UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 2008
2009
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
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
Illinois | | 36-1150280 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
100 Grainger Parkway, Lake Forest, Illinois | | 60045-5201 |
(Address of principal executive offices) | | (Zip Code) |
(847) 535-1000 |
(Registrant’s telephone number including area code) |
|
Not Applicable |
(Former name, former address and former fiscal year; if changed since last report) |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer T | | Accelerated filer £ |
| | | |
| Non-accelerated filer £ | | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
There were 76,067,84473,623,181 shares of the Company’s Common Stock outstanding as of SeptemberJune 30, 2008.2009.
EXPLANATORY NOTE:
This Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on October 30, 2008 (this “Amendment”), is being filed solely for the purpose of correcting a clerical error. The amount of Cash dividends paid per share for the nine months ended September 30, 2008 inadvertently reflected the amount paid for the three months ended September 30, 2008. This has been corrected and can be found on the Condensed Consolidated Statements of Earnings. Other than this correction, this Amendment does not change the previously reported financial statements or any of the other disclosures contained in the original Quarterly Report on Form 10Q.
TABLE OF CONTENTS |
| Page No. |
PART I | FINANCIAL INFORMATION | | |
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Item 1. | Financial Statements (Unaudited) | | |
| | | |
| June 30, 20072008 | | 3 |
| | | |
| | | 4 |
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| | | 5 - 6 |
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| | | 7 - 8 |
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| | | 9 - 17– 18 |
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Item 2. | | | |
| Condition and Results of Operations | | 1819 – 29 27 |
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Item 3. | | | 3028 |
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Item 4. | | | 3028 |
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PART II | | | |
| | | |
Item 1. | | | 3028 |
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Item 2. | | | 3129 |
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Item 5. | Other Information | | 29 |
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Item 6. | Exhibits | | 3130 |
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Signatures | | | 3231 |
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EXHIBITS | | | |
| | | |
Exhibits 31 & 32 | Certifications | | |
Item 1. Financial Statements (Unaudited)
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 1,839,475 | | | $ | 1,658,592 | | | $ | 5,257,377 | | | $ | 4,806,261 | | | $ | 1,533,263 | | | $ | 1,756,856 | | | $ | 2,998,511 | | | $ | 3,417,902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of merchandise sold | | | 1,097,127 | | | | 999,003 | | | | 3,129,218 | | | | 2,874,119 | | | | 908,295 | | | | 1,050,979 | | | | 1,744,128 | | | | 2,032,091 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 742,348 | | | | 659,589 | | | | 2,128,159 | | | | 1,932,142 | | | | 624,968 | | | | 705,877 | | | | 1,254,383 | | | | 1,385,811 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warehousing, marketing and administrative expenses | | | 510,891 | | | | 485,257 | | | | 1,526,044 | | | | 1,428,650 | | | | 471,039 | | | | 521,042 | | | | 941,240 | | | | 1,015,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings | | | 231,457 | | | | 174,332 | | | | 602,115 | | | | 503,492 | | | | 153,929 | | | | 184,835 | | | | 313,143 | | | | 370,658 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income and (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1,602 | | | | 3,144 | | | | 3,642 | | | | 11,182 | | | | 273 | | | | 1,236 | | | | 674 | | | | 2,040 | |
Interest expense | | | (4,393 | ) | | | (721 | ) | | | (9,591 | ) | | | (1,817 | ) | | | (2,318 | ) | | | (3,765 | ) | | | (4,536 | ) | | | (5,198 | ) |
Equity in net income (loss) of unconsolidated entities | | | 755 | | | | 470 | | | | 2,835 | | | | 353 | | | | 707 | | | | 1,343 | | | | 783 | | | | 2,080 | |
Unclassified – net | | | (731 | ) | | | (41 | ) | | | 569 | | | | (53 | ) | |
Other non-operating income | | | | 234 | | | | 796 | | | | 237 | | | | 1,431 | |
Other non-operating expense | | | | (1,199 | ) | | | (65 | ) | | | (207 | ) | | | (131 | ) |
Total other income and (expense) | | | (2,767 | ) | | | 2,852 | | | | (2,545 | ) | | | 9,665 | | | | (2,303 | ) | | | (455 | ) | | | (3,049 | ) | | | 222 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings before income taxes | | | 228,690 | | | | 177,184 | | | | 599,570 | | | | 513,157 | | | | 151,626 | | | | 184,380 | | | | 310,094 | | | | 370,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income taxes | | | 88,667 | | | | 68,034 | | | | 232,130 | | | | 197,429 | | | | 59,160 | | | | 71,201 | | | | 121,250 | | | | 143,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 140,023 | | | $ | 109,150 | | | $ | 367,440 | | | $ | 315,728 | | |
Net earnings (loss) | | | $ | 92,466 | | | $ | 113,179 | | | $ | 188,844 | | | $ | 227,417 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Basic | | $ | 1.84 | | | $ | 1.33 | | | $ | 4.78 | | | $ | 3.78 | | | $ | 1.23 | | | $ | 1.44 | | | $ | 2.50 | | | $ | 2.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 1.79 | | | $ | 1.29 | | | $ | 4.65 | | | $ | 3.67 | | | $ | 1.21 | | | $ | 1.42 | | | $ | 2.46 | | | $ | 2.83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 75,967,774 | | | | 82,233,231 | | | | 76,813,709 | | | | 83,437,184 | | | | 73,443,360 | | | | 76,542,071 | | | | 73,852,588 | | | | 77,241,860 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | | 78,279,422 | | | | 84,864,258 | | | | 79,085,640 | | | | 86,119,670 | | | | 74,558,636 | | | | 78,028,077 | | | | 74,853,304 | | | | 78,641,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends paid per share | | $ | 0.40 | | | $ | 0.35 | | | $ | 1.15 | | | $ | 0.99 | | | $ | 0.46 | | | $ | 0.40 | | | $ | 0.86 | | | $ | 0.75 | |
The accompanying notes are an integral part of these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 140,023 | | | $ | 109,150 | | | $ | 367,440 | | | $ | 315,728 | | |
Net earnings (loss) | | | $ | 92,466 | | | $ | 113,179 | | | $ | 188,844 | | | $ | 227,417 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive earnings (losses): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments, net of tax benefit (expense) of $2,534, $(4,181), $4,133, and $(9,229), respectively | | | (18,636 | ) | | | 24,317 | | | | (26,075 | ) | | | 52,552 | | |
Foreign currency translation adjustments, net of tax (expense) benefit of $(4,135), $(409), $(2,351), and $1,599, respectively | | | | 34,022 | | | | 2,459 | | | | 17,957 | | | | (7,439 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive earnings | | $ | 121,387 | | | $ | 133,467 | | | $ | 341,365 | | | $ | 368,280 | | | $ | 126,488 | | | $ | 115,638 | | | $ | 206,801 | | | $ | 219,978 | |
The accompanying notes are an integral part of these financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
ASSETS | | Sept. 30, 2008 | | | Dec. 31, 2007 | | | June 30, 2009 | | | Dec. 31, 2008 | |
CURRENT ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 364,417 | | | $ | 113,437 | | | $ | 416,291 | | | $ | 396,290 | |
Marketable securities at cost, | | | | | | | | | |
which approximates market value | | | – | | | | 20,074 | | |
Accounts receivable (less allowances for doubtful | | | | | | | | | | | | | | | | |
accounts of $29,345 and $25,830, respectively) | | | 721,387 | | | | 602,650 | | |
accounts of $27,955 and $26,481, respectively) | | | | 582,431 | | | | 589,416 | |
Inventories | | | 961,094 | | | | 946,327 | | | | 899,843 | | | | 1,009,932 | |
Prepaid expenses and other assets | | | 63,028 | | | | 61,666 | | | | 72,479 | | | | 95,915 | |
Deferred income taxes | | | 61,395 | | | | 56,663 | | | | 53,981 | | | | 52,556 | |
Total current assets | | | 2,171,321 | | | | 1,800,817 | | | | 2,025,025 | | | | 2,144,109 | |
| | | | | | | | | | | | | | | | |
PROPERTY, BUILDINGS AND EQUIPMENT | | | 2,116,796 | | | | 2,004,276 | | | | 2,181,430 | | | | 2,131,863 | |
Less accumulated depreciation and amortization | | | 1,188,300 | | | | 1,125,931 | | | | 1,252,634 | | | | 1,201,552 | |
Property, buildings and equipment – net | | | 928,496 | | | | 878,345 | | | | 928,796 | | | | 930,311 | |
| | | | | | | | | | | | | | | | |
DEFERRED INCOME TAXES | | | 72,760 | | | | 54,658 | | | | 110,723 | | | | 97,442 | |
| | | | | | | | | | | | | | | | |
INVESTMENT IN UNCONSOLIDATED ENTITIES | | | 23,089 | | | | 14,759 | | | | 19,645 | | | | 20,830 | |
| | | | | | | | | | | | | | | | |
GOODWILL | | | 231,945 | | | | 233,028 | | | | 218,841 | | | | 213,159 | |
| | | | | | | | | | | | | | | | |
OTHER ASSETS AND INTANGIBLES – NET | | | 108,830 | | | | 112,421 | | | | 102,735 | | | | 109,566 | |
| | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 3,536,441 | | | $ | 3,094,028 | | | $ | 3,405,765 | | | $ | 3,515,417 | |
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY | | Sept. 30, 2008 | | | Dec. 31, 2007 | | | June 30, 2009 | | | Dec. 31, 2008 | |
| | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | |
Short-term debt | | $ | 16,431 | | | $ | 102,060 | | | $ | 25,499 | | | $ | 19,960 | |
Current maturities of long-term debt | | | 12,923 | | | | 4,590 | | | | 42,090 | | | | 21,257 | |
Trade accounts payable | | | 314,445 | | | | 297,929 | | | | 255,373 | | | | 290,802 | |
Accrued compensation and benefits | | | 164,524 | | | | 182,275 | | | | 119,887 | | | | 162,380 | |
Accrued contributions to employees’ | | | | | | | | | |
profit sharing plans | | | 110,566 | | | | 126,483 | | |
Accrued contributions to employees’ profit sharing plans | | | | 55,421 | | | | 146,922 | |
Accrued expenses | | | 99,386 | | | | 102,607 | | | | 80,778 | | | | 118,633 | |
Income taxes payable | | | 16,589 | | | | 10,459 | | | | 2,564 | | | | 1,780 | |
Total current liabilities | | | 734,864 | | | | 826,403 | | | | 581,612 | | | | 761,734 | |
| | | | | | | | | | | | | | | | |
LONG-TERM DEBT (less current maturities) | | | 496,562 | | | | 4,895 | | | | 467,395 | | | | 488,228 | |
| | | | | | | | | | | | | | | | |
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES | | | 23,531 | | | | 20,727 | | | | 35,872 | | | | 33,219 | |
| | | | | | | | | | | | | | | | |
ACCRUED EMPLOYMENT-RELATED BENEFITS | | | 153,393 | | | | 143,895 | | | | 210,208 | | | | 198,431 | |
| | | | | | | | | | | | | | | | |
SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding | | | – | | | | – | | | | – | | | | – | |
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares | | | 54,830 | | | | 54,830 | | | | 54,830 | | | | 54,830 | |
Additional contributed capital | | | 555,410 | | | | 475,350 | | | | 576,433 | | | | 564,728 | |
Retained earnings | | | 3,593,931 | | | | 3,316,875 | | | | 3,794,397 | | | | 3,670,726 | |
Accumulated other comprehensive earnings | | | 46,096 | | | | 72,171 | | |
Treasury stock, at cost – 33,591,375 and 30,199,804 shares, respectively | | | (2,122,176 | ) | | | (1,821,118 | ) | |
Accumulated other comprehensive earnings (losses) | | | | (20,568 | ) | | | (38,525 | ) |
Treasury stock, at cost – 36,036,038 and 34,878,190 shares, respectively | | | | (2,294,414 | ) | | | (2,217,954 | ) |
| | | | | | | | | | | | | | | | |
Total shareholders' equity | | | 2,128,091 | | | | 2,098,108 | | | | 2,110,678 | | | | 2,033,805 | |
| | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 3,536,441 | | | $ | 3,094,028 | | | $ | 3,405,765 | | | $ | 3,515,417 | |
The accompanying notes are an integral part of these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
| | Nine Months Ended Sept. 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2009 | | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net earnings | | $ | 367,440 | | | $ | 315,728 | | |
Net earnings (loss) | | | $ | 188,844 | | | $ | 227,417 | |
Provision for losses on accounts receivable | | | 11,867 | | | | 7,824 | | | | 8,237 | | | | 9,053 | |
Deferred income taxes and tax uncertainties | | | (18,432 | ) | | | (7,437 | ) | | | (14,404 | ) | | | (10,693 | ) |
