26 Pages Complete
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
------ to ------
-----------------
Commission file number 1-5684
I.R.S. Employer Identification Number 36-1150280
W.W. Grainger, Inc.
(An Illinois Corporation)
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
Telephone: (847) 535-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 93,960,450 shares of the
Company's Common Stock were outstanding as of October 31, 2000.
The Exhibit Index appears on page 23 in the sequential numbering system.
1
Part I - FINANCIAL INFORMATION
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net sales ........................................ $ 1,241,730 $ 1,175,393 $ 3,678,946 $ 3,412,411
Cost of merchandise sold ......................... 794,115 752,657 2,375,321 2,170,798
--------------- --------------- --------------- ---------------
Gross profit ................................... 447,615 422,736 1,303,625 1,241,613
Warehousing, marketing, and
administrative expenses ........................ 356,037 342,354 1,064,369 977,494
--------------- --------------- --------------- ---------------
Operating earnings ............................. 91,578 80,382 239,256 264,119
Other income or (deductions)
Interest income ................................ 442 391 1,379 1,120
Interest expense ............................... (6,398) (5,276) (19,085) (9,952)
Equity in loss of unconsolidated
entities ..................................... (4,602) -- (4,602) --
Unclassified-net ............................... 2,963 1,405 29,847 1,138
--------------- --------------- --------------- ---------------
(7,595) (3,480) 7,539 (7,694)
--------------- --------------- --------------- ---------------
Earnings before income taxes ................... 83,983 76,902 246,795 256,425
Income taxes ..................................... 35,876 31,145 101,815 103,852
--------------- --------------- --------------- ---------------
Net earnings ................................... $ 48,107 $ 45,757 $ 144,980 $ 152,573
=============== =============== =============== ===============
Earnings per share:
Basic .......................................... $ 0.52 $ 0.49 $ 1.56 $ 1.64
=============== =============== =============== ===============
Diluted ........................................ $ 0.51 $ 0.49 $ 1.54 $ 1.62
=============== =============== =============== ===============
Weighted average number of shares outstanding:
Basic .......................................... 93,097,895 92,840,777 93,023,258 92,831,640
=============== =============== =============== ===============
Diluted ........................................ 94,074,751 94,352,612 94,313,030 94,358,453
=============== =============== =============== ===============
Cash dividends paid per share .................... $ 0.17 $ 0.16 $ 0.50 $ 0.47
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
2
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net earnings ......................................... $ 48,107 $ 45,757 $ 144,980 $ 152,573
Other comprehensive earnings (loss) net of tax:
Foreign currency translation
adjustments .................................... (2,555) 1,539 (8,527) 7,049
Unrealized gain (loss) on investment securities:
Unrealized holding (loss) .................... (6,967) -- (54,350) --
Reclassification
adjustments for gain
included in net earnings ................... (2,081) -- (17,631) --
------------ ------------ ------------ ------------
Comprehensive earnings ............................... $ 36,504 $ 47,296 $ 64,472 $ 159,622
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
ASSETS Sept. 30, 2000 Dec. 31, 1999
---------------------------------------------------------------------- --------------- ---------------
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 72,264 $ 62,683
Accounts receivable, less allowance for doubtful
accounts of $20,294 in 2000 and $18,369 in 1999 .................. 651,739 561,786
Inventories ........................................................ 754,509 762,495
Prepaid expenses ................................................... 25,297 18,387
Deferred income tax benefits ....................................... 76,995 65,794
--------------- ---------------
Total current assets ............................................. 1,580,804 1,471,145
PROPERTY, BUILDINGS, AND EQUIPMENT ................................... 1,289,131 1,302,029
Less accumulated depreciation and amortization ..................... 620,479 604,278
--------------- ---------------
Property, buildings, and equipment-net ............................. 668,652 697,751
INVESTMENTS IN UNCONSOLIDATED ENTITIES ............................... 28,941 --
OTHER ASSETS ......................................................... 276,642 395,930
--------------- ---------------
TOTAL ASSETS ......................................................... $ 2,555,039 $ 2,564,826
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt .................................................... $ 253,894 $ 296,836
Current maturities of long-term debt ............................... 27,683 27,721
Trade accounts payable ............................................. 271,734 260,084
Accrued expenses ................................................... 293,175 285,507
Income taxes ....................................................... 36,383 386
--------------- ---------------
