14 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, 1996 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: 51,032,753 shares of the Company's Common Stock were outstanding as of October 31, 1996. (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, --------------------------- -------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net sales .............. $ 901,858 $ 849,963 $2,633,129 $2,470,308 Cost of merchandise sold 582,324 548,951 1,703,490 1,591,170 ---------- ---------- ---------- ---------- Gross profit ........... 319,534 301,012 929,639 879,138 Warehousing, marketing, and administrative expenses 233,737 216,896 677,388 649,517 ---------- ---------- ---------- ---------- Operating earnings ..... 85,797 84,116 252,251 229,621 Other income or (deductions) Interest income ........ 1,780 1 2,780 158 Interest expense ....... (88) (1,564) (662) (2,727) Unclassified-net ....... (78) (387) (284) (483) ---------- ---------- ---------- ---------- 1,614 (1,950) 1,834 (3,052) ---------- ---------- ---------- ---------- Earnings before income taxes 87,411 82,166 254,085 226,569 Income taxes ........... 35,139 33,031 102,142 91,081 ---------- ---------- ---------- ---------- Net earnings ........... $ 52,272 $ 49,135 $ 151,943 $ 135,488 ========== ========== ========== ========== Net earnings per common and common equivalent share $ 1.02 $ 0.96 $ 2.96 $ 2.65 ========== ========== ========== ========== Average number of common and common equivalent shares outstanding ............ 51,454,355 51,225,001 51,417,826 51,220,289 ========== ========== ========== ========== Cash dividends paid per share $ 0.25 $ 0.23 $ 0.73 $ 0.66 ======= ========== ========== ========== 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, 1996 Dec. 31, 1995 - ------------------------------------------------- ----------- ------------- CURRENT ASSETS Cash and cash equivalents ...................... $ 131,553 $ 11,460 Accounts receivable, less allowance for doubtful accounts of $15,537 in 1996 and $14,229 in 1995 418,991 369,576 Inventories .................................... 565,873 602,639 Prepaid expenses ............................... 12,401 11,746 Deferred income tax benefits ................... 61,151 67,239 ----------- ----------- Total current assets ........................ 1,189,969 1,062,660 PROPERTY, BUILDINGS, AND EQUIPMENT ............... 928,340 897,700 Less accumulated depreciation and amortization . 421,257 379,349 ----------- ----------- Property, buildings, and equipment-net ......... 507,083 518,351 OTHER ASSETS ..................................... 77,066 88,232 ----------- ----------- TOTAL ASSETS ..................................... $ 1,774,118 $ 1,669,243 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------- CURRENT LIABILITIES Short-term debt ................................ $ 3,065 $ 23,577 Current maturities of long-term debt ........... 24,728 23,241 Trade accounts payable ......................... 233,893 204,925 Accrued liabilities ............................ 152,023 168,928 Income taxes ................................... 24,602 23,465 ----------- ----------- Total current liabilities ................... 438,311 444,136 LONG-TERM DEBT (less current maturities) ......... 6,668 8,713 DEFERRED INCOME TAXES ............................ 1,857 8,539 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ........ 31,626 28,746 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, 51,029,845 shares in 1996 and 50,894,629 shares in 1995................................... 25,515 25,447 Additional contributed capital .................. 88,695 86,548 Unearned restricted stock compensation .......... -- (19) Retained earnings ............................... 1,181,788 1,067,133 Foreign currency translation adjustment ......... (342) -- ----------- ----------- Total shareholders' equity .................. 1,295,656 1,179,109 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 1,774,118 $ 1,669,243 =========== =========== 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 September 30, ------------------------------- 1996 1995 ---- ---- Cash flows from operations: Net earnings ................................... $ 151,943 $ 135,488 Provision for losses on accounts receivable .... 7,986 8,862 Depreciation and amortization: Property, buildings, and equipment ........... 45,870 43,868 Intangibles and goodwill ..................... 9,427 10,046 Change in operating assets and liabilities: (Increase) in accounts receivable ............ (57,401) (57,443) Decrease (increase) in inventories ........... 36,766 (77,903) (Increase) in prepaid expenses ............... (655) (1,047) Increase (decrease) in trade accounts payable 28,968 (17,593) (Decrease) in other current liabilities ...... (16,905) (21,630) Increase (decrease) in current income taxes payable 1,137 (656) Increase in accrued employment related benefits costs ............................. 2,880 3,163 (Decrease) in deferred income taxes .......... (594) (5,962) Other-net ...................................... 2,304 382 --------- --------- Net cash provided by operating activities ........ 211,726 19,575 --------- --------- Cash flows from investing activities: Additions to property, buildings, and equipment - net of dispositions ........... (34,325) (78,925) Other - net .................................. (1,235) (153) --------- --------- Net cash (used in) investing activities .......... (35,560) (79,078) --------- --------- Cash flows from financing activities: Net (decrease) increase in short-term debt .... (20,512) 94,181 Proceeds from long-term debt .................. 