15 Pages Complete
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934 For the period ended March 31, 1997
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: 49,700,463 shares of the
Company's Common Stock were outstanding as of May 13, 1997.
<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 March 31,
-----------------------------------------
1997 1996
----------------- ------------------
Net sales $985,556 $842,647
Cost of merchandise sold 632,276 542,149
----------------- ------------------
Gross profit 353,280 300,498
Warehousing, marketing, and
administrative expenses 261,305 216,471
----------------- ------------------
Operating earnings 91,975 84,027
Other income or (deductions)
Interest income 1,390 257
Interest expense (1,148) (271)
Unclassified-net (437) (194)
----------------- ------------------
(195) (208)
----------------- ------------------
Earnings before income taxes 91,780 83,819
Income Taxes 37,171 33,695
----------------- ------------------
Net earnings $54,609 $50,124
================= ==================
Net earnings per common and common
equivalent share $1.03 $0.98
================= ==================
Average number of common and common
equivalent shares outstanding 52,938,414 51,380,696
================= ==================
Cash dividends paid per share $0.25 $0.23
================= ==================
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)
March 31, Dec. 31,
ASSETS 1997 1996
- --------------------------------------------------- ----------- -----------
CURRENT ASSETS
Cash and cash equivalents ........................ $ 101,664 $ 126,935
Accounts receivable, less allowance for doubtful
accounts of $16,203 in 1997 and $15,302 in 1996 . 465,837 433,575
Inventories ...................................... 627,712 686,925
Prepaid expenses ................................. 17,729 11,971
Deferred income tax benefits ..................... 61,317 60,837
----------- -----------
Total current assets ........................... 1,274,259 1,320,243
PROPERTY, BUILDINGS, AND EQUIPMENT ................. 1,002,639 985,712
Less accumulated depreciation and amortization ... 450,553 434,728
----------- -----------
Property, buildings, and equipment-net ........... 552,086 550,984
OTHER ASSETS ....................................... 238,915 247,794
----------- -----------
TOTAL ASSETS ....................................... $ 2,065,260 $ 2,119,021
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Short-term debt .................................. $ 133,277 $ 135,275
Current maturities of long-term debt ............. 24,778 24,753
Trade accounts payable ........................... 253,911 240,779
Accrued liabilities .............................. 143,748 187,457
Income Taxes ..................................... 64,122 27,804
----------- -----------
Total current liabilities ...................... 619,836 616,068
LONG-TERM DEBT (less current maturities) ........... 5,639 6,152
DEFERRED INCOME TAXES .............................. 105 2,207
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .......... 32,996 31,932
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock - $5 par value -
authorized, 6,000,000 shares, issued and
outstanding, none ............................ -- --
Common Stock - $0.50 par value - authorized,
150,000,000 shares; issued, 53,386,358
shares, 1997, and 53,338,026 shares, 1996 ... 26,693 26,669
Additional contributed capital ................... 263,254 262,318
Treasury stock, at cost -1,610,600 shares,
1997, and 409,600 shares, 1996 .............. (127,839) (32,090)
Unearned restricted stock compensation ........... (17,932) (17,597)
Cumulative translation adjustments ............... (4,532) (2,262)
Retained earnings ................................ 1,267,040 1,225,624
----------- -----------
Total shareholders' equity ....................... 1,406,684 1,462,662
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 2,065,260 $ 2,119,021
=========== ===========
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)
Three Months Ended March 31,
-----------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net earnings ...................................... $ 54,609 $ 50,124
Provision for losses on accounts receivable ....... 2,993 3,035
Depreciation and amortization:
Property, buildings, and equipment .............. 16,757 16,223
Intangibles and goodwill ........................ 4,103 3,568
Change in operating assets and liabilities:
(Increase) in accounts receivable ............... (35,255) (22,088)
Decrease in inventories ......................... 59,213 43,671
(Increase) in prepaid expenses .................. (5,758) (7,648)
(Increase) in deferred income taxes ............. (2,582) (1,312)
Increase in trade accounts payable .............. 13,132 1,123
(Decrease) in other current liabilities ......... (43,709) (44,385)
Increase in current income taxes payable ........ 36,318 30,873
Increase in accrued employement related
benefits costs ................................ 1,064 979
Other - net ....................................... 611 634
--------- ---------
Net cash provided by operating activities ........... 101,496 74,797
--------- ---------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions ................. (17,821) (11,279)
Other - net ....................................... 2,325 (7)
--------- ---------
Net cash (used in) investing activities ............. (15,496) (11,286)
--------- ---------
Cash flows from financing activities:
Net (decrease) in short-term debt ................. (1,998) (20,579)
Long-term debt payments ........................... (488) (485)
Stock incentive plan .............................. 157 1,409
Purchase of treasury stock ........................ (95,749) --
Cash dividends paid ............................... (13,193) (11,719)
--------- ---------
Net cash (used in) financing activities ............. (111,271) (31,374)
--------- ---------
Net (decrease) increase in cash and cash equivalents (25,271) 32,137
Cash and cash equivalents at beginning of year ...... 126,935 11,460
--------- ---------
Cash and cash equivalents at end of period .......... $ 101,664 $ 43,597
========= =========
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, 1996, 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
primarily 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 $34,621,000 and $35,366,000 were included in trade
accounts payable at March 31, 1997 and December 31, 1996, respectively.
