60 PAGES COMPLETE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 New York Stock Exchange
accompanying Preferred Stock Chicago Stock Exchange
Purchase Rights
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 $3,790,415,972 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 2, 1998.
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 48,834,587 shares outstanding as of March 2, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 29, 1998 are incorporated by reference
into Part III hereof.
The Exhibit Index appears on page 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
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CONTENTS
Page
PART I
Item 1: BUSINESS......................................................... 3-6
THE COMPANY.................................................... 3
GRAINGER BRANCH-BASED BUSINESS................................. 3-4
PARTS COMPANY OF AMERICA....................................... 4
ACKLANDS - GRAINGER INC........................................ 5
GRAINGER, S.A. de C.V.......................................... 5
GRAINGER INTEGRATED SUPPLY OPERATIONS.......................... 5
COMMODITY MANAGEMENT........................................... 5
GRAINGER CONSULTING SERVICES................................... 5
INTERNET COMMERCE.............................................. 6
LAB SAFETY SUPPLY, INC......................................... 6
INDUSTRY SEGMENTS.............................................. 6
COMPETITION.................................................... 6
EMPLOYEES...................................................... 6
Item 2: PROPERTIES....................................................... 6-7
Item 3: LEGAL PROCEEDINGS................................................ 7
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................................ 8
Item 6: SELECTED FINANCIAL DATA.......................................... 9
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS.................................. 9-13
RESULTS OF OPERATIONS.......................................... 9-11
YEAR 2000...................................................... 11-12
FINANCIAL CONDITION............................................ 12-13
INFLATION AND CHANGING PRICES.................................. 13
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 13
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 13
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 13
Item 11: EXECUTIVE COMPENSATION........................................... 13
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.. 14
Signatures................................................................ 15
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 16
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 17-36
2
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PART I
Item 1: Business
The Company
The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois
in 1928. It is engaged in the distribution of maintenance, repair, and operating
(MRO) supplies and related information to the commercial, industrial,
contractor, and institutional markets in North America. W.W. Grainger, Inc.,
regards itself as being in the service business. As used herein, "Company" means
W.W. Grainger, Inc., and/or its subsidiaries as the context may require.
In 1997, the Company refocused its organization into three general groups:
branch-based distribution - businesses serving traditional customers with
immediate MRO needs;
materials management services - businesses serving customers with more
complex needs; and
emerging channels - businesses serving customers who prefer to purchase
through non-traditional channels, such as the Internet and direct marketing.
The branch-based distribution businesses include the Grainger branch-based
business, Grainger Global Sourcing, Parts Company of America, Acklands -
Grainger Inc., and Grainger, S.A. de C.V.
The materials management services businesses include Grainger Integrated Supply
Operations (GISO), Commodity Management, and Grainger Consulting Services.
The emerging market channels include Internet Commerce and Lab Safety Supply,
Inc.
The Company's business support functions provide coordination and guidance in
the areas of Accounting, Administrative Services, Aviation, Business
Development, Communications, Compensation and Benefits, Employee Development,
Finance, Government Regulations, Human Resources, Industrial Relations,
Insurance and Risk Management, Internal Audit, International, Legal, Planning,
Real Estate and Construction Services, Security and Safety, Taxes, and Treasury
services. These services are provided in varying degrees to all of the operating
units.
A number of Company-wide strengths provide each business with a significant
advantage in serving its market. These include technology and information
management, powerful supplier partnerships, supply chain integration skills, and
a keen understanding of the customers' MRO environments.
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, recommendations of its employees, customers, and
suppliers, and other factors.
For a discussion of the Year 2000 issue, see "Item 7: Management's Discussion
and Analysis of Financial Condition and the Results of Operations" appearing
later in this report.
Branch-Based Distribution
The Company's branch-based businesses provide customers with solutions to their
immediate MRO needs throughout North America. Branches are close by and the
logistics networks are configured for rapid availability. A broad selection of
MRO products is offered with user-friendly catalogs.
Grainger Branch-Based Business
- ------------------------------
The focus of the Grainger branch-based business (Grainger) is to provide a broad
line of MRO products quickly and easily to American businesses of all sizes. Its
primary customers are small- and medium-sized companies, sometimes referred to
as "direct marketing customers" based on how they are reached. It also addresses
large-sized companies' immediate MRO needs. As used in this section, the data
within the Grainger branch-based business reflects the operations of the Company
excluding Acklands - Grainger Inc., Lab Safety Supply, Inc., and Parts Company
of America.
Grainger operates 350 branches in all 50 states, Puerto Rico, and Mexico. They
are located within 20 minutes of the majority of U.S. businesses and carry
inventory to support their local market. Products are available for immediate
pick-up, same-day shipment, or delivery.
An average branch has 16 employees and handles about 275 transactions per day.
During 1997, an average of approximately 96,600 sales transactions were
completed daily. Each branch tailors its inventory to local product demand. In
1997, Grainger invested more than $19,800,000 in the continuation of its
facilities optimization program, which consisted of new branches, relocations,
and additions to branches.
Two new branches were opened in 1997, six were relocated and a number of
remodeling projects were completed. A new operating process introduced at the
New Jersey Zone Distribution Center (ZDC) allows ZDCs to increase the number of
branches they can support.
3
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To provide same day pick-up service to areas beyond the normal reach of a
branch, Grainger opened its first "will-call center" in April. Located within
Denver International Airport, this 1,000 square foot facility receives three
daily deliveries from Denver's two branches and serves the MRO needs of area
businesses.
Grainger has six ZDCs in operation. The ZDC logistics network strategy provides
a break-bulk function for faster branch stock replenishment. In addition, ZDCs
handle shipped orders for their zone.
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 some 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.
During the year, Grainger shut down its satellite communications network in
favor of a land-based frame relay communications network. Frame relay, which
allows all branches to communicate with each other and with Chicago's central
systems, is faster and more reliable than the network it replaced. In addition,
intranet-based software was integrated with the branches' primary operating
systems, adding functionality and increasing branch employee access to
information sources.
In late 1997, Grainger made an important change to its marketing and sales
approach. Instead of distinct outside sales, telesales, and direct mail
organizations with separate goals, Grainger has set goals geographically. It is
up to local management to harness the combined power of these three tools to
penetrate each market. Grainger employed 1,629 sales representatives at December
31, 1997, to serve customers throughout North America.
Grainger sells principally to contractors, service shops, industrial and
commercial maintenance departments, manufacturers, hotels, and health care and
educational facilities. Sales transactions during 1997 averaged $142 and were
made to more than 1,300,000 customers. Sales to the largest single customer were
1.1% of sales. Grainger estimates that approximately 25% of 1997 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.
The Grainger Catalog offers more than 78,000 MRO products from more than 1,000
suppliers, most of whom are manufacturers. Approximately two million copies are
printed and distributed. The most current edition was issued in January 1998.
The largest supplier in 1997, a diversified manufacturer through 21 of its
divisions, accounted for 10.6% of purchases. No significant difficulty has been
encountered with respect to sources of supply.
The Grainger Electronic Catalog brings, directly to the customer's place of
business, a fast, easy way to select products. 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 150,000 copies of the current version of the Electronic Catalog are in use.
The Electronic Catalog is also used at the branches as a training tool and a
resource for identifying appropriate products for customers' applications.
Grainger 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.
Also in 1997, Grainger formed a global sourcing operation to procure high
quality products from around the world. These items will be sold, primarily
under private label, by Grainger and the Company's other businesses.
Parts Company of America
- ------------------------
Parts Company of America (PCA) provides access to over 230,000 parts and
accessories to Grainger products through its centralized warehouse located in
Northbrook, Illinois. Over 140,000 pages of parts diagrams are maintained
on-line. PCA handled about 1,800,000 customer calls in 1997 in its call centers
in Northbrook, Illinois and Waterloo, Iowa, resulting in over 600,000 orders.
PCA maintained its ISO 9002 certification in 1997. PCA's 100% compliance with
its standards ranked it among the top 10% of all ISO-certified companies.
4
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Acklands - Grainger Inc. (AGI)
- ------------------------------
AGI, acquired in December 1996, is the leading branch-based Canadian broad line
MRO distributor. It serves customers through 172 branches and 5 distribution
centers across Canada. AGI made a number of changes during 1997. A new 193,000
square foot office and distribution center in Edmonton, Alberta, allowed AGI to
consolidate its separate Edmonton warehouses. This facility serves over 90
branches daily. AGI standardized its product offering across Canada and added
several new lines of traditionally strong Grainger products. AGI distributes
tools, lighting, HVAC, safety supplies, pneumatics, instruments, welding
equipment and supplies, motors, shop equipment, as well as many other items. A
comprehensive catalog was created to showcase the product line and to help
customers select the product. This catalog, with over 260,000 products listed,
supports the efforts of 250 sales representatives throughout Canada. This
catalog will be sent to customers in the first quarter of 1998. During 1997, an
average of 18,000 sales transactions were completed daily.
Grainger, S.A. de C.V.
- ----------------------
Grainger, S.A. de C.V. serves the traditional MRO product needs of Mexico's
industrial interior. From its 40,000 square foot branch outside Monterrey, the
business provides rapid delivery of over 39,000 products.
Materials Management Services
Since the formation of Grainger's National Accounts group, the Company's sales
to larger businesses has grown dramatically. While some of these larger
companies have immediate MRO needs that can be handled by the Company's
branch-based businesses, many also require materials management services to
handle their more complex purchasing and operating environments. For these
customers, Materials Management Services offers a number of solutions.
Grainger Integrated Supply Operations (GISO)
- --------------------------------------------
GISO is focused on customers who have chosen to outsource their entire indirect
materials management process. By hiring GISO to keep their operations running
smoothly, these organizations are better able to focus on their core business
objectives and improve their global competitiveness.
GISO offers a full complement of on-site outsourcing solutions, including
business process reengineering, inventory management, supply chain management,
tool crib management, and information management. GISO provides its clients with
access to millions of products through its relationships with world class
manufacturers, service providers, and distributors, including Grainger's
branch-based business. Products not covered through these partnerships are found
through GISO's product sourcing process.
Commodity Management
- --------------------
In the fourth quarter of 1997, the Company made the decision to form an
organization specifically targeting the needs of larger companies that require
materials management services, but do not wish to outsource their procurement
process. These customers typically select a primary distributor for each major
commodity line. These businesses also tend to have custom handling, service,
systems, and reporting requirements.
Many items within each commodity line are purchased repetitively. Once fully
operational, this new organization will provide a low-cost logistics solution
for these repetitive purchases. Its access to the Grainger branch-based business
for its customers' immediate product needs will give it an advantage over
traditional commodity line distributors. Plans call for this unit to commence
operations in the second half of 1998.
Grainger Consulting Services
- ----------------------------
Many customers realize that they are not effectively managing their MRO
supplies, but are not sure what approach to take. Grainger Consulting Services
is the leading professional services firm specializing in MRO materials
management consulting.
In 1997, Grainger Consulting Services added stockroom design and construction
and product cross-referencing to its service offering. The practice offers
consulting services which include process reengineering, inventory database
development, and "turn-key" stockroom set up. It has generated the most
comprehensive database of real-world MRO procurement statistics.