1,500 5,303 Long-term debt payments ....................... (2,058) (260) Stock incentive plan .......................... 2,215 1,402 Cash dividends paid ........................... (37,218) (33,530) --------- --------- Net cash (used in) provided by financing activities (56,073) 67,096 --------- --------- Net increase in cash and cash equivalents ........ 120,093 7,593 Cash and cash equivalents at beginning of year ... 11,460 15,292 --------- --------- Cash and cash equivalents at end of period ....... $ 131,553 $ 22,885 ========= ========= 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, 1995, 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 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 $33,142,000 and $40,027,000 were included in trade accounts payable at September 30, 1996 and December 31, 1995, respectively. 2. DIVIDEND On October 30, 1996, the Board of Directors declared a quarterly dividend of 25 cents per share, payable December 1, 1996 to shareholders of record on November 12, 1996. 3. ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123) The Financial Accounting Standards Board's SFAS No. 123 "Accounting for Stock-Based Compensation" is effective for the fiscal year 1996. This statement requires the Company either to adopt SFAS No. 123 and recognize an expense for stock compensation in the financial statements or to continue accounting under Accounting Principles Board Opinion (APBO) No. 25 "Accounting for Stock Issued to Employees" with additional proforma footnote disclosure regarding the impact on Net earnings and Net earnings per share had the Company adopted SFAS No. 123. The Company has elected to continue to account for stock compensation under APBO No. 25 with additional footnote disclosure. The Company will provide the additional footnote disclosure in its 1996 year end financial statements. (5)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1995: Net Sales Net sales of $901,858,000 in the 1996 third quarter increased 6.1% from net sales of $849,963,000 for the comparable 1995 period. There were 64 sales days in the 1996 third quarter compared with 63 sales days in the 1995 third quarter. The year 1996 will have two more sales days than did the year 1995 (256 versus 254). The sales increase for the 1996 third quarter compared with the 1995 third quarter was principally volume related. The volume increase primarily represented the effects of the Company's market initiatives which included new product additions, the continuing expansion of branch facilities, adding Zone Distribution Centers (ZDCs), and the National Accounts and integrated supply programs. The Company's core branch-based business experienced selling price increases of about 1.9% when comparing the third quarters of 1996 and 1995. Daily sales to National Account customers within the core business increased an estimated 20%, on a comparable basis, over the 1995 third quarter. Sales of seasonal products in the core branch-based business declined approximately 18% in the 1996 third quarter as compared with the same 1995 period. Many regions of the country experienced milder weather in July and August versus the comparable 1995 periods. (6)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $52,272,000 in the 1996 third quarter increased 6.4% when compared to net earnings of $49,135,000 for the comparable 1995 period. The net earnings increase was higher than the net sales increase due to slightly higher gross profit margins, higher interest income, and lower interest expense partially offset by operating expenses increasing at a faster rate than net sales. The Company's gross profit margin was virtually the same when comparing the third quarters of 1996 and 1995 (0.02 percentage point improvement). Of note were the following: 1. The change in product mix was favorable as sales of seasonal products declined. Historically, the sales of seasonal products have lower than average gross profit margins. 2. Selling price increases exceeded the level of cost increases. 3. Partially offsetting the above points 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 7.8% for the 1996 third quarter as compared with the same 1995 period. The increase was greater than the increase in net sales. Contributing to this increase were the following factors: 1. Expenses related to market development and advertising initiatives increased at a faster rate than net sales. 2. Data processing expenses grew at a faster rate than net sales. Partially offsetting the above were the following factors: 1. Payroll and employee benefits costs grew at a slower rate than net sales. 