29 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 June 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: 93,907,430 shares of the
Company's Common Stock were outstanding as of July 31, 2000.
The Exhibit Index appears on page 23 in the sequential numbering system.
1
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 1,242,022 $ 1,146,175 $ 2,437,216 $ 2,237,018
Cost of merchandise sold ......................... 807,559 730,160 1,581,206 1,418,141
------------ ------------ ------------ ------------
Gross profit ................................... 434,463 416,015 856,010 818,877
Warehousing, marketing, and
administrative expenses ........................ 361,562 328,544 708,332 635,140
------------ ------------ ------------ ------------
Operating earnings ............................. 72,901 87,471 147,678 183,737
Other income or (deductions)
Interest income ................................ 440 319 937 729
Interest expense ............................... (6,585) (2,943) (12,687) (4,676)
Unclassified-net ............................... 26,793 117 26,884 (267)
------------ ------------ ------------ ------------
20,648 (2,507) 15,134 (4,214)
------------ ------------ ------------ ------------
Earnings before income taxes ................... 93,549 84,964 162,812 179,523
Income taxes ..................................... 37,887 34,411 65,939 72,707
------------ ------------ ------------ ------------
Net earnings ................................... $ 55,662 $ 50,553 $ 96,873 $ 106,816
============ ============ ============ ============
Earnings per share:
Basic .......................................... $ 0.60 $ 0.54 $ 1.04 $ 1.15
============ ============ ============ ============
Diluted ........................................ $ 0.59 $ 0.53 $ 1.03 $ 1.13
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic .......................................... 93,054,100 92,820,417 92,985,940 92,827,072
============ ============ ============ ============
Diluted ........................................ 94,447,965 94,511,981 94,432,170 94,361,373
============ ============ ============ ============
Cash dividends paid per share .................... $ 0.17 $ 0.16 $ 0.33 $ 0.31
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings ......................................... $ 55,662 $ 50,553 $ 96,873 $ 106,816
Other comprehensive earnings (loss) net of tax:
Foreign currency translation
adjustments .................................... (4,882) 2,973 (5,972) 5,510
Unrealized gain (loss) on investment securities:
Unrealized holding (loss) .................... (37,002) -- (47,383) --
Reclassification
adjustments for gain
included in net earnings ................... (15,550) -- (15,550) --
------------ ------------ ------------ ------------
Comprehensive (loss) earnings ........................ $ (1,772) $ 53,526 $ 27,968 $ 112,326
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<CAPTION>
ASSETS June 30, 2000 Dec. 31, 1999
------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 57,139 $ 62,683
Accounts receivable, less allowance for doubtful
accounts of $19,980 in 2000 and $18,369 in 1999 ..................... 654,623 561,786
Inventories ........................................................... 771,080 762,495
Prepaid expenses ...................................................... 32,455 18,387
Deferred income tax benefits .......................................... 74,533 65,794
----------------- -----------------
Total current assets ................................................ 1,589,830 1,471,145
PROPERTY, BUILDINGS, AND EQUIPMENT ...................................... 1,292,319 1,302,029
Less accumulated depreciation and amortization ........................ 612,601 604,278
----------------- -----------------
Property, buildings, and equipment-net ................................ 679,718 697,751
OTHER ASSETS ............................................................ 303,382 395,930
----------------- -----------------
TOTAL ASSETS ............................................................ $ 2,572,930 $ 2,564,826
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt ....................................................... $ 276,138 $ 296,836
Current maturities of long-term debt .................................. 27,701 27,721
Trade accounts payable ................................................ 334,739 260,084
Accrued expenses ...................................................... 249,016 285,507
Income taxes .......................................................... 28,947 386
----------------- -----------------
Total current liabilities ........................................... 916,541 870,534
LONG-TERM DEBT (less current maturities) ................................ 121,933 124,928
DEFERRED INCOME TAXES ................................................... 5,956 48,117
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ............................... 42,100 40,718
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock - $5 par value - authorized,
12,000,000 shares, issued and outstanding, none ................... -- --
Common Stock - $0.50 par value - authorized, 300,000,000
shares; issued, 107,995,642 shares, 2000 and
107,460,978 shares, 1999 .......................................... 53,998 53,730
Additional contributed capital ........................................ 274,822 255,569
Retained earnings ..................................................... 1,773,212 1,707,258
Unearned restricted stock compensation ................................ (27,079) (16,581)