Depreciation and amortization: | | | | | | | | | | | | | | | | |
Property, buildings and equipment | | | 81,507 | | | | 75,113 | | | | 54,364 | | | | 52,366 | |
Capitalized software and other intangibles | | | 19,258 | | | | 18,486 | | | | 14,141 | | | | 12,529 | |
Stock-based compensation | | | 36,655 | | | | 28,988 | | | | 24,841 | | | | 27,478 | |
Tax benefit of stock incentive plans | | | 1,612 | | | | 2,820 | | | | 685 | | | | 1,097 | |
Net gains on sales of property, buildings and equipment | | | (4,760 | ) | | | (5,433 | ) | | | 53 | | | | (3,366 | ) |
(Income) losses from unconsolidated entities – net | | | (2,835 | ) | | | (353 | ) | |
(Income) from unconsolidated entities – net | | | | (783 | ) | | | (2,080 | ) |
Change in operating assets and liabilities – net of business acquisitions | | | | | | | | | | | | | | | | |
(Increase) in accounts receivable | | | (125,936 | ) | | | (105,145 | ) | |
(Increase) in inventories | | | (17,360 | ) | | | (39,532 | ) | |
Decrease in prepaid expenses | | | 645 | | | | 7,410 | | |
Increase in trade accounts payable | | | 13,069 | | | | 39,188 | | |
(Decrease) in other current liabilities | | | (42,191 | ) | | | (16,324 | ) | |
Increase in current income taxes payable | | | 6,466 | | | | 3,598 | | |
Increase in accrued employment-related benefits cost | | | 9,498 | | | | 17,697 | | |
(Increase) decrease in accounts receivable | | | | 6,618 | | | | (82,929 | ) |
(Increase) decrease in inventories | | | | 120,528 | | | | (22,107 | ) |
(Increase) decrease in prepaid expenses and other assets | | | | 24,004 | | | | (12,591 | ) |
Increase (decrease) in trade accounts payable | | | | (41,776 | ) | | | 27,761 | |
Increase (decrease) in other current liabilities | | | | (163,188 | ) | | | (101,329 | ) |
Increase (decrease) in current income taxes payable | | | | 878 | | | | (8,800 | ) |
Increase (decrease) in accrued employment-related benefits cost | | | | 11,730 | | | | 6,781 | |
Other – net | | | (1,186 | ) | | | (4,876 | ) | | | (2,162 | ) | | | (1,865 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 335,317 | | | | 337,752 | | | | 232,610 | | | | 118,722 | |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Additions to property, buildings and equipment – net of dispositions | | | (125,020 | ) | | | (128,744 | ) | | | (46,796 | ) | | | (97,613 | ) |
Additions to capitalized software | | | (6,570 | ) | | | (5,726 | ) | | | (5,108 | ) | | | (4,166 | ) |
Cash paid for business acquisitions | | | (33,995 | ) | | | (4,684 | ) | |
Proceeds from sale of marketable securities | | | 19,627 | | | | 12,765 | | |
Purchases of marketable securities | | | – | | | | (17,079 | ) | |
Investments in unconsolidated entities | | | (6,486 | ) | | | – | | |
Net cash acquired (paid) for business acquisitions | | | | 1,345 | | | | (6,868 | ) |
Other – net | | | (416 | ) | | | (405 | ) | | | 948 | | | | 19,429 | |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | $ | (152,860 | ) | | $ | (143,873 | ) | | $ | (49,611 | ) | | $ | (89,218 | ) |
W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands of dollars)
(Unaudited)
| | Nine Months Ended Sept. 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2009 | | | 2008 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Net (decrease) in commercial paper | | $ | (95,356 | ) | | $ | – | | |
Net increase in short term debt | | | – | | | | 144,428 | | |
Net increase (decrease) in short-term debt | | | $ | – | | | $ | (95,947 | ) |
Borrowings under line of credit | | | 19,136 | | | | – | | | | 2,996 | | | | 7,442 | |
Payments against line of credit | | | (8,799 | ) | | | – | | | | (816 | ) | | | (111 | ) |
Proceeds from issuance of long-term debt | | | 500,000 | | | | – | | | | – | | | | 500,000 | |
Stock options exercised | | | 41,103 | | | | 103,465 | | | | 21,476 | | | | 31,891 | |
Excess tax benefits from stock-based compensation | | | 11,733 | | | | 27,050 | | | | 5,412 | | | | 9,369 | |
Purchase of treasury stock | | | (307,552 | ) | | | (647,293 | ) | | | (127,696 | ) | | | (270,950 | ) |
Cash dividends paid | | | (90,384 | ) | | | (84,766 | ) | | | (65,174 | ) | | | (59,351 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 69,881 | | | | (457,116 | ) | |
Net cash (used in) provided by financing activities | | | | (163,802 | ) | | | 122,343 | |
| | | | | | | | | | | | | | | | |
Exchange rate effect on cash and cash equivalents | | | (1,358 | ) | | | 4,132 | | | | 804 | | | | (7,050 | ) |
| | | | | | | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 250,980 | | | | (259,105 | ) | | | 20,001 | | | | 144,797 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 113,437 | | | | 348,471 | | | | 396,290 | | | | 113,437 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 364,417 | | | $ | 89,366 | | | $ | 416,291 | | | $ | 258,234 | |
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BACKGROUND AND BASIS OF PRESENTATION
W.W. Grainger, Inc. distributes facilities maintenance products and provides services and related information used by businesses and institutions primarily in North America.the United States, Canada and Mexico to keep their facilities and equipment running. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.
The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2007,2008, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
The Condensed Consolidated Balance Sheet as of December 31, 2007,2008, has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.
The Company has evaluated subsequent events through July 31, 2009, the date the financial statements were issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
In March 2008,April 2009, the Financial Accounting Standards Board (FASB) issued StatementFASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141(R)-1). FSP 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities –such an amendment ofasset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 133” (SFAS5, “Accounting for Contingencies,” and FASB Interpretation No. 161). SFAS No. 161 amends and expands14, “Reasonable Estimation of the disclosure requirements related to derivative instruments and hedging activities which will enable investors to better understand the effects on an entity’s financial statements, financial position and cash flows. The statementAmount of a Loss.” This FSP is effective for fiscal yearsassets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after NovemberDecember 15, 2008. The Company does not expect the adoption of SFAS No. 161FSP 141(R)-1 to have a material effect on its results of operations or financial position.
In April 2008, the FASB issued Staff Position FSP 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material effect on its results of operations or financial position.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In April 2009, the FASB issued three Staff Positions intended to provide application guidance and revise the disclosures regarding fair value measurements and impairment of securities. A summary of each Staff Position is as follows:
· | FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” addresses the determination of fair values when there is no active market or where the price inputs represent distressed sales. FSP 157-4 reaffirms the view in SFAS No. 157 that the objective of fair value measurement is to reflect an asset’s sale price in an orderly transaction at the date of the financial statements. |
· | FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures to a quarterly basis for any financial instruments that are not currently reflected on the balance sheet at fair value. |
· | FSP 115-2, FAS 124-2, and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater consistency to the timing of impairment recognition and provide greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold. |
The three Staff Positions are effective for interim and annual periods ending after June 15, 2009. The adoption of these FSPs did not have a material effect on the Company’s results of operations or financial position.
In May 2008,2009, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles”165, “Subsequent Events” (SFAS No. 162).165) to provide authoritative accounting literature for subsequent events which was previously addressed only in auditing literature. SFAS No. 162 is intended to improve165 addresses events that occur after the balance sheet date but before the issuance of the financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles tostatements. It distinguishes between subsequent events that should be usedrecognized in preparingthe financial statements and those that are presented in conformity with US GAAPshould not. Also, it requires disclosure of the date through which subsequent events were evaluated and disclosures for nongovernmental entities.certain non-recognized events. SFAS No. 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. The Company applied the provision of SFAS No. 165 for the period ending June 30, 2009 and disclosed the date through which it has evaluated subsequent events and the basis for choosing that date. The adoption of SFAS No. 165 did not have a material effect on the Company’s results of operations or financial position.
In June 2009, the FASB believesissued Statement of Financial Accounting Standards No. 167 (SFAS No. 167) which is a revision to FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities.” This statement changes how a reporting entity determines when an entity that the GAAP hierarchyis insufficiently capitalized or is not controlled through voting (or similar rights) should be directedconsolidated. SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities because it isand any significant changes in risk exposure due to that involvement. SFAS No. 167 will be effective at the entity (not its auditor) that is responsiblestart of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for selecting accounting principles for financial statements that are presented in conformity with GAAP.a calendar year-end entity. The Company does not expect the adoption of SFAS No. 162167 to have a material effect on its results of operations or financial position.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In June 2009, the FASB issued statement No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (FASB Statement No. 168) which establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. generally accepted accounting principles to be applied by non-governmental entities. The Accounting Standards Codification will supersede all existing non-SEC accounting and reporting standards. FASB Statement No. 168 is effective for interim or annual financial periods ending after September 15, 2009. The Company will apply this statement for the period ending September 30, 2009, however it does not expect adoption to have a material effect on its results of operations or financial position.
In June 2009, the Company acquired the remaining 50.1% of its joint venture in India, Asia Pacific Brands India Private Limited (Asia Pacific Brands), for $1.2 million. Asia Pacific Brands had revenue of approximately US$32 million for its fiscal year ended March 31, 2009. The Company originally paid $5.4 million for its ownership interest which was effective July 21, 2008. At the time of the original investment, the Company and its joint venture partner each made a $1.1 million capital infusion which was intended to help grow the business. In the fourth quarter of 2008, the Company wrote-off its investment in this joint venture due to the economic slowdown in India and the loss of a major supplier which accounted for approximately 25% of the joint venture’s annual revenue. These conditions severely affected Asia Pacific Brands’ ability to secure additional financing to meet its current obligations and continue as a going concern. Up through the time that the investment was written-off, the Company used the equity method to account for this investment. Over the past six months Asia Pacific Brands’ business has improved. It has been able to streamline its operations, strengthen its management and enhance its supplier base. The results of Asia Pacific Brands are now included in the Company’s consolidated results from the date of acquisition. Due to the immaterial nature of this transaction, disclosure of pro forma results were not considered necessary.
