SECURITIES AND EXCHANGE COMMISSION 57 pages
Washington, D.C. 20549 Complete
FORM 10-K
ANNUAL REPORT
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
Commission File Number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-1150280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5500 W. Howard St., Skokie, Illinois 60077-2699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 708/982-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $0.50 par value,
and accompanying Preferred Stock New York Stock Exchange
Purchase Rights Chicago Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,482,981,689 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 6, 1995.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock $0.50 par value 50,761,831 shares outstanding as of March 6, 1995
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 26, 1995 are incorporated by reference
into Part III hereof.
The Exhibit Index appears on pages 13 and 14 in the sequential numbering
system.
(The Securities and Exchange Commission has not approved or disapproved of
this report nor has it passed on the accuracy or adequacy hereof.)
CONTENTS
Page
PART I
Item 1: BUSINESS.........................................................3-5
THE COMPANY.......................................................3
GRAINGER........................................................3-4
LAB SAFETY SUPPLY.................................................5
PARTS COMPANY OF AMERICA..........................................5
INDUSTRY SEGMENTS.................................................5
COMPETITION.......................................................5
EMPLOYEES.........................................................5
Item 2: PROPERTIES.........................................................6
Item 3: LEGAL PROCEEDINGS..................................................6
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................7
Executive Officers Of The Company.........................................7-8
PART II
Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS...................................9
Item 6: SELECTED FINANCIAL DATA............................................9
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS.......................10-12
RESULTS OF OPERATIONS.........................................10-11
FINANCIAL CONDITION...........................................11-12
INFLATION AND CHANGING PRICES....................................12
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................12
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............12
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................12
Item 11: EXECUTIVE COMPENSATION............................................12
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....12
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................12
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE,
AND REPORTS ON FORM 8-K.......................................13-14
Signatures.................................................................15
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................16
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................17-36
<PAGE> 2
PART I
Item 1: Business
The Company
The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois
in 1928. It is a leading nationwide distributor of maintenance, repair, and
operating (MRO) supplies and related information to commercial, industrial,
contractor, and institutional customers and regards itself as a service
business. As used herein, "Company" means W.W. Grainger, Inc. and/or its
subsidiaries as the context may require.
During 1994, in conjunction with the integration of certain business units,
the Company began a process of integrating its Corporate headquarters
and core branch-based business support functions. These support
functions provide coordination and guidance to all business units in the
areas of Accounting, Administrative Services, Aviation, Communications,
Compensation and Benefits, Data Systems and Data Processing, Finance,
Government Regulations, Human Resources, Industrial Relations,
Insurance and Risk Management, Internal Audit, Legal, Planning, Real
Estate and Construction Services, Security and Safety, Taxes, Training and
Development, and Treasury Services.
The Company utilizes a satellite communications network which substantially
reduces its reliance on phone lines by linking branches and other facilities
together via a network control center. This results in almost instantaneous
transmittal of information, which expedites the completion of sales
transactions and the initiation of stock replenishment.
During 1994, the Company began a program to upgrade branch computer
systems. The new systems, upon final installation in 1995, will have the
capacity to accept enhancements to the Company's order processing
capabilities. This will result in greater efficiency and accuracy in handling
orders from large customers which often require special information or
handling. During 1994, an average of 88,700 sales transactions were completed
daily. The Company does not engage in basic or substantive product research
and development activity. New items are added regularly to its product line
on the basis of market research as well as recommendations of its employees,
customers, and suppliers. Before being added, a new item must satisfy many
evaluation tests and other rigid requirements.
Grainger
The Company's core branch-based business, Grainger, is a nationwide
distributor of air compressors, air conditioning and refrigeration equipment
and components, air tools and paint spraying equipment, blowers,
computer supplies, electric motors, fans, gas engine driven power plants,
gearmotors, heating equipment and controls, hydraulic equipment, janitorial
supplies, lighting fixtures and components, liquid pumps, material handling
and storage equipment, motor controls, office equipment, outdoor
equipment, plant and office maintenance equipment, power and hand tools,
power generating plants, power transmission components, safety products,
and shop tools, as well as other items shown in its General Catalog.
Grainger is also an important resource for both product and procurement
process information. The Company provides technical information on
products as well as information on historic usage of products to customers.
Grainger Consulting Services assists companies which are reengineering
their MRO procurement process. The Company also provides feedback to
suppliers concerning their products.
Grainger sells principally to contractors, service shops, industrial and
commercial maintenance departments, manufacturers, hotels, and health
care and educational facilities. Sales in 1994 represented approximately
20,200,000 transactions averaging $129 each and were made to more than
1,200,000 customers. Average 1994 purchases per customer
approximated $2,100, although average 1994 purchases per National
Accounts customer were significantly higher. Sales to the largest single
customer, General Electric Company, were 0.7% of sales. Grainger
estimates that approximately 29% of 1994 sales consisted of items bearing
the Company's registered trademarks, including "Dayton r" (principally
electric motors and ventilation equipment), "Demco r" (power transmission
belts), "Dem-Kote r" (spray paints), "Speedaire r" (air compressors), and
"Teel r" (liquid pumps), as well as other trademarks. The Company has
taken steps to protect these trademarks against infringement and believes
that they will remain available for future use in its business. Sales of
remaining items consisted of other well recognized brands.
3
<PAGE>
Grainger purchases from more than 1,700 product suppliers most of which
are manufacturers. The largest supplier in 1994, a diversified manufacturer
through 25 of its divisions, accounted for 12.7% of purchases. No
significant difficulty has been encountered with respect to sources of
supply.
Grainger offers its line of products at competitive prices through a
nationwide network of branches (337 at December 31, 1994). An average
branch has 14 employees and handles about 200 transactions per day.
Large, computer controlled stocks of over 61,000 items maintained at three
Regional Distribution Centers, located in the Chicago area, Greenville
County, South Carolina, and Kansas City, Missouri, provide the branches
and customers with protection against variable demand and delayed factory
deliveries. Each branch tailors its inventory to local customer preferences
and actual product demand. In 1994, Grainger invested more than
$59,000,000 in the continuation of its branch optimization program, which
consists of new branches, relocated branches, and additions to branches.
During 1995, Grainger plans to transform the Chicago area RDC into a
National Distribution Center (NDC). The NDC will be a centralized storage
and shipment facility for slower moving inventory items, creating additional
space to achieve increased product service levels at the other two RDCs.
In 1994, Grainger opened two additional Zone Distribution Centers (ZDCs).
The ZDC logistics strategy provides a break-bulk function for faster branch
stock replenishment. In addition, ZDCs handle shipped orders for their zone
and also offer a logistical solution for integrated supply customers by
coordinating complex orders and multiple receipts, and combining them into
a single shipment. By eliminating order and receipt complexity from the
branch, greater scale within the distribution system is created.
The Grainger National Accounts Program focuses on meeting the needs of
large multi-site companies by focusing on simplifying customers' MRO
purchasing activities and providing consistent service and pricing to each
customer location. Sales to National Accounts customers increased 25% in
1994 over the prior year, and National Account relationships have been
established with over 350 of the nation's largest companies.
During 1994, Grainger began the integration of Allied Safety, Inc. into the
core branch-based business in order to become a national full-line supplier
of safety products. The integration, anticipated to be completed in 1995, is
similar to the 1993 creation of Grainger Sanitary Supplies and Equipment,
which combined elements of Jani-Serv and Ball Industries with Grainger's
existing line of professional cleaning products. Similar integration efforts
for Bossert Industrial Supply, Inc. (production consumable products) are
planned to be completed in 1995.
Grainger employs sales representatives who call on existing and
prospective customers. Sales representatives are paid a salary and
commission. In addition, a sales force of market specialists and national
account specialists has been developed to serve individualized markets
and national accounts. These specialists are paid a salary only. Grainger
employed 1,408 sales representatives, market specialists and national
account specialists at December 31, 1994.
An important selling tool is the General Catalog, which has been published
continuously since 1927 and has grown to 3,276 pages listing over 61,000
items together with extensive technical and application data. For 1994,
2,285,000 copies were published. The most current edition was issued in
January 1995.
During 1994, Grainger continued its support of several large, multi-site
customers by expanding product offerings. Grainger now handles an
additional 33,000 "non-catalog" items, which includes full lines of products
from key suppliers.
The Grainger Electronic Catalog brings directly to the customer's place of
business a fast, easy way to select and order products. It is a state-of-the-
art system that uses PC-based software and CD-ROM technology.
Through the Electronic Catalog, the customer can use a variety of ways to
describe a needed product, and then review Grainger's offerings, complete
with specifications, prices, and pictures. Other Electronic Catalog features
include a cross-reference function that allows customers to retrieve product
information using their own stock numbers. Enhancements for 1994
included an improved Microsoft r Windows TM compatible version, and
accommodations for network software. In addition, Grainger's PC-based
tool crib management system, first introduced in 1993, can now be
interfaced with the Grainger Electronic Catalog, allowing customers to
benefit from the efficiencies achieved in combining these two applications.
More than 26,000 copies of the Electronic Catalog are currently in use. The
Electronic Catalog is also used at the branches as a training tool and a
resource for identifying appropriate products for customers' applications.
4
<PAGE>
Lab Safety Supply, Inc. (Lab Safety) and Parts Company of America (PCA)
Lab Safety, acquired in 1992, serves the safety products markets with such
items as respiratory systems, protective clothing, and other equipment
used in the workplace and in environmental clean-up operations. Lab
Safety is a leading national direct marketer of safety products, serving
350,000 customers from its facilities in Janesville, Wisconsin. The current
Lab Safety catalog, its primary selling tool, has over 900 pages, listing
approximately 27,000 items. During 1994, an average of 3,800 sales
transactions were completed daily.
Parts distribution continues to expand under the PCA name. PCA
distributes approximately 181,000 spare and replacement parts, takes
orders 24 hours a day, 365 days per year, and ships stocked items within
24 hours of an order, most on the same business day. PCA gives value to
customers by being a single source for many different spare and
replacement parts and by offering valuable technical assistance. During
1994, an average of 2,200 sales transactions were completed daily.
Industry Segments
The Company has concluded that its business is within a single industry
segment. For information as to the Company's consolidated revenue and
operating earnings see Item 7, "Management's Discussion and Analysis of
Financial Condition and the Results of Operations", and Item 8, "Financial
Statements and Supplementary Data".
The total assets of the Company for the last five years were: 1994,
$1,534,751,000; 1993, $1,376,664,000; 1992, $1,310,538,000; 1991,
$1,216,554,000; and 1990, $1,162,437,000.
Competition
The Company faces competition in all markets which it serves, from
manufacturers (including some of the Company's own suppliers) that sell
directly to certain segments of the market, from wholesale distributors, and
from certain retail enterprises.
The principal means by which the Company competes with manufacturers
and other distributors is by providing local stocks, efficient service, sales
representatives, competitive prices, its several catalogs, which include
product descriptions and in certain cases, extensive technical and
application data, and procurement process consulting services. The
Company believes that it can effectively compete on a price basis with its
manufacturing competitors on small orders, but that such manufacturers
may enjoy a cost advantage in filling large orders.
The Company serves a number of diverse markets, and is able in some
markets to reasonably estimate the Company's competitive position within
that market. However, taken as a whole, the Company is unable to
determine its market shares relative to others engaged in whole or in part in
similar activities.
Employees
As of December 31, 1994, the Company had 11,343 employees, of whom
9,104 were full-time and 2,239 were part-time or temporary. The Company
has never had a major work stoppage and believes that its employee
relations are good.
5
<PAGE>
Item 2: Properties
As of December 31, 1994, Grainger branch locations totaled 7,239,000
square feet, an increase of approximately 2.5% over 1993. Most branches
are located in or near major metropolitan areas, many in industrial parks.
Branches range in size from 5,800 to 58,000 square feet and average
approximately 21,000 square feet. A typical owned branch is on one floor,
is of masonry construction, consists primarily of warehouse space, contains
an air conditioned office and sales area, and has off the street parking for
customers and employees. The Company considers that its properties are
generally in good condition and well maintained, and are suitable and
adequate to carry on the Company's business.
