43 PAGES COMPLETE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
nX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
n 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 $3,291,595,177 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 7, 1997.
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 51,773,697 shares outstanding as of March 7, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 30, 1997 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
PART I
Item 1: BUSINESS............................................... 3-6
THE COMPANY.......................................... 3
GRAINGER............................................. 3-5
ACKLANDS - GRAINGER INC.............................. 5
LAB SAFETY SUPPLY, INC............................... 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........................................ 13
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 13
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE,
AND REPORTS ON FORM 8-K............................... 13-14
Signatures............................................................ 15
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 16
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................... 17-36
(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 distribution of maintenance, repair, and
operating supplies and related information to the commercial, industrial,
contractor, and institutional markets in North America. 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 1996, the Company acquired the Canadian industrial distribution business
of Acklands Limited, Canada's largest nationwide distributor of broad line
industrial supplies. The Company also completed the integration of its Bossert
Industrial Supply (production consumable products) unit into its Grainger
store-based business. With the completion of this integration and the
acquisition, the Company operates four business units: Grainger, the core
store-based business (a distributor of maintenance, repair, and operating (MRO)
supplies and related information), Acklands - Grainger Inc. (a Canadian
nationwide distributor of industrial supplies), Lab Safety Supply, Inc. (a
direct marketer of safety equipment and related industrial products), and Parts
Company of America (a distributor of repair and replacement parts).
The Company utilizes a satellite communications network which substantially
reduces its reliance on phone lines by linking stores and other facilities
together via a network control center. This capability 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 activities. New items are added regularly to its product line on the
basis of market information as well as on recommendations of its employees,
customers, and suppliers, and other factors.
Grainger
The Company's Grainger store-based business 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. During 1996, the Company completed the integration of
Bossert Industrial Supply into Grainger in order to enhance its position as a
distributor of production consumable products.
Grainger provides support functions and coordination and guidance in the areas
of Accounting, Administrative Services, Aviation, Communications, Compensation
and Benefits, Data Systems and Data Processing, Employee Development, Finance,
Government Regulations, Human Resources, Industrial Relations, Insurance and
Risk Management, Internal Audit, Legal, Planning, Real Estate and Construction
Services, Security and Safety, Taxes, and Treasury Services. These services are
provided in varying degrees to the other business units.
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 1996 averaged $137 and were
made to more than 1,300,000 customers. Sales to the largest single customer,
General Motors Corporation, were 0.9% of sales. Grainger estimates that
approximately 28% of 1996 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.
Grainger purchases from more than 1,000 product suppliers for its General
Catalog, most of whom are manufacturers, and numerous other suppliers in support
of Grainger Integrated Supply Operations (GISO). The largest supplier in 1996, a
diversified manufacturer through 22 of its divisions, accounted for 11.2% of
purchases. No significant difficulty has been encountered with respect to
sources of supply.
(3)
<PAGE>
Grainger offers its line of products at competitive prices through a network of
stores in the United States and Mexico (349 at December 31, 1996). An average
store has 15 employees and handles about 260 transactions per day. During 1996,
an average of 93,300 sales transactions were completed daily. Each store tailors
its inventory to local customer preferences and actual product demand. In 1996,
Grainger invested more than $31,000,000 in the continuation of its facilities
optimization program, which consisted of new stores, relocated stores, and
additions to stores. Grainger enhanced its marketing capabilities in Mexico by
opening its first foreign-based store in Monterrey.
Grainger has six Zone Distribution Centers (ZDCs) in operation. The ZDC
logistics strategy provides a break-bulk function for faster store 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 at the store, greater capacity 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. The NDC is a centralized storage and shipment
facility servicing the entire network with slower moving inventory items.
Grainger serves all sizes and types of customers, and accommodates a variety of
purchase situations and preferences.
Grainger employs account managers who call on existing and prospective
customers. In addition, a sales force of market specialists and National Account
specialists has been developed to serve individualized markets and National
Accounts. Grainger employed 1,608 account managers, market specialists, and
National Account specialists at December 31, 1996.
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 20%, on a comparable basis, in 1996 over
the prior year. National Account relationships have been established with over
400 of the nation's largest companies.
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 in reducing the number of MRO
suppliers and streamlining 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 1996, Grainger continued to develop its "Alliance Partner" relationships.
"Alliance Partners" participate in the full integration of technical support,
consolidated invoicing, and consolidated payment. These alliances provide
Grainger with enhanced capabilities in developing 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 1996, Grainger Consulting Services enhanced its capabilities, while
working on numerous engagements with Fortune 500 companies.
Grainger uses direct marketing for customers who prefer a direct marketing
approach or are too small to warrant in-person sales calls. Direct mailings to
these customers make them aware of Grainger's capabilities. Grainger provides
these customers, who are usually small to medium-sized businesses, with a low
total 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 4,116 pages listing over 78,000 items
together with extensive technical and application data. Before being added to
the General Catalog, a new item must satisfy many evaluation tests and other
rigid requirements. For 1996, approximately 2,000,000 copies of the General
Catalog were published. The most current edition was issued in January 1997.
(4)
<PAGE>
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 100,000 copies of the Electronic Catalog are currently in
use. The Electronic Catalog is also used at the stores as a training tool and a
resource for identifying appropriate products for customers' applications.
In 1996, Grainger enhanced the capabilities of its internet Web site
(http://www.grainger.com) by adding an interactive on-line catalog and on-line
ordering capabilities. The Web site contains useful information about Grainger's
products and services and provides an alternative way for customers to access
Grainger.
Acklands - Grainger Inc.
On December 2, 1996, the Company acquired the Canadian industrial distribution
business of Acklands Limited, Canada's largest nationwide distributor of broad
line industrial supplies. The Industrial Group of Acklands Limited had sales of
over $300 million for the fiscal year ended January 31, 1996. The acquired
entity is operated as a separate business unit under the name of Acklands -
Grainger Inc. (AGI). This acquisition will provide the opportunity to expand the
Company's market share in Canada and better serve the Canadian operations of the
Company's National Account customers.
Lab Safety Supply, Inc. (Lab Safety) and Parts Company of America (PCA)
Lab Safety is a leading national direct marketer of safety and related
industrial 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 1,300 pages, listing
approximately 36,000 items. During 1996, an average of 4,000 sales transactions
were completed daily.
PCA continues to expand its distribution of repair and replacement parts. PCA
distributes approximately 200,000 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 provides value to customers by being a single source for many
different replacement parts and by offering technical assistance. PCA 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 1996,
an average of 2,400 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: 1996,
$2,119,021,000; 1995, $1,669,243,000; 1994, $1,534,751,000; 1993,
$1,376,664,000; and 1992, $1,310,538,000.
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, catalog houses, 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, account managers,
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.
(5)
<PAGE>
The Company serves a number of diverse markets, and is able in some markets to
reasonably estimate the Company's competitive position within that market.
However, taken as a whole, the Company is unable to determine its market shares
relative to others engaged in whole or in part in similar activities.