Emerging Channels
As technology advances and the MRO marketplace evolves, some customers are
choosing to buy products through less traditional channels. The Company offers
customers the option to purchase through the Internet, as well as through the
high-growth business-to-business direct marketing channel.
5
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Internet Commerce
- -----------------
Since grainger.com was launched in 1995, the Company has been in the forefront
of business-to-business Internet technology, and intends to lead the MRO
industry in utilizing this technology for its customers' benefit.
The grainger.com site was one of the first MRO Web sites. In 1996, a separate
organization was formed to pursue electronic commerce opportunities. Now, as
administrator of grainger.com, Grainger Internet Commerce currently provides
customers with access to approximately 200,000 products and state-of-the-art
systems for quick reference to detailed product information and on-line ordering
of MRO supplies.
Lab Safety Supply, Inc.
- -----------------------
Lab Safety Supply is the leading direct marketer of safety products and other
industrial supplies to American business. Located in Janesville, Wisconsin, Lab
Safety Supply reaches its customers through its award-winning General Catalog,
targeted catalogs, and other marketing materials throughout the year.
Customers select Lab Safety Supply for its extensive product depth (over 40,000
products in the 1998 General Catalog), its superior technical knowledge, and its
industry-leading service. It is a primary supplier for many small- and
medium-sized companies and a critical back-up supplier for many larger
companies.
Fueled by the success of the Material Handling Direct(TM) catalog introduced in
1996, Lab Safety Supply launched several new initiatives in 1997. In June,
Maintenance Direct(TM) was published, featuring 436 pages of facilities
maintenance products.
During 1997 Lab Safety Supply committed a portion of its resources to increasing
its presence in the Canadian marketplace. It mailed various targeted catalogs to
Canadian customers and prospects.
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: 1997,
$1,997,821,000; 1996, $2,119,021,000; 1995, $1,669,243,000; 1994,
$1,534,751,000; and 1993, $1,376,664,000.
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 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.
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, 1997, the Company had 15,299 employees, of whom 12,603 were
full-time and 2,696 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, 1997, the Company's facilities totaled 16,458,000 square
feet, an increase of 0.6% over 1996. The Company's Grainger branch-based
business and Acklands - Grainger Inc. (AGI) branches account for 8,980,000
square feet of the Company's total square footage. Grainger branches are located
in the United States, Mexico, and Puerto Rico. AGI branches are located
throughout Canada. 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 Company's Grainger branches range in size from 2,000 to 109,000 square feet
and average 22,000 square feet. Most are located in or near major metropolitan
areas, many in industrial parks. A typical owned branch is on one floor, is of
masonry construction, consists primarily of warehouse space, contains an
air-conditioned office and sales area, and has off-the-street parking for
customers and employees.
6
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The significant facilities of the Company are briefly described below:
Size in
Location Facility and Use Square Feet
- ---------------------------- --------------------------------- -----------
Chicago Area (1) General Offices & National
Distribution Center 1,463,000
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) 350 Grainger branch locations 7,703,000
United States (3) Lab Safety Supply, PCA, and other
facilities 1,150,000
Canada (4) 171 AGI Facilities 2,272,000
----------
Total square feet 16,458,000
==========
The Company is constructing an office facility to house a large portion of the
Chicago-area office workforce on owned property. Construction of this Lake
Forest, Illinois facility is scheduled to be completed during 1999. It is
expected that certain Chicago-area owned or leased office facilities will be
vacated when this new facility becomes operational.
- --------------------------------------------------------------------------------
(1) These facilities are either owned or leased with leases expiring between
1998 and 2000. The owned facilities are not subject to any mortgages.
(2) Grainger branches consist of 271 owned and 79 leased properties. The owned
facilities are not subject to any mortgages. 348 branches are located in
the U.S., 1 branch is located in Puerto Rico, and 1 branch is located in
Monterrey, Mexico.
(3) Other facilities represent owned and leased general branch offices,
distribution centers, and branches. The owned facilities are not subject to
any mortgages.
(4) The majority of 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
branches 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.
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 1997.
Executive Officers of the Company
Following is information about the Executive Officers of the Company as of March
1, 1998. 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 (65) Senior Vice President (a position assumed in 1995
after serving as Vice President), General Counsel,
and Secretary.
Donald E. Bielinski (48) Group President, Emerging Businesses, a position
assumed in 1997 after serving as Senior Vice
President, Marketing and Sales. Prior to assuming
the last-mentioned position in 1995, Mr. Bielinski
served as Senior Vice President, Organization and
Planning. He has also served as Vice President and
Chief Financial Officer.
Wesley M. Clark (45) Group President, Standard Solutions, a position
assumed in 1997 after serving as Senior Vice
President, Operations and Quality. Prior to assuming
the last-mentioned position earlier in 1997, Mr.
Clark served as Vice President, Field Operations and
Quality. Previously, he served as President of the
Sanitary Supply and Equipment businesses.
(continued on next page)
7
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Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ----------------------- -----------------------------------------------------
Jere D. Fluno (56) Vice Chairman. Mr. Fluno is a member of the Office
of the Chairman.
Gary J. Goberville (51) Vice President, Human Resources. Before joining the
Company in 1995, Mr. Goberville served as an
executive with GenCorp, Inc.
David W. Grainger (70) Senior Chairman of the Board, a position assumed in
1997 after serving as Chairman of the Board. He was
the Company's Chief Executive officer until 1995 and
President from 1992 to 1994. Mr. Grainger is a
member of the Office of the Chairman.
Richard L. Keyser (55) Chairman of the Board, a position assumed in 1997,
and Chief Executive Officer, a position assumed in
1995. Other positions in which he served during the
past five years were President, Chief Operating
Officer, Executive Vice President, and Grainger
Division President. Mr. Keyser is a member of the
Office of the Chairman.
P. Ogden Loux (55) Senior Vice President, Finance and Chief Financial
Officer, a position 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.
Robert D. Pappano (55) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995 after serving
as Vice President and Treasurer.
James T. Ryan (39) 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 (40) Senior Vice President (a position assumed in 1997
after serving as Vice President), Business
Development and International. Prior to assuming
these responsibilities in 1996, Mr. Schweig served
as Vice President and General Manager, Direct
Marketing. Previously, he served the Grainger
Division as Vice President, Marketing.
John W. Slayton, Jr. (52) Senior Vice President, Supply Chain Management, a
position assumed in 1997 after serving as Senior
Vice President, Product Management. Prior to
assuming the last-mentioned position in 1995, Mr.
Slayton served as Vice President, Product Management
of the Grainger Division.
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 1997 and 1996, are shown below.
<TABLE>
<CAPTION>
Prices
-----------------------
Quarters High Low Dividends
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 First $82 1/2 $73 5/8 $0.25
Second 81 70 1/2 0.27
Third 99 3/4 78 0.27
Fourth 98 9/16 85 1/4 0.27
- --------------------------------------------------------------------------------
Year $99 3/4 $70 1/2 $1.06
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
</TABLE>
The approximate number of shareholders of record of the Company's common stock
as of March 2, 1998 was 1,800.
8
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Item 6: Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $ 4,136,560 $ 3,537,207 $ 3,276,910 $ 3,023,076 $ 2,628,398
Net earnings before cumulative
effect of accounting changes .......... 231,833 208,526 186,665 127,874 149,267
Cumulative effect of accounting changes . -- -- -- -- (820)
Net earnings ............................ 231,833 208,526 186,665 127,874 148,447
Net earnings per basic share before
cumulative effect of accounting changes 4.61 4.08 3.67 2.52 2.91
Cumulative effect of accounting changes . -- -- -- -- (0.02)
Net earnings per basic share ............ 4.61 4.08 3.67 2.52 2.89
Net earnings per diluted share before
cumulative effect of accounting changes 4.54 4.04 3.64 2.50 2.88
Cumulative effect of accounting changes . -- -- -- -- (0.02)
Net earnings per diluted share .......... 4.54 4.04 3.64 2.50 2.86
Total assets ............................ 1,997,821 2,119,021 1,669,243 1,534,751 1,376,664
Long-term debt .......................... 131,201 6,152 8,713 1,023 6,214
Cash dividends paid per share ........... $ 1.06 $ 0.98 $ 0.89 $ 0.78 $ 0.705
<FN>
NOTE: 1994 and 1993 net earnings include restructuring charges of $49,779 and $482, respectively.
</FN>
</TABLE>
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 percent of net sales for the years ended
December 31, 1997, 1996, 1995, and 1994, and the percent of increase (decrease)
in such items in 1997, 1996, and 1995 from the prior year.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percent of (Decrease) from
Net Sales Prior Year
-------------------------------- ------------------------
1997 1996 1995 1994 1997 1996 1995
------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 16.9% 7.9% 8.4%
Cost of merchandise sold............................. 63.9 64.2 63.9 64.5 16.4 8.3 7.4
Operating expenses................................... 26.6 26.0 26.5 27.9 19.5 6.5 3.0
Other (income) deductions, net....................... 0.1 (0.1) 0.1 0.1 (204.9) (181.1) 48.9
Income taxes......................................... 3.8 4.0 3.8 3.3 12.4 11.9 24.4
Net earnings......................................... 5.6% 5.9% 5.7% 4.2% 11.2% 11.7% 46.0%
<FN>
Note: The percent of increase from the prior year for net earnings, excluding restructuring charges, was 5.1% for 1995.
Net earnings, excluding restructuring charges, as a percent of net sales was 5.9% for 1994.
</FN>
</TABLE>
9
<PAGE>
Net Sales
The 1997 Company net sales increase of 16.9%, as compared with 1996, was
principally volume related. This increase was affected by 1997 having one less
sales day than 1996 (on a daily basis, net sales increased 17.4%). Excluding the
incremental net sales of Acklands - Grainger Inc. (AGI), the Canadian industrial
distribution business acquired on December 2, 1996, net sales increased 7.7%
(8.1% on a daily basis). This increase primarily represented the effects of the
Company's marketing initiatives which included new product additions, the
expansion of branch facilities, and the National Accounts, Integrated Supply,
and Direct Marketing programs. Partially offsetting the growth from these
initiatives were two factors. Sales in the 1997 third quarter were negatively
affected by the United Parcel Service's (UPS) work stoppage which began on
August 4, 1997 and lasted more than two weeks. The Company estimates that 1997
sales were approximately $14,000,000 lower as a result of the UPS work stoppage.
The second factor was that daily sales of seasonal products for the Company,
excluding AGI, declined an estimated 4% in the year 1997 as compared with the
same 1996 period. Many regions of the United States experienced milder weather
during most of 1997 versus 1996.
The Company's Grainger branch-based business experienced selling price increases
of about 1.1% when comparing the years 1997 with 1996. The Grainger National
Accounts program showed strong growth for the year, with sales increasing to
approximately $1,015,000,000. Daily sales to National Account customers
increased approximately 17%, on a comparable basis, over 1996. All geographic
areas for the Grainger branch-based business contributed to the sales growth,
with the percent increases for regions west of the Mississippi River being
slightly higher than for the regions east of the Mississippi River.