Total current liabilities ........................................ 882,869 870,534
LONG-TERM DEBT (less current maturities) ............................. 120,051 124,928
DEFERRED INCOME TAXES ................................................ 40 48,117
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ............................ 42,168 40,718
MINORITY INTERESTS ................................................... 98 --
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock - $5 par value - authorized,
12,000,000 shares, issued and outstanding, none ................ -- --
Common Stock - $0.50 par value - authorized, 300,000,000
shares; issued, 108,049,902 shares, 2000 and
107,460,978 shares, 1999 ....................................... 54,025 53,730
Additional contributed capital ..................................... 277,470 255,569
Retained earnings .................................................. 1,805,347 1,707,258
Unearned restricted stock compensation ............................. (26,873) (16,581)
Accumulated other comprehensive (loss) earnings .................... (11,717) 68,791
Treasury stock, at cost - 14,083,212 shares, 2000 and
14,079,292 shares, 1999 ........................................ (588,439) (588,238)
--------------- ---------------
Total shareholders' equity ....................................... 1,509,813 1,480,529
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 2,555,039 $ 2,564,826
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended September 30,
----------------------------------
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net earnings ....................................................... $ 144,980 $ 152,573
Provision for losses on accounts receivable ........................ 10,915 10,316
Depreciation and amortization:
Property, buildings, and equipment ............................... 62,611 55,546
Intangibles and goodwill ......................................... 7,484 11,945
Capitalized software ............................................. 12,521 7,236
(Gain) on sales of investment securities ........................... (29,288) --
Loss of unconsolidated entities .................................... 4,602 --
Change in operating assets and liabilities,
net of assets contributed to joint venture:
(Increase) in accounts receivable ................................ (100,868) (112,438)
Decrease (increase) in inventories ............................... 7,986 (72,559)
(Increase) in prepaid expenses ................................... (7,246) (4,248)
(Increase) in deferred income taxes .............................. (11,689) (5,237)
Increase in trade accounts payable ............................... 11,650 39,315
Increase (decrease) in other current liabilities ................. 7,668 (17,352)
Increase (decrease) in current income taxes payable .............. 35,997 (17,974)
Increase in accrued employment related benefits costs ............ 1,450 3,591
Other - net ........................................................ 5,803 3,032
--------------- ---------------
Net cash provided by operating activities ............................ 164,576 53,746
--------------- ---------------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions .................................. (35,390) (80,490)
Expenditures for capitalized software .............................. (27,742) (19,606)
Purchases of investment securities ................................. (5,000) (23,500)
Proceeds from sales of investment securities ....................... 30,740 --
Investments in unconsolidated entities ............................. (25,333) --
Other - net ........................................................ (8,201) 8,407
--------------- ---------------
Net cash (used in) investing activities .............................. (70,926) (115,189)
--------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in short-term debt ......................... (42,942) 133,851
Long-term debt payments ............................................ (52) (49)
Stock incentive plan ............................................... 6,174 1,069
Purchase of treasury stock - net ................................... (458) (14,912)
Contributions from minority interest ............................... 100 --
Cash dividends paid ................................................ (46,891) (43,876)
--------------- ---------------
Net cash (used in) provided by financing activities .................. (84,069) 76,083
--------------- ---------------
Net increase in cash and cash equivalents ............................ 9,581 14,640
Cash and cash equivalents at beginning of year ....................... 62,683 43,171
--------------- ---------------
Cash and cash equivalents at end of period ........................... $ 72,264 $ 57,811
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be read
in conjunction with the consolidated financial statements and related notes for
the year ended December 31, 1999, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated.
Inventories are valued at the lower of cost or market. Cost is determined
primarily by the last-in, first-out (LIFO) method.
The unaudited financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the statements
contained herein.
2. DIVIDEND
On October 25, 2000, the Board of Directors declared a quarterly dividend of 17
cents per share, payable December 1, 2000 to shareholders of record on
November 6, 2000.
