29 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 September 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: 93,546,126 shares of the Company's Common Stock were outstanding as of October 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 Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ ------------ Net sales .............................. $ 1,199,358 $ 1,273,038 $ 3,643,818 $ 3,767,138 Cost of merchandise sold ............... 803,507 863,853 2,458,140 2,584,317 ------------ ------------ ------------ ------------ Gross profit ......................... 395,851 409,185 1,185,678 1,182,821 Warehousing, marketing, and administrative expenses .............. 300,474 317,607 912,924 943,565 Restructuring charges .................. -- -- 40,000 -- ------------ ------------ ------------ ------------ Operating earnings ................... 95,377 91,578 232,754 239,256 Other income or (deductions) Interest income ...................... 713 442 1,813 1,379 Interest expense ..................... (2,169) (6,398) (9,137) (19,085) Equity in loss of unconsolidated entities ............ (339) (4,602) (6,352) (4,602) Loss on liquidation of equity in unconsolidated entity ........... -- -- (21,497) -- Gain on sale of investment securities ......................... 138 3,153 138 29,288 Unclassified-net ..................... 676 (190) (5,356) 559 ------------ ------------ ------------ ------------ (981) (7,595) (40,391) 7,539 ------------ ------------ ------------ ------------ Earnings before income taxes ......... 94,396 83,983 192,363 246,795 Income taxes ........................... 38,374 35,876 79,346 101,815 ------------ ------------ ------------ ------------ Net earnings ......................... $ 56,022 $ 48,107 $ 113,017 $ 144,980 ============ ============ ============ ============ Earnings per share: Basic ................................ $ 0.60 $ 0.52 $ 1.21 $ 1.56 ============ ============ ============ ============ Diluted .............................. $ 0.59 $ 0.51 $ 1.19 $ 1.54 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic ................................ 93,360,391 93,097,895 93,381,350 93,023,258 ============ ============ ============ ============ Diluted .............................. 94,905,733 94,074,751 94,818,617 94,313,030 ============ ============ ============ ============ Cash dividends paid per share .......... $ 0.175 $ 0.17 $ 0.52 $ 0.50 ============ ============ ============ ============
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 Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ ------------ Net earnings ........................... $ 56,022 $ 48,107 $ 113,017 $ 144,980 Other comprehensive (loss), net of tax: Foreign currency translation adjustments ...................... (10,958) (2,555) (14,755) (8,527) (Loss) in investment securities: Unrealized holding (loss) ........ (6,518) (6,967) (5,595) (54,350) Reclassification adjustments for realized gains included in net earnings ....................... (84) (2,081) (84) (17,631) ------------ ------------ ------------ ------------ Comprehensive earnings ................. $ 38,462 $ 36,504 $ 92,583 $ 64,472 ============ ============ ============ ============
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED BALANCE SHEETS(In thousands of dollars)(Unaudited)
ASSETS Sept. 30, 2001 Dec. 31, 2000 - ---------------------------------------------------------------- -------------- -------------- CURRENT ASSETS Cash and cash equivalents ..................................... $ 138,516 $ 63,384 Accounts receivable, less allowance for doubtful accounts of $30,685 in 2001 and $23,436 in 2000 ............. 548,288 608,297 Inventories ................................................... 630,437 704,071 Prepaid expenses .............................................. 47,993 25,173 Deferred income tax benefits .................................. 92,807 82,077 -------------- -------------- Total current assets ........................................ 1,458,041 1,483,002 PROPERTY, BUILDINGS, AND EQUIPMENT .............................. 1,354,569 1,308,027 Less accumulated depreciation and amortization ................ 682,461 631,630 -------------- -------------- Property, buildings, and equipment-net ........................ 672,108 676,397 DEFERRED INCOME TAXES ........................................... 5,974 8,820 INVESTMENTS IN UNCONSOLIDATED ENTITIES .......................... 4,412 23,838 OTHER ASSETS .................................................... 239,131 267,544 -------------- -------------- TOTAL ASSETS .................................................... $ 2,379,666 $ 2,459,601 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------- CURRENT LIABILITIES Short-term debt ............................................... $ 4,169 $ 173,538 Current maturities of long-term debt .......................... 22,755 22,770 Trade accounts payable ........................................ 284,998 220,924 Accrued expenses .............................................. 305,351 300,740 Income taxes .................................................. 