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 September 30, 1994
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: 50,747,971 shares of
the Company's Common Stock were outstanding as of October 31, 1994.
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<PAGE>
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 9/30, Nine Months Ended 9/30,
1994 1993 1994 1993
---------- -------- ---------- ----------
Net sales $779,300 $698,835 $2,254,223 $1,965,425
Cost of merchandise sold 505,764 447,382 1,456,269 1,243,928
---------- -------- ---------- ----------
Gross profit 273,536 251,453 797,954 721,497
Warehousing, marketing, and
administrative expenses 200,261 184,167 583,284 538,880
---------- -------- ---------- ----------
Operating earnings 73,275 67,286 214,670 182,617
Other income or (deductions)
Interest income - 1 14 479
Interest expense (503) (478) (1,513) (1,172)
Unclassified-net (671) 1 (598) 168
---------- -------- ---------- ----------
(1,174) (476) (2,097) (525)
Earnings before income taxes 72,101 66,810 212,573 182,092
Income taxes 29,056 28,096 85,666 73,748
---------- --------- ---------- ----------
Net earnings before
cumulative effect of
accounting changes $43,045 $38,714 $126,907 $108,344
Cumulative effect of accounting
changes - - - (820)
---------- --------- ---------- ---------
Net earnings $43,045 $38,714 $126,907 $107,524
========== ========= ========== =========
Earnings per common and
common equivalent share before
accounting changes $0.84 $0.75 $2.48 $2.08
Cumulative effect of
accounting changes - - - (0.02)
---------- --------- ---------- ---------
Net earnings per common
and common equivalent
share $0.84 $0.75 $2.48 $2.06
========== ========= ========== =========
Average number of common
and common equivalent
shares outstanding 51,269,001 51,504,939 51,253,260 52,170,644
========== ========== ========== ==========
Cash dividends paid per
share $0.20 $0.18 $0.58 $0.525
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
ASSETS Sept 30, 1994 Dec 31, 1993
-------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 12,078 $ 2,572
Accounts receivable, less allowance for doubtful
accounts of $15,646 in 1994 and $13,573 in 1993 357,479 299,856
Inventories 527,123 466,214
Prepaid expenses 16,472 10,832
Deferred income tax benefits 45,400 44,408
------------- ------------
Total current assets 958,552 823,882
PROPERTY, BUILDINGS, AND EQUIPMENT 783,608 716,755
Less accumulated depreciation and amortization 341,731 307,372
------------- ------------
Property, buildings, and equipment-net 441,877 409,383
OTHER ASSETS 130,225 143,399
------------- ------------
TOTAL ASSETS $1,530,654 $1,376,664
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 39,894 $ 34,298
Current maturities of long-term debt 21,564 21,662
Trade accounts payable 235,097 178,114
Accrued liabilities 130,748 128,510
Income taxes 12,061 18,773
------------- ------------
Total current liabilities 439,364 381,357
LONG-TERM DEBT (less current maturities) 5,956 6,214
DEFERRED INCOME TAXES 17,504 23,017
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 27,249 24,171
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,
50,747,971 shares in 1994 and 50,684,983 shares
in 1993 25,374 25,342
Additional contributed capital 80,402 79,364
Unearned restricted stock compensation (73) (192)
Retained earnings 934,878 837,391
------------ ----------
Total shareholders' equity 1,040,581 941,905
------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,530,654 $1,376,664
============ ==========
The accompanying notes are an integral part of these financial statements.
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W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended Sept 30,
1994 1993
----------- --------
Cash flows from operations:
Net earnings $126,907 $107,524
Provision for losses on accounts receivable 7,410 6,915
Depreciation and amortization:
Property, buildings, and equipment 39,613 31,766
Intangibles and goodwill 12,988 14,821
Change in operating assets and liabilities:
(Increase) in accounts receivable (65,033) (57,517)
(Increase) in inventories (60,909) (16,607)
(Increase) decrease in prepaid expenses (5,640) 1,286
Increase in trade accounts payable 56,983 29,679
Increase (decrease) in other current liabilities 2,237 (5,717)
(Decrease) increase in current income taxes payable (6,711) 120
Increase in accrued employment related
benefits costs 3,078 7,683
(Decrease) in deferred income taxes (6,504) (16,382)
Other-net (51) 423
--------- --------
Net cash provided by operating activities 104,368 103,994
--------- --------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions (71,830) (69,606)
Other - net 78 578
--------- --------
Net cash (used in) investing activities (71,752) (69,028)
Cash flows from financing activities:
Net proceeds from short-term debt 5,596 56,306
Proceeds from long-term debt - 1,400
Long-term debt payments (356) (1,373)
Stock incentive plan 1,070 1,175
Purchase of Company Common Stock - (104,656)
Cash dividends paid (29,420) (27,146)
--------- --------
Net cash (used in) financing activities (23,110) (74,294)
--------- --------
Net increase (decrease) in cash and cash equivalents 9,506 (39,328)
Cash and cash equivalents at beginning of year 2,572 44,809
--------- --------
Cash and cash equivalents at end of period $ 12,078 $ 5,481
========= ========
The accompanying notes are an integral part of these financial statements.