3. INVESTMENT IN WORKS.COM
On August 1, 2000, the Company completed a transaction that combined its
OrderZone.com business with Works.com. In addition, the Company invested $21
million in cash in Works.com and agreed to make the Works.com purchasing
management service and marketplace available to the Company's small and mid-size
customers through Grainger.com. For its contributions, the Company received a
40% equity stake, which is subject to certain voting and transfer restrictions.
The Company recognizes a proportionate share of earnings or losses as part of
Other Deductions.
6
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. SEGMENT INFORMATION (In thousands of dollars)
The following segment disclosures are condensed and should be read in
conjunction with the consolidated financial statements and related notes for the
year ended December 31, 1999, included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Three Months Ended September 30, 2000
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
Total net sales .................................. $ 1,122,421 $ 15,221 $ 123,938 $ 1,261,580
Intersegment net sales ........................... 3,717 14,634 1,499 19,850
Net sales from external customers ................ 1,118,704 587 122,439 1,241,730
Segment operating earnings ....................... 107,020 (12,095) 9,629 104,554
Three Months Ended September 30, 1999
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
Total net sales .................................. $ 1,073,602 $ 620 $ 105,659 $ 1,179,881
Intersegment net sales ........................... 2,625 589 1,274 4,488
Net sales from external customers ................ 1,070,977 31 104,385 1,175,393
Segment operating earnings ....................... 91,621 (6,703) 7,260 92,178
Nine Months Ended September 30, 2000
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
Total net sales .................................. $ 3,326,884 $ 35,359 $ 365,737 $ 3,727,980
Intersegment net sales ........................... 9,853 34,371 4,810 49,034
Net sales from external customers ................ 3,317,031 988 360,927 3,678,946
Segment operating earnings ....................... 282,277 (39,249) 31,689 274,717
Nine Months Ended September 30, 1999
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
Total net sales .................................. $ 3,113,242 $ 1,957 $ 309,372 $ 3,424,571
Intersegment net sales ........................... 7,498 1,551 3,111 12,160
Net sales from external customers ................ 3,105,744 406 306,261 3,412,411
Segment operating earnings ....................... 290,811 (14,804) 20,229 296,236
7
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. SEGMENT INFORMATION (In thousands of dollars) (Continued)
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
Segment Assets:
At September 30, 2000 .................. $ 2,082,286 $ 8,199 $ 179,559 $ 2,270,044
=============== =============== =============== ===============
At December 31, 1999 ................... $ 2,060,781 $ 3,615 $ 161,865 $ 2,226,261
=============== =============== =============== ===============
A reconciliation of segment information to consolidated information is as
follows:
Three Months Ended September 30,
----------------------------------
2000 1999
--------------- ---------------
Total operating earnings for reportable segments . $ 104,554 $ 92,178
Unallocated expenses ............................. (12,967) (11,796)
Elimination of intersegment profits .............. (9) --
--------------- ---------------
Total consolidated operating earnings .......... $ 91,578 $ 80,382
=============== ===============
Nine Months Ended September 30,
----------------------------------
2000 1999
--------------- ---------------
Total operating earnings for reportable segments . $ 274,717 $ 296,236
Unallocated expenses ............................. (35,452) (32,117)
Elimination of intersegment profits .............. (9) --
--------------- ---------------
Total consolidated operating earnings .......... $ 239,256 $ 264,119
=============== ===============
September 30, December 31,
2000 1999
--------------- --------------
Assets:
Total assets for reportable segments ............. $ 2,270,044 $ 2,226,261
Unallocated assets ............................... 284,995 338,565
--------------- ---------------
Total consolidated assets ...................... $ 2,555,039 $ 2,564,826
=============== ===============
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1999:
Company Net Sales
-----------------
The Company's net sales of $1,241,730,000 in the 2000 third quarter increased
5.6% from net sales of $1,175,393,000 for the comparable 1999 period. This
increase was primarily driven by volume and selected inflation related price
increases.
There were 63 sales days in the 2000 third quarter and 64 sales days in the 1999
third quarter. Average daily net sales for the 2000 third quarter increased 7.3%
compared with the third quarter of 1999. The year 2000 will have one more sales
day than did 1999 (255 vs. 254).