The 1996 Company net sales increase of 7.9%, as compared with 1995, was
principally 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 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 marketing
initiatives which included new product additions, the continuing expansion of
branch facilities, the addition of Zone Distribution Centers (ZDCs), and the
National Accounts, Integrated Supply, and Direct Marketing programs. Partially
offsetting the growth from these initiatives were two factors. First quarter
1996 net sales for the Company's Grainger branch-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 branch-based business declined approximately 18% in
the 1996 third quarter as compared with the same 1995 period. Many regions of
the country experienced milder weather in July and August 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 branch-based business experienced selling price increases of about
1.9% when comparing 1996 with 1995. The Grainger 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 branch-based business contributed to the sales growth, with the percent
increases for regions west of the Mississippi River being slightly higher than
for the regions in the east of the Mississippi River.
Net Earnings
Net earnings for 1997 increased 11.2% over 1996. This increase for 1997 was
lower than the increase in net sales due to operating expenses increasing at a
rate faster than the rate of growth in net sales, lower interest income, higher
interest expense, and a higher effective income tax rate, partially offset by
higher gross profit margins. Factors contributing to the increase in operating
expenses were the following:
1. Payroll and other operating expenses were higher as a result of the
following initiatives:
a. Continued expansion of the Company's integrated supply business;
b. Continued development of the Company's full service marketing
capabilities on the Internet;
c. Continued refocus and realignment of the Direct Sales force;
d. Increased advertising expenses supporting the Company's marketing
initiatives; and
e. Expansion of the Company's telesales capability.
2. Payroll and other operating expenses were higher by an estimated
$13,000,000 for Year 2000 compliance, of which approximately $10,000,000
related to outside services.
3. The operating expenses of AGI, which contributed to the increase, were
included for the entire year of 1997 as compared with only the month of
December in 1996.
The decrease in interest income resulted from lower average daily invested
balances. During 1997, interest income was affected by the purchase of 4,217,986
shares of the Company's common stock versus 409,600 shares purchased in 1996.
These incremental purchases contributed to lower average daily invested
balances. The decrease in interest income was partially offset by higher average
interest rates earned. The increase in interest expense resulted from higher
average borrowings, partially offset by lower average interest rates paid on all
outstanding debt. The increase
10
<PAGE>
in interest expense was primarily related to debt added to finance the AGI
acquisition and to the short-term debt added to partially fund the repurchase of
shares of the Company's common stock. The Company's effective income tax rate
was 40.5% for the year 1997 versus 40.2% for the year 1996. The increase in the
effective income tax rate is attributable to proportionately higher income
generated in Canada (AGI), which is taxed at a higher rate than domestic income.
The Company's gross profit margin increased by 0.30 percentage point when
comparing the years 1997 and 1996. Excluding AGI, the Company's gross profit
margin increased 0.56 percentage point when comparing the years of 1997 and
1996. Of note were the following factors affecting the gross profit margin for
the Company, excluding AGI:
1. The change in product mix was favorable as sales of seasonal products
(generally lower than average gross profit margins) declined, and Lab
Safety Supply sales (generally higher than average gross profit margins)
increased as a percent of total sales.
2. Selling price increases exceeded the level of cost increases.
Partially offsetting the above factors was an unfavorable change in selling
price category mix, which primarily resulted from the growth in sales to the
Company's larger volume customers.
Net earnings were negatively affected by the UPS work stoppage which occurred in
August 1997. The gross profit margin lost on the estimated $14,000,000 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 $0.06 per share.
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 the following factors:
1. Payroll and employee benefits expenses grew at a slower rate than net
sales.
2. Freight-out expenses declined.
Partially offsetting the above factors were the following:
1. Data processing expenses increased at a faster rate than net sales.
2. Advertising expenses increased at a faster rate than net sales.
3. Expenses related to marketing initiatives and business process improvement
programs increased at a faster rate than net sales.
4. Incremental expenses related to the acquisition of AGI in December 1996.
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 Company's larger volume customers. The
addition of AGI had a minor effect on this decrease.
Partially offsetting the above factors were the following:
1. Selling price increases exceeded the level of cost increases.
2. The change in product mix was favorable as sales of seasonal products
declined. Historically, the sales of seasonal products have lower than
average gross profit margins.
Year 2000
The Company uses various software and technology which 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.
11
<PAGE>
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, and replacing hardware and
software for other systems.
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 planned 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 and reduce
the cost of maintaining and supporting existing systems.
The Company is using both internal and external resources to reprogram, replace,
and test the software and hardware for Year 2000 compliance. The Company plans
to have a Year 2000 solution for all mission critical systems by late 1998. Year
2000 work for non-critical systems and testing of all system revisions is
planned to be completed by mid-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 initiated formal communications with suppliers, customers, and others 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.
The estimated expenses for these projects and the date on which the Company will
complete the Year 2000 modifications 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. 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.
FINANCIAL CONDITION
Working capital was $649,107,000 at December 31, 1997 compared with $704,175,000
at December 31, 1996 and $618,524,000 at December 31, 1995. The ratio of current
assets to current liabilities was 2.2, 2.1, and 2.4 at such dates.
Net cash flows from operations of $426,079,000 in 1997, $272,410,000 in 1996,
and $126,237,000 in 1995, have continued to improve the Company's financial
position and serve as the primary source of funding for capital requirements.
For information as to the Company's cash flows, see "Item 8: Financial
Statements and Supplementary Data."
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.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ---------
(In thousands of dollars)
<S> <C> <C> <C>
Land, buildings, structures,
and improvements.................. $ 78,529 $31,881 $ 55,280
Furniture, fixtures, and other
equipment......................... 29,723 30,170 56,655
Total.............................. $108,252 $62,051 $111,935
</TABLE>
On April 30, 1997, the Company's Board of Directors voted to restore an existing
share repurchase authorization to its original level of 5,000,000 shares. The
Company repurchased 4,217,986 shares of its common stock during 1997 and 409,600
shares of its common stock during 1996. The Company did not repurchase any
shares of common stock
12
<PAGE>
during 1995. As of December 31, 1997, approximately 2,000,000 shares of common
stock remain available under this repurchase authorization.
Dividends paid to shareholders were $53,934,000 in 1997, $50,035,000 in 1996,
and $45,227,000 in 1995.
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. The Company repurchased the 2,039,886
shares during 1997, which is included in the 4,217,986 shares repurchased during
the year.
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 systems
and other infrastructure developments, long-term cash requirements are
anticipated for the consolidation of Chicago-area offices into the Lake Forest,
Illinois office facility currently being constructed.
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 12%, 11%, and 5%, at December 31, 1997,
1996, and 1995, 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
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 29, 1998, 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
29, 1998, and, to the extent required, is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 29, 1998, 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 29, 1998, and, to the extent required, is
incorporated herein by reference.
13
<PAGE>
<TABLE>
<S> <C>
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: Exhibit Index
(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. 37-53
(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. Director Stock Plan, incorporated by
reference to Appendix A of the Company's Proxy Statement
dated March 26, 1997.
(ii) W.W. Grainger, Inc. Office of the Chairman Incentive
Plan, incorporated by reference to Appendix B of the
Company's Proxy Statement dated March 26, 1997.
(iii) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive Plan,
as amended, incorporated by reference to Appendix C of
the Company's Proxy Statement dated March 26, 1997.
(iv) 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.
(v) 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.
(vi) 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.
(vii) 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.
(viii)Summary Description of Management Incentive Program
Based on Improved Economic Earnings. 54-59
(ix) 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.
(11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.
(21) Subsidiaries of the Company. 60
(23) Consent of Independent Certified Public Accountants. See Index
to Financial Statements and Supplementary Data.
(27) Financial Data Schedules.
(a) For the year ended December 31, 1997.
(b) As restated, for 1997 interim periods.
(c) As restated, for the year ended December 31, 1996 and
1996 interim periods.
(d) As restated, for the year ended December 31, 1995.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 1997.
</TABLE>
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, 1998
W.W. GRAINGER, INC.