Accumulated other comprehensive (loss) earnings ....................... (114) 68,791
Treasury stock, at cost - 14,083,212 shares, 2000 and
14,079,292 shares, 1999 ........................................... (588,439) (588,238)
----------------- -----------------
Total shareholders' equity .......................................... 1,486,400 1,480,529
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 2,572,930 $ 2,564,826
================= =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
-----------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................... $ 96,873 $ 106,816
Provision for losses on accounts receivable ..................... 7,087 6,737
Depreciation and amortization:
Property, buildings, and equipment ............................ 42,270 36,135
Intangibles and goodwill ...................................... 6,190 7,960
Capitalized software .......................................... 7,450 4,722
(Gain) on sales of investment securities ........................ (26,135) --
Change in operating assets and liabilities:
(Increase) in accounts receivable ............................. (86,224) (105,990)
(Increase) in inventories ..................................... (8,585) (64,759)
(Increase) in prepaid expenses ................................ (14,068) (9,994)
(Increase) in deferred income taxes ........................... (9,293) (5,091)
Increase in trade accounts payable ............................ 74,655 91,957
(Decrease) in other current liabilities ....................... (36,491) (70,521)
Increase (decrease) in current income taxes payable ........... 28,561 (18,675)
Increase in accrued employment related benefits costs ......... 1,382 1,994
Other - net ..................................................... 1,539 760
--------------- ---------------
Net cash provided by (used in) operating activities ............... 85,211 (17,949)
--------------- ---------------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net of dispositions ............................... (24,237) (69,097)
Expenditures for capitalized software ........................... (23,373) (12,374)
Purchases of investment securities .............................. (4,900) (15,500)
Proceeds from sales of investment securities .................... 13,435 --
Other - net ..................................................... (7,250) 2,264
--------------- ---------------
Net cash (used in) investing activities ........................... (46,325) (94,707)
--------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in short-term debt ...................... (20,698) 159,277
Long-term debt payments ......................................... (34) (32)
Stock incentive plan ............................................ 7,679 2,941
Purchase of treasury stock - net ................................ (458) (14,477)
Cash dividends paid ............................................. (30,919) (28,934)
--------------- ---------------
Net cash (used in) provided by financing activities ............... (44,430) 118,775
--------------- ---------------
Net (decrease) increase in cash and cash equivalents .............. (5,544) 6,119
Cash and cash equivalents at beginning of year .................... 62,683 43,171
--------------- ---------------
Cash and cash equivalents at end of period ........................ $ 57,139 $ 49,290
=============== ===============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be read
in conjunction with the consolidated financial statements and related notes for
the year ended December 31, 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 August 2, 2000, the Board of Directors declared a quarterly dividend of 17
cents per share, payable September 1, 2000 to shareholders of record on August
14, 2000.
6
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. 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.
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total net sales ............................. $ 1,126,273 $ 13,858 $ 120,871 $ 1,261,002
Intersegment net sales ...................... 3,482 13,657 1,841 18,980
Net sales from external customers ........... 1,122,791 201 119,030 1,242,022
Segment operating earnings .................. 90,749 (16,221) 10,558 85,086
<CAPTION>
Three Months Ended June 30, 1999
----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total net sales ............................. $ 1,046,286 $ 674 $ 103,140 $ 1,150,100
Intersegment net sales ...................... 2,259 574 1,092 3,925
Net sales from external customers ........... 1,044,027 100 102,048 1,146,175
Segment operating earnings .................. 95,482 (4,457) 6,774 97,799
<CAPTION>
Six Months Ended June 30, 2000
-----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Total net sales ............................. $ 2,204,463 $ 20,138 $ 241,799 $ 2,466,400
Intersegment net sales ...................... 6,136 19,737 3,311 29,184
Net sales from external customers ........... 2,198,327 401 238,488 2,437,216
Segment operating earnings .................. 175,257 (27,154) 22,060 170,163
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------------------------------------
Branch-based
Distribution Digital Other Totals
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total net sales ............................. $ 2,039,640 $ 1,337 $ 203,713 $ 2,244,690
Intersegment net sales ...................... 4,873 962 1,837 7,672
Net sales from external customers ........... 2,034,767 375 201,876 2,237,018
Segment operating earnings .................. 199,190 (8,101) 12,969 204,058
</TABLE>
7
