41 Pages Complete
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
________to_______
_______________
Commission file number 1-5684
I.R.S. Employer Identification Number 36-1150280
W.W. Grainger, Inc.
(An Illinois Corporation)
455 Knightsbridge Parkway
Lincolnshire, Illinois 60069-3620
Telephone: (847)793-9030
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 94,949,080 shares of the
Company's Common Stock were outstanding as of October 30, 1998.
The Exhibit Index appears on page 18 in the sequential numbering system.
1
<PAGE>
Part I - FINANCIAL INFORMATION
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ........................... $ 1,120,038 $ 1,066,927 $ 3,296,115 $ 3,103,689
Cost of merchandise sold ............ 714,727 693,775 2,103,690 2,006,228
------------- ------------- ------------- -------------
Gross profit ...................... 405,311 373,152 1,192,425 1,097,461
Warehousing, marketing, and
administrative expenses ........... 309,068 277,338 897,825 811,687
------------- ------------- ------------- -------------
Operating earnings ................ 96,243 95,814 294,600 285,774
Other income or (deductions)
Interest income ................... 672 314 1,152 2,216
Interest expense .................. (1,550) (1,436) (4,847) (4,012)
Unclassified-net .................. (1,097) 233 (970) (536)
------------- ------------- ------------- -------------
(1,975) (899) (4,665) (2,332)
------------- ------------- ------------- -------------
Earnings before income taxes ........ 94,268 94,925 289,935 283,442
Income taxes ........................ 38,179 38,445 117,424 114,794
------------- ------------- ------------- -------------
Net earnings ...................... $ 56,089 $ 56,480 $ 172,511 $ 168,648
============= ============= ============= =============
Earnings per share:
Basic ............................. $ 0.58 $ 0.57 $ 1.78 $ 1.66
============= ============= ============= =============
Diluted ........................... $ 0.57 $ 0.56 $ 1.75 $ 1.64
============= ============= ============= =============
Average number of shares outstanding:
Basic ............................. 96,519,586 98,968,570 96,996,816 101,417,971
============= ============= ============= =============
Diluted ........................... 98,010,294 100,669,166 98,684,554 102,944,444
============= ============= ============= =============
Cash dividends paid per share ....... $ 0.15 $ 0.135 $ 0.435 $ 0.395
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Earnings .......................... $ 56,089 $ 56,480 $ 172,511 $ 168,648
Other comprehensive earnings:
Foreign currency translation
adjustments ....................... (6,547) (11) (10,549) (1,568)
------------ ------------ ------------ ------------
Comprehensive earnings ................ $ 49,542 $ 56,469 $ 161,962 $ 167,080
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<CAPTION>
ASSETS Sept. 30, 1998 Dec. 31, 1997
- -------------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 46,071 $ 46,929
Accounts receivable, less allowance for doubtful
accounts of $18,091 for 1998 and $15,803 for 1997 .......................... 496,646 455,457
Inventories .................................................................. 570,330 612,132
Prepaid expenses ............................................................. 13,296 9,122
Deferred income tax benefits ................................................. 60,480 59,348
------------ ------------
Total current assets ....................................................... 1,186,823 1,182,988
PROPERTY, BUILDINGS, AND EQUIPMENT ............................................. 1,173,130 1,087,158
Less accumulated depreciation and amortization ............................... 538,540 494,245
------------ ------------
Property, buildings, and equipment-net ....................................... 634,590 592,913
OTHER ASSETS ................................................................... 230,143 221,920
------------ ------------
TOTAL ASSETS ................................................................... $ 2,051,556 $ 1,997,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt .............................................................. $ 44,971 $ 2,960
Current maturities of long-term debt ......................................... 22,829 23,834
Trade accounts payable ....................................................... 279,256 261,802
Accrued liabilities .......................................................... 216,638 210,383
Income taxes ................................................................. 23,213 34,902
------------ ------------
Total current liabilities .................................................. 586,907 533,881
LONG-TERM DEBT (less current maturities) ....................................... 122,788 131,201
DEFERRED INCOME TAXES .......................................................... 332 2,871
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ...................................... 38,989 35,207
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock - $5 par value - authorized,
12,000,000 shares, issued and outstanding, none ............................ -- --
Common Stock - $0.50 par value - authorized, 300,000,000
shares; issued, 107,206,360 shares, 1998, and
106,971,524 shares, 1997 ................................................... 53,603 53,486
Additional contributed capital ............................................... 248,594 242,289
Treasury stock, at cost - 11,985,172 shares, 1998, and
9,249,572 shares, 1997 ..................................................... (496,233) (378,899)
Unearned restricted stock compensation ....................................... (17,216) (16,528)
Cumulative translation adjustments ........................................... (19,759) (9,210)
Retained earnings ............................................................ 1,533,551 1,403,523
------------ ------------
Total shareholders' equity ................................................... 1,302,540 1,294,661
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 2,051,556 $ 1,997,821
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................. $ 172,511 $ 168,648
Provision for losses on accounts receivable .............. 9,771 9,290
Depreciation and amortization:
Property, buildings, and equipment ..................... 46,236 48,078
Intangibles and goodwill ............................... 12,020 12,339
Capitalized software ................................... 6,961 801
Change in operating assets and liabilities:
(Increase) in accounts receivable ...................... (50,960) (69,275)
Decrease in inventories ................................ 41,802 110,444
(Increase) in prepaid expenses ......................... (4,174) (3,360)
(Increase) decrease in deferred income taxes ........... (3,671) 2,356
Increase in trade accounts payable ..................... 17,454 28,290
Increase (decrease) in other current liabilities ....... 6,255 (882)
(Decrease) increase in current income taxes payable .... (11,689) 1,722
Increase in accrued employment related
benefits costs ....................................... 3,782 3,356
Other - net .............................................. 995 1,463
----------- -----------
Net cash provided by operating activities .................. 247,293 313,270
----------- -----------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions ........................ (87,913) (71,383)
Expenditures for capitalized software .................... (31,967) (122)
Other - net .............................................. (13,654) 1,653
----------- -----------
Net cash (used in) investing activities .................... (133,534) (69,852)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in short-term debt ............... 42,011 (2,334)
Long-term debt payments .................................. (1,054) (1,485)
Stock incentive plan ..................................... 4,201 1,934
Purchases of treasury stock - net ........................ (117,292) (270,379)
Cash dividends paid ...................................... (42,483) (40,587)
----------- -----------
Net cash (used in) financing activities .................... (114,617) (312,851)
----------- -----------
Net (decrease) in cash and cash equivalents ................ (858) (69,433)
Cash and cash equivalents at beginning of year ............. 46,929 126,935
----------- -----------
Cash and cash equivalents at end of period ................. $ 46,071 $ 57,502
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be read
in conjunction with the consolidated financial statements and related notes for
the year ended December 31, 1997, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated.
The consolidated financial statements have been retroactively restated to
reflect the 2-for-1 stock split announced on April 29, 1998 effective at the
close of business on May 11, 1998. Computations of basic and diluted earnings
per share, average number of shares outstanding, and cash dividends paid per
share reflect this stock split.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. As of September 30,
1998, there was no recorded tax effect associated with the foreign currency
translation adjustments as reported in the Consolidated Statements of
Comprehensive Earnings.
Inventories are valued at the lower of cost or market. Cost is determined
primarily by the last-in, first-out (LIFO) method.
The unaudited financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the statements
contained herein.