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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, 1993,
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 $32,511,000 and $16,521,000 were included in
trade accounts payable at September 30, 1994 and December 31, 1993,
respectively.
2. DIVIDEND
On October 26, 1994, the Board of Directors declared a quarterly
dividend of 20 cents per share, payable December 1, 1994 to
shareholders of record on November 7, 1994.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1993:
Net Sales
Net sales of $779,300,000 in the 1994 third quarter increased 11.5% from
net sales of $698,835,000 in the same 1993 period. There were 64 sales
days in both the 1994 and 1993 third quarter. The year 1994 will have one
more sales day than did the year 1993 (255 versus 254).
The sales increase of 11.5% for the 1994 third quarter compared with the
1993 third quarter was all volume related; the Grainger Division actually
experienced selling price deflation of about 0.5%. The volume increase
primarily represented the effects of Company market initiatives and the
accelerated growth in the national economy. The Company's market
initiatives included new product additions, pricing actions (see Net
Earnings discussion), the continuing effect of expanding branch and adding
Zone Distribution facilities, and the continuing growth of the National
Accounts program. These increases were partially offset by a decline in
the sales of seasonal products at the Grainger Division. Daily sales to
Grainger Division National Accounts increased 22% over the 1993 third
quarter.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $43,045,000 increased 11.2% when compared to $38,714,000,
for the 1993 period. The earnings increase was less than the sales
increase due to lower gross profit margins partially offset by operating
expenses increasing at a slower rate than sales.
The Company gross profit margin decreased primarily due to a change in
selling price category mix and the level of cost increases exceeding the
level of selling price increases. Seasonal sales, which historically have
a lower than average gross profit margin, had a minor positive impact.
The change in the selling price category mix resulted from a shift in the
mix of sales toward lower gross profit margin categories. This change
primarily resulted from the growth in sales to Grainger Division National
Accounts. The level of cost increases, exceeding the level of selling
price increases was related to: strategic restructuring of pricing
within certain product lines including portable heating and air
conditioning, controls, air treatment, other HVAC products, and lighting;
and holding certain pricing firm in other categories. These actions were
based on market research focused at increasing market share in selected
areas.
The increase in operating expenses was less than the sales increase. This
occurred due to the strong sales growth experienced in the quarter. Of
note are the following factors: the continued leveraging of payroll and
related benefits costs which increased at a slower rate than sales; lower
amortization of goodwill and other acquisition related costs associated
with acquired businesses; and lower advertising expenses. Partially
offsetting these favorable comparisons were: increased data processing
expenses relating to beginning a significant upgrade and replacement of
the Grainger Division's branch order entry, order processing, and
inventory management system; and non-recurring expenses of about $800,000
incurred in connection with the continuing integration of the Company's
sanitary supply businesses. The initiative to improve the branch data
processing system will continue into 1995. As of September 30, 1994, the
Company has not incurred any significant expenses associated with the
integration of either Allied Safety or Bossert Industrial Supply into the
core business. Future expenses relating to integration, including any
reevaluation of goodwill, will be charged to operations as they become
determinable.
The Company's effective income tax rate for the third quarter of 1994 was
40.3% versus 42.1% in the comparable 1993 period. The higher 1993 rate
was primarily related to the effect of the Omnibus Budget Reconciliation
Act of 1993 which was enacted during the third quarter of 1993. The
Company's effective income tax rate for the 1993 year was 40.3%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1993:
Net Sales
Net sales of $2,254,223,000 in the first nine months of 1994 increased
14.7% from net sales of $1,965,425,000 in the same 1993 period. There
were 192 sales days in the first nine months of 1994 compared with 191
days in the comparable 1993 period. The year 1994 will have one more
sales day than did the year 1993 (255 versus 254).
The sales increase of 14.1% for the first nine months of 1994 compared
with the same 1993 period was primarily volume related; the Grainger
Division actually experienced selling price deflation of about 0.5%. The
volume increase primarily represented the effects of Company market
initiatives, the accelerated growth in the national economy, and strong
sales of seasonal products. The Company's market initiatives included new
product additions, pricing actions (see Net Earnings discussion), the
continuing effect of expanding branch and adding Zone Distribution
facilities, and the continuing growth of the National Accounts program.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings before the cumulative effect of accounting changes of
$126,907,000 increased 17.1% when compared to $108,344,000 for the 1993
period. The earnings increase was greater than the sales increase due to
operating expenses increasing at a slower rate than sales partially offset
by lower gross profit margins.