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. SEGMENT INFORMATION (In thousands of dollars) (Continued)
<TABLE>
<CAPTION>
Branch-based
Distribution Digital Other Totals
--------------- ---------------- --------------- ---------------
Segment Assets:
<S> <C> <C> <C> <C>
At June 30, 2000 ............................ $ 2,109,988 $ 10,246 $ 173,192 $ 2,293,426
=============== =============== =============== ===============
At December 31, 1999 ........................ $ 2,060,781 $ 3,615 $ 161,865 $ 2,226,261
=============== =============== =============== ===============
</TABLE>
A reconciliation of segment information to consolidated information is as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Total operating earnings for reportable segments .... $ 85,086 $ 97,799
Unallocated expenses ................................ (12,185) (10,328)
Elimination of intersegment profits ................. -- --
--------------- ---------------
Total consolidated operating earnings ............. $ 72,901 $ 87,471
=============== ===============
<CAPTION>
Six Months Ended June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Total operating earnings for reportable segments .... $ 170,163 $ 204,058
Unallocated expenses ................................ (22,485) (20,321)
Elimination of intersegment profits ................. -- --
--------------- ---------------
Total consolidated operating earnings ............. $ 147,678 $ 183,737
=============== ===============
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
Assets:
<S> <C> <C>
Total assets for reportable segments ................ $ 2,293,426 $ 2,226,261
Unallocated assets .................................. 279,504 338,565
--------------- ---------------
Total consolidated assets ......................... $ 2,572,930 $ 2,564,826
=============== ===============
</TABLE>
8
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. SUBSEQUENT EVENT
On August 1, 2000, the Company completed the transaction with Works.com, which
was announced in June. As part of the transaction, the Company's OrderZone.com
business, a business-to-business multi-supplier Internet marketplace, was
combined with Works.com, an on-line purchasing service, forming Works.com, a
comprehensive purchasing management service and e-marketplace of indirect goods
for small and mid-sized businesses.
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
contribution of cash and the OrderZone.com business, the Company received a 40
percent equity stake, which is subject to certain voting and transfer
restrictions. No gain or loss will be recognized on this transaction. Prior to
June 30, 2000, the results of OrderZone.com were consolidated; beginning
August 1, 2000, the Company will account for its interest using the equity
method.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
COMPARED WITH THE THREE MONTHS
ENDED JUNE 30, 1999:
Company Net Sales
-----------------
The Company's net sales of $1,242,022,000 in the 2000 second quarter increased
8.4% from net sales of $1,146,175,000 for the comparable 1999 period. This
increase was primarily driven by volume growth in the branch-based businesses,
especially in Canada and Mexico; continued strong growth in Internet
transactions; and strong growth at Grainger Integrated Supply.
There were 64 sales days in both the 2000 second quarter and 1999 second
quarter. The year 2000 will have one more sales day than did 1999 (255 vs. 254).
Sales processed through the digital businesses plus the sales that originated
through Grainger.com were $80 million for the second quarter of 2000 as compared
with $19 million in the 1999 second 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 3 of the Notes to
Consolidated Financial Statements included in this report.
Branch-based Distribution Businesses
------------------------------------
Net sales of $1,126,273,000 for the second quarter of 2000 increased 7.6%
compared with net sales of $1,046,286,000 in the second quarter of 1999. Average
daily net sales increased 7.6% for the 2000 second quarter compared with the
1999 second quarter.
Acklands-Grainger Inc. experienced 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 the previous 18 months.
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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Sales growth in the United States was driven by improved sales at Grainger
Industrial Supply. Contributing to second quarter sales growth were 27 new
branches opened during the previous 18 months and increased sales to government
accounts.
Sales were also favorably affected by continued momentum in the Company's
Internet initiative. Sales orders processed through Grainger.com were $65
million, a 242% increase over second quarter 1999 sales of $19 million.
Beginning with the 2000 second quarter, Grainger Industrial Supply includes the
results of the Grainger Custom Solutions operation. During the second quarter of
2000, the Company began to combine the operations of these two business units.
The purpose of the combination is to stimulate sales growth to large customers
and reduce operating expenses by eliminating duplicate distribution, sales, and
marketing costs. Integration is expected to be completed by December 31, 2000.
Digital Businesses
------------------
Net sales for the second quarter of 2000 were $13,858,000 an increase of
1,956.1% compared with $674,000 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 Grainger Auction, OrderZone.com, and TotalMRO.com.
FindMRO.com and Grainger Auction 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.
