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SECURITIES AND EXCHANGE COMMISSION 41 PAGES COMPLETE
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer
incorporation or organization) Identification No.)
5500 W. Howard St., Skokie, IL 60077-2699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 708/982-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $0.50 par value, and
accompanying Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,631,362,198 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 11, 1994.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock $0.50 par value 50,718,755 shares outstanding as of March 11, 1994
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 27, 1994 are incorporated by reference
into Part III hereof.
The Exhibit Index appears on pages 13 and 14 in the sequential numbering system.
(The Securities and Exchange Commission has not approved or disapproved of this
report nor has it passed on the accuracy or adequacy hereof.)
1
CONTENTS
Page
PART I
Item 1: BUSINESS...........................................................3-5
THE COMPANY.........................................................3
GRAINGER DIVISION.................................................3-4
OTHER DISTRIBUTION BUSINESSES.....................................4-5
INDUSTRY SEGMENTS...................................................5
COMPETITION.........................................................5
EMPLOYEES...........................................................5
Item 2: PROPERTIES...........................................................6
Item 3: LEGAL PROCEEDINGS....................................................6
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................7
Executive Officers of the Company.............................................7
PART II
Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.....................................8
Item 6: SELECTED FINANCIAL DATA..............................................8
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS..........................9-12
RESULTS OF OPERATIONS............................................9-11
FINANCIAL CONDITION.............................................11-12
INFLATION AND CHANGING PRICES......................................12
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................12
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................12
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................12
Item 11: EXECUTIVE COMPENSATION..............................................12
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......12
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................12
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 13-14
Signatures...................................................................15
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................16
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................17-36
2
PART I
Item 1: Business
The Company
The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois
in 1928. It is a nationwide distributor of equipment, components, and supplies
to the commercial, industrial, contractor, and institutional markets and regards
itself as a service business. As used herein, "Company" means W.W. Grainger,
Inc. and/or its subsidiaries as the context may require.
The Company's Corporate headquarters are located in Skokie, Illinois. Corporate
management has responsibility for overall organization, planning, business
development, and control of Company activities and provides specific
coordination and guidance in the areas of Accounting, Administrative Services,
Aviation, Communications, Compensation and Benefits, Data Systems and Data
Processing, Finance, Government Regulations, Human Resources, Industrial
Relations, Insurance and Risk Management, Internal Audit, Legal, Planning,
Real Estate and Construction Services, Security and Safety, Taxes, Training
and Development, and Treasury Services.
Data processing equipment is used extensively for inventory control, order
processing, branch inventory replenishment, requirements planning, invoicing,
accounts receivable, and numerous other accounting and management purposes.
During 1993, an average of 77,800 sales transactions were completed daily.
The Company utilizes a satellite communications network which substantially
reduces its reliance on phone lines by linking branches and other facilities
together via a network control center. This results in the instantaneous
transmittal of information, which expedites the completion of sales
transactions and stock replenishment.
The Company does not engage in basic or substantive product research and
development activity. New items are added regularly to its product line
on the basis of market research as well as recommendations of its employees,
customers, and suppliers. Before being added, a new item must satisfy many
evaluation tests and other rigid requirements.
Grainger Division
The Company's Grainger Division is a nationwide distributor of air compressors,
air conditioning and refrigeration equipment and components, air tools and
paint spraying equipment, blowers, communication equipment, electric motors,
fans, gearmotors, heating equipment and controls, hydraulic equipment,
janitorial supplies, lighting fixtures and components, liquid pumps, material
handling and storage equipment, motor controls, office equipment, outdoor
equipment, plant and office maintenance equipment, power and hand tools,
power generating plants, power transmission components, safety products, and
shop tools, as well as other items shown in its General Catalog.
The Grainger Division sells principally to contractors, service shops,
industrial and commercial maintenance departments, manufacturers, hotels, and
health care and educational facilities. Sales in 1993 represented approximately
17,400,000 transactions averaging $127 each and were made to more than 1,200,000
customers. Average 1993 purchases per customer approximated $1,886, although
average 1993 purchases per National Accounts customer were significantly higher.