The Company gross profit margin decrease was primarily the result of the
factors discussed for the third quarter (see third quarter Net Earnings
discussion). Additionally, the selling price category mix shift to lower
gross profit margin categories was impacted by a strategic repricing
applicable to the contractor customer segment. This repricing was
implemented during the second quarter of 1993. Also, the Company incurred
about $850,000 in non-recurring inventory costs in the second quarter of
1994 in connection with integrating its sanitary supply businesses.
The increase in operating expenses was less than the sales increase and
was the result of the same factors discussed for the third quarter (see
third quarter Net Earnings discussion).
Effective January 1, 1993, the Company adopted three Statements of
Financial Accounting Standards resulting in a charge to 1993 first quarter
net earnings of $820,000. The Company's effective income tax rate for the
first nine months of 1994 was 40.3% versus 40.5% in the comparable 1993
period. The Company's effective income tax rate for the 1993 year was
40.3%.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1994, working capital increased
$76,663,000. The ratio of current assets to current liabilities was 2.2
at September 30, 1994 and 2.2 at December 31, 1993. 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,
capital expenditures, and business acquisitions. Total debt as a percent
of shareholders' equity was 6.5% at September 30, 1994 and 6.6% at
December 31, 1993. For the first nine months of 1994, $56,615,000 was
expended for land, buildings, and facilities improvements, and $16,022,000
for data processing, office, and other equipment; a total of $72,637,000.
10
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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
(11) Computation of Earnings per Common
and Common Equivalent Share 13
(27) Financial Data Schedule 14
(99) Copy of News Release, issued by the
Company on November 2, 1994, announcing
an agreement with Kennametal Inc. to
establish an alliance to market
maintenance, repair and operations
supplies and metalcutting tools and
accessories. 15
(b) Reports on Form 8-K - None
11
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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.
W.W. Grainger, Inc.
(Registrant)
Date: November 14, 1994 By: /s/ J. D. Fluno
----------------------- --------------------------
J. D. Fluno, Vice Chairman
Date: November 14, 1994 By: /s/ P. J. Wallace
----------------------- --------------------------
P. J. Wallace, Vice President and
Controller
(Principal Accounting Officer)
12
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EXHIBIT 11
W.W. Grainger, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
1994 1993
Nine months ended September 30:
------------ ------------
Average number of shares outstanding
during the period 50,727,391 51,653,147
Common equivalent shares:
Shares issuable under outstanding
options which are dilutive
(Antidilutive stock options are excluded) 1,465,984 1,331,289
Shares which could have been purchased based
upon the average market value for the period 946,921 821,425
------------ ------------
519,063 509,864
Dilutive effect of exercised options
prior to being exercised 6,806 7,633
------------ ------------
525,869 517,497
------------ ------------
Weighted average number of common
and common equivalent shares outstanding 51,253,260 52,170,644
============ ============
Net earnings before cumulative effect of
accounting changes $126,907,000 $108,344,000
Cumulative effect of accounting changes - (820,000)
============ ============
Net earnings $126,907,000 $107,524,000
Earnings per common and common equivalent
share before accounting changes $2.48 $2.08
Cumulative effect of accounting changes per
common and common equivalent share - (0.02)
Earnings per common and common equivalent share $2.48 $2.06
Three months ended September 30:
Nine months ended September 30, from above $2.48 $2.06
Six months ended June 30, as previously reported 1.64 1.31
Net earnings per common and common equivalent
share for the three months ended September 30 $0.84 $0.75
NOTE: The effect under a fully diluted computation is immaterial for both
periods.
13
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Exhibit 99
GRAINGER AND KENNAMETAL ESTABLISH MARKETING ALLIANCE
Chicago (November 2, 1994) -- W.W. Grainger, Inc. and Kennametal Inc. have
agreed to establish an alliance to market maintenance, repair, and
operations (MRO) supplies and metalcutting tools and accessories. This
joint marketing effort will be implemented over the next twelve months.
Under this alliance, customers will benefit from the two companies'
extensive expertise in MRO supplies and cutting tools and accessories for
metalcutting applications. The respective involvement of Grainger and
Kennametal with each customer will depend on the customer's specific
product and service needs.
The expertise developed in Grainger's Bossert Division will play a
valuable role in the Grainger/Kennametal alliance. Bossert sales people
will be integrated into the Grainger sales team and will provide technical
and sales support for customers.
Kennametal Inc., headquartered in Latrobe, PA, is a manufacturer,
marketer, and distributor of a broad range of tools for the metalworking,
mining, and highway construction industries. Regarded as one of the
world's leading producers of cutting tools and wear resistant parts made
of cemented carbides and other hard materials, Kennametal had sales for
the year ended June 30, 1994 of $803 million. KMT shares are traded on
the New York Stock Exchange.
W.W. Grainger, Inc., with 1993 sales of $2.6 billion, is a nationwide
distributor of equipment, components, and supplies to the commercial,
industrial, contractor, and institutional markets. GWW shares are traded
on the New York and Chicago Stock Exchanges.
15
<PAGE>
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