The significant facilities of the Company are briefly described below:
Size in
Location Facility and Use Square Feet
-------- ---------------- -----------
Chicago Area (1) General Offices 513,000
Niles, IL (1) General Office & Regional Dist. Center 938,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County, SC (1) Regional Distribution Center 1,090,000
Nationwide (1) 3 Zone Distribution Centers 596,000
Nationwide (2) 337 Grainger branch locations 7,239,000
Nationwide (3) Other Facilities 1,751,000
----------
Total square feet 13,562,000
==========
(1) These facilities are either owned or leased with leases expiring between
1995 and 1999. The owned facilities are not subject to any mortgages.
(2) Grainger branches consist of 256 owned and 81 leased properties. The
owned facilities are not subject to any mortgages.
(3) Other facilities represent leased and owned general offices, distribution
centers, and branches. The owned facilities are not subject to any
mortgages.
Item 3: Legal Proceedings
There are pending various legal and administrative proceedings involving
the Company that are incidental to the business. It is not expected that the
outcome of any such proceeding will have a material adverse effect upon
the Company's consolidated financial position or its results of operations.
<PAGE>
6
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1994.
Executive Officers of the Company
Following is information about the Executive Officers of the Company.
Executive Officers of the Company generally serve until the next annual
election of officers, or until earlier resignation or removal.
Positions and Offices Held and Principal
Occupations and Employment During the
Name and Age Past Five Years
---------------- ---------------------------------------------------
James M. Baisley (62) Senior Vice President (a position assumed in 1995
after serving as Vice President), General Counsel,
and Secretary. Mr. Baisley assumed the position of
Secretary in 1991.
Donald E. Bielinski (45) Senior Vice President, Marketing and Sales, a
position assumed in 1995 after serving as Senior
Vice President, Organization and Planning. Mr.
Bielinski has also served as Vice President and
Chief Financial Officer.
Wesley M. Clark (42) Vice President, Field Operations and Quality, a
position assumed in 1995 after serving as President
of the Sanitary Supply and Equipment businesses.
Before joining the Company in 1992, Mr. Clark
served as an executive with Granite Rock Company.
Jere D. Fluno (53) Vice Chairman. Mr. Fluno is a member of the
Office of the Chairman.
Robert J. Gariano (45) Group Vice President, a position assumed in 1993
after serving as Vice President, Specialty
Distribution. Before joining the Company in 1988,
Mr. Gariano served as General Manager of the Lexan
Division of General Electric Company.
David W. Grainger (67) Chairman of the Board, and, from 1992 to 1994,
President. Mr. Grainger is a member of the
Office of the Chairman.
Richard H. Hantke (56) Vice President, Distribution Operations. Prior to
assuming this position in 1995, Mr. Hantke served
the Grainger Division in a similar capacity.
Richard L. Keyser (52) President, a position assumed in 1994, and Chief
Executive Officer, a position assumed in 1995.
Other positions in which he served during the past
years are Chief Operating Officer of the Company,
Executive Vice President of the Company, President
of the Grainger Division, and Executive Vice
President and General Manager of the Grainger
Division. Mr. Keyser is a member of the Office of
the Chairman.
Michael R. Kight (46) Vice President and General Manager, Integrated
Supply, positions assumed in 1995 after serving the
Grainger Division as Vice President, National
Accounts. Prior to assuming the last-mentioned
position in 1992, Mr. Kight served as Director,
National Accounts of the Grainger Division.
7
<PAGE>
Positions and Offices Held and Principal
Occupations and Employment During the
Name and Age Past Five Years
---------------- ---------------------------------------------------
P. Ogden Loux (52) Vice President, Finance, a position assumed in 1994
after serving the Grainger Division as Vice
President, Business Support. Prior to assuming the
last-mentioned position in 1992, Mr. Loux served as
Vice President and Controller of the Grainger
Division.
Robert D. Pappano (52) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995 after serving
as Vice President and Treasurer.
John J. Rozwat (56) Vice President and General Manager, Direct Sales,
positions assumed in 1995 after serving the
Grainger Division as Vice President, Sales. Prior
to assuming the last-mentioned position in 1991,
Mr. Rozwat served as Vice President, Field Sales
and Operations of the Grainger Division.
James T. Ryan (36) Vice President, Information Services, a position
assumed in 1994 after serving as President of Parts
Company of America. Prior to assuming the last-
mentioned position in 1993, Mr. Ryan served as
Director, Product Management of the Grainger
Division.
John A. Schweig (37) Vice President and General Manager, Direct
Marketing, positions assumed in 1995 after
serving the Grainger Division as Vice President,
Marketing. Before joining the Company in 1990, Mr.
Schweig served as a Vice President of Bain &
Company.
John W. Slayton, Jr. (49) Senior Vice President, Product Management, a
position assumed in 1995 after serving as Vice
President, Product Management of the Grainger
Division.
Paul J. Wallace (48) Vice President, Financial Services, a position
assumed in 1995 after serving as Vice President and
Controller.
8
<PAGE>
PART II
Item 5: Markets for Registrant's Common Equity and Related Shareholder
Matters
The Company's common stock is traded on the New York Stock Exchange
and the Chicago Stock Exchange, with the ticker symbol GWW. The high
and low sales prices for the common stock, and the dividends declared and
paid for each calendar quarter during 1994 and 1993, are shown below.
Prices
----------------------
Quarters High Low Dividends
---------------------------------------------------------------------------
1994 First $68 $561/2 $0.18
Second 691/8 587/8 0.20
Third 67 57 0.20
Fourth 593/8 511/2 0.20
---------------------------------------------------------------------------
Year $691/8 $511/2 $0.78
---------------------------------------------------------------------------
1993 First $611/8 $545/8 $0.165
Second 663/4 583/4 0.18
Third 621/2 52 0.18
Fourth 591/4 515/8 0.18
---------------------------------------------------------------------------
Year $663/4 $515/8 $0.705
---------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 1, 1995 was 2,200.
Item 6: Selected Financial Data
Years Ended December 31,
----------------------------------------------------------
(In thousands of dollars except for per share amounts)
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
Net sales $3,023,076 $2,628,398 $2,364,421 $2,077,235 $1,935,209
Net earnings
before cumulative
effect of accounting
changes 127,874 149,267 137,242 127,737 126,775
Cumulative effect
of accounting
changes -- (820) -- -- --
Net earning 127,874 148,447 137,242 127,737 126,775
Net earnings per common
and common equivalent
share before cumulative
effect of accounting
changes 2.50 2.88 2.58 2.37 2.31
Cumulative effect of
accounting changes -- (0.02) -- -- --
Net earnings per common
and common equivalent
share 2.50 2.86 2.58 2.37 2.31
Total assets 1,534,751 1,376,664 1,310,538 1,216,554 1,162,437
Long-term debt 1,023 6,214 6,936 11,327 14,471
Cash dividends paid
per share $0.78 $0.705 $0.65 $0.61 $0.565
NOTE: 1994 and 1993 net earnings include restructuring charges of $49,779
($0.97 on a per share basis) and $482 ($0.01 on a per share basis),
respectively.
9
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations
RESULTS OF OPERATIONS
The following table, which is included as an aid to understanding changes in
the Company's Consolidated Statements of Earnings, presents various items in
the earnings statements expressed as a percentage of net sales for the years
ended December 31, 1994, 1993, 1992, and 1991, and the percentage of increase
(decrease) in such items in 1994, 1993, and 1992 from the prior year.
Years Ended December 31,
------------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percentage of (Decrease) from
Net Sales Prior Year
------------------------------- ------------------------
1994 1993 1992 1991 1994 1993 1992
------ ------ ------ ------ ------ ----- ------
Net sales 100.0% 100.0% 100.0% 100.0% 15.0% 11.2% 13.8%
Cost of merchandise
sold 64.5 62.9 63.6 64.9 18.0 9.9 11.6
Operating expenses 27.9 27.6 26.7 25.2 16.3 14.5 20.4
Other (income) or
deductions, net 0.1 0.1 0.1 (0.2) 30.5 76.3 (123.5)
Income taxes 3.3 3.8 3.8 3.9 0.1 12.0 10.2
Net earnings 4.2% 5.6% 5.8% 6.2% (13.9)% 8.2% 7.4%
Note: Net earnings, excluding restructuring charges, as a percentage of net
sales were 5.9% and 5.7% for 1994 and 1993, respectively. The percent of
increase from the prior year for net earnings, excluding restructuring
charges, was 19.3% and 8.5% for 1994 and 1993, respectively.
Net sales
The 1994 Company net sales increase of 15.0% was primarily volume related; the
Grainger core branch-based business actually experienced selling price
deflation of 0.6%. This increase was affected by 1994 having one more sales
day than 1993 (on a daily basis, sales increased 14.6%). All geographic areas
contributed to the sales growth, with the percent increases for regions east
of the Mississippi being higher than for regions in the west. The volume
increase primarily represented the continuing effects of Company
market initiatives and the accelerated growth of the national economy. The
Company's market initiatives included new product additions, pricing actions,
the continuing effect of expanding branch and adding Zone Distribution
facilities, and the continuing growth of the National Accounts Program. Daily
sales to Grainger National Accounts increased 25% over 1993 levels.
The 1993 net sales increase was comprised of a 9.3% increase at Grainger and a
22.5% increase at Allied, Bossert, Lab Safety, and PCA (Other Business Units).
The 1993 Grainger net sales increase was comprised of a 7.4% volume increase
and a 1.8% price increase. All geographic regions contributed to the sales
growth, with the percent increases for regions east of the Mississippi being
higher than for regions in the west. The volume increase was attributable to a
combination of the Company's market initiatives, including new product
additions, the continuing effect of expanding branch facilities, the growth of
the National Accounts Program, and the accelerated growth in the national
economy. The increase in sales at the Other Business Units of 22.5% was the
result of $54,800,000 in incremental sales from an acquired business and a
6.7% increase at existing businesses. All of the Other Business Units
experienced sales increases except for Bossert, which had a slight sales
decrease. Assuming the acquisition was included in both periods, the Other
Business Units' pro forma sales would have increased by 7.9%.
Net earnings
Net earnings for 1994 were $127,874,000, net of the after tax effect of a
restructuring charge of $49,779,000. Excluding the effect of the restructuring
charge of $49,779,000 and the 1993 restructuring charge of $482,000, net
earnings increased 19.3% year over year. This increase was greater than the
sales increase primarily due to operating expenses increasing at a slower rate
than sales, partially offset by lower gross margins. The lower than sales
increase for operating expenses was primarily the result of leveraging payroll
and related benefit costs, lower amortization of goodwill and other
acquisition related costs, and lower advertising expenses, partially offset by
increased data processing expenses related to the ongoing significant upgrade
of the Grainger branch computer systems. Excluding restructuring charges,
operating expenses increased 9.0% on a year over year basis. The Company's
1994 gross margin was negatively affected by a restructuring charge of
$16,308,000 associated with inventory write-downs.
10
<PAGE>
Excluding the effect of the restructuring charge, the Company's gross margins
decreased by 1.1 percentage points in 1994 compared with 1993. The gross
margin decrease primarily resulted from a change in the selling price category
mix and the level of cost increases exceeding the level of selling price
increases. The change in the selling price category mix was primarily the
result of increased sales to Grainger National Accounts, and by a strategic
repricing applicable to the contractor customer segment.
The 1993 percentage increase of 8.2% was less than the increase in net sales
primarily due to operating expenses increasing faster than sales and an
increase in the effective income tax rate, partially offset by improved gross
margins. The increase in operating expenses was primarily attributable to
increased costs at the Other Business Units and increased expenses at the
Grainger Division. The increased costs at the Other Business Units reflect
increased amortization of goodwill and other acquisition related costs
principally due to the Lab Safety acquisition, increased advertising costs,
and the Company's continuing investment in these units. The increase in
expense at the Grainger Division was caused primarily by handling costs
increasing due to the elimination of a transaction handling charge to
customers on certain shipped sales and higher data processing expenses
primarily related to new system development, partially offset by lower bad
debt expense. The increase in the effective income tax rate was due to the
Omnibus Budget Reconciliation Act of 1993, which increased the maximum
corporate federal tax rate from 34% to 35% retroactive to January 1, 1993. The
Company's gross margin increase was attributable to improvements at both the
Grainger Division and at the Other Business Units. The improvement at the
Grainger Division was due to a favorable selling price category mix and a
favorable product mix partially offset by an unfavorable margin impact due to
the level of cost increases exceeding the level of price increases. The
improvement at the Other Business Units was primarily related to Lab Safety,
which had a higher gross margin than the average for the rest of the Other
Business Units and was included for all of 1993 versus eight months of 1992.