Employees
As of December 31, 1996, the Company had 14,601 employees, of whom 12,180 were
full-time and 2,421 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, 1996, the Company's Grainger store locations totaled
7,698,000 square feet, an increase of approximately 3.5% over 1995. Most stores
are located in or near major metropolitan areas, many in industrial parks.
Stores range in size from 2,000 to 109,000 square feet and average approximately
22,000 square feet. A typical owned store 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
United States (1) 6 Zone Distribution Centers 1,345,000
United States and Mexico (2) 349 Grainger store locations 7,698,000
United States (3) Other Facilities 1,321,000
Canada (4) 167 AGI Facilities 2,019,000
---------
Total square feet 16,359,000
==========
The Company is constructing an office facility to house a large portion of the
Company's Chicago-area office workforce on owned property in Lake Forest,
Illinois. Construction of the facility has started and is expected to be
completed during 1999. It is expected that most Chicago-area owned or leased
general office facilities occupied in 1996 will be vacated when this new
facility becomes operational.
- --------------------------------------------------------------------------------
(1) These facilities are either owned or leased with leases expiring between
1997 and 1999. The owned facilities are not subject to any mortgages.
(2) Grainger stores consist of 275 owned and 74 leased properties. The owned
facilities are not subject to any mortgages. 348 stores are located in the U.S.
and 1 store is located in Monterrey, Mexico.
(3) Other facilities represent leased and owned general offices, distribution
centers, and stores. The owned facilities are not subject to any mortgages.
(4) These facilities were acquired through the acquisition of the industrial
distribution business of Acklands Limited on December 2, 1996. The properties
consist of general offices, distribution centers, and stores that are either
owned or leased. 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 1996.
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 (64) Senior Vice President (a position assumed in 1995
after serving as Vice President), General Counsel,
and Secretary.
Donald E. Bielinski (47) 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 (44) Senior Vice President, Operations and Quality, a
position assumed in 1997 after serving as Vice
President, Field Operations and Quality. Prior to
assuming the last-mentioned position in 1995, Mr.
Clark served 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 (55) Vice Chairman. Mr. Fluno is a member of the Office of
the Chairman.
Gary J. Goberville (50) Vice President, Human Resources. Before joining the
Company in 1995, Mr. Goberville served as an
executive with GenCorp, Inc.
David W. Grainger (69) Chairman of the Board, and from 1992 to 1994,
President. Mr. Grainger is a member of the Office of
the Chairman.
Richard L. Keyser (54) 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.
(continued on next page)
(7)
<PAGE>
P. Ogden Loux (54) Senior Vice President, Finance and Chief Financial
Officer, positions assumed in 1997 after serving as
Vice President, Finance. Prior to assuming the
last-mentioned position in 1994, Mr. Loux
served the Grainger Division as Vice President,
Business Support. Previously, Mr. Loux served as
Vice President and Controller of the Grainger
Division.
Robert D. Pappano (54) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995
after serving as Vice President and Treasurer.
James T. Ryan (38) 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 (39) Vice President, Business Development and General
Manager, International, positions assumed in 1996
after serving as Vice President and General Manager,
Direct Marketing. Prior to assuming the
last-mentioned positions in 1995, Mr. Schweig served
as Vice President, Marketing of the Grainger
Division.
John W. Slayton, Jr. (51) 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 1996 and 1995, are shown below.
Prices
--------------------------
Quarters High Low Dividends
- -----------------------------------------------------------------------
1996 First $71 1/8 $62 5/8 $0.23
Second 78 5/8 64 0.25
Third 78 1/4 66 0.25
Fourth 81 1/2 68 3/4 0.25
- -----------------------------------------------------------------------
Year $81 1/2 $62 5/8 $0.98
- -----------------------------------------------------------------------
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
- -----------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 3, 1997 was 2,000.
Item 6: Selected Financial Data
Years Ended December 31,
----------------------------------------------------
(In thousands of dollars except for per share amounts)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales .......... $3,537,207 $3,276,910 $3,023,076 $2,628,398 $2,364,421
Net earnings before
cumulative effect
of accounting changes .. 208,526 186,665 127,874 149,267 137,242
Cumulative effect of
accounting changes ..... -- -- -- (820) --
Net earnings ........... 208,526 186,665 127,874 148,447 137,242
Net earnings per
common and common
equivalent share before
cumulative effect
of accounting changes ... 4.04 3.64 2.50 2.88 2.58
Cumulative effect of
accounting changes ...... -- -- -- (0.02) --
Net earnings per
common and
common equivalent share . 4.04 3.64 2.50 2.86 2.58
Total assets ......... 2,119,021 1,669,243 1,534,751 1,376,664 1,310,538
Long-term debt .......... 6,152 8,713 1,023 6,214 6,936
Cash dividends
paid per share .......... $0.98 $0.89 $0.78 $0.705 $0.65
NOTE: 1994 and 1993 net earnings include restructuring charges of $49,779 and
$482, 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, 1996, 1995, 1994, and 1993, and the percentage of increase
(decrease) in such items in 1996, 1995, and 1994 from the prior year.
Years Ended December 31,
---------------------------------------------------
Items in Consolidated
Statements of Earnings as a Percent of Increase
Percentage of (Decrease) from
Net Sales Prior Year
------------------------------ -----------------
1996 1995 1994 1993 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Net sales ................ 100.0% 100.0% 100.0% 100.0% 7.9% 8.4% 15.0%
Cost of merchandise sold . 64.2 63.9 64.5 62.9 8.3 7.4 18.0
Operating expenses ....... 26.0 26.5 27.9 27.6 6.5 3.0 16.3
Other (income) deductions,
net ..................... (0.1) 0.1 0.1 0.1 (181.1) 48.9 30.5
Income taxes ............. 4.0 3.8 3.3 3.8 11.9 24.4 0.1
Net earnings ............. 5.9% 5.7% 4.2% 5.6% 11.7% 46.0% (13.9)%
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%, and 19.3% for 1995 and 1994, respectively.
Net sales
The 1996 Company net sales increase of 7.9% was primarily volume related. This
increase was affected by 1996 having two more sales days than 1995 (on a daily
basis, net sales increased 7.1%). Excluding the incremental net sales of
Acklands - Grainger Inc. (AGI), the Canadian industrial distribution business
acquired on December 2, 1996, net sales increased 7.2% (6.4% on a daily basis).
This increase primarily represented the effects of the Company's market
initiatives which included new product additions, the continuing expansion of
store facilities, the addition of Zone Distribution Centers (ZDCs), and the
National Accounts, Integrated Supply, and Direct Marketing programs. Partially
offsetting the growth from these initiatives were two factors. First quarter
1996 net sales for the Company's Grainger store-based business were negatively
affected by the sluggish economy and adverse weather experienced by much of the
East Coast during January. The second factor was that net sales of seasonal
products within the Grainger store-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 of 1996 as compared to
the same periods in 1995. This contributed to a full year decline in seasonal
product sales estimated at 1%.