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
On June 19, 2009, the Company announced that it plans to become a majority owner of MonotaRO, a direct marketer of maintenance, repair and operating supplies in Japan, in which the Company currently has a 38.3% ownership interest. MonotaRO held a shareholder meeting which authorized the repurchase of 1.83 million shares. In August, the Company plans to initiate a tender offer bid for 380,000 MonotaRO shares, allowing the Company to achieve a majority interest in MonotaRO. The Company expects to invest approximately $4.0 million through the tender offer bid process. The tender is anticipated to be completed in the third quarter. At the time majority ownership is obtained, the Company will recognize 100% of the fair value of acquired assets and assumed liabilities. It is anticipated that this transaction will result in consolidation of MonotaRO’s results and trigger realization of a one time gain which could be significant.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. DIVIDEND
On July 29, 2009, the Company’s Board of Directors declared a quarterly dividend of 46 cents per share, payable September 1, 2009, to shareholders of record on August 10, 2009.
The Company generally warrants the products it sells against defects for one year. For a significant portion of warranty claims, the manufacturer of the product is responsible for the expenses associated with this warranty program. For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based on historical experience. The warranty reserve activity was as follows (in thousands of dollars):
| | Six Months Ended June 30, | |
| | 2009 | | | 2008 | |
Beginning balance | | $ | 3,218 | | | $ | 3,442 | |
Returns | | | (5,626 | ) | | | (5,997 | ) |
Provision | | | 5,550 | | | | 6,064 | |
Ending balance | | $ | 3,142 | | | $ | 3,509 | |
Retirement Plans
A majority of the Company’s employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions based upon a formula related primarily to earnings before federal income taxes with a minimum contribution of 8% and a maximum contribution of 18% of total eligible compensation paid to all eligible employees.
Postretirement Benefits
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its employees and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company. Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.
The net periodic benefit costs charged to operating expenses, which are valued at the measurement date of January 1 and recognized evenly throughout the year, consisted of the following components (in thousands of dollars):
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Service cost | | $ | 3,076 | | | $ | 2,425 | | | $ | 6,152 | | | $ | 4,850 | |
Interest cost | | | 2,682 | | | | 2,372 | | | | 5,365 | | | | 4,745 | |
Expected return on assets | | | (851 | ) | | | (1,116 | ) | | | (1,701 | ) | | | (2,232 | ) |
Amortization of transition asset | | | (35 | ) | | | (36 | ) | | | (71 | ) | | | (72 | ) |
Amortization of unrecognized losses | | | 1,033 | | | | 328 | | | | 2,067 | | | | 656 | |
Amortization of prior service credits | | | (318 | ) | | | (304 | ) | | | (607 | ) | | | (608 | ) |
Net periodic benefit costs | | $ | 5,587 | | | $ | 3,669 | | | $ | 11,205 | | | $ | 7,339 | |
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The funding of the trust is an estimated amount, which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC. During the three and six months ended June 30, 2009, the Company contributed $1.0 million and $1.8 million, respectively, to the trust.
Effective January 1, 2009 the Company revised its segment disclosure. The Company has two reportable segments: the United States and Canada. In the first quarter of 2009, the Company integrated the Lab Safety Supply business into the Grainger Industrial Supply business and results are now reported under the United States segment. The Canada segment reflects the results for Acklands – Grainger, Inc., the Company’s Canadian branch-based distribution business. Other Businesses include the following: Grainger, S.A. de C.V. (Mexico), Asia Pacific Brands India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama). These businesses generate revenue through the distribution of facilities maintenance products. Prior year segment amounts have been restated in a consistent manner. Following is a summary of segment results (in thousands of dollars):
| | Three Months Ended June 30, 2009 | |
| | United States | | | Canada | | | Other Businesses | | | Total | |
Total net sales | | $ | 1,353,795 | | | $ | 160,724 | | | $ | 27,901 | | | $ | 1,542,420 | |
Intersegment net sales | | | (8,957 | ) | | | (81 | ) | | | (119 | ) | | | (9,157 | ) |
Net sales to external customers | | $ | 1,344,838 | | | $ | 160,643 | | | $ | 27,782 | | | $ | 1,533,263 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings (losses) | | $ | 176,533 | | | $ | 9,740 | | | $ | (3,284 | ) | | $ | 182,989 | |
| | | | | | | | | | | | | | | | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
`
| | Three Months Ended June 30, 2008 | |
| | United States | | | Canada | | | Other Businesses | | | Total | |
Total net sales | | $ | 1,542,921 | | | $ | 197,867 | | | $ | 30,527 | | | $ | 1,771,315 | |
Intersegment net sales | | | (14,285 | ) | | | – | | | | (174 | ) | | | (14,459 | ) |
Net sales to external customers | | $ | 1,528,636 | | | $ | 197,867 | | | $ | 30,353 | | | $ | 1,756,856 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings (losses) | | $ | 209,721 | | | $ | 16,013 | | | $ | (1,927 | ) | | $ | 223,807 | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2009 | |
| | United States | | | Canada | | | Other Businesses | | | Total | |
Total net sales | | $ | 2,662,532 | | | $ | 304,519 | | | $ | 50,433 | | | $ | 3,017,484 | |
Intersegment net sales | | | (18,650 | ) | | | (93 | ) | | | (230 | ) | | | (18,973 | ) |
Net sales to external customers | | $ | 2,643,882 | | | $ | 304,426 | | | $ | 50,203 | | | $ | 2,998,511 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings (losses) | | $ | 349,718 | | | $ | 15,694 | | | $ | (6,218 | ) | | $ | 359,194 | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2008 | |
| | United States | | | Canada | | | Other Businesses | | | Total | |
Total net sales | | $ | 3,012,276 | | | $ | 375,170 | | | $ | 55,072 | | | $ | 3,442,518 | |
Intersegment net sales | | | (24,388 | ) | | | – | | | | (228 | ) | | | (24,616 | ) |
Net sales to external customers | | $ | 2,987,888 | | | $ | 375,170 | | | $ | 54,844 | | | $ | 3,417,902 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings (losses) | | $ | 404,854 | | | $ | 27,688 | | | $ | (6,151 | ) | | $ | 426,391 | |
| | | | | | | | | | | | | | | | |
| | United States | | | Canada | | | Other Businesses | | | Total | |
Segment assets: | | | | | | | | | | | | |
June 30, 2009 | | $ | 2,173,493 | | | $ | 464,849 | | | $ | 147,237 | | | $ | 2,785,579 | |
| | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 2,310,484 | | | $ | 448,660 | | | $ | 133,111 | | | $ | 2,892,255 | |
| | | | | | | | | | | | | | | | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following are reconciliations of segment information with the consolidated totals per the financial statements (in thousands of dollars):
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Operating earnings: | | | |
Total operating earnings for reportable segments | | $ | 182,989 | | | $ | 223,807 | | | $ | 359,194 | | | $ | 426,391 | |
Unallocated expenses and eliminations | | | (29,060 | ) | | | (38,972 | ) | | | (46,051 | ) | | | (55,733 | ) |
Total consolidated operating earnings | | $ | 153,929 | | | $ | 184,835 | | | $ | 313,143 | | | $ | 370,658 | |
| | June 30, 2009 | | | Dec. 31, 2008 | |
Assets: | | | |
Total assets for reportable segments | | $ | 2,785,579 | | | $ | 2,892,255 | |
Elimination of intersegment assets | | | (2,470 | ) | | | (2,095 | ) |
Unallocated assets | | | 622,656 | | | | 625,257 | |
Total consolidated assets | | $ | 3,405,765 | | | $ | 3,515,417 | |
Unallocated expenses and unallocated assets primarily relate to the Company headquarters’ support services, which are not part of any business segment. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets primarily include non-operating cash and cash equivalents, certain prepaid expenses, deferred income taxes and non-operating property, buildings and equipment – net.
Unallocated expenses decreased $9.9 million and $9.7 million for the three and six months ended June 30, 2009, respectively. The decrease in unallocated expenses is primarily due to lower payroll and benefits and a $6.0 million provision for a legal reserve in 2008 that did not repeat in 2009.
The unallocated assets as of June 30, 2009 were essentially flat when compared to the unallocated assets at December 31, 2008.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP 03-6-1). FSP 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the FSP 03-6-1 provisions. FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that adoption may have on its results of operation and financial position.
Effective July 21, 2008 the Company acquired a 49.9% interest in Asia Pacific Brands India Ltd. (Asia Pacific Brands) from its sole shareholder. Asia Pacific Brands, one of India's largest industrial and electrical wholesale distributors, is headquartered in Mumbai, India. With 27 locations and more than 6,200 dealer relationships across India, Asia Pacific Brands had revenue of US$47 million for its fiscal year ended March 31, 2008. The Company paid $5.4 million for its ownership interest. In addition, the Company and its joint venture partner each made a $1.1 million capital infusion which is intended to help grow the business. The Company is using the equity method to account for this investment.
On July 10, 2008, Lab Safety Supply, a direct marketing subsidiary ofJanuary 1, 2009, the Company acquired substantially alladopted FSP 03-6-1. The Company’s unvested share-based payment awards, such as certain Performance Shares, Restricted Stock and Restricted Stock Units that contain nonforfeitable rights to dividends meet the criteria of a participating security as defined by FSP 03-6-1. The adoption of FSP 03-6-1 has changed the assetsmethodology of Highsmith Inc. (Highsmith), located in Fort Atkinson, Wisconsin. Highsmith is a direct marketing leader in the library equipment, furniture and supplies market and had sales of $64 million in 2007. The purchase price and costs of the acquisition were $27.0 million in cash and $6.1 million in assumed liabilities. The estimated goodwill recognized in the transaction amounted to $4.1 million and is expected to be deductible for tax purposes. The integration of Highsmith into existing operations should be completed by the end of the year. As part of the integration Lab Safety is discontinuing the contract sales group of Highsmith which represented approximately $19 million of sales in 2007. The results of Highsmith are included incomputing the Company’s consolidated resultsearnings per share to the two-class method from the date of acquisition. Due to the immaterial nature of this transaction, disclosure of pro forma results were not considered necessary.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On June 6, 2008, Acklands - Grainger Inc.,treasury stock method. As a wholly owned subsidiary ofresult, the Company acquired substantially allhas restated previously reported earnings per share. This change has not affected previously reported consolidated net earnings or net cash flows from operations. Under the two-class method, earnings are allocated between common stock and participating securities. FSP 03-6-1 provides guidance that the presentation of the assetsbasic and assumed certain liabilities of Excel F.I.G. Inc. (Excel). Excel, located in Granby, Quebec, Canada, is a business-to-business broad line distributor of maintenance, repair and operating supplies. In 2007, Excel had sales of approximately US$12 million. The purchase price and costs of the acquisition were US$6.9 million in cash and US$0.7 million in assumed liabilities. The estimated goodwill recognized in the transaction amounted to US$4.4 million and is expected to be partially deductible for tax purposes. The results of Excel are included in the Company’s consolidated results from the date of acquisition. Due to the immaterial nature of this transaction, disclosure of pro forma results were not considered necessary.