Sales to the largest single customer, the United States Postal Service, were
0.4% of sales. The Grainger Division estimates that approximately 32% of 1993
sales consisted of items bearing the Company's registered trademarks: "DAYTON"
(principally electric motors, fans, heaters, and lighting); "DEMCO" (power
transmission belts); "DEM-KOTE" (spray paints); "SPEEDAIRE" (air compressors);
and "TEEL" (liquid pumps). The Company has taken steps to protect these
trademarks against infringement and believes that they will remain available
for future use in its business. Sales of remaining items consisted of other well
recognized brands.
The Grainger Division purchases from more than 1,200 product suppliers most of
which are manufacturers. The largest supplier in 1993, a diversified
manufacturer, through 26 of its divisions, accounted for 13.0% of purchases.
No material difficulty has been encountered with respect to sources of supply.
The Grainger Division offers its line of products at competitive prices through
a nationwide network of branches (337 at December 31, 1993). An average branch
has 13 employees and handles about 200 transactions per day. Large,
3
computer controlled stocks of over 53,000 items maintained at three Regional
Distribution Centers, located in the Chicago area, Greenville County, South
Carolina, and Kansas City, Missouri, provide the branches and customers with
protection against variable demand and delayed factory deliveries. Each branch
tailors its inventory to local customer preferences and actual product demand.
In 1993, the Grainger Division invested more than $60,000,000 in branch
expansion, which consisted of new branches, relocated branches, and additions
to branches.
To provide faster replenishment for local branches and to create greater scale
in shipping, the Grainger Division launched a new logistics strategy in 1993.
Zone Distribution Centers (ZDCs), a new level in the distribution system, are
approximately 200,000 square feet, or roughly ten times the size of a typical
branch. ZDCs "breakbulk" daily shipments from their respective Regional
Distribution Centers for local branch replenishment, and handle shipped orders
for their zone. ZDCs are also capable of filling almost all local branch will
call customer backorders within 24 hours.
The Grainger Division National Accounts Program addresses the needs of large
multisite companies by focusing on simplifying customers' plant maintenance,
repair, and operation (MRO) purchasing activities and providing consistent
service and pricing at each customer location. Sales to National Accounts
increased 25% in 1993 over the prior year, and National Accounts relationships
have been established with over 300 of the nation's largest companies.
During 1993, the Company created Grainger Sanitary Supplies and Equipment.
This was accomplished by combining elements of its two regional sanitary
supply distributors, Jani-Serv and Ball Industries (Ball), with the Grainger
Division's line of professional cleaning products. This new structure is
intended to preserve Jani-Serv's and Ball's market expertise and penetration,
and to leverage upon the Company's existing investments in product line, sales,
distribution, warehousing, and management information systems. Ball continues as
the Company's cleaning chemical mixing operation, and, during 1993, its
capacity was tripled. Ball now produces a full line of floor and carpet care
products under the Ball brand name. These replace Jani-Serv private label
products, and are the first Ball products to be distributed nationwide.
The Grainger Division employs sales representatives who call on existing and
prospective customers. Sales representatives are paid a salary and commission.
In addition, a sales force of market specialists and national account
specialists has been developed to serve individualized markets and National
Accounts. These specialists are paid a salary only. The Grainger Division
employed 1,081 sales representatives, market specialists, and national account
specialists at December 31, 1993.
An important selling tool is the General Catalog, which has been published
continuously since 1927 and has grown to 2,952 pages listing over 53,000 items
together with extensive technical and application data. Two separate editions,
totaling 2,811,000 copies, were published during 1993. The most current edition
was issued in January 1994.
In response to requests from several large, multisite customers to expand
product offerings, the Grainger Division now handles an additional 20,000
non-catalog items, which include full lines of products from key suppliers.