Checks outstanding of $33,630,000 and $54,218,000 were included in trade
accounts payable at September 30, 1998 and December 31, 1997, respectively.
2. DIVIDEND
On October 28, 1998, the Board of Directors declared a quarterly dividend of
$0.15 per share, payable December 1, 1998 to shareholders of record on
November 9, 1998.
6
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. SHARE REPURCHASE
On April 29, 1998, the Company's Board of Directors restored an existing share
repurchase authorization to its original level of ten million shares. Prior to
this authorization, less than four million shares remained available for
repurchase. The number of shares have been adjusted for the May 1998 2-for-1
stock split announced on April 29, 1998, and will automatically be adjusted for
any subsequent stock splits. Repurchases are expected to be made from time to
time in open market and privately negotiated transactions. The repurchased
shares will be retained in the Company's treasury and will be available for
general corporate purposes.
4. EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
(SFAS No. 132)
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits", is effective for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans by
standardizing certain disclosure requirements. In accordance with the release,
the Company plans to adopt SFAS No. 132 for the year ended December 31, 1998.
5. ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE (SOP 98-1)
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", is effective for fiscal years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use.
The Company has not yet determined the impact of adopting SOP 98-1 on its
results of operations or financial condition. The Company plans to adopt SOP
98-1 beginning January 1, 1999.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1997:
Net Sales
Net sales of $1,120,038,000 for the 1998 third quarter increased 5.0% from net
sales of $1,066,927,000 for the comparable 1997 period. There were 64 sales days
in both the 1998 and 1997 third quarters. The year 1998 will have the same
number of sales days as did the year 1997 (255).
The sales increase of 5.0% for the 1998 third quarter, as compared with the 1997
third quarter, was principally volume related. This increase primarily
represented the effects of the Company's market initiatives which included new
product additions, and the National Accounts, Integrated Supply, and Direct
Marketing programs.
Daily sales of seasonal products for the Company increased approximately 7% in
the 1998 third quarter as compared with the same 1997 period. Many regions of
the country experienced warmer weather during the third quarter of 1998 versus
the comparable 1997 period. Sales of all other products for the Company
increased approximately 5% in the 1998 third quarter as compared with the same
1997 period.
Additional factors affecting the Company's third quarter 1998 sales growth were:
1. A decline in sales at Acklands - Grainger Inc. (AGI), the Company's
Canadian subsidiary, which resulted from a slowdown in sales to customers
in the oil and other natural resources industries. An unfavorable change in
the Canadian exchange rate also contributed to this decline. The Company's
daily sales growth rate, excluding AGI from both quarters, would have been
6.5% above the third quarter of 1997.
2. The United Parcel Service's (UPS) work stoppage, which began on August 4,
1997, and lasted for more than 2 weeks. The Company estimated that sales
were approximately $14 million lower in August 1997 as a result of the UPS
work stoppage. The Company's 1998 third quarter sales growth rate would
have been 3.6% above the comparable 1997 period, after adjusting for these
lost sales.
The Company's daily sales growth rate was 5.0% after excluding AGI from both the
1998 and 1997 periods, and after adjusting for the effect of the 1997 UPS work
stoppage.
Also affecting the Company's sales growth was the overall impact that the 1998
General Motors Corp. strike had on the U.S. economy.
The Company's Grainger branch-based business experienced selling price increases
of about 0.6% when comparing the third quarters of 1998 and 1997. Daily sales to
National Account customers within the branch-based business increased an
estimated 8%, on a comparable basis, over the 1997 third quarter.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $56,089,000 in the 1998 third quarter decreased 0.7% when
compared to net earnings of $56,480,000 for the comparable 1997 period. The net
earnings decrease was due to operating expenses (warehousing, marketing, and
administrative) increasing at a faster rate than net sales, higher interest
expense, and the negative impact of unclassified-net, partially offset by higher
gross profit margins and higher interest income.
The Company's gross profit margin increased by 1.22 percentage points when
comparing the third quarters of 1998 and 1997. Of note are the following
favorable factors affecting the Company's gross profit margin:
1. The Grainger branch-based business had selling price increases of 0.6% and a
program to reduce product costs.
2. The net change in product mix was favorable. The sales of Lab Safety Supply
(generally higher than average gross profit margins) increased as a percent
of total sales. The sales of AGI (generally lower than average gross profit
margins) decreased as a percent of total sales. These favorable changes in
product mix were partially offset by the sales of seasonal products
(generally lower than average gross profit margins) which increased as a
percent of total sales.
Operating expenses (warehousing, marketing, and administrative) for the Company
increased 11.4% for the 1998 third quarter as compared with the same 1997
period. This rate of increase was greater than the rate of increase in net
sales. The following factors, combined with a lower than expected increase in
net sales, contributed to this higher rate of increase:
1. Operating expenses were higher as a result of the following initiatives:
a. Continued expansion of the Company's integrated supply business;
b. Start-up of the Grainger Custom Solutions business;
c. Continued development of the Company's full service marketing
capabilities on the Internet; and
d. Increased expenses supporting the Company's marketing initiatives.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings (continued)
2. Operating expenses related to data processing were higher by an
estimated $5,000,000 compared with 1997, as adjusted for 1998 volume
increases. This was primarily due to incurring expenses related to Year
2000 compliance and the ongoing installation of the new business
enterprise system.
For a more detailed discussion of the Year 2000 issue, see the Year 2000
section included in this report.
3. Excluding the estimated effects of the incremental expenses described in
points 1 and 2 above, the Company's operating expenses increased
approximately 8%.
Operating earnings for the third quarter of 1997 were negatively affected by the
UPS work stoppage which occurred in August 1997. The gross profit margin lost on
the estimated $14 million in lost sales, along with the incremental operating
expenses incurred to serve customers during this period, resulted in an
estimated negative effect on net earnings of about $0.03 per share.
Interest income increased $358,000 for the third quarter of 1998 as compared
with the same period in 1997. This increase resulted from higher average daily
invested balances. Interest rates were relatively flat when comparing the third
quarters of each year.
Interest expense increased $114,000 for the third quarter of 1998 as compared
with the same period in 1997. This increase resulted from higher average
interest rates paid on all outstanding debt. The increase was partially offset
by lower average borrowings.
Unclassified-net had a negative effect on earnings before income taxes of
$1,330,000 for the third quarter of 1998 as compared with the same period in
1997. This negative effect was primarily the result of foreign currency
translation losses relating to the Company's operations in Mexico and to a loss
on the sale of equipment.
The Company's effective income tax rate was 40.5% for the third quarters of both
1998 and 1997.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1997:
Net Sales
Net sales of $3,296,115,000 for the first nine months of 1998 increased 6.2%
from net sales of $3,103,689,000 for the comparable 1997 period. There were 191
sales days in the first nine months of 1998 and 1997. The year 1998 will have
the same number of sales days as did the year 1997 (255).
The sales increase of 6.2% for the first nine months of 1998, as compared with
the same 1997 period, was principally volume related. This increase primarily
represented the effects of the Company's market initiatives which included new
product additions, and the National Accounts, Integrated Supply, and Direct
Marketing programs.
Daily sales of seasonal products for the Company increased approximately 5% in
the first nine months of 1998 as compared with the same 1997 period. Sales of
all other products for the Company increased approximately 6% in the first nine
months of 1998 as compared with the same 1997 period.
The Company's growth in daily sales for the first nine months of 1998 versus the
same 1997 period was constrained by a decline in sales for AGI as discussed for
the third quarter of 1998. (See the Third Quarter Net Sales discussion included
in this report.)
