61 PAGES COMPLETE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1995
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.)
455 Knightsbridge Parkway, Lincolnshire, Illinois 60069-3620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 847/793-9030
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 Purchase Rights New York Stock Exchange
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 $2,835,465,170 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 4, 1996.
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 50,961,490 shares outstanding as of March 4, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 24, 1996 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.)
(1)
<PAGE>
CONTENTS
Page
PART I
Item 1: BUSINESS............................................. 3-6
THE COMPANY........................................ 3
GRAINGER........................................... 3-5
LAB SAFETY SUPPLY.................................. 5
PARTS COMPANY OF AMERICA........................... 5
INDUSTRY SEGMENTS.................................. 5
COMPETITION........................................ 5
EMPLOYEES.......................................... 6
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 SCHEDULES,
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
(2)
<PAGE>
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 leader in the nationwide distribution of maintenance, repair,
and operating supplies, and a provider of related information, serving the
commercial, industrial, contractor, and institutional markets. W.W. Grainger,
Inc. 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 1995 the Company completed the integration of its Allied Safety (safety
products) unit and continued the integration of its Bossert Industrial Supply
(production consumable products) unit into the core branch-based business. The
Company also completed the consolidation of its administrative support
functions. With the completion of the integration of Bossert Industrial Supply,
the Company will operate three business units: Grainger, the core branch-based
business (a nationwide distributor of maintenance, repair, and operating (MRO)
supplies, and a provider of related information), Lab Safety Supply (a direct
marketer of safety equipment), and Parts Company of America (a distributor of
spare and replacement parts).
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.
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 information as well as recommendations of its employees,
customers, suppliers, and other factors. Before being added to the General
Catalog, 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 industrial and commercial equipment and supplies. It distributes motors, HVAC
equipment, lighting, hand and power tools, pumps, electrical equipment, as well
as many other items.
Grainger now provides support functions and 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, Employee Development, and
Treasury Services.
Grainger is an important resource for both product and procurement process
information. Grainger provides technical information on products as well as
information on historic usage of products to customers. Grainger 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 transactions during 1995 averaged $133 and were
made to more than 1,300,000 customers. Sales to the largest single customer,
General Motors Company, were 0.7% of sales. Grainger estimates that
approximately 30% of 1995 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 generally consisted of
other well recognized brands.
(3)
<PAGE>
Grainger purchases from more than 1,900 product suppliers for its General
Catalog, most of which are manufacturers, and numerous other suppliers in
support of Grainger Integrated Supply Operations (GISO). The largest supplier in
1995, a diversified manufacturer through 23 of its divisions, accounted for
11.0% 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 (344 at December 31, 1995). An average branch has 15
employees and handles about 250 transactions per day. During 1995, Grainger
completed the upgrade of the hardware that supports its branch computer systems.
The new hardware has the capacity to accept enhancements to the Company's order
processing capabilities. During 1995, an average of 89,600 sales transactions
were completed daily. Each branch tailors its inventory to local customer
preferences and actual product demand. In 1995, Grainger invested more than
$53,000,000 in the continuation of its branch optimization program, which
consists of new branches, relocated branches, and additions to branches.
Grainger opened three additional Zone Distribution Centers (ZDCs) and now has
six in operation. 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 reducing order and receipt complexity from the branch,
greater scale within the distribution system is created.
Large computer controlled stocks which are maintained at two Regional
Distribution Centers (RDCs), located in Greenville County, South Carolina, and
Kansas City, Missouri, and a National Distribution Center (NDC) in the Chicago
area provide the branches and customers with protection against variable demand
and delayed factory deliveries. During 1995, Grainger transformed the Chicago
area RDC into a NDC. The NDC is a centralized storage and shipment facility for
slower moving inventory items.
During 1995, Grainger completed the integration of Allied Safety into the core
branch-based business in order to enhance its position as a national full-line
supplier of safety products. Similar integration efforts for Bossert Industrial
Supply (production consumable products) are in process and are planned to be
completed during 1996.
In 1995 the Company continued to enhance the capabilities of GISO. As an
integrated supplier, GISO provides access to over three million products and
numerous services, thereby assisting its customers to reduce the number of MRO
suppliers and streamline their procurement processes. GISO extends the product
reach of the Grainger General Catalog by offering the full product lines of
strategic suppliers. Grainger has agreements with "Best-in-Class" distributors,
which provide depth in a particular product grouping. These distributors sell
their products through GISO as the integrator, while continuing to provide
technical assistance directly to the customer.
In 1995, Grainger developed relationships which go beyond these supply
agreements. "Alliance Partners" participate in the full integration of technical
support, consolidated invoicing, and consolidated payment. These alliances
between Grainger and their Alliance Partners marked a milestone in the
development of the MRO supply marketplace.
Integrated supply customers lower their MRO costs by reengineering internal
business processes and adopting new materials management systems and practices.
An important part of Grainger's solution is Grainger Consulting Services, which
provides customers with expertise in process mapping, process reengineering,
benchmarking, inventory management, supplier management, and systems analysis.
During 1995, Grainger Consulting Services enhanced its capabilities, while
working on numerous engagements with Fortune 500 companies.
The Grainger National Accounts Program focuses on meeting the needs of large
multi-site businesses by simplifying customers' MRO purchasing activities and
providing consistent service and pricing to each customer location. Daily sales
to National Account customers increased 22% on a comparable basis in 1995 over
the prior year. National Account relationships have been established with about
400 of the nation's largest companies.
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 1,488 sales
representatives, market specialists, and national account specialists at
December 31, 1995.
(4)
<PAGE>
Grainger uses direct marketing for customers who are not called on by sales
representatives. Grainger's capabilities provide these customers, who are
usually small to medium-sized businesses, with a low cost solution for their MRO
needs.
An important selling tool is the General Catalog, which has been published
continuously since 1927 and has grown to 3,588 pages listing over 67,000 items
together with extensive technical and application data. For 1995, approximately
2,000,000 copies were published. The most current edition was issued in January
1996.
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. More than 50,000 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.
Grainger was one of the first MRO suppliers to establish a Web site on the
internet. The Web site contains useful information about Grainger products and
services. Customers can select products from Grainger's Web site catalog,
"WebCat", a format that is similar to the Electronic Catalog.
LAB SAFETY SUPPLY, INC. (LAB SAFETY) AND PARTS COMPANY OF AMERICA (PCA)
Lab Safety is a leading national direct marketer of safety products, serving
about 350,000 customers from its facilities in Janesville, Wisconsin. Lab Safety
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. The current Lab Safety General Catalog, its
primary selling tool, has over 1,100 pages, listing approximately 34,000 items.
During 1995, an average of 4,000 sales transactions were completed daily.
PCA continues to expand its distribution of spare and replacement parts. PCA
distributes approximately 190,000 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. This provides the customer fast and easy access to name brand parts
for most products found in the Grainger General Catalog, as well as for many
other products. During 1995, an average of 2,300 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: 1995,
$1,669,243,000; 1994, $1,534,751,000; 1993, $1,376,664,000; 1992,
$1,310,538,000; and 1991, $1,216,554,000.
COMPETITION
The Company faces competition in all the markets 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,
procurement process consulting services and other efforts to assist customers in
lowering their total MRO costs. 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.
(5)
<PAGE>
EMPLOYEES
As of December 31, 1995, the Company had 11,853 employees, of whom 9,881 were
full-time and 1,972 were part-time or temporary. The Company has never had a
major work stoppage and believes that its employee relations are good.
