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 June 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: 51,021,994 shares of the Company's Common Stock were outstanding as of July 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 Six Months Ended June 30, Ended June 30, ------------------- ----------------------- 1996 1995 1996 1995 -------- -------- --------- --------- Net sales .................... $888,624 $813,518 $1,731,271 $1,620,345 Cost of merchandise sold ..... 579,017 527,097 1,121,166 1,042,219 --------- -------- --------- --------- Gross profit .............. 309,607 286,421 610,105 578,126 Warehousing, marketing, and administrative expenses ...... 227,180 219,091 443,651 432,621 --------- -------- --------- --------- Operating earnings ........ 82,427 67,330 166,454 145,505 Other income or (deductions) Interest income ........... 743 2 1,000 157 Interest expense .......... (303) (1,080) (574) (1,163) Unclassified-net .......... (12) (226) (206) (96) ---------- --------- ---------- --------- 428 (1,304) 220 (1,102) ---------- --------- ---------- --------- Earnings before income taxes .. 82,855 66,026 166,674 144,403 Income taxes .................. 33,308 26,542 67,003 58,050 ---------- --------- ---------- --------- Net earnings .................. $ 49,547 $ 39,484 $ 99,671 $ 86,353 ========== ========= ========== ========= Net earnings per common and common equivalent share .. $ 0.96 $ 0.77 $ 1.94 $ 1.69 ========== ========= ========== ========== Average number of common and common equivalent shares outstanding ..... 51,418,428 51,219,169 51,399,562 51,217,933 ========== ========== ========== ========== Cash dividends paid per share $ 0.25 $ 0.23 $ 0.48 $ 0.43 ========= ======== ========== ========== 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 June 30, 1996 Dec. 31, 1995 - -------------- -------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 94,399 $ 11,460 Accounts receivable, less allowance for doubtful accounts of $15,694 in 1996 and $14,229 in 1995 432,167 369,576 Inventories 545,847 602,639 Prepaid expenses 17,719 11,746 Deferred income tax benefits 64,334 67,239 -------------- -------------- Total current assets 1,154,466 1,062,660 PROPERTY, BUILDINGS, AND EQUIPMENT 917,918 897,700 Less accumulated depreciation and amortization 407,545 379,349 -------------- -------------- Property, buildings, and equipment-net 510,373 518,351 OTHER ASSETS 80,436 88,232 -------------- -------------- TOTAL ASSETS $ 1,745,275 $ 1,669,243 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 3,265 $ 23,577 Current maturities of long-term debt 24,704 23,241 Trade accounts payable 259,403 204,925 Accrued liabilities 134,800 168,928 Income taxes 24,219 23,465 -------------- --------------- Total current liabilities 446,391 444,136 LONG-TERM DEBT (less current maturities) 7,209 8,713 DEFERRED INCOME TAXES 4,255 8,539 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 30,636 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, 51,013,829 shares in 1996 and 50,894,629 shares in 1995 25,492 25,447 Additional contributed capital 88,738 86,548 Unearned restricted stock compensation (3) (19) Retained earnings 1,142,342 1,067,133 Foreign currency translation adjustment 215 - -------------- ------------- Total shareholders' equity 1,256,784 1,179,109 -------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,745,275 $ 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) Six Months Ended June 30, 1996 1995 Cash flows from operations: Net earnings $ 99,671 $ 86,353 Provision for losses on accounts receivable 5,734 5,826 Depreciation and amortization: Property, buildings, and equipment 31,650 29,885 Intangibles and goodwill 6,521 6,696 Change in operating assets and liabilities: (Increase) in accounts receivable (68,325) (48,244) Decrease (Increase) in inventories 56,792 (87,525) (Increase) decrease in prepaid expenses (5,973) 353 Increase in trade accounts payable 54,478 22,698 (Decrease) in other current liabilities (34,128) (39,244) Increase (decrease) in current income taxes payable 754 (15,962) Increase in accrued employment related benefits costs 1,890 2,175 (Decrease) in deferred income taxes (1,379) (2,932) Other-net 2,240 1,515 --------- --------- Net cash provided by (used in) operating activities 149,925 (38,406) --------- --------- Cash flows from investing activities: Additions to property, buildings, and equipment - net of dispositions (23,819) (52,647) Other - net (587) (1,288) --------- --------- Net cash (used in) investing activities (24,406) (53,935) --------- --------- Cash flows from financing activities: Net (decrease) increase in short-term debt (20,312) 114,216 Proceeds from long-term debt 1,500 - Long-term debt payments (1,541) (230) Stock incentive plan 2,235 1,140 Cash dividends paid (24,462) (21,838) --------- --------- Net cash (used in) provided by financing activities (42,580) 93,288 --------- --------- Net increase in cash and cash equivalents 82,939 947 Cash and cash equivalents at beginning of year 11,460 15,292 --------- ---------- Cash and cash equivalents at end of period $ 94,399 $ 16,239 ========== ========= 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 $46,943,000 and $40,027,000 were included in trade accounts payable at June 30, 1996 and December 31, 1995, respectively. 