2743 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, 1999March 31, 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: 93,383,44193,944,330 shares of the
Company's Common Stock were outstanding as of October 31, 1999.April 28, 2000.
The Exhibit Index appears on page 2417 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,
---------------------------- ----------------------------March 31,
------------------------------
2000 1999 1998 1999 1998
------------ ------------
------------ ------------
Net sales .......................................................................... $ 1,175,3931,195,194 $ 1,120,038 $ 3,412,411 $ 3,296,1151,090,843
Cost of merchandise sold ......................... 752,657 714,727 2,170,798 2,103,690
------------ ------------................... 773,647 687,981
------------ ------------
Gross profit ................................... 422,736 405,311 1,241,613 1,192,425............................ 421,547 402,862
Warehousing, marketing, and
administrative expenses ........................ 342,354 309,068 977,494 897,825
------------ ------------................. 346,770 306,596
------------ ------------
Operating earnings ............................. 80,382 96,243 264,119 294,600...................... 74,777 96,266
Other income or (deductions)
Interest income ................................ 391 672 1,120 1,152......................... 497 410
Interest expense ............................... (5,276) (1,550) (9,952) (4,847)........................ (6,102) (1,733)
Unclassified-net ............................... 1,405 (1,097) 1,138 (970)........................ 91 (384)
------------ ------------
------------ ------------
(3,480) (1,975) (7,694) (4,665)
------------ ------------(5,514) (1,707)
------------ ------------
Earnings before income taxes ..................... 76,902 94,268 256,425 289,935............... 69,263 94,559
Income taxes ..................................... 31,145 38,179 103,852 117,424
------------ ------------............................... 28,052 38,296
------------ ------------
Net earnings ............................................................... $ 45,75741,211 $ 56,089 $ 152,573 $ 172,511
============ ============56,263
============ ============
Earnings per share:
Basic ............................................................................. $ 0.490.44 $ 0.58 $ 1.64 $ 1.78
============ ============0.61
============ ============
Diluted .......................................................................... $ 0.490.44 $ 0.57 $ 1.62 $ 1.75
============ ============0.60
============ ============
Weighted average number of shares outstanding:
Basic .......................................... 92,840,777 96,519,586 92,831,640 96,996,816
============ ============................................... 92,917,780 92,833,727
============ ============
Diluted ........................................ 94,352,612 98,010,294 94,358,453 98,684,554
============ ============................................. 94,416,374 94,210,765
============ ============
Cash dividends paid per share .................................. $ 0.16 $ 0.15 $ 0.47 $ 0.435
============ ============
============ ============
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,
------------------------- -----------------------March 31,
----------------------------
2000 1999
1998 1999 1998
--------- --------- --------- ----------------- --------
Net Earnings ........................................................................... $ 45,75741,211 $ 56,089 $ 152,573 $ 172,51156,263
Other comprehensive earnings:earnings (loss):
Foreign currency translation adjustments .................................. 1,539 (6,547) 7,049 (10,549)
--------- --------- --------- ---------....... (1,090) 2,537
Unrealized (loss) on investments, net of tax ... (10,381) -
-------- --------
Comprehensive earnings ....................................................... $ 47,29629,740 $ 49,542 $ 159,622 $ 161,962
========= ========= ========= =========58,800
======== ========
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, 1999March 31, 2000 Dec. 31, 19981999
- ------------------------------------------------------------ --------------- -------------------------------------------------------------------------------- -------------- --------------
CURRENT ASSETS
Cash and cash equivalents ..................................................................... $ 47,60964,685 $ 43,10762,683
Accounts receivable, less allowance for doubtful
accounts of $18,009 for$19,203 in 2000 and $18,369 in 1999 and $15,951 for 1998 ...... 565,499 463,377............. 600,974 561,786
Inventories .............................................. 699,290 626,731................................................... 773,214 762,495
Prepaid expenses ......................................... 16,198 11,950.............................................. 37,235 18,387
Deferred income tax benefits ............................. 64,187 61,200
--------------- ---------------.................................. 67,554 65,794
-------------- --------------
Total current assets ................................... 1,392,783 1,206,365........................................ 1,543,662 1,471,145
PROPERTY, BUILDINGS, AND EQUIPMENT ......................... 1,270,784 1,209,167.............................. 1,301,776 1,302,029
Less accumulated depreciation and amortization ........... 585,312 548,639
--------------- ---------------................ 613,772 604,278
-------------- --------------
Property, buildings, and equipment-net ................... 685,472 660,528
DEFERRED INCOME TAXES ...................................... 9,167 3,187........................ 688,004 697,751
OTHER ASSETS ............................................... 261,978 233,822
--------------- ---------------.................................................... 380,809 395,930
-------------- --------------
TOTAL ASSETS ................................................................................................... $ 2,349,4002,612,475 $ 2,103,902
=============== ===============2,564,826
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt ......................................................................................... $ 221,911283,519 $ 88,060296,836
Current maturities of long-term debt ..................... 22,835 22,831.......................... 27,718 27,721
Trade accounts payable ................................... 306,136 287,055........................................ 295,153 260,084
Accrued expenses ......................................... 226,072 233,327.............................................. 263,479 285,507
Income taxes ............................................. 17,681 33,220
--------------- ---------------.................................................. 32,923 386
-------------- --------------
Total current liabilities .............................. 794,635 664,493................................... 902,792 870,534
LONG-TERM DEBT (less current maturities) ................... 127,833 122,883........................ 124,457 124,928
DEFERRED INCOME TAXES ........................................... 41,419 48,117
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .................. 41,376 37,785....................... 41,425 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, 107,455,033107,732,855 shares, 2000 and
107,460,978 shares, 1999 and
107,233,771 shares, 1998 ............................... 53,728 53,617.................................. 53,866 53,730
Additional contributed capital ........................... 255,302 249,482................................ 264,285 255,569
Retained earnings ............................................. 1,733,514 1,707,258
Unearned restricted stock compensation ........................ (18,019) (16,581)