ITEM 2: PROPERTIES
As of December 31, 1995, Grainger branch locations totaled 7,437,000 square
feet, an increase of approximately 2.7% over 1994. 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 22,000 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
& National Distribution 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) 6 Zone Distribution Centers 1,345,000
Nationwide (2) 344 Grainger branch locations 7,437,000
Nationwide (3) Other Facilities 1,605,000
----------
Total square feet 14,363,000
==========
In addition, the Company plans to construct an office facility to house a large
portion of the Company's Chicago-area office workforce on owned property in Lake
County, Illinois. Construction of the facility is expected to be completed in
1999.
- -------------------------------------------------------------------------------
(1) These facilities are either owned or leased with leases expiring between
1996 and 1999. The owned facilities are not subject to any mortgages.
(2) Grainger branches consist of 271 owned and 73 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.
(6)
<PAGE>
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 1995.
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
Name and Age Occupations and Employment During the Past Five Years
- ----------------------- -----------------------------------------------------
James M. Baisley (63) 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 (46) 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 (43) 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 (54) Vice Chairman. Mr. Fluno is a member of the Office of
the Chairman.
Gary J. Goberville (49) Vice President, Human Resources. Before joining the
Company in 1995, Mr. Goberville served as an executive
with GenCorp, Inc.
David W. Grainger (68) Chairman of the Board, and from 1992 to 1994,
President. Mr. Grainger is a member of the Office of
the Chairman.
Richard H. Hantke (57) Vice President, Distribution Operations.Prior to
assuming this position in 1995, Mr.Hantke served the
Grainger Division in a similar capacity.
Richard L. Keyser (53) President, a position assumed in 1994, and Chief
Executive Officer, a position assumed in 1995. Other
positions in which he served during the past five
years were Chief Operating Officer of the Company,
Executive Vice President of the Company, and President
of the Grainger Division. Mr. Keyser is a member of
the Office of the Chairman.
(7)
<PAGE>
Michael R. Kight (47) 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.
P. Ogden Loux (53) 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 (53) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995 after serving as
Vice President and Treasurer.
John J. Rozwat (57) Vice President and General Manager, Direct Sales,
positions assumed in 1995 after serving the Grainger
Division as Vice President, Sales.
James T. Ryan (37) Vice President, Information Services, a position
assumed in 1994 after serving as President, 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 (38) Vice President and General Manager, Direct Marketing,
positions assumed in 1995 after serving the Grainger
Division as Vice President, Marketing.
John W. Slayton, Jr.(50) Senior Vice President, Product Management, a position
assumed in 1995 after serving as Vice President,
Product Management of the Grainger Division.
(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 1995 and 1994, are shown below.
Prices
Quarters High Low Dividends
- -------------------------------------------------------------------------------
1995 First $64 3/8 $55 3/4 $0.20
Second 63 7/8 56 1/8 0.23
Third 61 7/8 55 1/2 0.23
Fourth 67 5/8 58 3/8 0.23
- -------------------------------------------------------------------------------
Year $67 5/8 $55 1/2 $0.89
- -------------------------------------------------------------------------------
1994 First $68 $56 1/2 $0.18
Second 69 1/8 58 7/8 0.20
Third 67 57 0.20
Fourth 59 3/8 51 1/2 0.20
- --------------------------------------------------------------------------------
Year $69 1/8 $51 1/2 $0.78
- -------------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 4, 1996 was 2,100.
ITEM 6: SELECTED FINANCIAL DATA
Years Ended December 31,
(In thousands of dollars except for per share amounts)
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
Net sales $3,276,910 $3,023,076 $2,628,398 $2,364,421 $2,077,235
Net earnings before
cumulative effect
of accounting changes 186,665 127,874 149,267 137,242 127,737
Cumulative effect of
accounting changes -- -- (820) -- --
Net earnings 186,665 127,874 148,447 137,242 127,737
Net earnings per common
and common equivalent
share before cumulative
effect of accounting
changes 3.64 2.50 2.88 2.58 2.37
Cumulative effect of
accounting changes -- -- (0.02) -- --
Net earnings per common
and common equivalent
share 3.64 2.50 2.86 2.58 2.37
Total assets 1,669,243 1,534,751 1,376,664 1,310,538 1,216,554
Long-term debt 8,713 1,023 6,214 6,936 11,327
Cash dividends paid
per share $0.89 $0.78 $0.705 $0.65 $0.61
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, 1995, 1994, 1993, and 1992, and the percentage of increase
(decrease) in such items in 1995, 1994, and 1993 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
------------------------------- --------------------
1995 1994 1993 1992 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Net sales........ 100.0% 100.0% 100.0% 100.0% 8.4% 15.0% 11.2%
Cost of
merchandise sold 63.9 64.5 62.9 63.6 7.4 18.0 9.9
Operating expenses 26.5 27.9 27.6 26.7 3.0 16.3 14.5
Other deductions,
net............. 0.1 0.1 0.1 0.1 48.9 30.5 76.3
Income taxes..... 3.8 3.3 3.8 3.8 24.4 0.1 12.0
Net earnings..... 5.7% 4.2% 5.6% 5.8% 46.0% (13.9)% 8.2%
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 5.1%, 19.3%, and 8.5% for 1995, 1994, and 1993, respectively.
NET SALES
The 1995 Company net sales increase of 8.4% was primarily volume related. This
increase was affected by 1995 having one less sales day than 1994 (on a daily
basis, net sales increased 8.8%). The volume increase can be explained primarily
by the Company's market initiatives and the growth in the national economy. The
Company's market initiatives included new product additions, the expansion of
branch facilities, adding Zone Distribution Centers (ZDCs), and the National
Accounts program. The core business' National Accounts program showed strong
growth for the year. Daily sales to National Account customers increased about
22% on a comparable basis. The core business experienced selling price increases
of about 1.5% when comparing 1995 with 1994. All geographic areas for the core
business contributed to the sales growth, with the percent increases for regions
east of the Mississippi being slightly higher than for regions in the west.
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% on a comparable basis over 1993 levels.
NET EARNINGS
Net earnings for 1995 increased 46.0% over 1994 including the effects of after
tax restructuring charges recorded in 1994 (see 1994 Net earnings discussion
below). Excluding the effect of these restructuring charges, net earnings
increased 5.1% year over year. This increase was less than the sales increase
primarily due to operating expenses increasing at a faster rate than net sales
offset by slightly higher gross profit margins. Operating expenses increased
faster than sales primarily due to the Company's continuing investment in the
business infrastructure needed to support its market initiatives, increased
employee benefits costs, and increased freight-out expenses. Increased
freight-out expenses resulted from proportionally more shipments qualifying for
prepaid freight and proportionally more orders being transferred within the Zone
Distribution facilities/branch network. This partially resulted in orders being
shipped longer distances. These incremental expenses, by policy, were not billed
to customers. Partially offsetting these increases were lower bad debt expenses;
payroll costs increasing somewhat slower than the rate of sales growth;
(10)
<PAGE>
and decreased amortization of goodwill and other acquisition related costs
associated with acquired and start-up businesses. The Company's gross profit
margin increased by 0.06 percentage points when comparing the full years of 1995
and 1994, excluding the effects of a restructuring charge of $16,308,000 (0.54
percentage points of gross profit) associated with inventory write-downs taken
during 1994. This slight increase was principally related to a favorable product
mix as sales of non-seasonal products grew at a higher rate than the sales of
seasonal products. The sales of seasonal products have historically had lower
than average gross profit margins. Partially offsetting the favorable impacts
was an unfavorable change in selling price category mix, which primarily
resulted from the growth in sales to National Accounts.
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. 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.