By: /s/ D. W. Grainger By: /s/ P. O. Loux
--------------------------------- -----------------------
D. W. Grainger P.O. Loux
Senior Chairman of the Board Senior Vice President, Finance
(a Principal Executive Officer and and Chief Financial Officer
a Director) (Principal Financial Officer)
By: /s/ R. L. Keyser By: /s/ R. D. Pappano
--------------------------------- -----------------------
R. L. Keyser R. D. Pappano
Chairman of the Board Vice President, Financial Reporting
and Chief Executive Officer and Investor Relations
(a Principal Executive Officer and (Principal Accounting Officer)
a Director)
By: /s/ J. D. Fluno
---------------------------------
J. D. Fluno
Vice Chairman
(a Principal Executive Officer and
a Director)
/s/ George R. Baker March 24, 1998 /s/ James D. Slavik March 24, 1998
- ---------------------- --------------- --------------------- ---------------
George R. Baker James D. Slavik
Director Director
/s/ Robert E. Elberson March 24, 1998 /s/ Harold B. Smith March 24, 1998
- ---------------------- --------------- -------------------- ---------------
Robert E. Elberson Harold B. Smith
Director Director
/s/ Wilbur H. Gantz March 24, 1998 /s/ Fred L. Turner March 24, 1998
- ---------------------- --------------- -------------------- ---------------
Wilbur H. Gantz Fred L. Turner
Director Director
/s/ John W. McCarter, Jr. March 24, 1998 /s/ Janiece S. Webb March 24, 1998
- ------------------------- -------------- -------------------- ---------------
John W. McCarter, Jr. Janiece S. Webb
Director Director
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1997, 1996, and 1995
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, 1997, 1996, and 1995, 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, 1997, 1996, and 1995, 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, 1997, 1996, and 1995. 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 3, 1998
17
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<CAPTION>
December 31,
------------------------------------
ASSETS 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................... $ 46,929 $ 126,935 $ 11,460
Accounts receivable, less allowances for
doubtful accounts of $15,803 for 1997,
$15,302 for 1996, and $14,229 for 1995 .... 455,457 433,575 369,576
Inventories ................................. 612,132 686,925 602,639
Prepaid expenses ............................ 9,122 11,971 11,746
Deferred income tax benefits ................ 59,348 60,837 67,239
---------- ---------- ----------
Total current assets .................. 1,182,988 1,320,243 1,062,660
PROPERTY, BUILDINGS, AND EQUIPMENT
Land ........................................ 133,213 132,095 123,431
Buildings, structures, and improvements ..... 583,823 510,386 472,154
Furniture, fixtures, machinery, and equipment 370,122 343,231 302,115
--------- ---------- ----------
1,087,158 985,712 897,700
Less accumulated depreciation
and amortization .......................... 494,245 434,728 379,349
--------- ---------- ----------
Property, buildings, and
equipment--net .......................... 592,913 550,984 518,351
OTHER ASSETS
Goodwill .................................... 187,963 192,555 25,635
Customer lists and other intangibles ........ 89,699 91,882 97,332
---------- ---------- ----------
277,662 284,437 122,967
Less accumulated amortization ............... 70,814 54,574 50,356
---------- ---------- ----------
206,848 229,863 72,611
Sundry ...................................... 15,072 17,931 15,621
---------- ---------- ----------
Other assets--net ......................... 221,920 247,794 88,232
---------- ---------- ----------
TOTAL ASSETS .................................. $1,997,821 $2,119,021 $1,669,243
========== ========== ==========
</TABLE>
18
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)
<CAPTION>
December 31,
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Short-term debt ............................... $ 2,960 $ 135,275 $ 23,577
Current maturities of long-term debt .......... 23,834 24,753 23,241
Trade accounts payable ........................ 261,802 240,779 204,925
Accrued contributions to employees'
profit sharing plans ........................ 62,234 56,258 53,618
Accrued expenses .............................. 148,149 131,199 115,310
Income taxes .................................. 34,902 27,804 23,465
----------- ------------ -----------
Total current liabilities ............... 533,881 616,068 444,136
LONG-TERM DEBT (less current maturities) ........ 131,201 6,152 8,713
DEFERRED INCOME TAXES ........................... 2,871 2,207 8,539
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ....... 35,207 31,932 28,746
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, 53,485,762 shares, 1997,
53,338,026 shares, 1996, and
50,894,629 shares, 1995 ..................... 26,743 26,669 25,447
Additional contributed capital ................ 269,032 262,318 86,548
Treasury stock, at cost--4,624,786 shares, 1997
and 409,600 shares, 1996 .................... (378,899) (32,090) --
Unearned restricted stock compensation ........ (16,528) (17,597) (19)
Cumulative translation adjustments ............ (9,210) (2,262) --
Retained earnings ............................. 1,403,523 1,225,624 1,067,133
----------- ------------ -----------
Total shareholders' equity .............. 1,294,661 1,462,662 1,179,109
----------- ------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .......................... $ 1,997,821 $ 2,119,021 $ 1,669,243
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ---------- -----------
<S> <C> <C> <C>
Net sales........................................ $4,136,560 $3,537,207 $3,276,910
Cost of merchandise sold......................... 2,642,208 2,269,993 2,095,552
------------ ---------- -----------
Gross profit.............................. 1,494,352 1,267,214 1,181,358
Warehousing, marketing, and
administrative expenses........................ 1,101,193 921,685 865,067
------------ ------------ -----------
Operating earnings........................ 393,159 345,529 316,291
Other income or (deductions)
Interest income................................ 2,896 4,554 162
Interest expense............................... (5,461) (1,228) (4,260)
Unclassified--net.............................. (958) 33 (44)
------------ ------------ -----------
(3,523) 3,359 (4,142)
------------ ---------- -----------
Earnings before income taxes.............. 389,636 348,888 312,149
Income taxes..................................... 157,803 140,362 125,484
------------ ---------- -----------
Net earnings ............................. $231,833 $208,526 $186,665
============ ========== ===========
Earnings per share:
Basic.......................................... $4.61 $4.08 $3.67
============ ========== ===========
Diluted........................................ $4.54 $4.04 $3.64
============ ========== ===========
Average number of shares outstanding:
Basic.......................................... 50,302,259 51,147,753 50,815,081
============ ========== ===========
Diluted........................................ 51,089,476 51,636,204 51,241,217
============ ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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, 1995............. $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
--------- ---------- --------- ------------- ------------- ----------
Exercise of stock options.............. 69 5,822 -- -- -- --
Issuance of 10,000 shares
of restricted common stock........... 5 798 -- (803) -- --
Amortization of unearned
restricted stock compensation........ -- 107 -- 1,872 -- --
Purchase of 4,215,186 shares
of treasury stock, net of
2,800 shares issued.................. -- (13) (346,809) -- -- --
Cumulative translation
adjustments.......................... -- -- -- -- (6,948) --
Net earnings........................... -- -- -- -- -- 231,833
Cash dividends paid
($1.06 per share).................... -- -- -- -- -- (53,934)
--------- ---------- ---------- ------------- ------------- -----------
Balance at December 31, 1997........... $26,743 $269,032 $(378,899) $(16,528) $(9,210) $1,403,523
========= ======== ========== ============= ============= ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .......................................... $ 231,833 $ 208,526 $ 186,665
Provision for losses on accounts receivable ........... 9,984 9,131 7,780
Depreciation and amortization:
Property, buildings, and equipment .................. 63,257 61,585 57,760
Intangibles and goodwill ............................ 16,394 12,676 13,090
Change in operating assets and liabilities--
net of the effects of the business acquisition:
(Increase) in accounts receivable ................... (31,866) (28,871) (31,563)
Decrease (increase) in inventories .................. 74,793 (7,430) (82,673)
Decrease in prepaid expenses ........................ 2,849 255 2,487
Decrease (increase) in deferred income taxes ........ 2,153 70 (5,515)
Increase (decrease) in trade accounts payable ....... 21,023 1,891 (21,534)
Increase (decrease) in other current liabilities .... 22,926 3,724 (3,431)
Increase in current income taxes payable ............ 7,098 4,339 815
Increase in accrued employment related benefits costs 3,275 3,186 2,051
Other--net ............................................ 2,360 3,328 305
--------- --------- ---------
Net cash provided by operating activities ............... 426,079 272,410 126,237
Cash flows from investing activities:
Additions to property, buildings, and equipment ....... (108,252) (62,051) (111,935)
Proceeds from sale of property, buildings,
and equipment--net .................................. 3,066 8,069 4,966
Net cash paid for business acquisition ................ -- (136,144) --
Other--net ............................................ 2,044 (1,932) 378
--------- --------- ---------
Net cash (used in) investing activities ................. (103,142) (192,058) (106,591)
</TABLE>
22
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands of dollars)
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short-term debt ............................. $(132,315) $ 111,698 $ 12,443
Proceeds from long-term debt ........................................... 126,127 1,500 5,665
Long-term debt payments ................................................ (1,997) (2,549) (1,183)
Stock options exercised ................................................ 2,239 2,890 2,147
Tax benefit of stock incentive plan .................................... 3,759 3,709 2,677
Purchase of treasury stock--net ........................................ (346,822) (32,090) --
Cash dividends paid .................................................... (53,934) (50,035) (45,227)
---------- ---------- ----------
Net cash (used in) provided by financing activities ...................... (402,943) 35,123 (23,478)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................... (80,006) 115,475 (3,832)
Cash and cash equivalents at beginning of year ........................... 126,935 11,460 15,292
---------- ---------- ----------
Cash and cash equivalents at end of year ................................. $ 46,929 $ 126,935 $ 11,460
========== ========== ==========
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
==========
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
23
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is engaged in the distribution of maintenance, repair, and operating
(MRO) 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.
LONG - LIVED ASSETS
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 to the financial statements.
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 $1,810,000, $1,772,000, and
$2,136,000, in 1997, 1996, and 1995, respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are generally
measured using the local currency as the functional currency. Net exchange gains
or losses resulting from the translation of financial statements of foreign
operations, and related long-term debt, except for those from highly
inflationary economies, are 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.
24
<PAGE>
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.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," as of December 31, 1997. This statement established
new standards for computing and disclosing earnings per share. In accordance
with SFAS No. 128, all earnings per share amounts for prior periods have been
restated to conform with the new standard.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997 the Financial Accounting Standards Board (FASB) issued Statements of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," both effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires disclosure of the components of and total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners. In accordance with the release, the Company plans to
adopt SFAS No. 130 in the first quarter of 1998.
SFAS No. 131 requires disclosures of certain segment information based on the
way that management evaluates segments for making decisions and assessing
performance. It also requires disclosure of certain information about products
and services, the geographic areas in which the Company operates, and major
customers. In accordance with the release, the Company plans to adopt SFAS No.
131 for the year ended December 31, 1998.
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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995
---------- ----------
(Pro-forma,
in thousands of dollars
except for per share amounts)
<S> <C> <C>
Net sales........................... $3,847,665 $3,585,964
Operating earnings.................. $368,203 $336,336
Net earnings........................ $216,680 $191,528
Earnings per share:
Basic............................. $4.07 $3.62
Diluted........................... $4.04 $3.59
</TABLE>
25
<PAGE>
NOTE 3--CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents the carrying amount approximates fair value due to the short
maturity of these instruments.
Cash paid during the year for:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Interest (net of amounts capitalized).... $5,773 $974 $4,167
======== ======== ========
Income taxes............................. $143,471 $131,726 $127,041
======== ======== ========
</TABLE>
NOTE 4--CASH
Checks outstanding of $54,218,000, $35,366,000, and $40,027,000 are included in
Trade accounts payable at December 31, 1997, 1996, and 1995, respectively. These
amounts are immaterial to the consolidated financial statements.
NOTE 5--CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.
The Company has a broad customer base representing many diverse industries doing
business in all regions of the United States as well as other areas of North
America. Consequently, in management's opinion, no significant concentration of
credit risk exists for the Company.
NOTE 6--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $215,707,000, $209,305,000, and $194,854,000 higher
than reported at December 31, 1997, 1996, and 1995, 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 7--OTHER ASSETS
Included in other assets are intangibles such as customer lists and goodwill.
Customer lists are amortized on a straight-line basis over periods of five to
sixteen years. Goodwill represents the cost in excess of net assets of acquired
companies and is amortized on a straight-line basis over periods of five to
forty years. Other assets increased in 1996 primarily due to the business
acquisition described in Note 2.
26
<PAGE>
<TABLE>
NOTE 8--SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
<CAPTION>
1997 1996 1995
-------- -------- -------
Bank Debt (In thousands of dollars)
- ---------
<S> <C> <C> <C>
Outstanding at December 31 .................... $ 2,960 $135,275 $ 3,186
Maximum month-end balance during the year ..... $139,187 $135,275 $ 64,853
Average amount outstanding during the year .... $119,962 $ 13,796 $ 22,576
Weighted average interest rates during the year 3.5% 3.8% 6.2%
Weighted average interest rates at December 31 6.2% 3.2% 6.2%
Commercial Paper
- ----------------
Outstanding at December 31 .................... -- -- $ 20,391
Maximum month-end balance during the year ..... $ 81,355 -- $ 79,734
Average amount outstanding during the year .... $ 15,429 $ 1,436 $ 43,357
Weighted average interest rates during the year 5.7% 5.7% 6.0%
Weighted average interest rates at December 31 -- -- 5.8%
</TABLE>
The Company and its subsidiaries had committed lines of credit totaling
$168,983,000 at December 31, 1997, including $13,983,000 denominated in Canadian
dollars. A Company subsidiary also has a $34,958,000 uncommitted line of credit
denominated in Canadian dollars. At December 31, 1997, borrowings under the
subsidiaries' lines of credit were $2,960,000. The Company has guaranteed these
borrowings.
At December 31, 1996 available lines of credit were $186,483,000 including a
$36,483,000 working capital line of credit denominated in Canadian dollars.
Available lines of credit at December 31, 1995 totaled $54,500,000, including a
working capital line of credit of $4,500,000.
