14 Pages Complete
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
to
Commission file number 1-5684
I.R.S. Employer Identification Number 36-1150280
W.W. Grainger, Inc.
(An Illinois Corporation)
455 Knightsbridge Parkway
Lincolnshire, Illinois 60069-3620
Telephone: (847)793-9030
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 51,032,753 shares of the
Company's Common Stock were outstanding as of October 31, 1996.
(1)
<PAGE>
Part I - FINANCIAL INFORMATION
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
(Unaudited)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net sales .............. $ 901,858 $ 849,963 $2,633,129 $2,470,308
Cost of merchandise sold 582,324 548,951 1,703,490 1,591,170
---------- ---------- ---------- ----------
Gross profit ........... 319,534 301,012 929,639 879,138
Warehousing, marketing, and
administrative expenses 233,737 216,896 677,388 649,517
---------- ---------- ---------- ----------
Operating earnings ..... 85,797 84,116 252,251 229,621
Other income or (deductions)
Interest income ........ 1,780 1 2,780 158
Interest expense ....... (88) (1,564) (662) (2,727)
Unclassified-net ....... (78) (387) (284) (483)
---------- ---------- ---------- ----------
1,614 (1,950) 1,834 (3,052)
---------- ---------- ---------- ----------
Earnings before income taxes 87,411 82,166 254,085 226,569
Income taxes ........... 35,139 33,031 102,142 91,081
---------- ---------- ---------- ----------
Net earnings ........... $ 52,272 $ 49,135 $ 151,943 $ 135,488
========== ========== ========== ==========
Net earnings per common and
common equivalent share $ 1.02 $ 0.96 $ 2.96 $ 2.65
========== ========== ========== ==========
Average number of common
and common equivalent shares
outstanding ............ 51,454,355 51,225,001 51,417,826 51,220,289
========== ========== ========== ==========
Cash dividends paid per share $ 0.25 $ 0.23 $ 0.73 $ 0.66
======= ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
(2)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
ASSETS Sept. 30, 1996 Dec. 31, 1995
- ------------------------------------------------- ----------- -------------
CURRENT ASSETS
Cash and cash equivalents ...................... $ 131,553 $ 11,460
Accounts receivable, less allowance for doubtful
accounts of $15,537 in 1996 and $14,229 in 1995 418,991 369,576
Inventories .................................... 565,873 602,639
Prepaid expenses ............................... 12,401 11,746
Deferred income tax benefits ................... 61,151 67,239
----------- -----------
Total current assets ........................ 1,189,969 1,062,660
PROPERTY, BUILDINGS, AND EQUIPMENT ............... 928,340 897,700
Less accumulated depreciation and amortization . 421,257 379,349
----------- -----------
Property, buildings, and equipment-net ......... 507,083 518,351
OTHER ASSETS ..................................... 77,066 88,232
----------- -----------
TOTAL ASSETS ..................................... $ 1,774,118 $ 1,669,243
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------
CURRENT LIABILITIES
Short-term debt ................................ $ 3,065 $ 23,577
Current maturities of long-term debt ........... 24,728 23,241
Trade accounts payable ......................... 233,893 204,925
Accrued liabilities ............................ 152,023 168,928
Income taxes ................................... 24,602 23,465
----------- -----------
Total current liabilities ................... 438,311 444,136
LONG-TERM DEBT (less current maturities) ......... 6,668 8,713
DEFERRED INCOME TAXES ............................ 1,857 8,539
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ........ 31,626 28,746
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock - $5.00
par value - authorized 6,000,000 shares,
issued and outstanding, none ................. -- --
Common Stock - $0.50 par value - authorized
150,000,000 shares, issued and outstanding,
51,029,845 shares in 1996 and 50,894,629
shares in 1995................................... 25,515 25,447
Additional contributed capital .................. 88,695 86,548
Unearned restricted stock compensation .......... -- (19)
Retained earnings ............................... 1,181,788 1,067,133
Foreign currency translation adjustment ......... (342) --
----------- -----------
Total shareholders' equity .................. 1,295,656 1,179,109
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 1,774,118 $ 1,669,243
=========== ===========
The accompanying notes are an integral part of these financial statements.