The Company estimated that August 1997 sales were approximately $14 million
lower as a result of the UPS work stoppage as discussed for the third quarter of
1998. (See the Third Quarter Net Sales discussion included in this report.)
Also affecting the Company's sales growth was the overall impact that the 1998
General Motors Corp. strike had on the U. S. economy.
The Company's Grainger branch-based business experienced selling price increases
of about 0.9% when comparing the first nine months of 1998 and 1997. Daily sales
to National Account customers within the branch-based business increased an
estimated 10%, on a comparable basis, over the same 1997 period.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings
Net earnings of $172,511,000 for the first nine months of 1998 increased 2.3%
when compared to net earnings of $168,648,000 for the comparable 1997 period.
The net earnings increase was lower than the sales increase primarily due to
operating expenses (warehousing, marketing, and administrative) increasing at a
faster rate than net sales, lower interest income, and higher interest expense,
partially offset by higher gross profit margins.
The Company's gross profit margin increased by 0.82 percentage point when
comparing the first nine months of 1998 and 1997. Of note are the following
favorable factors affecting the Company's gross profit margin:
1. The Grainger branch-based business had selling price increases of 0.9% and a
program to reduce costs.
2. The change in product mix was favorable. The sales of Lab Safety Supply
(generally higher than average gross profit margins) increased as a percent
of total sales. The sales of AGI (generally lower than average gross profit
margins) decreased as a percent of total sales. The sales of seasonal
products (generally lower than average gross profit margins) decreased as a
percent of total sales.
Operating expenses (warehousing, marketing, and administrative) for the Company
increased 10.6% for the first nine months of 1998 as compared with the same 1997
period. This rate of increase was greater than the rate of increase in net
sales. The following factors, combined with a lower than expected increase in
net sales, contributed to this higher rate of increase:
1. Operating expenses were higher as a result of the following initiatives:
a. Continued expansion of the Company's integrated supply business;
b. Start-up of the Grainger Custom Solutions business;
c. Continued development of the Company's full service marketing
capabilities on the Internet; and
d. Increased expenses supporting the Company's marketing initiatives.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Earnings (continued)
2. Operating expenses related to data processing were higher by an estimated
$20,000,000 compared with 1997, as adjusted for 1998 volume increases. This
was primarily due to incurring expenses related to Year 2000 compliance and
the ongoing installation of the new business enterprise system.
For a more detailed discussion of the Year 2000 issue, see the Year 2000
section included in this report.
3. Excluding the estimated effects of the incremental expenses described in
points 1 and 2 above, the Company's operating expenses increased
approximately 7%.
Interest income decreased $1,064,000 for the first nine months of 1998 as
compared with the same period in 1997. This decrease primarily resulted from
lower average daily invested balances. The decrease in interest income was
partially offset by higher average interest rates earned.
Interest expense increased $835,000 for the first nine months of 1998 as
compared with the same period in 1997. This increase resulted from higher
average interest rates paid on all outstanding debt. The increase was partially
offset by lower average borrowings.
Net earnings for the first nine months of 1997 were negatively affected by the
UPS work stoppage which occurred during the third quarter of 1997. (See the
Third Quarter Net Earnings discussion included in this report.)
The Company's effective income tax rate was 40.5% for the first nine months of
both 1998 and 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year 2000
The Company uses various software and technology that is affected by the Year
2000 issue. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or in miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company has put in place project teams dedicated to implementing a Year 2000
solution and to improving the Company's overall systems capabilities. The teams
are actively working to achieve the objectives of Year 2000 compliance and
improved internal systems. The work includes the modification of certain
existing systems, a major new system initiative, replacing hardware and software
for other systems, the creation of contingency plans, and surveying suppliers of
goods and services with whom the Company does business.
The major new system initiative, in addition to solving some Year 2000 issues,
reduces the complexity which has evolved over time from the development of
in-house systems. This complexity, which makes it difficult to change and modify
systems quickly, has resulted in a proliferation of programs and databases.
These issues will be addressed by the installation of a new business enterprise
system to replace a majority of the Company's primary operating systems. The
major system initiative has been undertaken to improve the Company's ability to
quickly respond to changing market conditions, to reduce the cost of maintaining
and supporting existing systems, and to leverage the use of information.
The Company is using a standard methodology with three phases for the Year 2000
compliance project. Phase I included conducting a complete inventory of
potentially affected areas of the business (including information technology and
non- information technology), assessing and prioritizing the information
collected during the inventory, and completing detailed project plans to address
all key areas of the project. Phase II includes the remediation and testing of
all mission critical areas of the project, surveying suppliers of goods and
services with whom the Company does business, and the creation of contingency
plans to address potential Year 2000 related problems. The Company is currently
in Phase II of the project. Phase III of the project includes the remediation
and testing of non-mission critical areas of the project, and the implementation
of contingency plans as may be necessary.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
Year 2000 (continued)
The Company is using both internal and external resources to reprogram, replace,
and test the software and hardware for Year 2000 compliance. Currently, Year
2000 work for mission critical and most non-mission critical systems and testing
of all system revisions is planned to be completed in the third quarter of 1999.
The expenses associated with this project include both a reallocation of
existing internal resources plus the use of outside services. Project expenses
for 1997 amounted to an estimated $13 million. The total remaining expenses
associated with the Year 2000 project are estimated to be between $60 and $65
million. Due to the Year 2000 project and the major new system initiative, 1998
data processing expenses will be higher than 1997. The data processing expenses
for 1998 are estimated to be a net $20 to $25 million higher than the 1997
expenses as adjusted for 1998 volume related changes. It is estimated that 1999
data processing expenses will approximate 1998 expenses, adjusted only for
volume related changes. It is expected that these projects will be funded
through the Company's operating cash flows.
In addition to addressing internal systems, the Company's Year 2000 project team
has surveyed suppliers of goods and services with whom the Company does
business. This is being done to determine the extent to which the Company is
vulnerable to a third parties' failure to remediate their own Year 2000 issue.
However, there can be no guarantee that the systems of other companies on which
the Company's systems interact will be timely converted, that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
As part of Phase II of the Year 2000 project, the Company is creating
contingency plans to address potential Year 2000 related problems with key
business processes. The plans are expected to address risks to the Company's
systems as well as risks from third party suppliers, customers, and others with
whom the Company does business. It is recognized that while the Company cannot
eliminate all potential risks, the effect of the risks on the business can be
partially mitigated by creating and testing contingency plans. Contingency plans
for key business processes are expected to be completed in the first quarter of
1999.
The estimated expenses for these projects and the dates by which the Company
will complete the Year 2000 work are based on management's current assessment
and were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
Year 2000 (continued)
However, there can be no guarantee that these estimates will be achieved or that
all components of Year 2000 compliance will be addressed as planned.
Uncertainties include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and the sources and timeliness of various systems replacements.
Management believes that failure to address the Year 2000 issue on a timely
basis could have a materially adverse effect on the Company and is committed to
devoting the appropriate resources to ensure a Year 2000 solution.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, working capital decreased by
$49,191,000. The ratio of current assets to current liabilities was 2.0 at
September 30, 1998 and 2.2 at December 31, 1997. The Consolidated Statements of
Cash Flows, included in this report, detail the sources and uses of cash and
cash equivalents.