The Grainger store-based business experienced selling price increases of about
1.9% when comparing 1996 with 1995. The Grainger store-based business' National
Accounts program showed strong growth for the year, with net sales increasing to
approximately $849,000,000. Daily net sales to these National Account customers
increased about 20%, on a comparable basis, over 1995. All geographic areas for
the Grainger store-based business contributed to the sales growth, with the
percent increases for regions west of the Mississippi being slightly higher than
for the regions in the east.
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
store facilities, adding Zone Distribution Centers (ZDCs), and the National
Accounts program.
The Grainger store-based business experienced selling price increases of about
1.5% when comparing 1995 with 1994. The Grainger store-based business' National
Accounts program showed strong growth for the year, with net sales increasing to
approximately $668,000,000. Daily net sales to these National Account customers
increased about 22%, on a comparable basis, over 1994. All geographic areas for
the Grainger store-based business contributed to the net sales growth, with the
percent increases for regions east of the Mississippi being slightly higher than
for regions in the west.
(10)
<PAGE>
Net earnings
Net earnings for 1996 increased 11.7% over 1995. This increase for 1996 was
higher than the net 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 rate of
growth in operating expenses was lower than the net sales increase primarily due
to payroll and employee benefits costs increasing at a slower rate than net
sales and lower freight-out expenses. Partially offsetting the above factors
were data processing expenses, advertising expenses, and expenses relating to
marketing initiatives and business process improvement programs, all increasing
faster than net sales, and December 1996 incremental expenses associated with
AGI. 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 average borrowings and lower interest
rates paid on all outstanding debt, partially offset by lower capitalized
interest. Partially offsetting these decreases in interest expense was
incremental interest expense attributable to $132,874,000 in short-term debt
added in December 1996 relating to the acquisition of AGI. The Company's gross
profit margin decreased by 0.22 percentage point when comparing the full years
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. The addition of AGI had a
minor effect on this decrease. Partially offsetting the above factors were
selling price increases exceeding the level of cost increases and a favorable
change in the product mix as sales of seasonal products declined. Historically,
the sales of seasonal products have lower than average gross profit margins.
Net earnings for 1995 increased 46.0% over 1994 including the effects of
after-tax restructuring charges of $49,779,000 recorded in 1994. 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/store
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; 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 point when comparing the full years of 1995 and 1994, excluding
the effects of a restructuring charge of $16,308,000 (0.54 percentage point 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.
FINANCIAL CONDITION
Working capital was $704,175,000 at December 31, 1996 compared to $618,524,000
at December 31, 1995 and $504,595,000 at December 31, 1994. The ratio of current
assets to current liabilities was 2.1, 2.4, and 2.1 at such dates.
Net cash flows from operations of $271,434,000 in 1996, $126,285,000 in 1995,
and $191,382,000 in 1994 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.
1996 1995 1994
------ ------- -------
(In thousands of dollars)
Land, buildings, structures, and improvements ... $31,881 $55,280 $73,342
Furniture, fixtures, and other equipment ........ 30,170 56,655 47,015
------ ------- -------
Total............................................. $62,051 $111,935 $120,357
====== ======= =======
The company repurchased 409,600 shares of its common stock in 1996. The Company
did not repurchase any shares of common stock during 1995 or 1994. At December
31, 1996, approximately 3,200,000 shares of common stock remained available for
repurchase under the existing authorization. At March 7, 1997, approximately
2,000,000 shares of common stock remained available for repurchase.
(11)
<PAGE>
Dividends paid to shareholders were $50,035,000 in 1996, $45,227,000 in 1995,
and $39,570,000 in 1994.
On December 2, 1996, the Company acquired AGI for approximately $289,334,000
including transaction expenses. The purchase consisted of cash payments and
transaction expenses of $136,801,000 (funded principally by short-term debt of
$132,874,000), and the issuance of 2,039,886 shares of W.W. Grainger, Inc.
common stock valued at $152,533,000.
Internally generated funds have been the primary source of working capital and
funds needed for expanding the business (including capital expenditures 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 currently being constructed in Lake Forest, Illinois. The
Company had no material financing commitments outstanding at December 31, 1996.
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%, 5%, and 4%, at December 31, 1996, 1995,
and 1994, respectively.
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The predominant 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 30, 1997, 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
30, 1997, and, to the extent required, is incorporated herein by reference.
(12)
<PAGE>
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 30, 1997, 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 30, 1997, and, to the extent required, is
incorporated herein by reference.
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
- ------------- (iii) Executive Death Benefit Plan, incorporated by
reference to Exhibit 10(c)(iii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995.
(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.
39-43 (vii) Summary Description of Management Incentive
Program Based on Improved Economic Earnings.
(viii) Supplemental Profit Sharing Plan, incorporated by
reference to Exhibit 10(c)(viii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995.
(ix) Plan for Payment of Directors' Fees incorporated
by reference to Exhibit 10(c)(ix) to the
Company's Annual Report of Form 10-K for the year
ended December 31, 1995.
(11) Computations of Earnings Per Common and Common Equivalent Share.
See Index to Financial Statements and Supplementary Data.
37 (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.
On December 16, 1996, the Company filed a Report on Form 8-K announcing that the
Company acquired the industrial distribution business of Acklands Limited
pursuant to a Share Purchase Agreement dated as of November 4, 1996.
(14)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly issued this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: March 24, 1997
W.W. GRAINGER, INC.