At December 31, 1996, in connection with the business acquisition described in
Note 2, a Company subsidiary had approximately $131,000,000 in outstanding
banker's acceptances included in short-term debt. During 1997 this debt was
refinanced as described in Note 10.
NOTE 9--EMPLOYEE BENEFITS
RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula 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 $55,052,000, $49,450,000, and $47,323,000 for the years ended
December 31, 1997, 1996, and 1995, 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
$3,653,000, $3,578,000, and $3,488,000 for the years ended December 31, 1997,
1996, and 1995, respectively. Components of the expense were:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands of dollars)
<S> <C> <C> <C>
Service cost .......................................... $ 2,442 $ 2,309 $ 1,973
Interest cost ......................................... 2,272 2,080 2,025
Actual return on assets ............................... (3,745) (2,008) (2,282)
Deferral of gain on return on assets .................. 3,007 1,397 1,913
Amortization of transition asset (22 year amortization) (143) (143) (143)
Amortization of unrecognized gain ..................... (262) (139) (80)
Amortization of prior service cost .................... 82 82 82
-------- -------- --------
$ 3,653 $ 3,578 $ 3,488
======== ======== ========
</TABLE>
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. Plan design and
eligibility changes effective January 1, 1998, include modifications to
eligibility requirements and the adjustment of benefit maximums. These changes
will not materially affect the Company's anticipated future benefits expense.
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 37.9% 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 $859,000, $379,000, and $2,409,000 for
the years ended December 31, 1997, 1996, and 1995, respectively.
A reconciliation of the funded status of the Benefit obligation as of December
31, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In thousands of dollars)
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation (APBO):
Retirees and their dependents ..................... $ (5,543) $ (3,739) $ (3,852)
Fully eligible active plan participants ........... (2,390) (1,825) (1,767)
Other active plan participants .................... (27,933) (26,345) (27,863)
--------- -------- --------
Total APBO .......................................... (35,866) (31,909) (33,482)
Plan assets at fair value ........................... 16,127 12,307 10,288
--------- --------- ---------
Funded status ....................................... (19,739) (19,602) (23,194)
Unrecognized transition asset ....................... (2,428) (2,570) (2,713)
Unrecognized net (gain) loss ........................ (4,589) (4,388) 2,464
Unrecognized prior service cost ..................... (1,003) 1,595 1,677
--------- --------- ---------
Accrued postretirement benefits costs ............... $(27,759) $(24,965) $(21,766)
========= ========= =========
</TABLE>
To determine the APBO as of December 31, 1997, the assumed weighted average
discount rate used was 7.0%. To determine the APBO as of December 31, 1996 and
1995, the assumed weighted average discount rate used was 7.5%. The assumed
health care cost trend rate for 1998 through 1999 is 8.0%. Beginning in 2000,
the assumed health care cost trend rate declines on a straight-line basis until
2009, when the ultimate trend rate of 5.0% 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, 1997 would increase by $8,520,000.
The aggregate of the service cost and interest cost components of the 1997 net
periodic postretirement benefits expense would increase by $1,277,000.
NOTE 10--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
(In thousands of dollars)
<S> <C> <C> <C>
Uncommitted revolving credit facility................ $126,127 $ -- $ --
Industrial development revenue bonds................. 27,650 27,650 26,150
Other................................................ 1,258 3,255 5,804
-------- ------ ------
155,035 30,905 31,954
Less current maturities.............................. 23,834 24,753 23,241
-------- ------ ------
$131,201 $ 6,152 $ 8,713
======== ======= =======
</TABLE>
As part of the permanent financing for the acquisition described in Note 2, the
Company entered into a $139,831,000 uncommitted revolving credit facility,
denominated in Canadian dollars. The Company has $126,127,000, denominated in
Canadian dollars, outstanding at December 31, 1997, with a weighted average
interest rate of 5.06%. The Company has the intent and the ability to refinance
the obligation on a long-term basis through its credit lines and therefore it is
included in long-term debt.
28
<PAGE>
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, 1997 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, 1997. The Company classified $22,755,000 of bonds currently subject
to redemption options in current maturities of long-term debt at December 31,
1997, and 1996. The Company classified $21,255,000 of bonds subject to
redemption options in current maturities of long-term debt at December 31, 1995.
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
------------- -----------
(In thousands of dollars)
<S> <C> <C>
1998..................................... $ 1,079 $ 22,755
1999..................................... 76 --
2000..................................... 83 4,895
2001..................................... 126,147 --
2002..................................... -- --
</TABLE>
NOTE 11--LEASES
The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.
At December 31, 1997, the approximate future minimum aggregate payments for all
leases were as follows:
<TABLE>
<CAPTION>
Operating Leases
---------------------------
Real Personal Capital
Property Property Total Leases
-------- -------- ------- -------
(In thousands of dollars)
<S> <C> <C> <C> <C>
1998 .................................... $15,832 $ 1,599 $17,431 $ 75
1999 .................................... 13,765 30 13,795 75
2000 .................................... 7,505 -- 7,505 75
2001 .................................... 4,624 -- 4,624 15
2002 .................................... 3,480 -- 3,480 --
Thereafter .............................. 8,500 -- 8,500 --
-------- -------- ------- ------
Total minimum payments required ......... 53,706 1,629 55,335 240
Less amounts representing sublease income 4,023 -- 4,023
-------- -------- -------
$49,683 $ 1,629 $51,312
======== ======== =======
Less imputed interest................................ 29
Present value of minimum lease payments ------
(included in long-term debt)....................... $ 211
======
</TABLE>
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $21,396,000, $18,434,000, and $20,084,000 for 1997,
1996, and 1995, respectively.
29
<PAGE>
NOTE 12--STOCK INCENTIVE PLANS
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.
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 100% 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.
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 10,000 shares of restricted stock issued in 1997 with a fair market
value of $80.25 per share. 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 ten years from issuance, although accelerated vesting is provided in
certain instances. There were no shares of restricted stock issued in 1995.
Restricted stock released totaled 500, 1,000, and 1,050 shares in 1997, 1996,
and 1995, respectively. 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
relating to restricted stock was $1,872,000, $282,000, and $42,000 in 1997,
1996, and 1995, respectively.
During 1997 the Company adopted a Director Stock Plan in which non-employee
directors participate. A total of 250,000 shares of common stock were reserved
for issuance in connection with awards of stock, stock units, stock options,
restricted stock, and other stock-based awards under the new plan.
The Company awarded Stock Units under the Director Stock Plan in connection with
the termination of previous director compensation plans. A Stock Unit is
essentially the economic equivalent of a share of Company stock. Additional
deferred fees and dividends are converted to Stock Units based on the market
value of the stock at the relevant time.
Payment of the value of Stock Units generally will be made after the termination
of service as a director. As of December 31, 1997, eight directors held Stock
Units, in connection with which the Company had recognized expense of
$1,850,000.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Price Per
Option Shares Share Exercisable
------------- --------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1995................... 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
Granted........................................ 347,330 $74.75 ===========
Exercised...................................... (206,351) $38.33
Canceled or expired............................ (25,860) $67.26
-------------
Outstanding at December 31, 1997................. 1,646,680 $58.28 839,950
============= ===========
</TABLE>
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.
30
<PAGE>
Information about stock options outstanding at December 31, 1997 is as follows:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Average
-----------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
- ----------------- ----------- --------------------- --------
$27.88-$47.38 385,660 2.33 $36.16
$51.50-$62.13 645,250 5.97 $58.82
$67.50-$90.25 615,770 8.87 $71.57
Options Exercisable
- ------------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
- ----------------- ----------- ----------------
$27.88-$47.38 385,660 $36.16
$51.50-$67.50 454,290 $57.56
Shares available for future awards were 2,383,509, 2,471,719, and 2,965,519 at
December 31, 1997, 1996, and 1995, 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 No. 25. Pro forma net earnings and earnings
per share, as calculated under SFAS No. 123, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands of dollars
except for per share amounts)
<S> <C> <C> <C>
Net earnings......................... $229,107 $206,696 $186,010
Earnings per share:
Basic.............................. $ 4.55 $ 4.04 $ 3.66
Diluted............................ $ 4.49 $ 4.00 $ 3.63
</TABLE>
The weighted average fair value of the stock options granted during 1997, 1996,
and 1995 was $25.90, $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:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate.............. 6.71% 6.55% 6.82%
Expected life........................ 7.0 years 6.5 years 6.5 years
Expected volatility.................. 20.97% 21.75% 21.75%
Expected dividend yield.............. 1.46% 1.46% 1.46%
</TABLE>
NOTE 13--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.
31
<PAGE>
The Rights expire on May 15, 1999, unless earlier redeemed. They generally are
redeemable at $.01 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 20% or more of the Company's common stock. They are also automatically
redeemable, at the redemption price, upon consummation of certain transactions
approved by shareholders in accordance with procedures provided in the plan. The
Rights do not have voting or dividend rights and, until they become exercisable,
have no dilutive effect on the earnings of the Company.
NOTE 14--INCOME TAXES
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.
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Current provision:
Federal (including foreign)............. $128,470 $113,968 $106,690
State................................... 27,180 26,324 24,309
--------- --------- ---------
Total current......................... 155,650 140,292 130,999
Deferred tax expense (benefits)........... 2,153 70 (5,515)
--------- --------- ---------
Total provision........................... $157,803 $140,362 $125,484
========= ========= =========
</TABLE>
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, 1997, 1996, and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In thousands of dollars)
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Inventory valuations ........................ $ 23,761 $ 25,059 $ 26,896
Administrative and general expenses
deducted on a paid basis for tax purposes . 28,267 26,759 25,004
Employment related benefits expense ......... 2,160 1,778 1,566
Restructuring costs ......................... 5,432 7,428 13,957
Other ....................................... (272) (187) (184)
--------- --------- ---------
Total net current deferred tax asset ...... 59,348 60,837 67,239
--------- --------- ---------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits ...................... (26,185) (29,693) (32,781)
Differences related to property,
buildings, and equipment .................. (816) (400) (1,013)
Intangible amortization ..................... 9,116 14,681 13,208
Employment related benefits expense ......... 14,012 12,709 11,441
Other ....................................... 1,002 496 606
--------- --------- ---------
Total net noncurrent deferred tax liability (2,871) (2,207) (8,539)
--------- --------- ---------
Net deferred tax asset ........................ $ 56,477 $ 58,630 $ 58,700
========= ========= =========
</TABLE>
32
<PAGE>
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981.
A reconciliation of income tax expense with U.S. federal income taxes at the
statutory rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Federal income taxes at the statutory rate ........... $ 136,373 $ 122,111 $ 109,252
Foreign rate differences ............................. 2,034 (4) --
State income taxes, net of federal income tax benefits 17,954 17,010 15,141
Other--net ........................................... 1,442 1,245 1,091
---------- ---------- ----------
Income tax expense ................................. $ 157,803 $ 140,362 $ 125,484
========== ========== ==========
Effective tax rate ................................. 40.5% 40.2% 40.2%
========== ========== ==========
</TABLE>
NOTE 15--FOREIGN OPERATIONS
Foreign operations consisted of the following for the year ended December 31,
1997 (in thousands of dollars):
<TABLE>
<S> <C>
Net Sales:
Canada ............................... $ 351,312
Other North American operations ...... 3,785,248
----------
Total ................................ $4,136,560
==========
Operating Profit:
Canada ............................... $ 24,872
Other North American operations ...... 368,287
----------
Total ................................ $ 393,159
==========
Identifiable Assets:
Canada ............................... $ 342,258
Other North American operations ...... 1,655,563
----------
Total ................................ $1,997,821
==========
</TABLE>
The Company's revenue and operating earnings from foreign operations were less
than 10% of consolidated results for the years ending December 31, 1997, 1996
and 1995.