21,662 29,352 -------------- -------------- Total current liabilities ................................... 638,935 747,324 LONG-TERM DEBT (less current maturities) ........................ 119,116 125,258 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ....................... 53,601 49,537 MINORITY INTEREST ............................................... 88 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 108,455,180 shares, 2001 and 108,037,082 shares, 2000 .................................... 54,228 54,017 Additional contributed capital ................................ 289,220 276,819 Retained earnings ............................................. 1,892,805 1,837,298 Unearned restricted stock compensation ........................ (21,712) (22,720) Accumulated other comprehensive (loss) ........................ (39,266) (18,832) Treasury stock, at cost-14,574,662 shares, 2001 and 14,104,212 shares, 2000 ................................. (607,349) (589,196) -------------- -------------- Total shareholders' equity ...................................... 1,567,926 1,537,386 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 2,379,666 $ 2,459,601 ============== ==============
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of dollars)(Unaudited)
Nine Months Ended Sept. 30, ------------------------------------- 2001 2000 -------------- -------------- Cash flows from operating activities: Net earnings .................................................. $ 113,017 $ 144,980 Provision for losses on accounts receivable ................... 15,616 10,915 Depreciation and amortization: Property, buildings, and equipment .......................... 59,440 62,611 Intangibles and goodwill .................................... 4,459 7,484 Amortization of capitalized software ........................ 12,200 12,521 (Gain) on sales of investment securities ...................... (138) (29,288) Non-cash restructuring charge ................................. 10,638 -- Asset write-downs ............................................. 6,000 -- Loss on unconsolidated entities ............................... 25,749 4,602 Change in operating assets and liabilities- net of business acquisition and asset write-downs: Decrease (increase) in accounts receivable .................. 42,714 (103,044) Decrease in inventories ..................................... 71,566 4,543 (Increase) in prepaid expenses .............................. (22,238) (7,252) (Increase) in deferred income taxes ......................... (10,576) (11,177) Increase in trade accounts payable .......................... 64,149 12,804 Increase in other current liabilities ....................... 2,644 8,375 (Decrease) increase in current income taxes payable ......... (8,944) 36,029 Increase in accrued employment related benefits costs ............................................ 4,064 1,450 Other - net ................................................... 4,714 5,803 -------------- -------------- Net cash provided by operating activities ....................... 395,074 161,356 -------------- -------------- Cash flows from investing activities: Additions to property, buildings, and equipment-net of dispositions ............................... (53,905) (37,112) Expenditures for capitalized software ......................... (5,463) (27,742) Proceeds from sales of investment securities .................. 473 30,740 Purchases of investment securities ............................ -- (5,000) Net cash paid for business acquisition ........................ (14,407) -- Investments in unconsolidated entities ........................ (4,547) (25,333) Other-net ..................................................... (160) (1,764) -------------- -------------- Net cash (used in) investing activities ......................... $ (78,009) $ (66,211) -------------- --------------
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W.W. Grainger, Inc., and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(In thousands of dollars)(Unaudited)
Nine Months Ended Sept. 30, ------------------------------------- 2001 2000 -------------- --------------- Cash flows from financing activities: Net (decrease) in short-term debt ............................. $ (169,369) $ (42,942) Long-term debt payments ....................................... (15) (52) Stock incentive plan .......................................... 6,013 6,174 Proceeds from sale of treasury stock .......................... 24,366 -- Purchase of treasury stock-net ................................ (51,315) (458) Contributions from minority interest .......................... -- 100 Cash dividends paid ........................................... (49,099) (46,891) -------------- -------------- Net cash (used in) financing activities ......................... (239,419) (84,069) -------------- -------------- Exchange rate effect on cash and cash equivalents ............... (2,514) (1,495) -------------- -------------- Net increase in cash and cash equivalents ....................... 75,132 9,581 Cash and cash equivalents at beginning of year .................. 63,384 62,683 -------------- -------------- Cash and cash equivalents at end of period ...................... $ 138,516 $ 72,264 ============== ==============