Accumulated other comprehensive earnings ...................... 57,320 68,791
Treasury stock, at cost - 14,069,89214,086,892 shares, 2000 and
14,079,292 shares, 1999 and
13,728,672 shares, 1998 ................................ (587,812) (572,900)
Unearned restricted stock compensation ................... (17,188) (17,238)
Cumulative translation adjustments ....................... (12,515) (19,564)
Retained earnings ........................................ 1,694,041 1,585,344
--------------- ---------------.................................... (588,584) (588,238)
-------------- --------------
Total shareholders' equity ............................... 1,385,556 1,278,741
--------------- ---------------.................................... 1,502,382 1,480,529
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 2,349,4002,612,475 $ 2,103,902
=============== ===============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)
NineThree Months Ended September 30,
----------------------------------March 31,
--------------------------------
2000 1999
1998
--------------- ----------------------------- --------------
Cash flows from operating activities:
Net earnings ............................................................................................... $ 152,57341,211 $ 172,51156,263
Provision for losses on accounts receivable .............. 10,316 9,771................... 3,553 3,035
Depreciation and amortization:
Property, buildings, and equipment ..................... 55,546 46,236.......................... 21,458 17,908
Intangibles and goodwill ............................... 11,945 12,020
Capitalized.................................... 4,002 3,965
Amortization of capitalized software ................................... 7,236 6,961........................ 3,492 2,290
Change in operating assets and liabilities:
(Increase) in accounts receivable ...................... (112,438) (50,960)........................... (42,741) (47,738)
(Increase) decrease in inventories ..................... (72,559) 41,802................................... (10,719) (19,824)
(Increase) in prepaid expenses ......................... (4,248) (4,174).............................. (18,848) (16,650)
(Increase) in deferred income taxes .................... (5,237) (3,671)......................... (1,594) (648)
Increase in trade accounts payable ..................... 19,081 17,454.......................... 35,069 56,470
(Decrease) increase in other current liabilities ....... (7,256) 6,255
(Decrease)..................... (22,028) (77,095)
Increase in current income taxes payable ............. (17,974) (11,689).................... 32,537 22,651
Increase in accrued employment related
benefits costs ....................................... 3,591 3,782............................................ 707 741
Other - net .............................................. 985 995
--------------- ---------------................................................... 481 270
-------------- --------------
Net cash provided by operating activities .................. 41,561 247,293
--------------- ---------------....................... 46,580 1,638
-------------- --------------
Cash flows from investing activities:
Additions to property, buildings, and
equipment - net ........................................ (80,490) (87,913)of dispositions ............................. (11,711) (37,966)
Expenditures for capitalized software .................... (19,606) (31,967)......................... (9,635) (4,228)
Other - net .............................................. (15,093) (13,654)
--------------- ---------------................................................... (1,493) (274)
-------------- --------------
Net cash (used in) investing activities .................... (115,189) (133,534)
--------------- ---------------......................... (22,839) (42,468)
-------------- --------------
Cash flows from financing activities:
Net (decrease) increase in short-term debt .......................... 133,851 42,011.................... (13,317) 65,872
Long-term debt payments .................................. (49) (1,054)....................................... (17) (16)
Stock incentive plan ..................................... 3,116 4,201.......................................... 6,896 852
Purchase of treasury stock - net ......................... (14,912) (117,292)stock-net ................................ (346) (13,212)
Cash dividends paid ...................................... (43,876) (42,483)
--------------- ---------------........................................... (14,955) (14,003)
-------------- --------------
Net cash (used in) provided by (used in) financing activities ........ 78,130 (114,617)
--------------- ---------------............. (21,739) 39,493
-------------- --------------
Net increase (decrease) in cash and cash equivalents ....... 4,502 (858)............ 2,002 (1,337)
Cash and cash equivalents at beginning of year ............. 43,107 46,929
--------------- ---------------.................. 62,683 43,171
-------------- --------------
Cash and cash equivalents at end of period ....................................... $ 47,60964,685 $ 46,071
=============== ===============41,834
============== ==============
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, 1998,1999, 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
determined by the last-in, first-out (LIFO) method.
The unaudited financial information reflects all adjustments which are, in the
opinion of management, are necessary for a fair presentation of the statements
contained herein.
Checks outstanding of $57,688,000 and $74,183,000 were included in trade
accounts payable at September 30, 1999 and December 31, 1998, respectively.
These amounts are immaterial to the consolidated financial statements.
2. DIVIDEND
On October 27, 1999,April 26, 2000, the Board of Directors declared a quarterly dividend of 1617
cents per share, payable DecemberJune 1, 19992000 to shareholders of record on NovemberMay 8, 1999.2000.
6
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, 1998,1999, included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Three Months ended September 30, 1999
----------------------------------------------------Ended March 31, 2000
----------------------------------------------------------------
Branch-based
Distribution Digital Other Distribution Businesses Totals
--------------- --------------- --------------------------- ------------ ------------ ------------
Total net sales ........................ $ 1,033,0931,078,190 $ 196,0236,280 $ 1,229,116120,928 $ 1,205,398
Intersegment net sales ................. 50,915 2,808 53,7232,654 6,080 1,470 10,204
Net sales from external customers ...... 982,178 193,215 1,175,3931,075,536 200 119,458 1,195,194
Segment operating earnings ............. 103,489 (10,781) 92,70884,508 (10,933) 11,502 85,077
Three Months ended September 30, 1998
----------------------------------------------------Ended March 31, 1999
----------------------------------------------------------------
Branch-based
Distribution Digital Other Distribution Businesses Totals
--------------- --------------- --------------------------- ------------ ------------ ------------
Total net sales ........................ $ 1,008,310993,354 $ 179,991663 $ 1,188,301100,573 $ 1,094,590
Intersegment net sales ................. 66,084 2,179 68,2632,614 388 745 3,747
Net sales from external customers ...... 942,226 177,812 1,120,038990,740 275 99,828 1,090,843
Segment operating earnings ............. 104,984 1,380 106,364103,708 (3,644) 6,195 106,259
Nine Months ended September 30, 1999
----------------------------------------------------
Branch-based
Distribution Digital Other Distribution Businesses Totals
--------------- --------------- --------------------------- ------------ ------------ ------------
Total net sales ........................