FINANCIAL CONDITION
Working capital was $618,524,000 at December 31, 1995 compared to $504,595,000
at December 31, 1994 and $442,525,000 at December 31, 1993. The ratio of current
assets to current liabilities was 2.4, 2.1, and 2.2 at such dates.
Net cash flows from operations of $126,285,000 in 1995, $191,382,000 in 1994,
and $162,498,000 in 1993 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.
1995 1994 1993
------ ------ ------
(In thousands of dollars)
Land, buildings, structures, and improvements..$55,280 $73,342 $56,393
Furniture, fixtures, and other equipment....... 56,655 47,015 42,012
-------- -------- --------
Total........................................ $111,935 $120,357 $98,405
======== ======== ========
The Company did not repurchase any shares of common stock during 1995 or 1994.
The Company did repurchase 1,777,000 shares in 1993. 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 $45,227,000 in 1995, $39,570,000 in 1994,
and $36,272,000 in 1993.
Internally generated funds have been the primary source of working capital and
funds for expansion (including capital expenses relating to the facilities
optimization program), supplemented by debt as circumstances dictated. In
addition to continuing facilities optimization efforts and infrastructure
development to support current initiatives, long-term cash requirements are
anticipated for the consolidation of Chicago-area offices in the office facility
to be constructed in Lake County, Illinois. The Company had no material
financing commitments outstanding at December 31, 1995.
(11)
<PAGE>
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. In addition to internally generated funds, the
Company has various sources of financing available, including commercial paper
sales and bank borrowings under lines of credit and otherwise. Total debt as a
percent of shareholders' equity was 5%, 4%, and 7%, at December 31, 1995, 1994,
and 1993, respectively.
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 24, 1996, 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
24, 1996, 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 24, 1996, 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 24, 1996, and, to the extent required, is
incorporated herein by reference.
(12)
<PAGE>
PART IV
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, incorporated by reference to Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
(b) By-laws as amended October 25, 1995, incorporated by
reference to Exhibit 3(ii) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(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>
Exhibit Index
- -------------
39-46 (iii) Executive Death Benefit Plan.
(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.
47-51 (vii) Summary Description of Corporate Management
Incentive Program Based on Improved Economic
Earnings.
52-59 (viii)Supplemental Profit Sharing Plan.
60-61 (ix) Plan for Payment of Directors' Fees.
37 (11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.
(21) Subsidiaries of the Company.
(23) Consent of Independent Certified Public Accountants. See Index
to Financial Statements and Supplementary Data.
38 (27) Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 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 25, 1996
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 (a Principal Executive Officer,
Director) a Principal Financial Officer and a
Director)
By:R. L. Keyser By:R. D. Pappano
- --------------- ----------------
R. L. Keyser R. D. Pappano
President and Chief Executive Officer Vice President, Financial Reporting
(a Principal Executive Officer and and Investor Relations
a Director) (Principal Accounting Officer)
George R. Baker March 25, 1996 James D. Slavik March 25, 1996
- --------------- ---------------
George R. Baker James D. Slavik
Director Director
Robert E. Elberson March 25, 1996 Harold B. Smith March 25, 1996
------------------ ---------------
Robert E. Elberson Harold B. Smith
Director Director
Wilbur H. Gantz March 25, 1996 Fred L. Turner March 25, 1996
--------------- --------------
Wilbur H. Gantz Fred L. Turner
Director Director
John W. McCarter, Jr. March 25, 1996 Janiece S. Webb March 25, 1996
- --------------------- ---------------
John W. McCarter, Jr. Janiece S. Webb
Director Director
(15)
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1995, 1994, and 1993
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
(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, 1995, 1994, and 1993, 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, 1995, 1994, and 1993, 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, 1995, 1994, and 1993. 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 2, 1996
(17)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
------------------------------
ASSETS 1995 1994 1993
---- ---- ----
CURRENT ASSETS
Cash and cash equivalents .............. $ 11,460 $ 15,292 $ 2,572
Accounts receivable, less allowances for
doubtful accounts of $14,229 for 1995,
$15,333 for 1994, and $13,573 for 1993 369,576 345,793 299,856
Inventories ............................ 602,639 519,966 466,214
Prepaid expenses ....................... 11,746 14,233 10,832
Deferred income tax benefits ........... 67,239 68,362 44,408
------ ------ ------
Total current assets ............. 1,062,660 963,646 823,882
PROPERTY, BUILDINGS, AND EQUIPMENT
Land ................................... 123,431 115,497 100,903
Buildings, structures, and improvements 472,154 431,184 381,716
Machinery and equipment ................ 11,940 11,705 11,567
Furniture, fixtures, and other equipment 290,175 251,831 222,569
------- ------- -------
897,700 810,217 716,755
Less accumulated depreciation
and amortization ..................... 379,349 341,075 307,372
------- ------- -------
Property, buildings, and
equipment--net ................... 518,351 469,142 409,383
OTHER ASSETS ............................. 88,232 101,963 143,399
------ ------- -------
TOTAL ASSETS ............................. $1,669,243 $1,534,751 $1,376,664
========== ========== ==========
(18)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)
December 31,
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 1993
---- ---- ----
CURRENT LIABILITIES
Short-term debt ............................ $23,577 $11,134 $34,298
Current maturities of long-term debt ....... 23,241 26,449 21,662
Trade accounts payable ..................... 204,925 226,459 178,114
Accrued contributions to employees'
profit sharing plans ..................... 53,618 50,020 44,587
Accrued expenses ........................... 115,310 122,339 83,923
Income taxes ............................... 23,465 22,650 18,773
------ ------ ------
Total current liabilities ............ 444,136 459,051 381,357
LONG-TERM DEBT (less current maturities) ..... 8,713 1,023 6,214
DEFERRED INCOME TAXES ........................ 8,539 15,177 23,017
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .... 28,746 26,695 24,171
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--1995, 1994,
and 1993, $5 par value--authorized,
6,000,000 shares, issued and outstanding,
none...................................... -- -- --
Common Stock--$0.50 par value--authorized,
150,000,000 shares, 1995, 1994, and 1993;
issued and outstanding, 50,894,629 shares,
1995, 50,749,681 shares, 1994, and
50,684,983 shares, 1993 .................. 25,447 25,375 25,342
Additional contributed capital ............. 86,548 81,796 79,364
Unearned restricted stock compensation ..... (19) (61) (192)
Retained earnings .......................... 1,067,133 925,695 837,391
--------- ------- -------
Total shareholders' equity ........... 1,179,109 1,032,805 941,905
--------- --------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .......................$1,669,243 $1,534,751 $1,376,664
========== ========== ==========
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,
----------------------------
1995 1994 1993
---- ---- ----
Net sales ................................. $3,276,910 $3,023,076 $2,628,398
Cost of merchandise sold .................. 2,095,552 1,951,321 1,653,534
--------- --------- ---------
Gross profit ....................... 1,181,358 1,071,755 974,864
Warehousing, marketing, and
administrative expenses ................. 865,067 787,137 721,904
Restructuring charges ..................... -- 53,082 800
------- ------ ---
Total operating expenses ........... 865,067 840,219 722,704
------- ------- -------
Operating earnings ................. 316,291 231,536 252,160
Other income or (deductions)
Interest income ......................... 162 17 480
Interest expense ........................ (4,260) (1,870) (1,727)
Unclassified--net ....................... (44) (928) (884)
--- ---- ----
(4,142) (2,781) (2,131)
------ ------ ------
Earnings before income taxes ....... 312,149 228,755 250,029
Income taxes .............................. 125,484 100,881 100,762
------- ------- -------
Net earnings before cumulative
effect of accounting changes ..... 186,665 127,874 149,267
Cumulative effect of accounting changes ... -- -- (820)
------- ------- ----
Net earnings ....................... $186,665 $127,874 $148,447
======== ======== ========
Net earnings per common and common
equivalent share before cumulative