FINANCIAL CONDITION
Working capital was $504,595,000 at December 31, 1994 compared to $442,525,000
at December 31, 1993 and $478,784,000 at December 31, 1992. The ratio of
current assets to current liabilities was 2.1, 2.2, and 2.5 at such dates.
Net cash flows from operations of $191,382,000 in 1994, $162,498,000 in 1993,
and $196,368,000 in 1992 have continued to improve the Company's financial
position and serve as the primary source of funding for capital requirements.
In each of the past three years, a portion of working capital has been used
for additions to property, buildings, and equipment as summarized in the
following table.
1994 1993 1992
------- ------- -------
(In thousands)
Land, buildings, structures, and improvements $73,342 $56,393 $31,632
Furniture, fixtures, and other equipment 47,015 42,012 18,288
-------- ------- -------
Total $120,357 $98,405 $49,920
======== ======= =======
The Company did not repurchase any shares of common stock during 1994. The
Company did repurchase 1,777,000 shares in 1993, and 733,000 shares in 1992.
Approximately 3,600,000 shares of common stock remain available for repurchase
under the existing authorization. The Company may resume share repurchases at
any time.
Dividends paid to shareholders were $39,570,000 in 1994, $36,272,000 in 1993,
and $34,295,000 in 1992.
Long-term cash requirements, other than normal operating expenses, are
anticipated for the branch optimization program, construction of Zone
Distribution Centers, upgrading branch computer systems, and office space
expansion. The Company's ongoing profitability continues to support these
requirements. Internally generated funds are the primary source for working
capital and expansion needs, supplemented by debt as the need arises. The
Company had no material commitments outstanding at December 31, 1994.
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. Total debt as a percent of shareholders' equity
was 4%, 7%, and 3%, at December 31, 1994, 1993, and 1992, respectively.
11
<PAGE>
In May 1992, the Company completed the acquisition of the assets of Lab Safety
for $161,343,000. The acquisition was funded by short-term borrowings of
$72,727,000, including bank borrowings aggregating $36,727,000, internal funds
of the Company, and the assumption of $8,227,000 of long-term debt. Also
during 1992, the Company completed its acquisition of Rice Safety Equipment
Company for $5,906,000.
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The use of the last-in, first-out (LIFO) method of accounting for
inventories and accelerated depreciation methods for financial reporting and
income tax purposes result in a substantial recognition of the effects of
inflation in the primary financial statements.
The major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost continues to be significant for
these long lived assets. The related depreciation expense associated with
these assets increases significantly when adjusting for the cumulative effect
of inflation.
The Company believes the most positive means to combat inflation and advance
the interests of investors lies in continued application of basic business
principles, which include improving productivity, increasing working capital
turnover, and offering products and services which can command proper price
levels in the marketplace.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 17 to
36. See the Index to Financial Statements and Supplementary Data on page 16.
Item 9: Disagreements on Accounting and Financial Disclosure
None
PART III
With respect to Items 10 through 13, the Company will file with the Securities
and Exchange Commission, within 120 days of the close of its fiscal year, a
definitive proxy statement pursuant to Regulation 14-A.
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 26, 1995, and, to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set
forth under the caption "Executive Officers".
Item 11: Executive Compensation
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 26, 1995, and, to the extent required, is incorporated herein by
reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 26, 1995, and, to the extent
required, is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will be
set forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 26, 1995, and, to the extent required, is
incorporated herein by reference.
12
<PAGE>
PART IV Exhibit
Index
Item 14: Exhibits, Financial Statement Schedule, and Reports on
Form 8-K
(a)1.Financial Statements. See Index to Financial Statements
and Supplementary Data.
2.Financial Statement Schedule. See Index to Financial
Statements and Supplementary Data.
3.Exhibits:
(3)(a)Restated Articles of Incorporation dated April 27, 1994. 39-43
(b)By-laws, incorporated by reference to Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1988.
(10)Material Contracts:
(a)No instruments which define the rights of holders of the
Company's Industrial Development Revenue Bonds are filed
herewith, pursuant to the exemption contained in Regulation
S-K, Item 601(b)(4)(iii). The Company hereby agrees to furnish
to the Securities and Exchange Commission, upon request, a
copy of any such instrument.
(b)Shareholders rights agreement dated April 26, 1989,
incorporated by reference to Exhibit 10(m) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989,
and a related Certificate of Adjustment, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991.
(c)Compensatory Plans or Arrangements
(i)W.W. Grainger, Inc. 1990 Long-Term Stock Incentive Plan,
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990.
(ii)W.W. Grainger, Inc. 1975 Non-Qualified Stock Option Plan as
Amended and Restated March 3, 1988, incorporated by reference
to Exhibit 10(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1987.
13
<PAGE>
(iii)Executive Death Benefit Plan dated December 30, 1983,
incorporated by reference to Exhibit 10(d) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989.
(iv)Executive Deferred Compensation Plan dated December 30, 1983,
incorporated by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989.
(v)1985 Executive Deferred Compensation Plan dated December 31,
1984, incorporated by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
(vi)Post-Service Benefits Plan for Non-Management Directors,
incorporated by reference to Exhibit 10(e)(vi) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
(vii)Summary Description of Corporate Management Incentive 44-47
Program Based on Improved Economic Earnings.
(viii)Supplemental Profit Sharing Plan as amended effective 48-55
January 1, 1995.
(ix)Plan for Payment of Directors' Fees as amended effective 56-57
January 1, 1995.
(11)Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.
(21)Subsidiaries of the Company. 37
(23)Consent of Independent Certified Public Accountants. See
Index to Financial Statements and Supplementary Data.
(27)Financial Data Schedule. 38
(b)Reports on Form 8-K.
(i)On January 13, 1995 the Company filed a Report on Form 8-K
announcing that the Company would take a fourth quarter pre-tax
charge of $67,097,000, ($48,398,000 or 94 cents per share on an
after tax basis) to recognize the expected costs associated with
integration efforts.
(ii)On March 2, 1995, the Company filed a Report on Form 8-K
announcing that the Board of Directors of the Company elected
Richard L. Keyser President and Chief Executive Officer, effective
March 1, 1995.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE: March 24, 1995
W.W. GRAINGER, INC.
By: D. W. Grainger By: J. D. Fluno
------------------------------- ---------------------------
D. W. Grainger J. D. Fluno
Chairman of the Board of Directors Vice Chairman
(a Principal Executive Officer and (a Principal Executive Officer,
a Director) Principal Financial Officer,
and a Director
By: R. L. Keyser By: P. J. Wallace
------------------------------- ---------------------------
R. L. Keyser P. J. Wallace
President and Chief Executive Officer Vice President,Financial
(a Principal Executive Officer Services (Principal
and a Director) Accounting Officer)
George R. Baker March 24, 1995 James D. Slavik March 24, 1995
---------------------- --------------------
George R. Baker James D. Slavik
Director Director
Robert E. Elberson March 24, 1995 Harold B. Smith March 24, 1995
---------------------- --------------------
Robert E. Elberson Harold B. Smith
Director Director
Wilbur H. Gantz March 24, 1995 Fred L. Turner March 24, 1995
---------------------- ---------------------
Wilbur H. Gantz Fred L. Turner
Director Director
John W. McCarter, Jr. March 24, 1995
---------------------- ----------------------
John W. McCarter, Jr.
Director
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1994, 1993, and 1992
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................17
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS........................................................18
LIABILITIES AND SHAREHOLDERS' EQUITY..........................19
CONSOLIDATED STATEMENTS OF EARNINGS................................20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY....................21
CONSOLIDATED STATEMENTS OF CASH FLOWS...........................22-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................24-33
SCHEDULE
II - ALLOWANCE FOR DOUBTFUL ACCOUNTS.............................34
EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE.........................35
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........36
SCHEDULES OMITTED
Schedules not included above are omitted for the reason that they are not
applicable or not required or the required information is contained in Notes
to Consolidated Financial Statements.
16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
W.W. Grainger, Inc.
We have audited the accompanying consolidated balance sheets of W.W. Grainger,
Inc. and Subsidiaries as of December 31, 1994, 1993, and 1992, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of W.W. Grainger,
Inc. and Subsidiaries as of December 31, 1994, 1993, and 1992, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
We have also audited schedule II of W. W. Grainger, Inc. and Subsidiaries
for the years ended December 31, 1994, 1993, and 1992. In our opinion, this
schedule presents fairly, in all material respects, the information required
to be set forth therein.
GRANT THORNTON LLP
Chicago, Illinois
February 10, 1995
17
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
----------------------------------
ASSETS 1994 1993 1992
--------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 15,292 $ 2,572 $ 44,809
Accounts receivable, less allowances for
doubtful accounts of $15,333 for 1994,
$13,573 for 1993, and $13,810 for 1992 345,793 299,856 265,410
Inventories 519,966 466,214 432,233
Prepaid expenses 14,233 10,832 11,856
Deferred income tax benefits 68,362 44,408 39,958
--------- ---------- ---------
Total current assets 963,646 823,882 794,266
--------- ---------- ---------
PROPERTY, BUILDINGS, AND EQUIPMENT
Land 115,497 100,903 87,815
Buildings, structures, and improvements 431,184 381,716 339,943
Machinery and equipment 11,705 11,567 11,557
Furniture, fixtures, and other equipment 251,831 222,569 187,416
--------- ---------- ---------
810,217 716,755 626,731
Less accumulated depreciation
and amortization 341,075 307,372 274,038
Property, buildings, and
equipment-net 469,142 409,383 352,693
OTHER ASSETS 101,963 143,399 163,579
---------- ---------- ----------
TOTAL ASSETS $1,534,751 $1,376,664 $1,310,538
========== ========== ==========
18
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS-CONTINUED
(In thousands of dollars)
December 31,
-------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993 1992
---------- ---------- ---------
CURRENT LIABILITIES
Short-term debt $ 11,134 $ 34,298 $ --
Current maturities of long-term debt 26,449 21,662 24,954
Trade accounts payable 226,459 178,114 151,898
Accrued contributions to employees'
profit sharing and pension plans 50,020 44,587 39,450
Accrued expenses 122,339 83,923 89,539
Income taxes 22,650 18,773 9,641
---------- --------- ---------
Total current liabilities 459,051 381,357 315,482
LONG-TERM DEBT (less current maturities) 1,023 6,214 6,936
DEFERRED INCOME TAXES 15,177 23,017 41,008
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 26,695 24,171 15,903
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock-1994, 1993,
and 1992, $5 par value-authorized,
6,000,000 shares, issued and
outstanding, none -- -- --
Common Stock-$0.50 par value-authorized,
150,000,000 shares, 1994, 1993, and 1992;
issued and outstanding, 50,749,681 shares,
1994, 50,684,983 shares, 1993, and
52,375,812 shares, 1992 25,375 25,342 26,188
Additional contributed capital 81,796 79,364 79,050
Unearned restricted stock compensation (61) (192) (299)
Retained earnings 925,695 837,391 826,270
---------- ---------- ----------
Total shareholders' equity 1,032,805 941,905 931,209
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,534,751 $1,376,664 $1,310,538
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
Years Ended December 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
Net sales $3,023,076 $2,628,398 $2,364,421
Cost of merchandise sold 1,951,321 1,653,534 1,504,893
---------- ---------- ----------
Gross profit 1,071,755 974,864 859,528
Warehousing, marketing, and
administrative expenses 787,137 721,904 631,097
Restructuring charges 53,082 800 --
---------- ---------- ----------
Total operating expenses 840,219 722,704 631,097
---------- -------- ----------
Operating earnings 231,536 252,160 228,431
Other income or (deductions)
Interest income 17 480 1,764
Interest expense (1,870) (1,727) (2,266)
Unclassified-net (928) (884) (707)
---------- ---------- ---------
(2,781) (2,131) (1,209)
Earnings before income taxes 228,755 250,029 227,222
Income taxes 100,881 100,762 89,980
---------- ---------- ---------
Net earnings before cumulative effect
of accounting changes 127,874 149,267 137,242
Cumulative effect of accounting changes -- (820) --
--------- ---------- ---------
Net earnings $127,874 $148,447 $137,242
========= ========== =========
Net earnings per common and common equivalent