On June 12, 2000, the Company announced an agreement to combine OrderZone.com
with Works.com, a leading Internet purchasing service for businesses. The
transaction closed on August 1, 2000. See Note 4, Subsequent Event to the Notes
to Consolidated Financial Statements (Unaudited) included in this report.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Businesses
----------------
Net sales for the second quarter of 2000 were $120,871,000, an increase of 17.2%
compared with $103,140,000 for the same period of 1999.
Average daily sales for Grainger Integrated Supply increased strongly for the
2000 second quarter compared with the 1999 second quarter. Sales for this
business unit include product sales and management fees. Growth was driven by
new engagements, contract renewals, and scope expansion.
Average daily sales for Lab Safety Supply, the Company's direct marketing
business, increased for the 2000 second quarter compared with the same period of
1999. The increase at Lab Safety Supply reflects the continued growth in the
sales of industrial products and expanded market share attained through new
customer accounts.
12
<PAGE>
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 $55,662,000 in the second quarter of 2000
increased 10.1% when compared to the net earnings of $50,553,000 for the
comparable 1999 period.
Second quarter 2000 earnings include an after-tax gain on the sale of an
investment security of $15.5 million, or $0.16 per share. The investment in this
security was made to help provide funding for the Company's Internet
initiatives. Excluding this gain, net earnings declined. This decline resulted
from lower operating earnings and higher interest expense. Operating earnings
declined at the Branch-based Distribution Businesses and the loss at the Digital
Businesses increased. Operating earnings improved at the Other Businesses.
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 3 of the Notes to Consolidated Financial Statements included in this
report.
Branch-based Distribution Businesses
------------------------------------
Operating earnings of $90,749,000 declined 5.0% for the 2000 second quarter as
compared with $95,482,000 for the 1999 period. The decline resulted from a lower
gross profit margin, which decreased 1.4 percentage points from the comparable
1999 quarter. This decline was caused by the following factors:
1. An unfavorable change in selling price category mix, which was driven by
faster growth in sales to large customers; and by lower selling prices on
selected products coinciding with the issuance of the Grainger Industrial
Supply Catalog in February 2000.
2. An unfavorable change in product mix.
3. Current recognition of certain product costs not fully recorded in 1999
until the fourth quarter physical inventory, due to system installation
issues.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Partially offsetting the decline in the gross margin was operating expenses
growing at a slower rate than sales. Operating expenses increased 6.3% for the
quarter versus a 7.6% growth in net sales. This positive leverage primarily
resulted from productivity improvements and was achieved while making the
following investments:
o Continued spending to enhance and market Grainger.com. Grainger.com
spending for the 2000 second quarter was $15.6 million compared with $4.0
million for the 1999 period and $12.6 million in the first quarter of 2000.
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 $16,221,000 in the 2000
second quarter compared with operating losses of $4,457,000 for the second
quarter of 1999. These operating losses resulted from increased operating
expenses incurred to launch, operate, and market the new businesses.
Total Company Internet related operating expense, as represented by this segment
plus Grainger.com, (which is included in the Branch-based Distribution
Businesses) was $34 million for the 2000 second quarter as compared with $9
million for the 1999 period. The increase for the quarter ended June 30, 2000
was primarily the result of incremental operating expenses incurred by the
Company to develop, launch, 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 digital businesses plus Grainger.com
were $80 million for the 2000 second quarter as compared with $19 million in the
1999 second quarter.
Other Businesses
----------------
Grainger Integrated Supply experienced an operating loss for the second quarter
of 2000 that was roughly equivalent to the operating loss incurred during the
second quarter of 1999.
Operating earnings at Lab Safety Supply increased at a faster rate than the
growth in sales, reflecting positive operating leverage from this direct
marketing business.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Interest Expense
Interest expense of $6,585,000 in the second quarter of 2000 increased 123.8%
compared with interest expense of $2,943,000 for the second quarter of 1999. The
increase resulted from higher average borrowings, higher average interest rates
paid on all outstanding debt, and lower capitalized interest.
Unclassified-net
Unclassified-net in the second quarter of 2000 includes a gain of $26 million
($15.5 million after-tax, or $0.16 per share) related to the sale of an
investment security. This investment was part of the Company's plans to help
fund the development of its digital businesses.