Segment Assets
At March 31, 2000 ...................... $ 3,003,5722,074,321 $ 589,26710,584 $ 3,592,839
Intersegment net sales ................. 173,780 6,648 180,428
Net sales from external customers ...... 2,829,792 582,619 3,412,411
Segment operating earnings ............. 306,504 (9,731) 296,773
Nine Months ended September 30, 1998
----------------------------------------------------
Branch-based Other
Distribution Businesses Totals
--------------- --------------- ---------------
Total net sales ........................183,708 $ 2,950,6382,268,613
============ ============ ============ ============
At December 31, 1999 ................... $ 549,5542,060,781 $ 3,500,192
Intersegment net sales ................. 198,147 5,930 204,077
Net sales from external customers ...... 2,752,491 543,624 3,296,115
Segment operating earnings ............. 307,545 14,390 321,9353,615 $ 161,865 $ 2,226,261
============ ============ ============ ============
7
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. SEGMENT INFORMATION (In thousands of dollars)
Branch-based Other
Distribution Businesses Totals
--------------- --------------- ---------------
Segment Assets:
At September 30, 1999 .................. $ 1,789,304 $ 283,925 $ 2,073,229
At December 31, 1998 ................... $ 1,805,396 $ 189,298 $ 1,994,694
A reconciliation of segment operating earningsinformation to consolidated operating
earningsinformation is as
follows:
Three Months ended September 30Ended March 31,
------------------------------
2000 1999
1998
--------------- --------------------------- ------------
Total operating earnings for reportable segments ............ $ 92,70885,077 $ 106,364106,259
Unallocated expenses ............................. (12,326) (10,121)....................................... (10,300) (9,993)
Elimination of intersegment profits .............. -- --
--------------- ---------------........................ - -
------------ ------------
Total consolidated operating earnings .............................. $ 80,38274,777 $ 96,243
=============== ===============96,266
============ ============
Nine Months ended September 30
1999 1998
--------------- ---------------
Total operating earnings for reportable segments . $ 296,773 $ 321,935
Unallocated expenses ............................. (32,638) (27,335)
Elimination of intersegment profits .............. (16) --
--------------- ---------------
Total consolidated operating earnings .......... $ 264,119 $ 294,600
=============== ===============
September 30,March 31, December 31,
--------------- ---------------2000 1999
1998
--------------- --------------------------- ------------
Assets:
Total assets for reportable segments .................................... $ 2,073,2292,268,613 $ 1,994,6942,226,261
Unallocated assets ............................... 276,171 109,208
--------------- ---------------......................................... 343,862 338,565
------------ ------------
Total Consolidatedconsolidated assets ...................................................... $ 2,349,4002,612,475 $ 2,103,902
=============== ===============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, 1999MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998:MARCH 31,
1999:
Company Net Sales
--------------------------
The Company's net sales of $1,175,393,000 for$1,195,194,000 in the 1999 third2000 first quarter increased
4.9%9.6% from net sales of $1,120,038,000$1,090,843,000 for the comparable 19981999 period. This
increase resulted from a 2.5% increasewas primarily driven by volume growth in the Branch-based Distribution segmentbranch-based businesses,
especially in Canada and an 8.9% increaseMexico; continued strong growth in Internet
transactions; and strong growth at Grainger Integrated Supply.
There were 65 sales days in the Other Businesses2000 quarter versus 63 sales days in the 1999
quarter. On a daily basis the Company's net sales increased 6.2%. 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 $62 million for the first quarter of 2000 as compared
with $10 million in the Company (percentages
consider both1999 first quarter.
Segment Net Sales
The following comments at the segment level include external and intersegment
sales). (For additionalnet 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.) There were 64 sales days in both the 1999 and 1998
third quarters. The year 1999 will have one less sales day than did the year
1998 (254 vs. 255).
Despite a soft industrial economy in the United States, sales growth was
positive for the third quarter of 1999 versus the comparable 1998 period. Sales
growth for the third quarter of 1999 was primarily volume-driven, reflecting
favorable effects from the Company's customer-focused business unit strategy,
new marketing initiatives, and the continuing acceleration in Internet
transactions. Sales growth was constrained, however, by customer service issues
at Grainger Industrial Supply and Grainger Parts related to the field rollout of
the new business enterprise system. The Company estimates that it lost
$9,000,000 of sales as a result of these service issues.
Segment Net Sales
Branch-based Distribution Businesses
- ------------------------------------
Grainger Industrial Supply - Average dailyNet sales increased 1%of $1,078,190,000 for the 1999 thirdfirst quarter of 2000 increased 8.5% when
compared to the 1998 third quarter. Sales were favorably affected by
continued momentumwith net sales of $993,354,000 in the Company's Internet strategy. Sales through the
Internet were $30,000,000 in the 1999 third quarter, representing a 740%
increase over the third quarter of 1998 and a 58% increase over Internet sales
of $19,000,000 in the secondfirst quarter of 1999. Average
daily net sales increased 5% for the 2000 first quarter compared with the 1999
first quarter.
Sales were negatively affectedgrowth in the United States was tempered by the customer service issues discussed above. Grainger Industrial Supply
estimates that it lost $8,000,000 ofa decline in sales to large
accounts requiring customized services, lower pricing as a result of these service issues.
Sales prices decreased 1.5% versusselected
price decreases, and customer mix variations. Contributing to the third2000 first
quarter of 1998.growth in the United States were 22 branches opened during 1999 and
increased sales to government accounts.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Acklands - GraingerAcklands-Grainger Inc. (Canada) - Average dailyexperienced strong sales increased 12% for the
1999 third quarter compared to the 1998 third quarter. This increase was driven
by growth in both Eastern and Westernacross most of Canada.
The growth in Eastern Canada was
attributable to 12 new branches opened during 1998 and 1999. The growth in
Western Canada was driven by an improvement in the oil and gas and industrialforestry sectors
of the economy.economy, gains in large customer account business, and the volume impact
of 8 new branches opened during 1999. In Canadian dollars, average daily sales
increased 11%14%. The Company is planning to open 3 moreadditional branches in Eastern Canada during the
remainder of 1999.