share before cumulative effect of
accounting changes $2.50 $2.88 $2.58
Cumulative effect of accounting changes -- (0.02) --
--------- ---------- ---------
Net earnings per common and common
equivalent share $2.50 $2.86 $2.58
========= ========== =========
Average number of common and
common equivalent shares outstanding 51,226,476 51,910,906 53,256,629
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)
Additional Restricted
Common Contributed Unearned Retained
Stock Capital Compensation Earnings
------- ------- ------------ ---------
Balance at January 1, 1992 $26,457 $73,938 $(499) $760,541
Exercise of stock options 98 6,138 -- --
Purchase of 733,000 shares of
Common Stock (367) (1,045) -- (37,218)
Amortization of restricted
Common Stock compensation -- 19 200 --
Net earnings -- -- -- 137,242
Cash dividends paid
($0.65 per share) -- -- -- (34,295)
------- ------- ---- --------
Balance at December 31, 1992 26,188 79,050 (299) 826,270
Exercise of stock options 41 2,821 -- --
Purchase of 1,777,000 shares
of Common Stock (888) (2,712) -- (101,054)
Issuance of 2,700 shares of
restricted Common Stock 1 154 (155) --
Amortization of restricted
Common Stock compensation -- 51 262 --
Net earnings -- -- -- 148,447
Cash dividends paid
($0.705 per share) -- -- -- (36,272)
------- ------- ---- --------
Balance at December 31, 1993 25,342 79,364 (192) 837,391
Exercise of stock options 33 2,420 -- --
Cancellation of 700 shares
of restricted Common Stock -- (35) 35 --
Amortization of restricted
Common Stock compensation -- 47 96 --
Net earnings -- -- -- 127,874
Cash dividends paid
($0.78 per share) -- -- -- (39,570)
------- ------- ---- --------
Balance at December 31, 1994 $25,375 $81,796 $ (61) $925,695
======= ======= ===== ========
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
--------------------------------
1994 1993 1992
-------- -------- ---------
Cash flows from operating activities:
Net earnings $127,874 $148,447 $137,242
Provision for losses on accounts receivable 9,928 8,147 10,326
Depreciation and amortization:
Property, buildings, and equipment 49,795 40,576 35,217
Intangibles and goodwill 16,855 18,588 13,903
Restructuring charges-non-cash 68,363 75 --
Change in operating assets and liabilities,
net of effects of acquisitions of businesses
and restructuring charges:
(Increase) in accounts receivable (56,268) (42,593) (30,433)
(Increase) decrease in inventories (70,060) (33,981) 23,692
(Increase) decrease in prepaid expenses (3,401) 1,024 (736)
Increase (decrease) in trade accounts payable 48,345 26,216 (9,583)
Increase (decrease) in other current liab. 25,393 (554) 24,698
Increase in current income taxes payable 3,878 9,132 3,315
Increase in accrued employment related
benefits costs 2,524 8,268 421
(Decrease) in deferred income taxes (31,794) (22,441) (12,398)
Other-net (50) 1,594 704
-------- -------- --------
Net cash provided by operating activities 191,382 162,498 196,368
Cash flows from investing activities:
Additions to property, buildings, and
equipment (120,357) (98,405) (49,920)
Proceeds from sale of property, buildings,
and equipment 2,573 533 1,072
Expenditures for business acquisitions-
net of cash balances assumed -- -- (167,249)
Other-net (240) 866 (2,678)
-------- -------- --------
Net cash (used in) investing activities (118,024) (97,006) (218,775)
22
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
(In thousands of dollars)
Years Ended December 31,
-------------------------------
1994 1993 1992
-------- ------- --------
Cash flows from financing activities:
Net change in short-term debt $(23,164) $34,298 $ --
Proceeds from long-term debt 775 1,400 2,950
Long-term debt payments (1,179) (5,414) (1,804)
Retirement of long-term debt assumed in
business acquisition -- -- (8,227)
Stock options exercised 1,155 1,178 3,211
Tax benefit of stock incentive plan 1,345 1,735 3,044
Purchase of Company Common Stock -- (104,654) (38,630)
Cash dividends paid (39,570) (36,272) (34,295)
-------- -------- --------
Net cash (used in) financing activities (60,638) (107,729) (73,751)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 12,720 (42,237) (96,158)
-------- -------- --------
Cash and cash equivalents at
beginning of year 2,572 44,809 140,967
-------- -------- --------
Cash and cash equivalents at end of year $15,292 $2,572 $44,809
======== ======== ========
Non-Cash Investing and Financing Activities
Acquisition of businesses:
Fair value of assets acquired $ -- $ -- $186,747
Liabilities assumed, net of long-term debt -- -- (11,271)
Long-term debt assumed in business acquisition -- -- (8,227)
------- ------ --------
Net assets acquired $ -- $ -- $167,249
======= ====== ========
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1993, and 1992
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Industry Information
The Company is a nationwide distributor of maintenance, repair, and operating
supplies and related information to commercial, industrial, contractor, and
institutional customers. The Company operates within a single industry segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated
from the consolidated financial statements.
Accounting Changes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note
15) and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" (see Note 10). In the fourth quarter of 1993, retroactive to
January 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (see Note 10).
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
Property, Buildings, and Equipment
Property, buildings, and equipment are valued at cost.For financial statement
purposes, depreciation and amortization are provided in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives, principally on the declining-balance and sum-of-the-years-
digits methods. For income tax purposes, the Company uses the maximum
allowable accelerated methods.Improvements to leased property are being
amortized over the initial terms of the respective leases or the estimated
service lives of the improvements, whichever is shorter.The Company
capitalized interest costs of $1,929,000, $1,258,000, and $1,110,000 in 1994,
1993, and 1992, respectively.
Purchased Tax Benefits
The Company has purchased tax benefits through leases as provided by the
Economic Recovery Tax Act of 1981. Realized tax benefits, net of repayments,
are included in Deferred Income Taxes.
Income Taxes
The Company uses the maximum allowable accelerated depreciation methods.
Deferred income taxes are provided to recognize the temporary differences
between financial and tax reporting.
Purchase of Company Common Stock
Through December 31, 1993, the Company was required by its state of
incorporation to retire any Common Stock it purchased. The excess of cost over
par value was charged proportionately to Additional contributed capital
and Retained earnings. Effective January 1, 1994, the Company is no longer
required by its state of incorporation to retire Common Stock repurchases.
24
<PAGE>
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed based upon the
weighted average number of shares outstanding during each year which includes
outstanding options for Common Stock, when dilutive.
Note 2 - Restructuring Charges
In December 1993, the Company announced its decision to integrate its sanitary
supply business with the core business. Based on the results of that program,
the Company announced in July 1994 its intention to similarly integrate its
Allied Safety (safety products) and Bossert Industrial Supply (production
consumable products) units. In conjunction with the integration of these
business units, the Company also began the process of consolidating financial,
information services, and human resource functions. In the fourth quarter, the
Company recorded a $67,097,000 pretax charge ($48,398,000 or 94 cents per
share on an after tax basis) to recognize the expected costs associated with
the above efforts. Total restructuring charges for 1994 and 1993 were:
Years Ended December 31,
------------------------
1994 1993
--------- ------
(In thousands of dollars
except for per share amounts)
Inventory writedowns-charged to cost of goods sold $16,308 $ --
------- -----
Operating expenses:
Revaluation of goodwill and other intangibles 24,249 --
Non-inventory asset write-downs 9,350 --
Severance and related benefits 10,917 --
Lease payments and other facility expenses 7,862 152
Other 704 648
------- -----
Charged to operating expenses 53,082 800
Total $69,390 $800
======= =====
Total, net of tax $49,779 $482
======= =====
Effect on earnings per common and common
equivalent share $0.97 $0.01
======= =====
NOTE 3-BUSINESS ACQUISITION
Effective May 1, 1992, the Company completed the acquisition of the assets and
business of Lab Safety Supply, Inc., a leading direct marketer and distributor
of safety products. The acquisition included cash payments of $161,343,000 and
the assumption of certain liabilities of Lab Safety Supply, Inc. including
$8,227,000 of long-term debt. The acquisition was accounted for as a purchase.
Included in the purchase price was $121,367,000 which was allocated to
intangibles including customer list and goodwill, to be amortized over useful
lives of five to forty years. The acquisition was funded from internal sources
and the issuance of $72,727,000 of short-term debt.The following unaudited pro
forma summary combines the consolidated results of operations of the Company
and Lab Safety Supply, Inc. as if the acquisition had occurred at the
beginning of 1992. The pro forma amounts give effect to certain adjustments,
including the amortization of intangibles, the amortization of non-competition
agreements, certain executive compensation, increased interest expense, lost
interest income, and income tax effects. This pro forma summary does not
necessarily reflect the results of operations as they would have been if the
companies had constituted a single entity during such periods and is not
necessarily indicative of results which may be obtained in the future.
Year Ended December 31, 1992
----------------------------
(In thousands of dollars
except for per share amount)
Sales $2,411,758
Net earnings $135,830
Earnings per common and common equivalent share $2.55
25
<PAGE>
NOTE 4-CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents the carrying amount approximates fair value due to the short
maturity of those instruments. Cash paid during the year for:
1994 1993 1992
-------- -------- --------
(In thousands of dollars)
Interest (net of amount capitalized) $1,836 $1,837 $2,235
======== ======== =======
Income taxes $127,039 $106,085 $95,691
======== ======== =======
NOTE 5 CASH
Checks outstanding of $37,088,000, $16,521,000, and $23,713,000 are included
in Trade accounts payable at December 31, 1994, 1993, and 1992, respectively.
NOTE 6-CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.The Company has a broad customer base representing many diverse
industries doing business in all regions of the United States. Consequently,
in management's opinion, no significant concentration of credit risk exists
for the Company.
NOTE 7-INVENTORIES
Inventories primarily consist of merchandise purchased for resale.Inventories
would have been $184,364,000, $179,450,000, and $168,363,000 higher than
reported at December 31, 1994, 1993, and 1992, respectively, if the first-in,
first-out (FIFO) method of inventory accounting had been used.
NOTE 8-OTHER ASSETS
Included in other assets are intangibles such as customer lists and goodwill.
Customer lists are amortized on a straight-line basis over periods of five to
sixteen years. Goodwill represents the cost in excess of net assets of
acquired companies and is amortized on a straight-line basis over forty years.
The carrying value of intangible assets is periodically reviewed by the
Company and impairments are recognized when the present value of projected
future cash flows is less than their carrying value. Other assets at December
31, 1994, 1993, and 1992 were:
1994 1993 1992
-------- -------- --------
(In thousands of dollars)
Customer lists $93,857 $102,015 $102,015
Goodwill 25,635 46,283 46,197
Other intangibles 3,875 6,472 6,472
-------- -------- --------
123,367 154,770 154,684
Less accumulated amortization 37,266 29,528 14,133
86,101 125,242 140,551
Sundry 15,862 18,157 23,028
-------- -------- --------
Total $101,963 $143,399 $163,579
======== ======== ========
Other assets decreased in 1994 primarily due to the revaluation of goodwill
and other intangibles that occurred in conjunction with the fourth quarter
restructuring charge as described in Note 2.
26
<PAGE>
NOTE 9-SHORT-TERM DEBT
During 1994 and 1993, the Company borrowed funds to finance working capital
needs. In 1992, the Company borrowed funds to partially finance the
acquisition of Lab Safety Supply, Inc. The following summarizes information
concerning short-term debt:
1994 1993 1992
------- ------- -------
Bank Notes (In thousands of dollars)
----------
Outstanding at December 31 $ 3,739 $22,316 $ --
Maximum month-end balance during the year $27,170 $27,725 $36,000
Average amount outstanding during the year $ 9,973 $ 8,493 $ 5,035
Weighted average interest rates during the year 4.6% 3.4% 3.8%
Weighted average interest rates at December 31 8.0% 3.5% --%
Commercial Paper
----------------
Outstanding at December 31 $7,395 $11,982 $ --
Maximum month-end balance during the year $49,985 $28,581 $36,727
Average amount outstanding during the year $23,143 $ 7,935 $ 9,885
Weighted average interest rates during the year 4.4% 3.2% 3.9%
Weighted average interest rates at December 31 6.3% 3.3% --%
The Company had available lines of credit of $54,000,000 at December 31, 1994,
$28,500,000 at December 31, 1993, and $75,000,000 at December 31, 1992. Of the
total available at December 31, 1994, $50,000,000 were in place to support
commercial paper outstanding, and carried commitment fees of 1/8%. There were
no borrowings under these credit lines. The remaining $4,000,000 credit line
available at December 31, 1994 was used to support working capital needs. This
line carried a commitment fee of 1/4% and an additional fee of 1/8% on the
unused portion.