The Grainger Electronic Catalog brings directly to the customer's place of
business a fast, easy way to select and order products. It is a state-of-the-
art system that uses PC-based software and CD-ROM technology. Through the
Electronic Catalog, the customer can use a variety of ways to describe a
needed product, and then review Grainger's offerings, complete with
specifications, prices, and pictures. Other Electronic Catalog features include
a cross-reference function that allows customers to retrieve product
information using their own stock numbers. Enhancements for 1993 included
a selection guide which responds to customer inquiries about motors, casters,
and light bulbs and automatically identifies those items that meet the
customer's specifications, and an order pad function which permits customers
to browse and check their orders. More than 13,000 copies of the Electronic
Catalog are currently in use. The Electronic Catalog is also used at the
branches as a training tool and a resource for identifying appropriate products
for customers' applications.
Allied Safety, Inc. (Allied), Bossert Industrial Supply, Inc. (Bossert), Lab
Safety Supply, Inc. (Lab Safety), and Parts Company of America (PCA)
Since 1989, the Company has been building other distribution businesses
intended to complement the market position held by the Grainger Division.
Developed through acquisitions and internal expansion, these businesses have
made the Company an active participant in three key markets: safety products,
general industrial supplies, and repair and replacement parts. As with the
development of Grainger Sanitary Supplies and Equipment, similar collaborative
4
efforts between the Grainger Division and these businesses are being
evaluated. Initial programs begun in 1993 will be reviewed and expanded as
appropriate in future years.
Allied and Lab Safety serve the safety products markets with such items as
respiratory systems, protective clothing, and other equipment used in the
workplace and in environmental clean-up operations. Allied was formed by
combining three acquired regional safety businesses in the Southeast and
Northwest. Allied began a national expansion program during 1993 by extending
its sales activities to Baton Rouge, Chicago, Dallas, Los Angeles, and
Philadelphia. Allied intends to use the Grainger Division's ZDCs to support its
national expansion. Lab Safety, acquired in 1992, is a leading national direct
marketer of safety products, and is the largest catalog safety supply
distributor in the United States, serving 340,000 customers from its facilities
in Janesville, Wisconsin. The Lab Safety General Catalog, its primary selling
selling tool, has over 900 pages, listing approximately 26,000 items.
Bossert is the Midwest leader in general industrial supplies distribution, with
19 locations serving more than 35,000 customers in 14 states. Built through
a series of acquisitions, Bossert provides cutting tools and abrasives, MRO
products, and other supplies used in manufacturing processes. Bossert
distributes more than 250,000 items. In 1993, Bossert and the Grainger Division
combined efforts for several team selling approaches to large customers, taking
advantage of the trend of these businesses toward consolidation of suppliers. By
presenting their combined product offerings, both businesses' value added
packages were increased. The potential of further joint efforts will continue
to be evaluated.
Parts distribution continues to expand under the PCA name. PCA distributes
approximately 110,000 repair and replacement parts, takes orders 24 hours a
day, 365 days per year, and ships stocked items within 24 hours of an order,
most on the same business day. PCA offers value to both suppliers and customers.
By developing "partnerships" with small and medium manufacturers, PCA assumes
complete responsibility for purchasing, stocking, and managing the supplier's
parts inventory. PCA gives value to customers by being a single source for many
different repair and replacement parts and by offering valuable technical
assistance.
Industry Segments
The Company has concluded that its business is within a single industry
segment. For information as to the Company's consolidated revenue and operating
earnings see Item 7, "Management's Discussion and Analysis of Financial
Condition and the Results of Operations," and Item 8, "Financial Statements
and Supplementary Data." The total assets of the Company for the last five years
were: 1993, $1,376,664,000; 1992, $1,310,538,000; 1991, $1,216,554,000; 1990,
$1,162,437,000; and 1989, $1,065,245,000.
Competition
The Company faces competition in all markets which it serves, principally from
manufacturers (including some of the Company's own suppliers) that sell directly
to certain segments of the market, from wholesale distributors, and from
certain retail enterprises.
The principal means by which the Company competes with manufacturers and other
distributors is by providing local stocks, efficient service, sales
representatives, competitive prices, and its several catalogs, which include
product descriptions and in certain cases, extensive technical and application
data. The Company believes that it can effectively compete on a price basis
with its larger manufacturing competitors on small orders, but that such
manufacturers may enjoy a cost advantage in filling large orders.