On October 29, 2008, the Company’s Board of Directors declared a quarterly dividend of 40 centsdiluted earnings per share payable December 1, 2008, to shareholdersis required only for each class of record on November 10, 2008.
5. WARRANTY RESERVES
common stock and not for participating securities. As such, the Company will present basic and diluted earnings per share for its one class of common stock.
The Company generally warrants the products it sells against defectstwo-class method includes an earnings allocation formula that determines earnings per share for one year. For a significant portioneach class of warranty claims, the manufacturer of the product is responsiblecommon stock according to dividends declared and undistributed earnings for the expenses associated with this warranty program. For warranty expenses not coveredperiod. The Company’s reported net earnings is reduced by the manufacturer, the Company provides a reserve for future costs based on historical experience. The warranty reserve activity was as follows:
| | Nine Months Ended September 30, | | |
| | 2008 | | | 2007 |
| | (In thousands of dollars) | | |
| | | | | |
Beginning balance | | $ | 3,442 | | | $ | 4,651 | |
Returns | | | (10,218 | ) | | | (9,266 | ) |
Provision | | | 10,495 | | | | 8,630 | |
Ending balance | | $ | 3,719 | | | $ | 4,015 | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 6, 2008, the Company entered into a four year term loan of $500 million. Proceeds were usedamount allocated to pay down short-term debt, fund additional share repurchases and for general corporate purposes.
At the election of the Company, the term loan shall bear interestparticipating securities to arrive at the Base Rate plus the Applicable Margin or the LIBOR Rate plus the Applicable Margin as defined within the contract. At September 30, 2008 the Company has elected a one month LIBOR Interest Period. The weighted average interest rate during the period outstanding was 3.26%.earnings allocated to common stock shareholders for purposes of calculating earnings per share.
The Company may prepaydilutive effect of participating securities is calculated using the loan in whole or in part at its option. The scheduled loan repaymentmore dilutive of the outstanding principal amount is as follows:
Year | | Payment Amount | |
2009 | | $ | 16.7 | million | |
2010 | | $ | 45.8 | million | |
2011 | | $ | 50.0 | million | |
2012 | | $ | 387.5 | million | |
The Company’s debt instruments include only standard affirmative and negative covenants that are normal in debt instruments of similar amounts and structure. The Company’s debt instruments do not contain financialtreasury stock or performance covenants restrictive to the business of the Company. The Company is in compliance with all debt covenants for the nine months ended September 30, 2008.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Retirement Plans
A majority of the Company’s employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions based upon a formula related primarily to earnings before federal income taxes, limited to a percentage of total eligible compensation paid to all eligible employees. Retroactive to January 1, 2008, the plan was amended on July 30, 2008 to establish a minimum contribution of 8% and a maximum contribution of 18% of total eligible compensation paid to all eligible employees. Previously, there was no minimum percentage and the maximum percentage was 25%.
Postretirement Benefits
two-class method. The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its retired employees and their dependents should they electdetermined the two-class method to maintainbe the more dilutive. As such, coverage. Covered employees become eligible for participation when they qualify for retirement. Participationthe earnings allocated to common stock shareholders in the planbasic earnings per share calculation is voluntary and requires participantsadjusted for the reallocation of undistributed earnings to make contributions,participating securities as determinedprescribed by the Company, toward the cost of the plan.
The net periodic benefit costs chargedFSP 03-6-1 to operating expenses, which are valuedarrive at the measurement date of January 1 and recognized evenly throughoutearnings allocated to common stock shareholders for calculating the year, consisted of the following components:diluted earnings per share.
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | (In thousands of dollars) | |
| | | |
Service cost | | $ | 2,425 | | | $ | 2,714 | | | $ | 7,275 | | | $ | 8,142 | |
Interest cost | | | 2,373 | | | | 2,243 | | | | 7,118 | | | | 6,730 | |
Expected return on assets | | | (1,117 | ) | | | (1,012 | ) | | | (3,349 | ) | | | (3,037 | ) |
Amortization of transition asset | | | (36 | ) | | | (36 | ) | | | (108 | ) | | | (107 | ) |
Amortization of unrecognized losses | | | 328 | | | | 523 | | | | 984 | | | | 1,570 | |
Amortization of prior service credits | | | (304 | ) | | | (109 | ) | | | (912 | ) | | | (328 | ) |
Net periodic benefit costs | | $ | 3,669 | | | $ | 4,323 | | | $ | 11,008 | | | $ | 12,970 | |
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The funding of the trust is an estimated amount, which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC. During the three and nine months ended September 30, 2008, the Company contributed $1.0 million and $3.1 million, respectively, to the trust.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The three reportable segments are Grainger Branch-based, Acklands - Grainger Branch-based (Acklands - Grainger) and Lab Safety Supply, Inc. (Lab Safety). Grainger Branch-based is an aggregation including the following: Grainger Industrial Supply, Grainger, S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama). Acklands - Grainger is the Company’s Canadian branch-based distribution business. Lab Safety is a direct marketer of safety and other industrial products. Following is a summary of segment results (in thousands of dollars):
| | Three Months Ended September 30, 2008 | |
| | Grainger Branch-based | | | Acklands - Grainger Branch-based | | | Lab Safety | | | Total | |
| | | |
Total net sales | | $ | 1,523,543 | | | $ | 190,754 | | | $ | 127,321 | | | $ | 1,841,618 | |
Intersegment net sales | | | (1,021 | ) | | | (127 | ) | | | (995 | ) | | | (2,143 | ) |
Net sales to external customers | | $ | 1,522,522 | | | $ | 190,627 | | | $ | 126,326 | | | $ | 1,839,475 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings | | $ | 226,602 | | | $ | 14,168 | | | $ | 12,212 | | | $ | 252,982 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2007 | |
| | Grainger Branch-based | | | Acklands - Grainger Branch-based | | | Lab Safety | | | Total | |
| | | |
Total net sales | | $ | 1,385,278 | | | $ | 163,519 | | | $ | 111,199 | | | $ | 1,659,996 | |
Intersegment net sales | | | (487 | ) | | | – | | | | (917 | ) | | | (1,404 | ) |
Net sales to external customers | | $ | 1,384,791 | | | $ | 163,519 | | | $ | 110,282 | | | $ | 1,658,592 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings | | $ | 173,115 | | | $ | 10,243 | | | $ | 14,213 | | | $ | 197,571 | |
| | | | | | | | | | | | | | | | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | Nine Months Ended September 30, 2008 | |
| | Grainger Branch-based | | | Acklands - Grainger Branch-based | | | Lab Safety | | | Total | |
| | | |
Total net sales | | $ | 4,346,857 | | | $ | 565,924 | | | $ | 350,032 | | | $ | 5,262,813 | |
Intersegment net sales | | | (2,330 | ) | | | (127 | ) | | | (2,979 | ) | | | (5,436 | ) |
Net sales to external customers | | $ | 4,344,527 | | | $ | 565,797 | | | $ | 347,053 | | | $ | 5,257,377 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings | | $ | 596,411 | | | $ | 41,856 | | | $ | 40,596 | | | $ | 678,863 | |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2007 | |
| | Grainger Branch-based | | | Acklands - Grainger Branch-based | | | Lab Safety | | | Total | |
| | | |
Total net sales | | $ | 4,014,522 | | | $ | 464,851 | | | $ | 330,653 | | | $ | 4,810,026 | |
Intersegment net sales | | | (1,211 | ) | | | – | | | | (2,554 | ) | | | (3,765 | ) |
Net sales to external customers | | $ | 4,013,311 | | | $ | 464,851 | | | $ | 328,099 | | | $ | 4,806,261 | |
| | | | | | | | | | | | | | | | |
Segment operating earnings | | $ | 505,027 | | | $ | 29,710 | | | $ | 43,191 | | | $ | 577,928 | |
| | | | | | | | | | | | | | | | |
| | Grainger Branch-based | | | Acklands - Grainger Branch-based | | | Lab Safety | | | Total | |
| | | |
Segment assets: | | | |
September 30, 2008 | | $ | 2,225,971 | | | $ | 506,897 | | | $ | 240,572 | | | $ | 2,973,440 | |
| | | | | | | | | | | | | | | | |
December 31, 2007 | | $ | 2,107,408 | | | $ | 502,414 | | | $ | 212,627 | | | $ | 2,822,449 | |
| | | | | | | | | | | | | | | | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following are reconciliations of segment information with the consolidated totals per the financial statements (in thousands of dollars):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Operating earnings: | | | |
Total operating earnings for reportable segments | | $ | 252,982 | | | $ | 197,571 | | | $ | 678,863 | | | $ | 577,928 | |
Unallocated expenses and eliminations | | | (21,525 | ) | | | (23,239 | ) | | | (76,748 | ) | | | (74,436 | ) |
Total consolidated operating earnings | | $ | 231,457 | | | $ | 174,332 | | | $ | 602,115 | | | $ | 503,492 | |
| | Sept. 30, 2008 | | Dec. 31, 2007 |
Assets: | | | |
Total assets for reportable segments | | $ | 2,973,440 | | | $ | 2,822,449 | |
Elimination of intersegment assets | | | (34,579 | ) | | | (167 | ) |
Unallocated assets | | | 597,580 | | | | 271,746 | |
Total consolidated assets | | $ | 3,536,441 | | | $ | 3,094,028 | |
Unallocated expenses and unallocated assets primarily relate to the Company headquarters’ support services, which are not part of any business segment. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets primarily include non-operating cash and cash equivalents, certain prepaid expenses, deferred income taxes and non-operating property, buildings and equipment – net.
The increase in unallocated assets as of September 30, 2008 is primarily due to the Company’s higher cash balance.