NOTE 10-EMPLOYEE BENEFITS
RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula related primarily to earnings before
federal income taxes, limited to 15% of the total compensation paid to all
eligible employees. The Company also sponsors additional profit sharing and
defined contribution plans which cover most other employees. Provisions under
all plans were $46,117,000, $42,056,000, and $37,289,000 for the years ended
December 31, 1994, 1993, and 1992, respectively.
POSTRETIREMENT BENEFITS. The Company has a health care benefits plan covering
most of its retired employees and their dependents. A majority of the
Company's employees become eligible for these benefits when they qualify
for retirement while working for the Company. On January 1, 1993, the Company
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions". The statement requires the Company to accrue the estimated
cost of providing postretirement benefits during the working careers of those
employees who could become eligible for such benefits when they retire.
Because the Company had previously accrued postretirement benefits, the effect
of adoption of SFAS No. 106 was not material.The amount charged to operating
expense for postretirement benefits was $3,153,000, $2,600,000, and $2,000,000
for the years ended December 31, 1994, 1993, and 1992, respectively.
Components of the 1994 and 1993 expense were:
1994 1993
------- --------
(In thousands of dollars)
Service cost $1,887 $1,566
Interest cost 1,695 1,553
Actual return on assets (17) (472)
Amortization of transition asset
(22 year amortization) (143) (143)
Deferred asset (loss) gain (339) 96
Unrecognized loss 29 --
Prior service cost 41 --
------ ------
$3,153 $2,600
====== ======
27
<PAGE>
Participation in the plan is voluntary at retirement and requires participants
to make contributions, as determined by the Company, toward the cost of the
plan. The accounting for the health plan anticipates future cost-sharing
changes to retiree contributions that will maintain the current cost-sharing
ratio between the Company and the retirees. A Group Benefit Trust has been
established as the vehicle to process benefit payments. The assets of the
trust are invested in a Standard & Poors 500 index fund. The assumed weighted
average long-term rate of return is 5.9%, which is net of a 42.3% tax rate.The
funding of the trust includes an estimated amount which is intended to allow
the maximum deductible contribution under the Internal Revenue Code of 1986,
as amended, and was $737,000, $211,000, and $1,579,000 for the years ended
December 31, 1994, 1993, and 1992, respectively.
A reconciliation of funded status as of December 31, 1994 and 1993 is as
follows:
1994 1993
-------- --------
(In thousands of dollars)
Accumulated Postretirement Benefit Obligation (APBO):
Retirees and their dependents $(3,715) $(4,044)
Fully eligible active plan participants (1,331) (879)
Other active plan participants (17,299) (17,165)
-------- -------
Total APBO (22,345) (22,088)
Plan assets at fair value 6,199 5,993
-------- -------
Funded status (16,146) (16,095)
Unrecognized transition asset (2,856) (2,999)
Unrecognized net (gain) loss (3,443) 823
Unrecognized prior service cost 1,758 --
-------- --------
Accrued postretirement benefits cost $(20,687) $(18,271)
======== ========
In determining the APBO as of December 31, 1994, the assumed weighted average
discount rate used was 8.5%. To determine the APBO as of December 31, 1993,
the assumed weighted average discount rate was 7.3%. The assumed health care
cost trend rate for 1994 through 1998 was 10.0%. Beginning in 1999, the
assumed health care cost trend rate declines on a straight-line basis until
2008, when the ultimate trend rate of 5.6% will be achieved.If the assumed
health care cost trend rate was increased by one percentage point for each
year, the APBO as of December 31, 1994 would increase by $4,637,000. The
aggregate of the service cost and interest cost components of the 1994 net
periodic postretirement benefits expense would increase by $921,000.
POSTEMPLOYMENT BENEFITS. In the fourth quarter of 1993, retroactive to January
1, 1993, the Company adopted SFAS No. 112, "Employer's Accounting for
Postemployment Benefits". This statement requires the accrual of certain
benefits provided to former or inactive employees, after employment but before
retirement, if attributable to an employee's service already rendered.The
Company benefits accrued under SFAS No. 112 included long-term disability
health care benefits, short-term disability salary continuation benefits, and
COBRA benefits in excess of participant contributions. The cumulative effect
at January 1, 1993 of adopting SFAS No. 112 reduced Net earnings by $4,033,000
or eight cents per share. The effect of this change on 1993 Net earnings
before the cumulative effect of accounting changes was not material.
NOTE 11-LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1994 1993 1992
------- ------- -------
(In thousands of dollars)
Industrial development revenue bonds $26,150 $26,225 $25,600
Other 1,322 1,651 6,290
------- ------- -------
27,472 27,876 31,890
Less current maturities 26,449 21,662 24,954
------- ------- -------
$1,023 $6,214 $6,936
======= ======= =======
28
<PAGE>
The industrial development revenue bonds include various issues that bear
interest at a variable rate up to 15%, or variable rates up to 78.2% of the
prime rate, and come due in various amounts from 2001 through 2011. Interest
rates on some of the issues are subject to change at certain dates in the
future. The bondholders may require the Company to redeem certain bonds
concurrent with a change in interest rates and certain other bonds annually.
At December 31, 1994, all of the bonds were subject to these redemption
options. In addition, $12,045,000 of these bonds had an unsecured liquidity
facility available at December 31, 1994 for which the Company compensated a
bank through a commitment fee of 1/8%. There were no borrowings related to
these facilities at December 31, 1994. The Company classified $26,150,000,
$21,255,000, and $20,555,000 of bonds currently subject to redemption
options in current maturities of long-term debt at December 31, 1994, 1993,
and 1992, respectively.The aggregate amounts of long-term debt maturing in
each of the five years subsequent to December 31, 1994
are as follows:
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
------------- ----------
(In thousands of dollars)
1995 $299 $26,150
1996 146 --
1997 163 --
1998 182 --
1999 75 --
NOTE 12-LEASES
The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.At December
31, 1994, the approximate future minimum aggregate payments for all leases
were as follows:
Operating Leases
-----------------------------
Real Personal Capital
Property Property Total Leases
-------- -------- ------- -------
(In thousands of dollars)
1995 $14,636 $1,555 $16,191 $ 240
1996 12,178 40 12,218 240
1997 9,800 26 9,826 240
1998 7,798 15 7,813 240
1999 7,146 5 7,151 240
2000-2034 7,391 -- 7,391 338
------- ------ ------- -------
Total minimum payments required $58,949 $1,641 $60,590 1,538
======= ====== =======
Less imputed interest 450
------
Present value of minimum
lease payments (included
in long-term debt) $1,088
======
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $20,935,000, $22,264,000, and $21,421,000 for 1994,
1993, and 1992, respectively.
29
<PAGE>
NOTE 13-STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan ("The Plan"), allows the Company
to grant a variety of incentive awards to key employees of the Company. These
awards involve the use of a maximum of 4,028,414 shares of common stock, in
connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights, and other stock based
awards.The Plan authorizes the granting of restricted stock which is held by
the Company until certain terms and conditions as specified by the Company are
satisfied. Except for the right of disposal, holders of restricted stock have
full shareholders' rights during the period of restriction, including voting
rights and the right to receive dividends. Compensation expense related to
restricted stock awards is based upon market price at date of grant and is
charged to earnings on a straight-line basis over the period of restriction.
The Plan authorizes the granting of options to purchase shares at a price of
not less than 85% of the closing market price on the last trading day
preceding the date of grant. The options expire within ten years after the
date of grant. The Plan also permits the granting of stock appreciation
rights, either alone or in tandem with options already granted and to be
granted in the future. The stock appreciation rights permit the holder to
receive stock, cash, or a combination thereof, equal to the amount by which
the fair market value on the date of exercise exceeds the option price.
Exercise of a stock option or a stock appreciation right automatically cancels
any respective tandem stock appreciation right or stock option. Shares covered
by terminated, surrendered or cancelled options or stock appreciation rights
that are unexercised, by forfeited restricted stock, or by the forfeiture of
other awards that do not result in shares being issued, are again available
for awards under the Plan.
In 1994, 1993, and 1992, 4,615 shares of restricted stock were released each
year. There were no shares of restricted stock issued in 1994 or 1992. There
were 2,650 shares of restricted stock issued in 1993.
There was no activity relating to stock appreciation rights in 1994, 1993, or
1992, and at December 31, 1994, there were no stock appreciation rights
outstanding.
Transactions involving stock options are summarized as follows:
Option Price
Option Shares Per Share Exercisable
------------- ------------ -----------
Outstanding at January 1, 1992 1,435,302 $9.75-$47.38 1,418,802
=========
Granted 204,440 $51.50
Exercised (266,288) $9.75-$41.06
Cancelled or expired (14,380) $40.06-$51.50
---------
Outstanding at December 31, 1992 1,359,074 $12.84-$51.50 1,152,514
=========
Granted 193,510 $58.75
Exercised (132,914) $12.84-$41.06
Cancelled or expired (4,400) $43.00-$58.75
---------
Outstanding at December 31, 1993 1,415,270 $13.31-$58.75 1,019,600
=========
Granted 202,360 $61.50
Exercised (90,196) $13.31-$51.50
Cancelled or expired (13,230) $22.75-$61.50
---------
Outstanding at December 31, 1994 1,514,204 $15.31-$61.50 1,124,164
========= =========
Options available for grant were 3,172,009, 3,361,139, and 3,552,899 at
December 31, 1994, 1993, and 1992, respectively. All options were issued at
market price on the date of grant.
30
<PAGE>
NOTE 14-ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS
The Company has adopted a Shareholder Rights Plan, under which there is
outstanding one preferred share purchase right (Right) for each outstanding
share of the Company's Common Stock. Each Right, under certain circumstances,
may be exercised to purchase one two-hundredth of a share of Series A Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's Common Stock) at a price of $125, subject to
adjustment. The Rights become exercisable only after a person or a group,
other than a person or group exempt under the plan, acquires or announces a
tender offer for 20% or more of the Company's Common Stock.If a person or
group, other than a person or group exempt under the plan, acquires 20% or
more of the Company's Common Stock or if the Company is acquired in a merger
or other business combination transaction, each Right generally entitles the
holder, other than such person or group, to purchase, at the then-current
exercise price, stock and/or other securities or assets of the Company or the
acquiring company having a market value of twice the exercise price.The Rights
expire on May 15, 1999 unless earlier redeemed. They generally are
redeemable at $.01 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 20% or more of the Company's Common Stock. They are also
automatically redeemable, at the redemption price, upon consummation of
certain transactions approved by shareholders in accordance with procedures
provided in the plan.The Rights do not have voting or dividend rights and,
until they become exercisable, have no dilutive effect on the earnings of the
Company.
NOTE 15-INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes". The cumulative effect of this accounting change increased net
earnings by $3,213,000 or six cents per share in 1993. The adoption of SFAS
No. 109 changed the Company's method of accounting for income taxes from the
deferred method to an asset and liability approach. Previously the Company
deferred the tax effects of timing differences between financial reporting
income and taxable income. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial bases and the tax
bases of assets and liabilities.Income tax expense consisted of the following:
1994 1993 1992
-------- -------- --------
(In thousands of dollars)
Current:
Federal $108,053 $95,558 $82,915
State 24,622 21,766 19,463
-------- -------- -------
Total current 132,675 117,324 102,378
Deferred (31,794) (11,795) (12,398)
Net effect of the Omnibus Budget
Reconciliation Act of 1993 -- (4,767) --
-------- -------- -------
Total provision $100,881 $100,762 $89,980
======== ======== =======
31
<PAGE>
In accordance with the provisions of SFAS No. 109, the deferred income tax
benefit for 1994 represents the effects of the changes in the amounts of
temporary differences during 1994. The income tax effects of temporary
differences that gave rise to the net deferred tax asset as of December 31,
1994 and 1993 were:
1994 1993
------- --------
(In thousands of dollars)
Current deferred tax assets (liabilities):
Inventory valuations $25,001 $21,263
Administrative and general expenses
deducted on a paid basis for tax purposes 25,117 21,651
Restructuring costs 17,288 --
Other 956 1,494
------- -------
Total net current deferred tax asset 68,362 44,408
------- -------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits (35,432) (37,515)
Temporary differences related to property,
building, and equipment (2,424) (3,368)
Intangible amortization 11,479 7,247
Employment related benefits expense 10,625 9,620
Other 575 999
------- -------
Total net noncurrent deferred tax liability (15,177) (23,017)
------- -------
Net deferred tax asset $53,185 $21,391
======= =======
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981.