Sales processed through the Company's Internet businesses were $100 million for
the third quarter of 2000, up 233% from the $30 million achieved in the 1999
third quarter.
Segment Net Sales
The following comments at the segment level include external and intersegment
net sales; those comments at the business unit level include external and inter-
and intrasegment net sales. For segment information see Note 4 of the Notes to
Consolidated Financial Statements (Unaudited) included in this report.
Branch-based Distribution Businesses
------------------------------------
Net sales of $1,122,421,000 for the third quarter of 2000 increased 4.5%
compared with net sales of $1,073,602,000 in the third quarter of 1999. Average
daily net sales increased 6.2% for the 2000 third quarter compared with the 1999
third quarter.
Acklands-Grainger Inc. continued to experience strong growth across most of
Canada. The growth was driven by an improvement in the oil and gas and forestry
sectors of the Canadian economy, gains in large customer accounts, and the
opening of 6 new branches during the 12 months ended September 30, 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
The Mexican operation experienced strong sales growth reflecting the continued
development of this business. This growth in sales was attributable to an
expanded product offering, market share expansion, account penetration, and the
opening of a new branch in January 2000.
Sales growth in the United States was driven by improved sales at Grainger
Industrial Supply. Contributing to third quarter sales growth were 16 new
branches opened during the 12 months ended September 30, 2000 and increased
sales to government accounts. Partially offsetting this growth was a 20% decline
in sales of summer seasonal products. This decline resulted from relatively mild
weather, primarily during the month of July.
Sales were also favorably affected by continued momentum in the Company's
Internet initiative. Sales orders processed through Grainger.com were $75
million, a 150% increase over third quarter 1999 sales of $30 million.
Digital Businesses
------------------
Net sales for the third quarter of 2000 were $15,221,000 compared with $620,000
for the same period in 1999. Net sales for these businesses include product
sales and service fee revenues for FindMRO.com and service fee revenues for
MROverstocks.com (formerly Grainger Auction), OrderZone.com (for July 2000
only), and TotalMRO.com.
FindMRO.com and MROverstocks.com were officially launched in November 1999.
TotalMRO.com opened for business on March 31, 2000. TotalMRO.com is a utility
that provides real time access to easily searchable product information,
availability, and contract pricing, for millions of maintenance, repair, and
operating products and services available through major distributors.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Businesses
----------------
Net sales for the third quarter of 2000 were $123,938,000, an increase of 17.3%
compared with $105,659,000 for the same period of 1999.
Sales for Grainger Integrated Supply increased for the 2000 third quarter
compared with the 1999 third quarter. Sales for this business unit include
product sales and management fees. Growth was driven by new engagements and
contract renewals reflecting continued demand for this outsourcing business.
Sales for Lab Safety Supply, the Company's direct marketing business, increased
for the 2000 third quarter compared with the 1999 third quarter. The increase at
Lab Safety Supply reflects the continued growth in the sales of industrial
products and expanded market share attained through new customers and further
penetration of existing accounts.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Company Net Earnings
--------------------
The Company's net earnings of $48,107,000 in the third quarter of 2000 increased
5.1% when compared to the net earnings of $45,757,000 for the comparable 1999
period.
This increase resulted from higher operating earnings and a $3.2 million gain on
the sale of an investment security. Partially offsetting these increases were
higher interest expense and losses from equity interests in unconsolidated
entities.
Segment Operating Earnings
The following comments at the segment level include external and intersegment
operating earnings; those comments at the business unit level include external
and inter- and intrasegment operating earnings. For segment information see Note
4 of the Notes to Consolidated Financial Statements (Unaudited) included in this
report.
Branch-based Distribution Businesses
------------------------------------
Operating earnings of $107,020,000 increased 16.8% for the 2000 third quarter as
compared with $91,621,000 for the 1999 period. This increase resulted from a
higher gross profit margin and from proportionally lower operating expenses,
which grew at a slower rate than sales. Gross profit margins increased 0.44
percentage point from the comparable 1999 quarter. This improvement in gross
profit margins was primarily attributable to the following factors:
o A favorable change in product mix partially the result of the decline in
sales of seasonal products. Historically, sales of seasonal products have
lower than average gross profit margins.
o Selected price increases on products to recover freight and supplier cost
increases.
o Changes in promotional pricing.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Partially offsetting these improvements was the current recognition of certain
product costs not fully recorded in 1999 until the fourth quarter physical
inventory, due to system implementation issues.