2. DIVIDEND
On April 30, 1997, the Board of Directors declared a quarterly dividend of 27
cents per share, payable June 1, 1997 to shareholders of record on May 12, 1997.
3. SHARE REPURCHASE
On April 30, 1997, the Company's Board of Directors restored an existing share
repurchase authorization to its original level of five million shares. Through
that date, over three million shares had been repurchased under the original
1992 authorization. The authorization continues to be adjustable to reflect
stock splits and stock dividends. Repurchases are expected to be made from time
to time in open market and privately negotiated transactions. The repurchased
shares will be retained in the Company's treasury and be available for general
corporate purposes (see the Liquidity and Capital Resources section).
5
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. EARNINGS PER SHARE (SFAS No. 128)
The Financial Accounting Standards Board's SFAS No. 128, "Earnings per Share" is
effective for 1997 year end financial statements.
SFAS No. 128 replaces Accounting Principles Board (APB) Opinion No. 15,
"Earnings per Share", for calculating earnings per share (EPS). SFAS No. 128
eliminates the presentation of primary and fully diluted EPS and requires the
dual presentation of earnings per share and earnings per share - assuming
dilution. The calculation of basic EPS excludes any contingently returnable and
any potential common shares (options, warrants, convertible securities, and
contingent stock agreements). The calculation of diluted EPS includes common
shares outstanding and the dilutive effect of potential common shares.
The effect on the Company's EPS of adopting SFAS No. 128 is estimated to be
immaterial.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1996:
Net Sales
Net sales of $985,556,000 in the 1997 first quarter increased 17.0% from net
sales of $842,647,000 for the comparable 1996 period. There were 63 sales days
in the 1997 first quarter compared with 64 sales days in the same 1996 period.
The year 1997 will have one less sales day than did the year 1996 (255 versus
256).
The sales increase of 17.0% for the 1997 first quarter, as compared with the
1996 first quarter, was principally volume related. Excluding the incremental
sales of Acklands - Grainger, Inc. (AGI), the Canadian industrial distribution
business acquired on December 2, 1996, sales increased 6.9%. This increase
primarily represented the effects of the Company's market initiatives, which
included new product additions, the continuing expansion of branch facilities,
the addition of Zone Distribution Centers (ZDCs), and the National Accounts,
Integrated Supply, and Direct Marketing programs.
Sales of seasonal products for the Company, excluding AGI, declined
approximately 4.0% in the 1997 first quarter as compared with the same 1996
period. Many regions of the country experienced milder weather during the
quarter versus the comparable 1996 period.
The Company's Grainger branch-based business experienced selling price increases
of about 1.2% when comparing the first quarters of 1997 and 1996. Daily sales to
National Account customers within the branch-based business increased an
estimated 20%, on a comparable basis, over the 1996 first quarter.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $54,609,000 in the 1997 first quarter increased 8.9% when
compared to net earnings of $50,124,000 for the comparable 1996 period. The net
earnings increase was lower than the net sales increase due to operating
expenses increasing at a faster rate than net sales, partially offset by higher
gross profit margins.