The Company continues to maintain a low debt ratio and strong liquidity
position, which provides flexibility in funding working capital needs and
long-term cash requirements. In addition to internally generated funds, the
Company has various sources of financing available, including commercial paper
sales and bank borrowings under lines of credit and otherwise. Total debt, as a
percent of Shareholders' Equity, was 14.6% at September 30, 1998 and 12.2% at
December 31, 1997. For the first nine months of 1998, $92,298,000 were expended
for property, buildings, and equipment, and $31,967,000 were expended for
capitalized software, for a total of $124,265,000.
For the first nine months of 1998, the Company repurchased approximately 2.7
million shares of its common stock. The Company used internally generated funds
and short-term debt to fund 1998 share repurchases. As of September 30, 1998,
approximately 7.4 million shares of common stock remain available under the
repurchase authorization. (See Note 3 of the Notes to Consolidated Financial
Statements.)
17
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 not applicable.
Item 6: Exhibits (numbered in accordance with Item 601 of regulation S-K) and
Reports on Form 8-K.
<CAPTION>
EXHIBIT INDEX
-------------
<S> <C>
(a) Exhibits:
(10) Material Contracts:
(i) 1985 Executive Deferred Compensation Plan, as amended. 22-33
(ii) Supplemental Profit Sharing Plan, as amended. 34-41
(11) Computation of Earnings Per Share. 20-21
(27) Financial Data Schedule.
(b) Reports on Form 8-K - None.
</TABLE>
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.W. Grainger, Inc.
-------------------------------------------------------
(Registrant)
Date: November 12, 1998 By: /s/ J.D. Fluno
- ----------------------- -------------------------------------------------------
J.D. Fluno, Vice Chairman
Date: November 12, 1998 By: /s/ P.O. Loux
- ----------------------- -------------------------------------------------------
P.O. Loux, Senior Vice President, Finance and Chief
Financial Officer
Date: November 12, 1998 By: /s/ R.D. Pappano
- ----------------------- -------------------------------------------------------
R.D. Pappano, Vice President, Financial Reporting and
Investor Relations
19
<PAGE>
<TABLE>
Exhibit 11.1
W.W. Grainger, Inc., and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Basic:
Average number of shares outstanding during the period ..... 96,996,816 101,417,971
=============== ===============
Net earnings ............................................... $ 172,511,000 $ 168,648,000
=============== ===============
Earnings per share ......................................... $ 1.78 $ 1.66
=============== ===============
Diluted:
Average number of shares outstanding
during the period (basic) ............................... 96,996,816 101,417,971
Common equivalents
Shares issuable under outstanding options ........... 3,272,000 3,234,865
Shares which could have been purchased based
on the average market value for the period ........ 2,124,251 2,221,390
--------------- ---------------
1,147,749 1,013,475
Dilutive effect of exercised options prior to being
exercised ............................................... 27,767 21,998
--------------- ---------------
Shares for the portion of the period that the options
were outstanding ........................................ 1,175,516 1,035,473
Contingently issuable shares ............................... 512,222 491,000
--------------- ---------------
Average number of shares outstanding during the period ..... 98,684,554 102,944,444
=============== ===============
Net earnings ............................................... $ 172,511,000 $ 168,648,000
=============== ===============
Earnings per share ......................................... $ 1.75 $ 1.64
=============== ===============
</TABLE>
20
<PAGE>
<TABLE>
Exhibit 11.2
W.W. Grainger, Inc., and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Basic:
Three months ended September 30:
Nine months ended September 30, as reported in
Exhibit 11.1 ................................................ $ 1.78 $ 1.66
Six months ended June 30, as previously reported ............... 1.20 1.09
---------- ----------
Earnings per share for the three months ended
September 30 ................................................ $ 0.58 $ 0.57
========== ==========
Diluted:
Three months ended September 30:
Nine months ended September 30, as reported in
Exhibit 11.1 ............................................... $ 1.75 $ 1.64
Six months ended June 30, as previously reported .............. 1.18 1.08
---------- ----------
Earnings per share for the three months ended
September 30 .............................................. $ 0.57 $ 0.56
========== ==========
21
<PAGE>
</TABLE>
Exhibit (10) (i)
W.W. GRAINGER, INC.
1985 EXECUTIVE DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective as of October 28, 1998)
SECTION ONE
PURPOSE
-------
1.1 The purpose of this W. W. GRAINGER, INC. 1985 EXECUTIVE DEFERRED
COMPENSATION PLAN, as amended and restated effective as of October 28, 1998
(hereinafter referred to as the "1985 Plan") is to provide certain employees of
W.W. Grainger, Inc. with a program to permit them to defer a portion of their
present compensation to provide them with financial security in addition to the
Company's other retirement programs.
SECTION TWO
DEFINITIONS
-----------
2.1 The terms defined in this Section shall have the meanings shown
unless the context requires otherwise.
2.2 "Agreement" means the W.W. Grainger, Inc. 1985 Executive Deferred
Compensation Agreement (substantially in the form attached to this 1985 Plan)
entered into between the Company and the Employee to carry out the 1985 Plan
with respect to such Participant.
2.3 "Beneficiary" means the person, trust or other legal entity
designated by a Participant pursuant to Section 4.8.
2.4 "Committee" means the Compensation Committee of Management
described in Section Six to manage and administer the 1985 Plan.
2.5 "Company" means W.W. Grainger, Inc., an Illinois corporation, and
includes its subsidiaries.
2.6 "Compensation" means the Participant's base salary paid during the
calendar year.
2.7 "Deferral Period" means the period commencing on the Participant's
Effective Date of Participation and ending on the date his Compensation
Reductions cease.
22
<PAGE>
2.8 "Disability" means a condition that totally and continuously
prevents the Participant, for at least-six consecutive months, from engaging in
an "occupation" for Compensation or profit. During the first twenty-four months
of total disability, "occupation" means the Participant's occupation at the time
the disability began. After that period, occupation means any occupation for
which the Participant is or becomes reasonably fitted by education, training or
experience. Notwithstanding the foregoing, a disability shall not exist for
purposes of this 1985 Plan if the Participant fails to qualify for disability
benefits under the Social Security Act, unless the Committee determines, in its
sole discretion, that a disability exists.
2.9 "Early Benefit Date" means the date of Termination of Service of
the Participant for reasons other than death or disability prior to attainment
of age sixty-five but after the earliest of the date on which the Participant:
(a) attains age sixty,
(b) attains age fifty-five or older after completing ten Years of
Service, or
(c) completes twenty-five Years of Service.
2.10 "Effective Date of Participation" means the January 1 following
the date the Employee executes an Agreement.
2.11 "Normal Benefit Date" means the date of Termination of Service of
the Participant when he attains age sixty-five.
2.12 "Participant" means any Employee of the Company who is selected by
the Committee and who enters into an Agreement.
2.13 "Profit Sharing Plan" means the W.W. Grainger, Inc. Employees
Profit Sharing Plan, as amended from time to time.
2.14 "Service" means Service as accumulated under the Profit Sharing
Plan.
2.15 "Termination of Service" means the Participant's ceasing his
service with the Company for any reason whatsoever, whether voluntarily or
involuntarily, including by reason of death or disability.
2.16 "Year of Service" means a year that a Participant hereunder is
"Eligible" under the Profit Sharing Plan, or if he is not a Participant in the
Profit Sharing Plan, a year that he would meet the requirements of the Profit
Sharing Plan which would make him "Eligible" if he were a Participant in the
Profit Sharing Plan.