(3)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Cash flows from operations:
Net earnings ................................... $ 151,943 $ 135,488
Provision for losses on accounts receivable .... 7,986 8,862
Depreciation and amortization:
Property, buildings, and equipment ........... 45,870 43,868
Intangibles and goodwill ..................... 9,427 10,046
Change in operating assets and liabilities:
(Increase) in accounts receivable ............ (57,401) (57,443)
Decrease (increase) in inventories ........... 36,766 (77,903)
(Increase) in prepaid expenses ............... (655) (1,047)
Increase (decrease) in trade accounts payable 28,968 (17,593)
(Decrease) in other current liabilities ...... (16,905) (21,630)
Increase (decrease) in current income taxes
payable 1,137 (656)
Increase in accrued employment related
benefits costs ............................. 2,880 3,163
(Decrease) in deferred income taxes .......... (594) (5,962)
Other-net ...................................... 2,304 382
--------- ---------
Net cash provided by operating activities ........ 211,726 19,575
--------- ---------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions ........... (34,325) (78,925)
Other - net .................................. (1,235) (153)
--------- ---------
Net cash (used in) investing activities .......... (35,560) (79,078)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in short-term debt .... (20,512) 94,181
Proceeds from long-term debt .................. 1,500 5,303
Long-term debt payments ....................... (2,058) (260)
Stock incentive plan .......................... 2,215 1,402
Cash dividends paid ........................... (37,218) (33,530)
--------- ---------
Net cash (used in) provided by financing activities (56,073) 67,096
--------- ---------
Net increase in cash and cash equivalents ........ 120,093 7,593
Cash and cash equivalents at beginning of year ... 11,460 15,292
--------- ---------
Cash and cash equivalents at end of period ....... $ 131,553 $ 22,885
========= =========
The accompanying notes are an integral part of these financial statements.
(4)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be read
in conjunction with the consolidated financial statements and related notes for
the year ended December 31, 1995, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated.
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method.
The unaudited financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the statements
contained herein.
Checks outstanding of $33,142,000 and $40,027,000 were included in trade
accounts payable at September 30, 1996 and December 31, 1995, respectively.
2. DIVIDEND
On October 30, 1996, the Board of Directors declared a quarterly dividend of 25
cents per share, payable December 1, 1996 to shareholders of record on November
12, 1996.
3. ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123)
The Financial Accounting Standards Board's SFAS No. 123 "Accounting for
Stock-Based Compensation" is effective for the fiscal year 1996. This statement
requires the Company either to adopt SFAS No. 123 and recognize an expense for
stock compensation in the financial statements or to continue accounting under
Accounting Principles Board Opinion (APBO) No. 25 "Accounting for Stock Issued
to Employees" with additional proforma footnote disclosure regarding the impact
on Net earnings and Net earnings per share had the Company adopted SFAS No. 123.
The Company has elected to continue to account for stock compensation under APBO
No. 25 with additional footnote disclosure. The Company will provide the
additional footnote disclosure in its 1996 year end financial statements.
(5)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1995:
Net Sales
Net sales of $901,858,000 in the 1996 third quarter increased 6.1% from net
sales of $849,963,000 for the comparable 1995 period. There were 64 sales days
in the 1996 third quarter compared with 63 sales days in the 1995 third quarter.
The year 1996 will have two more sales days than did the year 1995 (256 versus
254).
The sales increase for the 1996 third quarter compared with the 1995 third
quarter was principally volume related. The volume increase primarily
represented the effects of the Company's market initiatives which included new
product additions, the continuing expansion of branch facilities, adding Zone
Distribution Centers (ZDCs), and the National Accounts and integrated supply
programs.
The Company's core branch-based business experienced selling price increases of
about 1.9% when comparing the third quarters of 1996 and 1995. Daily sales to
National Account customers within the core business increased an estimated 20%,
on a comparable basis, over the 1995 third quarter.
Sales of seasonal products in the core branch-based business declined
approximately 18% in the 1996 third quarter as compared with the same 1995
period. Many regions of the country experienced milder weather in July and
August versus the comparable 1995 periods.
(6)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $52,272,000 in the 1996 third quarter increased 6.4% when
compared to net earnings of $49,135,000 for the comparable 1995 period. The net
earnings increase was higher than the net sales increase due to slightly higher
gross profit margins, higher interest income, and lower interest expense
partially offset by operating expenses increasing at a faster rate than net
sales.