A reconciliation of income tax expense with federal income taxes at the
statutory rate follows:
1994 1993 1992
------- ------- -------
(In thousands of dollars)
Federal income taxes at the statutory rate $ 80,064 $ 87,510 $77,256
State income taxes, net of
federal income tax benefits 11,145 12,077 11,170
Nondeductible restructuring costs 8,189 -- --
Other-net 1,483 1,175 1,554
-------- -------- -------
Income tax expense $100,881 $100,762 $89,980
======== ======== =======
Effective tax rate 44.1% 40.3% 39.6%
======== ======== =======
The Omnibus Budget Reconciliation Act of 1993 increased the maximum corporate
federal tax rate from 34% to 35% retroactive to January 1, 1993. The effect of
this rate change on the Company's deferred tax balances was not material.
32
<PAGE>
NOTE 16-SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
A summary of selected quarterly information for 1994 and 1993 is as follows:
1994 Quarter Ended
-------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
--------- -------- ------------ ----------- ---------
Net sales $706,369 $768,554 $779,300 $768,853 $3,023,076
Gross profit 255,626 268,792 273,536 273,801 1,071,755
Net earnings $41,538 $42,324 $43,045 $967 $127,874
Net earnings per common
and common equivalent
share $0.81 $0.83 $0.84 $0.02 $2.50
======== ======== ========= ======== ==========
1993 Quarter Ended
-------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
-------- -------- ------------ ---------- ---------
Net sales $606,183 $660,407 $698,835 $662,973 $2,628,398
Gross profit 228,372 241,672 251,453 253,367 974,864
Net earnings before
cumulative effect of
accounting changes 34,185 35,445 38,714 40,923 149,267
Cumulative effect of
accounting changes (820) -- -- -- (820)
Net earnings $33,365 $35,445 $38,714 $40,923 $148,447
Net earnings per common
and common equivalent
share before accounting
changes $0.65 $0.68 $0.75 $0.80 $2.88
Cumulative effect of
accounting changes (0.02) -- -- -- (0.02)
Net earnings per common
and common equivalent
share $0.63 $0.68 $0.75 $0.80 $2.86
======= ======== ======== ======== ========
In 1993, the Company elected early adoption of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits", which resulted in an after tax charge
of eight cents per share. The Company also adopted SFAS No. 109, "Accounting
for Income Taxes", which resulted in after tax income of six cents per share.
The cumulative effect of accounting changes was a net after tax expense of two
cents per share.
In 1994, the Company recorded pretax restructuring charges of $69,390,000.
Selected quarterly information excluding these charges is as follows:
1994 Quarter Ended
-------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
-------- -------- ------------ ----------- ---------
Net earnings $41,741 $43,033 $43,514 $49,365 $177,653
======= ======= ============ =========== =========
Net earnings per
common and common
equivalent share $0.81 $0.85 $0.85 $0.96 $3.47
======= ======= =========== =========== =========
In the quarter ended December 31, 1993 the Company recorded pretax
restructuring charges of $800,000 ($482,000 or one cent per share on an after
tax basis).
33
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE II-ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(In thousands of dollars)
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions(a) Other(b) of period
--------------------- ---------- --------- ------------- -------- ---------
Allowance for
doubtful accounts
1994 $13,573 $10,331 $8,571 $-- $15,333
1993 13,810 8,147 8,384 $-- 13,573
1992 12,826 10,326 10,042 700 13,810
(a) Accounts charged off as uncollectible, less recoveries.
(b) Businesses acquired.
34
<PAGE>
W.W. Grainger, Inc. and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1994 1993 1992 1991 1990
---------- --------- ---------- --------- ----------
Average number of
common shares
outstanding during
the year 50,732,625 51,410,228 52,747,423 53,597,448 54,681,010
========== ========== ========== ========== ==========
Common equivalents (a)
Shares issuable
under outstanding
options and stock
appreciation
rights 1,380,529 1,304,037 1,367,030 1,349,541 1,072,882
Shares which could
have been
purchased based on
the average market
value for the
period 891,933 809,773 870,576 953,873 852,814
--------- ---------- ---------- ---------- ---------
488,596 494,264 496,454 395,668 220,068
Dilutive effect of
exercised options and
stock appreciation
rights prior to being
exercised 5,255 6,414 12,752 7,531 4,214
-------- ---------- ---------- ---------- ---------
Shares for the
portion of the
period that the
options and stock
appreciation rights
were outstanding 493,851 500,678 509,206 403,199 224,282
-------- ---------- ---------- --------- ----------
Average number of
common and common
equivalent shares
outstanding during
the year 51,226,476 51,910,906 53,256,629 54,000,647 54,905,292
========== ========== ========== ========== ==========
Net earnings before
cumulative effect
of accounting
changes $127,874,000 $149,267,000 $137,242,000 $127,737,000 $126,775,000
Cumulative effect of
accounting changes -- (820,000) -- -- --
------------ ------------ ------------ ------------ -----------
Net earnings $127,874,000 $148,447,000 $137,242,000 $127,737,000 $126,775,000
============ ============ ============ ============ ==========
Earnings per share
before accounting
changes $2.50 $2.88 $2.58 $2.37 $2.31
Cumulative effect of
accounting changes
per share -- (0.02) -- -- --
----------- ----------- ---------- ----------- ----------
Earnings per share $2.50 $2.86 $2.58 $2.37 $2.31
=========== =========== ========== ========== ==========
(a)Does not include options which are not dilutive. Effect under fully diluted
computation is not material.
35
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report on page 17 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995 and 33-43902) and on Form S-4
(No. 33-32091) of W.W. Grainger, Inc.
GRANT THORNTON LLP
Chicago, Illinois
March 24, 1995
36
<PAGE>
Exhibit 21 to the Annual
Report on Form 10-K for the
year ended December 31, 1994
W.W. GRAINGER, INC.
Subsidiaries as of March 1, 1995
Allied Safety, Inc. (Virginia)
Bossert Industrial Supply, Inc. (Illinois)
Dayton Electric Manufacturing Co. (Illinois)
Grainger Caribe, Inc. (Illinois)
Grainger FSC, Inc. (U.S. Virgin Islands)
Grainger, SA de CV (Mexico)
Lab Safety Supply, Inc. (Wisconsin)
WWG de Mexico, SA de CV (Mexico)
WWG International, Inc. (Illinois)
WWG Servicios, SA de CV (Mexico)
37
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<PERIOD-TYPE> 12-MOS
<CASH> 15292
<SECURITIES> 0
<RECEIVABLES> 361126
<ALLOWANCES> 15333
<INVENTORY> 519966
<CURRENT-ASSETS> 963646
<PP&E> 810217
<DEPRECIATION> 341075
<TOTAL-ASSETS> 1534751
<CURRENT-LIABILITIES> 459051
<BONDS> 1023
0
0
<COMMON> 25375
<OTHER-SE> 1007430
<TOTAL-LIABILITY-AND-EQUITY> 1534751
<SALES> 3023076
<TOTAL-REVENUES> 3023076
<CGS> 1951321
<TOTAL-COSTS> 1951321
<OTHER-EXPENSES> 830799
<LOSS-PROVISION> 10331
<INTEREST-EXPENSE> 1870
<INCOME-PRETAX> 228755
<INCOME-TAX> 100881
<INCOME-CONTINUING> 127874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127874
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.50
</TABLE>
Exhibit (3)(a) to the Annual
Report on Form 10-K of
W.W. Grainger, Inc. for the
year ended December 31, 1994
RESTATED ARTICLES OF INCORPORATION
OF
W.W. GRAINGER, INC.
The Articles of Incorporation, as amended, of W.W. Grainger, Inc. are
restated to read as follows:
ARTICLE ONE
The name of the corporation is:
W.W. GRAINGER, INC.
The corporation has not adopted any amendments changing the
corporation's name since its initial incorporation.
The date of incorporation is December 27, 1928.
ARTICLE TWO
The name of its registered agent in the State of Illinois is CT
Corporation System and the address of its registered office in the State of
Illinois is c/o CT Corporation System, 208 South La Salle Street, Chicago,
Illinois 60604.
ARTICLE THREE
The duration of the corporation is perpetual.
ARTICLE FOUR
The purpose or purposes for which the corporation is organized are:
To transact any and all lawful businesses for which a corporation
may be incorporated under the Business Corporation Act,
including, without limitation, to acquire, own, lease, use,
develop, improve, manage, mortgage, convey and otherwise
dispose of and deal in real property, improvements thereon or
appurtenant thereto, or any interest therein.
39
<PAGE>
ARTICLE FIVE
Paragraph 1: The aggregate number of shares which the corporation is
authorized to issue is 156,000,000 divided into two
classes. The designations of each class, the number of
shares of each class and the par value, if any, of the
shares of each class, or a statement that the shares of any
class are without par value, are as follows:
Par value per share or
Series No. of statement that shares
Class (if any) Shares are without par value
----- -------- ------- ----------------------
Common None 150,000,000 $0.50
Preferred As determined 6,000,000 $5.00
by Board of
Directors
Paragraph 2: The preferences, qualifications, limitations, restrictions
and the special or relative rights in respect of the shares
of each class are:
PREFERRED STOCK
---------------
(1) Authority is hereby vested in the Board of Directors (by adoption
of a resolution and filing and recording of a statement in
accordance with the laws of the State of Illinois) to divide any
or all of the authorized 6,000,000 shares of Preferred Stock into
series and, within the limitations provided by law, to fix and
determine:
(a)The rate per annum at which the holders of shares of any
such series shall be entitled to receive dividends out of
any funds of the corporation at that time legally available
for such purpose and as declared by the Board of Directors;
(b)The price or prices and other terms and conditions on
which shares of any such series of Preferred Stock shall
be redeemable;
(c)The amount or amounts per share to which holders of
shares of any such series of Preferred Stock shall be
entitled in the event of any voluntary or involuntary
dissolution, liquidation or winding up of the corporation;
(d)Sinking fund provisions for the redemption or purchase
of shares of any such series;
40
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(e)The terms and conditions on which shares of any such
series may be converted into shares of another class, if
the shares of any such series are issued with the
privilege of conversion; and
(f)The limitation or denial of voting rights, or the grant of
special voting rights for any such series.
(2) Any shares of Preferred Stock which are converted or redeemed
shall not be reissued but shall be canceled, and the corporation
shall take appropriate action to reduce the authorized number of
shares accordingly.
COMMON STOCK
(1) The holders of shares of Common Stock of the corporation are
entitled to receive dividends when and as declared by the Board of
Directors, and after provision for all dividends on the Preferred
Stock as hereinabove set forth, provided no dividend shall be
declared or paid hereunder unless it is declared and paid at the
same time and in the same manner on all outstanding shares of the
Common Stock.
(2) None of the shares of Common Stock of the corporation shall be
subject to mandatory redemption.
PREEMPTIVE RIGHTS
Except for the conversion of shares of Preferred Stock as may be
determined by the Board of Directors, no holder of shares of any class of the
corporation shall have any preemptive right to subscribe for or acquire
additional shares of the corporation of the same or any other class, or any
other securities convertible into or evidencing or accompanied by any right
to subscribe for, purchase or acquire shares of stock of any class of the
corporation, whether such shares be hereby or hereafter authorized; all such
additional shares may be sold for such consideration, at such time, and to
such person or persons as the Board of Directors may from time to time
determine, subject to the limitations hereinabove set forth.
ARTICLE SIX
The corporation has issued and outstanding 50,679,867 shares of
common stock $0.50 par value and its paid-in-capital is $102,933,230.*
*As of September 30, 1993.
ARTICLE SEVEN
Any action of the shareholders of the corporation shall be taken only at
an annual or special meeting of the shareholders of the corporation.