The Company serves a number of diverse markets, and is able in some markets to
reasonably estimate the Company's competitive position within that market.
However, taken as a whole the Company is unable to determine its market shares
relative to others engaged in whole or in part in similar activities.
Employees
As of December 31, 1993, the Company had 10,219 employees, of whom 8,550 were
full-time and 1,669 were part-time or temporary. Of the 10,219 employees, the
Company had 609 Corporate employees. The Grainger Division included 4,414
branch employees, 1,081 sales representatives, and 2,096 office and regional
distribution center employees. There were 195 Allied employees, 202 Ball
employees, 468 Bossert employees, 172 Jani-Serv employees, 671 Lab employees,
and 311
5
PCA employees. The Company has never had a major work stoppage and
believes that its employee relations are good.
Item 2: Properties
As of December 31, 1993, the 337 Grainger Division branches total 7,065,000
square feet, an increase of approximately 5.7% over 1992. This increase is a
result of branch expansion discussed in Item 1. Most branches are located in
or near major metropolitan areas, many in industrial parks. Branches range in
size from 5,800 to 58,000 square feet and average approximately 21,000 square
feet. A typical owned branch is on one floor, is of masonry construction,
consists primarily of warehouse space, contains an air conditioned office and
sales area, and has off the street parking for customers and employees. The
Company considers that its properties are generally in good condition and well
maintained, and are suitable and adequate to carry on the Company's business.
The significant facilities of the Company are briefly described below:
Size in
Location Facility and Use Square Feet
- ------------------- --------------------------------------------- ------------
Chicago Area (1) General Offices 478,000
Niles, IL (1) General Office & Regional Distribution Center 938,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County,SC(1) Regional Distribution Center 1,090,000
Nationwide (2) 337 Grainger Division branch locations 7,065,000
Nationwide (3) Other Facilities 2,062,000
----------
Total square feet 13,068,000
==========
(1) These facilities are both owned and leased with leases expiring between 1994
and 1998. The owned facilities are not subject to any mortgages.
(2) Grainger Division branches consist of 235 owned and 102 leased properties.
The owned facilities are not subject to any mortgages.
(3) Other facilities represent leased and owned general offices, distribution
centers, and branches. The owned facilities are not subject to any
mortgages.
Item 3: Legal Proceedings
There are pending various legal and administrative proceedings involving the
Company that are incidental to the business. It is not expected that the
outcome of any such proceeding will have a material adverse effect upon
the Company's consolidated financial position.
6
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1993.
Executive Officers of the Company
Following is information about the Executive Officers of the Company. Executive
Officers of the Company generally serve on a calendar year basis.
Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- -------------------- ----------------------------------------------------------
James M. Baisley (61) Vice President and General Counsel and, since 1991,
Secretary
Edward C. Bender (56) Vice President, Information Services
Donald E. Bielinski (44) Vice President and Chief Financial Officer since 1989.
Previously, Mr. Bielinski served as Vice President,
Finance.
Jere D. Fluno (52) Vice Chairman. Mr. Fluno is a member of the Office of
the Chairman.
Robert J. Gariano (44) Group Vice President, a position assumed in 1993 after
serving as Vice President, Specialty Distribution.
Before joining the Company in 1988, Mr. Gariano served
as General Manager of the Lexan Division of General
Electric Company.
David W. Grainger (66) Chairman of the Board and a member of the Office of
the Chairman. Mr. Grainger also served as President
from August 1992 to March 1994.
Richard L. Keyser (51) President and Chief Operating Officer since March
1994. Previously, Mr. Keyser served as Executive
Vice President. a position assumed in August 1992.
He also serves as President of the Grainger Division,
a position assumed in 1991. Prior thereto, Mr. Keyser
served as Executive Vice President and General Manager
of the Grainger Division. Mr. Keyser is a member of
the Office of the Chairman.
Neal Ormond III (52) Vice President, Human Resources.
Robert D. Pappano (51) Vice President and Treasurer.