effect of accounting changes ............ $3.64 $2.50 $2.88
Cumulative effect of accounting changes ... -- -- (0.02)
----- ----- ------
Net earnings per common and common
equivalent share ........................ $3.64 $2.50 $2.86
===== ===== =====
Average number of common and
common equivalent shares outstanding .... 51,241,217 51,226,476 51,910,906
========== ========== ==========
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)
Unearned
Additional Restricted
Common Contributed Stock Retained
Stock Capital Compensation Earnings
----- ------- ------------ --------
Balance at January 1, 1993............. $26,188 $79,050 $(299) $826,270
Exercise of stock options.............. 41 2,821 -- --
Purchase of 1,776,700 shares of
Common Stock......................... (888) (2,712) -- (101,054)
Issuance of 2,700 shares of
restricted Common Stock.............. 1 154 (155) --
Amortization of unearned
restricted 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 unearned restricted
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
Exercise of stock options.............. 72 4,746 -- --
Amortization of unearned restricted
stock compensation................... -- 6 42 --
Net earnings........................... -- -- -- 186,665
Cash dividends paid ($0.89 per share).. -- -- -- (45,227)
------ ------- ----- -------
Balance at December 31, 1995........... $25,447 $86,548 $(19) $1,067,133
======= ======= ==== ==========
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,
------------------------
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net earnings ....................................$186,665 $127,874 $148,447
Provision for losses on accounts receivable ..... 7,780 9,928 8,147
Depreciation and amortization:
Property, buildings, and equipment ............ 57,760 49,795 40,576
Intangibles and goodwill ...................... 13,090 14,534 15,395
Restructuring charges--non-cash ................. -- 68,363 75
Change in operating assets and liabilities,
net of effect of restructuring charges:
(Increase) in accounts receivable ............. (31,563) (56,268) (42,593)
(Increase) in inventories ..................... (82,673) (70,060) (33,981)
Decrease (increase) in prepaid expenses ....... 2,487 (3,401) 1,024
(Decrease) increase in trade accounts payable . (21,534) 48,345 26,216
(Decrease) increase in other current
liabilities................................... (3,431) 25,393 (554)
Increase in current income taxes payable ...... 815 3,878 9,132
Increase in accrued employment related
benefits cost................................. 2,051 2,524 8,268
(Decrease) in deferred income taxes ........... (5,515) (31,794) (22,441)
Other--net ...................................... 353 2,271 4,787
--- ----- -----
Net cash provided by operating activities ......... 126,285 191,382 162,498
Cash flows from investing activities:
Additions to property, buildings, and
equipment .....................................(111,935) (120,357) (98,405)
Proceeds from sale of property, buildings,
and equipment ................................. 4,918 2,573 533
Other--net ...................................... 378 (240) 866
------- -------- -------
Net cash (used in) investing activities ...........(106,639) (118,024) (97,006)
(22)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands of dollars)
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Net increase (decrease) in short-term debt... $12,443 $(23,164) $34,298
Proceeds from long-term debt................. 5,665 775 1,400
Long-term debt payments...................... (1,183) (1,179) (5,414)
Stock options exercised...................... 2,147 1,155 1,178
Tax benefit of stock incentive plan.......... 2,677 1,345 1,735
Purchase of Common Stock..................... -- -- (104,654)
Cash dividends paid.......................... (45,227) (39,570) (36,272)
------- ------- -------
Net cash (used in) financing activities........ (23,478) (60,638) (107,729)
------- ------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS......................... (3,832) 12,720 (42,237)
Cash and cash equivalents at beginning of year. 15,292 2,572 44,809
------ ----- ------
Cash and cash equivalents at end of year....... $11,460 $15,292 $2,572
======= ======= ======
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, 1995, 1994, and 1993
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is a leader in the nationwide distribution of maintenance, repair,
and operating supplies, and a provider of related information, serving the
commercial, industrial, contractor, and institutional markets. 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.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
estimates of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note 14) and SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
(see Note 9). In the fourth quarter of 1993, retroactive to January 1, 1993, the
Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits" (see Note 9).
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.
The principal estimated useful lives used in determining depreciation are as
follows:
Buildings, structures, and improvements............. 10 to 45 years
Machinery and equipment................. ........... 5 to 10 years
Furniture, fixtures, and other equipment............ 3 to 10 years
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 $2,136,000, $1,929,000, and $1,258,000
in 1995, 1994, and 1993, respectively.
PURCHASED TAX BENEFITS
The Company 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.
(24)
<PAGE>
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 purchases.
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 its
financial, information services, and human resource functions. In the fourth
quarter of 1994, 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 per share amounts)
Inventory writedowns--charged to cost of merchandise 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
===== =====
For 1995, amounts charged against expense accruals included in the 1994
restructuring charges were not material.
NOTE 3--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:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Interest (net of amount capitalized)....... $4,167 $1,836 $1,837
====== ====== ======
Income taxes............................... $127,041 $127,039 $106,085
======== ======== ========
(25)
<PAGE>
NOTE 4--CASH
Checks outstanding of $40,027,000, $37,088,000, and $16,521,000 are included in
Trade accounts payable at December 31, 1995, 1994, and 1993, respectively.
NOTE 5--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 6--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $194,854,000, $184,364,000, and $179,450,000 higher
than reported at December 31, 1995, 1994, and 1993, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used.
NOTE 7--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. Effective January 1, 1996, impairments will
be recognized in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," if applicable.
Other assets at December 31, 1995, 1994, and 1993 were:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Customer lists.................... $93,857 $93,857 $102,015
Goodwill.......................... 25,635 25,635 46,283
Other intangibles................. 3,475 3,875 6,472
----- ----- -----
122,967 123,367 154,770
Less accumulated amortization..... 50,356 37,266 29,528
------ ------ ------
72,611 86,101 125,242
Sundry............................ 15,621 15,862 18,157
------ ------ ------
Total............................. $88,232 $101,963 $143,399
======= ======== ========
Other assets decreased in 1994 primarily due to the revaluation of goodwill and
other intangibles that occurred in conjunction with the restructuring charges as
described in Note 2.
(26)
<PAGE>
NOTE 8--SHORT-TERM DEBT
During 1995, 1994, and 1993, the Company borrowed funds to finance working
capital needs. The following summarizes information concerning short-term debt:
1995 1994 1993
---- ---- ----
Bank Notes (In thousands of dollars)
- ----------
Outstanding at December 31........................ $3,186 $3,739 $22,316
Maximum month-end balance during the year......... $64,853 $27,170 $27,725
Average amount outstanding during the year........ $22,576 $9,973 $8,493
Weighted average interest rates during the year... 6.2% 4.6% 3.4%
Weighted average interest rates at December 31.... 6.2% 8.0% 3.5%
Commercial Paper
- ----------------
Outstanding at December 31........................ $20,391 $7,395 $11,982
Maximum month-end balance during the year......... $79,734 $49,985 $28,581
Average amount outstanding during the year........ $43,357 $23,143 $7,935
Weighted average interest rates during the year... 6.0% 4.4% 3.2%
Weighted average interest rates at December 31.... 5.8% 6.3% 3.3%
The Company had available lines of credit of $54,500,000 at December 31, 1995,
$54,000,000 at December 31, 1994, and $28,500,000 at December 31, 1993. Of the
total available at December 31, 1995, $50,000,000 was in place to support
commercial paper, and carried commitment fees of 1/8%. There were no borrowings
under these credit lines. The remaining $4,500,000 credit line at December 31,
1995 was used to support working capital needs. This line carried a commitment
fee of 1/8% and an additional fee of 1/8% on the unused portion.