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W.W. Grainger, Inc., and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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 October 31, 2001, the Board of Directors declared a quarterly dividend of $0.175 per share, payable December 1, 2001, to shareholders of record on November 12, 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 September 30, 2001 ------------------------------------------------------------------------------------------ Lab Branch-based Safety Distribution Digital Supply Other Totals ------------ ----------- ------------ ------------ ------------ (In thousands of dollars) Total net sales ................... $ 1,074,309 $ -- $ 79,012 $ 49,950 $ 1,203,271 Intersegment net sales ............ 3,575 -- 338 -- 3,913 Net sales to external customers ... 1,070,734 -- 78,674 49,950 1,199,358 Segment operating earnings (loss) . 95,488 -- 12,280 (880) 106,888 Three Months Ended September 30, 2000 ------------------------------------------------------------------------------------------ Lab Branch-based Safety Distribution Digital Supply Other Totals ------------ ----------- ------------ ------------ ------------ (In thousands of dollars) Total net sales ................... $ 1,146,432 $ 15,848 $ 83,230 $ 48,000 $ 1,293,510 Intersegment net sales ............ 3,718 15,229 224 1,301 20,472 Net sales to external customers ... 1,142,714 619 83,006 46,699 1,273,038 Segment operating earnings (loss) . 107,020 (12,095) 14,747 (5,118) 104,554 Nine Months Ended September 30, 2001 ------------------------------------------------------------------------------------------ Lab Branch-based Safety Distribution Digital Supply Other Totals ------------ ----------- ------------ ------------ ------------ (In thousands of dollars) Total net sales ................... $ 3,265,085 $ 29,979 $ 250,150 $ 138,277 $ 3,683,491 Intersegment net sales ............ 10,571 28,139 963 -- 39,673 Net sales to external customers ... 3,254,514 1,840 249,187 138,277 3,643,818 Segment operating earnings (loss) . 279,423 (50,157) 40,991 (39) 270,218 Nine Months Ended September 30, 2000 ------------------------------------------------------------------------------------------ Lab Branch-based Safety Distribution Digital Supply Other Totals ------------ ----------- ------------ ------------ ------------ (In thousands of dollars) Total net sales ................... $ 3,393,877 $ 36,446 $ 253,592 $ 133,474 $ 3,817,389 Intersegment net sales ............ 9,854 35,403 676 4,318 50,251 Net sales to external customers ... 3,384,023 1,043 252,916 129,156 3,767,138 Segment operating earnings (loss) . 282,277 (39,249) 43,129 (11,440) 274,717
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Lab Branch-based Safety Distribution Digital Supply Other Totals ------------ ----------- ------------ ------------ ------------ (In thousands of dollars) Segment assets At September 30, 2001 ............. $ 1,904,848 $ -- $ 130,153 $ 40,507 $ 2,075,508 ============ ============ ============ ============ ============ 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 September 30, -------------------------------------- 2001 2000 --------------- --------------- Total operating earnings for reportable segments ...... $ 106,888 $ 104,554 Unallocated expenses .................................. (11,495) (12,967) Elimination of intersegment profits ................... (16) (9) -------------- -------------- Total consolidated operating earnings ............... $ 95,377 $ 91,578 ============== ============== Nine Months Ended September 30, ------------------------------------- 2001 2000 -------------- -------------- Total operating earnings for reportable segments ...... $ 270,218 $ 274,717 Unallocated expenses .................................. (37,448) (35,452) Elimination of intersegment profits ................... (16) (9) -------------- -------------- Total consolidated operating earnings ............... $ 232,754 $ 239,256 ============== ============== September 30, December 31, 2001 2000 -------------- -------------- Assets: Total assets for reportable segments .................. $ 2,075,508 $ 2,192,209 Unallocated assets .................................... 304,158 267,392 -------------- -------------- Total consolidated assets ........................... $ 2,379,666 $ 2,459,601 ============== ==============
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4. ADOPTION OF ACCOUNTING STANDARD 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 nine month period ended September 30, 2001, $6,142,000 of gain related to the foreign currency denominated debt obligation and was included in the cumulative translation adjustment. For the same period of 2000, $4,863,000 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 $151 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.
