33 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 September 30, 1995 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) 5500 W. Howard St. Skokie, IL. 60077-2699 Telephone: (708) 982-9000 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 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 50,856,218 shares of the Company's Common Stock were outstanding as of October 31, 1995. (1)
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 Sept 30, Nine Months Ended Sept 30, 1995 1994 1995 1994 Net sales $849,963 $779,300 $2,470,308 $2,254,223 Cost of merchandise sold 548,951 505,764 1,591,170 1,456,269 -------- -------- --------- --------- Gross profit 301,012 273,536 879,138 797,954 Warehousing, marketing, and administrative expenses 216,896 199,482 649,517 581,838 Restructuring charges - 779 - 1,446 ------- ------- ------- ------- Total operating expenses 216,896 200,261 649,517 583,284 ------- ------- ------- ------- Operating earnings 84,116 73,275 229,621 214,670 Other income or (deductions) Interest income 1 - 158 14 Interest expense (1,564) (503) (2,727) (1,513) Unclassified-net (387) (671) (483) (598) ------- ------- ------- -------- (1,950) (1,174) (3,052) (2,097) ------- ------- ------- -------- Earnings before income taxes 82,166 72,101 226,569 212,573 Income taxes 33,031 29,056 91,081 85,666 ------- ------- ------- ------- Net earnings $49,135 $43,045 $135,488 $126,907 ======= ======= ======== ======== Net earnings per common and common equivalent share $0.96 $0.84 $2.65 $2.48 ===== ===== ===== ===== Average number of common and common equivalent shares outstanding 51,225,001 51,269,001 51,220,289 51,253,260 ========== ========== ========== ========== Cash dividends paid per share $0.23 $0.20 $0.66 $0.58 ===== ===== ===== ===== 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) ASSETS Sept 30, 1995 Dec 31, 1994 CURRENT ASSETS Cash and cash equivalents $ 22,885 $ 15,292 Accounts receivable, less allowance for doubtful accounts of $17,816 in 1995 and $15,333 in 1994 394,374 345,793 Inventories 597,869 519,966 Prepaid expenses 15,280 14,233 Deferred income tax benefits 68,243 68,362 -------- --------- Total current assets 1,098,651 963,646 PROPERTY, BUILDINGS, AND EQUIPMENT 869,653 810,217 Less accumulated depreciation and amortization 365,987 341,075 --------- --------- Property, buildings, and equipment-net 503,666 469,142 OTHER ASSETS 92,253 101,963 --------- --------- TOTAL ASSETS $1,694,570 $1,534,751 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 105,315 $ 11,134 Current maturities of long-term debt 28,109 26,449 Trade accounts payable 208,866 226,459 Accrued liabilities 150,729 172,359 Income taxes 21,994 22,650 ---------- ---------- Total current liabilities 515,013 459,051 LONG-TERM DEBT (less current maturities) 4,405 1,023 DEFERRED INCOME TAXES 9,096 15,177 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 29,858 26,695 SHAREHOLDERS' EQUITY Cumulative Preferred Stock - $5.00 par value - authorized 6,000,000 shares, issued and outstanding, none - - Common Stock - $0.50 par value - authorized 150,000,000 shares, issued and outstanding, 50,836,421 shares in 1995 and 50,749,681 shares in 1994 25,418 25,375 Additional contributed capital 83,155 81,796 Unearned restricted stock compensation (28) (61) Retained earnings 1,027,653 925,695 --------- ------- Total shareholders' equity 1,136,198 1,032,805 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,694,570 $1,534,751 ========== ========== 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) Nine Months Ended Sept 30, 1995 1994 Cash flows from operations: Net earnings $135,488 $126,907 Provision for losses on accounts receivable 8,862 7,410 Depreciation and amortization: Property, buildings, and equipment 43,868 39,613 Intangibles and goodwill 10,481 12,988 Restructuring charges - non-cash - 1,266 Change in operating assets and liabilities net of effect of restructuring charges: (Increase) in accounts receivable (57,443) (65,033) (Increase) in inventories (77,903) (61,756) (Increase) in prepaid expenses (1,047) (5,640) (Decrease) increase in trade accounts payable (17,593) 56,983 (Decrease) increase in other current liabilities (21,630) 1,818 (Decrease) in current income taxes payable (656) (6,711) Increase in accrued employment related benefits costs 3,163 3,078 (Decrease) in deferred income taxes (5,962) (6,504) Other-net (53) (51) ------- ------- Net cash provided by operating activities 19,575 104,368 ------- ------- Cash flows from investing activities: Additions to property, buildings, and equipment - net of dispositions (78,925) (71,830) Other - net (153) 78 ------- ------- Net cash (used in) investing activities (79,078) (71,752) ------- -------- Cash flows from financing activities: Net proceeds from short-term debt 94,181 5,596 Proceeds from long-term debt 5,303 - Long-term debt payments (260) (356) Stock incentive plan 1,402 1,070 Cash dividends paid (33,530) (29,420) ------- ------- Net cash provided by (used in) financing activities 67,096 (23,110) ------- ------- Net increase in cash and cash equivalents 7,593 9,506 Cash and cash equivalents at beginning of year 15,292 2,572 ------- ------- Cash and cash equivalents at end of period $ 22,885 $ 12,078 ======== ======== 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, 1994, 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 from the consolidated financial statements. Inventories are valued at the lower of cost or market. Cost is determined 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 $43,233,000 and $37,088,000 were included in trade accounts payable at September 30, 1995 and December 31, 1994, respectively. 