Primarily as a result of the business acquisition described in Note 2,
identifiable assets in foreign countries were $349,332,000 and $332,388,000 at
December 31, 1997 and 1996, respectively. Identifiable assets in foreign
countries were less than 10% of consolidated assets for the year ended December
31, 1995.
NOTE 16--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 Quarter Ended
-----------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales .................... $ 985,556 $1,051,206 $1,066,927 $1,032,871 $4,136,560
Gross profit ................. $ 353,280 $ 371,029 $ 373,152 $ 396,891 $1,494,352
Net earnings ................. $ 54,609 $ 57,559 $ 56,480 $ 63,185 $ 231,833
Earnings per share-basic ..... $ 1.05 $ 1.14 $ 1.14 $ 1.28 $ 4.61
Earnings per share-diluted ... $ 1.03 $ 1.13 $ 1.12 $ 1.26 $ 4.54
<CAPTION>
1996 Quarter Ended
---------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
---------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
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
Earnings per share-basic ..... $ 0.98 $ 0.98 $ 1.02 $ 1.10 $ 4.08
Earnings per share-diluted ... $ 0.98 $ 0.96 $ 1.02 $ 1.08 $ 4.04
</TABLE>
33
<PAGE>
<TABLE>
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
1997 ........................... $15,302 $9,984 $9,483 $-- $15,803
1996 ........................... 14,229 9,131 8,824 766 15,302
1995 ........................... 15,333 7,780 8,884 -- 14,229
<FN>
(a) Accounts charged off as uncollectible, less recoveries.
(b) Business acquired.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc. and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1997 1996 1995
------------ ------------ ------------
BASIC:
<S> <C> <C> <C>
Average number of shares outstanding during the year ........ 50,302,259 51,147,753 50,815,081
============ ============ ============
Net earnings ................................................ $231,833,000 $208,526,000 $186,665,000
============ ============ ============
Earnings per share .......................................... $ 4.61 $ 4.08 $ 3.67
============ ============ ============
DILUTED:
Average number of shares outstanding during the year (basic) 50,302,259 51,147,753 50,815,081
Common equivalents
Shares issuable under outstanding options ............... 1,624,745 1,532,878 1,297,551
Shares which could have been purchased based on
the average market value for the period ............... 1,092,051 1,096,632 883,851
------------ ------------ ------------
532,694 436,246 413,700
Dilutive effect of exercised options prior to being exercised 9,023 16,721 9,355
------------ ------------ ------------
Shares for the portion of the period
that the options were outstanding ......................... 541,717 452,967 423,055
Contingently issuable shares ................................ 245,500 35,484 3,081
------------ ------------ ------------
787,217 488,451 426,136
Average number of shares outstanding during the year ........ 51,089,476 51,636,204 51,241,217
============ ============ ============
Net earnings ................................................ $231,833,000 $208,526,000 $186,665,000
============ ============ ============
Earnings per share .......................................... $ 4.54 $ 4.04 $ 3.64
============ ============ ============
</TABLE>
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, 33-43902, and 333-24215) and on
Form S-4 (No. 33-32091) of W.W. Grainger, Inc.
GRANT THORNTON LLP
Chicago, Illinois
March 24, 1998
36
<PAGE>
Exhibit 3(b) to the Annual Report on
Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1997
As Amended August 8, 1997
BY-LAWS
OF
W.W. GRAINGER, INC.
ARTICLE I
OFFICES
The principal office of the corporation shall be located in the State
of Illinois. The corporation may have such other offices, either within or
without the State of Illinois, as the business of the corporation may require
from time to time.
The registered office of the corporation required by the Illinois
Business Corporation Act to be maintained in the State of Illinois may be, but
need not be, identical with the principal office in the State of Illinois, and
the address of the registered office may be changed from time to time by the
board of directors.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. (a) The annual meeting of the shareholders
shall be held on the last Wednesday of April, in each year, or at such time as
may be determined by the board of directors, for the purpose of electing
directors and for the transaction of such other business as may properly come
before the meeting. If the day fixed for the annual meeting shall be a legal
holiday, such meeting shall be held on the next succeeding business day. If the
election of the directors shall not be held on the day designated herein for any
annual meeting or adjournment thereof, the board of directors shall cause the
election to be held at a meeting of the shareholders as soon thereafter as
conveniently may be.
(b) At any annual meeting or adjournment thereof only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the
37
<PAGE>
board of directors or (ii) by any shareholder (x) who is entitled to vote at the
time of giving notice provided for in this Section 1(b) and remains such until
the meeting and (y) who complies with the procedures set forth in this Section
1(b). For business to be properly brought before an annual meeting or
adjournment thereof by a shareholder, the shareholder must have given timely
notice thereof in proper written form to the secretary. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal office of the corporation no less than thirty days nor more than sixty
days prior to the meeting; provided, however, that in the event that less than
forty days' notice or prior public disclosure of the date of the meeting is
given or made to shareholders, notice by the shareholder to be timely must be
received not later than the close of business on the tenth day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made. To be in proper written form, a shareholder's notice to the
secretary shall set forth in writing as to each matter the shareholder proposes
to bring before the meeting (i) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting, (ii) the name and address, as they appear on the corporation's
books, of the shareholder proposing such business, (iii) the class and number of
shares of the corporation which are beneficially owned by the shareholder and
(iv) any material interest of the shareholder in such business. Notwithstanding
anything in these by-laws to the contrary, no business shall be conducted at any
annual meeting or adjournment thereof except in accordance with the procedures
set forth in this Section 1(b). The officer or other person presiding shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the procedures set forth
in this Section 1(b), and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the chairman of the board, the vice chairman, the president and
chief executive officer, the board of directors or by the holders of not less
than one-fifth of all the outstanding shares of the corporation, for the purpose
or purposes for which the meeting is called. Unless otherwise stated in the
notice of special meeting, no other business may be transacted at any such
meeting.
SECTION 3. PLACE OF MEETING. The board of directors may designate any
place, either within or without the State of Illinois, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal office of the corporation in
the State of Illinois.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the place, day
and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
nor more than sixty days before the date of the meeting, or in the case of a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than twenty days nor more than sixty days before the date of
the meeting, either personally or by mail, by
38
<PAGE>
or at the direction of the chairman of the board or the secretary, or the
officer or persons calling the meeting, to each shareholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, addressed to the shareholder at his
address as it appears on the records of the corporation, with postage thereon
prepaid.
SECTION 5. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors of the corporation may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than sixty days and, in case of a meeting of shareholders, not less than ten
days, or in the case of a merger, consolidation, share exchange, dissolution or
sale, lease or exchange of assets, not less than twenty days, prior to the date
on which the particular action, requiring such determination of shareholders, is
to be taken. If no record date is fixed for the determination of shareholders
entitled to notice of or entitled to vote at a meeting of shareholders, or
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided above,
such determination shall apply to any adjournment thereof.
SECTION 6. VOTING LISTS. The officer or agent having charge of the
transfer books for shares of the corporation shall make within twenty days after
the record date for a meeting of shareholders, or ten days before such meeting
of shareholders, whichever is earlier, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the principal office of
the corporation in the State of Illinois and shall be subject to inspection by
any shareholder at any time during usual business hours and to copying at the
shareholder's expense. Such list shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The original share ledger or
transfer book, or a duplicate thereof kept in the State, shall be prima facie
evidence as to who are the shareholders entitled to examine such list or share
ledger, or transfer book or to vote at any meeting of shareholders.
SECTION 7. QUORUM. A majority of the outstanding shares of the
corporation, entitled to vote on a matter, represented in person or by proxy,
shall constitute a quorum at any meeting of shareholders; provided, that if less
than a majority of the outstanding shares are represented at said meeting, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice.
39
<PAGE>
SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy.
SECTION 9. VOTING OF SHARES. Subject to the provisions of Section 11 of
this Article, each outstanding share, regardless of class, shall be entitled to
one vote upon each matter submitted to vote at a meeting of shareholders.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation, domestic or foreign, may be voted by such officer,
agent, or proxy as the by-laws of such corporation may prescribe, or, in the
absence of such provision, as the board of directors of such corporation may
determine.
Shares standing in the name of a deceased person may be voted by his
administrator or executor, either in person or by proxy. Shares standing in the
name of a guardian, conservator, or trustee may be voted by such fiduciary,
either in person or by proxy, but no guardian, conservator, or trustee shall be
entitled, as such fiduciary, to vote shares held by him without a transfer of
such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to this corporation shall not be
voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by it in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
SECTION 11. CUMULATIVE VOTING. In all elections for directors, every
shareholder shall have the right to vote, in person or by proxy, the number of
shares owned by him, for as many persons as there are directors to be elected,
or to cumulate said shares, and give one candidate as many votes as the number
of directors multiplied by the number of his shares shall equal, or to
distribute them on the same principle among as many candidates as he shall see
fit.
40
<PAGE>
SECTION 12. VOTING BY BALLOT. Voting on any question or in any election
may be by voice, unless the officer or other person presiding over the meeting
shall order or any shareholder shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the corporation
shall be managed under the direction of its board of directors.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
of the corporation shall be not less than seven nor more than twelve. The number
of directors may be fixed or changed from time to time, within the minimum and
maximum, by the directors or the shareholders without amending these by-laws.
Each director shall hold office until the next annual meeting of shareholders or
until his successor shall have been elected and qualified. Directors need not be
residents of Illinois or shareholders of the corporation.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this by-law, immediately after
the annual meeting of shareholders. The board of directors may provide by
resolution, the time and place, either within or without the State of Illinois,
for the holding of additional regular meetings without other notice than such
resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or any two
directors. The person or persons authorized to call special meetings of the
board of directors may fix any place, either within or without the State of
Illinois, as the place for holding any special meeting of the board of directors
called by them.
SECTION 5. NOTICE. Notice of any special meeting shall be given at
least two days previously thereto by written notice delivered personally or
mailed to each director at his business address, or by telegram. If mailed, such
notice shall be deemed to be delivered 24 hours after deposited in the United
States mail, next-day delivery guaranteed, so addressed with postage thereon
prepaid. If notice to be given by telegram, such notice shall be deemed to be
delivered 24 hours after the telegram is delivered to the telegraph company. Any
director may waive notice of any meeting. The attendance of a director at any
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
41
<PAGE>
SECTION 6. QUORUM. A majority of the board of directors shall
constitute a quorum for transaction of business at any meeting of the board of
directors, provided, that if less than a majority of the directors are present
at said meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice.
