15 Pages Complete QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ------------------------------- X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1995 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ------------ to ------------------ ----------------------------------- Commission file number 1-5684 I.R.S. Employer Identification Number 36-1150280 W.W. Grainger, Inc. (an Illinois Corporation) 5500 W. Howard St. Skokie, IL. 60077-2699 Telephone: (708) 982-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 50,831,162 shares of the Company's Common Stock were outstanding as of July 31, 1995. (1) Part I - FINANCIAL INFORMATION W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except for per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1995 1994 1995 1994 Net sales $813,518 $768,554 $1,620,345 $1,474,923 Cost of merchandise sold 527,097 499,762 1,042,219 950,505 -------- -------- --------- ---------- Gross profit 286,421 268,792 578,126 524,418 Warehousing, marketing, and administrative expenses 219,091 197,260 432,621 382,356 Restructuring charges - 330 - 667 ------- ------- ------- ------- Total operating expenses 219,091 197,590 432,621 383,023 ------- ------- ------- ------- Operating earnings 67,330 71,202 145,505 141,395 Other income or (deductions) Interest income 2 2 157 14 Interest expense (1,080) (671) (1,163) (1,010) Unclassified-net (226) 361 (96) 73 -------- ------- ------ ------- (1,304) (308) (1,102) (923) -------- ------ ------ ------- Earnings before income taxes 66,026 70,894 144,403 140,472 Income taxes 26,542 28,570 58,050 56,610 -------- ------ ------- ------- Net earnings $39,484 $42,324 $86,353 $83,862 ======= ======= ======= ======= Net earnings per common and common equivalent share $0.77 $0.83 $1.69 $1.64 ===== ===== ===== ===== Average number of common and common equivalent shares outstanding 51,219,169 51,260,049 51,217,933 51,245,390 ========== ========== ========== ========== Cash dividends paid per share $0.23 $0.20 $0.43 $0.38 ===== ===== ===== ===== The accompanying notes are an integral part of these financial statements. (2) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) (Unaudited) ASSETS June 30, 1995 Dec. 31, 1994 CURRENT ASSETS Cash and cash equivalents $ 16,239 $ 15,292 Accounts receivable, less allowance for doubtful accounts of $17,015 in 1995 and $15,333 in 1994 388,211 345,793 Inventories 607,491 519,966 Prepaid expenses 13,880 14,233 Deferred income tax benefits 67,773 68,362 --------- --------- Total current assets 1,093,594 963,646 PROPERTY, BUILDINGS, AND EQUIPMENT 859,396 810,217 Less accumulated depreciation and amortization 367,802 341,075 --------- --------- Property, buildings, and equipment-net 491,594 469,142 OTHER ASSETS 95,373 101,963 --------- --------- TOTAL ASSETS $1,680,561 $1,534,751 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 125,350 $ 11,134 Current maturities of long-term debt 26,287 26,449 Trade accounts payable 249,157 226,459 Accrued liabilities 133,115 172,359 Income taxes 6,688 22,650 --------- --------- Total current liabilities 540,597 459,051 LONG-TERM DEBT (less current maturities) 955 1,023 DEFERRED INCOME TAXES 11,656 15,177 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 28,870 26,695 SHAREHOLDERS' EQUITY Cumulative Preferred Stock - $5.00 par value - authorized 6,000,000 shares, issued and outstanding, none - - Common Stock - $0.50 par value - authorized 150,000,000 shares, issued and outstanding, 50,824,991 shares in 1995 and 50,749,681 shares in 1994 25,412 25,375 Additional contributed capital 82,899 81,796 Unearned restricted stock compensation (38) (61) Retained earnings 990,210 925,695 --------- --------- Total shareholders' equity 1,098,483 1,032,805 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,680,561 $1,534,751 ========== ========== The accompanying notes are an integral part of these financial statements. (3) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Six Months Ended June 30, 1995 1994 Cash flows from operations: Net earnings $86,353 $83,862 Provision for losses on accounts receivable 5,826 5,530 Depreciation and amortization: Property, buildings, and equipment 29,885 26,103 Intangibles and goodwill 7,988 8,906 Restructuring charges - non cash _ 847 Change in operating assets and liabilities net of effect of restructuring charges: (Increase) in accounts receivable (48,244) (78,446) (Increase) in inventories (87,525) (32,721) Decrease in prepaid expenses 353 1,179 Increase in trade accounts payable 22,698 39,359 (Decrease) in other current liabilities (39,244) (9,275) (Decrease) in current income taxes payable (15,962) (6,618) Increase in accrued employment related benefits costs 2,175 2,450 (Decrease) in deferred income taxes (2,932) (4,731) Other-net 223 8 ------- -------- Net cash (used in) provided by operating activities (38,406) 36,453 ------- --------- Cash flows from investing activities: Additions to property, buildings, and equipment -net of dispositions (52,647) (42,980) Other - net (1,288) (277) ------- ------- Net cash (used in) investing activities (53,935) (43,257) ------- ------- Cash flows from financing activities: Net proceeds from short-term debt 114,216 35,389 Long-term debt payments (230) (315) Stock incentive plan 1,140 887 Cash dividends paid (21,838) (19,272) ------- ------- Net cash provided by financing activities 93,288 16,689 ------- ------- Net increase in cash and cash equivalents 947 9,885 Cash and cash equivalents at beginning of year 15,292 2,572 -------- -------- Cash and cash equivalents at end of period $ 16,239 $ 12,457 ======== ======== The accompanying notes are an integral part of these financial statements. (4) W.W. Grainger, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF STATEMENT PRESENTATION The financial statements and the related notes are condensed and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 1994, included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated from the consolidated financial statements. Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. The unaudited financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Checks outstanding of $45,515,000 and $37,088,000 were included in trade accounts payable at June 30, 1995 and December 31, 1994, respectively. 2. DIVIDEND On August 2, 1995, the Board of Directors declared a quarterly dividend of 23 cents per share, payable September 1, 1995 to shareholders of record on August 14, 1995. (5) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1995 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1994: Net Sales --------- Net sales of $813,518,000 in the 1995 second quarter increased 5.9% from net sales of $768,554,000 for the comparable 1994 period. There were 64 sales days in both the 1995 and 1994 second quarter. The year 1995 will have one less sales day than did the year 1994 (254 versus 255). The sales increase for the 1995 second quarter compared with the 1994 second quarter was principally volume related. The rate of sales increase for the second quarter of 1995 was significantly less than the rate of increase for the first quarter of 1995. Contributing to this decline were two factors: 1. A slowing in the growth of the general economy. 2. The sales of seasonal products having a larger negative effect in the second quarter versus the first quarter. The volume increase primarily represented the continuing effects of the Company's market initiatives. These initiatives included new product additions, the expansion of branch facilities, adding Zone Distribution Centers (ZDCs), and the National Accounts program. Daily sales to National Account customers within the Company's core branch-based business increased about 19%, on a comparable basis, over the 1994 second quarter. Partially offsetting the sales increase was a decline in the sales of seasonal products by the core business. The core business experienced selling price increases of about 1.4% when comparing the second quarters of 1995 and 1994. (6) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings ------------ Net earnings of $39,484,000, in the 1995 second quarter, decreased 8.2%, when compared with 1994 second quarter net earnings of $43,033,000, which excludes the effect of after tax restructuring charges of $709,000. When considering the effect of the restructuring charges, net earnings for the 1995 second quarter decreased 6.7%. The net earnings decrease versus the sales increase was due primarily to operating expenses increasing at a faster rate than net sales, partially offset by slightly higher gross profit margins. The Company's gross profit margin increased by 0.24 percentage point for the second quarter of 1995 as compared with the same 1994 period. Contributing to the improvement were: 1. A favorable product mix primarily resulting from a decline in sales of seasonal products. The sales of seasonal products have historically had lower than average gross profit margins. 2. Cost of goods sold for the 1994 second quarter included $847,000 of restructuring charges attributable to business unit integration. Offsetting the above positive items was a negative effect from a change in selling price category mix. This change primarily resulted from the growth in sales to National Accounts. Warehousing, marketing, and administrative (operating) expenses increased 10.9% for the 1995 second quarter compared with the 1994 second quarter. This increase was greater than the sales increase primarily due to the Company's continuing investment in the business infrastructure to support its market initiatives and to the rapid decline in the rate of sales growth experienced throughout the quarter. Of note were the following factors relating to infrastructure investments: 1. Increased data processing expenses related to the ongoing significant upgrade and replacement of the branch order entry, order processing, and inventory management system. This initiative will continue throughout 1995. 2. Increased systems development expenses designed to support Grainger Integrated Supply Operations' role in managing transactions for the Company and its best-in-class distribution partners. 