2. DIVIDEND On October 25, 1995, the Board of Directors declared a quarterly dividend of 23 cents per share, payable December 1, 1995 to shareholders of record on November 6, 1995. (5)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1994: Net Sales Net sales of $849,963,000 in the 1995 third quarter increased 9.1% from net sales of $779,300,000 for the comparable 1994 period. There were 63 sales days in the 1995 third quarter compared with 64 sales days in the 1994 third quarter. The year 1995 will have one less sales day than did the year 1994 (254 versus 255). The sales increase for the 1995 third quarter compared with the 1994 third quarter was principally volume related. The volume increase primarily represented the continuing effects of the Company's market initiatives and an increase in sales of seasonal products. The market initiatives included new product additions, the expansion of branch facilities, adding Zone Distribution Centers (ZDCs), and the National Accounts program. Daily sales to National Account customers within the Company's core branch-based business increased about 23%, on a comparable basis, over the 1994 third quarter. Daily sales of seasonal products within the core business increased about 24% over the 1994 third quarter. The core business experienced selling price increases of about 1.9% when comparing the third quarters of 1995 and 1994. (6)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $49,135,000 in the 1995 third quarter, increased 12.9%, when compared with 1994 third quarter net earnings of $43,514,000 which excluded the effect of after tax restructuring charges of $469,000. When considering the effect of the restructuring charges, net earnings for the 1995 third quarter increased 14.1%. The net earnings increase of 12.9% was higher than the increase in net sales primarily due to slightly higher gross profit margins and to operating expenses increasing at a slower rate than net sales. The Company's gross profit margin increased by 0.31 percentage point for the third quarter of 1995 as compared with the same 1994 period. This change was primarily related to the following 2 factors: 1. A favorable product mix effect in non-seasonal product categories, partially offset by increased sales of seasonal products. The sales of seasonal products historically have had lower than average gross profit margins. 2. Partially offsetting the above effect was an unfavorable change in selling price category mix which primarily resulted from the growth in sales to National Accounts. Warehousing, marketing, and administrative (operating) expenses increased 8.7% in the third quarter of 1995 when compared with the same period in 1994, excluding the effect of restructuring charges of $779,000 in 1994. This increase was slightly lower than the increase in net sales. Contributing to this favorable comparison were the following factors: 1. The increase in the rate of growth in net sales allowed the Company to leverage its payroll costs. 2. Travel related expenses were lower in the 1995 period as compared with the same 1994 period. 3. The Company experienced lower amortization of goodwill and other acquisition related expenses associated with acquired and start-up businesses. (7)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings (continued) Partially offsetting these favorable comparisons were higher payroll related benefits costs and the Company's continuing investment in the business infrastructure needed to support its market initiatives. Of note were the following factors relating to infrastructure investments: 1. Increased data processing expenses related to the ongoing significant upgrade and replacement of the branch order entry, order processing, and inventory management system. This initiative will continue throughout 1995. 2. Increased expenses related to Grainger Integrated Supply Operations, whose role is managing transactions for the Company and its best-in-class distribution partners. 