The improvement in other income and expense was primarily attributable to the gains realized on the sale of several facilities and the combination of higher interest income and lower interest expense versus the 2004 quarter. The gains from the sales of fixed assets resulted principally from the sale of seven facilities: four located in the United States that were related to the market expansion program and three located in Canada. The change to net interest income in 2005 from net interest expense in the prior year was primarily the result of higher average cash balances and higher interest rates and lower interest expense resulting from the payoff of debt.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
For the six months ended June 30, 2005, working capital of $1,102.2 million increased by $9.9 million when compared to $1,092.3 million at December 31, 2004. The ratio of current assets to current liabilities was 2.8 at June 30, 2005, versus 2.6 at December 31, 2004.
Net cash flows provided by operating activities were $114.6 million and $161.9 million for the six months ended June 30, 2005 and 2004, respectively. Net cash flows from operating activities serve as the Company’s primary source of funding its growth initiatives. Contributing to cash flows from operations were net earnings in the first six months ended June 30, 2005 of $154.4 million and the change in non-cash items such as deferred income taxes and depreciation and amortization. Partially offsetting these amounts were Changes in operating assets and liabilities – net of business acquisition, which resulted in a net use of cash of $115.6 million for the first six months of 2005. The principal uses of cash were increases in accounts receivable and inventories and a reduction of other current liabilities. The increase in accounts receivable was due primarily to higher sales, partially offset by improved collections. The increase in inventories was primarily in the Branch-based Distribution segment and was due to volume increases, inventory additions to provide greater availability of products and market expansion. Other current liabilities declined primarily due to the annual cash payments for profit sharing and bonuses.
Net cash used in investing activities was $89.8 million and $34.9 million for the six months ended June 30, 2005 and 2004, respectively. In the first half of 2005, Grainger continued funding of the Company’s growth initiatives with the purchase of AW Direct and its ongoing investment in the market expansion program. The cash portion of the AW Direct purchase price was approximately $24.8 million. AW Direct is included as part of the Lab Safety segment. Cash expended for additions to property, buildings, equipment and capitalized software was $77.2 million in the first six months of 2005 versus $41.8 million in the first six months of 2004.
Net cash used in financing activities was $127.9 million and $42.4 million for the six months ended June 30, 2005 and 2004, respectively. Grainger’s purchases of treasury stock were $56.4 million higher in the first six months of 2005 as Grainger repurchased 1,840,400 shares in the first six months of 2005, as compared with 975,900 shares in the comparable period of 2004. As of June 30, 2005, approximately 5.2 million shares of common stock remained available under Grainger’s repurchase authorization. Dividends paid to shareholders were $39.7 million and $35.0 million for the first half of 2005 and 2004, respectively. Partially offsetting these cash outlays were proceeds from stock options exercised of $14.6 million and $39.0 million for the six months ended June 30, 2005 and 2004, respectively.
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, 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 0.5% at both June 30, 2005 and December 31, 2004, respectively.
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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 highly 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, 2004.
Forward-Looking Statements
This document may contain forward-looking statements under the federal securities laws. The forward-looking statements relate to Grainger’s expected future financial results and business plans, strategies and objectives and are not historical facts. They are often identified by qualifiers such as: “believes,” “estimated,” “intended,” “expect,” “projections,” “may,” “will,” “preliminary,” “ongoing” or similar expressions. There are risks and uncertainties the outcome of which could cause Grainger’s results to differ materially from what is projected.
Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on Grainger’s businesses; failure to develop or implement new technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns; disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; and other difficulties in achieving or improving margins or financial performance.
Trends and projections could also be affected by general industry and market conditions, gross domestic product growth rates, general economic conditions, including industrial production, interest rate and currency rate fluctuations, global and other conflicts, job creation and employment levels in manufacturing, non-farm and other sectors, and other factors.
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W.W. Grainger, Inc. and Subsidiaries
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, 2004. |
| Item 4. | | Controls and Procedures |
| | 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 period covered by this report that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting. |
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W.W. Grainger, Inc. and Subsidiaries
PART II — OTHER INFORMATION
Items 3, 4 and 5 not applicable.
Item 1. Legal Proceedings
In its Form 10-Q for the quarter ended September 30, 2004, the Company reported an administrative complaint filed by the U.S. Environmental Protection Agency (EPA) against Grainger for alleged violations of federal clean-air regulations. The Company and the EPA settled this matter on May 18, 2005. Under the settlement, the Company agreed to pay a penalty of $177,156 for the alleged violations, without admission of liability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – Second 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 | | | | 1,113 | | $ | 54.29 | | | 516,400 | | | 6,324,900 shares | |
May 1 — May 31 | | | | 176 | | $ | 54.82 | | | 757,600 | | | 5,567,300 shares | |
June 1 — June 30 | | | | 413 | | $ | 54.73 | | | 327,000 | | | 5,240,300 shares | |
|
|
|
|
|
| Total | | | | 1,702 | | $ | 54.63 | | | 1,601,000 | | | 5,240,300 shares | |
| | (A) | | The total number of shares purchased includes Grainger’s retention of 1,702 shares to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards and shares exchanged for the exercise of options. |
| | (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 settlement date basis. |
| | (C) | | Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors. As reported in Grainger’s Form 10-Q for the quarter ended September 30, 2002, which was filed on November 11, 2002, authority under the program was restored to 10 million shares on October 30, 2002. The program has no specified expiration date. No share repurchase plan or program expired, or was terminated, during the period covered by this report. |
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| | (a) | Exhibits (numbered in accordance with Item 601 of Regulation S-K) |
| | | (11) | Computations of Earnings per Share. |
| | | (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: July 27, 2005 |
By: |
/s/ P. O. Loux
P. O. Loux, Senior Vice President,
Finance and Chief Financial Officer |
Date: July 27, 2005 |
By: |
/s/ J. E. Andringa
J. E. Andringa, Vice President
and Controller |
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