By: D. W. Grainger By: P. O. Loux
- -------------------- ----------------
D. W. Grainger P.O. Loux
Chairman of the Board of Directors Senior Vice President, Finance
(a Principal Executive Officer and and Chief Financial Officer
a Director) (Principal Financial Officer)
By: R. L. Keyser By: R. D. Pappano
- ------------------ ------------------
R. L. Keyser R. D. Pappano
President and Chief Executive Vice President, Financial
Officer Reporting and Investor
(a Principal Executive Officer and Relations
a Director) (Principal Accounting Officer)
By: J. D. Fluno
- -----------------
J. D. Fluno
Vice Chairman
(a Principal Executive Officer and
a Director)
George R. Baker March 24, 1997 James D. Slavik March 24, 1997
--------------------- -----------------
George R. Baker James D. Slavik
Director Director
Robert E. Elberson March 24, 1997 Harold B. Smith March 24, 1997
--------------------- -----------------
Robert E. Elberson Harold B. Smith
Director Director
Wilbur H. Gantz March 24, 1997 Fred L. Turner March 24, 1997
--------------------- -----------------
Wilbur H. Gantz Fred L. Turner
Director Director
John W. McCarter, Jr. March 24, 1997 Janiece S. Webb March 24, 1997
--------------------- -----------------
John W. McCarter, Jr. Janiece S. Webb
Director Director
(15)
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1996, 1995, and 1994
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, 1996, 1995, and 1994, 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, 1996, 1995, and 1994, 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, 1996, 1995, and 1994. 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 4, 1997
(17)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
--------------------------
ASSETS 1996 1995 1994
------ ---- ---- ----
CURRENT ASSETS
Cash and cash equivalents ................... $ 126,935 $ 11,460 $ 15,292
Accounts receivable, less allowances for
doubtful accounts of $15,302 for 1996,
$14,229 for 1995, and $15,333 for 1994 .... 433,575 369,576 345,793
Inventories ................................. 686,925 602,639 519,966
Prepaid expenses ............................ 11,971 11,746 14,233
Deferred income tax benefits ................ 60,837 67,239 68,362
------ ------ ------
Total current assets .................. 1,320,243 1,062,660 963,646
PROPERTY, BUILDINGS, AND EQUIPMENT
Land ........................................ 132,095 123,431 115,497
Buildings, structures, and improvements ..... 510,386 472,154 431,184
Furniture, fixtures, machinery, and equipment 343,231 302,115 263,536
------- ------- -------
985,712 897,700 810,217
Less accumulated depreciation
and amortization .......................... 434,728 379,349 341,075
------- ------- -------
Property, buildings, and
equipment--net ........................ 550,984 518,351 469,142
OTHER ASSETS
Goodwill .................................... 192,555 25,635 25,635
Customer lists .............................. 85,700 93,857 93,857
Other intangibles ........................... 6,182 3,475 3,875
----- ----- -----
284,437 122,967 123,367
Less accumulated amortization ............... 54,574 50,356 37,266
------ ------ ------
229,863 72,611 86,101
Sundry ...................................... 17,931 15,621 15,862
------ ------ ------
Other assets--net ......................... 247,794 88,232 101,963
------- ------ -------
TOTAL ASSETS .................................. $2,119,021 $1,669,243 $1,534,751
========= ========== =========
(18)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)
December 31,
-----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 1994
------------------------------------ ---- ---- ----
CURRENT LIABILITIES
Short-term debt ........................$ 135,275 $ 23,577 $ 11,134
Current maturities of long-term debt ... 24,753 23,241 26,449
Trade accounts payable ................. 240,779 204,925 226,459
Accrued contributions to employees'
profit sharing plans ................. 56,258 53,618 50,020
Accrued expenses ....................... 131,199 115,310 122,339
Income taxes ........................... 27,804 23,465 22,650
--------- --------- ----------
Total current liabilities ........ 616,068 444,136 459,051
LONG-TERM DEBT (less current maturities) . 6,152 8,713 1,023
DEFERRED INCOME TAXES .................... 2,207 8,539 15,177
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS. 31,932 28,746 26,695
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--
$5 par value--authorized, 6,000,000
shares, issued and outstanding, none . -- -- --
Common Stock--$0.50 par value--
authorized, 150,000,000 shares;
issued, 53,338,026 shares, 1996,
50,894,629 shares, 1995, and
50,749,681 shares, 1994 .............. 26,669 25,447 25,375
Additional contributed capital ......... 262,318 86,548 81,796
Treasury stock, at cost--409,600 shares. (32,090) -- --
Unearned restricted stock compensation . (17,597) (19) (61)
Cumulative translation adjustments ..... (2,262) -- --
Retained earnings ...................... 1,225,624 1,067,133 925,695
--------- ---------- ---------
Total shareholders' equity ....... 1,462,662 1,179,109 1,032,805
--------- ---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ...................$ 2,119,021 $ 1,669,243 $ 1,534,751
========= ========= =========
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,
------------------------
1996 1995 1994
---- ---- ----
Net sales ............................ $ 3,537,207 $ 3,276,910 $ 3,023,076
Cost of merchandise sold ............. 2,269,993 2,095,552 1,951,321
------------ ------------ ------------
Gross profit .................. 1,267,214 1,181,358 1,071,755
Warehousing, marketing, and
administrative expenses ............ 921,685 865,067 787,137
Restructuring charges ................ -- -- 53,082
------------ ------------ ------------
Total operating expenses ...... 921,685 865,067 840,219
------------ ------------ ------------
Operating earnings ............ 345,529 316,291 231,536
Other income or (deductions)
Interest income .................... 4,554 162 17
Interest expense ................... (1,228) (4,260) (1,870)
Unclassified--net .................. 33 (44) (928)
------------ ------------ ------------
3,359 (4,142) (2,781)
------------ ------------ ------------
Earnings before income taxes .. 348,888 312,149 228,755
Income taxes ......................... 140,362 125,484 100,881
------------ ------------ ------------
Net earnings .................. $ 208,526 $ 186,665 $ 127,874
------------ ------------ ------------
Net earnings per common and common
equivalent share ................... $ 4.04 $ 3.64 $ 2.50
============ ============ ============
Average number of common and
common equivalent shares outstanding 51,636,204 51,241,217 51,226,476
============ ============ ============
The accompanying notes are an integral part of these financial statements.
(20)
<PAGE>
<TABLE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)
<CAPTION>
Unearned
Additional Restricted Cumulative
Common Contributed Treasury Stock Translation Retained
Stock Capital Stock Compensation Adjustments Earnings
-------- ------------ -------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ...... $ 25,342 $ 79,364 $ -- $ (192) $ -- $ 837,391
Exercise of stock options ....... 33 2,420 -- -- -- --
Cancellation of 650 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
Exercise of stock options ....... 84 6,489 -- -- -- --
Issuance of 2,039,886 shares
of common stock
for business acquisition ...... 1,020 151,513 -- -- -- --
Issuance of 235,000 shares
of restricted common stock .... 118 17,742 -- (17,860) -- --
Amortization of unearned
restricted stock compensation . -- 26 -- 282 -- --
Purchase of 409,600 shares of
treasury stock ................ -- -- (32,090) -- -- --
Cumulative translation
adjustments ................... -- -- -- -- (2,262) --
Net earnings .................... -- -- -- -- -- 208,526
Cash dividends paid
($0.98 per share) ............. -- -- -- -- -- (50,035)
-------- ---------- ------- ---------- ---------- ------------
Balance at December 31, 1996 .... $ 26,669 $ 262,318 $(32,090) $ (17,597) $ (2,262) $ 1,225,624
======== ========== ======== ========== ========== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
(21)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net earnings ................................. $208,526 $186,665 $127,874
Provision for losses on accounts receivable .. 9,131 7,780 9,928
Depreciation and amortization:
Property, buildings, and equipment ......... 61,585 57,760 49,795
Intangibles and goodwill ................... 12,676 13,090 14,534
Restructuring charges--non-cash .............. -- -- 68,363
Change in operating assets and liabilities--
net of the effects of restructuring charges
and the business acquisition:
(Increase) in accounts receivable .......... (28,871) (31,563) (56,268)