Richard D. Quast (63) Vice President, Real Estate.
Paul J. Wallace (47) Vice President and Controller since 1989. Previously,
Mr. Wallace served as Director, Taxes.
7
PART II
Item 5: Markets for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales
prices for the common stock, and the dividends declared and paid for each
calendar quarter during 1993 and 1992, are shown below.
Prices
------------------
Quarters High Low Dividends
- -----------------------------------------------------------------------
1993 First $61 1/8 $54 5/8 $0.165
Second $66 3/4 $58 3/4 0.18
Third $62 1/2 $52 0.18
Fourth $59 1/4 $51 5/8 0.18
- -----------------------------------------------------------------------
Year $66 3/4 $51 5/8 $0.705
- -----------------------------------------------------------------------
1992 First $58 1/4 $50 5/8 $0.155
Second $60 1/4 $45 1/8 0.165
Third $51 1/4 $39 0.165
Fourth $61 $48 7/8 0.165
- -----------------------------------------------------------------------
Year $61 $39 0.65
- -----------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 1, 1994 was 2,100.
Item 6: Selected Financial Data
Years Ended December 31,
-----------------------------------------------------
(In thousands of dollars except for per share amounts)
1993 1992 1991 1990 1989
----------- --------- --------- ---------- ---------
Net sales $2,628,398 $2,364,421 $2,077,235 $1,935,209 $1,727,454
Net earnings before
cumulative effect of
accounting changes 149,267 137,242 127,737 126,775 119,563
Cumulative effect of
accounting changes (820) - - - -
Net earnings 148,447 137,242 127,737 126,775 119,563
Net earnings per
common and common
equivalent share before
cumulative effect of
accounting changes 2.88 2.58 2.37 2.31 2.19
Cumulative effect of
accounting changes (0.02) - - - -
Net earnings per common
and common equivalent
share 2.86 2.58 2.37 2.31 2.19
Total assets 1,376,664 1,310,538 1,216,554 1,162,437 1,065,245
Long-term debt 6,214 6,936 11,327 14,471 2,776
Cash dividends paid per share$0.705 $0.65 $0.61 $0.565 $0.50
8
Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations
RESULTS OF OPERATIONS
The following table, which is included as an aid to understanding changes in the
Company's Consolidated Statements of Earnings, presents various items in the
earnings statements expressed as a percentage of net sales for the years ended
December 31, 1993, 1992, 1991, and 1990, and the percentage of increase
(decrease) in such items in 1993, 1992, and 1991 from the prior year.
Years Ended December 31,
------------------------------------------------------
Items in Consolidated Statement Percent of Increase
of Earnings as a Percentage of (Decrease) from
Net Sales Prior Year
------------------------------- ---------------------
1993 1992 1991 1990 1993 1992 1991
-------- ------ ------- ------ ------- ------ ------
Net sales 100.0% 100.0% 100.0% 100.0% 11.2% 13.8% 7.3%
Cost of merchandise sold 62.9 63.6 64.9 65.1 9.9 11.6 7.1
Warehousing, marketing, and
administrative expenses 27.6 26.7 25.2 24.4 14.5 20.4 11.0
Other (income) or
deductions, net 0.1 0.1 (0.2) (0.3) 76.3 (123.5) 7.9
Income taxes 3.8 3.8 3.9 4.2 12.0 10.2 (0.1)
Net earnings 5.6% 5.8% 6.2% 6.6% 8.2% 7.4% 0.8%
While the Company has concluded that its business is within a single industry
segment, the following sales and operating earnings breakdown for the years
ended December 31, 1993 and 1992 is provided to assist in understanding its
financial performance.