NOTE 9--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 $47,323,000, $46,117,000, and $42,056,000 for the years ended December 31,
1995, 1994, and 1993, 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.
The amount charged to operating expense for Postretirement benefits was
$3,488,000, $3,153,000, and $2,600,000 for the years ended December 31, 1995,
1994, and 1993, respectively. Components of the expense were:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Service cost........................ $1,973 $1,887 $1,566
Interest cost....................... 2,025 1,695 1,553
Actual return on assets............. (2,282) (17) (472)
Amortization of transition asset
(22 year amortization)............ (143) (143) (143)
Deferred asset gain (loss).......... 1,913 (339) 96
Unrecognized (gain) loss............ (80) 29 --
Prior service cost.................. 82 41 --
------ ------ -----
$3,488 $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 6.1%, which is net of a 40.5% tax rate.
The funding of the trust is an estimated amount which is intended to allow the
maximum deductible contribution under the Internal Revenue Code of 1986, as
amended, and was $2,409,000, $737,000, and $211,000 for the years ended December
31, 1995, 1994, and 1993, respectively.
A reconciliation of funded status as of December 31, 1995, 1994, and 1993 is as
follows:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Accumulated Postretirement Benefit Obligation (APBO):
Retirees and their dependents.................. $(3,852) $(3,715) $(4,044)
Fully eligible active plan participants........ (1,767) (1,331) (879)
Other active plan participants................. (27,863) (17,299) (17,165)
------- ------- -------
Total APBO....................................... (33,482) (22,345) (22,088)
Plan assets at fair value........................ 10,288 6,199 5,993
------- ------- ------
Funded status.................................... (23,194) (16,146) (16,095)
Unrecognized transition asset.................... (2,713) (2,856) (2,999)
Unrecognized net loss (gain)..................... 2,464 (3,443) 823
Unrecognized prior service cost.................. 1,677 1,758 --
------- ------- ------
Accrued postretirement benefits cost.............$(21,766) $(20,687) $(18,271)
======== ======== ========
In determining the APBO as of December 31, 1995, the assumed weighted average
discount rate used was 7.5%. To determine the APBO as of December 31, 1994, the
assumed weighted average discount rate 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 1996 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, 1995 would increase by $7,283,000.
The aggregate of the service cost and interest cost components of the 1995 net
periodic postretirement benefits expense would increase by $996,000.
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's postemployment 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.
(28)
<PAGE>
NOTE 10--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Industrial development revenue bonds.... $26,150 $26,150 $26,225
Other................................... 5,804 1,322 1,651
----- ----- -----
31,954 27,472 27,876
Less current maturities................. 23,241 26,449 21,662
------ ------ ------
$8,713 $1,023 $6,214
====== ====== ======
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. In
addition, $12,045,000 of these bonds had an unsecured liquidity facility
available at December 31, 1995 for which the Company compensated a bank through
a commitment fee of .07%. There were no borrowings related to this facility at
December 31, 1995. The Company classified $21,255,000, $26,150,000, and
$21,255,000 of bonds currently subject to redemption options in current
maturities of long-term debt at December 31, 1995, 1994, and 1993, respectively.
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1995 are as follows:
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
------------ ----------
(In thousands of dollars)
1996................................ $1,986 $21,255
1997................................ 2,096 --
1998................................ 1,190 --
1999................................ 204 --
2000................................ 228 4,895
(29)
<PAGE>
NOTE 11--LEASES
The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.
At December 31, 1995, 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)
1996...............................$14,480 $3,320 $17,800 $240
1997............................... 11,549 3,308 14,857 240
1998............................... 8,719 1,358 10,077 240
1999............................... 7,377 6 7,383 240
2000............................... 2,592 -- 2,592 240
2001-2034.......................... 5,656 -- 5,656 97
----- ----- ----- --
Total minimum payments required.... 50,373 7,992 58,365 1,297
Less amounts representing sublease
income............................. 1,997 -- 1,997
----- ----- -----
$48,376 $7,992 $56,368
======= ====== =======
Less imputed interest.............. 332
---
Present value of minimum
lease payments (included
in long-term debt) .............. $965
====
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $20,084,000, $20,935,000, and $22,264,000 for 1995,
1994, and 1993, respectively.
NOTE 12--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. 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 canceled 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.
(30)
<PAGE>
There were no shares of restricted stock issued in 1995 or 1994. There were
2,650 shares of restricted stock issued in 1993. In 1995, 1,050 shares of
restricted stock were released. In 1994 and 1993, 4,615 shares of restricted
stock were released each year. There were 650 shares canceled in 1994.
There was no activity relating to stock appreciation rights in 1995, 1994, or
1993, and at December 31, 1995, 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, 1993...... 1,359,074 $12.84-$51.50 1,152,514
=========
Granted.......................... 193,510 $58.75
Exercised........................ (132,914) $12.84-$41.06
Canceled 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
Canceled or expired.............. (13,230) $22.75-$61.50
--------
Outstanding at December 31, 1994.... 1,514,204 $15.31-$61.50 1,124,164
=========
Granted.......................... 221,620 $58.88-$62.13
Exercised........................ (207,402) $15.31-$51.50
Canceled or expired.............. (14,480) $58.75-$62.13
--------
Outstanding at December 31, 1995.... 1,513,942 $22.75-$62.13 916,762
========= =========
Options available for grant were 2,964,869, 3,172,009, and 3,361,139 at December
31, 1995, 1994, and 1993, respectively. All options were issued at market price
on the date of grant.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.123,
"Accounting for Stock-Based Compensation." The effective date of this statement
is for fiscal years beginning after December 15, 1995. The statement will
require the Company either to adopt SFAS No. 123 and recognize an expense for
stock compensation in the financial statements or continue accounting under
Accounting Principles Board Opinion (APBO) No. 25, "Accounting for Stock Issued
to Employees" with additional pro forma footnote disclosure regarding the impact
on Net earnings and Net earnings per share had the Company adopted SFAS No. 123.
It is the Company's intent to continue to account for stock compensation under
APBO No. 25 with additional footnote disclosure regarding the impact on Net
earnings and Net earnings per share had the Company adopted SFAS No. 123. The
Company will provide the additional footnote disclosure in 1996.
NOTE 13--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.
(31)
<PAGE>
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 14--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:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Current:
Federal............................... $106,690 $108,053 $95,558
State................................. 24,309 24,622 21,766
------ ------ ------
Total current ...................... 130,999 132,675 117,324
Deferred tax benefits................... (5,515) (31,794) (11,795)
Net effect of the Omnibus Budget
Reconciliation Act of 1993 ........... -- -- (4,767)
-------- -------- -------
Total provision ........................ $125,484 $100,881 100,762
======== ======== =======
The deferred tax benefits represent the net effect of the changes in the amounts
of temporary differences.