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 and supplies 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, pro forma disclosures are not considered necessary.
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 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 took a non-recurring, pretax 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 September 30, 2001, approximately 163 employees have been severed. Severance payments for most terminated employees began on July 1, 2001.
In addition, the Company wrote down its investment in other digital enterprises and took a pretax charge of $26.5 million (after-tax $14 million). This included divestiture of the Company’s 40% investment in Works.com, Inc. The Company acquired its ownership in Works.com, Inc., an unrelated third party, on August 1, 2000, when the Company’s OrderZone.com business unit 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.
The following table displays the activity and balance of the Material Logic restructuring reserve as of September 30, 2001:
(In thousands of dollars) Original Provision Deductions Adjustments Balance ------------ ------------ ---------------- ------------ Restructuring Reserve (Operating expenses): - ------------------------------------------ Workforce reductions ............................. $ 17,200 $ (6,758) $ -- $ 10,442 Asset and equipment write-offs and disposals ..... 5,800 (4,176) -- 1,624 Contractual obligations .......................... 5,000 (7,224) 2,224 -- Other shut-down costs ............................ 12,000 (7,071) (2,224) 2,705 ------------ ------------ ------------ ------------ $ 40,000 $ (25,229) $ -- $ 14,771 ============ ============ ============ ============
Deductions reflect cash payments of $14,591,000 and non-cash utilization of $10,638,000. The amounts in the adjustment column are reclassifications to reflect management’s current estimate of costs, by expense category.
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8. SUBSEQUENT EVENT
On October 1, 2001, the Company announced an agreement to form a joint venture with Uni-Select Inc. The joint venture will combine Uni-Select’s Western Division with the automotive aftermarket division of Acklands-Grainger Inc. (AGI), which operates as Bumper to Bumper. AGI is a Canadian subsidiary of the Company. The transaction is subject to regulatory approval and customary closing conditions. The Company will have a 50% stake in the new entity, which will be managed by Uni-Select. Annual revenues for the new company are expected to be C$120 million.
No gain or loss will be recognized when this transaction is finalized. As of September 30, 2001 and until the joint venture transaction is completed, the results of the Company’s automotive aftermarket division are consolidated with AGI. After the joint venture is formed, the Company will account for its interest using the equity method.
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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 SEPTEMBER 30, 2001 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000:
Company Net Sales
The Company’s net sales of $1,199,358,000 in the 2001 third quarter were down 5.8% compared with sales of $1,273,038,000 for the comparable 2000 period. Sales performance in the third quarter of 2001 was affected by the continuing general weakness in the North American economy. Sales levels declined further subsequent to the September 11th terrorist attacks.
There were 63 sales days in both the 2001 and 2000 third 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 $115 million, up 15% from the $100 million achieved in the third 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 $1,074,309,000 for the third quarter of 2001 decreased 6.3% when compared with net sales of $1,146,432,000 in the third quarter of 2000.
Daily sales in the United States declined approximately 6.5% primarily due to a slowdown in the U.S. economy. Sales to government accounts increased by 14.5%, while sales to other customer categories declined. Sales were favorably affected by the Company’s Grainger.com Internet initiative. Sales processed through Grainger.com were $85 million, a 13% increase over third quarter 2000 sales of $75 million.
