15 Pages Complete QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-5684 I.R.S. Employer Identification Number 36-1150280 W.W. Grainger, Inc. (An Illinois Corporation) 455 Knightsbridge Parkway Lincolnshire, Illinois 60069-3620 Telephone: (847)793-9030 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: 49,700,463 shares of the Company's Common Stock were outstanding as of May 13, 1997.
Part I - FINANCIAL INFORMATION W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except for per share amounts) (Unaudited) Three Months Ended March 31, ----------------------------------------- 1997 1996 ----------------- ------------------ Net sales $985,556 $842,647 Cost of merchandise sold 632,276 542,149 ----------------- ------------------ Gross profit 353,280 300,498 Warehousing, marketing, and administrative expenses 261,305 216,471 ----------------- ------------------ Operating earnings 91,975 84,027 Other income or (deductions) Interest income 1,390 257 Interest expense (1,148) (271) Unclassified-net (437) (194) ----------------- ------------------ (195) (208) ----------------- ------------------ Earnings before income taxes 91,780 83,819 Income Taxes 37,171 33,695 ----------------- ------------------ Net earnings $54,609 $50,124 ================= ================== Net earnings per common and common equivalent share $1.03 $0.98 ================= ================== Average number of common and common equivalent shares outstanding 52,938,414 51,380,696 ================= ================== Cash dividends paid per share $0.25 $0.23 ================= ================== The accompanying notes are an integral part of these financial statements. 2
W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) (Unaudited) March 31, Dec. 31, ASSETS 1997 1996 - --------------------------------------------------- ----------- ----------- CURRENT ASSETS Cash and cash equivalents ........................ $ 101,664 $ 126,935 Accounts receivable, less allowance for doubtful accounts of $16,203 in 1997 and $15,302 in 1996 . 465,837 433,575 Inventories ...................................... 627,712 686,925 Prepaid expenses ................................. 17,729 11,971 Deferred income tax benefits ..................... 61,317 60,837 ----------- ----------- Total current assets ........................... 1,274,259 1,320,243 PROPERTY, BUILDINGS, AND EQUIPMENT ................. 1,002,639 985,712 Less accumulated depreciation and amortization ... 450,553 434,728 ----------- ----------- Property, buildings, and equipment-net ........... 552,086 550,984 OTHER ASSETS ....................................... 238,915 247,794 ----------- ----------- TOTAL ASSETS ....................................... $ 2,065,260 $ 2,119,021 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------- CURRENT LIABILITIES Short-term debt .................................. $ 133,277 $ 135,275 Current maturities of long-term debt ............. 24,778 24,753 Trade accounts payable ........................... 253,911 240,779 Accrued liabilities .............................. 143,748 187,457 Income Taxes ..................................... 64,122 27,804 ----------- ----------- Total current liabilities ...................... 619,836 616,068 LONG-TERM DEBT (less current maturities) ........... 5,639 6,152 DEFERRED INCOME TAXES .............................. 105 2,207 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .......... 32,996 31,932 SHAREHOLDERS' EQUITY Cumulative Preferred Stock - $5 par value - authorized, 6,000,000 shares, issued and outstanding, none ............................ -- -- Common Stock - $0.50 par value - authorized, 150,000,000 shares; issued, 53,386,358 shares, 1997, and 53,338,026 shares, 1996 ... 26,693 26,669 Additional contributed capital ................... 263,254 262,318 Treasury stock, at cost -1,610,600 shares, 1997, and 409,600 shares, 1996 .............. (127,839) (32,090) Unearned restricted stock compensation ........... (17,932) (17,597) Cumulative translation adjustments ............... (4,532) (2,262) Retained earnings ................................ 1,267,040 1,225,624 ----------- ----------- Total shareholders' equity ....................... 1,406,684 1,462,662 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 2,065,260 $ 2,119,021 =========== =========== The accompanying notes are an integral part of these financial statements. 3
W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Three Months Ended March 31, ----------------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net earnings ...................................... $ 54,609 $ 50,124 Provision for losses on accounts receivable ....... 2,993 3,035 Depreciation and amortization: Property, buildings, and equipment .............. 16,757 16,223 Intangibles and goodwill ........................ 4,103 3,568 Change in operating assets and liabilities: (Increase) in accounts receivable ............... (35,255) (22,088) Decrease in inventories ......................... 59,213 43,671 (Increase) in prepaid expenses .................. (5,758) (7,648) (Increase) in deferred income taxes ............. (2,582) (1,312) Increase in trade accounts payable .............. 13,132 1,123 (Decrease) in other current liabilities ......... (43,709) (44,385) Increase in current income taxes payable ........ 36,318 30,873 Increase in accrued employement related benefits costs ................................ 1,064 979 Other - net ....................................... 611 634 --------- --------- Net cash provided by operating activities ........... 101,496 74,797 --------- --------- Cash flows from investing activities: Additions to property, buildings, and equipment - net of dispositions ................. (17,821) (11,279) Other - net ....................................... 2,325 (7) --------- --------- Net cash (used in) investing activities ............. (15,496) (11,286) --------- --------- Cash flows from financing activities: Net (decrease) in short-term debt ................. (1,998) (20,579) Long-term debt payments ........................... (488) (485) Stock incentive plan .............................. 157 1,409 Purchase of treasury stock ........................ (95,749) -- Cash dividends paid ............................... (13,193) (11,719) --------- --------- Net cash (used in) financing activities ............. (111,271) (31,374) --------- --------- Net (decrease) increase in cash and cash equivalents (25,271) 32,137 Cash and cash equivalents at beginning of year ...... 126,935 11,460 --------- --------- Cash and cash equivalents at end of period .......... $ 101,664 $ 43,597 ========= ========= The accompanying notes are an integral part of these financial statements. 4