Income Taxes
The Company's effective tax rate was 40.5% for the second quarter of both 2000
and 1999.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 1999
Company Net Sales
-----------------
The Company's net sales of $2,437,216,000 in the first six months of 2000
increased 8.9% from net sales of $2,237,018,000 for the comparable 1999 period.
This increase was primarily driven by volume growth in the branch-based
businesses, especially in Canada and Mexico; continued strong growth in Internet
transactions; and strong growth at Grainger Integrated Supply.
There were 129 sales days in the first six months of 2000 and 127 in the
comparable 1999 period. Average daily sales for the six months ended
June 30, 2000 increased 7.3% 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 digital businesses plus sales that originated
through Grainger.com were $142 million for the first half of 2000 as compared
with $29 million in the first half 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 3 of the Notes to
Consolidated Financial Statements (Unaudited) included in this report.
Branch-based Distribution Businesses
------------------------------------
Net sales of $2,204,463,000 for the first six months of 2000 increased 8.1%
compared with net sales of $2,039,640,000 in the first six months of 1999.
Average daily net sales increased 6.4% for the first six months of 2000 compared
with the first six months of 1999.
Acklands-Grainger Inc. experienced 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 six months of 2000.
16
<PAGE>
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, and account penetration. In
January 2000, the Company opened a storefront branch in Guadalajara.
Sales growth in the United States improved in the 2000 second quarter versus the
2000 first quarter. This growth was driven by improved sales at Grainger
Industrial Supply. Contributing to the sales growth were 27 new branches opened
during 1999 and the first six months of 2000 and increased sales to government
accounts.
Sales were also favorably affected by continued momentum in the Company's
Internet initiative. Sales orders processed through Grainger.com were $120
million, a 314% increase over 1999 first half sales of $29 million.
Digital Businesses
------------------
Net sales for the first six months of 2000 were $20,138,000 an increase of
1,406.2% compared with $1,337,000 for the same period of 1999. Net sales for
these businesses included product sales and service fee revenues for FindMRO.com
and service fee revenues for Grainger Auction, OrderZone.com, and TotalMRO.com.
FindMRO.com and Grainger Auction 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.
On June 12, 2000, the Company announced an agreement to combine OrderZone.com
with Works.com, a leading Internet purchasing service for businesses. The
transaction closed on August 1, 2000. See Note 4, Subsequent Event to the Notes
to Consolidated Financial Statements (Unaudited) included in this report.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Businesses
----------------
Net sales for the first six months of 2000 were $241,799,000, an increase of
18.7% compared with $203,713,000 for the same period of 1999.
Average daily sales for Grainger Integrated Supply increased strongly for the
first six months of 2000 compared with the first six months of 1999. Sales for
this business unit include product sales and management fees. Growth was driven
by new engagements, contract renewals, and scope expansion.
Average daily sales for Lab Safety Supply, the Company's direct marketing
business, increased for the first six 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
customer accounts.
18
<PAGE>
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 $96,873,000 in the first six months of 2000
decreased 9.3% when compared to the net earnings of $106,816,000 for the
comparable 1999 period. This decline resulted from lower operating earnings and
higher interest expense, partially offset by an after-tax gain on the sale of an
investment security of $15.5 million.
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
3 of the Notes to Consolidated Financial Statements (Unaudited) included in this
report.
Branch-based Distribution Businesses
------------------------------------
Operating earnings of $175,257,000 declined 12.0% for the first six months of
2000 as compared with $199,190,000 for the 1999 period. This decline resulted
from a lower gross profit margin and from operating expenses growing slightly
faster than the growth in sales.
The gross profit margin decreased 1.5 percentage points from the comparable 1999
period. The decline was caused by the following factors:
1. 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.
2. Current recognition of certain product costs not fully recorded in 1999
until the fourth quarter physical inventory, due to system installation
issues.
Operating expenses increased 9.3% for the first six months of 2000 when compared
with the first six months of 1999. During the first six months of 2000 the
Company made the following investments:
o Continued spending to enhance and market Grainger.com. Grainger.com
spending for the first six months was $28.2 million compared with $6.5
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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
In addition, the segment experienced higher freight-out expenses driven by
increased per shipment costs and increased shipments made directly to customers.
Digital Businesses
------------------
The Digital Businesses incurred operating losses in the first six months of 2000
of $27,154,000 compared with operating losses of $8,101,000 for the first six
months of 1999. These operating losses resulted from increased operating
expenses incurred to launch, operate, and market the new businesses.