SECTION 7. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors.
SECTION 8. VACANCIES. Any vacancy occurring in the board of directors
and any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual meeting or at a special meeting
of shareholders called for that purpose; provided, however, vacancies arising
between meetings of shareholders by reason of an increase in the number of
directors or otherwise may be filled by a majority of the board of directors
then remaining. A director elected by the shareholders to fill a vacancy shall
hold office for the balance of the term for which elected. A director appointed
by the directors to fill a vacancy shall serve until the next meeting of
shareholders at which directors are to be elected.
SECTION 9. COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, for attendance at each meeting of
the board or of a committee thereof, and may be paid a fixed sum for attendance
at meetings and/or a stated retainer as directors. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
SECTION 10. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
SECTION 11. COMMITTEES. Committees of the board of directors shall
consist of an audit committee, a compensation committee, a board affairs and
nominating committee, and such other committees as the board of directors by
resolution may create. Each committee shall have such number of members and
shall exercise such authority and carry out such duties as are set forth in
resolutions of the board of directors. Committee members shall be elected
annually but shall serve at the discretion of the board of directors and may be
removed by the board of directors. The board of directors may increase or
decrease the number of members of any committee at any time and may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member or members at any meeting of the committee. A
majority of members of a committee shall constitute a
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quorum and, unless otherwise set forth in resolutions of the board of directors,
a majority of those members present at a meeting and not disqualified from
voting shall constitute the acts of the committee.
SECTION 12. INFORMAL ACTION BY DIRECTORS. (a) Any action required to be
taken at a meeting of the board of directors of the corporation, or any other
action which may be taken at a meeting of the board of directors or a committee
thereof, may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the directors entitled to vote
with respect to the subject matter thereof, or by all of the members of such
committee, as the case may be.
(b) The consent shall be evidenced by one or more written approvals,
each of which sets forth the action taken and bears the signature of one or more
directors. All the approvals evidencing the consent shall be delivered to the
secretary to be filed in the corporate records. The action taken shall be
effective when all the directors have approved the consent unless the consent
specifies a different effective date.
(c) Any such consent signed by all the directors or all the members of
a committee shall have the same effect as a unanimous vote, and may be stated as
such in any document filed with the Secretary of State.
SECTION 13. TELEPHONE ATTENDANCE. (a) Members of the board of directors
or of any committee of the board of directors may participate in and act at any
meeting of such board or committee through the use of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in such meeting shall constitute
attendance and presence in person at the meeting of the person or persons so
participating.
(b) The board of directors or any committee may, at its option, provide
for a tape recording of any such conference telephone portion of a meeting but
the lack thereof shall not affect the validity of any actions taken at such
meeting.
SECTION 14. REMOVAL OF DIRECTORS. One or more of the directors may be
removed, with or without cause, at a meeting of shareholders by the affirmative
vote of the holders of a majority of the outstanding shares then entitled to
vote at an election of directors, except that:
(1) No director shall be removed at a meeting of shareholders unless
the notice of such meeting shall state that a purpose of the meeting is to vote
upon the removal of one or more directors named in the notice. Only the named
director or directors may be removed at such meeting;
(2) If less than the entire board is to be removed, no director may be
removed, with or without cause, if the votes cast against his removal would be
sufficient to elect him, if then cumulatively voted at an election of the entire
board of directors; and
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(3) If a director is elected by a class or series of shares, he may be
removed only by the shareholders of that class or series.
SECTION 15. DIRECTOR CONFLICT OF INTEREST. If a transaction is fair to
the corporation at the time it is authorized, approved or ratified, the fact
that a director of the corporation is directly or indirectly a party to the
transaction shall not be grounds for invalidating the transaction.
SECTION 16. NOMINATIONS OF DIRECTORS. (a) Except for directors elected
to fill vacancies pursuant to these by-laws, nominations for election for the
board of directors may be made by the board of directors, or by the nominating
committee of the board of directors and approved by the board of directors. Such
nominations shall be submitted to a vote of the shareholders at the next annual
meeting of shareholders or at a special meeting of shareholders called for such
purpose.
(b) Nominations for election to the board of directors may be made by
any shareholder of any outstanding class of stock of the corporation entitled to
vote for the election of directors provided that; (i) any such shareholder
nominating a director shall, not later than the date with respect to submission
of shareholders' proposals for the next annual meeting as set forth in the
corporation's proxy statement for the preceding annual meeting of shareholders,
notify the chairman of the board of the corporation in writing of the intent to
so nominate one or more persons and shall further set forth in such notice the
names of all such nominees together with, with respect to each such nominee, his
principal occupation, age, holdings of equity securities of the corporation and
such other information as would be required under applicable laws, including the
various securities laws, to be set forth by the corporation in its proxy
statement and related materials if such person were a nominee of the board of
directors; (ii) such shareholder so proposing to nominate a person remains a
shareholder of the corporation through the date of the annual meeting at which
such shareholder, or such shareholder's proxy, nominates such person for
election as a director; and (iii) such shareholder delivers the consent of each
such nominee to serve as director, or states in the notice that each such
nominee, if elected, has consented to serve as director.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the corporation shall be a chairman
of the board, a vice chairman of the board, a senior chairman of the board, one
or more presidents, one or more vice presidents, a treasurer, a secretary, and
such other officers and such assistant or administrative officers as may be
elected or appointed as hereinafter provided. Any two or more offices may be
held by the same person.
SECTION 2. ELECTION, APPOINTMENT AND TERM OF OFFICE. Officers of the
corporation shall be elected or appointed annually by the board of directors,
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although vacancies may be filled or new offices created and filled at any
meeting of the board of directors. Each officer elected or appointed by the
board of directors shall hold office until the next annual election or
appointment of officers by the board of directors, or until his earlier death,
resignation or removal. Officers and assistant or administrative officers of the
corporation may also be appointed from time to time by the chairman of the
board, to serve as such at his pleasure.
SECTION 3. REMOVAL. Any officer or assistant or administrative officer
of the corporation elected or appointed by the board of directors may be removed
by the board of directors whenever in its judgment the best interests of the
corporation would be served thereby. Any officer or assistant or administrative
officer of the corporation appointed by the chairman of the board may be removed
by the chairman of the board whenever in his judgment the best interests of the
corporation would be served thereby. Any removal provided for in this Section 3
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or assistant or administrative
officer of the corporation shall not itself create contract rights.
SECTION 4. CHAIRMAN OF THE BOARD. The chairman of the board shall be
the chief executive officer. He shall preside at all meetings of the
shareholders and the board of directors or, from time to time, may delegate any
part of such responsibilities to the vice chairman of the board or any other
member of the board of directors. He may sign, with the secretary or any other
authorized officer, certificates for shares of the corporation. He shall be
primarily responsible for carrying out the policies established by and the
directions of the board of directors and shall perform such other duties as may
be prescribed from time to time by the board of directors. He may from time to
time, to the extent not delegated by the board of directors, delegate and
re-delegate any part of any of the responsibilities and authority set forth
herein to the vice chairman of the board, the senior chairman of the board
and/or a president. The chairman of the board must be a director of the
corporation.
SECTION 5. VICE CHAIRMAN OF THE BOARD. The vice chairman of the board
shall perform such duties as may from time to time be prescribed by the board of
directors or delegated to him by the chairman of the board, including the
presiding at meetings of the shareholders and the board of directors. He may
sign, with the secretary or any other authorized officer, certificates for
shares of the corporation. The vice chairman of the board must be a director of
the corporation.
SECTION 6. SENIOR CHAIRMAN OF THE BOARD. The senior chairman of the
board shall, in the absence of the chairman of the board, the vice chairman of
the board, or another director to whom the responsibilities have been delegated,
preside at all meetings of the shareholders and the board of directors. He shall
advise the chairman of the board on matters of long- and short-term strategic
planning and policy and other significant matters affecting the corporation, and
shall perform such other duties as may from time to time be prescribed by the
board of directors, or delegated to him by the chairman of the board. The senior
chairman of the board must be a director of the corporation.
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SECTION 7. OFFICE OF THE CHAIRMAN. The chairman of the board, the vice
chairman of the board, and the senior chairman of the board shall comprise the
office of the chairman, which shall act as the senior management of the
corporation. By agreement of the members of the office of the chairman, any
member or members thereof shall be authorized to act as the office of the
chairman.
Any member of the office of the chairman and a president may sign
deeds, mortgages, bonds, contracts or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors or by
these by-laws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed. The office of the chairman
and a president may delegate signing authority to other persons within the
corporation as shall be deemed necessary.
SECTION 8. PRESIDENTS. The president or, if there be more than one, the
presidents shall oversee and direct such operations, shall be responsible for
such day-to-day activities, and shall do and perform such other duties as from
time to time may be assigned by the board of directors or the chairman of the
board. If there be more than one president, the board of directors may designate
one or more of them as group president or use a similar descriptive designation.
SECTION 9. VICE PRESIDENTS. Each of the vice presidents shall be
responsible for those activities and shall perform those duties as from time to
time may be assigned by the board of directors, the chairman of the board, the
vice chairman of the board, or a president. The board of directors may designate
one or more of the vice presidents as executive, group or senior vice presidents
or use a similar descriptive designation.
SECTION 10. TREASURER. If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his duties in such sum
and with such surety or sureties as the board of directors shall determine. He
shall (a) have charge and custody of and be responsible for all funds and
securities of the corporation, (b) receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositories as shall be selected in accordance with the provisions of Article V
of these by-laws and (c) in general perform all the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the board of directors, the chairman of the board, the vice chairman
of the board, or the chief financial officer.
SECTION 11. SECRETARY. The secretary shall (a) keep the minutes of the
shareholders' and of the board of directors' meetings in one or more books
provided for that purpose, (b) see that all notices are duly given in accordance
with the provisions of these by-laws or as required by law, (c) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all
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certificates for shares prior to the issue thereof and to all documents, the
execution of which on behalf of the corporation under its seal is duly
authorized in accordance with the provisions of these by-laws, (d) keep, or
cause the transfer agent to keep, a register of the post office address of each
shareholder which shall be furnished to the secretary by such shareholder, (e)
sign with the chairman of the board or the vice chairman of the board
certificates for shares of the corporation, the issue of which shall have been
authorized by resolution of the board of directors, (f) have general charge of
the stock transfer books of the corporation and (g) in general perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the board of directors, the chairman of the
board, or the vice chairman of the board.
SECTION 12. SALARIES. The salaries of the officers elected or appointed
by the board of directors shall be fixed from time to time by the board of
directors and no such officer shall be prevented from receiving such salary by
reason of the fact that he is also a director of the corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The board of directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. DEPOSITS. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies, or other depositaries as the board of directors
may select.
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ARTICLE VI
CERTIFICATES FOR SHARES
AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. The issued shares of the
corporation shall be represented by certificates, except as and to the extent
determined by, or pursuant to, resolution adopted by the board of directors.