23
<PAGE>
SECTION THREE
PARTICIPANT COMPENSATION REDUCTION
----------------------------------
3.1 Compensation Reduction. Prior to the Effective Date of
Participation, each Employee designated eligible to participate in the 1985 Plan
shall execute an Agreement and irrevocably elect to defer a portion of his
Compensation otherwise earned and payable on or after the Effective Date of
Participation (as determined by the Committee). The amount of annual
Compensation to be deferred shall be set forth in Section 4 of the Agreement and
shall be not less than five percent (5%) nor greater than fifteen percent (15%)
of Compensation (or such greater percentage as may be approved by the Committee)
for a period of not less than one nor more than four years. The amount deferred
shall result in corresponding reductions in the Compensation payable to the
Participant during the Deferral Period.
3.2 Company Contributions. If the Participant elects to participate,
the Company will allocate fifteen percent (15%) of the amount of the
Participant's Compensation Reduction to be used as provided in the 1985 Plan.
The Compensation Reduction elected by a Participant under the 1985 Plan during
the Deferral Period shall reduce the Participant's Recognized Compensation under
the Profit Sharing Plan during the same period.
SECTION FOUR
BENEFITS
--------
4.1 Normal Benefit.
(a) If the Participant continues his Service until his Normal Benefit
Date, the Company shall pay to the Participant one hundred eighty equal
monthly installments commencing on the first day of the month following
his Normal Benefit Date, as Compensation earned for services rendered
prior to such date, of one-twelfth of the amount per annum specified in
Section 5 of the Agreement (the "Normal Benefit").
(b) If the Participant continues in Service with the Company after he
has attained age sixty-five and with the consent of the Committee, his
Normal Benefit payments shall commence on the first day of the month
following his Termination of Service. The Normal Benefit shall be
increased by an annualized interest rate factor of six percent (6%) to
reflect the later commencement of the benefit after the Normal Benefit
Date. Such increased benefit amount shall be payable for one hundred
eighty months.
24
<PAGE>
4.2 Continuation of Normal Benefit. If a Participant who is entitled to
the Normal Benefit dies after his Normal Benefit Date, his Beneficiary shall be
entitled to receive the remaining Normal Benefit payments, if any, that would
have been paid to the Participant if the Participant had survived until he
retrieved one hundred eighty monthly Normal Benefit payments. In lieu of such
monthly payments, the Committee may determine, in its sole discretion, to make
an actuarially determined equivalent lump sum payment to the Beneficiary.
4.3 Early Benefit.
(a) If a Participant incurs a Termination of Service on an Early
Benefit Date, the Company shall pay to the, Participant in equal
monthly installments commencing on the first day of the month following
the later of his attaining age fifty-five or his Early Benefit Date, as
Compensation earned for services rendered prior to such time,
one-twelfth of the amount per annum specified in Section 5 of the
Agreement reduced by an annualized interest rate factor of six percent
(6%) to reflect the earlier commencement of the benefit prior to the
Normal Benefit Date. If the Participant dies before he has received one
hundred eighty monthly Early Benefit payments, his Early Benefit
payments shall cease, and the Company shall pay to the Participant's
Beneficiary a Survivor's Benefit pursuant to Section 4.6 hereof.
(b) Prior to such Termination of Service, the Participant may elect to
defer commencement of payment of his benefits until the first day of
any month after he attains age fifty-five but not later than the month
after he attains age sixty-five. In such event the Company shall pay to
the Participant in equal monthly installments one-twelfth of the amount
per annum specified in Section 5 of the Agreement, reduced by an
annualized interest rate factor of six percent (6%) to reflect the
earlier commencement of the benefit prior to the Normal Benefit Date.
If the Participant dies before he has received one hundred eighty
monthly Early Benefit payments, his Early Benefit payments shall cease,
and the Company shall pay to the Participant's Beneficiary a Survivor's
Benefit pursuant to Section 4.6 hereof.
4.4 Disability Benefit. If the Participant incurs a Termination of
Service before age sixty-five as a result of a disability (as defined in Section
2.8) which results from a bodily injury sustained or sickness which first
manifests itself while his Agreement is in effect, the Company shall pay to the
Participant, in equal monthly installments commencing on the first day of the
month after the Participant has been disabled for a period of six consecutive
months, one-twelfth of the amount per annum specified in Section 6 of the
Agreement until the Participant attains his Normal Benefit Date or ceases to be
totally and continuously disabled (the "Disability Benefit"). After the
Participant who is receiving a Disability Benefit attains his Normal Benefit
Date, he shall be entitled to the Normal Benefit.
25
<PAGE>
4.5 Termination of Service Prior to Early Benefit Date.
(a) Except as provided in Sections 4.3 (Early Benefit), 4.4 (Disability
Benefit) and 4.6 (Survivor's Benefit), upon Termination of Service of
the Participant before his Early Benefit Date the Company shall pay to
the Participant, as Compensation earned for services rendered prior to
his Termination of Service, a lump sum equal to the sum of:
(i) the actual amounts of his Compensation Reduction made pursuant
to Section 4 of the Agreement,
(ii) a percentage of the amount of Company allocations made in
behalf of such Participant pursuant to Section 3.2 hereof, based on
the following schedule:
Years of Service Percentage
---------------- ----------
0-4 50
5-6 60
7-9 80
10 and Over 100
(iii) interest through the date of Termination of Service,
compounded quarterly, on the amounts of (i) and (ii) above at the
end of each quarter at half the rate on ninety-day U.S. Treasury
Bills in effect at the end of each quarter,
(the "Termination Benefit"). Such payment shall be made within ninety days
following Termination of Service.
(b) Notwithstanding any other provision of the 1985 Plan, upon any
termination of the Participant's participation in the 1985 Plan while the
Participant continues in the Service of the Company, the Participant shall
immediately cease to be eligible for any other benefits under the 1985
Plan and shall be entitled to receive only his Termination Benefit at the
time of his Termination of Service with the Company.
4.6 Survivor's Benefit. If the Participant dies while in the Service of
the Company before his Normal Benefit Date, or after Termination of Service if
he was eligible for an Early Benefit or Disability Benefit at the time his
Termination of Service occurred, the Company shall pay to the Participant's
Beneficiary in equal monthly installments commencing on the first day the month
after the Participant's death one-twelfth of the amount per annum specified in
Section 7 of the Agreement (the "Survivor's Benefit") until the later of:
26
<PAGE>
(a) the date the Participant would have attained age sixty-five, or
(b) the date on which the one hundred eightieth payment is made reduced
by the number of payments which were made to the Participant under
Section 4.3 hereof.
4.7 Proportionate Adjustment of Benefits. If the amount of actual
deferral is less than the amount of expected deferral based upon the
Participant's election in Section 4 of the Agreement, the benefits under
Sections 4.1 (Normal Benefit), 4.3 (Early Benefit), 4.4 (Disability Benefit) and
4.6 (Survivor's Benefit) will be adjusted proportionately based upon a fraction,
the numerator of which is the actual amount of deferral and the denominator of
which is the expected amount of deferral under Section 4 of his Agreement. In
the case of death or disability during the Deferral Period, the denominator will
be the expected amount of deferral for the actual period that deferrals were
made.