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W.W. Grainger, Inc., and SubsidiariesMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS (Continued)
Daily sales in Canada decreased 4.9% for the third quarter of 2001 compared with the same period of 2000 primarily due to an unfavorable Canadian exchange rate. In local currency, this business experienced a decrease of 0.8% due to the weakness in the Canadian economy, partially offset by improved sales to the oil and gas industry. On October 1, 2001, the Company announced an agreement to form a joint venture with Uni-Select Inc. The joint venture will combine Uni-Select’s Western Division with AGI’s automotive aftermarket division. After the joint venture is formed, the Company will account for its interest using the equity method. For additional information, see Note 8 in the Notes to Consolidated Financial Statements.
The Mexican operation experienced a 21.0% decline in net sales. This decrease was attributable to continued weakness in the automotive and electronics manufacturing industries and a slowdown in the Mexican economy.
Digital Businesses
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 pretax 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 ceased operations. As a result, there were no net sales for the third quarter of 2001 compared with $15,848,000 for the same period in 2000. Net sales for this segment primarily represented product sales for FindMRO.com (transferred to Branch-based Distribution Businesses effective June 1, 2001) and service fee revenues for the rest of Material Logic.
Lab Safety Supply
Third quarter 2001 net sales for Lab Safety Supply were $79,012,000, down 5.1% compared with $83,230,000 for the same period in 2000. Sales declined in both safety and industrial products. Lab Safety Supply’s customer mix is heavily weighted in the industrial sector, which weakened further in the quarter. Partially offsetting these declines were incremental sales from the February 26, 2001 acquisition of Ben Meadows Co., a direct marketer, which specializes in equipment and supplies for the environmental and forestry management markets.
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Other Businesses
Net sales for the third quarter of 2001 were $49,950,000, an increase of 4.1% compared with $48,000,000 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.
Company Net Earnings
The Company’s net earnings of $56,022,000 in the third quarter of 2001 increased 16% compared with the net earnings of $48,107,000 for the comparable 2000 period. The third quarter of 2000 included a pretax gain related to sales of an investment security for $3.2 million or $0.02 per share. Excluding this unusual item from the 2000 third quarter, net earnings increased 21% to $56.0 million from $46.2 million and earnings per share increased 20% to $0.59 from $0.49. The increase in net earnings (excluding unusual items) resulted primarily from the elimination of losses from Material Logic and OrderZone.com, lower operating losses at 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 $95,488,000 for the third quarter decreased 10.8% compared with operating earnings of $107,020,000 in the third quarter of 2000. Lower sales and flat operating expenses contributed to the decline in operating earnings, partially offset by higher gross profit margins and a positive contribution to earnings from Grainger.com and FindMRO.com.
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Gross profit margins increased 1.1 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 were unfavorable changes in both product mix and selling price category mix. The unfavorable change in product mix was partially the result of increased sales of seasonal products that historically have lower than average gross profit margins.
Operating expenses were flat for the quarter versus a 6.3% decline in net sales. Operating expenses for the quarter included an additional provision for uncollectable accounts to reflect uncertainties in the economy.
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 ceased operations. The Digital Businesses incurred operating losses of $12,095,000 for the third quarter of 2000. For additional information, see Note 7 to the Consolidated Financial Statements included in this report.
Lab Safety Supply had operating earnings of $12,280,000 for the third quarter of 2001, a decrease of 17% compared with operating earnings of $14,747,000 for the third quarter of 2000. The operating earnings decline was primarily the result of lower sales and higher operating expenses. The operating expense increase was primarily related to higher employee benefits costs and increased intangible amortization costs related to the Ben Meadows Co. acquisition.
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Other Businesses had operating losses of $880,000 in the third quarter of 2001 compared with operating losses of $5,118,000 in the comparable period of 2000. The significant improvement in operating performance primarily relates to Grainger Integrated Supply, which reduced losses by eliminating or restructuring unprofitable contracts and by reducing its cost structure. The loss for the quarter was the result of a significant increase in the provision for uncollectable accounts. This increased provision was made due to the bankruptcy filing of a large customer. Without this incremental provision, Grainger Integrated Supply would have been profitable for the quarter.