The Company's gross profit margin increased by 0.19 percentage point when
comparing the first quarters of 1997 and 1996. The overall increase was reduced
by the incremental effect of Acklands - Grainger, Inc. (AGI) which has lower
average gross profit margins as compared with the average of all other business
units. Excluding AGI, the Company's gross profit margin increased 0.62
percentage point when comparing the first quarters of 1997 and 1996. Of note are
the following favorable factors affecting the Company's gross profit margin,
excluding AGI:
1. Selling price increases exceeded the level of cost increases.
2. The change in product mix was favorable as Lab Safety Supply sales
(generally higher than average gross profit margins) increased as a percent
of total sales and seasonal product sales (generally lower than average
gross profit margins) declined.
Partially offsetting the above factors 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 20.7% for the 1997 first quarter as compared with the same 1996
period. This rate of increase was greater than the rate of increase in net
sales. This was caused by a lower than expected increase in net sales, the
incremental operating expenses of AGI, and by the following expenses which
increased at a faster rate than the growth rate in net sales:
1. Payroll costs;
2. Advertising expenses;
3. Expenses related to marketing initiatives and business process improvement
programs; and
4. Freight-out expenses.
Partially offsetting the above factors was a decline in employee benefits costs,
primarily related to lower health care costs and lower profit sharing expenses.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's effective income tax rate for the first quarter of 1997 was 40.5%
versus 40.2% for the comparable 1996 period. The increase in the effective
income tax rate is attributable to proportionally more business in Canada (AGI)
which has higher tax rates.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997, working capital decreased by
$49,752,000. The ratio of current assets to current liabilities was 2.1 at March
31, 1997 and 2.1 at December 31, 1996. The Consolidated Statements of Cash
Flows, included in this report, detail the sources and uses of cash and cash
equivalents.
The Company continues to maintain a low debt ratio and 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 11.6 % at March 31, 1997 and 11.4% at
December 31, 1996. For the first three months of 1997, $11,395,000 was expended
for land, buildings, and facilities improvements, and $4,876,000 for data
processing, office, and other equipment, for a total of $16,271,000.
In 1997, the Company repurchased 1,201,000 common shares during the first
quarter. From April 1, 1997 through May 13, 1997, the Company acquired an
additional 2,120,000 common shares. At May 13, 1997, approximately 2,900,000
shares of common stock remained available for repurchase under the current share
repurchase authorization (see Note 3 of the Notes to Consolidated Financial
Statements).
10
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
PART II - OTHER INFORMATION
Items 1, 2, 3, and 5 not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
An annual meeting of shareholders of the Company was held on April
30, 1997. At that meeting:
a) Management's nominees listed in the proxy statement pertaining
to the meeting were elected directors for the ensuing year. Of
the 45,905,022 shares present in person or represented by proxy
at the meeting, the number of shares voted for and the number of
shares as to which authority to vote in the election was
withheld, were as follows with respect to each of the nominees:
Shares as to Which
Shares Voted for Voting Authority
Name Election Withheld
--------------------- ---------------- -----------------
G. R. Baker 45,657,934 247,088
R. E. Elberson 45,685,844 219,178
J. D. Fluno 45,706,395 198,627
W. H. Gantz 45,675,266 229,756
D. W. Grainger 45,689,714 215,308
R. L. Keyser 45,701,148 203,874
J. W. McCarter, Jr. 45,678,420 226,602
J. D. Slavik 45,695,906 209,116
H. B. Smith 45,691,092 213,930
F. L. Turner 45,673,966 231,056
J. S. Webb 45,677,115 227,907
b) A proposal to ratify the appointment of Grant Thornton, LLP as
independent auditors of the Company for the year ended December
31, 1997 was approved. Of the 45,905,022 shares present in
person or represented by proxy at the meeting, 45,734,648 shares
were voted for the proposal, 73,357 shares were voted against
the proposal, and 97,017 shares abstained from voting with
respect to the proposal.
c) A proposal to approve the Director Stock Plan was approved. Of
the 45,905,022 shares present in person or represented by proxy
at the meeting, 43,677,405 shares were voted for the proposal,
1,845,148 shares were voted against the proposal, and 382,469
shares abstained from voting with respect to the proposal.
d) A proposal to approve the Office of the Chairman Incentive Plan
was approved. Of the 45,905,022 shares present in person or
represented by proxy at the meeting, 44,474,152 shares were
voted for the proposal, 1,035,788 shares were voted against the
proposal, and 395,082 shares abstained from the voting with
respect to the proposal.