4.8 Recipients of Payments; Designation of Beneficiary. All payments to
be made by the Company under the 1985 Plan shall be made to' the Participant
during his lifetime,-provided that if the Participant dies prior to the
completion of such payments, then all subsequent payments under the 1985 Plan
shall be made by the Company to the Beneficiary or Beneficiaries determined in
accordance with this Section 4.8. The Participant's Beneficiary under this 1985
Plan shall be the Beneficiary designated by the Participant under the Profit
Sharing Plan unless the Participant files a written notice of a different
Beneficiary designation with the Committee in such form as the committee
requires. The form may include contingent Beneficiaries. The Participant may
from time to time change the designated Beneficiary or Beneficiaries without the
consent of such Beneficiary or Beneficiaries by filing a new designation in
writing with the Committee. (If a Participant maintains his primary residence in
a state which has community property laws, the spouse of a married Participant
shall join in any designation of a Beneficiary or Beneficiaries other than the
spouse.) If no designation shall be in effect at the time when any benefits
payable under this 1985 Plan shall become due, the Beneficiary shall be the
spouse of the Participant, or if no spouse is then living, the representatives
of the Participant's estate.
4.9 Withholding; Employment Taxes. To the extent required by the law in
effect at the time payments are made, the Company shall withhold from payments
made hereunder any taxes required to be withheld by the federal or any state or
local government.
27
<PAGE>
SECTION FIVE
CLAIMS PROCEDURE
----------------
5.1 Claim for Benefits. Any claim for benefits under the 1985 Plan
shall be made in writing to any member of the Committee. If such claim for
benefits is wholly or partially denied by the Committee Members, the Committee
Members shall, within a reasonable period of time, but not later than sixty days
after receipt of the claim, notify the claimant of the denial of the claim. Such
notice of denial shall be in writing and shall contain:
(a) the specific reason or reasons for denial of the claim,
(b) a reference to the relevant 1985 Plan provisions upon which the
denial is based,
(c) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an explanation of
why such material or information is necessary, and
(d) an explanation of the 1985 Plan's claim review procedure.
5.2 Request for Review of a Denial of a Claim for Benefits. Upon the
receipt by the claimant of written notice of denial of the claim, the claimant
may within ninety days file a written request to the full Committee, requesting
a review of the denial of the claim, which review shall include a hearing if
deemed necessary by the Committee. In connection with the claimant's appeal of
the denial of his claim, he may review relevant documents and may submit issues
and comments in writing.
5.3 Decision Upon Review of Denial of Claim for Benefits. The Committee
shall render a decision on the claim review promptly, but no more than sixty
days after the receipt of the claimant's request for review, unless special
circumstances (such as the need to hold a hearing) require an extension of time,
in which case the sixty-day period shall be extended to one hundred twenty days.
Such decision shall:
(a) include specific reasons for the decision,
(b) be written in a manner calculated to be understood by the claimant,
and
(c) contain specific references to the relevant 1985 Plan provisions
upon which the decision is based.
28
<PAGE>
SECTION SIX
COMMITTEE
---------
6.1 General Rights, Powers, and Duties of the Committee. The
Compensation Committee of Management shall be the Named Fiduciary and Committee
responsible for the management, operation and administration of the 1985 Plan.
In addition to any powers, rights, and duties set forth elsewhere in the 1995
Plan, it shall have the following powers and duties:
(a) to adopt such rules and regulations consistent with the provisions
of the 1985 Plan as it deems necessary for the proper and efficient
administration of the 1985 Plan;
(b) to enforce the 1985 Plan in accordance with its terms and any rules
and regulations it establishes;
(c) to maintain records concerning the 1985 Plan sufficient to prepare
reports, returns, and other information required by the 1985 Plan or by
law;
(d) to construe and interpret the 1985 Plan; to resolve all questions
arising under the 1985 Plan; and to approve the amounts of the
Compensation Reductions in excess of fifteen percent (15%) of
Compensation;
(e) to direct the Company to pay benefits under the 1985 Plan, and to
give such other directions and instructions as may be necessary for the
proper administration of the 1985 Plan;
(f) to employ or retain agents, attorneys, actuaries, accountants or
other persons, who may also be employed by or represent the Company;
and
(g) to be responsible for the preparation, filing, and disclosure on
behalf of the 1985 Plan of such documents and reports as are required
by any applicable federal or state law.
6.2 Information to be Furnished to Committee. The Company shall furnish
the Committee such data and information as it may require. The records of the
Company shall be determinative of each Participant's period of employment,
termination of employment and the reason therefor, leave of absence,
reemployment, Years of Service, personal data, and Compensation. Participants
and their Beneficiaries shall furnish to the Committee such evidence, data or
information, and execute such documents as the Committee requests.
29
<PAGE>
6.3 Responsibility. No member of the Committee or of the Board of
Directors of the Company shall be liable to any person for any action taken or
omitted in connection with the administration of this 1985 Plan unless
attributable to his own fraud or willful misconduct; nor shall the Company be
liable to any person for any such action unless attributable to fraud or willful
misconduct on the part of a director, officer or employee of the Company.
SECTION SEVEN
AMENDMENT AND TERMINATION
-------------------------
7.1 Rights on Termination of Service. Except as expressly provided in
Section Four or, if Termination of Service occurs after a Change in Control,
Section 7.5 hereof, the Company shall not be required or be liable to make any
payment under this 1985 Plan subsequent to the Termination of Service of the
Participant.
7.2 No Right to Company Assets. Neither the Participant nor any other
person shall acquire by reason of the 1985 Plan or Agreement any right in or
title to any assets, funds or property of the Company whatsoever including,
without limiting the generality of the foregoing, any specific funds, assets, or
other property which the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. No trust shall be created in connection
with or by the execution or adoption of this 1985 Plan or the Agreement, and any
benefits which become payable hereunder shall be paid from the general assets of
the Company. The Participant shall have only a contractual right to the amounts,
if any, payable hereunder unsecured by any asset of Company.
7.3 No Employment Rights. Nothing herein shall constitute a contract of
continuing Service or in any manner obligate the Company to continue the
services of the Participant, or obligate the Participant to continue in the
Service of the Company, and nothing herein shall be construed as fixing or
regulating the bonuses or other Compensation payable to the Participant.
7.4 Company's Right to Terminate. The Company reserves the right at any
time by resolution of its Board of Directors delivered to the Committee to amend
or terminate the 1985 Plan and/or the Agreement pertaining to the Participant or
to reduce the amount of benefits payable, provided however, that:
(a) in the event of any such termination, the Participant shall be
entitled to the Termination Benefit specified in Section 4.5 of this
1985 Plan at the time of the termination of the 1985 Plan and/or his
Agreement except that:
(i) the interest rate set forth in subsection 4.5(a)(iii) shall be
one hundred percent (100%) of the rate on ninety-day U.S. Treasury
Bills; and
30
<PAGE>
(ii) the Participant will be entitled to one hundred percent (100%)
of the Company allocations made pursuant to Section 3.2 of the 1985
Plan;
(b) in the event of any amendment which reduces the amount of benefits
payable hereunder, a reduction may not reduce the amount of the Normal
Benefit payable at age sixty-five to an amount less than the Normal
Benefit that could be provided by the amount of the Termination Benefit
calculated in accordance with subsection 7.4(a) hereof using the date
the reduction of benefit is adopted as the date of termination. In
calculating the Normal Benefit payable at age sixty-five that could be
provided by the Termination Benefit (as modified), the Committee shall
use an interest rate no less than the average of the interest rate on
U.S. Treasury Bonds with twenty year maturities as published by the
Federal Reserve Board for the twelve months ending on December 31 of
the calendar year prior to the date on which the calculation is being
made rounded to the nearest one-tenth of one percent (.1%). A reduction
in the amount of a benefit may not change the ratio of the benefits
provided in Sections 4.1, 4.3, 4.4 and 4.6 hereof to the Normal Benefit
as set forth in the affected Participant's Agreement; and
(c) benefits which are being paid at the time the 1985 Plan is
terminated or when benefits are reduced will continue to be paid
without reduction in accordance with the 1985 Plan and the Agreement
which pertains to the particular Participant.