Operating expenses increased 2.4% for the quarter versus a 4.5% growth in net
sales. This positive leverage primarily resulted from productivity improvements
and was achieved while making the following operating expense investments:
o Continued spending to enhance, re-launch, and market Grainger.com.
Grainger.com spending for the 2000 third quarter was $18.0 million compared
with $6.2 million for the 1999 period.
o Increased data processing expenses resulting from higher depreciation,
amortization, and maintenance for the Enterprise Resource Planning system,
installed in 1999.
Digital Businesses
------------------
The Digital Businesses incurred operating losses of $12,095,000 in the 2000
third quarter compared with operating losses of $6,703,000 for the third quarter
of 1999. These operating losses resulted from increased operating expenses
incurred to develop, operate, and market these digital businesses.
On August 1, 2000, the Company combined OrderZone.com with Works.com, a leading
Internet purchasing service for businesses. This combination is designed to
provide small and mid-size businesses with on-line business purchasing services
and e-marketplaces for indirect business products. The Company received a 40%
interest in the combined entity and recognizes a proportionate share of earnings
or losses as part of Other Deductions.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Total Company Internet related operating expenses, as represented by this
segment plus Grainger.com, (which is included in the Branch-based Distribution
Businesses) were $32.8 million for the 2000 third quarter as compared with $13.6
million for the 1999 period. The increases for the quarter ended September 30,
2000 are primarily the result of incremental operating expenses incurred by the
Company to develop, operate, and market its portfolio of Web sites. The Company
estimates that total Internet spending in the year 2000 will approximate $120
million. Sales processed through the Company's Internet businesses were $100
million for the 2000 third quarter as compared with $30 million in the 1999
third quarter. As of the end of the third quarter, the annualized run rate for
the Internet businesses is $385 million. The Company now estimates that total
sales processed through all of its Internet businesses in 2000 should reach
between $350 and $400 million.
Other Businesses
----------------
Operating earnings improved 33% due to improved operating performance and
significantly lower amortization of intangibles at Lab Safety Supply, partially
offset by higher losses at Grainger Integrated Supply.
Other Income or (Deductions)
The majority of the increase in other deductions is attributable to the equity
loss in unconsolidated entities. This joint venture loss primarily related to
the Company's interest in Works.com which was obtained during the 2000 third
quarter. Interest expense also increased resulting from higher average
borrowings and higher average interest rates paid on all outstanding debt.
Partially offsetting the above was the pre-tax gain on the sale of an investment
security of $3.2 million, or $0.02 per share after tax.
For the quarter, the Company estimates that the OrderZone.com / Works.com merger
reduced earnings by $0.02 per share versus the run rate experienced prior to the
merger. At this rate, the Company anticipates the incremental effect from the
equity stake will lower EPS by $0.03 to $0.04 per share in the 2000 fourth
quarter.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Income Taxes
The Company's effective income tax rate was 42.7% for the third quarter of 2000
and 40.5% for the same period in 1999. This increase in the effective tax rate
relates to the loss on equity interests in unconsolidated entities, which is a
net of tax amount. Excluding the effect of the joint venture losses, the
effective tax rate is 40.5% for both periods.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Company Net Sales
-----------------
The Company's net sales of $3,678,946,000 in the first nine months of 2000
increased 7.8% from net sales of $3,412,411,000 for the comparable 1999 period.
This increase was primarily driven by volume growth at Grainger Integrated
Supply, volume growth in Canada and Mexico, and continued strong growth in
Internet transactions.
There were 192 sales days in the first nine months of 2000 and 191 sales days in
the comparable 1999 period. Average daily net sales for the nine months ended
September 30, 2000 increased 7.2% compared with the same period in 1999. The
year 2000 will have one more sales day than did 1999 (255 vs. 254).
Sales processed through the Company's Internet businesses were $242 million for
the first nine months of 2000, a 310% increase as compared with $59 million in
the first nine months of 1999.