Grainger, S.A. de C.V. (Mexico) - Average daily sales increased 16% for the 1999
third quarter compared to the 1998 third quarter. Thisin
2000.
The Mexican operation experienced strong sales growth reflectsreflecting the continuingcontinued
planned development of this new business. A key driver was increased sales to
customers located in Mexico's interior, whowhich are served by the Company's
facility in Monterrey. This growth in sales was attributable to market share
expansion and account penetration. In January, the Company opened a storefront
branch in Guadalajara.
Net sales of the Branch-based Distribution Businesses were also favorably
affected by continued momentum associated with the Company's Internet strategy.
Sales orders processed through Grainger.com were $55 million, a 450% increase
over first quarter 1999 sales of $10 million.
Digital Businesses
- ------------------
Net sales for the first quarter of 2000 were $6,280,000, an increase of 847.2%
compared with $663,000 for the same period of 1999. Net sales for these
businesses included product sales and service fee revenues for FindMRO.com and
service fee revenue for Grainger Auction, OrderZone.com, and TotalMRO.com.
FindMRO.com and Grainger Auction were officially launched in November 1999,
whereas TotalMRO.com opened for business on March 31, 2000. TotalMRO.com is a
utility that brings together a variety of distributors and key technology
partners in an easily searchable site containing millions of maintenance,
repair, and operating products and services.
Other Businesses
- ----------------
Grainger Custom Solutions -Net sales for the first quarter of 2000 were $120,928,000, an increase of 20.2%
compared with $100,573,000 for the same period of 1999.
Average daily sales decreased 4% for the 1999 third
quarter compared to the 1998 third quarter. This decrease was primarily the
result of reduced sales to several large customers who experienced slowdowns in
their business during the quarter. The transition of customers to Grainger
Custom Solutions from both Grainger Industrial Supply and Grainger Integrated Supply is expected to continue through the end of 1999.
Grainger Integrated Supply - Average daily sales increased 84%51% for the 1999
third2000
first quarter compared towith the 1998 third1999 first quarter. Sales for this business unit
includesinclude product throughputsales and management fees. Growth was driven by new engagements,
contract renewals, and scope expansion reflecting the strong demand
for this new business, which provides fee-based, on-site indirect materials
management services to large businesses.
Lab Safety Supply - Average daily sales increased 7% for the 1999 third quarter
compared to the 1998 third quarter reflecting the continuing success of product
line expansion.expansions.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Gross Profit Margin
-------------------Average daily sales for Lab Safety Supply, the Company's direct marketing
business, increased for the first quarter 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.
Company Net Earnings
--------------------
The Company's gross profit margin fornet earnings of $41,211,000 in the 1999 thirdfirst quarter of 2000 decreased
by 0.22
percentage point26.8% when compared to the same 1998 quarter. Thenet earnings of $56,263,000 for the comparable 1999
period.
This decline resulted from a decrease was driven by
lower gross profit margins within the Other Businesses partially offset by
higher gross profit margins withinin operating earnings and an increase in
other deductions. Operating earnings declined at the Branch-based Distribution
Business
segment.Businesses and the loss at the Digital Businesses increased. Operating earnings
improved at the Other Businesses.
Segment Gross Profit MarginOperating 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
- ------------------------------------
GrossOperating earnings of $84,508,000 declined 18.5% for the first quarter 2000 as
compared with $103,708,000 for the 1999 period. The majority of the shortfall
resulted from lower gross profit margins improved atwhich decreased 1.65 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 lower selling prices on
selected products coinciding with the issuance of the Grainger Industrial
Supply. The improvement
primarily relatedSupply 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.
Partially offsetting the above factors was a favorable product mix reflecting netrelated to
new products added since the thirdfirst quarter of 1998.
This improvement was partially offset by an unfavorable selling price category
mix and by lower selling prices on selected items, coinciding with the issuance
of Grainger Industrial Supply's Catalog in February 1999.
Other Businesses
- ----------------
Gross profit margins decreased at Grainger Integrated Supply and Grainger Custom
Solutions. The decrease at Grainger Integrated Supply related to product sales
throughput, which grew at a faster rate than related management fee income. The
decrease at Grainger Custom Solutions was primarily related to higher sales of
sourced product (not inventoried) which, in general, carry lower gross profit
margins.
Operating Expenses
------------------
Operating expenses (warehousing, marketing, and administrative expenses)
increased 10.8% for the 1999 third quarter compared to the 1998 third quarter.
The increase included higher data processing expenses, which exceeded the 1998
quarter by $8,800,000, as adjusted for 1999 volume increases. The higher data
processing expenses primarily related to Year 2000 compliance initiatives,
Internet commerce activities, and the ongoing installation of new business
enterprise systems. Data processing expenses for 1999 are estimated to be
approximately $30,000,000 higher than in 1998, as adjusted for 1999 volume
related increases.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Segment Operating Expenses
Branch-based Distribution Businesses
- ------------------------------------
OperatingAlso contributing to lower operating earnings were higher operating expenses,
which increased about 6%13% for the 2000 first quarter as compared with the 1999 period.
This increase was a result of the following factors:
o Continued spending to enhance and market Grainger.com. Grainger.com
spending for the 2000 first quarter was $12.6 million compared with $2.5
million for the 1999 third quarter versus the
comparable 1998 quarter. This rate of growth exceeded the growth rate in net
sales due to:
1.period.
o Increased data processing and systems development expenses, as described on page 11 of this report;
2. Increased expenses relating towell as
higher costs associated with the developmentoperation of the business in Mexico;
3.Enterprise Resource
Planning (ERP) System.
o Increased occupancy expenses;
4. Increasedcosts related to 8 new branches in Canada, 22 new
branches in the United States, and the new Lake Forest office facility
opened during 1999.
o Higher freight-out expenses primarily driven by increased per shipment
costs and increased shipments made directly to customers.
Digital Businesses
- ------------------
The Digital Businesses incurred operating losses of $10,933,000 compared with
operating losses of $3,644,000 for the first quarter of 1999. These operating
losses resulted from increased operating expenses incurred to maintain customer service levels duringlaunch, operate,
and market these new digital businesses.