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per share:
| | Three Months Ended Sept. 30, | | | Nine Months Ended Sept. 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net earnings | | $ | 140,023,000 | | | $ | 109,150,000 | | | $ | 367,440,000 | | | $ | 315,728,000 | |
| | | | | | | | | | | | | | | | |
Denominator for basic earnings per share – weighted average shares | | | 75,967,774 | | | | 82,233,231 | | | | 76,813,709 | | | | 83,437,184 | |
Effect of dilutive securities – stock-based compensation | | | 2,311,648 | | | | 2,631,027 | | | | 2,271,931 | | | | 2,682,486 | |
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | | | 78,279,422 | | | | 84,864,258 | | | | 79,085,640 | | | | 86,119,670 | |
| | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 1.84 | | | $ | 1.33 | | | $ | 4.78 | | | $ | 3.78 | |
Diluted earnings per common share | | $ | 1.79 | | | $ | 1.29 | | | $ | 4.65 | | | $ | 3.67 | |
share under the two-class method as prescribed by FSP 03-6-1 (in thousands of dollars, except for share and per share amounts):
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Net earnings as reported | | $ | 92,466 | | | $ | 113,179 | | | $ | 188,844 | | | $ | 227,417 | |
| | | | | | | | | | | | | | | | |
Less: Distributed earnings available to participating securities | | | (750 | ) | | | (673 | ) | | | (1,440 | ) | | | (1,189 | ) |
| | | | | | | | | | | | | | | | |
Less: Undistributed earnings available to participating securities | | | (1,413 | ) | | | (1,998 | ) | | | (2,968 | ) | | | (3,796 | ) |
| | | | | | | | | | | | | | | | |
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders | | $ | 90,303 | | | $ | 110,508 | | | $ | 184,436 | | | $ | 222,432 | |
| | | | | | | | | | | | | | | | |
Add: Undistributed earnings allocated to participating securities | | | 1,413 | | | | 1,998 | | | | 2,968 | | | | 3,796 | |
| | | | | | | | | | | | | | | | |
Less: Undistributed earnings reallocated to participating securities | | | (1,392 | ) | | | (1,961 | ) | | | (2,929 | ) | | | (3,730 | ) |
| | | | | | | | | | | | | | | | |
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders | | $ | 90,324 | | | $ | 110,545 | | | $ | 184,475 | | | $ | 222,498 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Denominator for basic earnings per share – weighted average shares | | | 73,443,360 | | | | 76,542,071 | | | | 73,852,588 | | | | 77,241,860 | |
| | | | | | | | | | | | | | | | |
Effect of dilutive securities | | | 1,115,276 | | | | 1,486,006 | | | | 1,000,716 | | | | 1,399,414 | |
| | | | | | | | | | | | | | | | |
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities | | | 74,558,636 | | | | 78,028,077 | | | | 74,853,304 | | | | 78,641,274 | |
| | | | | | | | | | | | | | | | |
Earnings per share Two-class method | | | | | | | | | | | | | | | | |
Basic | | $ | 1.23 | | | $ | 1.44 | | | $ | 2.50 | | | $ | 2.88 | |
Diluted | | $ | 1.21 | | | $ | 1.42 | | | $ | 2.46 | | | $ | 2.83 | |
| | | | | | | | | | | | | | | | |
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. CONTINGENCIES AND LEGAL PROCEEDINGSMATTERS
As previously reported, in December 2007, the Company received a letter in December 2007 from the Commercial Litigation Branch of the Civil Division of the Department of Justice (the “DOJ”) regarding the Company’s contract with the United States General Services Administration (the “GSA”). The letter suggested that the Company had not complied with its disclosure obligations and the contract’s pricing provisions, and had potentially overcharged government customers under the contract.
Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing. The timing and outcome of these discussions are uncertain and could include settlement or civil litigation by the DOJ to recover, among other amounts, treble damages and penalties under the False Claims Act. While this matter is not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in materialsignificant payments by the Company. The Company continues to believe that it has complied with the GSA contract in all material respects.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.
Overview
General
Grainger is the leading broad-line supplier of facilities maintenance and other related products in North America. Grainger distributes a wide range of products used by businesses and institutions to keep their facilities and equipment up and running. Grainger uses a multichannel business model to provide customers with a range of options for finding and purchasing products through a network of branches, sales representatives, direct marketing including catalogs, and a variety of electronic and Internet channels. Grainger serves customers through a network of more than 600 branches, 18 distribution centers and multiple Web sites.
Grainger’s threeEffective January 1, 2009 Grainger revised its segment disclosure. Grainger has two reportable segments aresegments: the United States and Canada. In the first quarter of 2009, Grainger Branch-based, Acklands - Grainger Branch-based (Acklands - Grainger) andintegrated the Lab Safety Supply Inc. (Lab Safety). Grainger Branch-based is an aggregation includingbusiness into the following business units: Grainger Industrial Supply business and results are now reported under the United States segment. The Canada segment reflects the results for Acklands – Grainger, Inc., Grainger’s Canadian branch-based distribution business. Other Businesses include the following: Grainger, S.A. de C.V. (Mexico), Asia Pacific Brands India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama). Acklands - Grainger is the Company’s Canadian branch-based distribution business. Lab Safety is a direct marketer of safety and other industrial products.
Business Environment
Several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide insight into anticipated economic factors for the near term and help in forming the development of projections for the remainder of 2009. In July 2009, Consensus Forecast-USA projected a 2009 Industrial Production and GDP decline for the United States of 11.0% and 2.6%, respectively. In July 2009, Consensus Forecast-USA projected a GDP decline of 2.3% for Canada.
Historically, Grainger’s sales trends have tended to correlate positively with industrial production growth, particularly manufacturing output, as well as employment growth, particularly non-farm payrolls.production. According to the Federal Reserve, overall industrial production decreased 4.5%13.6% from September 2007June 2008 to September 2008.June 2009. The continued decline in the economy has affected Grainger’s sales growth for the second quarter of 2009, which declined 13 percent.
The light and heavy manufacturing customer sectors have historically correlated with manufacturing employment levels and manufacturing output. Manufacturing output decreased 4.8%15.5% from September 2007June 2008 to September 2008, andJune 2009 while manufacturing employment levels declined 3.2%decreased 12.2%. Non-farm employment was essentially flat from September 2007These declines contributed to September 2008. Grainger’s sales to manufacturing customers, as well as to most other customer-end markets, continued to grow in the third quarter of 2008. This reflects the success of Grainger’s on-going market expansion and product line expansion initiatives, as well as Grainger’s growing diversification into markets other than manufacturing. Current economic growth projections for 2008 industrial production and GDP are (0.4%) and 1.4%, respectively.
For the first nine months of 2008, the Company had $142.0 million of capital expenditures, of which $35.3 million related to its U.S. market expansion program. The Company is targeting completion of its investments in the U.S. market expansion program in 2008.
Matters Affecting Comparability
There were 64 sales day in the third quarter of 2008 compared to 63 sales days in the third quarter of 2007. There were 192 sales days in the first nine months of 2008 compared to 191 sales days in the first nine months of 2007.
Grainger’s operating results for the first nine months of 2008 include the operating results of the Highsmith acquisition made by Lab Safety in July 2008. Since the acquisition date, those results have been included in the Lab Safety segment. See the Segment Analysis in the following Management’s Discussion and Analysis.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Three Months Ended Septemberan almost 30 2008
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:
| Three Months Ended September 30, | |
| Items in Condensed Consolidated Statements of Earnings | |
| | | | | | |
| | | As a Percent of Net Sales | | | |
| | | 2008 | | 2007 | | Percent Increase (Decrease) | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 10.9 | % |
| Cost of merchandise sold | | | 59.6 | | | | 60.2 | | | | 9.8 | |
| Gross profit | | | 40.4 | | | | 39.8 | | | | 12.5 | |
| Operating expenses | | | 27.8 | | | | 29.3 | | | | 5.3 | |
| Operating earnings | | | 12.6 | | | | 10.5 | | | | 32.8 | |
| Other income (expense) | | | (0.2 | ) | | | 0.2 | | | | (197.0 | ) |
| Income taxes | | | 4.8 | | | | 4.1 | | | | 30.3 | |
| Net earnings | | | 7.6 | % | | | 6.6 | % | | | 28.3 | % |
Grainger’s net sales of $1,839.5 million for the third quarter of 2008 increased 10.9% compared with sales of $1,658.6 million for the comparable 2007 quarter. Daily sales were up 9.2%. An increase in net sales was realized in all three segments of the business. The overall increase in net sales was led by low double-digit growth in the government sector and high single-digit growth in the reseller sector. Approximately 3 percentage points of the sales growth came from Grainger’s ongoing strategic initiatives, market expansion and product line expansion. For the quarter, sales were positively affected by price increases of approximately 4 percentage points and there was minimal effect from foreign exchange. Sales were negatively affected by 1 percentage point due to apercent decline in the sales of seasonal products. Prices were increased to offset cost inflation. Refer toheavy manufacturing customer sector for the Segment Analysis belowthree and six months ended June 30, 2009, and a low double-digit percent decline in the light manufacturing customer sector for further detail ofthe three and six months ended June 30, 2009.
Grainger expects some continued decline in sales and ongoing strategic initiatives.
Gross profitincreased pricing pressure throughout the remainder of $742.3 million for the third quarter of 2008 increased 12.5%. The gross profit marginyear. Grainger plans to use its financial strength in an effort to increase its market share during the third quarterdownturn. Some reductions to operating margins are expected as a result of 2008 increased 0.6 percentage point when compared to the same period in 2007, primarily due to positive inflation recovery partially offset by unfavorable selling price category mix.
Operating expenses of $510.9 million for the third quarter of 2008 increased 5.3%. Operating expenses grew slower thanexpanding the sales growth primarily dueforce and implementing additional customer incentives. Grainger expects these actions to non-payroll operating expenses includingcost approximately $25-50 million this year, although it is more likely these costs will trend towards the lower advertising expenses, and a lower provision for bad debts due to improved collection effectiveness. Comparisons also benefited from one extra sales day which increasedend of the leverage on fixed costs.
Operating earnings for the third quarter of 2008 totaled $231.5 million, an increase of 32.8% over the third quarter of 2007. This earnings growth exceeded the sales growth due to an improvement in gross profit margin and positive operating expense leverage.range.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Given the continued decline in economic trends, in February 2009 Grainger announced the elimination of 300-400 jobs across the Company’s workforce. Grainger incurred approximately $8 million in severance expenses for the elimination of 298 of these positions during the first six months of 2009.
Matters Affecting Comparability
There were 127 sales days for the first six months of 2009, compared to 128 sales days for the first six months of 2008.
Since June 2009, Grainger’s operating results have included the operating results of Asia Pacific Brands India Private Limited (India) in the Other Businesses segment. See Note 3 to the Consolidated Financial Statements for additional information regarding this business acquisition.
Effective January 1, 2009 Grainger revised its segment disclosure. Prior year amounts have been restated in a consistent manner.
Results of Operations – Three Months Ended June 30, 2009
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:
| | |
| | | Three Months Ended June 30, | |
| | | | | Percent | |
| | | As a Percent of Net Sales | | Increase | |
| | | 2009 | | 2008 | | (Decrease) | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | (12.7 | )% |
| Cost of merchandise sold | | | 59.2 | | | | 59.8 | | | | (13.6 | ) |
| Gross profit | | | 40.8 | | | | 40.2 | | | | (11.5 | ) |
| Operating expenses | | | 30.7 | | | | 29.7 | | | | (9.6 | ) |
| Operating earnings | | | 10.1 | | | | 10.5 | | | | (16.7 | ) |
| Other income (expense) | | | (0.2 | ) | | | 0.0 | | | | 406.2 | |
| Income taxes | | | 3.9 | | | | 4.1 | | | | (16.9 | ) |
| Net earnings | | | 6.0 | % | | | 6.4 | % | | | (18.3 | )% |
Grainger’s net sales of $1,533.3 million for the second quarter of 2009 decreased 12.7% compared with sales of $1,756.9 million for the comparable 2008 quarter. For the quarter, sales were positively affected by pricing of approximately 6 percentage points which was offset by a decline in volume of 18 percentage points. In addition, sales were negatively affected by approximately 2 percentage points due to foreign exchange, while sales from acquisitions contributed approximately 1 percentage point. Sales in all customer segments declined except sales to the government, which increased in the low single digits. The overall decrease in net sales was led by an almost 30 percent decline in the heavy manufacturing customer sector, a low 20 percent decline in the reseller customer sector, and a mid-teen percent decline in the contractor customer sector. The light manufacturing customer sector declined in the low double-digits. Refer to the Segment Analysis below for further details.