Segment Net Sales
The following comments at the segment level include external and intersegment
net sales; those comments at the business unit level include external and inter-
and intrasegment net sales. For segment information see Note 4 of the Notes to
Consolidated Financial Statements (Unaudited) included in this report.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Branch-based Distribution Businesses
------------------------------------
Net sales of $3,326,884,000 for the first nine months of 2000 increased 6.9%
compared with net sales of $3,113,242,000 in the first nine months of 1999.
Average daily net sales increased 6.3% for the first nine months of 2000
compared with the first nine months of 1999.
Acklands-Grainger Inc. continued to experience sales growth across most of
Canada. The growth was driven by an improvement in the oil and gas and forestry
sectors of the Canadian economy, gains in large customer accounts, and the
opening of 12 new branches during 1999 and the first nine months of 2000.
The Mexican operation experienced strong sales growth reflecting the continued
development of this business. This growth in sales was attributable to an
expanded product offering, market share expansion, and account penetration. In
January 2000, the Company opened a storefront branch in Guadalajara.
Sales growth in the United States was driven by improved sales at Grainger
Industrial Supply. Contributing to the sales growth were 35 new branches opened
during 1999 and the first nine months of 2000. Also contributing to the sales
growth was increased sales to government accounts. Partially offsetting this
growth was the impact of a 20% decline in third quarter sales of seasonal
products resulting from relatively mild weather in the more heavily populated
areas of the United States.
Sales were also favorably affected by continued momentum in the Company's
Internet initiative. Sales orders processed through Grainger.com were $195
million, a 231% increase over 1999 first nine months sales of $59 million.
Digital Businesses
------------------
Net sales for the first nine months of 2000 were $35,359,000, an increase of
over 1,700% compared with $1,957,000 for the same period of 1999. Net sales for
these businesses include product sales and service fee revenues for FindMRO.com
and service fee revenues for MROverstocks.com (formerly Grainger Auction),
OrderZone.com (through July 2000), and TotalMRO.com.
FindMRO.com and MROverstocks.com were officially launched in November 1999.
TotalMRO.com opened for business on March 31, 2000. TotalMRO.com is a utility
that provides real time access to easily searchable product information,
availability, and contract pricing, for millions of maintenance, repair, and
operating products and services available through major distributors.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Businesses
----------------
Net sales for the first nine months of 2000 were $365,737,000, an increase of
18.2% compared with $309,372,000 for the same period of 1999.
Sales for Grainger Integrated Supply increased for the first nine months of 2000
compared with the first nine months of 1999. Sales for this business unit
include product sales and management fees. Growth was driven by new engagements,
contract renewals, and scope expansions.
Sales for Lab Safety Supply, the Company's direct marketing business, increased
for the first nine months of 2000 compared with the same period of 1999. The
increase at Lab Safety Supply reflects the continued growth of industrial
product sales and expanded market share attained through new customers and
further penetration of existing accounts.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Company Net Earnings
--------------------
The Company's net earnings of $144,980,000 in the first nine months of 2000
decreased 5.0% when compared to net earnings of $152,573,000 for the comparable
1999 period. This decline resulted from lower operating earnings, higher
interest expense, and losses from equity interests in unconsolidated entities.
Partially offsetting these negative factors were after-tax gains from the sales
of investment securities of $17.4 million, or $0.18 per share.
Segment Operating Earnings
The following comments at the segment level include external and intersegment
operating earnings; those comments at the business unit level include external
and inter- and intrasegment operating earnings. For segment information see Note
4 of the Notes to Consolidated Financial Statements (Unaudited) included in this
report.
Branch-based Distribution Businesses
------------------------------------
Operating earnings of $282,277,000 declined 2.9% for the first nine months of
2000 as compared with $290,811,000 for the 1999 period. This decline primarily
resulted from lower gross profit margins, as operating expenses grew at
approximately the same rate as sales.