Total Internet related operating expenses, as represented by this segment plus
Grainger.com, (which is included in the installationBranch-based Distribution Businesses)
were $25 million for the 2000 first quarter as compared with $7 million for the
1999 period. This increase for the quarter ended March 31, 2000 was primarily
the result of the new business enterprise system, and;
5. Increased training and educationincremental operating expenses relating to the new business
enterprise system.
These factors were partially offsetincurred by decreased advertising expenses at
Grainger Industrial Supply resulting from increased cooperative programs.
Other Businesses
- ----------------
Operating expenses grew faster than net sales, reflecting continuing investments
to meet the diverse needs of segment-specific customers, to improve
accountability within the Company to develop,
launch, operate, and to take advantagemarket its portfolio of growth
opportunities. These investments included:
1. Continued development of the Grainger Custom Solutions business;
2. Expanded marketing programs at Lab Safety Supply, and;
3. Increased expenses, including data processing expenses related toWeb sites. The Company estimates
that total Internet initiatives totaling $12,200,000spending in the thirdyear 2000 will range between $110 and $120
million. Sales processed through the digital businesses plus Grainger.com were
$62 million for the 2000 first quarter of 1999 versus
$2,200,000as compared with $10 million in the third quarter of 1998.
During the quarter, Grainger Integrated Supply reduced its operating expenses by
about 3% while achieving sales growth of 84%.1999
first quarter.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Operating Earnings
------------------
The Company's operating earnings decreased 16.5% for the third quarter of 1999
compared to the same quarter in 1998. Operating earnings declined at both the
Branch-based Distribution segment and at the Other Businesses. (For segment
operating earnings, see Note 3 of the Notes to Consolidated Financial Statements
included in this report.)
Segment Operating Earnings
Branch-based Distribution Businesses
- ------------------------------------
The decline in operating earnings is primarily attributable to Grainger
Industrial Supply and Grainger Parts and largely reflects the systems
installation issues described earlier in this document. As previously noted, the
Company estimates that it lost $9,000,000 in sales as a result of customer
service issues at Grainger Industrial Supply and Grainger Parts. It is estimated
that the effect of the systems installation issues - including gross profit on
the lost sales, along with incremental operating expenses to maintain customer
service levels - was an $11,000,000 reduction in operating earnings for the
quarter.
Other Businesses
- ----------------
The decline in operating earnings primarily related to Internet Commerce and
Grainger Custom Solutions. Partially offsetting these declines were improved
results at Grainger Integrated Supply and Lab Safety Supply.
The results for Internet Commerce reflect incremental marketing expenses to
promote the Company's Web sites, Grainger.com and OrderZone.com. The marketing
programs were initiatedexperienced an operating loss in the fourthfirst quarter of
1998 and grew substantially in
magnitude2000 that was 27% less than the operating loss incurred during the thirdfirst quarter
of 1999. This improvement in operating performance reflects improved
productivity, partially offset by lower gross profit margins. The decrease in
gross profit margins related to product sales, which grew at a faster rate than
related management fee income.
Operating expenditures duringearnings at Lab Safety Supply increased at a faster rate than the
growth in sales, reflecting positive operating leverage from this direct
marketing business.
Other Deductions
Other deductions of $5,514,000 in the first quarter of 2000 increased 223%
compared with $1,707,000 in the prior year's first quarter. Other deductions
were also directed toward enhancing the functionality of Grainger.com.
Operating expenses also increasedhigher principally due to payroll expenses to support additional
transaction volume. (Sales processed through Grainger.com, which accelerated
substantially duringan increase in interest expense. This increase
resulted from higher average borrowings, higher average interest rates paid on
all outstanding debt, and lower capitalized interest.
Income Taxes
The Company's effective tax rate was 40.5% for the first quarter are recognized in Grainger Industrial Supply's
sales.)
Grainger Custom Solutions' results reflected increased investments for
developing the infrastructure for this businessof both 2000
and the effect of eliminating
some less profitable business. During the transition, certain infrastructure
investments temporarily duplicate the Grainger Industrial Supply platform.1999.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Income Statement Data
---------------------------
Interest income decreased by $281,000 for the third quarter of 1999 compared
with the same period in 1998. This decrease resulted from lower average
daily-invested balances and lower average interest rates earned.
Interest expense increased by $3,726,000 for the third quarter of 1999 compared
to the same period in 1998. This increase resulted from higher average interest
rates paid on all outstanding debt, higher average borrowings, and lower
capitalized interest.
Unclassified-net had a positive effect on earnings before income taxes of
$2,502,000 for the third quarter of 1999 as compared with the same period in
1998. 1999 included a gain related to the disposal of facilities in the
Chicagoland area.
The Company's effective income tax rate was 40.5% for the third quarter of both
1999 and 1998.
Net Earnings
------------
The Company's net earnings of $45,757,000 in the 1999 third quarter decreased
18.4% as compared to net earnings of $56,089,000 for the comparable 1998 period.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Net Sales
---------
The Company's net sales of $3,412,411,000 for the first nine months of 1999
increased 3.5% from net sales of $3,296,115,000 for the comparable 1998 period.
This increase resulted from a 1.8% increase in the Branch-based Distribution
segment and a 7.2% increase in the Other Businesses of the Company (percentages
consider both external and intersegment sales). (For additional segment
information, see Note 3 of the Notes to Consolidated Financial Statements
included in this report.) There were 191 sales days in the first nine months of
both 1999 and 1998. The year 1999 will have one less sales day than did the year
1998 (254 vs. 255).
Despite a soft North American industrial economy, sales growth was positive for
the first nine months of 1999 versus the comparable 1998 period. Sales growth
for the first nine months of 1999 was primarily volume-driven, reflecting
favorable effects from the Company's customer-focused business unit strategy,
new marketing initiatives, and the continuing acceleration in Internet
transactions. Sales growth was constrained, however, by customer service issues
at Grainger Industrial Supply and Grainger Parts related to the field rollout of
the new business enterprise system. The Company estimates that it lost
$19,000,000 of sales as a result of these service issues which occurred during
the latter part of the second quarter and the third quarter of 1999.