2. Freight-out expenses were lower. The increase in interest income resulted from higher average daily invested balances, partially offset by lower average interest rates earned. The decrease in interest expense resulted from lower borrowings and lower average interest rates paid on outstanding debt. The decrease in interest expense was partially offset by lower capitalized interest. The Company's effective income tax rate was 40.2% for the third quarters of both 1996 and 1995. (7)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1995: Net Sales Net sales of $2,633,129,000 in the first nine months of 1996 increased 6.6% from net sales of $2,470,308,000 for the comparable 1995 period. There were 192 sales days in the 1996 nine month period compared with 191 sales days in the 1995 nine month period. The year 1996 will have two more sales days than did the year 1995 (256 versus 254). The sales increase for the first nine months of 1996 when compared with the same 1995 period was principally volume related. The volume increase can be explained primarily by the same factors discussed for the third quarter (see Third Quarter Net Sales discussion). In addition, sales in the 1996 first quarter were negatively affected by the sluggish national economy and adverse weather experienced by much of the East Coast during January 1996. The Company's core branch-based business experienced selling price increases of about 2.0% when comparing the first nine months of each year. Daily sales to National Account customers within the core business increased an estimated 20%, on a comparable basis, over the same 1995 period. (8)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $151,943,000 in the first nine months of 1996 increased 12.1% when compared to net earnings of $135,488,000 for the comparable 1995 period. The net earnings increase was higher than the sales increase primarily due to operating expenses increasing at a slower rate than net sales, higher interest income, and lower interest expense, partially offset by lower gross profit margins. The Company's gross profit margin decreased by 0.28 percentage point when comparing the first nine months of 1996 and 1995. This decrease was principally the result of an unfavorable change in selling price category mix, which primarily resulted from the growth in sales to the Company's larger volume customers. Partially offsetting the above effect were the following two factors: 1. Selling price increases exceeded the level of cost increases. 2. The change in product mix was favorable as sales of seasonal products declined. Historically, the sales of seasonal products have lower than average gross profit margins. Operating expenses for the Company increased 4.3% for the first nine months of 1996 as compared with the same 1995 period. This increase was lower than the increase in net sales. Contributing to this favorable comparison were the following factors: 1. Data processing expenses grew at a slower rate than net sales. 2. Payroll grew at a slower rate than net sales. 3. Freight-out expenses were lower. Partially offsetting the above were the following factors: 1. Employee benefits costs were higher. These costs were related to higher health care costs and to an increased allocation of profit sharing expenses due to a higher level of Company earnings as compared with 1995. 2. Expenses related to the continuing enhancement and reconfiguration of the Company's logistics network increased. The first nine months of 1996 included incremental expenses related to the ongoing ramp-up of the ZDCs. The increase in interest income resulted from higher average daily invested balances, partially offset by lower average interest rates earned. The decrease in interest expense resulted from lower borrowing and lower average interest rates paid on outstanding debt. The decrease in interest expense was partially offset by lower capitalized interest. The Company's effective income tax rate was 40.2% for the first nine months of both 1996 and 1995. (9)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1996, working capital increased by $133,134,000. The ratio of current assets to current liabilities was 2.7 at September 30, 1996 and 2.4 at December 31, 1995. The Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents. The Company's liquidity position and low debt ratio provide 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 2.7% at September 30, 1996 and 4.7% at December 31, 1995. For the first nine months of 1996, $21,755,000 was expended for land, buildings, and facilities improvements, and $21,494,000 for data processing, office, and other equipment, for a total of $43,249,000. On November 6, 1996, the Company announced that it had entered into a definitive agreement to acquire the Canadian industrial distribution business of Acklands Limited, which business had sales of more than C$400 million (US$299 million) for the fiscal year ended January 31, 1996. The agreement provides for Acklands Limited to receive approximately C$370 million (US$277 million), consisting of C$180 million (US$135 million) in cash and approximately two million shares of the Company's common stock. The Company intends to reactivate its share repurchase program in connection with this transaction. (10)
W.W. Grainger, Inc. and Subsidiaries PART II - OTHER INFORMATION EXHIBIT INDEX ------------- Items 1, 2, 3, 4, and 5 not applicable. Item 6 Exhibits (numbered in accordance with Item 601 of regulation S-K) and Reports on Form 8-K. (a) Exhibits (11) Computation of Earnings per Common and Common Equivalent Share 13 (27) Financial Data Schedule 14 (b) Reports on Form 8-K - None. (11)
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 11, 1996 By: /s/ J. D. Fluno - ----------------------- -------------------------------- J. D. Fluno, Vice Chairman Date: November 11, 1996 By: /s/ P.O. Loux - ----------------------- -------------------------------- P. O. Loux, Vice President, Finance Date: November 11, 1996 By: /s/ R.D. Pappano - ----------------------- ----------------------------------- R. D. Pappano, Vice President, Financial Reporting and Investor Relations (12)