The gross profit margin decreased 0.85 percentage point from the comparable 1999
period. This decline was caused by the following factors:
o An unfavorable change in selling price category mix, which was driven by
faster growth in sales to large customers; and lower selling prices on
selected products coinciding with the issuance of the Grainger Industrial
Supply Catalog in February 2000.
o Current recognition of certain product costs not fully recorded in 1999
until the fourth quarter physical inventory, due to system installation
issues.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Partially offsetting these negatives were the following positive factors that
occurred during the third quarter of 2000:
o A favorable change in product mix partially the result of the decline in
sales of seasonal products. Historically, the sales of seasonal products
have lower than average gross profit margins.
o Selected price increases on products to recover freight and supplier cost
increases.
o Changes in promotional pricing.
Operating expenses increased 6.9% for the first nine months of 2000 when
compared with the first nine months of 1999. This increase in operating expenses
was in line with the net sales increase.
During the first nine months of 2000 the Company made the following investments:
o Continued spending to enhance and market Grainger.com. Grainger.com
spending for the first nine months of 2000 was $46.2 million compared with
$12.7 million for the 1999 period.
o Increased data processing expenses resulting from higher depreciation,
amortization, and maintenance for the Enterprise Resource Planning system,
installed in 1999.
Digital Businesses
------------------
The Digital Businesses incurred operating losses in the first nine months of
2000 of $39,249,000 compared with operating losses of $14,804,000 for the first
nine months of 1999. These operating losses resulted from increased operating
expenses incurred to develop, operate, and market these new businesses.
On August 1, 2000, the Company combined OrderZone.com with Works.com, a leading
Internet purchasing service for businesses. This combination is designed to
provide small and mid-size businesses with on-line business purchasing services
and e-marketplaces for indirect business products. The Company received a 40%
interest in the combined entity and recognizes a proportionate share of earnings
or losses as part of Other Deductions.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Total Company Internet related operating expenses, as represented by this
segment plus Grainger.com, (which is included in the Branch-based Distribution
Businesses) were $92.2 million for the first nine months of 2000 as compared
with $29.5 million for the 1999 period. This increase for the nine months ended
September 30, 2000 was primarily the result of incremental operating expenses
incurred by the Company to develop, operate, and market its portfolio of Web
sites. The Company estimates that total Internet spending in the year 2000 will
approximate $120 million. Sales processed through the Company's Internet
businesses were $242 million for the first nine months of 2000 as compared with
$59 million in the first nine months of 1999.
Other Businesses
----------------
Grainger Integrated Supply experienced an operating loss during the first nine
months of 2000 that was lower than the operating loss incurred during the first
nine months of 1999. This improvement primarily resulted from operating expenses
growing at a slower rate than sales.
Operating earnings at Lab Safety Supply increased at a faster rate than the
growth in sales, due to improved operating performance and significantly lower
amortization of intangibles.
Interest Expense
Interest expense of $19,085,000 in the first nine months of 2000 increased 91.8%
compared with interest expense of $9,952,000 in the comparable 1999 period. The
increase resulted from higher average borrowings, higher average interest rates
paid on all outstanding debt, and lower capitalized interest.
Equity in Loss of Unconsolidated Entities
This joint venture loss primarily related to the Company's interest in
Works.com, which was obtained during the 2000 third quarter. For the quarter,
the Company estimates that the OrderZone.com / Works.com merger reduced earnings
by $0.02 per share versus the run rate experienced prior to the merger. At this
rate, the Company anticipates the incremental effect from the equity stake will
lower EPS by $0.03 to $0.04 per share in the 2000 fourth quarter.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Unclassified-net
For the first nine months of 2000, Unclassified-net includes gains of $29.3
million ($17.4 million after-tax, or $0.18 per share) related to sales of
investment securities. These investments were part of the Company's plans to
help fund the development of its digital businesses.
Income Taxes
The Company's effective income tax rate was 41.3% for the first nine months of
2000 and 40.5% for the same period in 1999. This increase in the effective tax
rate relates to the loss on equity interests in unconsolidated entities, which
is a net of tax number. Excluding the effect of the joint venture losses, the
effective tax rate is 40.5% for both periods.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, working capital increased by
$97,324,000. The ratio of current assets to current liabilities was 1.8 and 1.7
at September 30, 2000 and December 31, 1999, respectively. The Consolidated
Statements of Cash Flows, included in this report, detail the sources and uses
of cash and cash equivalents.