Segment Net Sales
Branch-based Distribution Businesses
- ------------------------------------
Grainger Industrial Supply - Average daily sales increased 2% for the first nine
months of 1999 as compared to the 1998 period. Sales were favorably affected by
momentum in the Company's Internet strategy. Online sales through the Internet
were $59,000,000 in the first nine months of 1999, representing a 555% increase
over the comparable 1998 period. Sales were negatively affected by the customer
service issues discussed above. Grainger Industrial Supply estimates that it
lost $18,000,000 of sales as a result of these service issues. Sales prices
decreased 0.6% for the first nine months of 1999 versus the comparable period of
1998.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Acklands - Grainger Inc. (Canada) - Average daily sales increased 2% for the
first nine months of 1999 as compared to the 1998 period. This increase was
driven by growth in both Eastern and Western Canada during the third quarter of
1999 versus the comparable 1998 period. The growth in Eastern Canada was
attributable to 12 new branches opened during 1998 and 1999. The growth in
Western Canada was driven by an improvement in the oil and gas and industrial
sectors of the economy. In Canadian dollars, average daily sales increased 4%.
The Company is planning to open 3 more branches in Eastern Canada during the
remainder of 1999.
Grainger, S.A. de C.V. (Mexico) - Average daily sales increased 15% for the
first nine months of 1999 as compared to the 1998 period. This strong sales
growth reflects the continuing development of this new business. A key driver
was increased sales to customers located in Mexico's interior, who are served by
the Company's facility in Monterrey.
Other Businesses
- ----------------
Grainger Custom Solutions - Average daily sales decreased 2% for the first nine
months of 1999 as compared to the 1998 period. The focus remains on
transitioning customers to the new business platform. The transition of
customers to Grainger Custom Solutions from both Grainger Industrial Supply and
Grainger Integrated Supply is expected to continue through the end of 1999.
Grainger Integrated Supply - Average daily sales increased 46% for the first
nine months of 1999 as compared to the 1998 period. Sales for this business unit
includes product throughput and management fees. Growth was driven by new
engagements, contract renewals, and scope expansion reflecting the strong demand
for this new business, which provides fee-based, on-site indirect materials
management services to large businesses.
Lab Safety Supply - Average daily sales increased 8% for the first nine months
of 1999 as compared to the 1998 period. Strong sales growth reflects the
continuing success of the product line expansion program.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Gross Profit Margin
-------------------
The Company's gross profit margin for the first nine months of 1999 increased by
0.21 percentage point compared to the same 1998 period. This increase was driven
by improvements at Grainger Industrial Supply and Grainger Custom Solutions.
Segment Gross Profit Margin
Branch-based Distribution Businesses
- ------------------------------------
The improvement in gross profit margins at Grainger Industrial Supply primarily
related to favorable product mix, reflecting net new products added since the
third quarter of 1998.
This improvement was partially offset by an unfavorable selling price category
mix and by lower selling prices on selected items, coinciding with the issuance
of Grainger Industrial Supply's Catalog in February 1999.
Other Businesses
- ----------------
The improvement in gross profit margins at Grainger Custom Solutions was
primarily due to the elimination of less profitable business and to lower
pricing received from suppliers.
Operating Expenses
------------------
Operating expenses (warehousing, marketing, and administrative expenses)
increased 8.9% for the first nine months of 1999 as compared to the same 1998
period. The increase included higher data processing expenses, which exceeded
the 1998 period by $19,300,000, as adjusted for 1999 volume increases. The
higher data processing expenses primarily related to Year 2000 compliance
initiatives, Internet commerce activities, and the ongoing installation of new
business enterprise systems. Data processing expenses for 1999 are estimated to
be approximately $30,000,000 higher than in 1998, as adjusted for 1999 volume
related increases.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Segment Operating Expenses
Branch-based Distribution Businesses
- ------------------------------------
Operating expenses increased about 5% for the first nine months of 1999 versus
the comparable 1998 period. This rate of growth exceeded the growth in net sales
due to:
1. Increased data processing expenses, as described on page 17 of this report;
2. Increased expenses relating to the development of the business in Mexico;
3. Increased occupancy expenses;
4. Increased expenses incurred to maintain customer service levels during the
installation of the new business enterprise system, and;
5. Increased training and education expenses relating to the new business
enterprise system.
These factors were partially offset by decreased advertising expenses at
Grainger Industrial Supply resulting from increased cooperative programs.
Other Businesses
- ----------------
Operating expenses grew faster than net sales, reflecting continuing investments
to meet the diverse needs of segment-specific customers, to improve
accountability within the Company, and to take advantage of growth
opportunities. These investments included:
1. Continued development of the Grainger Custom Solutions business;
2. Expanded marketing programs at Lab Safety Supply, and;
3. Increased expenses, including data processing expenses, related to Internet
initiatives totaling $26,500,000 for the first nine months of 1999 versus
$9,500,000 for the comparable 1998 period.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Operating Earnings
------------------
The Company's operating earnings decreased 10.3% for the first nine months of
1999 as compared to the same 1998 period. Operating earnings were relatively
flat at the Branch-based Distribution segment and declined at the Other
Businesses. (For segment operating earnings, see Note 3 of the Notes to
Consolidated Financial Statements included in this report.)
Segment Operating Earnings
Branch-based Distribution Businesses
- ------------------------------------
Operating earnings performance was affected by lower than expected sales growth,
largely due to weakness in the North American industrial economy and to service
issues at Grainger Industrial Supply and Grainger Parts. The Company estimates
that these service issues cost the Company $23,000,000 in operating earnings
year-to-date 1999, comprised of gross profit on lost sales and incremental
operating expenses.
Other Businesses
- ----------------
The decline in operating earnings primarily related to Internet Commerce and
Grainger Custom Solutions.
The results for Internet Commerce reflect the development and enhancement of
OrderZone.com, the Company's one-stop, business-to-business on-line service,
which became operational in the second quarter of 1999, and Grainger.com. (Sales
processed through Grainger.com are recognized in Grainger Industrial Supply's
sales.) Also reflected are continuing investments to market and promote these
two Web sites.