The Company's gross profit margin was virtually the same when comparing the
third quarters of 1996 and 1995 (0.02 percentage point improvement). Of note
were the following:
1. The change in product mix was favorable as sales of seasonal products
declined. Historically, the sales of seasonal products have lower than
average gross profit margins.
2. Selling price increases exceeded the level of cost increases.
3. Partially offsetting the above points was an unfavorable change in selling
price category mix, which primarily resulted from the growth in sales to
the Company's larger volume customers.
Operating expenses (warehousing, marketing, and administrative) for the Company
increased 7.8% for the 1996 third quarter as compared with the same 1995 period.
The increase was greater than the increase in net sales.
Contributing to this increase were the following factors:
1. Expenses related to market development and advertising initiatives
increased at a faster rate than net sales.
2. Data processing expenses grew at a faster rate than net sales.
Partially offsetting the above were the following factors:
1. Payroll and employee benefits costs grew at a slower rate than net sales.
2. Freight-out expenses were lower.
The increase in interest income resulted from higher average daily invested
balances, partially offset by lower average interest rates earned.
The decrease in interest expense resulted from lower borrowings and lower
average interest rates paid on outstanding debt. The decrease in interest
expense was partially offset by lower capitalized interest.
The Company's effective income tax rate was 40.2% for the third quarters of both
1996 and 1995.
(7)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1995:
Net Sales
Net sales of $2,633,129,000 in the first nine months of 1996 increased 6.6% from
net sales of $2,470,308,000 for the comparable 1995 period. There were 192 sales
days in the 1996 nine month period compared with 191 sales days in the 1995 nine
month period. The year 1996 will have two more sales days than did the year 1995
(256 versus 254).
The sales increase for the first nine months of 1996 when compared with the same
1995 period was principally volume related. The volume increase can be explained
primarily by the same factors discussed for the third quarter (see Third Quarter
Net Sales discussion). In addition, sales in the 1996 first quarter were
negatively affected by the sluggish national economy and adverse weather
experienced by much of the East Coast during January 1996.
The Company's core branch-based business experienced selling price increases of
about 2.0% when comparing the first nine months of each year. Daily sales to
National Account customers within the core business increased an estimated 20%,
on a comparable basis, over the same 1995 period.
(8)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $151,943,000 in the first nine months of 1996 increased 12.1%
when compared to net earnings of $135,488,000 for the comparable 1995 period.
The net earnings increase was higher than the sales increase primarily due to
operating expenses increasing at a slower rate than net sales, higher interest
income, and lower interest expense, partially offset by lower gross profit
margins.
The Company's gross profit margin decreased by 0.28 percentage point when
comparing the first nine months of 1996 and 1995. This decrease was principally
the result of an unfavorable change in selling price category mix, which
primarily resulted from the growth in sales to the Company's larger volume
customers. Partially offsetting the above effect were the following two factors:
1. Selling price increases exceeded the level of cost increases.
2. The change in product mix was favorable as sales of seasonal products
declined. Historically, the sales of seasonal products have lower than
average gross profit margins.
Operating expenses for the Company increased 4.3% for the first nine months of
1996 as compared with the same 1995 period. This increase was lower than the
increase in net sales. Contributing to this favorable comparison were the
following factors:
1. Data processing expenses grew at a slower rate than net sales.
2. Payroll grew at a slower rate than net sales.
3. Freight-out expenses were lower.
Partially offsetting the above were the following factors:
1. Employee benefits costs were higher. These costs were related to higher
health care costs and to an increased allocation of profit sharing expenses
due to a higher level of Company earnings as compared with 1995.
2. Expenses related to the continuing enhancement and reconfiguration of the
Company's logistics network increased. The first nine months of 1996
included incremental expenses related to the ongoing ramp-up of the ZDCs.
The increase in interest income resulted from higher average daily invested
balances, partially offset by lower average interest rates earned.
The decrease in interest expense resulted from lower borrowing and lower average
interest rates paid on outstanding debt. The decrease in interest expense was
partially offset by lower capitalized interest.
The Company's effective income tax rate was 40.2% for the first nine months of
both 1996 and 1995.
(9)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, working capital increased by
$133,134,000. The ratio of current assets to current liabilities was 2.7 at
September 30, 1996 and 2.4 at December 31, 1995. The Consolidated Statements of
Cash Flows, included in this report, detail the sources and uses of cash and
cash equivalents.