The Company maintains a debt ratio and liquidity position that 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, bank borrowings under
lines of credit, and otherwise. Total debt as a percent of Shareholders' Equity
was 27% at September 30, 2000 and 30% at December 31, 1999. For the first nine
months of 2000, $39,425,000 was expended for property, buildings, and equipment,
and $27,742,000 was expended for capitalized software, for a total of
$67,167,000.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q are forward-looking statements about the Company's
expected future financial results and business plans, strategies, and
objectives. These forward-looking statements are often identified by qualifiers
such as: "expects," "plans," "anticipates," "intends," or similar expressions.
There are risks and uncertainties the outcome of which could cause the Company's
results to differ materially from what is projected.
Factors that may affect forward-looking statements include the following: higher
product costs or other expenses; a major loss of customers; increased
competitive pricing pressure on the Company's businesses; failure to develop,
implement, or commercialize successfully new Internet technologies or other
business strategies; the outcome of pending and future litigation and
governmental proceedings; changes in laws and regulations; facilities
disruptions or shutdowns due to accidents, natural acts or governmental action;
unanticipated weather conditions; and other difficulties in improving margins or
financial performance.
Trends and projections could also be affected by general industry and market
conditions and growth rates, general economic conditions, including interest
rate and currency rate fluctuations and other factors.
22
W.W. Grainger, Inc., and Subsidiaries
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 not applicable.
EXHIBIT INDEX
------------------
Item 6 Exhibits (numbered in accordance with Item 601 of regulation S-K).
a) Exhibits
(11) Statement Regarding Computation of Per Share 25-26
Earnings
(27) Financial Data Schedule
b) Reports on Form 8-K - None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.W. Grainger, Inc.
----------------------------------------------------------
(Registrant)
Date: November 10, 2000 By: /s/ P.O. Loux
-------------------------------------- ----------------------------------------------------------
P.O. Loux, Senior Vice President, Finance, and
Chief Financial Officer
Date: November 10, 2000 By: /s/ R.D. Pappano
-------------------------------------- ----------------------------------------------------------
R.D. Pappano, Vice President,
Financial Reporting
24
Exhibit 11.1
W.W. Grainger, Inc., and Subsidiaries
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30,
---------------------------------
Basic: 2000 1999
--------------- ---------------
Weighted average number of shares outstanding
during the year .................................................... 93,023,258 92,831,640
=============== ===============
Net earnings ......................................................... $ 144,980,000 $ 152,573,000
=============== ===============
Earnings per share ................................................... $ 1.56 $ 1.64
=============== ===============
Diluted:
Weighted average number of shares outstanding
during the year (basic) ........................................... 93,023,258 92,831,640
Potential Shares:
Shares issuable under outstanding options ..................... 1,806,750 3,115,730
Shares which could have been purchased based
on the average market value for the period .................. 1,329,394 2,166,366
--------------- ---------------
477,356 949,364
Dilutive effect of exercised options prior to being
exercised ......................................................... 28,416 24,282
--------------- ---------------
Shares for the portion of the period that the options
were outstanding .................................................. 505,772 973,646
Contingently issuable shares ......................................... 784,000 553,167
--------------- ---------------
1,289,772 1,526,813
--------------- ---------------
Adjusted weighted average number of shares outstanding
during the period .................................................. 94,313,030 94,358,453
=============== ===============
Net earnings ......................................................... $ 144,980,000 $ 152,573,000
=============== ===============
Earnings per share ................................................... $ 1.54 $ 1.62
=============== ===============
25
Exhibit 11.2
W.W. Grainger, Inc., and Subsidiaries
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Basic: 2000 1999
------------- -------------
Three months ended September 30:
Nine months ended September 30, as reported in Exhibit 11.1 ....... $ 1.56 $ 1.64
Six months ended June 30, as previously reported .................. 1.04 1.15
------------- -------------
Earnings per share for the three months ended September 30 ........ $ 0.52 $ 0.49
============= =============
Diluted:
Three months ended September 30:
Nine months ended September 30, as reported in Exhibit 11.1 ....... $ 1.54 $ 1.62
Six months ended June 30, as previously reported .................. 1.03 1.13
------------- -------------
Earnings per share for the three months ended September 30 ........ $ 0.51 $ 0.49
============= =============
26