Gross profit of $625.0 million for the second quarter of 2009 decreased 11.5%. The gross profit margin during the second quarter of 2009 increased 0.6 percentage point when compared to the same period in 2008, primarily due to positive inflation recovery, partially offset by unfavorable selling price category mix.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating expenses of $471.0 million for the second quarter of 2009 decreased 9.6%. Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs. In addition, the second quarter of 2008 included a $6.0 million provision for a legal reserve that did not repeat in 2009.
Operating earnings for the second quarter of 2009 totaled $153.9 million, a decrease of 16.7% compared to the second quarter of 2008. The decrease in operating earnings was primarily due to the decline in sales combined with operating expenses, which declined at a lower rate than sales. These declines were partially offset by an increase in gross profit margin.
Net earnings for the thirdsecond quarter of 2008 increased2009 decreased by 28.3%18.3% to $140.0$92.5 million from $109.1$113.2 million in 2007.2008. The growthdecrease in net earnings for the quarter primarily resulted from the improvementdecline in operating earnings. Lower interest income, lower equity in net income of unconsolidated entities and foreign currency transaction losses also contributed to the decline in net earnings. Diluted earnings per share of $1.21 in the second quarter of 2009 were 14.8% lower than the $1.42 for the second quarter of 2008 primarily due to the decrease in net earnings, partially offset by lower interest income, higher interest expense andshares outstanding. In the first quarter of 2009 Grainger adopted FSP 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” resulting in a higher income tax rate versus 2007. Dilutedone cent reduction to the previously reported 2008 second quarter earnings per share of $1.79 in the third quarter of 2008 were 38.8% higher than the $1.29 for the third quarter of 2007. This improvement was higher than the percentage increase for net earnings due to lower shares outstanding primarily a result of the Company’s share repurchase program.share.
Segment Analysis
The following comments at the segment level refer to external and intersegment net sales. Comments at the business unit level include external and inter- and intrasegment net sales. See Note 8 to the Condensed Consolidated Financial Statements.
Grainger Branch-basedUnited States
Net sales were $1,523.5$1,353.8 million for the thirdsecond quarter of 2008, an increase2009, a decrease of $138.2$189.1 million, or 10.0%12.3%, when compared with net sales of $1,385.3$1,542.9 million for the same period in 2007. Daily sales were up 8.3%.
2008. Sales in the United States were up 9.6%. Daily sales were up 7.9% with growth in all customer end marketssegments declined except retail,sales to the government, which was flat.increased in the low single digits. The increasedecrease in net sales was led by low double-digit growthan almost 30 percent decline in the governmentheavy manufacturing customer sector, and high single-digit growtha high-teen percent decline in the reseller sector. Sales were negatively affected by 1 percentage point due tocustomer sector, and a mid-teen percent decline in the sales of seasonal products. Market expansion and product line expansion added approximately 3 percentage points to overall growthcontractor customer sector. The light manufacturing customer sector declined in the quarter.
Results for the market expansion program were as follows:
| | 2008 Third Quarter | |
| | Sales Increase | | Percent Complete | |
Phase 1 (Atlanta, Denver, Seattle) | | 11% | | 100% | |
Phase 2 (Four markets in Southern California) | | 5% | | 100% | |
Phase 3 (Houston, St. Louis, Tampa) | | 10% | | 100% | |
Phase 4 (Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington D.C.) | | 4% | | 100% | |
Phase 5 (Dallas, Detroit, Greater New York, Phoenix) | | 5% | | 95% | |
Phase 6 (Chicago, Minneapolis, Pittsburgh, San Francisco) | | 7% | | 95% | |
The Company is targeting completion of phases 5 and 6 in 2008 and expects to see continued incremental sales growth from the program for another five years.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
low double-digits.
The U.S. branch-based business hassegment added approximately 60,00050,000 net new products to the catalog issued in 2008 which will be featured in the February 2009 catalog but are currently for sale on grainger.com.2009. The 20082009 catalog includes a total of 183,000233,000 products.
Sales in Mexico increased 16.8% Grainger will continue to expand the product line throughout the year and anticipates having almost 300,000 products in the third quarter of 2008 versus 2007. Daily sales were up 15.0%. In local currency, daily sales were up 8.2% primarily driven by increased market share coming from the ongoing branch expansion program. Daily sales were led by growth to the natural resources sector of the economy, partially offset by weakness in manufacturing and hospitality.2010 catalog. There are 38,000 Lab Safety products also currently available on grainger.com.
The segment gross profit margin increased 0.81.1 percentage pointpoints in the 2008 third2009 second quarter over the comparable quarter of 2007,2008. The improvement in gross profit margin was primarily due todriven by positive inflation recovery, partially offset by unfavorable selling price category mix.
Operating expenses in this segment were up 3.6%down 7.0% in the thirdsecond quarter of 20082009 versus the thirdsecond quarter of 2007.2008. Operating expenses grew slower than the sales growthdecreased primarily due to non-payroll operating expenses including lower advertising expenses,commissions, bonuses and a lower provision for bad debts due to improved collection effectiveness. Comparisons also benefited from one extra sales day which increased the leverage on fixed costs.
For the segment, operating earnings of $226.6 million for the third quarter of 2008 increased 30.9% over the $173.1 million for the third quarter of 2007. This earnings improvement exceeded the sales growth rate due to improved gross profit margin and positive operating expense leverage. Included in these results were lower profits in Mexico primarily due to branch expansion related expenses, ongoing losses in China and start up expenses related to the new branch in Panama.
Acklands - Grainger Branch-based
Net sales at Acklands - Grainger were $190.8 million for the third quarter of 2008, an increase of $27.3 million, or 16.7%, when compared with $163.5 million for the same period in 2007. On a daily basis sales increased 14.8%. There was minimal effect from foreign exchange as sales increased 16.2% in local currency, or 14.4% on a daily basis. The results benefited from continued strength from sales to oil sands, natural gas, construction, government, mining, and agriculture customers,sharing accruals, partially offset by weaknessan increase in the forestry sector.
The gross profit margin increased 0.7 percentage point in the 2008 third quarter versus the third quarter of 2007, primarily due to positive inflation recovery, partially offset by increased freight and handlingseverance costs.
Operating expenses were up 14.9% in the third quarter of 2008. The segment achieved positive operating expense leverage as operating expenses increased 14.4% in local currency.
Operating earnings of $14.2 million for the third quarter of 2008 were up $3.9 million, or 38.3%. The earnings improvement was primarily a result of an improved gross profit margin and operating expenses which grew at a slower rate than sales.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the segment, operating earnings of $176.5 million for the second quarter of 2009 decreased 15.8% from $209.7 million for the second quarter of 2008. The decrease in operating earnings for the quarter is primarily due to the decline in net sales and operating expenses which declined at a lower rate than sales, partially offset by an increase in gross profit margin.
Lab SafetyCanada
Net sales at Lab Safety were $127.3$160.7 million for the thirdsecond quarter of 2008, an increase2009, a decrease of $16.1$37.2 million, or 14.5%18.8%, when compared with $197.9 million for the same period in 2007. Daily2008. In local currency daily sales were up 12.7%.
Sales from the Highsmith acquisition made in July 2008 contributed all of the sales growthdecreased 6.3% for the quarter. Excluding this acquisitionThe decrease in net sales was led by declines in the forestry, manufacturing, transportation and mining industries, partially offset by growth forin the remainder ofutilities and infrastructure related sectors, as well as strong sales to the business was down 4.6% on a daily basis.government.
The gross profit margin decreased 1.7%2.1 percentage points in the third2009 second quarter of 2008 fromversus the third quarter of 2007. Gross profit margin was down primarily due to product mix, as the Highsmith acquisition negatively impacted margins due to lower margin rates, and from a negative selling price category mix.
Operating expenses were up 20.2% in the thirdsecond quarter of 2008, primarily due to costs associated with the Highsmith acquisition. Excluding Highsmith, operatingnegative inflation recovery due to unfavorable foreign exchange rates on inventory purchases. In addition, price competition, an increase in lower margin sales to large customer and government accounts and an increase in inventory reserves negatively affected gross profit margins.
Operating expenses were down 1.3% for18.8% in the thirdsecond quarter of 2009 versus the second quarter of 2008. In local currency, operating expenses decreased 6.3% primarily due to lower commissions and bonus accruals, and other non-payroll related expenses including lower travel and advertising costs, partially offset by an increase in severance costs.
Operating earnings of $12.2$9.7 million for the thirdsecond quarter of 2008 decreased 14.1%2009 were down $6.3 million, or 39.2% from $16.0 million for the second quarter of 2008. In local currency operating earnings declined 30.1% in the second quarter of 2009 over the same period in 2007. Operating2008. The decrease in earnings decreasedwas primarily due to athe decline in sales and gross profit marginmargin.
Other Businesses
Net sales for other businesses, which include Mexico, India, Puerto Rico, China and Panama, were down 8.6% for the second quarter of 2009 when compared to the same period in 2008. Sales in Mexico decreased 26.8% in the second quarter of 2009 versus the second quarter of 2008, and in local currency daily sales decreased 6.6%. In China, sales increased 44.3% in the second quarter of 2009 versus the second quarter of 2008. Operating losses for other businesses were $3.3 million or a 70.4% increase over operating expenses which grew at a higher rate than sales.losses of $1.9 million in the second quarter of 2008. The operating losses are primarily due to the volume declines in Mexico and the incorporation of India’s results for the month of June.
Other Income and Expense
Other income and expense was an expense of $2.8$2.3 million and $0.5 million in the thirdsecond quarter of 2009 and 2008, compared with $2.9 million of incomerespectively. This increase in the third quarter of 2007. This decreaseexpense was primarily attributabledue to foreign currency transaction losses and to lower interest income due to lower interest rates and higher interest expense in 2008 due to increased borrowings.rates.