W.W. Grainger, Inc. and Subsidiaries NOTES 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, 1996, 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. Checks outstanding of $34,621,000 and $35,366,000 were included in trade accounts payable at March 31, 1997 and December 31, 1996, respectively. 2. DIVIDEND On April 30, 1997, the Board of Directors declared a quarterly dividend of 27 cents per share, payable June 1, 1997 to shareholders of record on May 12, 1997. 3. SHARE REPURCHASE On April 30, 1997, the Company's Board of Directors restored an existing share repurchase authorization to its original level of five million shares. Through that date, over three million shares had been repurchased under the original 1992 authorization. The authorization continues to be adjustable to reflect stock splits and stock dividends. Repurchases are expected to be made from time to time in open market and privately negotiated transactions. The repurchased shares will be retained in the Company's treasury and be available for general corporate purposes (see the Liquidity and Capital Resources section). 5
W.W. Grainger, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. EARNINGS PER SHARE (SFAS No. 128) The Financial Accounting Standards Board's SFAS No. 128, "Earnings per Share" is effective for 1997 year end financial statements. SFAS No. 128 replaces Accounting Principles Board (APB) Opinion No. 15, "Earnings per Share", for calculating earnings per share (EPS). SFAS No. 128 eliminates the presentation of primary and fully diluted EPS and requires the dual presentation of earnings per share and earnings per share - assuming dilution. The calculation of basic EPS excludes any contingently returnable and any potential common shares (options, warrants, convertible securities, and contingent stock agreements). The calculation of diluted EPS includes common shares outstanding and the dilutive effect of potential common shares. The effect on the Company's EPS of adopting SFAS No. 128 is estimated to be immaterial. 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1996: Net Sales Net sales of $985,556,000 in the 1997 first quarter increased 17.0% from net sales of $842,647,000 for the comparable 1996 period. There were 63 sales days in the 1997 first quarter compared with 64 sales days in the same 1996 period. The year 1997 will have one less sales day than did the year 1996 (255 versus 256). The sales increase of 17.0% for the 1997 first quarter, as compared with the 1996 first quarter, was principally volume related. Excluding the incremental sales of Acklands - Grainger, Inc. (AGI), the Canadian industrial distribution business acquired on December 2, 1996, sales increased 6.9%. This increase primarily represented the effects of the Company's market initiatives, which included new product additions, the continuing expansion of branch facilities, the addition of Zone Distribution Centers (ZDCs), and the National Accounts, Integrated Supply, and Direct Marketing programs. Sales of seasonal products for the Company, excluding AGI, declined approximately 4.0% in the 1997 first quarter as compared with the same 1996 period. Many regions of the country experienced milder weather during the quarter versus the comparable 1996 period. The Company's Grainger branch-based business experienced selling price increases of about 1.2% when comparing the first quarters of 1997 and 1996. Daily sales to National Account customers within the branch-based business increased an estimated 20%, on a comparable basis, over the 1996 first quarter. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $54,609,000 in the 1997 first quarter increased 8.9% when compared to net earnings of $50,124,000 for the comparable 1996 period. The net earnings increase was lower than the net sales increase due to operating expenses increasing at a faster rate than net sales, partially offset by higher gross profit margins. The Company's gross profit margin increased by 0.19 percentage point when comparing the first quarters of 1997 and 1996. The overall increase was reduced by the incremental effect of Acklands - Grainger, Inc. (AGI) which has lower average gross profit margins as compared with the average of all other business units. Excluding AGI, the Company's gross profit margin increased 0.62 percentage point when comparing the first quarters of 1997 and 1996. Of note are the following favorable factors affecting the Company's gross profit margin, excluding AGI: 1. Selling price increases exceeded the level of cost increases. 2. The change in product mix was favorable as Lab Safety Supply sales (generally higher than average gross profit margins) increased as a percent of total sales and seasonal product sales (generally lower than average gross profit margins) declined. Partially offsetting the above factors was an unfavorable change in selling price category mix, which primarily resulted from the growth in sales to the Company's larger volume customers. Operating expenses (warehousing, marketing, and administrative) for the Company increased 20.7% for the 1997 first quarter as compared with the same 1996 period. This rate of increase was greater than the rate of increase in net sales. This was caused by a lower than expected increase in net sales, the incremental operating expenses of AGI, and by the following expenses which increased at a faster rate than the growth rate in net sales: 1. Payroll costs; 2. Advertising expenses; 3. Expenses related to marketing initiatives and business process improvement programs; and 4. Freight-out expenses. Partially offsetting the above factors was a decline in employee benefits costs, primarily related to lower health care costs and lower profit sharing expenses. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's effective income tax rate for the first quarter of 1997 was 40.5% versus 40.2% for the comparable 1996 period. The increase in the effective income tax rate is attributable to proportionally more business in Canada (AGI) which has higher tax rates. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1997, working capital decreased by $49,752,000. The ratio of current assets to current liabilities was 2.1 at March 31, 1997 and 2.1 at December 31, 1996. The Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents. The Company continues to maintain a low debt ratio and strong liquidity position, which 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 11.6 % at March 31, 1997 and 11.4% at December 31, 1996. For the first three months of 1997, $11,395,000 was expended for land, buildings, and facilities improvements, and $4,876,000 for data processing, office, and other equipment, for a total of $16,271,000. In 1997, the Company repurchased 1,201,000 common shares during the first quarter. From April 1, 1997 through May 13, 1997, the Company acquired an additional 2,120,000 common shares. At May 13, 1997, approximately 2,900,000 shares of common stock remained available for repurchase under the current share repurchase authorization (see Note 3 of the Notes to Consolidated Financial Statements). 10
W.W. Grainger, Inc. and Subsidiaries PART II - OTHER INFORMATION Items 1, 2, 3, and 5 not applicable. Item 4 Submission of Matters to a Vote of Security Holders. An annual meeting of shareholders of the Company was held on April 30, 1997. At that meeting: a) Management's nominees listed in the proxy statement pertaining to the meeting were elected directors for the ensuing year. Of the 45,905,022 shares present in person or represented by proxy at the meeting, the number of shares voted for and the number of shares as to which authority to vote in the election was withheld, were as follows with respect to each of the nominees: Shares as to Which Shares Voted for Voting Authority Name Election Withheld --------------------- ---------------- ----------------- G. R. Baker 45,657,934 247,088 R. E. Elberson 45,685,844 219,178 J. D. Fluno 45,706,395 198,627 W. H. Gantz 45,675,266 229,756 D. W. Grainger 45,689,714 215,308 R. L. Keyser 45,701,148 203,874 J. W. McCarter, Jr. 45,678,420 226,602 J. D. Slavik 45,695,906 209,116 H. B. Smith 45,691,092 213,930 F. L. Turner 45,673,966 231,056 J. S. Webb 45,677,115 227,907 b) A proposal to ratify the appointment of Grant Thornton, LLP as independent auditors of the Company for the year ended December 31, 1997 was approved. Of the 45,905,022 shares present in person or represented by proxy at the meeting, 45,734,648 shares were voted for the proposal, 73,357 shares were voted against the proposal, and 97,017 shares abstained from voting with respect to the proposal. c) A proposal to approve the Director Stock Plan was approved. Of the 45,905,022 shares present in person or represented by proxy at the meeting, 43,677,405 shares were voted for the proposal, 1,845,148 shares were voted against the proposal, and 382,469 shares abstained from voting with respect to the proposal. d) A proposal to approve the Office of the Chairman Incentive Plan was approved. Of the 45,905,022 shares present in person or represented by proxy at the meeting, 44,474,152 shares were voted for the proposal, 1,035,788 shares were voted against the proposal, and 395,082 shares abstained from the voting with respect to the proposal. 11
W.W. Grainger, Inc. and Subsidiaries PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders. (continued) e) A proposal to approve the 1990 Long Term Incentive Plan, as amended, was approved. Of the 45,905,022 shares present in person or represented by proxy at the meeting,44,043,932 shares were voted for the proposal, 1,469,108 shares were voted against the proposal, and 391,982 shares abstained from the voting with respect to the proposal. EXHIBIT INDEX -------------------- Item 6 Exhibits (numbered in accordance with Item 601 of regulation S-K) and Reports on Form 8-K. a) Exhibits (10) Material Contracts Compensatory Plans or Arrangements (a) W.W. Grainger, Inc. Director Stock Plan, incorporated by reference to Appendix A of the Company's Proxy Statement dated March 26, 1997. (b) W.W. Grainger, Inc. Office of the Chairman Incentive Plan, incorporated by reference to Appendix B of the Company's Proxy Statement dated March 26, 1997. (c) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Appendix C of the Company's Proxy Statement dated March 26, 1997. (11) Computation of Earnings per Common and Common Equivalent Share 14 (27) Financial Data Schedule 15 b) Reports on Form 8-K - None. 12
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. W.W. Grainger, Inc. --------------------------------------------------- (Registrant) Date: May 13, 1997 By: /s/ J.D. Fluno - ---------------------- --------------------------------------------------- J.D. Fluno, Vice Chairman Date: May 13, 1997 By: /s/ P.O. Loux - ---------------------- --------------------------------------------------- P.O. Loux, Senior Vice President, Finance and Chief Financial Officer Date: May 13, 1997 By: /s/ R.D. Pappano - ---------------------- --------------------------------------------------- R.D. Pappano, Vice President, Financial Reporting and Investor Relations 13