The income tax effects of temporary differences that gave rise to the net
deferred tax asset as of December 31, 1995, 1994, and 1993 were:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Current deferred tax assets:
Inventory valuations.......................... $26,896 $25,001 $21,263
Administrative and general expenses
deducted on a paid basis for tax purposes... 25,004 25,117 21,651
Restructuring costs........................... 13,957 17,288 --
Other......................................... 1,382 956 1,494
----- --- -----
Total net current deferred tax asset........ 67,239 68,362 44,408
------ ------ ------
Noncurrent deferred tax (liabilities) assets:
Purchased tax benefits........................ (32,781) (35,432) (37,515)
Temporary differences related to property,
building, and equipment..................... (1,013) (2,424) (3,368)
Intangible amortization....................... 13,208 11,479 7,247
Employment related benefits expense........... 11,441 10,625 9,620
Other......................................... 606 575 999
--- --- ---
Total net noncurrent deferred tax liability. (8,539) (15,177) (23,017)
------ ------- -------
Net deferred tax asset.......................... $58,700 $53,185 $21,391
======= ======= =======
(32)
<PAGE>
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:
1995 1994 1993
---- ---- ----
(In thousands of dollars)
Federal income taxes at the statutory rate.. $109,252 $80,064 $87,510
State income taxes, net of federal income
tax benefits............................... 15,141 11,145 12,077
Effect of nondeductible restructuring costs. -- 8,189 --
Other-net................................... 1,091 1,483 1,175
----- ----- -----
Income tax expense........................ $125,484 $100,881 $100,762
======== ======== ========
Effective tax rate........................ 40.2% 44.1% 40.3%
==== ==== ====
NOTE 15--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 1995 and 1994 is as follows:
1995 Quarter Ended
---------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- -----
Net sales ......... $806,827 $813,518 $849,963 $806,602 $3,276,910
Gross profit ...... 291,705 286,421 301,012 302,220 1,181,358
Net earnings ...... $ 46,869 $ 39,484 $ 49,135 $ 51,177 $ 186,665
Net earnings per
common and common
equivalent share.. $ 0.92 $ 0.77 $ 0.96 $ 0.99 $ 3.64
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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
===== ===== ===== ===== =====
(33)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions(a) of period
- ----------- --------- -------- ------------- ---------
(In thousands of dollars)
Allowance for doubtful accounts
1995 ........................ $15,333 $7,780 $8,884 $14,229
1994 ........................ 13,573 10,331 8,571 15,333
1993 ........................ 13,810 8,147 8,384 13,573
(a) Accounts charged off as uncollectible, less recoveries.
(34)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1995 1994 1993
---- ---- ----
Average number of common
shares outstanding during the year 50,818,162 50,732,625 51,410,228
Common equivalents (a)
Shares issuable under outstanding
options......................... 1,297,551 1,380,529 1,304,037
Shares which could have been
purchased based on the average
market value for the period ....... 883,851 891,933 809,773
------- ------- -------
413,700 488,596 494,264
Dilutive effect of exercised
options prior to being exercised ..... 9,355 5,255 6,414
----- ----- -----
Shares for the portion of the
period that the options were
outstanding ................... 423,055 493,851 500,678
------- ------- -------
Average number of common and common
equivalent shares outstanding
during the year ............. 51,241,217 51,226,476 51,910,906
========== ========== ==========
Net earnings before cumulative
effect of accounting changes ........$186,665,000 $127,874,000 $149,267,000
Cumulative effect of
accounting changes .......... -- -- (820,000)
----------- ------------ ------------
Net earnings .........................$186,665,000 $127,874,000 $148,447,000
============ ============ ============
Earnings per share before
accounting changes........ $3.64 $2.50 $2.88
Cumulative effect of accounting
changes per share. -- -- (0.02)
------ ------ ------
Earnings per share....................... $3.64 $2.50 $2.86
===== ===== =====
(a) Does not include options which are not dilutive. Effect under fully diluted
computation is the same.
(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 25, 1996
(36)
<PAGE>
Exhibit 21 to the Annual Report on
Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1995
W.W. GRAINGER, INC.
Subsidiaries as of March 1, 1996
Bossert Industrial Supply, Inc. (Illinois)
Dayton Electric Manufacturing Co. (Illinois)
Grainger Caribe, Inc. (Illinois)
Grainger FSC, Inc. (U.S. Virgin Islands)
Grainger International, Inc. (Illinois)
- WWG de Mexico, S.A. de C.V. (Mexico)
- Grainger, S.A. de C.V. (Mexico)
- WWG Servicios, S.A. de C.V. (Mexico)
- Grainger Canada Inc. (Canada)
Lab Safety Supply, Inc. (Wisconsin)
WWG International, Inc. (Illinois)
(37)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,460
<SECURITIES> 0
<RECEIVABLES> 383,805
<ALLOWANCES> 14,229
<INVENTORY> 602,639
<CURRENT-ASSETS> 1,062,660
<PP&E> 897,700
<DEPRECIATION> 379,349
<TOTAL-ASSETS> 1,669,243
<CURRENT-LIABILITIES> 444,136
<BONDS> 26,206
0
0
<COMMON> 25,447
<OTHER-SE> 1,153,662
<TOTAL-LIABILITY-AND-EQUITY> 1,669,243
<SALES> 3,276,910
<TOTAL-REVENUES> 3,276,910
<CGS> 2,095,552
<TOTAL-COSTS> 2,095,552
<OTHER-EXPENSES> 857,169
<LOSS-PROVISION> 7,780
<INTEREST-EXPENSE> 4,260
<INCOME-PRETAX> 312,149
<INCOME-TAX> 125,484
<INCOME-CONTINUING> 186,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186,665
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.64
</TABLE>
Exhibit 10 (c) (iii) to the
Annual Report on Form 10-K
of W.W. Grainger, Inc. for the
year ended December 31, 1995
W.W. GRAINGER, INC.
EXECUTIVE DEATH BENEFIT PLAN
ARTICLE I
PURPOSE
1.1 Purpose. The purpose of this W.W. GRAINGER, INC. EXECUTIVE DEATH
BENEFIT PLAN (the "Plan") is to improve and maintain relations with a select
group of management employees (the "key employees"), to induce them to remain
employed by W.W. Grainger, Inc., and to provide an incentive to them to not
enter into competitive employment or engage in a competitive business by
providing supplemental survivor security benefits. All benefits hereunder shall
be paid solely from the general assets of the Company, and the right of any
Participant or Beneficiary to receive payments under this Plan shall be as an
unsecured general creditor of the Company.
1.2 Construction. In construing the terms of the Plan, the primary
consideration shall be the Plan's stated purpose, i.e., to provide certain
disability and survivors' benefits and to supplement certain benefits from the
Company's Group Insurance Plans.
ARTICLE II
DEFINITIONS AND DESIGNATIONS
2.1 "Annual Compensation" shall mean the sum of:
(a) the annual salary of the Participant determined by the Board
of Directors of the Company in effect on the Date Creating
an Entitlement, and
(b) the Participant's target bonus under the Company's
Management Incentive Program for the calendar year in which
the Date Creating an Entitlement occurs.
2.2 "Average Monthly Earnings" shall mean Annual Compensation divided by
twelve (12).
(39)
<PAGE>
2.3 "Committee" shall mean the Compensation Committee of Management
described in Article VII hereof.
2.4 "Company" shall mean W.W. Grainger, Inc., an Illinois corporation, and
its divisions and subsidiaries.
2.5 "Date Creating an Entitlement" shall mean the Participant's date of
death for benefits described in Section 4.1 or date of Termination of Service
for benefits described in Section 4.3.
2.6 "Disability" means a condition that totally and continuously prevents
the Participant, for at least six (6) consecutive months, from engaging in an
"occupation" for Compensation or profit. During the first twenty-four (24)
months of total disability, "occupation" means the Participant's occupation at
the time the disability began. After that period, "occupation" means any
occupation for which the Participant is or becomes reasonably fitted by
education, training or experience. Notwithstanding the foregoing, a disability
shall not exist for purposes of this Plan if the Participant fails to qualify
for disability benefits under the Social Security Act, unless the Committee
determines, in its sole discretion, that a disability exists.
