40,000,000 compared with operating losses of $16,221,000 for the second quarter of 2000. On April 23, 2001, the Company announced it would shut down the operations of Material Logic with the exception of FindMRO.com. In connection with this announcement, the Company took a non-recurring charge of $40 million. FindMRO.com was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO.com was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital Businesses segment will cease operations. For additional information, see Note 7 to the Consolidated Financial Statements included in this report.
Lab Safety Supply had operating earnings of $12,577,000 for the second quarter of 2001, a decrease of 8.7% compared with operating earnings of $13,774,000 for the second quarter of 2000. The operating earnings decline was primarily due to higher operating expenses including increased data processing and employee costs.
Other Businesses had operating earnings of $470,000 in the second quarter of 2001 compared with operating losses of $3,216,000 in the comparable period of 2000. The significant improvement in operating earnings primarily relates to Grainger Integrated Supply, which improved profitability by eliminating or restructuring unprofitable contracts and by reducing its cost structure.
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Other Income or (Deductions)
Other income and deductions includes the following non-recurring items:
Excluding these unusual items from both periods, 2001 had a net deduction of $4.0 million versus a net deduction of $5.5 million in 2000.
Income Taxes
The Company’s effective income tax rate was 36.0% for the second quarter of 2001 and 40.5% for the same period in 2000. This rate decrease was due to the write-off of investments in unconsolidated entities, which resulted in tax benefits disproportionate to the loss incurred. Partially offsetting the rate reduction were two items:
Excluding the effect of these items, the effective tax rate was 40.5% for the second quarter 2001.
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SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000:
The Company’s net sales of $2,444,460,000 in the first half of 2001 were down 2.0% compared with sales of $2,494,100,000 for the comparable 2000 period. Sales performance in the first half of 2001 was affected by the continuing general weakness in the North American economy and one less selling day versus 2000.
There were 128 sales days in the 2001 first half and 129 sales days in the first half of 2000. The full year 2001 will have 255 sales days, the same number of sales days as the year 2000.
Sales processed through the Company's Internet sites were $210 million, up 48% from the $142 million achieved in the first half of 2000.
Net sales of $2,190,776,000 for the first six months of 2001 decreased 2.5% when compared with net sales of $2,247,445,000 in the first six months of 2000.
Daily sales in the United States declined approximately 2% primarily due to a slowdown in the U.S. economy. Daily sales to government and national accounts increased while sales to other customer categories declined. Sales processed through Grainger.com were $160 million, a 33% increase over the first six months of 2000 sales of $120 million.
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Daily sales growth in Canada increased 0.9% during the first half of 2001, which was impacted by an unfavorable Canadian exchange rate. In local currency, this business experienced an increase in daily sales of 5.5% driven by the oil and gas and selected forestry sectors of the Canadian economy, along with improved sales to large accounts. This growth was partially offset by a continued slowdown in the manufacturing sector in Eastern Canada.
The Mexican operation experienced a 12.2% decline in daily net sales. This decrease was attributable to weakness in the automotive and electronics manufacturing industries and a slowdown in the Mexican economy.
Net sales for the first half of 2001 were $29,979,000 compared with $20,598,000 for the same period in 2000. Net sales for this segment primarily represents product sales for FindMRO.com (through May 2001) and service fee revenues for the rest of Material Logic.
On April 23, 2001, the Company announced that it would shut down the operations of Material Logic with the exception of FindMRO.com. In connection with this announcement, the Company took a pre-tax, non-recurring charge of $40 million. FindMRO.com was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO.com was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital segment will cease operations.
First half 2001 net sales for Lab Safety Supply were $171,138,000, an increase of 0.5% compared with $170,362,000 for the same period in 2000. Net sales for the six months ended June 30, 2001 includes net sales for Ben Meadows, a direct marketer specializing in equipment for the environmental and forestry management markets, since its acquisition on February 26, 2001. Excluding these acquired sales, first half 2001 sales performance for Lab Safety Supply decreased for both safety and industrial products. This performance was the result of the continued slowing of the industrial economy.
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Net sales for the first half of 2001 were $88,327,000, an increase of 3.3% compared with $85,474,000 for the same period in 2000. Sales growth for this segment is primarily attributable to increased sales at Grainger Integrated Supply. Sales for this business unit include product sales and management fees.
The Company’s net earnings of $56,995,000 in the first half of 2001 decreased 41 percent compared with the net earnings of $96,873,000 for the comparable 2000 period. The first half of 2001 included the previously announced non-recurring, after-tax charges of $38 million, or $0.40 per share. The first half of 2000 included an after-tax gain related to sales of an investment security of $15.5 million, or $0.16 per share. Excluding these unusual items from both periods, net earnings increased 17 percent to $95.0 million from $81.3 million and earnings per share increased 15 percent to $1.00 from $0.87. The increase in net earnings (excluding unusual items) resulted primarily from the elimination of losses of the Digital Businesses, improved operating earnings of the Branch-based Distribution Businesses and the Other Businesses, and from lower interest expense.
Operating earnings of $183,935,000 for the first half of 2001 increased 5.0% compared with operating earnings of $175,257,000 in the first half of 2000. This improvement resulted from higher gross profit margins partially offset by slightly higher operating expenses.
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Gross profit margins increased 1.4 percentage points from the comparable 2000 period. The improvement in gross profit margins was primarily attributable to selected pricing actions intended to cover freight and supplier cost increases. Partially offsetting this improvement was higher sales of sourced product (not inventoried) which in general, carry lower gross profit margins.
Operating expenses increased 1.1% for the first half versus a 2.5% decline in net sales. The increase in operating expenses was primarily related to employee benefits costs. Other operating expenses declined approximately 2% versus the first half of 2000.