3. Increased expenses related to the continuing enhancement and reconfiguration of the Company's logistics network. The quarter included expenses related to the ongoing ramp-up of three additional ZDCs. Also included were expenses associated with converting the Niles, Illinois Regional Distribution Center to a National Distribution Center. The Company's effective income tax rate for the third quarter of 1995 was 40.2% versus 40.3% in the comparable 1994 period. (8)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1994: Net Sales Net sales of $2,470,308,000 in the first nine months of 1995 increased 9.6% from net sales of $2,254,223,000 in the same 1994 period. There were 191 sales days in the 1995 nine month period versus 192 sales days in the comparable 1994 period. The year 1995 will have one less sales day than did the year 1994 (254 versus 255). The sales increase for the first nine months of 1995 when compared with the same 1994 period was principally volume related. The volume increase can be explained primarily by the Company's market initiatives and the growth in the national economy. Daily sales to National Account customers within the core business increased about 23%, on a comparable basis, over the same 1994 period. The core business experienced selling price increases of about 1.3% when comparing the first nine month period for each year. (9) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings for the 1995 first nine months increased 5.6% to $135,488,000 when compared with 1994 net earnings of $128,288,000, which excluded the effect of after tax restructuring charges of $1,381,000. When considering the effect of the restructuring charges, net earnings for the 1995 first nine months increased 6.8%. The net earnings increase of 5.6% was less than the net sales increase primarily due to operating expenses increasing at a faster rate than net sales, partially offset by slightly higher gross profit margins. The Company's gross profit margin increased by 0.15 percentage point for the first nine months of 1995 as compared with the same 1994 period, excluding the effect of restructuring charges of $847,000 in 1994. This change in gross profit margin was primarily the result of the factors discussed for the third quarter (see Third Quarter Net Earnings discussion) with the following exception. The sales of seasonal products had a positive effect on this nine month comparison. During the 1995 nine month period, the sales of seasonal products grew at a slower rate than all other products. Warehousing, marketing, and administrative (operating) expenses for the Company increased 11.6% for the first nine months of 1995 as compared with the same 1994 period, excluding the effect of restructuring charges of $1,446,000 in 1994. This increase was greater than the increase in net sales primarily due to the following factors: 1. The Company's continuing investment in the business infrastructure to support its market initiatives discussed for the third quarter (see Third Quarter Net Earnings discussion). 2. Increased freight-out expenses resulting from several factors including: a. Proportionally more shipments qualifying for prepaid freight. b. Proportionally more orders being transferred within the ZDC/branch network. This resulted in orders being shipped longer distances. These incremental expenses, by policy, were not billed to customers. Partially offsetting these unfavorable comparisons were payroll and related benefits costs increasing somewhat slower than the rate of sales growth and decreased amortization of goodwill and other acquisition related costs associated with acquired and start-up businesses. The Company's effective income tax rate for the nine months of 1995 was 40.2% versus 40.3% in the comparable 1994 period. The Company's effective income tax rate for the full year 1994 would have been 40.4% without the effects of the restructuring charges recorded during 1994. (10)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1995, working capital increased $79,043,000. The ratio of current assets to current liabilities was 2.1 at September 30, 1995 and 2.1 at December 31, 1994. 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 a strong liquidity position, which provide flexibility in funding working capital needs and long-term cash requirements. Total debt as a percent of shareholders' equity was 12.1% at September 30, 1995 and 3.7% at December 31, 1994. For the first nine months of 1995, $33,222,000 was expended for land, buildings, and facilities improvements, and $45,854,000 for data processing, office, and other equipment; for a total of $79,076,000. (11)
W.W. Grainger, Inc. and Subsidiaries PART II - OTHER INFORMATION Items 1, 2, 3, 4, and 5 not applicable EXHIBIT INDEX Item 6 Exhibits and Reports on Form 8-K (numbered in accordance with Item 601 of regulation S-K). (a) Exhibits (3)(ii) By-Laws, as amended October 25, 1995 14 (11) Computation of Earnings per Common and Common Equivalent Share 32 (27) Financial Data Schedule 33 (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: November 9, 1995 By: /s/ J. D. Fluno ---------------------------------- J. D. Fluno, Vice Chairman Date: November 9, 1995 By: /s/ P. O. Loux ---------------------------------- P. O. Loux, Vice President, Finance Date: November 9, 1995 By: /s/ R. D. Pappano ----------------------------------- R. D. Pappano, Vice President, Financial Reporting and Investor Relations (13)