(Increase) in inventories .................. (7,430) (82,673) (70,060)
Decrease (increase) in prepaid expenses .... 255 2,487 (3,401)
Decrease (increase) in deferred income
taxes .................................... 70 (5,515) (31,794)
Increase (decrease) in trade accounts
payable .................................. 1,891 (21,534) 48,345
Increase (decrease) in other current
liabilities .............................. 3,724 (3,431) 25,393
Increase in current income taxes payable ... 4,339 815 3,878
Increase in accrued employment related
benefits costs ........................... 3,186 2,051 2,524
Other--net ................................... 2,352 353 2,271
--------- -------- --------
Net cash provided by operating activities ...... 271,434 126,285 191,382
Cash flows from investing activities:
Additions to property, buildings, and
equipment .................................. (62,051) (111,935) (120,357)
Proceeds from sale of property, buildings,
and equipment .............................. 9,045 4,918 2,573
Net cash paid for business acquisition ....... (136,144) -- --
Other--net ................................... (1,932) 378 (240)
--------- -------- --------
Net cash (used in) investing activities ........ (191,082) (106,639) (118,024)
(22)
<PAGE>
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt ... $111,698 $12,443 $(23,164)
Proceeds from long-term debt ................. 1,500 5,665 775
Long-term debt payments ...................... (2,549) (1,183) (1,179)
Stock options exercised ...................... 2,890 2,147 1,155
Tax benefit of stock incentive plan .......... 3,709 2,677 1,345
Purchase of treasury stock ................... (32,090) -- --
Cash dividends paid .......................... (50,035) (45,227) (39,570)
--------- -------- --------
Net cash provided by (used in) financing
activities ................................ 35,123 (23,478) (60,638)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ......................... 115,475 (3,832) 12,720
Cash and cash equivalents at beginning of year . 11,460 15,292 2,572
--------- -------- --------
Cash and cash equivalents at end of year ....... $126,935 $11,460 $15,292
========= ======== ========
Non-cash investing and financing activities
from acquisition of business:
Fair value of assets acquired............... $338,101
Liabilities acquired........................ (49,424)
Fair value of common stock issued .......... (152,533)
---------
Net cash paid for business acquisition.......... $136,144
=========
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, 1996, 1995, AND 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is a leader in the distribution of maintenance, repair, and
operating supplies and related information to the commercial, industrial,
contractor, and institutional markets in North America. The Company's business
is 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, the disclosure of
contingent assets and liabilities, and the estimates of revenues and expenses.
Actual results could differ from those estimates.
ACCOUNTING CHANGE
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The effect of adopting this new
standard was immaterial.
REVENUE RECOGNITION
The Company recognizes revenue at the date products are shipped or at the date
services are completed.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily 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
Furniture, fixtures, machinery, and equipment........ 3 to 10 years
Improvements to leased property are amortized over the initial terms of the
respective leases or the estimated service lives of the improvements, whichever
is shorter.
The Company capitalized interest costs of $1,772,000, $2,136,000, and
$1,929,000, in 1996, 1995, and 1994, respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. Accordingly, the effect of
translating these subsidiary's financial statements into U.S. dollars is
recorded as a separate component of shareholders' equity.
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
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes being provided
for temporary differences between financial and tax reporting.
(24)
<PAGE>
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are computed based upon the
weighted average number of shares outstanding during each year which includes
outstanding options for common stock, when dilutive.
NOTE 2--BUSINESS ACQUISITION
Effective December 2, 1996, the Company purchased the stock of a subsidiary of
Acklands Limited (a Canadian corporation). The business acquired is the largest
nationwide distributor of broad line industrial supplies in Canada. The
aggregate purchase price was approximately $289,334,000 including transaction
expenses. The purchase consisted of cash payments and transaction expenses of
$136,801,000 (funded principally by short-term debt of $132,874,000) and the
issuance of 2,039,886 shares of W.W. Grainger, Inc. common stock valued at
$152,533,000. The acquisition is being accounted for as a purchase, and
accordingly, the financial statements include results of operations from the
date of acquisition. The purchase included intangibles, including trademarks and
goodwill, valued at $173,420,000 to be amortized over periods of five to forty
years.
The following unaudited pro forma summary presents the combined results of
operations of the Company and the acquired business, as if the acquisition had
occurred at the beginning of 1995. The pro forma amounts give effect to certain
adjustments, including the amortization of intangibles, foreign currency
translation, increased interest expense and income tax effects. This pro forma
summary does not necessarily reflect the results of operations as they would
have been if the businesses had constituted a single entity during such periods
and is not necessarily indicative of results which may be obtained in the
future.
Years Ended December 31,
------------------------
1996 1995
---- ----
(In thousands of dollars
except for per share amounts)
Net sales ....................................... $3,847,665 $3,585,964
Operating earnings .............................. $ 368,203 $ 336,336
Net earnings .................................... $ 216,680 $ 191,528
Earnings per common and common equivalent share . $ 4.05 $ 3.59
NOTE 3--RESTRUCTURING CHARGES
The Company announced in July 1994 its intention to 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 were (in thousands of dollars except per share amounts):
1994
----
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
Other .................................................... 704
-------
Charged to operating expenses .............................. 53,082
-------
Total ...................................................... $69,390
-------
Total, net of tax .......................................... $49,779
-------
Effect on earnings per common and common equivalent share .. $ 0.97
=======
For 1996 and 1995, amounts charged against expense accruals included in the 1994
restructuring charges were not material.
(25)
<PAGE>
NOTE 4--CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents the carrying amount approximates fair value due to the short
maturity of these instruments.
Cash paid during the year for:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Interest (net of amounts capitalized)... $ 974 $ 4,167 $ 1,836
========= ======= =======
Income taxes............................ $131,726 $127,041 $127,039
========= ======= =======
NOTE 5--CASH
Checks outstanding of $35,366,000, $40,027,000, and $37,088,000, are included in
Trade accounts payable at December 31, 1996, 1995, and 1994, respectively. These
amounts are immaterial to the consolidated financial statements.
NOTE 6--CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.
The Company has a broad customer base representing many diverse industries doing
business in all regions of the United States as well as other areas of North
America. Consequently, in management's opinion, no significant concentration of
credit risk exists for the Company.
NOTE 7--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $209,305,000, $194,854,000, and $184,364,000 higher
than reported at December 31, 1996, 1995, and 1994, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used for all
Company inventories. Inventories under FIFO approximate replacement cost.
NOTE 8--OTHER ASSETS
Included in other assets are intangibles such as customer lists and goodwill.
Customer lists are amortized on a straight-line basis over periods of five to
sixteen years. Goodwill represents the cost in excess of net assets of acquired
companies and is amortized on a straight-line basis over periods of five to
forty years. Other assets increased in 1996 primarily due to the business
acquisition described in Note 2.