3. Increased expenses related to the continuing enhancement and reconfiguration of the Company's logistics network. The quarter included expenses related to the ramp-up of three additional ZDCs. Also included were expenses associated with converting the Niles, Illinois Regional Distribution Center to a National Distribution Center. (7) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings (continued) ------------ Also contributing to operating expenses increasing faster than the sales increase were: 1. Payroll and related benefits costs increasing somewhat faster than the rate of sales. The Company was unable to balance its workforce due to the sharp decline in the rate of sales growth, particularly in the month of June. 2. Increased freight-out expenses resulting from several factors including: a. Proportionally more shipments qualifying for prepaid freight. b. Proportionally more orders being transferred within the ZDC/branch network. This resulted in orders being shipped longer distances. These incremental expenses, by policy, were not billed to customers. Partially offsetting these unfavorable comparisons was lower amortization of goodwill and other acquisition related costs associated with acquired and start-up businesses. Operating expenses for the 1994 second quarter included $330,000 of restructuring charges in connection with the Company's previously announced integration of its business units and its administrative support functions. The Company's effective income tax rate for the second quarter of 1995 was 40.2% versus 40.3% in the comparable 1994 period. (8) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1994: Net Sales --------- Net sales of $1,620,345,000 in the first six months of 1995 increased 9.9% from net sales of $1,474,923,000 in the same 1994 period. There were 128 sales days in both six month periods. The year 1995 will have one less sales day than did the year 1994 (254 versus 255). The sales increase for the first six months of 1995 when compared with the same 1994 period was principally volume related. The volume increase can be explained primarily by the same factors discussed for the second quarter (see Second Quarter Net Sales discussion). Daily sales to National Account customers within the Company's core branch-based business increased about 22%, on a comparable basis, over the same 1994 period. The core business experienced selling price increases of about 1.0% when comparing the first six month period for each year. (9) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Earnings ------------ Net earnings for the 1995 first half increased 1.9% to $86,353,000 compared with 1994 net earnings of $84,774,000, which excludes the effect of after tax restructuring charges of $912,000. When considering the effect of the restructuring charges, net earnings for the 1995 first half increased 3.0%. The earnings increase was less than the sales increase due primarily to operating expenses increasing at a faster rate than net sales, partially offset by slightly higher gross profit margins. The Company's gross profit margin was virtually the same when comparing the first six months of 1995 and 1994 (0.12 percentage point improvement). This change in gross profit margin was primarily the result of the factors discussed for the second quarter (see Second Quarter Net Earnings discussion). Warehousing, marketing, and administrative (operating) expenses increased 12.9% for the first six months of 1995 as compared with the same 1994 period. This increase was greater than the increase in net sales due primarily to the factors discussed for the second quarter (see Second Quarter Net Earnings discussion). Operating expenses for the first six months of 1994 included $667,000 of restructuring charges in connection with the Company's previously announced integration of its business units and its administrative support functions. The Company's effective income tax rate for the six months of 1995 was 40.2% versus 40.3% in the comparable 1994 period. The Company's effective income tax rate for the full year 1994 would have been 40.4% without the effects of the restructuring charges recorded during 1994. (10) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 1995, working capital increased $48,402,000. The ratio of current assets to current liabilities was 2.0 at June 30, 1995 and 2.1 at December 31, 1994. The Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents. The Company continues to maintain a low debt ratio and a strong liquidity position, which provide flexibility in funding working capital needs, capital expenditures, and business acquisitions. Total debt as a percent of shareholders' equity was 13.9% at June 30, 1995 and 3.7% at December 31, 1994. For the first six months of 1995, $16,894,000 was expended for land, buildings, and facilities improvements, and $35,593,000 for data processing, office, and other equipment; a total of $52,487,000. (11) W.W. Grainger, Inc. and Subsidiaries PART II - OTHER INFORMATION Items 1, 2, 3, 4, and 5 not applicable EXHIBIT INDEX ------------- Item 6 Exhibits and Reports on Form 8-K (numbered in accordance with Item 601 of regulation S-K). (a) Exhibits (11) Computation of Earnings per Common and Common Equivalent Share 14 (27) Financial Data Schedule 15 (b) Reports on Form 8-K - None. (12) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. W.W. Grainger, Inc. ----------------------------------- (Registrant) Date: August 10, 1995 By: /s/ J. D. Fluno ----------------------------------- J. D. Fluno, Vice Chairman Date: August 10, 1995 By: /s/ P. O. Loux ----------------------------------- P. O. Loux, Vice President, Finance Date: August 10, 1995 By: /s/ R. D. Pappano ----------------------------------- R. D. Pappano, Vice President, Financial Reporting and Investor Relations (13)