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ARTICLE EIGHT
Any amendment or restatement of the Articles of Incorporation of the
corporation which must be approved by the shareholders of the corporation
pursuant to the Business Corporation Act, and any plan of merger of the
corporation into a wholly-owned subsidiary (provided that the articles of
Incorporation of the surviving corporation in such merger require at least
the minimum voting requirements set forth in this Article Eight) which
must be approved by the shareholders of the corporation pursuant to the
Business Corporation Act, shall be adopted in the following manner:
(1) The Board of Directors shall adopt a resolution setting forth
the proposed amendment or plan of merger and directing that it be
submitted to a vote at a meeting of shareholders, which may be
either an annual or a special meeting;
(2) Written notice setting forth the proposed amendment, or plan
of merger or a summary thereof shall be given to each shareholder of
record within the time and in the manner provided in the Business
Corporation Act for the giving of notice of meetings of
shareholders;
(3) At such meeting a vote of the shareholders entitled to vote on
the proposed amendment or plan of merger shall be taken. The
proposed amendment or plan of merger shall be adopted upon receiving
the affirmative vote of at least a majority of the outstanding
shares entitled to vote on such amendment or plan of merger, unless
any class of shares is entitled to vote as a class in respect
thereof, in which event the proposed amendment or plan of merger
shall be adopted upon receiving the affirmative vote of the holders
of at least a majority of the outstanding shares of each class of
shares entitled to vote as a class in respect thereof and of the
total outstanding shares entitled to vote on such amendment or plan
of merger.
(4) Any number of amendments may be submitted to the
shareholders, and voted upon by them, at one meeting.
Anything herein to the contrary notwithstanding, this Article shall not
affect the vote required by the Business Corporation Act, for the approval of
any (i) merger other than a merger with a wholly-owned subsidiary; (ii)
consolidation; (iii) share exchange as described in present Section 11.10 of
the Business Corporation Act; (iv) dissolution; or (v) sale, lease or
exchange of all or substantially all of the assets of the corporation. Any
amendment of the corporation's Articles of Incorporation effecting any
decrease in the voting requirements for approval of the actions set forth in
clauses (i) through (v) of this paragraph shall be approved upon the
affirmative vote of that percentage of shareholders required for approval of
the action itself.
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ARTICLE NINE
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) under Section 8.65 of the Business
Corporation Act or any successor provision thereto, or (iv) for any
transaction from which the director derived an improper personal
benefit. If the Business Corporation Act is hereafter amended to permit
further elimination or limitation of the personal liability of directors,
then the liability of a director of the corporation shall be eliminated or
limited to the fullest extent permitted by the Business Corporation Act as so
amended. Any repeal or modification of this Article by the shareholders of
the corporation or otherwise shall not apply to or have any effect on the
liability or alleged liability of any director of the corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The undersigned corporation has caused these Restated Articles of
Incorporation to be signed by its duly authorized officers, each of whom
affirms, under penalties of perjury, that the facts stated herein are true
and that these Restated Articles of Incorporation were adopted by a majority
of the Board of Directors, in accordance with Section 10.15 of the Business
Corporation Act, shares having been issued but shareholder action not being
required for adoption.
Dated: June 9, 1994. W.W. GRAINGER, INC.
Attested by J.M. BAISLEY by D.W. GRAINGER
J.M. Baisley D.W. Grainger
Secretary Chairman and Chief Executive Officer*
*Authorized to sign this document.
[CORPORATE SEAL]
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Exhibit 10(c)(vii) to the Annual
Report on Form 10-K of
W.W. Grainger, Inc. for the year
ended December 31, 1994
February 15, 1995
SUMMARY DESCRIPTION OF THE
1994 MANAGEMENT INCENTIVE PROGRAM (MIP)
BASED ON IMPROVED ECONOMIC EARNINGS
INTRODUCTION
The Company Management Incentive Program (MIP) was initiated January 1,
1993 with the first payout in March 1994. For eligible participants, this
program replaced former participation in both the discontinued Team
Achievement Bonus (TAB) and the Long-Term Incentive Program (LTIP).
BACKGROUND
The Company has adopted Economic Earnings (EE) as a key financial
measurement. EE incorporates the attributes of growth, asset management,
and earnings to evaluate financial performance. Conceptually, long-term
improvements in EE should correspond to long-term improvements in
shareholder value.
The MIP is designed to encourage decision making that results in
improvement in EE and to compensate executives appropriately for positive
or negative performance resulting from business decisions. By linking EE to
incentive compensation, the MIP should influence managers to make
business decisions consistent with long-term shareholders' interests.
ELIGIBILITY FOR PARTICIPATION
Members of the Office of the Chairman (OOC) and all employees in Salary
Grades 13-18 (officers and non-officer key managers) who are on the payroll
on 1/1/95 are eligible to participate in this program, subject to the
eligibility provisions below. These employees are most responsible for
decisions affecting EE and/or major policy direction.
Note: Target bonus for the president of Lab Safety Supply (LSS) is
based 100% on the EE of LSS; target bonus for the president of Parts
Company of America (PCA) is based 50% on Company-wide EE and 50% on
the EE of PCA. Other eligible MIP participants at either LSS or PCA are on
programs unique to those business units.
ADMINISTRATION OF PROGRAM
The administration of the MIP is the responsibility of the Compensation
Committee of Management (CCOM), subject to the review and approval of
the Compensation Committee of the Board (CCOB). The CCOM shall have
the sole and complete authority to interpret this Program, determine all
questions relating to it, and to modify its provisions. All determinations,
interpretations, or other actions, made or taken by the CCOM, in connection
with it, shall be final and conclusive for all purposes and upon all persons.
44
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The following eligibility provisions shall apply to change of employment
status:
1. Death _ Any account balance vests immediately and, along
with a pro-rata award for the current year, is paid as a lump sum on the next
regular incentive payment date.
2. Retirement or Long Term Disability _ A pro-rata award for the
current year will be added to any participant account balance, and the
employee will receive the account balance in a lump sum on the next regular
incentive payment date. Retirement is defined the same as under the W.W.
Grainger, Inc. or Lab Safety Supply, Inc. Profit Sharing Plan.
3. Involuntary Termination _ For Misconduct or Performance
Related Reasons _ In these instances, a participant's account balance will
be forfeited and no award will be granted for the current or prior year.
For "Misconduct" means:
The participant has engaged, or intends to engage, in
competition with the Company, has induced any customer of the
Company to breach any contract with the Company, has made any
unauthorized disclosure of any of the secrets or confidential
information of the Company, has committed an act of
embezzlement, fraud, or theft with respect to the property of
the Company, or has deliberately disregarded the rules of the
Company in such a manner as to cause any loss, damage, or
injury to, or otherwise endanger the property, reputation, or
employees of the Company.
4. Voluntary Resignation _ If a participant leaves after July 1,
but before the end of a calendar year, the employee will be deemed to have
earned that year's payment (unless the most recent performance rating is 1
or 2) and will receive that year's payout on the next regular incentive
payment date. The salary to be used in calculations will be the actual
amount paid in the year rather than an annualized amount. Any remaining
account balance will be forfeited except in the case of terminations
resulting from the business support and business unit integration program
announced May 2, 1994, applicable to terminations in the period July 1, 1994
to June 30, 1995.
5. Job Elimination or Downgrade _ If a participant's job is
eliminated or downgraded and the employee's new job is at a non-
participating level, a pro-rata award for the current year will be made on
the next regular incentive payment date. The employee also will receive any
account balance on that date. In the event the participant does not continue
employment, the provisions applicable to Voluntary Resignation apply.
6. Transfer to Other Business Units _ A person who transfers to
another Company business unit and no longer participates in the MIP will
receive a pro-rata award for the period of time the person was in a
participating position on the next regular incentive payment date, and also
will receive any account balance on that date.
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7. First Year Participation for Continuing Employees _
Individuals who are hired into a position eligible for participation in the
MIP and who are participants for 6 months or more, but less than a year, will
receive a pro-rata award. Individuals who are promoted or transferred into
an eligible position from another position eligible for incentive pay under
another economic earnings based incentive program will receive an award
prorated to reflect the actual number of days worked in the new position
during the year regardless of when they were promoted to that position.
8. Promotions within MIP _ Individuals who are promoted during
the year from one MIP eligible position to another, shall have their target
bonuses prorated accordingly.
9. Employees rated 1 or 2 are not eligible for participation.
Exceptions to the above provisions can only be approved by the CCOM.
OVERVIEW
The MIP consists of 2 components _ quantitative and qualitative. The
quantitative component is built around target bonuses, which are established
for each of Grades 13 through 18 and the Office of the Chairman. The target
bonuses are stated as a percentage of annualized base salary as of
December 31, 1994. They range from 25% of base salary for Grade 13 to
75% of base salary for the Office of the Chairman (see Attachment 1).
The target bonus for all participants is based solely on Company EE. The
target bonus is adjusted upward or downward based on the relationship
between Actual Company EE and Target Company EE for each year. The
qualitative component consists of a discretionary bonus. The discretionary
bonus, if any, begins as a pool, and can be plus or minus up to 10% of the
base salaries of the bonus group. Once the amount of the pool is
determined, it is allocated pro rata across the group according to the
quantitative component earned by each participant.
Target Company EE is based on a weighted average of the 3 prior years'
Actual Company EE plus a 10% improvement factor. The Target Company
EE formula is:
Target Company EE =
[(50% x EE-1) + (30% x EE-2) + (20% x EE-3)] x 110%
Where: EE-1 equals prior year's EE
EE-2 equals EE 2 years ago
EE-3 equals EE 3 years ago
The bonus calculation includes a mechanism to identify significant strategic
investments and adjust for their impact. The forecast short-term negative
impact would be excluded from Target EE with corresponding increases in
subsequent years' targets.
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The next step involves comparison of Actual to Target in order to calculate
the bonus earned. Two factors are employed: the Bonus Interval and the
Bonus Multiple. The Bonus Interval is the variance from Target required to
double the bonus earned or result in no bonus earned. The Bonus Multiple
can be expressed as:
EE Bonus Multiple =
[(Actual EE - Target EE) / Bonus Interval] + 1.00
The bonus earned is computed as:
Bonus Earned =
(Target EE Bonus $ x EE Bonus Multiple)
The bonus earned constitutes the quantitative component of the MIP. The
total bonus earned is equal to this quantitative component plus or minus any
discretionary adjustment as recommended by the CCOM and approved by
the CCOB.
The total bonus earned for each year will be added to a MIP account for each
participant. MIP accounts are not funded with actual cash amounts; they
represent a paper record of unpaid earned bonuses for an individual. The
beginning account balance, if any, will be adjusted annually by the increase
in the salary structure for eligible employees.
Former LTIP participants had an opening MIP account balance. It was equal
to LTIP amounts theoretically earned for 1991 and 1992 which had not been
paid to eligible participants. Employees new to the MIP, either through
promotion or as new hires, will have no beginning account balance.
For 1994, the bonus paid will be equal to the target bonus times an average
of the 1994 and the prior year's bonus multiple, plus or minus any
discretionary adjustment. For 1995 and later years, the bonus paid will be
equal to the target bonus times an average of that year's and the prior 2
years' bonus multiples, plus or minus any discretionary adjustment. The only
condition imposed on these calculations is that payment of the bonus may not
result in a negative ending account balance.
The MIP does not consider the performance rating of an individual when
determining bonuses earned other than to exclude individuals with a
performance rating of 1 or 2. These individuals would earn no bonuses for
the year.
OTHER
50% of incentive dollars paid out will be included in "admissible
compensation" under the Profit Sharing Trust Plan.
Life insurance -- Payouts under the MIP will not have any effect on
the level of life insurance or disability. Coverages will remain as at
present under those programs as "compensation" is defined as base salary and
commissions.
Notwithstanding anything herein to the contrary, payment of all or
part of awards under the MIP that are subject to or otherwise result in
disallowance as deductions for employee remuneration under Section 162(m)
of the Internal Revenue Code of 1986, as amended, shall be withheld as and
to the extent provided by the Board of Directors or the CCOB.
THE COMPANY RESERVES THE RIGHT TO MODIFY, AMEND, OR TERMINATE THE PROGRAM.
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Exhibit 10(c)(viii) to the Annual
Report on Form 10-K of
W.W. Grainger, Inc. for the
year ended December 31, 1994
W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended Effective January 1, 1995)
48
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W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended Effective January 1, 1995)
Article Page
1 PURPOSE AND EFFECTIVE DATE 1
2 DEFINITIONS 1
3 ADMINISTRATION 2
4 ELIGIBILITY 2
5 BENEFITS AND ACCOUNTS 3
6 VESTING 4
7 AMENDMENT AND TERMINATION 5
8 MISCELLANEOUS 5
49
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W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended Effective January 1, 1995)
ARTICLE ONE. PURPOSE AND EFFECTIVE DATE
----------------------------------------
1.1 Purpose of Plan. The purpose of this W.W. Grainger, Inc.
Supplemental Profit Sharing Plan is to provide key executives with profit
sharing and retirement benefits commensurate with their current
compensation unaffected by limitations imposed by the Internal Revenue
Code on qualified retirement plans. The Plan is intended to constitute an
excess benefit plan, as defined in Section 3(36) of ERISA, and a "top hat"
plan, as defined in Section 201(2) of ERISA.