2.7 "Early Retirement Date" shall mean the earliest of the date on which
the Participant:
(a) attains age sixty (60),
(b) attains age fifty-five (55) or older after completing ten
(10) Years of Service,
(c) completes twenty-five (25) Years of Service, or
(d) incurs a Disability.
2.8 "Forfeiting Act" shall mean the Participant's fraud, dishonesty,
willful destruction of Company property, revealing Company trade secrets, acts
of competition against the Company or acts in aid of a competitor of the
Company.
2.9 "Group Life Insurance Plan" shall mean the Company's Group Term Life
and Accidental Death and Dismemberment Insurance Plan, as amended from time to
time.
2.10 "Normal Retirement Date" shall mean the date on which the Participant
attains age sixty-five (65).
2.11 "Participant" shall mean a person designated as such under Article III
of the Plan.
2.12 "Plan" shall mean the W.W. Grainger, Inc. Executive Death Benefit
Plan.
(40)
<PAGE>
2.13 "Termination of Service" shall mean the Participant's ceasing his
Service with the Company for any reason whatsoever, whether voluntarily or
involuntarily, including by reason of death or disability.
2.14 "Years of Service" shall mean a year that a Participant hereunder is
"Eligible" under the W.W. Grainger, Inc. Employees Profit Sharing Plan.
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. An Employee of the Company shall become
eligible to be a Participant in the Plan by designation of the Committee. The
Committee shall make such designation, specifying the effective date of the
Participant's eligibility. The Committee shall notify each Participant of his
eligibility date. Each designated Employee shall furnish such information and
perform such acts as the Committee may require prior to becoming a Participant.
3.2 Re-Employment. Any Participant who terminates employment shall not be
eligible to participate in the Plan on re-employment unless the Committee so
determines. In such event, the Committee shall specify the effective date of the
Participant's renewed eligibility. The Committee shall notify each re-employed
former Participant of his eligibility, of the effective date and of the
conditions of participation.
ARTICLE IV
DEATH BENEFITS
4.1 Death During Employment. If a Participant's death occurs while he is in
the employ of the Company, his Beneficiary shall receive a monthly payment in an
amount equal to:
(a) fifty percent (50%) of the Participant's Average Monthly
Earnings in effect on his date of death, which payments
shall commence on the first day of the month following the
Participant's death and end as of the date on which the
120th monthly payment is made; or
(b) for a Participant who was a Participant on the effective
date of the First Amendment of the Plan [May 8, 1995], and
notwithstanding anything to the contrary in Section 8.2:
(i) fifty percent (50%) of the Participant's Average Monthly Earnings in
effect on his date of death, determined without regard to Section
2.1(b),
(41)
<PAGE>
(ii) which payment shall commence on the first day of the month following
the Participant's death and end as of the later of the date the
Participant would have attained age 65 or the date on which the 120th
monthly payment is made,if the benefit so calculated would have a
greater present value on the date of the Participant's death than the
benefit calculated under paragraph (a) next above. The Committee shall
use reasonable and consistent assumptions to determine present values.
4.2 Additional Death Benefit. The Company will maintain death benefit
coverage for each Participant in the amount of fifty thousand dollars ($50,000)
under the Company's Group Life Insurance Plan. Payment of such benefit shall be
made in accordance with the provisions of the Group Life Insurance Plan.
4.3 Death After Retirement. If a Participant incurs Termination of Service
on or after an Early Retirement Date, or on or after his Normal Retirement Date,
and dies after such Termination of Service, the Company will pay to his
Beneficiary a lump sum death benefit equal to one hundred percent (100%) of his
Annual Compensation as defined under the Plan on the Date Creating an
Entitlement. Such death benefit amount shall be increased to reflect estimated
federal income tax payable on such death benefit, based on the then maximum tax
rate, determined in accordance with rules established from time to time by the
Committee, provided that in no event shall the death benefit exceed two hundred
percent (200%) of Annual Compensation.
4.4 Death After Termination of Employment. Except as provided in Section
4.3, no benefits shall be payable to or on behalf of a Participant whose death
occurs subsequent to his Termination of Employment.
ARTICLE V
BENEFICIARIES
5.1 Designation by Participant. Each Participant may designate a
Beneficiary or Beneficiaries who shall, upon his death, receive the death
benefits, if any, payable pursuant to Sections 4.1 and 4.3. The Participant's
Beneficiary under this Plan shall be the Beneficiary designated by the
Participant in the Special Beneficiary Designation filed under the Company's
Group Life Insurance Plan unless the Participant files a written notice of a
different Beneficiary Designation in such form as the Committee requires. The
form may include contingent Beneficiaries. A Beneficiary Designation shall be
effective when filed with the Committee during the Participant's life and shall
cancel and revoke all prior designations.
5.2 Payment of Benefits Upon Death - Other Beneficiary. If no primary or
contingent Beneficiary survives a Participant or if no Beneficiary Designation
is in effect upon his death, then the payments shall be made to the deceased
Participant's spouse. If his spouse does not survive him, then payments shall be
made to the Participant's descendants who survive him by right of
(42)
<PAGE>
representation; or if no descendants of the Participant survive him, then to his
estate. In the event any person entitled to receive benefits in accordance with
this Section dies prior to his receipt of all of the benefits to which he is
entitled, the balance of such benefits, if any, shall be payable to the next
class of recipients.
5.3 Minors and Persons Under Legal Disability. Benefits payable to a minor
or a person under a legal disability shall be paid in a manner determined
appropriate by the Committee.
ARTICLE VI
CLAIMS PROCEDURE
6.1 Claim for Benefits. Any claim for benefits under the Plan shall be made
in writing to any member of the Committee. If such claim for benefits is wholly
or partially denied by the Committee Members, the Committee Members shall,
within a reasonable period of time, but not later than sixty (60) days after
receipt of the claim, notify the claimant of the denial of the claim. Such
notice of denial shall be in writing and shall contain:
(a) the specific reason or reasons for denial of the claim,
(b) a reference to the relevant Plan provisions upon which the denial
is based,
(c) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an
explanation of why such material or information is necessary, and
(d) an explanation of the Plan's claim review procedure.
6.2 Request for Review of a Denial of a Claim for Benefits. Upon the
receipt by the claimant of written notice of denial of the claim, the claimant
may within ninety (90) days file a written request to the full Committee,
requesting a review of the denial of the claim, which review shall include a
hearing if deemed necessary by the Committee. In connection with the claimant's
appeal of the denial of his claim, he may review relevant documents and may
submit issues and comments in writing.
6.3 Decision Upon Review of Denial of Claim for Benefits. The Committee
shall render a decision on the claim review promptly, but no more than sixty
(60) days after the receipt of the claimant's request for review, unless special
circumstances (such as the need to hold a hearing) require an extension of time,
in which case the sixty (60)-day period shall be extended to one hundred twenty
(120) days. Such decision shall:
(a) include specific reasons for the decision.
(43)
<PAGE>
(b) be written in a manner calculated to be understood by the
claimant, and
(c) contain specific references to the relevant Plan provisions upon
which the decision is based.