11
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders. (continued)
e) A proposal to approve the 1990 Long Term Incentive Plan, as
amended, was approved. Of the 45,905,022 shares present in
person or represented by proxy at the meeting,44,043,932 shares
were voted for the proposal, 1,469,108 shares were voted against
the proposal, and 391,982 shares abstained from the voting with
respect to the proposal.
EXHIBIT INDEX
--------------------
Item 6 Exhibits (numbered in accordance with Item
601 of regulation S-K) and Reports on Form 8-K.
a) Exhibits
(10) Material Contracts
Compensatory Plans or Arrangements
(a) W.W. Grainger, Inc. Director Stock Plan,
incorporated by reference to Appendix A of
the Company's Proxy Statement dated March 26,
1997.
(b) W.W. Grainger, Inc. Office of the Chairman
Incentive Plan, incorporated by reference to
Appendix B of the Company's Proxy Statement
dated March 26, 1997.
(c) W.W. Grainger, Inc. 1990 Long-Term Stock
Incentive Plan, as amended, incorporated by
reference to Appendix C of the Company's
Proxy Statement dated March 26, 1997.
(11) Computation of Earnings per Common and
Common Equivalent Share 14
(27) Financial Data Schedule 15
b) Reports on Form 8-K - None.
12
<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: May 13, 1997 By: /s/ J.D. Fluno
- ---------------------- ---------------------------------------------------
J.D. Fluno, Vice Chairman
Date: May 13, 1997 By: /s/ P.O. Loux
- ---------------------- ---------------------------------------------------
P.O. Loux, Senior Vice President, Finance and Chief
Financial Officer
Date: May 13, 1997 By: /s/ R.D. Pappano
- ---------------------- ---------------------------------------------------
R.D. Pappano, Vice President, Financial Reporting
and Investor Relations
13
<PAGE>
Exhibit 11
W.W. Grainger, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Three Months Ended March 31,
------------------------------
1997 1996
----------- -----------
Average number of shares outstanding during
the period ........................................ 52,444,172 50,941,982
Common equivalent shares:
Shares issuable under outstanding options
which are dilutive .............................. 1,461,688 1,402,351
Shares which could have been purchased based
upon the average market value for the period .... 980,603 980,255
----------- -----------
481,085 422,096
Dilutive effect of exercised options prior to being
exercised ......................................... 13,157 16,618
----------- -----------
494,242 438,714
----------- -----------
Weighted average number of common and
common equivalent shares outstanding .............. 52,938,414 51,380,696
=========== ===========
Net earnings ........................................ $54,609,000 $50,124,000
=========== ===========
Net earnings per common and common
equivalent share .................................. $ 1.03 $ 0.98
=========== ===========
Note: The computation of earnings per share assuming full dilution is the same
as set forth above.
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 101,664
<SECURITIES> 0
<RECEIVABLES> 482,040
<ALLOWANCES> 16,203
<INVENTORY> 627,712
<CURRENT-ASSETS> 1,274,259
<PP&E> 1,002,639
<DEPRECIATION> 450,553
<TOTAL-ASSETS> 2,065,260
<CURRENT-LIABILITIES> 619,836
<BONDS> 27,698
0
0
<COMMON> 26,693
<OTHER-SE> 1,379,991
<TOTAL-LIABILITY-AND-EQUITY> 2,065,260
<SALES> 985,556
<TOTAL-REVENUES> 985,556
<CGS> 632,276
<TOTAL-COSTS> 632,276
<OTHER-EXPENSES> 257,359
<LOSS-PROVISION> 2,993
<INTEREST-EXPENSE> 1,148
<INCOME-PRETAX> 91,780
<INCOME-TAX> 37,171
<INCOME-CONTINUING> 54,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,609
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 0
</TABLE>