Other Income or (Deductions)
Other deductions for the quarter were $1.0 million versus $7.6 million for the 2000 quarter. This difference is primarily attributable to lower interest expense and reduced losses from unconsolidated entities. Partially offsetting this improvement were lower gains on sales of investment securities.
Income Taxes
The Company’s effective income tax rate was 40.7% for the third quarter of 2001 and 42.7% for the same period in 2000. This rate decrease was due to reduced losses on equity interests in unconsolidated entities, which is a net of tax number.
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NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
The Company’s net sales of $3,643,818,000 in the first nine months of 2001 were down 3.3% compared with sales of $3,767,138,000 for the comparable 2000 period. Sales performance in the first nine months of 2001 was affected by the general weakness in the North American economy and one less selling day versus 2000.
There were 191 sales days in the 2001 first nine months and 192 sales days in the first nine months 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 $325 million, up 34% from the $242 million achieved in the first nine months of 2000.
Net sales of $3,265,085,000 for the first nine months of 2001 decreased 3.8% when compared with net sales of $3,393,877,000 in the first nine months of 2000. Daily net sales declined 3.3% compared with the first nine months of 2000.
Daily sales in the United States declined approximately 3.6% primarily due to a slowdown in the U.S. economy. Daily sales to government accounts increased while sales to other customer categories declined. Sales processed through Grainger.com were $245 million, a 26% increase over sales of $195 million for the first nine months of 2000.
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Daily sales in Canada decreased 1.1% for the first nine months of 2001 compared with the same period of 2000, which was impacted by an unfavorable Canadian exchange rate. In local currency, this business experienced an increase in daily sales of 3.4% driven by the oil and gas industry, 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 15.2% 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 nine months of 2001 were $29,979,000 compared with $36,446,000 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 pretax, 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 ceased operations.
For the first nine months of 2001, net sales for Lab Safety Supply were $250,150,000, a decrease of 1.4% compared with $253,592,000 for the same period in 2000. Net sales for the nine months ended September 30, 2001 includes net sales for Ben Meadows, a direct marketer specializing in equipment and supplies for the environmental and forestry management markets, since its acquisition on February 26, 2001. Excluding these acquired sales, the first nine months 2001 sales performance for Lab Safety Supply decreased for both safety and industrial products. This performance was the result of the slowing of the industrial economy.
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Net sales for the first nine months of 2001 were $138,277,000, an increase of 3.6% compared with $133,474,000 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 $113,017,000 in the first nine months of 2001 decreased 22% compared with the net earnings of $144,980,000 for the comparable 2000 period. The Company’s earnings per share for the first nine months declined 23% to $1.19 in 2001 from $1.54 in 2000. The first nine months of 2001 included the previously announced non-recurring, after-tax charges of $38 million, or $0.40 per share. The first nine months of 2000 included a pretax gain related to sales of an investment security of $29.3 million, or $0.18 per share. Excluding these unusual items from both periods, net earnings increased 18% to $151.0 million from $127.6 million and earnings per share increased 17% to $1.59 from $1.36. The increase in net earnings (excluding unusual items) resulted primarily from the elimination of losses of the Digital Businesses, improved operating performance of the Other Businesses, and from lower interest expense.
Operating earnings of $279,423,000 for the first nine months of 2001 decreased 1% compared with operating earnings of $282,277,000 in the first nine months of 2000. This decrease resulted from higher operating expenses partially offset by slightly higher gross profit margins.
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Gross profit margins increased 1.3 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 0.8% for the first nine months versus a 3.8% decline in net sales. The increase in operating expenses was primarily related to employee benefits costs and a significant increase in the provision for uncollectable accounts. Other operating expenses declined approximately 1.8% versus the first nine months of 2000.
The Digital Businesses incurred operating losses of $50,157,000 compared with operating losses of $39,249,000 for the first nine months 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, pretax 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 ceased operations. For additional information, see Note 7 to the Consolidated Financial Statements included in this report.