(26)
<PAGE>
NOTE 9--SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
1996 1995 1994
---- ---- ----
Bank Debt (In thousands of dollars)
- ---------
Outstanding at December 31....................... $135,275 $ 3,186 $ 3,739
Maximum month-end balance during the year........ $135,275 $64,853 $27,170
Average amount outstanding during the year....... $ 13,796 $22,576 $ 9,973
Weighted average interest rates during the year.. 3.8% 6.2% 4.6%
Weighted average interest rates at December 31... 3.2% 6.2% 8.0%
Commercial Paper
- ----------------
Outstanding at December 31....................... -- $20,391 $ 7,395
Maximum month-end balance during the year........ -- $79,734 $49,985
Average amount outstanding during the year....... $1,436 $43,357 $23,143
Weighted average interest rates during the year.. 5.7% 6.0% 4.4%
Weighted average interest rates at December 31... -- 5.8% 6.3%
On December 2, 1996, in connection with the business acquisition described in
Note 2, the acquired Canadian subsidiary issued six month banker's acceptances
with a face value of $134,947,000, denominated in Canadian dollars. The banker's
acceptances were issued at a discount, with an effective interest rate of 3.13%
which yielded proceeds of $132,874,000. In addition, this subsidiary has
established a working capital line of credit of $36,483,000. At December 31,
1996, borrowings under the working capital line of credit were $2,518,000. The
Company has guaranteed these borrowings.
The Company also had available lines of credit of $150,000,000 at December 31,
1996, $54,500,000 at December 31, 1995, and $54,000,000 at December 31, 1994.
The total available at December 31, 1996 was in place to support commercial
paper, and carried commitment fees of 0.07%.
NOTE 10--EMPLOYEE BENEFITS
RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula primarily related 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
benefit plans which cover most of the other employees. Provisions under all
plans were $49,450,000, $47,323,000, and $46,117,000 for the years ended
December 31, 1996, 1995, and 1994, 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
$3,578,000, $3,488,000, and $3,153,000 for the years ended December 31, 1996,
1995, and 1994, respectively. Components of the expense were:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Service cost...................................... $2,309 $1,973 $1,887
Interest cost..................................... 2,080 2,025 1,695
Actual return on assets........................... (2,008) (2,282) (17)
Amortization of transition asset
(22 year amortization)........................... (143) (143) (143)
Deferred asset gain (loss)........................ 1,397 1,913 (339)
Unrecognized (gain) loss.......................... (139) (80) 29
Prior service cost................................ 82 82 41
------ ------ ------
$3,578 $3,488 $3,153
====== ====== ======
(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 and benefits 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 & Poor's 500 index fund. The assumed
weighted average long-term rate of return is 6.7%, which is net of a 36.5% 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 $379,000, $2,409,000, and $737,000 for the years ended December
31, 1996, 1995, and 1994, respectively.
A reconciliation of funded status as of December 31, 1996, 1995, and 1994 is as
follows:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Accumulated Postretirement Benefit Obligation (APBO):
Retirees and their dependents................. $(3,739) $ (3,852) $(3,715)
Fully eligible active plan participants....... (1,825) (1,767) (1,331)
Other active plan participants................ (26,345) (27,863) (17,299)
-------- -------- --------
Total APBO...................................... (31,909) (33,482) (22,345)
Plan assets at fair value....................... 12,307 10,288 6,199
-------- -------- --------
Funded status................................... (19,602) (23,194) (16,146)
Unrecognized transition asset................... (2,570) (2,713) (2,856)
Unrecognized net (gain) loss ................... (4,388) 2,464 (3,443)
Unrecognized prior service cost................. 1,595 1,677 1,758
-------- -------- --------
Accrued postretirement benefits costs........... $(24,965) $(21,766) $(20,687)
======== ======== ========
To determine the APBO as of December 31, 1996 and 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%. The assumed health
care cost trend rate for 1997 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, 1996 would increase by $7,184,000.
The aggregate of the service cost and interest cost components of the 1996 net
periodic postretirement benefits expense would increase by $1,137,000.
NOTE 11--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Industrial development revenue bonds................$ 27,650 $ 26,150 $ 26,150
Other............................................... 3,255 5,804 1,322
-------- -------- --------
30,905 31,954 27,472
Less current maturities............................. 24,753 23,241 26,449
-------- -------- --------
$6,152 $ 8,713 $ 1,023
======== ======== ========
The industrial development revenue bonds include various issues that bear
interest at a variable rate up to 15%, or variable rates up to 78.20% of the
prime rate, and come due in various amounts from 2001 through 2021. 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, $13,545,000 of these bonds had an unsecured liquidity facility
available at December 31, 1996 for which the Company compensated a bank through
a commitment fee of 0.07%. There were no borrowings related to this facility at
December 31, 1996. The Company classified $22,755,000, $21,255,000, and
$26,150,000, of bonds currently subject to redemption options in current
maturities of long-term debt at December 31, 1996, 1995, and 1994, respectively.
(28)
<PAGE>
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1996 are as follows:
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
---------- -------
(In thousands of dollars)
1997............................ $1,998 $22,755
1998............................ 1,080 --
1999............................ 76 --
2000............................ 83 4,895
2001............................ 18 --
NOTE 12--LEASES
The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.
At December 31, 1996, 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)
1997...................................... $15,863 $3,346 $19,209 $75
1998...................................... 12,280 1,391 13,671 75
1999...................................... 10,276 32 10,308 75
2000...................................... 4,609 15 4,624 75
2001...................................... 2,980 10 2,990 15
Thereafter................................ 5,616 -- 5,616 --
-------- -------- ------- ------
Total minimum payments required........... 51,624 4,794 56,418 315
Less amounts representing sublease income. 2,080 -- 2,080
-------- -------- -------
$49,544 $4,794 $54,338
======== ======== =======
Less imputed interest..................... 54
------
Present value of minimum
lease payments (included
in long-term debt)...................... $261
======
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $18,434,000, $20,084,000, and $20,935,000 for 1996,
1995, and 1994, respectively.
NOTE 13--STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan ("The Plan") allows the Company to
grant a variety of incentive awards to key employees of the Company. A maximum
of 4,028,414 shares of common stock are authorized for issuance under the Plan,
in connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights, and other stock-based awards.
(29)
<PAGE>
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.
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.
There were 235,000 shares of restricted stock issued in 1996 with a fair market
value of $76 per share. The shares are scheduled to vest in November 2006,
although accelerated vesting is provided in certain instances. There were no
shares of restricted stock issued in 1995 or 1994. Restricted stock released
totaled 1,000, 1,050, and 4,615 shares in 1996, 1995 and 1994, respectively.
There were 650 shares canceled in 1994. 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.
Total compensation expense for stock-based compensation was $282,000, $42,000
and $96,000 in 1996, 1995, and 1994, respectively.
There was no activity relating to stock appreciation rights in 1996, 1995, or
1994, and at December 31, 1996, there were no stock appreciation rights
outstanding.