Grainger Custom Solutions' results reflected increased investments for
developing the infrastructure for this business and the effect of eliminating
some less profitable business. During the transition, certain infrastructure
investments temporarily duplicate the Grainger Industrial Supply platform.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Other Income Statement Data
---------------------------
Interest income decreased by $32,000 for the first nine months of 1999 compared
with the same period in 1998. This decrease resulted from lower average
daily-invested balances and lower average interest rates earned.
Interest expense increased by $5,105,000 for the first nine months of 1999
compared to the same period in 1998. This increase resulted from higher average
interest rates paid on all outstanding debt and from higher average borrowings,
partially offset by higher capitalized interest.
Unclassified-net had a positive effect on earnings before income taxes of
$2,108,000 for the first nine months of 1999 as compared with the same period in
1998. During the third quarter of 1999 the Company recorded a gain related to
the disposal of facilities in the Chicagoland area.
The Company's effective income tax rate was 40.5% for the first nine months of
both 1999 and 1998.
Net Earnings
------------
The Company's net earnings of $152,573,000 in the first nine months of 1999
decreased 11.6% when compared to net earnings of $172,511,000 for the comparable
1998 period.
Year 2000
---------
The CompanyYear 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Computer programs that have date
sensitive software may recognize a standard methodology with three phases fordate using "00" as the year 1900 versus the
year 2000. This could result in systems failure or in miscalculation causing
disruptions to operations.
The Company's efforts in response to the Year 2000 project.
Phase I includes conducting a complete inventoryissue included the review of potentially affected areas
of the business (including
information technology and non-information technology), assessingtechnology products and prioritizing the information collected during the
inventory, and developing detailed plans to address all key areas of the
project. The Company has completed Phase I.
Phase II includessystems, the
remediation or replacement, and testing, of all mission
critical areas of the project,affected information technology
systems and facilities, the surveying of key suppliers of goods and services,
and the creation of reasonable contingency plans to address potentially serious
Year 2000 related problems.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
The remediation of mission critical systems has been completed. The remediated
systems have been returned to production and final date testing of them has been
completed. The installation of replacement mission critical systems (as
distinguished from the remediation of existing mission critical systems) is
continuing and is scheduled for completion in the fourth quarter of 1999.
Remediation work required to make facilities Year 2000 ready has been completed.
The surveying of key suppliers is essentially complete. Of the key suppliers
surveyed, approximately 97% either have indicated that they are Year 2000 ready
or have provided a specific date by which they anticipate being ready.
Contingency plans reflect analyses of, among other things, risk levels to the
Company associated with Year 2000 related problems of key suppliers and
practical alternatives. In connection with these analyses, alternative sources
of various products and services have been identified. The possibility that
customers of the Company will have difficulty meeting their payment obligations
on a timely basis due to Year 2000 problems was a factor in establishing a new
line of credit from participating banks. This short-term line of credit is in
addition to an existing line of credit. The creation of contingency plans is
essentially complete.
Phase III includes the remediation or replacement, and testing, of non-mission
critical areas of the project. Substantially all of this non-mission critical
work has been completed with the remainder scheduled for completion during the
fourth quarter of 1999. Also included in Phase III is the implementation of
contingency plans as may be appropriate. Contingency plan implementation will
continue during the remainder of 1999. Expenses associated with the Year 2000 project includeincluded both
a reallocation of existing internal resources and the use of outside services.
ProjectYear 2000 expenses for 1998 and 1997 totaled approximately $39,000,000. Project expenses forfrom the inception of the project through 1999 and beyondyear end are
estimated to be approximately $30,000,000.
Total data processing expenses for 1999, including those related to the$62,000,000. Year 2000 project and the Company's new enterprise system,expenses after 1999 are currently estimatedexpected to be
approximately $30,000,000 higher than data processing expenses for 1998,minimal.
The Company did not experience any material systems, product supply, or customer
service disruptions as adjusted for 1999 volume related increases.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
The estimated 1999 data processing expenses and the dates by which the Company
will complete thea result of Year 2000 work are based on management's current assessment
and were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans, and
other factors. However, thereproblems. There can be no
guaranteeassurance, however, that these estimatessuch disruptions will be
achieved or that all componentsnot occur by reason of Year 2000
compliance will be addressed as
planned. Uncertainties include, but are not limitedor other date-related problems yet to the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and the sources and timeliness of various systems
replacements. There also can be no guarantee that the systems of other companies
will be Year 2000 ready on a timely basis or that the related changes will be
compatible with the Company's systems.
Management believes that failure to address the Year 2000 issue on a timely
basis could have a material adverse effect on the Company and continues to be
committed to devoting the appropriate resources to address that issue.
22become manifest.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the ninethree months ended September 30, 1999,March 31, 2000, working capital increased by
$56,276,000.$40,259,000. The ratio of current assets to current liabilities was 1.81.7 at September 30, 1999both
March 31, 2000 and 1.8 at December 31, 1998.1999. The Consolidated Statements of Cash Flows,
included in this report, detail the sources and uses of cash and cash
equivalents.
The Company continues to maintainmaintains a modest debt ratio and strong liquidity position whichthat 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 26.9%29% at September 30, 1999March 31, 2000 and 18.3%30% at December 31, 1998.1999. For
the first ninethree months of 1999, $83,107,000 were2000, $12,186,000 was expended for property,
buildings, and equipment, and $19,606,000 were$9,635,000 was expended for capitalized software,
for a total of $102,713,000.
RISK FACTORS
This document contains$21,821,000.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q are forward-looking statements that are not historical factsabout the Company's
expected future financial results and are
forward-looking. Thebusiness plans, strategies, and
objectives. These forward-looking statements are based on the Company's
current expectations and some of themoften identified by qualifiers
such as: "expects," "plans," " anticipates," "intends," or similar expressions.
There are subject to risks and uncertainties the outcome of which could result in actual future performance being materially
different from the performance indicated. Among the factors that could affect
indicated future performance are changes in, and the extent of implementation
and effectiveness of, Company strategies, market initiatives, business
development plans, and programs. Risk factors relating tocause the Company's
Year
2000 compliance efforts are described elsewhere in this document. The
forward-looking statements should be read in conjunction with the discussion of
the Company's business and various factorsresults to differ materially from what is projected.