Total Company Internet related operating expenses, as represented by this
segment plus Grainger.com, (which is included in the Branch-based Distribution
Businesses) were $59 million for the first six months of 2000 as compared with
$16 million for the 1999 period. This increase for the six months ended June 30,
2000 was primarily the result of incremental operating expenses incurred by the
Company to develop, launch, 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 digital businesses plus Grainger.com
were $142 million for the first six months of 2000 as compared with $29 million
in the first six months of 1999.
Other Businesses
----------------
Grainger Integrated Supply experienced an operating loss during the first six
months of 2000 that was lower than the operating loss incurred during the first
six months of 1999. This improvement 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, reflecting positive operating leverage from this direct
marketing business.
Interest Expense
Interest expense of $12,687,000 in the first six months of 2000 increased 171.3%
compared with interest expense of $4,676,000 in the first six months of 1999.
The increase resulted from higher average borrowings, higher average interest
rates paid on all outstanding debt, and lower capitalized interest.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Unclassified-net
Unclassified-net in the first six months of 2000 includes a gain of $26 million
($15.5 million after-tax, or $0.16 per share) related to the sale of an
investment security. This investment was part of the Company's plans to help
fund the development of its digital businesses.
Income Taxes
The Company's effective tax rate was 40.5% for the first six months of both 2000
and 1999.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, working capital increased by
$72,678,000. The ratio of current assets to current liabilities was 1.7 at both
June 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
reasonable 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 29% at June 30, 2000 and 30% at December 31, 1999. For
the first six months of 2000, $26,185,000 was expended for property, buildings,
and equipment, and $23,373,000 was expended for capitalized software, for a
total of $49,558,000.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q may be 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
<PAGE>
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
(10) (a) Summary Description of 2000 Management
Incentive Program 27-29
(11) Computation of Earnings per Common and
Common Equivalent Share 25-26
(27) Financial Data Schedule
b) Reports on Form 8-K - None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.W. Grainger, Inc.
----------------------------------------------
(Registrant)
Date: August 11, 2000 By: /s/ P.O. Loux
--------------------- ----------------------------------------------------
P.O. Loux, Senior Vice President, Finance, and
Chief Financial Officer
Date: August 11, 2000 By: /s/ R.D. Pappano
--------------------- ---------------------------------------------------
R.D. Pappano, Vice President,
Financial Reporting
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
W.W. Grainger, Inc., and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
Six Months Ended June 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Basic:
Weighted average number of shares outstanding
during the year .............................................. 92,985,940 92,827,072
=============== ===============
Net earnings ................................................... $ 96,873,000 $ 106,816,000
=============== ===============
Earnings per share ............................................. $ 1.04 $ 1.15
=============== ===============
Diluted:
Weighted average number of shares outstanding
during the year (basic) ..................................... 92,985,940 92,827,072
Potential Shares:
Shares issuable under outstanding options ............... 2,415,545 3,339,320
Shares which could have been purchased based
on the average market value for the period ............ 1,742,716 2,382,966
--------------- ---------------
672,829 956,354
Dilutive effect of exercised options prior to being
exercised ................................................... 40,401 35,447
--------------- ---------------
Shares for the portion of the period that the options
were outstanding ............................................ 713,230 991,801
Contingently issuable shares ................................... 733,000 542,500
--------------- ---------------
1,446,230 1,534,301
--------------- ---------------
Adjusted weighted average number of shares outstanding
during the period ............................................ 94,432,170 94,361,373
=============== ===============
Net earnings ................................................... $ 96,873,000 $ 106,816,000
=============== ===============
Earnings per share ............................................. $ 1.03 $ 1.13
=============== ===============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.2
W.W. Grainger, Inc., and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
2000 1999
--------------- ----------------
<S> <C> <C>
Basic:
Three months ended June 30:
Six months ended June 30, as reported in Exhibit 11.1 ....... $ 1.04 $ 1.15
Three months ended March 31, as previously reported ......... 0.44 0.61
--------------- ---------------
Earnings per share for the three months ended June 30 ....... $ 0.60 $ 0.54
=============== ===============
Diluted:
Three months ended June 30:
Six months ended June 30, as reported in Exhibit 11.1 ....... $ 1.03 $ 1.13
Three months ended March 31, as previously reported ......... 0.44 0.60
--------------- ---------------
Earnings per share for the three months ended June 30 ....... $ 0.59 $ 0.53
=============== ===============
</TABLE>
26
<PAGE>