Transactions involving stock options are summarized as follows:
Weighted
Average
Price Per
Option Shares Share Exercisable
------------- ----- -----------
Outstanding at January 1, 1994....... 1,415,270 $38.40 1,019,600
=========
Granted............................ 202,360 $61.50
Exercised.......................... (90,196) $30.05
Canceled or expired................ (13,230) $46.94
---------
Outstanding at December 31, 1994..... 1,514,204 $41.91 1,124,164
Granted............................ 221,620 $61.91 =========
Exercised.......................... (207,402) $29.44
Canceled or expired................ (14,480) $60.68
---------
Outstanding at December 31, 1995..... 1,513,942 $46.36 916,762
=========
Granted............................ 288,730 $67.62
Exercised.......................... (241,181) $33.99
Canceled or expired................ (29,930) $62.12
---------
Outstanding at December 31, 1996..... 1,531,561 $52.01 855,091
========= =========
All options were issued at market price on the date of grant. Options were
issued with initial vesting periods ranging from six months to five years.
Information about stock options outstanding at December 31, 1996 is as follows:
Options Outstanding
- -----------------------------------------------------------------------
Weighted Average
--------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
- ----------------- ----------- --------------------- --------
$24.00-$32.31 236,071 1.78 $29.39
$36.69-$47.38 301,900 3.84 $39.04
$51.50-$62.13 708,520 6.95 $58.79
$67.50-$77.50 285,070 9.32 $67.62
(30)
<PAGE>
Options Exercisable
---------------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
----------------- ----------- ----------------
$24.00-$32.31 236,071 $29.39
$36.69-$47.38 301,900 $39.04
$51.50-$58.75 317,120 $55.20
Shares available for future awards were 2,471,719, 2,965,519, and 3,172,659 at
December 31, 1996, 1995, and 1994, respectively.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion (APBO) No. 25. Pro forma net earnings and
earnings per share, as calculated under SFAS No. 123, are as follows:
1996 1995
---- ----
(In thousands of dollars
except for per share amounts)
Net earnings.................... $206,696 $186,010
Earnings per share.............. $ 4.00 $ 3.63
The weighted average fair value of the stock options granted during 1996 and
1995 were $21.75 and $20.33, respectively. The fair value of each option grant
was estimated using the Black-Scholes option-pricing model based on the date of
the grant and the following weighted average assumptions:
1996 1995
---- ----
Risk-free interest rate......... 6.55% 6.82%
Expected life................... 6.5 years 6.5 years
Expected volatility............. 21.75% 21.75%
Expected dividend yield......... 1.46% 1.46%
NOTE 14--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS
The Company adopted a Shareholder Rights Plan, under which there is outstanding
one preferred share purchase right (Right) for each outstanding share of the
Company's common stock. Each Right, under certain circumstances, may be
exercised to purchase one two-hundredth of a share of Series A Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's common stock) at a price of $125, subject to adjustment.
The Rights become exercisable only after a person or a group, other than a
person or group exempt under the plan, acquires or announces a tender offer for
20% or more of the Company's common stock. If a person or group, other than a
person or group exempt under the plan, acquires 20% or more of the Company's
common stock or if the Company is acquired in a merger or other business
combination transaction, each Right generally entitles the holder, other than
such person or group, to purchase, at the then-current exercise price, stock
and/or other securities or assets of the Company or the acquiring company having
a market value of twice the exercise price.
The Rights expire on May 15, 1999 unless earlier redeemed. They generally are
redeemable at $.01 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 20% or more of the Company's common stock. They are also automatically
redeemable, at the redemption price, upon consummation of certain transactions
approved by shareholders in accordance with procedures provided in the plan. The
Rights do not have voting or dividend rights and, until they become exercisable,
have no dilutive effect on the earnings of the Company.
NOTE 15--INCOME TAXES
The asset and liability approach of SFAS No. 109, "Accounting for Income Taxes,"
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.
(31)
<PAGE>
Income tax expense consisted of the following:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Current provision:
Federal.....................................$114,725 $106,690 $108,053
State and foreign........................... 25,567 24,309 24,622
------- ------- -------
Total current............................. 140,292 130,999 132,675
Deferred tax expense (benefits)............... 70 (5,515) (31,794)
------- ------- -------
Total provision...............................$140,362 $125,484 $100,881
======= ======= =======
The deferred tax expense (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, 1996, 1995, and 1994 were:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Current deferred tax assets (liabilities):
Inventory valuations......................... $25,059 $ 26,896 $ 25,001
Administrative and general expenses
deducted on a paid basis for tax purposes.. 26,759 25,004 25,117
Employment related benefits expense.......... 1,778 1,566 1,017
Restructuring costs.......................... 7,428 13,957 17,288
Other........................................ (187) (184) (61)
------- ------- -------
Total net current deferred tax asset....... 60,837 67,239 68,362
------- ------- -------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits....................... (29,693) (32,781) (35,432)
Differences related to property,
buildings, and equipment................... (400) (1,013) (2,424)
Intangible amortization...................... 14,681 13,208 11,479
Employment related benefits expense.......... 12,709 11,441 10,625
Other........................................ 496 606 575
Total net noncurrent deferred tax liability. (2,207) (8,539) (15,177)
------- ------- --------
Net deferred tax asset......................... $58,630 $58,700 $53,185
======= ======= ========
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 U.S. federal income taxes at the
statutory rate follows:
1996 1995 1994
---- ---- ----
(In thousands of dollars)
Federal income taxes at the statutory rate..... $122,111 $109,252 $80,064
State income taxes, net of federal income tax
benefits and foreign taxes................... 17,006 15,141 11,145
Effect of nondeductible restructuring costs.... -- -- 8,189
Other--net..................................... 1,245 1,091 1,483
----- ----- -----
Income tax expense........................... $140,362 $125,484 $100,881
======= ======= =======
Effective tax rate........................... 40.2% 40.2% 44.1%
======= ======= =======
(32)
<PAGE>
NOTE 16-- FOREIGN OPERATIONS
The Company's revenue and operating earnings from foreign operations were less
than 10% of consolidated results for the years ending December 31, 1996, 1995
and 1994.
Primarily as a result of the business acquisition described in Note 2,
identifiable assets in foreign countries were $332,388,000 at December 31, 1996.
Identifiable assets in foreign countries were less than 10% of consolidated
assets for the years ended December 31, 1995 and 1994.
NOTE 17--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 1996 and 1995 is as follows:
1996 Quarter Ended
----------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- -----
Net sales.................. $842,647 $888,624 $ 901,858 $904,078 $3,537,207
Gross profit................ 300,498 309,607 319,534 337,575 1,267,214
Net earnings............... $ 50,124 $ 49,547 $ 52,272 $ 56,583 $ 208,526
Net earnings per common and
common equivalent share... $ 0.98 $ 0.96 $ 1.02 $ $1.08 $ 4.04
======== ======= ======== ======== ==========
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
======== ======= ======== ======== ==========
(33)
<PAGE>
W.W. GRAINGER, INC. AND SUBSIDIARIES
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions(a) Other(b) of period
- --------------------- --------- ---------- ------------- -------- ---------
(In thousands of dollars)
Allowance for doubtful
accounts
1996.............. $14,229 $9,131 $8,824 $766 $15,302
1995.............. 15,333 7,780 8,884 -- 14,229
1994.............. 13,573 10,331 8,571 -- 15,333
(a) Accounts charged off as uncollectible, less recoveries.