The Committee shall notify each Participant affected by any amendment,
termination or reduction of such action and its effective date within thirty
days after it receives notice from the Company.
7.5 Change in Control. If there is a Change in Control as defined in
Section 7.6 hereof, notwithstanding any other provision of this Plan and/or
Agreement, the Plan and all Agreements hereunder shall be terminated in their
entirety (unless subsection 7.6(c) is applicable) and:
(a) each Participant or his Beneficiary who is then receiving a benefit
hereunder shall be paid by the Company a lump sum payment equal to the
present value of the remaining payments due him under this Plan based
upon an interest rate which is no greater than one-half the interest
rate set forth in subsection 7.4(b) hereof;
(b) each Participant who is not then receiving a benefit shall be paid
by the Company a lump sum equal to the greater of:
(i) the amount of the Termination Benefit as modified in subsection
7.4(a), or
31
<PAGE>
(ii) the present value of his Normal Benefit payable beginning at
age sixty-five based upon an interest rate determined by the Company
which is no greater than one-half the interest rate set forth in
subsection 7.4(b) hereof.
7.6 Definition of Change in Control. "Change in Control shall mean:
(a) the sale of the Company or substantially all of its assets, in any
form whatsoever, including merger, consolidation, or other
reorganization;
(b) the acquisition after October 28, 1998 by any individual (excluding
individuals who are Directors of the Company on October 28, 1998),
corporation, partnership or other person or entity, together with his
or her "Affiliates" and "Associates" (as defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended September 30, 1981) of
five percent (5%) or more of the outstanding shares of the common stock
of the Company followed by a change in the makeup of a majority of the
Board of Directors, within two years from the acquisition of such
amount of shares; or
(c) any sale of a substantial portion of the Company or its assets or
any substantial change in the ownership of the outstanding shares of
common stock of the Company which the Company, in its sole discretion,
determines to be a Change in Control under this Section. "Change in
Control" under this clause (c) may terminate the Plan either in its
entirety, or only as to the Participants who service with the Company
is terminated as a result of such sale or change in ownership.
SECTION EIGHT
MISCELLANEOUS
-------------
8.1 Setoff. If at the time payments or installments of payments are to
be made hereunder the Participant or the Beneficiary or both are indebted or
obligated to the Company, then the payments remaining to be made to the
Participant or the Beneficiary or both may, at the discretion of the Company, be
reduced by the amount of such indebtedness or obligation, provided, however,
that an election by the Company not to reduce any such payment or payments shall
not constitute a waiver of its claim for such indebtedness or obligation.
8.2 Nonassignability. Neither the Participant nor any other person
shall have any right to commute, sell, assign, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate or convey in advance of actual receipt
the amounts, if any,
32
<PAGE>
payable hereunder, or any part thereof, which are, and all rights to which are,
expressly declared to be unassignable and nontransferable. Except for debts owed
to the Company, no part of the amounts payable hereunder shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by the Participant or any other
person, or be transferable by operation of law in the event of the Participant's
or any other person's bankruptcy or insolvency.
8.3 Gender and Number. Wherever appropriate herein, the masculine may
mean the feminine and the singular may mean the plural or vice versa.
8.4 Notice. Any notice required or permitted to be given under the 1985
Plan shall be sufficient if in writing and hand delivered, or sent by registered
or certified mail, and if given to the Company, delivered to the principal
office of the Company, directed to the attention of the Compensation Committee
of Management. Such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark or the receipt
for registration or certification.
8.5 Governing Laws. The 1985 Plan shall be construed and administered
according to the laws of the State of Illinois.
IN WITNESS WHEREOF, the Company has amended and restated this W.W. Grainger,
Inc. 1985 Executive Deferred Compensation Plan on November 3, 1998.
W.W. GRAINGER, INC.
By: [J.D. Fluno]
-------------------
Vice Chairman
ATTEST:
[K.S. Kirsner]
- -------------------
Assistant Secretary
33
<PAGE>
Exhibit (10) (ii)
W.W. Grainger, Inc.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended and Restated Effective January 1, 1992)
(Conformed Copy as of November 3, 1998, Including First through Fourth
Amendments)
ARTICLE ONE. PURPOSE AND EFFECTIVE DATE
-----------------------------------------
1.1 Purpose of Plan. The purpose of this W.W. Grainger, Inc. Supplemental
Profit Sharing Plan is to provide key executives with profit sharing and
retirement benefits commensurate with their current compensation unaffected by
limitations imposed by the Internal Revenue Code on qualified retirement plans.
The Plan is intended to constitute an excess benefit plan, as defined in Section
3(36) of ERISA, and a "top hat" plan, as defined in Section 201(2) of ERISA.
1.2 Effective Date. This Plan was originally established effective as
of January 1, 1983. It was subsequently amended and restated by action of the
Board of Directors on April 29, 1992. The effective date of the Plan as amended
and restated herein is January 1, 1992.
ARTICLE TWO. DEFINITIONS
--------------------------
2.1 Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below and, when intended, such terms shall be
capitalized.
(a) "Retirement" shall have the same meaning as defined in Section 1.36
of the Profit Sharing Plan.
34
<PAGE>
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(c) "Committee" shall mean the Profit Sharing Trust Committee.
(d) "Company" shall mean W.W. Grainger, Inc., a corporation organized
under the laws of the State of Illinois, and subsidiaries thereof.
(e) "Disability" shall have the same meaning as defined in Section 1.14
of the Profit Sharing Plan.
(f) "Employee" shall mean any person who is employed by the Company.
(g) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
(h) "Participant" shall mean any Employee selected by the Committee to
participate in this Plan pursuant to Article Four.
(i) "Plan" shall mean this W.W. Granger, Inc. Supplemental Profit
Sharing Plan.
(j) "Profit Sharing Plan" shall mean the W.W. Grainger, Inc. Employees
Profit Sharing Plan as amended from time to time.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine term used in this plan also shall include the feminine; the plural
shall include the singular and the singular shall include the plural.
35
<PAGE>
ARTICLE THREE. ADMINISTRATION
-------------------------------
3.1 Administration by Committee. The Plan shall be administered by the
Committee, which is appointed by the Board of Directors of the Company to
administer this Plan and the Profit Sharing Plan.
3.2 Authority of Committee. The Committee shall have the authority to
interpret the Plan, to establish and revise rules and regulations relating to
the Plan, to designate Participants, and to make all determinations that it
deems necessary or advisable for the administration of the Plan.
ARTICLE FOUR. ELIGIBILITY
---------------------------
4.1 Participants. The Committee shall select the Employee or Employees
who shall participate in this Plan, subject to the limitations set forth in
Section 4.2. Once an Employee is designated a Participant, he shall remain a
Participant for the purposes specified in Section 5.1 and/or Section 5.2 until
the earlier of his death, retirement, disability, or termination of employment.
4.2 Limitations on Eligibility. The Committee may select as Participants
in this Plan only those Employees who are "Eligible Employees" in the Profit
Sharing Plan (as defined therein) and whose share of contribution are
forfeitures under the Profit Sharing Plan are limited by:
(a) Section 415 of the Code; or
(b) Any other provision of the Code or ERISA, provided that the
Employee is among "a select group of management or highly compensated
Employees" of the Company, within the meaning of Sections 201, 301,
36
<PAGE>
and 401 of ERISA, such that the Plan with respect to benefits
attributable to this subsection (b) qualifies for a "top hat" exemption
from most of the substantive requirements of Title I of ERISA.