Certificates representing shares of the corporation shall be in such form as may
be determined by the board of directors. Such certificates shall be signed by
the chairman of the board or the vice chairman of the board, and by the
secretary or an assistant secretary, and shall be sealed with the seal of
corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered in the books of the corporation, as shall similar information with
respect to shares that are uncertificated. All certificates surrendered to the
corporation for transfer shall be canceled. No new certificate shall be issued
until the former certificate for a like number of shares, unless the shares are
uncertificated, shall have been surrendered and canceled except that in the case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon such terms and indemnity to the corporation as the board of directors may
prescribe.
SECTION 2. TRANSFERS OF SHARES. Transfers of shares of the corporation
shall be made either on the books of the corporation or on the books of the duly
authorized and appointed agent or agents of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the secretary of the corporation or proper
officer of the transfer agent and, unless such shares are uncertificated, on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation or its duly authorized
and appointed transfer agent or agents shall be deemed the owner thereof for all
purposes as regards the corporation.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of
January in each year and end on the last day of December in each year.
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ARTICLE VIII
DIVIDENDS
The board of directors may from time to time, declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its articles of incorporation.
ARTICLE IX
SEAL
The board of directors shall provide a corporate seal which shall be in
the form of a circle and shall have inscribed thereon the name of the
corporation and the words, "Corporate Seal, Illinois".
ARTICLE X
WAIVER OF NOTICE
Whenever any notice whatever is required to be given under the
provisions of these by-laws or under the provisions of the articles of
incorporation or under the provisions of the Illinois Business Corporation Act,
a waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein shall be deemed
equivalent to the giving of such notice.
ARTICLE XI
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may
be adopted at any meeting of the board of directors of the corporation by a
majority vote of the directors present at the meeting.
ARTICLE XII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a
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director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. The corporation shall indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action, suit or proceeding, if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to the best interests
of the corporation, and except that no indemnification shall be made with
respect to any claim, issue or matter as to which such person has been finally
adjudged to have been liable to the corporation, unless, and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
SECTION 3. Any indemnification under Sections 1 or 2 (unless ordered by
a court) shall be made only as authorized in the specific case, upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 or 2. Such determination shall be made (1) by the board of directors
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (2) if such a quorum is not obtainable (or,
even if obtainable, a quorum of disinterested directors so directs) by
independent legal counsel in a written opinion, or (3) by the shareholders. In
any event, to the extent that a director or officer of the corporation has been
successful, on the merits or otherwise, in the defense of any action, suit or
proceeding referred to in Sections 1 or 2 or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including reasonable
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
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SECTION 4. (a) Reasonable expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding, upon receipt of (i)
a statement signed by such director or officer to the effect that such director
or officer acted in good faith and in a manner which he believed to be in, or
not opposed to the best interests of the corporation and (ii) an undertaking by
or on behalf of the director or officer to repay such amount, if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Article.
(b) The board of directors may, by separate resolution adopted under
and referring to this Article of the by-laws, provide for securing the payment
of authorized advances by the creation of escrow accounts, the establishment of
letters of credit or such other means as the board deems appropriate and with
such restrictions, limitations and qualifications with respect thereto as the
board deems appropriate in the circumstances.
SECTION 5. (a) The indemnification and advancement of expenses provided
by or granted under other subsections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(b) The provisions of this ARTICLE XII shall be deemed to be a contract
between the corporation and each director and officer who serves in such
capacity at anytime while this ARTICLE XII is in effect and any indemnification
provided under this ARTICLE XII to a person shall continue after such person
ceases to be an officer, director, agent or employee of the corporation as to
all facts, circumstances and events occurring while such person was such
officer, director, agent or employee, and shall not be decreased or diminished
in scope without such person's consent, regardless of the repeal or modification
of this Article or any repeal or modification of the Illinois Business
Corporation Act or any other applicable law. If the scope of indemnity provided
by this ARTICLE XII or any replacement article, or pursuant to the Illinois
Business Corporation Act or any modification or replacement thereof is
increased, then such person shall be entitled to such increased indemnification
as is in existence at the time indemnity is provided to such person, it being
the intent, subject to Section 10 of this ARTICLE XII, to indemnify persons
under this ARTICLE XII to the fullest extent permitted by law.
SECTION 6. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of
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his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 7. Subject to Section 10 of this Article, if a claim under this
Article is not promptly paid in full by the corporation after a written claim
has been received by the corporation or if expenses pursuant to Section 4 of
this Article have not been promptly advanced after a written request for such
advancement accompanied by the statement and undertaking required by Section 4
of this Article has been received by the corporation, the director or officer
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim or the advancement of expenses. If successful, in
whole or in part, in such suit, such director or officer shall also be entitled
to be paid the reasonable expense thereof, including attorneys' fees. It shall
be a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking has been tendered to the corporation)
that the director or officer has not met the standards of conduct which make it
permissible under the Illinois Business Corporation Act for the corporation to
indemnify the director or officer for the amount claimed, but the burden of
proving such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
shareholders) to have made a determination, if required, prior to the
commencement of such action that indemnification of the director or officer is
proper in the circumstances because he or she has met the applicable standard of
conduct required under the Illinois Business Corporation Act, nor an actual
determination by the corporation (including its board of directors, independent
legal counsel, or its shareholders) that the director or officer had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the director or officer had not met the applicable standard
of conduct.
SECTION 8. For purposes of this Article, references to "the
corporation" shall include, in addition to the surviving corporation, any
merging corporation (including any corporation having merged with a merging
corporation) absorbed in a merger which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers and employees or agents, so that any person who was a director or
officer of such merging corporation, or was serving at the request of such
merging corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article with respect to the surviving
corporation as such person would have with respect to such merging corporation
if its separate existence had continued.
SECTION 9. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and references to "officers" shall include elected and
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appointed officers. A person who acted in good faith and in a manner he
reasonably believed to be in the best interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this Article.
SECTION 10. Anything herein to the contrary notwithstanding, if the
corporation purchases insurance in accordance with Section 6 of this ARTICLE
XII, the corporation shall not be required to, but may (if the board of
directors so determines in accordance with this ARTICLE XII) reimburse any party
instituting any action, suit or proceeding if a result of the institution
thereof is the denial of or limitation of payment of losses under such insurance
when such losses would have been paid thereunder if a non-insured third party
had instituted such action, suit or proceedings.
ARTICLE XIII
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may indemnify any agent or employee of the corporation
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (including, but not limited to
any such proceeding by or in the right of the corporation) whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was serving the corporation at its request and in the course and scope of his
duties and acting in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the corporation, against expenses
(including reasonable attorney's fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action, suit or proceeding.
The standards of conduct, the provisions for payment and advances, and the terms
and conditions contained in Article XII, Sections 1, 2, 3, 4, 5(a), 6, 8, 9 and
10 shall apply to any indemnification hereunder.
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Exhibit 10(c)(viii) to the Annual Report
on form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1997
SUMMARY DESCRIPTION OF THE
1997 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 for
employees in grades 13 and above with the first payout in March 1994. For
eligible participants, this program replaced participation in both the
discontinued Team Achievement Bonus (TAB) and the Long-Term Incentive Program
(LTIP).
The effective date of the Team Incentive Program (TIP) was January 1, 1994. For
eligible participants, this program replaced the discontinued Team Achievement
Bonus (TAB) program and other short-term incentive programs.
Effective January 1, 1997, the MIP and the TIP were combined into one program.
Changes were made to various provisions to accomplish this transition. This
Summary Description details the provisions of the combined program.
II. BACKGROUND
During 1993, the Company 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, middle managers and key staff appropriately for
positive or negative performance resulting from business decisions. By linking
EE to incentive compensation, the MIP should influence participants to make
business decisions consistent with long-term shareholders' interests.
III. ELIGIBILITY FOR PARTICIPATION
Employees in salary grades 10 and above are eligible to participate in this
program, subject to the eligibility provisions in Section IV. These employees
are responsible for decisions affecting EE and/or major policy direction.
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Managers of Lab Safety Supply, Inc. (LSS) and Parts Company of America (PCA) are
on separate programs unique to their business units.
Effective January 1, 1997, members of the Office of the Chairman participate in
the Office of the Chairman Incentive Plan (OCIP).
IV. ELIGIBILITY PROVISIONS
Specific eligibility provisions are developed and reviewed annually. Eligibility
provisions are as follows:
A. Full-Year Participation - Employees in grades 10 and above 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 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 award
percentage based on the salary grade in effect on July 1.
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.
55
<PAGE>
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, a pro-rata award for the current year will
be made on the next regular incentive payment date and the participant
will receive any account balance on that date also.
H. Voluntary Resignation - If a participant leaves before October 1, no
award will be paid for the current year and any remaining account
balance will be forfeited. If a participant leaves after October 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.
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.
56
<PAGE>
V. 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.
VI. 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 10 and above. The target bonuses are stated as a percentage of
annualized base salary as of December 31. 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.
Target Company EE is based on a weighted average of the three prior years'
Actual Company EE before MIP 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)
Note: The improvement factor applicable to any prior year having
negative EE is 90%.
57
<PAGE>
The bonus calculation includes a mechanism to identify significant strategic
investments and adjust for their impact. The forecast short-term negative impact
from such investments would be excluded from Target EE with corresponding
increases in subsequent years' targets.
The next step involves comparison of Actual 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.
A MIP account will be established for each participant. MIP accounts are not
funded with actual cash amounts; they represent a paper record of unpaid earned
bonuses for an individual.
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.
Each year, the Bonus Earned will be posted to each participant's account. Next,
the Bonus Paid will be calculated (see below). If the Bonus Paid is less than or
equal to the participant's account balance, the participant will be paid the
full Bonus Paid. If the Bonus Paid is calculated to be more than the
participant's incentive account balance, the participant will be paid the entire
account balance. Account balances of less than $1,000 will be paid out
immediately.
Each year, the beginning account balance, if any, will be adjusted by the merit
budget percentage established for that year.
58
<PAGE>
MIP accounts were in existence for employees in grades 13 and above prior to the
combination of MIP and TIP. Thus 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.
For employees in grades 10 through grade 12, the above formula will be used
beginning in 1999. In 1997, the Bonus Paid will equal the Bonus Earned. For
1998, the current year (1998) and the prior year (1997) will be averaged. The
only condition imposed on these calculations is that payment of the bonus may
not result in a negative account balance.
It shall be noted from the last two formulas that the EE bonus multiple can be a
negative number and, as a result, the Bonus Earned can also be a negative
number. If the Bonus Earned is negative, it is posted to the MIP account just as
any other bonus amount would be. If the MIP account balance is negative after
this posting, no bonus can be paid. No bonus will be paid until positive bonuses
in subsequent years restore a positive MIP account balance.
VII. 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. 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.
59
<PAGE>
Exhibit 21 to the Annual Report on
Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1997
W.W. GRAINGER, INC.
Subsidiaries as of December 31, 1997
Acklands - Grainger Inc. (Canada)
- 370071 Alberta Ltd. (Alberta) (50% owned)
- 655206 Alberta Ltd. (Alberta) (50% owned)
- AGI Investment Corporation (Alberta)
- 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)
60
<PAGE>
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