Lab Safety Supply had operating earnings of $40,991,000 for the first nine months of 2001, a decrease of 5% compared with operating earnings of $43,129,000 for the first nine months of 2000. The operating earnings shortfall was due to higher operating expenses partially offset by improved gross margins. Operating expenses were higher due to increased data processing and employee costs partially offset by lower amortization of intangibles.
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Other Businesses had operating losses of $39,000 in the first nine months of 2001 compared with operating losses of $11,440,000 in the comparable period of 2000. The significant improvement in operating performance primarily relates to Grainger Integrated Supply, which improved profitability by eliminating or restructuring unprofitable contracts and by reducing its cost structure. Partially offsetting this improved performance was a significant increase in the provision for uncollectable accounts relating to the bankruptcy filing of a large customer. Without this incremental provision, Grainger Integrated Supply would have been profitable for the first nine months of 2001.
Other income and deductions includes the following non-recurring items:
Excluding these unusual items from both periods, the first nine months of 2001 had a net deduction of $13.9 million versus a net deduction of $21.7 million in the comparable 2000 period. The difference was primarily attributable to lower interest expense.
The Company’s effective income tax rate was 41.2% for the first nine months of 2001 and 41.3% for the same period in 2000. This rate decrease was due primarily to the impact of the write-off of investments in unconsolidated entities, which resulted in tax benefits disproportionate to the loss incurred partially offset by the following two items:
Excluding the effect of these items, the effective tax rate was 40.5% for both 2001 and 2000.
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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 nine months ended September 30, 2001, working capital increased by $83,428,000. The ratio of current assets to current liabilities was 2.3 at September 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 9% at September 30, 2001 and 21% at December 31, 2000. For the first nine months of 2001, $61,841,000 was expended for property, buildings, and equipment, and $5,463,000 was expended for capitalized software, for a total of $67,304,000.
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, including costs associated with the acquisition. 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
Nine Months Ended September 30, ------------------------------------- BASIC: 2001 2000 -------------- -------------- Weighted average number of shares outstanding during the year ......................................... 93,381,350 93,023,258 ============== ============== Net earnings ............................................... $ 113,017,000 $ 144,980,000 ============== ============== Earnings per share ......................................... $ 1.21 $ 1.56 ============== ============== DILUTED: Weighted average number of shares outstanding during the year (basic) ................................. 93,381,350 93,023,258 Potential Shares: Shares issuable under outstanding options ........... 3,329,303 1,806,750 Shares which could have been purchased based on the average market value for the period ........ (2,932,539) (1,329,394) -------------- -------------- 396,764 477,356 Dilutive effect of exercised options prior to being exercised ......................................... 14,910 28,416 -------------- -------------- Shares for the portion of the period that the options were outstanding .................................. 411,674 505,772 Contingently issuable shares ........................ 1,025,593 784,000 -------------- -------------- 1,437,267 1,289,772 -------------- -------------- Adjusted weighted average number of shares outstanding during the year .......................................... 94,818,617 94,313,030 ============== ============== Net earnings ............................................... $ 113,017,000 $ 144,980,000 ============== ============== Earnings per share ......................................... $ 1.19 $ 1.54 ============== ==============
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Exhibit 11.2
2001 2000 -------------- ----------------- Basic: Three months ended September 30: Nine months ended September 30, as reported in Exhibit 11.1 $ 1.21 $ 1.56 Six months ended June 30, as previously reported .......... 0.61 1.04 -------------- -------------- Earnings per share for the three months ended September 30 ............................................ $ 0.60 $ 0.52 ============== ============== Diluted: Three months ended September 30: Nine months ended September 30, as reported in Exhibit 11.1 $ 1.19 $ 1.54 Six months ended June 30, as previously reported .......... 0.60 1.03 -------------- -------------- Earnings per share for the three months ended September 30 ........................................... $ 0.59 $ 0.51 ============== ==============
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