2. DIVIDEND On August 7, 1996, the Board of Directors declared a quarterly dividend of 25 cents per share, payable September 1, 1996 to shareholders of record on August 19, 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 JUNE 30, 1996 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1995: Net Sales Net sales of $888,624,000 in the 1996 second quarter increased 9.2% from net sales of $813,518,000 for the comparable 1995 period. There were 64 sales days in both the 1996 and 1995 second quarter. The year 1996 will have two more sales days than did the year 1995 (256 versus 254). The sales increase for the 1996 second quarter compared with the 1995 second 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 (ZDC's), and the National Accounts program. The Company's core branch-based business experienced selling price increases of about 2.1% quarter over quarter. Daily sales to National Account customers within the core business increased an estimated 22%, on a comparable basis, over the 1995 second quarter. (6)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $49,547,000 in the 1996 second quarter increased 25.5% when compared to net earnings of $39,484,000 for the comparable 1995 period. The net earnings increase was higher than the sales increase due to operating expenses increasing at a slower rate than net sales, partially offset by lower gross profit margins. The Company's gross profit margin decreased by 0.37 percentage point for the 1996 second quarter as compared with the same 1995 period. This decrease was principally related to a change in selling price category mix. Partially offsetting this decrease was the effect of selling price increases exceeding the level of cost increases. Warehousing, marketing, and administrative (operating) expenses for the Company increased 3.7% for the 1996 second quarter as compared with the 1995 second quarter. The increase was lower than the increase in net sales. Contributing to this favorable comparison were the following factors: 1. Payroll grew at a slower rate than net sales. 2. Freight-out expenses were lower. Partially offsetting the above were the following factors: 1. Employee benefits costs were higher. These costs were related to an increased allocation of profit sharing expenses due to a higher level of Company earnings as compared with 1995. 2. Advertising expenses increased due to marketing initiatives. 3. Expenses related to business process improvement programs increased. The Company's effective income tax rate was 40.2% for the second quarters of both 1996 and 1995. (7)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995: Net Sales Net sales of $1,731,271,000 in the first six months of 1996 increased 6.8% from net sales of $1,620,345,000 for the comparable 1995 period. There were 128 sales days in both six month periods. The year 1996 will have two more sales days than did the year 1995 (256 versus 254). The sales increase for the first six months of 1996 when compared with the same 1995 period 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 (ZDC's), and the National Accounts program. The Company's core branch-based business experienced selling price increases of about 2.0% when comparing the first six 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. It should be noted that 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. Due to January 1996 weather conditions, 53 branches and one ZDC were closed one to two days. Additionally, some of the Company's customers were affected for longer periods. (8)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings Net earnings of $99,671,000 in the first six months of 1996 increased 15.4% when compared to net earnings of $86,353,000 for the comparable 1995 period. The net earnings increase was higher than the sales increase due to operating expenses increasing at a slower rate than net sales, partially offset by lower gross profit margins. The Company's gross profit margin decreased by 0.44 percentage point for the first six months of 1996 as compared with the same 1995 period. This change in gross profit margin was primarily related to the same factors discussed in comparing the second quarters of 1996 and 1995 (see Second Quarter Net Earnings discussion). Warehousing, marketing, and administrative (operating) expenses for the Company increased 2.5% for the first six months of 1996 as compared with the same 1995 period. The increase was lower than the increase in net sales. Contributing to this favorable comparison were the following factors: 1. Data processing expenses were lower. The Company continues the upgrade of its branch order entry, order processing, and inventory management system. However, the expenses related to this upgrade were less on a comparable basis with the first six months of 1995. 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 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 six months of 1996 included incremental expenses related to the ongoing ramp-up of the ZDCs. 3. Expenses related to business process improvement programs increased. The Company's effective income tax rate was 40.2% for the first six 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 six months ended June 30, 1996, working capital increased by $89,551,000. The ratio of current assets to current liabilities was 2.6 at June 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 low debt ratio and liquidity position 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 2.8% at June 30, 1996 and 4.7% at December 31, 1995. For the first six months of 1996, $13,697,000 was expended for land, buildings, and facilities improvements, and $13,840,000 for data processing, office, and other equipment, for a total of $27,537,000. (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: August 12, 1996 By: /s/ J. D. Fluno - --------------------- ------------------------------------- J. D. Fluno, Vice Chairman Date: August 12, 1996 By: /s/ P.O. Loux - --------------------- ------------------------------------- P. O. Loux, Vice President, Finance Date: August 12, 1996 By: /s/ R.D. Pappano - --------------------- ------------------------------------- R. D. Pappano, Vice President, Financial Reporting and Investor Relations (12)