1.2 Effective Date. This Plan was originally established effective
as of January 1, 1983. It was subsequently amended and restated by action
of the Board of Directors on April 29, 1995. The effective date of the
Plan as amended and restated herein is January 1, 1995.
ARTICLE TWO. DEFINITIONS
-------------------------
2.1 Definitions. Whenever used herein, the following terms shall
have the respective meanings set forth below and, when intended, such
terms shall be capitalized.
(a) "Retirement" shall have the same meaning as defined in
paragraphs 7.1(a), (b), and (c) of the Profit-Sharing Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(c) "Committee" shall mean the Compensation Committee of the
Board of Directors of the Company.
(d) 'Company' shall mean W.W. Grainger, Inc., a corporation
organized under the laws of the State of Illinois, and
subsidiaries thereof.
(e) "Disability" shall have the same meaning as defined in
paragraph 7.1(e) of the Profit-Sharing Plan.
(f) "Employee" shall mean any person who is employed by the
Company.
(g) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended from time to time.
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(h) "Participant" shall mean any Employee selected by the
Committee to participate in this Plan pursuant to Article
Four.
(i) "Plan" shall mean this W.W. Grainger, Inc. Supplemental
Profit Sharing Plan.
(j) "Profit-Sharing Plan" shall mean the W.W. Grainger, Inc.
Employees Profit-Sharing Plan as amended from time to time.
2.2 Gender and Number. Except when otherwise indicated by the
context, any masculine term used in this plan also shall include the
feminine; the plural shall include the singular and the singular shall
include the plural.
ARTICLE THREE. ADMINISTRATION
------------------------------
3.1 Administration by Committee. The Plan shall be administered by
the Committee which shall be appointed by the Board of Directors of the
Company from its own members. The membership of the Committee may be
reduced, changed, or increased from time to time in the absolute
discretion of the Board of Directors of the Company.
3.2 Authority of Committee. The Committee shall have the authority
to interpret the Plan, to establish and revise rules and regulations
relating to the Plan, to designate Participants, and to make all
determinations that it deems necessary or advisable for the administration
of the Plan.
ARTICLE FOUR. ELIGIBILITY
--------------------------
4.1 Participants. The Committee shall select the Employee or
Employees who shall participate in this Plan, subject to the limitations
set forth in Section 4.2. Once an Employee is designated a Participant,
he shall remain a Participant for the purposes specified in Section 5.1
and/or Section 5.2 until the earlier of his death, retirement, disability,
or termination of employment.
4.2 Limitations on Eligibility. The Committee may select as
Participants in this Plan only those Employees who are "Eligible
Employees" in the Profit-Sharing Plan (as defined therein) and whose share
of contributions and forfeitures under the Profit-Sharing Plan are limited
by:
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(a) Section 415 of the Code; or
(b) Any other provision of the Code or ERISA, provided that
the Employee is among "a select group of management or
highly compensated Employees" of the Company, within the
meaning of Sections 201, 301, and 401 of ERISA, such that
the Plan with respect to benefits attributable to this
subsection (b) qualifies for a "top hat" exemption from
most of the substantive requirements of Title I of ERISA.
ARTICLE FIVE. BENEFITS AND ACCOUNTS
------------------------------------
5.1 Accounts. An account shall be established for each Participant.
Each year there shall be credited to each Participant's account the
difference between (a) the aggregate amount of Company contributions and
forfeitures which would have been allocated to the account of the
Participant in the Profit-Sharing Plan without regard to the contribution
limitations described in Section 4.2 hereof; and (b) the amount of Company
contributions and forfeitures actually allocated to the account of the
Participant in the Profit-Sharing Plan.
5.2 Earnings Factor. In addition to the credit under Section 5.1, if
any, an earnings factor shall be credited to each Participant's account at
the end of each calendar quarter. Such earnings factor shall be equal to
the rate of return that the Participant's account earned under the Profit-
Sharing Plan for that calendar quarter; provided that the rate of return
for a Participant who no longer has a Profit-Sharing Plan account shall be
based upon the Participant's Profit-Sharing Plan investment allocation
immediately prior to final distribution of his Profit-Sharing Plan
account.
5.3 Disability or Retirement. In the event of a Participant's
termination of employment due to Disability or Retirement, the
Participant's account balance under this Plan shall become payable to the
Participant in the form of five annual installments, provided that an
account balance less than $50,000 shall be paid in a lump sum within
ninety (90) days after the end of the calendar quarter in which
termination occurs.
The amount of each annual installment shall be equal to the quotient
obtained by dividing the value of the Participant's account balance on the
effective date of the related employment termination (and on the date of
each subsequent installment, as appropriate) by the number of years
remaining in the distribution period including that installment. The
Participant's account balance shall continue to accrue earnings, as
specified in Section 5.2, until the entire account balance has been paid.
The first annual installment shall be paid to the Participant within
ninety (90) days after the end of the calendar quarter in which
termination of employment occurs. The remaining four installments shall
be paid in the first calendar quarter of each subsequent year.
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5.4 Termination Before Retirement. In the event of a Participant's
termination of employment for any reason other than death, Disability, or
Retirement, the Participant's vested account balance under this Plan shall
become payable to the Participant in the form of five annual installments,
in accordance with the payment provisions provided in Section 5.3,
provided that an account balance less than $50,000 shall be paid in a lump
sum within ninety (90) days after the end of the calendar quarter in which
termination occurs.
5.5 Death Benefit. In the event of a Participant's death, the
Participant's entire remaining account balance shall be paid in a lump
sum, within ninety (90) days after the end of the calendar quarter in
which such death occurs, to the Participant's beneficiary, as such
beneficiary was designated by the Participant in accordance with the
Company's beneficiary designation procedures.
In the event a Participant dies without having designated a
beneficiary, or with no surviving beneficiary, the Participant's account
balance shall be paid in a lump sum to the Participant's estate within
ninety (90) days after the end of the calendar quarter in which death
occurs.
5.6 Alternative Payment Form. Notwithstanding the payment form
provided in Sections 5.3 and 5.4, a Participant may at any time on or
after his termination of employment petition the Committee to request that
payment of his account balance be made in a form other than five annual
installments. The Committee, at its sole discretion, shall make a binding
determination as to whether such alternative form of payment will be
allowed.
5.7 Termination Before October 1, 1995. Notwithstanding the
foregoing provisions of this Article Five, the account balance of a
Participant who terminates employment for any reason before October 1,
1995 shall be paid at the same time and in the same method of payment as
the Participant's account balance under the Profit-Sharing Plan.
ARTICLE SIX. VESTING
---------------------
Vesting. Subject to Section 8.1, each Participant shall become vested
in his account balance under this Plan at the same rate and at the same
time as he becomes vested in his account balance in the Profit-Sharing
Plan.
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ARTICLE SEVEN. AMENDMENT AND TERMINATION
-----------------------------------------
7.1 Amendment. The Company shall have the power at any time and from
time to time to amend this Plan by resolution of its Board of Directors,
provided that no amendment shall be adopted the effect of which would be
to deprive any Participant of his vested interest in his account under
this Plan.
7.2 Termination. The Company reserves the right to terminate this
Plan at any time by resolution of its Board of Directors. Subject to
Section 8.1, upon termination of this Plan, each Participant shall become
fully vested in his account balance and such account balance shall become
payable at the same time and in the same manner as provided in Article
Five.
ARTICLE EIGHT. MISCELLANEOUS
-----------------------------
8.1 Funding. This Plan shall be unfunded. No contributions shall be
made to any separate funding vehicle. The Company may set up reserves on
its books of account evidencing the liability under this Plan. To the
extent that any person acquires an account balance hereunder or a right to
receive payments from the Company, such right shall be no greater than the
right of a general unsecured creditor.
8.2 Limitation of Rights. Nothing in the Plan shall be construed to:
(a) Give any Employee any right to participate in the Plan
except in accordance with the provisions of the Plan;
(b) Limit in any way the right of the Company to terminate an
Employee's employment; or
(c) Evidence any agreement or understanding, express or implied,
that the Company will employ an Employee in any particular
position or at any particular rate of remuneration.
8.3 Nonalienation. No benefits under this Plan shall be pledged,
assigned, transferred, sold or in any manner whatsoever anticipated,
charged, or encumbered by an Employee, former Employee, or their
beneficiaries, or in any manner be liable for the debts, contracts,
obligations, or engagements of any person having a possible interest in
the Plan, voluntary or involuntary, or for any claims, legal or equitable,
against any such person, including claims for alimony or the support of
any spouse.
8.4 Controlling Law. This Plan shall be construed in accordance with
the laws of the State of Illinois in every respect, including without
limitation, validity, interpretation, and performance.
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<PAGE>
8.5 Text Controls. Article headings are included in the Plan for
convenience of reference only, and Plan is to be construed without any
reference to such headings. If there is any conflict between such
headings and the text of the Plan, the text shall control.
IN WITNESS WHEREOF, the Company has caused this Plan, as amended and
restated herein, to be signed and attested by its duly qualified officers
and caused its corporate seal to be hereunto affixed on this 29th day of
April, 1995. ----
------
W.W. Grainger, Inc.
By: /s/ D.W. Grainger
---------------------
Chairman
Attest:
/s/ J.M. Baisley
------------------------
Secretary
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Exhibit 10(c)(ix) to the
Annual on Form 10-K of
W.W. Grainger, Inc. for the
year ended December 31, 1994
W.W. GRAINGER, INC.
PLAN FOR PAYMENT OF DIRECTORS FEES
(As Amended Effective January 1, 1995)
RESOLVED, that each Director entitled to be paid Director's fees for all or
any part of any year in which such Director serves in a Director's capacity
may elect to receive such fees under one of the following two methods:
(a) One-quarter of the applicable annual and committee chairman
retainer fees payable in advance on or about July 1, October 1, January 1,
and April 1; and applicable Board and Committee attendance fees payable
in arrears on or about July 1, October 1, December 20, and April 1; or
(b) An irrevocable written election filed with the Secretary of the
Corporation at least 30 days prior to any annual shareholders' meeting to
defer receipt of all or a specified percentage of applicable fees until after
he ceases to be a Director. In this election, the Director also shall specify
whether payment is to be made in up to five annual installments, or in a
lump sum.
If any Director elects under (b) above to defer receipt of his fees until
after he ceases to be a Director, such fees shall be paid to the Director in
the form specified by the Director at the time of making the deferral
election.
However, at any time the Director may petition the Compensation
Committee of the Board of Directors, excluding such Director if he is on the
Compensation Committee, to request payment of his deferred fees in a form
other than that specified in his deferral election. The Compensation
Committee, at its sole discretion, shall make a binding determination as to
whether such alternative form of payment will be allowed.
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<PAGE>
In all cases, payment shall begin or be made in full within ninety (90) days
after the end of the calendar quarter in which the Director ceases to be a
member of the Company's Board of Directors. Remaining installments, if
any, will be paid in the first calendar quarter of each subsequent year.
In the event of the death of a Director before receipt of all fees payable to
such Director, the entire unpaid fees for the Director's services shall be
paid to such beneficiary or beneficiaries as may be designated in writing by
the Director or, in the absence of such designation, to the Director's spouse
or estate, at the discretion of the Committee.
In the event a Director makes one or more deferral elections under (b)
above, all deferred fees shall accrue earnings until paid out in full.
Earnings shall be accrued at the end of each calendar quarter at the 10-year
U.S. Treasury constant maturity yield
FURTHER RESOLVED, that this Corporation shall not be required to fund
or otherwise provide for any unpaid fees under (b) above and the electing
Director(s) shall have only a contractual
FURTHER RESOLVED, that each Director shall be deemed to have elected
to be paid in accordance with method (a) unless he files an election to
receive such fees under method (b).
FURTHER RESOLVED, that any election made hereunder shall continue to
be effective for as long as the electing Director remains a Director of this
Corporation unless rescinded by written notice to the Secretary of the
Corporation at least 30 days prior to any subsequent annual shareholders'
meeting, such notice to be effective upon his election as a Director at said
meeting.
57