The Digital Businesses incurred operating losses of $50,157,000 compared with operating losses of $27,154,000 for the first half of 2000. On April 23, 2001, the Company announced it would shut down the operations of Material Logic with the exception of FindMRO.com. In connection with this announcement, the Company took a non-recurring, pre-tax charge of $40 million. FindMRO.com was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO.com was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital Businesses segment will cease operations. For additional information, see Note 7 to the Consolidated Financial Statements included in this report.
Lab Safety Supply had operating earnings of $28,711,000 for the first half of 2001, an increase of 1.2% compared with operating earnings of $28,382,000 for the first half of 2000. The operating earnings improvement was primarily due to improved gross margins partially offset by higher operating expenses. Operating expenses increased faster than sales primarily due to increased data processing and employee costs partially offset by lower amortization of intangibles.
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Other Businesses had operating earnings of $841,000 in the first half of 2001 compared with operating losses of $6,322,000 in the comparable period of 2000. The significant improvement in operating earnings primarily relates to Grainger Integrated Supply, which improved profitability by eliminating or restructuring unprofitable contracts and by reducing its cost structure.
Excluding these unusual items from both periods, the first half of 2001 had a net deduction of $12.9 million versus a net deduction of $11.0 million in the comparable 2000 period.
The Company’s effective income tax rate was 41.8% for the first half of 2001 and 40.5% for the same period in 2000. This rate increase was due primarily to the following two items:
Partially offsetting these items was the impact of the write-off of investments in unconsolidated entities, which resulted in tax benefits disproportionate to the loss incurred.
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W.W. Grainger, Inc., and SubsidiariesMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND THE RESULTS OF OPERATIONSLIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2001, working capital increased by $63,302,000. The ratio of current assets to current liabilities was 2.2 at June 30, 2001 and 2.0 at December 31, 2000. The Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents.
The Company 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, the Company has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit and otherwise. Total debt as a percent of Shareholders’ Equity was 16% at June 30, 2001 and 21% at December 31, 2000. For the first six months of 2001, $42,905,000 was expended for property, buildings, and equipment, and $4,061,000 was expended for capitalized software, for a total of $46,966,000.
On February 26, 2001, Lab Safety Supply, Inc., the Company's wholly owned subsidiary, acquired The Ben Meadows Co., Inc. for approximately $14.4 million. See Note 5, "Acquisition," in the Notes to Consolidated Financial Statements for additional information.
On March 26, 2001, a group of 83 executives bought $24,366,000 of common stock from the Company. The proceeds were used to repurchase shares on the open market. See Note 6, “Executive Stock Purchase Program,” in the Notes to Consolidated Financial Statements for additional information.
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W.W. Grainger, Inc., and SubsidiariesMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND THE RESULTS OF OPERATIONSFORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q are forward-looking statements, i.e., not historical facts, about the Company’s expected future financial results and business plans, strategies, and objectives. These forward-looking statements are often identified by qualifiers such as: “expects,” “will,” “plans,” “estimates,” “intends,” or similar expressions. There are risks and uncertainties the outcome of which could cause the Company’s results to differ materially from what is projected.
Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on the Company’s businesses; failure to develop or implement new technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns due to accidents, natural acts or governmental action; unanticipated weather conditions; and other difficulties in improving margins or financial performance.
Trends and projections could also be affected by general industry and market conditions, gross domestic product growth rates, general economic conditions, including interest rate and currency rate fluctuations, and other factors.
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W.W. Grainger, Inc., and SubsidiariesPART II-OTHER INFORMATION
Items 1, 2, 3, 4, and 5 not applicable.
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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.
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Exhibit 11.1
W.W. Grainger, Inc., and SubsidiariesCOMPUTATIONS OF EARNINGS PER SHARE
Six Months Ended June 30, --------------------------------------- BASIC: 2001 2000 --------------- --------------- Weighted average number of shares outstanding during the year ................................................... 93,391,830 92,985,940 =============== =============== Net earnings ......................................................... $ 56,995,000 $ 96,873,000 =============== =============== Earnings per share ................................................... $ 0.61 $ 1.04 =============== =============== DILUTED: Weighted average number of shares outstanding during the year (basic) ........................................... 93,391,830 92,985,940 Potential Shares: Shares issuable under outstanding options ..................... 2,924,035 2,415,545 Shares which could have been purchased based on the average market value for the period .................. (2,580,324) (1,742,716) --------------- --------------- 343,711 672,829 Dilutive effect of exercised options prior to being exercised ................................................... 15,994 40,401 --------------- --------------- Shares for the portion of the period that the options were outstanding ............................................ 359,705 713,230 Contingently issuable shares .................................. 1,023,525 733,000 --------------- --------------- 1,383,230 1,446,230 --------------- --------------- Adjusted weighted average number of shares outstanding during the year .................................................... 94,775,060 94,432,170 =============== =============== Net earnings ......................................................... $ 56,995,000 $ 96,873,000 =============== =============== Earnings per share ................................................... $ 0.60 $ 1.03 =============== ===============
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Exhibit 11.2
Basic: 2001 2000 --------------- -------------- Three months ended June 30: Six months ended June 30, as reported in Exhibit 11.1 ............. $ 0.61 $ 1.04 Three months ended March 31, as previously reported ............... 0.45 0.44 -------------- -------------- Earnings per share for the three months ended June 30 ............. $ 0.16 $ 0.60 =============== ============== Diluted: Three months ended June 30: Six months ended June 30, as reported in Exhibit 11.1 ............. $ 0.60 $ 1.03 Three months ended March 31, as previously reported ............... 0.45 0.44 --------------- ------------ Earnings per share for the three months ended June 30 ............. $ 0.15 $ 0.59 =============== =============
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