ARTICLE VII
COMMITTEE
7.1 General Rights, Powers and Duties of the Committee. The Compensation
Committee of Management shall be the Named Fiduciary and Committee responsible
for the management, operation and administration of the Plan. In addition to any
powers, rights and duties set forth elsewhere in the Plan, it shall have the
following powers and duties:
(a) to adopt such rules and regulations consistent with the
provisions of the Plan as it deems necessary for the proper and
efficient administration of the Plan;
(b) to enforce the Plan in accordance with its terms and any rules
and regulations it establishes;
(c) to maintain records concerning the Plan sufficient to prepare
reports, returns and other information required by the Plan or by
law;
(d) to construe and interpret the Plan and to resolve all questions
arising under the Plan;
(e) to direct the Company to pay benefits under the Plan, and to give
such other directions and instructions as may be necessary for
the proper administration of the Plan;
(f) to employ or retain agents, attorneys, actuaries, accountants or
other persons, who may also be employed by or represent the
Company; and
(g) to be responsible for the preparation, filing and disclosure on
behalf of the Plan of such documents and reports as are required
by any applicable federal or state law.
7.2 Information to be Furnished to Committee. The Company shall furnish the
Committee such data and information as it may require. The records of the
Company shall be determinative of each Participant's period of employment,
termination of employment and the reason therefor, leave of absence,
re-employment, Years of Service, personal data, and Compensation or bonus
reductions. Participants and their Beneficiaries shall furnish to the
(44)
<PAGE>
Committee such evidence, data or information, and execute such documents as the
Committee requests.
7.3 Responsibility. No member of the Committee or of the Board of Directors
of the Company shall be liable to any person for any action taken or omitted in
connection with the administration of this Plan unless attributable to his own
fraud or willful misconduct; nor shall the Company be liable to any person for
any such action unless attributable to fraud or willful misconduct on the part
of a director, officer or employee of the Company.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 Amendment. The Plan may be amended in whole or in part by the Company
at any time by a resolution of the Board of Directors delivered to the
Committee.
8.2 Right to Terminate Plan. The Company reserves the right to reduce or
terminate benefits under the Plan with regard to any or all Participants at any
time by a resolution of its Board of Directors delivered to the Committee;
provided however, that a Beneficiary receiving benefits payable by the Plan
shall continue to receive such benefits, and further provided, that the Company
may not terminate its obligation to pay the death benefit to the Beneficiary of
a Participant who:
(a) already has incurred a Termination of Service after his Early or
Normal Retirement Date, or
(b) is still an active Employee but has attained an Early Retirement
Date.
The amount of the benefit payable in the event clause (b) above is applicable
shall be determined as if the date of the reduction in benefits or termination
of the Plan is a Date Creating an Entitlement. The Committee shall notify any
Participant affected by such reduction or termination of such action and its
effective date within thirty (30) days after it receives notice from the
Company.
ARTICLE IX
MISCELLANEOUS
9.1 No Funding nor Guarantee. This Plan is unfunded. Nothing contained in
the Plan shall be deemed to create a trust or fiduciary relationship of any
kind. The rights of Participants and of any Beneficiary shall be no greater than
the rights of unsecured general creditors of the Company. Nothing contained in
the Plan constitutes a guarantee by the Company that the assets of the Company
will be sufficient to pay any benefit to any person.
9.2 Inalienability of Benefits. The right of any Participant or Beneficiary
to any benefit or payment under the Plan shall not be subject to voluntary or
involuntary transfer, alienation,
(45)
<PAGE>
pledge, assignment, garnishment, sequestration or other legal or equitable
process. Any attempt to transfer, alienate, pledge, assign or otherwise dispose
of such right or any attempt to subject such right to attachment, execution,
garnishment, sequestration or other legal or equitable process shall be null and
void.
9.3 No Implied Rights. Neither the establishment of the Plan nor any
modification thereof shall be construed as giving any Participant, Beneficiary
or other person any legal or equitable right unless such right shall be
specifically provided for in the Plan or conferred by affirmative action of the
Company in accordance with the terms and provisions of the Plan.
9.4 Forfeiture for Cause. Notwithstanding any other provisions of this Plan
to the contrary, if the Participant commits one or more Forfeiting Acts during
his employment with the Company, all benefits due the Participant or his
Beneficiary shall be forfeited. This provision shall apply regardless of the
date the Company first learns of the occurrence of a Forfeiting Act.
9.5 Binding Effect. The provisions of the Plan shall be binding on the
Company, the Committee and all persons entitled to benefits under the Plan,
together with their respective heirs, legal representatives and successors in
interest.
9.6 Governing Laws. The Plan shall be construed and administered according
to the laws of the State of Illinois.
9.7 Number and Gender. Wherever appropriate, the singular shall include the
plural, the plural shall include the singular, and the masculine shall include
the feminine or neuter.
(46)
<PAGE>
Exhibit 10 (c)(vii) to the
Annual Report on Form 10-K
of W.W.Grainger, Inc. for the
year ended December 31, 1995
SUMMARY DESCRIPTION OF THE
1995 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 1/1/96
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 75% on the EE of LSS, 25% on Company-wide EE; 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.
(47)
<PAGE>
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.
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 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 or as otherwise determined by management.
(48)
<PAGE>
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.
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 accordingly.
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, 1995.
(49)
<PAGE>
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 before MIP/TIP accrual 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 EE in prior year (year one)
EE-2 equals EE in year prior to year one
EE-3 equals EE in year prior to year two
The bonus calculation includes a mechanism to identify significant strategic
investments and adjust for their impact. The forecast short-term negative impact
from such investments would be excluded from Target EE with corresponding
increases in subsequent years' targets.
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 Merit
Program budget percentage for eligible employees.
(50)
<PAGE>
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 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
o 100% of incentive dollars paid out will be included in "admissible
compensation" under the Profit Sharing Trust Plan.
o 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.
o 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
deferred 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.
(51)
<PAGE>
Exhibit 10(c)(viii) to the
Annual Report on Form 10-K
of W.W. Grainger, Inc. for
the year ended December 31, 1995
W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
Article Page
- ------- ----
1 PURPOSE AND EFFECTIVE DATE....................53
2 DEFINITIONS...................................53
3 ADMINISTRATION................................54
4 ELIGIBILITY...................................55
5 BENEFITS AND ACCOUNTS.........................56
6 VESTING.......................................58
7 AMENDMENT AND TERMINATION.....................58
8 MISCELLANEOUS.................................58
(52)
<PAGE>
W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
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, 1992. The effective date of the Plan as amended and
restated herein is January 1, 1992.
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 Section 1.36 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 Profit Sharing Trust Committee.
(53)
<PAGE>
(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 Section 1.14 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.
(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. Granger, 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 is appointed by the Board of Directors of the Company to
administer this Plan and the Profit Sharing Plan.
(54)
<PAGE>
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 contribution are
forfeitures under the Profit Sharing Plan are limited by:
(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.
(55)
<PAGE>
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 contribution 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.
(56)
<PAGE>
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.
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.
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5.7 Termination Before October 1, 1992. Notwithstanding the foregoing
provisions of this Article Five, the account balance of a Participant who
terminates employment for any reason before October 1, 1992 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.
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
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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.
8.5 Text Controls. Article headings are included in the Plan for
convenience of reference only, and the 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.
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Exhibit 10(c)(ix) to the
Annual Report on Form 10-K
of W.W. Grainger, Inc for the
year ended December 31, 1995
W.W. GRAINGER, INC.
PLAN FOR PAYMENT OF DIRECTORS FEES
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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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 the 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 that 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 (which is meant to be the equivalent of a
10-year AA corporate bond) plus 1/2 of 1 percentage point.
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 right to the amounts payable hereunder, unsecured by any asset of
this Corporation.
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).
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.
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