Income Taxes
Grainger’s effective income tax rates were 38.8%39.0% and 38.4%38.6% for the thirdsecond quarter of 2009 and 2008, and 2007, respectively. Excluding the effect of equityThe increase in net income of unconsolidated entities, the effective rate is due to lower earnings reported in non-U.S. jurisdictions with lower tax rates, as well as an increase in current estimates of the overall U.S. state income tax rate was 38.9% for the third quarter of 2008 and 38.5% for the third quarter of 2007.rates.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – NineSix Months Ended SeptemberJune 30, 20082009
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:
| | |
| | | Six Months Ended June 30, | |
| | | | | Percent | |
| | | As a Percent of Net Sales | | Increase | |
| | | 2009 | | 2008 | | (Decrease) | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | (12.3 | )% |
| Cost of merchandise sold | | | 58.2 | | | | 59.5 | | | | (14.2 | ) |
| Gross profit | | | 41.8 | | | | 40.5 | | | | (9.5 | ) |
| Operating expenses | | | 31.4 | | | | 29.7 | | | | (7.3 | ) |
| Operating earnings | | | 10.4 | | | | 10.8 | | | | (15.5 | ) |
| Other income (expense) | | | (0.1 | ) | | | 0.0 | | | | (1,473.4 | ) |
| Income taxes | | | 4.0 | | | | 4.2 | | | | (15.5 | ) |
| Net earnings | | | 6.3 | % | | | 6.6 | % | | | (17.0 | )% |
| Nine Months Ended September 30, | |
| Items in Condensed Consolidated Statements of Earnings | |
| | | | | | |
| | | As a Percent of Net Sales | | | |
| | | 2008 | | 2007 | | Percent Increase (Decrease) | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 9.4 | % |
| Cost of merchandise sold | | | 59.5 | | | | 59.8 | | | | 8.9 | |
| Gross profit | | | 40.5 | | | | 40.2 | | | | 10.1 | |
| Operating expenses | | | 29.0 | | | | 29.7 | | | | 6.8 | |
| Operating earnings | | | 11.5 | | | | 10.5 | | | | 19.6 | |
| Other income (expense) | | | (0.1 | ) | | | 0.2 | | | | (126.3 | ) |
| Income taxes | | | 4.4 | | | | 4.1 | | | | 17.6 | |
| Net earnings | | | 7.0 | % | | | 6.6 | % | | | 16.4 | % |
Grainger’s net sales of $5,257.4$2,998.5 million for the first ninesix months of 2008 increased 9.4%2009 decreased 12.3% compared with sales of $4,806.3$3,417.9 million for the comparable 20072008 period. Daily sales were up 8.8%down 11.6%. An increaseFor the first six months of 2009, sales were positively affected by pricing of approximately 6 percentage points which was offset by a decline in netvolume of 17 percentage points. In addition, sales was realizedwere negatively affected by 2 percentage points due to foreign exchange, while sales from acquisitions contributed approximately 1 percentage point. Sales in all threecustomer segments ofdeclined except sales to the business.government, which increased in the low single digits. The increaseoverall decrease in net sales was led by low double-digit sales growth in the government sector and mid single-digit growth in the light manufacturing, commercial and reseller sectors. Approximately 3 percentage points of the sales growth came from Grainger’s ongoing strategic initiatives, market expansion and product line expansion, with another 1 percentage point from foreign exchange. For the first nine months of 2008, sales were positively affected by price increases of approximately 3 percentage points. Sales were negatively affected by approximately 1 percentage point due to aan almost 30 percent decline in the sales of seasonal products.heavy manufacturing customer sector, a high-teen percent decline in the reseller customer sector and a mid-teen percent decline in the contractor customer sector. The light manufacturing customer sector declined in the low double-digits. Refer to the Segment Analysis below for further detail of sales and ongoing strategic initiatives.details.
Gross profit of $2,182.2$1,254.4 million for the first ninesix months of 2008 increased 10.1%2009 decreased 9.5%. The gross profit margin during the first ninesix months of 20082009 increased 0.31.3 percentage pointpoints when compared to the same period in 20072008, primarily due to positive inflation recovery, partially offset by unfavorable selling price category mix.
Operating expenses of $1,526.0$941.2 million for the first ninesix months of 2009 decreased 7.3%. Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, other non-payroll related expenses including lower travel and training costs, partially offset by an increase in severance costs. In addition, the first six months of 2008 increased 6.8%. Operating expenses grew atincluded a slower rate than sales due primarily to non-payroll operating expenses including advertising and professional services. Comparisons also benefited from one extra sales day which increased the leverage on fixed costs.$6.0 million provision for a legal reserve that did not repeat in 2009.
Operating earnings for the first ninesix months of 20082009 totaled $602.1$313.1 million, an increasea decrease of 19.6% over15.5% from the first ninesix months of 2007. This2008. The decrease in operating earnings growth exceeded the sales growthwas primarily due to the decline in sales combined with operating expenses, which declined at a lower rate than sales. These declines were partially offset by an improvementincrease in gross profit margin and positive operating expense leverage.margin.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net earnings for the first ninesix months of 2008 increased 16.4%2009 decreased by 17.0% to $367.4$188.8 million from $315.7$227.4 million in 2007.2008. The growthdecrease in net earnings for the first ninesix months primarily resulted from the improvementdecline in operating earnings. Lower interest income, lower equity in net income of unconsolidated entities and foreign currency transaction losses also contributed to the decline in net earnings. Diluted earnings per share of $2.46 in the first six months of 2009 were 13.1% lower than the $2.83 for the first six months of 2008 primarily due to the decrease in net earnings, partially offset by lower interest income, higher interest expense andshares outstanding. During the first quarter of 2009 Grainger adopted FSP 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” resulting in a higher income tax rate versus 2007. Dilutedthree cent reduction to the previously reported earnings per share of $4.65 in the first nine months of 2008 were 26.7% higher than the $3.67 for the first ninesix months of 2007. This improvement was higher than the percentage increase for net earnings due to lower shares outstanding primarily a result of the Company’s share repurchase program.2008.
Segment Analysis
The following comments at the segment level refer to external and intersegment net sales. Comments at the business unit level include external and inter- and intrasegment net sales. See Note 8 to the Condensed Consolidated Financial Statements.
Grainger Branch-basedUnited States
Net sales were $4,346.9$2,662.5 million for the first ninesix months of 2008, an increase2009, a decrease of $332.4$349.8 million, or 8.3%11.6%, when compared with net sales of $4,014.5$3,012.3 million for the same period in 2007.2008. Daily sales were up 7.7%.
Sales in the United States were up 8.0%down 10.9%. Daily sales were up 7.5% with growthSales in all customer end markets,segments declined except sales to the retail customer market,government, which was flat.increased in the low single digits. The increasedecrease in net sales was led by low double-digit sales growth in the government sector, and mid single-digit growth in the light manufacturing, commercial and reseller sectors. Sales were negatively affected by approximately 1 percentage point due to aan almost 30 percent decline in the sales of seasonal products. Market expansionheavy manufacturing customer sector and product line expansion added approximately 4 percentage points to overall growth fora mid-teen percent decline in the first nine months of 2008.
Results forcontractor and reseller customer sectors. The light manufacturing customer sector declined in the market expansion program were as follows:
| | 2008 Year-to-Date | |
| | Sales Increase | | Percent Complete | |
Phase 1 (Atlanta, Denver, Seattle) | | 11% | | 100% | |
Phase 2 (Four markets in Southern California) | | 8% | | 100% | |
Phase 3 (Houston, St. Louis, Tampa) | | 12% | | 100% | |
Phase 4 (Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington D.C.) | | 4% | | 100% | |
Phase 5 (Dallas, Detroit, Greater New York, Phoenix) | | 6% | | 95% | |
Phase 6 (Chicago, Minneapolis, Pittsburgh, San Francisco) | | 8% | | 95% | |
low double-digits.
The Company is targeting completion of phases 5 and 6 in 2008 and expects to see continued incremental sales growth from the program for another five years.
The U.S. branch-based business hassegment added approximately 60,00050,000 net new products to the catalog issued in 2008 which will be featured in the February 2009 catalog but are currently for sale on grainger.com.2009. The 20082009 catalog includes a total of 183,000233,000 products. Grainger will continue to expand the product line throughout the year and anticipates having almost 300,000 products in the 2010 catalog. There are 38,000 Lab Safety products also currently available on grainger.com.
The segment gross profit margin increased 1.7 percentage points in the 2009 first six months over the comparable 2008 period. The improvement in gross profit margin was primarily driven by positive inflation recovery, partially offset by unfavorable selling price category mix.
Operating expenses in this segment were down 5.2% in the first six months of 2009 versus the first six months of 2008. Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.
For the segment, operating earnings of $349.7 million for the first six months of 2009 decreased 13.6% over $404.9 million for the first six months of 2008. The decrease in operating earnings for the six months is primarily due to the decline in net sales and operating expenses which declined at a lower rate than sales, partially offset by an increase in gross profit margin.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales in Mexico increased 19.8% inCanada
Net sales were $304.5 million for the first ninesix months of 2008 versus 2007. Daily2009, a decrease of $70.7 million, or 18.8%, when compared with $375.2 million for the same period in 2008. On a daily basis sales were up 19.2%decreased 18.2%. In local currency daily sales were up 14.3% primarily drivendecreased 2.4% for the first six months of 2009. The decrease in net sales was led by increased market share coming from the ongoing branch expansion program.
The segment gross profit margin increased 0.4 percentage pointdeclines in the first nine months of 2008 over the comparable 2007 period, primarily driven by positive inflation recovery,forestry, manufacturing, transportation and mining industries, partially offset by unfavorable selling price category mix and increased freight and handling costs.
Operating expenses in this segment were up 5.3%growth in the first nine months of 2008. Operating expenses grew at a slower rate thanutilities and infrastructure related sectors, as well as strong sales due primarily to non-payroll operating expenses including advertising and professional services. Comparisons also benefited from one extra sales day which increased the leverage on fixed costs.
For the segment, operating earnings of $596.4 million for the first nine months of 2008 increased 18.1% over the $505.0 million for the first nine months of 2007. This earnings improvement exceeded the sales growth rate due to an improved gross profit margin and positive operating expense leverage. Included in these results were lower profits in Mexico primarily due to branch expansion related expenses, ongoing losses in China and start up expenses related to the new branch in Panama.
Acklands - Grainger Branch-based
Net sales at Acklands - Grainger were $565.9 million for the first nine months of 2008, an increase of $101.0 million, or 21.7%, when compared with $464.9 million for the same period in 2007. Daily sales were up 21.1%. In local currency, daily sales increased 12.0% The results benefited from continued strength from sales to government, construction, oil sands, natural gas, mining and agriculture customers, partially offset by weakness in the forestry sector.government.
The gross profit margin increased 0.4decreased 1.7 percentage pointpoints in the first ninesix months of 2009 versus the comparable period in 2008, over the first nine months of 2007. Theprimarily due to negative inflation recovery due to unfavorable foreign exchange rates, price competition and an increase was primarily driven by positive inflation recovery.in lower margin sales to large customer and government accounts.
Operating expenses were up 19.3%down 17.5% in the first ninesix months of 2009 versus the first six months of 2008. The segment achieved positive operating expense leverage asIn local currency operating expenses increased 10.3% in local currency. The increase in operating expenses wasdecreased 1.3% primarily due to payrolllower commissions and benefits as a result of increased headcount and merit increases,bonus accruals, and other operating expenses.non-payroll related expenses including lower travel and advertising costs, partially offset by an increase in severance costs.
Operating earnings of $41.9$15.7 million for the first ninesix months of 20082009 were up $12.1down $12.0 million, or 40.9%. This43.3% from $27.7 for the first six months of 2008. In local currency operating earnings improvement exceededdeclined 32.9% in the sales growth ratefirst six months of 2009 from the same period in 2008. The decrease in earnings was primarily due to an improvedthe decline in gross profit margin and positive operating expenses which declined at a slower rate than sales.
Other Businesses
Net sales for other businesses, which include Mexico, India, Puerto Rico, China and Panama, were down 8.4% for the first six months of 2009 when compared to the same period in 2008. Daily sales decreased 7.7%. Daily sales in Mexico decreased 25.0% in the first six months of 2009 versus the first six months of 2008, and in local currency daily sales decreased 2.3%. In China daily sales increased 61.9% in the first six months of 2009 versus the first six months of 2008. Operating losses for other businesses were $6.2 million or flat versus the first six months of 2008. The operating losses are primarily due to the volume declines in Mexico and the incorporation of India’s results for the month of June.