(b) Business acquired.
(34)
<PAGE>
W.W. GRAINGER, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATIONS OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
1996 1995 1994
---- ---- ----
Average number of common
shares outstanding during the year .... 51,183,237 50,818,162 50,732,625
Common equivalents (a)
Shares issuable under outstanding
options ......................... 1,532,878 1,297,551 1,380,529
Shares which could have been
purchased based on the average
market value for the period...... 1,096,632 883,851 891,933
----------- ----------- -----------
436,246 413,700 488,596
Dilutive effect of exercised options
prior to being exercised .......... 16,721 9,355 5,255
----------- ----------- -----------
Shares for the portion of the period
that the options were outstanding . 452,967 423,055 493,851
----------- ----------- -----------
Average number of common and common
equivalent shares outstanding during
the year .............................. 51,636,204 51,241,217 51,226,476
=========== =========== ===========
Net earnings ............................ $208,526,000 $186,665,000 $127,874,000
=========== =========== ===========
Net earnings per common and common
equivalent share ...................... $ 4.04 $ 3.64 $ 2.50
=========== =========== ===========
(a) Does not include options which are not dilutive. Effect under fully diluted
computation is immaterial.
(35)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report on page 17 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995 and 33-43902) and on Form S-4 (No.
33-32091) of W.W. Grainger, Inc.
GRANT THORNTON LLP
Chicago, Illinois
March 24, 1997
(36)
<PAGE>
Exhibit 21 to the Annual Report on
Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1996
W.W. GRAINGER, INC.
Subsidiaries as of March 1, 1997
Acklands - Grainger Inc. (Canada)
370071 Alberta Ltd. (Alberta) (50% owned)
655206 Alberta Ltd. (Alberta) (50% owned)
Wilter Auto & Industrial Supply (Lloyd) Ltd. (Alberta) (50% owned)
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)
(37)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 126,935
<SECURITIES> 0
<RECEIVABLES> 448,877
<ALLOWANCES> 15,302
<INVENTORY> 686,925
<CURRENT-ASSETS> 1,320,243
<PP&E> 985,712
<DEPRECIATION> 434,728
<TOTAL-ASSETS> 2,119,021
<CURRENT-LIABILITIES> 616,068
<BONDS> 27,297
0
0
<COMMON> 26,669
<OTHER-SE> 1,435,993
<TOTAL-LIABILITY-AND-EQUITY> 2,119,021
<SALES> 3,537,207
<TOTAL-REVENUES> 3,537,207
<CGS> 2,269,993
<TOTAL-COSTS> 2,269,993
<OTHER-EXPENSES> 907,967
<LOSS-PROVISION> 9,131
<INTEREST-EXPENSE> 1,228
<INCOME-PRETAX> 348,888
<INCOME-TAX> 140,362
<INCOME-CONTINUING> 208,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,526
<EPS-PRIMARY> 4.04
<EPS-DILUTED> 0
</TABLE>
Exhibit 10(c)(vii) to the
Annual Report on form 10-K
of W.W.Grainger, Inc. for the
year ended December 31, 1996
SUMMARY DESCRIPTION OF THE
1996 MANAGEMENT INCENTIVE PROGRAM (MIP)
BASED ON IMPROVED ECONOMIC EARNINGS
FOR W.W. GRAINGER, INC.
I. 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).
II. 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.
III. ELIGIBILITY FOR PARTICIPATION
Members of the Office of the Chairman and all employees in salary grades 13
through 18 (officers and non-officer key managers) are eligible to participate
in this program, subject to the eligibility provisions in Section IV. These
employees are most responsible for decisions affecting EE and/or major policy
direction.
IV. 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. Specific eligibility
provisions are developed and reviewed annually.
(39)
<PAGE>
Eligibility provisions are as follows:
A. Full-Year Participation - Members of the Office of the Chairman and
employees in grades 13 to 18 who were employed in those grades for the
full year will be eligible to receive a full award under the MIP, except
as noted below.
B. First-Year Participation - Individuals who are hired or promoted into a
position eligible for participation in the MIP on or before July 1 will
be eligible to receive a pro-rata award based on the number of months in
the eligible position.
C. Transfer From Another EE-Based Program - Individuals who are promoted or
transferred into an eligible position from a position eligible for
incentive pay under another EE-based incentive program (for example,
TIP) will receive an award prorated based on the number of months in
each eligible position.
D. Promotions within MIP - Participants who are promoted during the year
from one MIP eligible position to another shall have their target
bonuses prorated based on the number of months spent in each grade.
E. Ungraded Positions - Participants who are in an ungraded position will
be considered, for purposes of this program, to be in the grade
indicated on the most recently approved PAF. If none has been indicated,
Human Resources, in conjunction with the functional Vice President, will
determine the grade to be used.
F. Transfer to Other Business Units - An employee who transfers to another
Company business unit and no longer participates in the MIP will receive
a pro-rata award for the number of months the person was in a
participating position on the next regular incentive payment date and
also will receive any account balance on that date.
G. Job Elimination or Downgrade - If a participant's job is eliminated for
business reasons or is 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.
H. Voluntary Resignation - If a participant leaves before July 1, no award
will be paid for the current year and any remaining account balance will
be forfeited. 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.
(40)
<PAGE>
I. 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 year or the prior year if not
yet paid at the time of termination.
"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.
J. Death, Retirement or Long-Term Disability - A pro-rata award for the
current year will be added to any participant account balance and the
employee or his/her estate 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.
K. Employees rated 1 or 2 are not eligible for participation.
Exceptions to the above provisions can only be approved by the CCOM.
V. OVERVIEW
The MIP consists of two 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 (Exhibit
A). 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 adjustment. The
discretionary adjustment, 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.
(41)
<PAGE>
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 (year two)
EE-3 equals EE in year prior to year two (year three)
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 bonus calculation includes a
separate mechanism to reflect the construction period of the Lake Forest office
complex. The EE effect of all capital spending commencing January 1, 1996 and
ending with the occupancy of the complex will be excluded until the year of
occupancy. For 1996, the calculation also excludes the EE effect of Acklands -
Grainger Inc. (AGI). The acquisition of AGI was not part of the 1996 Plan and
occurred late in the year (12/2/96). Most MIP and TIP participants were not part
of the acquisition process and have not been involved in AGI's operations. The
treatment of AGI for future years is under review.
The next step involves comparison of Actual EE to Target EE 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 EE 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.
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.
(42)
<PAGE>
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 two 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.
VI. OTHER
A. 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.
B. 100% of incentive dollars paid out will be included in "admissible
compensation" under the Profit Sharing Trust Plan.
C. Life insurance -- Payouts under the MIP will not have any effect on the
level of life insurance or disability coverage. Coverages will remain as
at present under those programs as "compensation" is defined as base
salary and commissions.
D. 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 AT ANY
TIME WITH OR WITHOUT PRIOR NOTICE.
(43)
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