Factors that may affect it contained inthe 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 most recent Annual Report on Form 10-K, as well asbusinesses; 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 Company
reports filed with the Securitiesdifficulties in improving margins or
financial performance.
Trends and Exchange Commission.
23projections could also be affected by general industry and market
conditions and growth rates, general economic conditions, including currency
rate fluctuations and other factors.
15
W.W. Grainger, Inc., and Subsidiaries
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 not applicable.
Item 6: Exhibits (numbered4 Submission of Matters to a Vote of Security Holders.
An annual meeting of shareholders of the Company was held on April 26,
2000. At that meeting:
a) Management's nominees listed in accordancethe proxy statement pertaining to
the meeting were elected directors for the ensuing year. Of the
83,327,034 shares present in person or represented by proxy at
the meeting, the number of shares voted for and the number of
shares as to which authority to vote in the election was
withheld, were as follows with Item 601respect to each of regulation S-K)the nominees:
Shares as to Which Voting
Name Shares Voted for Election Authority Withheld
--------------------- --------------------------- -----------------------------
B. P. Anderson 82,501,667 825,367
J. D. Fluno 82,482,271 844,763
W. H. Gantz 82,506,916 820,118
D. W. Grainger 82,498,556 828,478
R. L. Keyser 82,489,180 837,854
J. W. McCarter, Jr. 82,506,837 820,197
N. S. Novich 82,504,676 822,358
J. D. Slavik 82,501,669 825,365
H. B. Smith 82,503,937 823,097
F. L. Turner 82,503,060 823,974
J. S. Webb 74,143,981 9,183,053
b) A proposal to ratify the appointment of Grant Thornton, LLP as
independent auditors of the Company for the year ended December
31, 2000 was approved. Of the 83,327,034 shares present or
represented by proxy at the meeting, 82,988,724 shares were voted
for the proposal, 102,592 shares were voted against the proposal,
and Reports on Form 8-K.
EXHIBIT INDEX
-------------
(a) Exhibits
(11) Computation of Earnings Per Share. 26-27
(27) Financial Data Schedule.
(b) Reports on Form 8-K235,718 shares abstained from voting with respect to the
proposal.
16
W.W. Grainger, Inc., and Subsidiaries
PART II - None.
24OTHER INFORMATION
EXHIBIT INDEX
-------------
Item 6 Exhibits (numbered in accordance with Item 601 of regulation S-K).
a) Exhibits
(3)(ii) By-laws, as amended 20-35
(10) Material Contracts
(a) Supplemental Profit Sharing Plan, as amended 36-43
(11) Computation of Earnings per Common and Common
Equivalent Share 19
(27) Financial Data Schedule
b) Reports on Form 8-K - None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.W. Grainger, Inc.
---------------------------------------------------------------------------------------
(Registrant)
Date: November 12, 1999 By: /s/ J.D. Fluno
- ------------------------------ -------------------------------------------
J.D. Fluno, Vice Chairman
Date: November 12, 1999May 11, 2000 By: /s/ P.O. Loux
- ------------------------------ ---------------------------------------------------------------------------------------
P.O. Loux, Senior Vice President, Finance
and Chief Financial Officer
Date: November 12, 1999May 11, 2000 By: /s/ R.D. Pappano
- ------------------------------ ---------------------------------------------------------------------------------------
R.D. Pappano, Vice President,
Financial Reporting
2518
Exhibit 11.111
W.W. Grainger, Inc., and Subsidiaries
COMPUTATIONCOMPUTATIONS OF EARNINGS PER SHARE
NineThree Months Ended September 30,
---------------------------------March 31,
-----------------------------------
2000 1999 1998
--------------- ---------------
BASIC:
Basic:
Weighted average number of shares outstanding
during the period
92,831,640 96,996,816year ................................................... 92,917,780 92,833,727
=============== ===============
Net earnings ......................................................... $ 152,573,00041,211,000 $ 172,511,00056,263,000
=============== ===============
Earnings per share ................................................... $ 1.640.44 $ 1.780.61
=============== ===============
Diluted:DILUTED:
Weighted average number of shares outstanding
during the periodyear (basic) ......................................... 92,831,640 96,996,816
Common equivalents........................................... 92,917,780 92,833,727
Potential Shares:
Shares issuable under outstanding options ..................... 3,115,730 3,272,0002,541,850 2,840,880
Shares which could have been purchased based
on the average market value for the period .................. 2,166,366 2,124,2511,737,022 2,044,197
--------------- ---------------
949,364 1,147,749804,828 796,683
Dilutive effect of exercised options prior to being
exercised ......................................................... 24,282 27,767................................................... 77,266 37,855
--------------- ---------------
Shares for the portion of the period that the options
were outstanding .................................................. 973,646 1,175,516............................................ 882,094 834,538
Contingently issuable shares ......................................... 553,166 512,222.................................. 616,500 542,500
--------------- ---------------
1,526,812 1,687,7381,498,594 1,377,038
--------------- ---------------
WeightedAdjusted weighted average number of shares outstanding
during the period ................................................ 94,358,453 98,684,554year .................................................... 94,416,374 94,210,765
=============== ===============
Net earnings ......................................................... $ 152,573,00041,211,000 $ 172,511,00056,263,000
=============== ===============
Earnings per share ................................................... $ 1.620.44 $ 1.750.60
=============== ===============
2619
Exhibit 11.2
W.W. Grainger, Inc., and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
1999 1998
------------ ------------
Basic:
Three months ended September 30:
Nine months ended September 30, as reported in .................... $ 1.64 $ 1.78
Exhibit 11.1
Six months ended June 30, as previously reported .................. 1.15 1.20
------------- -------------
Earnings per share for the three months ended
September 30 .................................................... $ 0.49 $ 0.58
============= =============
Diluted:
Three months ended September 30:
Nine months ended September 30, as reported in .................... $ 1.62 $ 1.75
Exhibit 11.1
Six months ended June 30, as previously reported .................. 1.13 1.18
------------- -------------
Earnings per share for the three months ended
September 30 .................................................... $ 0.49 $ 0.57
============= =============
27