Other Income and Expense
Other income and expense leverage.was an expense of $3.0 million in the first six months of 2009 compared with $0.2 million of income in the first six months of 2008. This decrease in income was primarily due to foreign currency transaction losses and to lower interest income due to lower interest rates.
Income Taxes
Grainger’s effective income tax rates were 39.1% and 38.7% for the first six months of 2009 and 2008, respectively. The increase in the effective rate is due to lower earnings reported in non-U.S. jurisdictions with lower tax rates, as well as an increase in current estimates of the overall U.S. state income tax rates.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Lab Safety
Net sales at Lab Safety were $350.0 million for the first nine months of 2008, an increase of $19.3 million, or 5.9%, when compared with $330.7 million for the same period in 2007. Daily sales were up 5.3%. Excluding sales from the Highsmith acquisition, sales growth for the remainder of the business was down approximately 1%.
The gross profit margin decreased 0.5 percentage point in the first nine months of 2008 from the first nine months of 2007. Gross profit margin was down as a result of unfavorable selling price category mix and product mix partially offset by positive inflation recovery.
Operating expenses were up 9.2% in the first nine months of 2008. Expenses grew at a faster rate than sales primarily due to the costs associated with the Highsmith acquisition. Excluding Highsmith, operating expenses were up approximately 2% for the first nine months of 2008.
Operating earnings of $40.6 million for the first nine months of 2008 decreased 6.0% versus the same period in 2007. Operating earnings decreased due to a decline in gross profit margin and operating expenses which grew at a higher rate than sales.
Other Income and Expense
Other income and expense was an expense of $2.5 million in the first nine months of 2008 compared with income of $9.7 million in the first nine months of 2007. This decrease was primarily attributable to lower interest income due to lower interest rates and lower average cash balances and higher interest expense in 2008 due to increased borrowings.
Income Taxes
Grainger’s effective income tax rates were 38.7% and 38.5% for the first nine months of 2008 and 2007, respectively. Excluding the effect of equity in net income of unconsolidated entities, the effective income tax rate was 38.9% for the first nine months of 2008 and 38.5% for the first nine months of 2007.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
For the ninesix months ended SeptemberJune 30, 2008,2009, working capital of $1,436.5$1,443.4 million increased by $462.1$61.0 million when compared to $974.4$1,382.4 million at December 31, 2007.2008. The increase in working capital primarily relates to increasesa decrease in cashaccrued liabilities due to lower compensation and receivables and the replacement of short-term borrowings with long-term debt.profit sharing accruals. The ratio of current assets to current liabilities was 3.0increased to 3.5 at SeptemberJune 30, 2008,2009, versus 2.22.8 at December 31, 2007.2008, primarily due to the decline in other current liabilities as a result of annual cash payments for profit sharing and bonuses.
Net cash provided by operating activities was $335.3$232.6 million and $337.8$118.7 million for the ninesix months ended SeptemberJune 30, 20082009 and 2007,2008, respectively. Net cash flows from operating activities serve as Grainger’s primary source to fund its growth initiatives. Contributing to cash flows from operations were net earnings in the first ninesix months ended SeptemberJune 30, 20082009 of $367.4$188.8 million and the effect of non-cash expenses such as stock-based compensation, and depreciation and amortization. Partially offsetting these amounts were changes in operating assets and liabilities, which resulted in a net use of cash of $155.8$41.2 million for the first ninesix months of 2008. The principal operating uses of cash were increases in accounts receivable and inventory, as well as a reduction of other current liabilities. The increase in receivables was due to a higher sales volume. The increase in inventories was due to the product line expansion initiative and higher inventories to improve customer service through better product availability.2009. Other current liabilities declined primarily due to annual cash payments for profit sharing and bonuses. Partially offsetting these usesThe principal operating sources of cash were decreases in cash was an increase in trade accounts payable.receivable and inventory due to lower sales volume.
Net cash used in investing activities was $152.9$49.6 million and $143.9$89.2 million for the ninesix months ended SeptemberJune 30, 20082009 and 2007,2008, respectively. Cash expended for additions to property, buildings, equipment and capitalized software was $140.5$53.5 million in the first ninesix months of 20082009 versus $143.5$108.3 million in the first ninesix months of 2007.2008. Capital expenditures in 2009 included the continued funding of infrastructure improvement projects in the market expansion initiativesdistribution centers in the United States, Canada and Mexico. Cash expended for business acquisitionsIn 2008, cash used was $34.0partially offset by proceeds on sales of marketable securities.
Net cash used in financing activities was $163.8 million for the first ninesix months of 2008ended June 30, 2009, versus $4.7 million in the first nine months of 2007.
Netnet cash provided by financing activities was $69.9of $122.3 million for the ninesix months ended SeptemberJune 30, 2008, versus net2008. The $286.1 million difference in cash used of $457.1 millionversus provided in financing activities for the ninesix months ended SeptemberJune 30, 2007. For the nine months ended September 30, 2008, cash provided by financing activities included proceeds from long-term borrowings2009 was due primarily to a four-year bank term loan of $500 million and proceeds and excess tax benefits realized from stock options exercised of $52.8 millionobtained in 2008 versus $130.5 million in 2007.May 2008. Amounts used in financing activities included treasury stock purchases of $307.6$127.7 million for the first ninesix months of 20082009 versus $647.3$271.0 million for the first ninesix months of 2007.2008. Grainger repurchased 4.31.9 million shares compared to 7.1and 3.5 million shares in the first ninesix months of 2007.2009 and 2008, respectively. As of SeptemberJune 30, 2008,2009, approximately 8.85.7 million shares of common stock remained available under Grainger’s repurchase authorization. Grainger also used cash in financing activities to pay dividends to shareholders of $90.4$65.2 million and $84.8$59.4 million for the first ninesix months of 2009 and 2008, and 2007, respectively, and paid off $85.0 million ofrespectively. Offsetting these financing cash outlays were net proceeds from short-term borrowings in the first nine months of 2008 versus an increase of $144.4$2.2 million in the first ninesix months of 2007.
W.W. Grainger, Inc.2009 versus payments of $88.6 million in the first six months of 2008. Also offsetting cash outlays were proceeds and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
excess tax benefits realized from stock options exercised of $26.9 million and $41.3 million in the first six months of 2009 and 2008, respectively.
Grainger maintains a debt ratio and liquidity position that provide flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit. Total debt as a percent of total capitalization was 19.8%20.2% at SeptemberJune 30, 2008,2009, and 5.0%20.7% at December 31, 2007. The increase in total debt as a percent of total capitalization was primarily the result of long-term borrowings. See Note 6 to the Condensed Consolidated Financial Statements for additional borrowings detail.2008.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.
Accounting policies are considered critical when they require management to make assumptions about matters that are uncertain at the time the estimate is made and when different estimates than those management reasonably could have made have a material impact on the presentation of Grainger’s financial condition, changes in financial condition or results of operations. For a description of Grainger’s critical accounting policies see the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS2008.
Forward-Looking Statements
This Form 10-Q contains statements that are not historical in nature but concern future results and business plans, strategies and objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Grainger has generally identified such forward-looking statements by using words such as "continued incremental sales growth,“anticipates, anticipated, believes, continue to expand, continued, continues to believe it complies, could, effort to increase, expect, expected, expects, intended, intends, is targeting,likely, may, percent complete,plans, projected, projections, should, be completed,tended, timing and outcome are uncertain, and will" or similar expressions.
Grainger cannot guarantee that any forward-looking statement will be realized although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievement of future results is subject to risks and uncertainties which could cause Grainger’s results to differ materially from those which are presented.
Factors that could cause actual results to differ materially from those presented or implied in a forward-looking statement include, without limitation: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the outcome of pending and future litigation or governmental or regulatory proceedings; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes;catastrophes and unanticipated weather conditions.
Caution should be taken not to place undue reliance on Grainger’s forward-looking statements and Grainger undertakes no obligation to publicly update the forward-looking statements, whether as a result of new information, future events or otherwise.
PART I – FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.2008.
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There were no changes in Grainger’s internal control over financial reporting that occurred during the third quarter,first six months, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.
Items 1A, 3 4 and 54 not applicable.
As previously reported, in December 2007, the Company received a letter in December 2007 from the Commercial Litigation Branch of the Civil Division of the Department of Justice (the “DOJ”) regarding the Company’s contract with the United States General Services Administration (the “GSA”). The letter suggested that the Company had not complied with its disclosure obligations and the contract’s pricing provisions, and had potentially overcharged government customers under the contract.
Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing. The timing and outcome of these discussions are uncertain and could include settlement or civil litigation by the DOJ to recover, among other amounts, treble damages and penalties under the False Claims Act. While this matter is not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in materialsignificant payments by the Company. The Company continues to believe that it has complied with the GSA contract in all material respects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – ThirdSecond Quarter
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
| | | | | |
April 1 – April 30 | – | – | – | 5,683,580 | shares |
| | | | | |
May 1 – May 31 | – | – | – | 5,683,580 | shares |
| | | | | |
June 1 – June 30 | – | – | – | 5,683,580 | shares |
| | | | | |
Total | – | – | – | | |
Period | Total Number of Shares Purchased (A) | Average Price Paid per Share (B) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
| | | | | |
July 1 – July 31 | 350,000 | $83.38 | 350,000 | 8,811,100 | shares |
| | | | | |
August 1 – August 31 | 3,375 | $89.15 | – | 8,811,100 | shares |
| | | | | |
Sept. 1 – Sept. 30 | – | – | – | 8,811,100 | shares |
| | | | | |
Total | 353,375 | $83.44 | 350,000 | | |
(A) | There were 3,375no shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards. |
(B) | Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs. Activity is reported on a trade date basis. |
(C) | Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors. OnDirectors on April 30, 2008, Grainger announced that its2008. The Board of Directors granted authority to repurchase up to 10 million shares. The program has no specified expiration date. No share repurchase plan or program expired or was terminated during the period covered by this report. Activity is reported on a trade date basis. |
Item 5. Other Information
Effective as of July 29, 2009, the Company’s Board of Directors amended the Company by-laws.
Article II, to clarify the provisions requiring advance notice of all shareholder proposals and nominations whether the materials would be included in the Company’s or the proposing party’s proxy materials and to ensure that any shareholder making a nomination or proposal fully discloses his ownership interest in Company stock, including voting and economic positions, as well as any voting agreements.
Article XII, to clarify the provisions requiring preservation of director and officer existing indemnification rights and not allow any future action to decrease or diminish the right to indemnification including advancement of expenses, and that indemnification and advancement of expenses is a continuing right and that this right remains available after a change in control.
W.W. Grainger, Inc. and Subsidiaries
Item 6. | Exhibits |
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| (a) | Exhibits (numbered in accordance with Item 601 of Regulation S-K) |
| | (3) | Bylaws, as amended. |
| | (31) | Rule 13a – 14(a)/15d – 14(a) Certifications |
| | | (a) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | (b) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | (32) | Section 1350 Certifications |
| | | (a) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | (b) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 7, 2008July 31, 2009 | By: | /s/ R. L. Jadin |
| | R. L. Jadin, Senior Vice President and Chief Financial Officer |
Date: November 7, 2008July 31, 2009 | By: | /s/ G. S. Irving |
| | G. S. Irving, Vice President and Controller |