ARTICLE FIVE. BENEFITS AND ACCOUNTS
-------------------------------------
5.1 Accounts. An account shall be established for each Participant. Each
year there shall be credited to each Participant's account the difference
between (a) the aggregate amount of Company contributions and forfeitures which
would have been allocated to the account of the Participant in the Profit
Sharing Plan without regard to the contribution limitations described in Section
4.2 hereof; and (b) the amount of Company contribution and forfeitures actually
allocated to the account of the Participant in the Profit Sharing Plan.
5.2 Earnings Factor. In addition to the credit under Section 5.1, if any,
an earnings factor shall be credited to each Participant's account at the end of
each calendar quarter. Such earnings factor shall be equal to the rate of return
that the Participant's account earned under the Profit Sharing Plan for that
calendar quarter; provided that the rate of return for a Participant who no
longer has a Profit Sharing Plan account shall be based upon the Participant's
Profit Sharing Plan investment allocation immediately prior to final
distribution of his Profit Sharing Plan account.
5.3 Distribution Upon Termination of Employment. In the event of a
Participant's termination of employment for any reason other than death, the
Participant's vested account balance under this Plan shall become payable to the
Participant in the form of five annual installments, provided that a vested
account balance less than $100,000 shall be paid in a lump sum within ninety
(90) days after the end of the calendar quarter in which termination occurs.
Notwithstanding, a Participant whose vested account balance is $100,000
or greater may elect, on a form approved by the Committee, to receive
distribution of his
37
<PAGE>
or her vested account balance in the form of a lump sum payment or in the form
of annual installments paid over a period not to exceed the lesser of 15 years
or the Participant's remaining life expectancy. Such election shall not be given
effect unless it is submitted to the Committee or its designee at least 12
months prior to the Participant's termination of employment. Life expectancy
shall be calculated as of the end of the calendar year during which the
Participant's employment is terminated, and shall not thereafter be
recalculated.
The first annual installment, or a lump sum payment, if properly
elected, shall be paid to the Participant within ninety (90) days after the end
of the calendar quarter in which termination of employment occurs. The remaining
installments shall be paid in the first calendar quarter of each subsequent
year.
The amount of each annual installment shall be equal to the quotient
obtained by dividing the value of the Participant's vested account balance on
the effective date of the related employment termination (and on the date of
each subsequent installment, as appropriate) by the number of years remaining in
the distribution period including that installment. The Participant's vested
account balance shall continue to accrue earnings, as specified in Section 5.2,
until the entire vested account balance has been paid.
5.4 Death Benefit. In the event of a Participant's death, the
Participant's entire remaining account balance shall be paid in a lump sum,
within ninety (90) days after the end of the calendar quarter in which such
death occurs, to the Participant's beneficiary, as such beneficiary was
designated by the Participant in accordance with the Company's beneficiary
designation procedures.
In the event a Participant dies without having designated a beneficiary,
or with no surviving beneficiary, the Participant's account balance shall be
paid in a lump sum to the Participant's estate within ninety (90) days after the
end of the calendar quarter in which death occurs.
38
<PAGE>
5.5 Alternative Payment Form. Notwithstanding the terms and conditions
of Section 5.3, a Participant may at any time on or after his termination of
employment petition the Committee to request that payment of his remaining
vested account balance be made in a lump sum due to circumstances of compelling
personal hardship. The Committee, at its sole discretion, shall make a binding
determination as to whether such alternative form of payment will be allowed.
ARTICLE SIX. VESTING
---------------------
Vesting. Subject to Section 8.1, each Participant shall become vested in
his account balance under this Plan at the same rate and at the same time as he
becomes vested in his account balance in the Profit Sharing Plan.
ARTICLE SEVEN. AMENDMENT AND TERMINATION
------------------------------------------
7.1 Amendment. The Company shall have the power at any time and from time
to time to amend this Plan by resolution of its Board of Directors, provided
that no amendment shall be adopted the effect of which would be to deprive any
Participant of his vested interest in his account under this Plan.
7.2 Termination. The Company reserves the right to terminate this Plan at
any time by resolution of its Board of Directors. Subject to Section 8.1, upon
termination of this Plan, each Participant shall become fully vested in his
account balance and such account balance shall become payable at the same time
and in the same manner as provided in Article Five.
39
<PAGE>
ARTICLE EIGHT. MISCELLANEOUS
------------------------------
8.1 Funding. This Plan shall be unfunded. No contributions shall be made
to any separate funding vehicle. The Company may set up reserves on its books of
account evidencing the liability under this Plan. To the extent that any person
acquires an account balance hereunder or a right to receive payments from the
Company, such right shall be no greater than the right of a general unsecured
creditor.
8.2 Limitation of Rights. Nothing in the Plan shall be construed to:
(a)Give any Employee any right to participate in the Plan except in
accordance with the provisions of the Plan;
(b)Limit in any way the right of the Company to terminate an
Employee's employment; or
(c)Evidence any agreement or understanding, express or implied, that
the Company will employ an Employee in any particular position or at
any particular rate of remuneration.
8.3 Nonalienation. No benefits under this Plan shall be pledged,
assigned, transferred, sold or in any manner whatsoever anticipated, charged, or
encumbered by an Employee, former Employee, or their beneficiaries, or in any
manner be liable for the debts, contracts, obligations, or engagements of any
person having a possible interest in the Plan, voluntary or involuntary, or for
any claims, legal or equitable, against any such person, including claims for
alimony or the support of any spouse.
40
<PAGE>
8.4 Controlling Law. This Plan shall be construed in accordance with the
laws of the State of Illinois in every respect, including without limitation,
validity, interpretation, and performance.
8.5 Text Controls. Article headings are included in the Plan for
convenience of reference only, and the Plan is to be construed without any
reference to such headings. If there is any conflict between such headings and
the text of the Plan, the text shall control.
IN WITNESS WHEREOF, the Company has caused this Plan, as amended and
restated herein, to be signed and attested by its duly qualified officers and
caused its corporate seal to be hereunto affixed on this 29th day of April,
1992.
W.W. Grainger, Inc.
By: [D.W. Grainger]
--------------------
Chairman
Attest:
[J.M. Baisley]
- --------------
Secretary
41
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 46,071
<SECURITIES> 0
<RECEIVABLES> 514,737
<ALLOWANCES> 18,091
<INVENTORY> 570,330
<CURRENT-ASSETS> 1,186,823
<PP&E> 1,173,130
<DEPRECIATION> 538,540
<TOTAL-ASSETS> 2,051,556
<CURRENT-LIABILITIES> 586,907
<BONDS> 122,788
0
0
<COMMON> 53,603
<OTHER-SE> 1,248,937
<TOTAL-LIABILITY-AND-EQUITY> 2,051,556
<SALES> 3,296,115
<TOTAL-REVENUES> 3,296,115
<CGS> 2,103,690
<TOTAL-COSTS> 2,103,690
<OTHER-EXPENSES> 897,825
<LOSS-PROVISION> 9,771
<INTEREST-EXPENSE> 4,847
<INCOME-PRETAX> 289,935
<INCOME-TAX> 117,424
<INCOME-CONTINUING> 172,511
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,511
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.75
</TABLE>