The Company's liquidity position and low debt ratio provide flexibility in
funding working capital needs and long-term cash requirements. In addition to
internally generated funds, the Company has various sources of financing
available, including commercial paper sales and bank borrowings under lines of
credit and otherwise. Total debt as a percent of Shareholders' Equity was 2.7%
at September 30, 1996 and 4.7% at December 31, 1995. For the first nine months
of 1996, $21,755,000 was expended for land, buildings, and facilities
improvements, and $21,494,000 for data processing, office, and other equipment,
for a total of $43,249,000.
On November 6, 1996, the Company announced that it had entered into a definitive
agreement to acquire the Canadian industrial distribution business of Acklands
Limited, which business had sales of more than C$400 million (US$299 million)
for the fiscal year ended January 31, 1996. The agreement provides for Acklands
Limited to receive approximately C$370 million (US$277 million), consisting of
C$180 million (US$135 million) in cash and approximately two million shares of
the Company's common stock. The Company intends to reactivate its share
repurchase program in connection with this transaction.
(10)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
PART II - OTHER INFORMATION
EXHIBIT INDEX
-------------
Items 1, 2, 3, 4, and 5 not applicable.
Item 6 Exhibits (numbered in accordance with Item 601 of regulation S-K)
and Reports on Form 8-K.
(a) Exhibits
(11) Computation of Earnings per Common and
Common Equivalent Share 13
(27) Financial Data Schedule 14
(b) Reports on Form 8-K - None.
(11)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.W. Grainger, Inc.
-------------------
(Registrant)
Date: November 11, 1996 By: /s/ J. D. Fluno
- ----------------------- --------------------------------
J. D. Fluno, Vice Chairman
Date: November 11, 1996 By: /s/ P.O. Loux
- ----------------------- --------------------------------
P. O. Loux, Vice President, Finance
Date: November 11, 1996 By: /s/ R.D. Pappano
- ----------------------- -----------------------------------
R. D. Pappano, Vice President,
Financial Reporting and Investor Relations
(12)
<PAGE>
Exhibit 11
W.W. Grainger, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Average number of shares outstanding
during the period ..................... 50,980,853 50,799,957
Common equivalent shares:
Shares issuable under outstanding options
which are dilutive ................... 1,533,317 1,225,419
Shares which could have been purchased
based upon the average market value for
the period ........................... 1,112,806 813,606
---------- -----------
420,511 411,813
Dilutive effect of exercised options
prior to being exercised .............. 16,462 8,519
---------- -----------
436,973 420,332
---------- -----------
Weighted average number of common
and common equivalent shares outstanding 51,417,826 51,220,289
=========== ===========
Net earnings ........................... $151,943,000 $135,488,000
============ ============
Net earnings per common and common
equivalent share ...................... $ 2.96 $ 2.65
========== ===========
Three months ended September 30:
Nine months ended September 30, from above $ 2.96 $ 2.65
Six months ended June 30,
as previously reported ................ 1.94 1.69
---------- -----------
Net earnings per common and common equivalent
share for the three months ended September 30 $ 1.02 $ 0.96
========== ===========
Note:The effect on earnings per common and common equivalent share, under a
fully diluted computation, is immaterial.
(13)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 131,553
<SECURITIES> 0
<RECEIVABLES> 434,528
<ALLOWANCES> 15,537
<INVENTORY> 565,873
<CURRENT-ASSETS> 1,189,969
<PP&E> 928,340
<DEPRECIATION> 421,257
<TOTAL-ASSETS> 1,774,118
<CURRENT-LIABILITIES> 438,311
<BONDS> 27,706
0
0
<COMMON> 25,515
<OTHER-SE> 1,270,141
<TOTAL-LIABILITY-AND-EQUITY> 1,774,118
<SALES> 2,633,129
<TOTAL-REVENUES> 2,633,129
<CGS> 1,703,490
<TOTAL-COSTS> 1,703,490
<OTHER-EXPENSES> 666,906
<LOSS-PROVISION> 7,986
<INTEREST-EXPENSE> 662
<INCOME-PRETAX> 254,085
<INCOME-TAX> 102,142
<INCOME-CONTINUING> 151,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,943
<EPS-PRIMARY> 2.96
<EPS-DILUTED> 0
</TABLE>