Unallocated
Other Corporate
Grainger Business Expenses and
Year Ended December 31, 1993 Division Units (A) Eliminations-Net Total
- ---------------------------- --------- -------- ---------------- ---------
(In thousands)
Net sales:
Grainger Division $2,214,003 $ - $ (1,374) $2,212,629
Other Business Units - 423,162 (7,393) 415,769
---------- ---------- --------- ----------
$2,214,003 $ 423,162 $ (8,767) $2,628,398
========== ========== ========= ==========
Operating earnings (loss)
before acquisition related
costs $ 298,871 $ 12,810 $(33,972) $ 277,709
Acquisition costs (B) - (25,549) - (25,549)
---------- ----------- --------- ------------
Operating earnings (loss) $ 298,871 $ (12,739) $(33,972) $ 252,160
========== =========== ========= ============
Year Ended December 31, 1992
- ----------------------------
Net sales:
Grainger Division $2,025,115 $ - $ (1,037) $2,024,078
Other Business Units - 345,393 (5,050) 340,343
---------- ---------- --------- ----------
$2,025,115 $ 345,393 $ (6,087) $2,364,421
========== ========== ========= ==========
Operating earnings (loss)
before acquisition related
costs $ 274,709 $ 6,409 $(32,016) $ 249,102
Acquisition costs (B) - (20,671) - (20,671)
---------- ---------- --------- -----------
Operating earnings (loss) $ 274,709 $ (14,262) $(32,016) $ 228,431
========== =========== ========= ===========
(A)Allied, Ball, Bossert, Jani-Serv, Lab Safety, and PCA.
(B)Acquisition costs are defined as amortization of goodwill and other
acquisition related costs.
9
Net sales
The 1993 Grainger Division net sales increase of 9.3% was comprised of a 7.4%
volume increase and a 1.8% price increase. All geographic regions contributed
to the sales growth, with the percent increase for regions east of the
Mississippi being higher than for regions in the west. The volume increase was
attributable to a combination of the Company's market initiatives, including
new product additions, the continuing effect of expanding branch facilities, and
the growth of the National Accounts Program, and the accelerated growth in the
national economy. The increase in sales at the Other Business Units of 22.5%
was the result of $54,800,000 in incremental sales from an acquired business
and a 6.7% increase at existing businesses. All of the Other Business Units
experienced sales increases except for Bossert, which had a slight sales
decrease. Assuming the acquisition was included in both periods, the other
Business Units' pro forma sales would have increased by 7.9%.
The 1992 Grainger Division net sales increase of 8.6% was comprised of a 6.3%
volume increase and a 2.2% price increase. All geographic regions contributed
to the sales growth, with the percent increase for regions east of the
Mississippi being higher than for the regions in the west. The volume increase
primarily represents the effects of new product additions, the continuing
expansion of branch facilities, and the effect of the National Accounts Program.
In part, the price increase was intended to pass through supplier price
increases and to offset costs associated with the elimination of a per order
handling charge. The increase in sales for the year at the Other Business Units
of 61.5% was primarily the result of $131,268,000 in incremental sales from
acquired businesses. All of the Other Business Units, except Bossert, had a
sales increase. Assuming all acquisitions were included in both periods, the
Other Business Units' pro forma sales would have increased 5.4%. Other
Business Units' sales in 1992 were adversely affected by the termination of a
distribution arrangement by a supplier to Bossert of industrial abrasive
products which had accounted for approximately 14% of Bossert's sales.
Net earnings
The 1993 percentage increase was less than the increase in net sales primarily
due to operating expenses increasing faster than sales and an increase in the
effective income tax rate, partially offset by improved gross margins. The
increase in operating expenses was primarily attributable to increased costs
at the acquired and start-up businesses and increased expenses at the Grainger
Division. The increased costs at the acquired and start-up businesses
reflect increased amortization of goodwill and other acquisition related
costs principally due to the Lab Safety acquisition, increased advertising
costs, and the Company's continuing investment in these units. The increase
in expense at the Grainger Division was caused primarily by handling costs
increasing due to the elimination of a transaction handling charge to
customers on certain shipped sales and higher data processing expenses primarily
related to new system development, partially offset by lower bad debt expense.
The increase in the effective income tax rate is due to the Omnibus Budget
Reconciliation Act of 1993, which increased the maximum corporate federal
tax rate from 34% to 35% retroactive to January 1, 1993. Costs associated with
the creation of Grainger Sanitary Supplies and Equipment were not material. Any
future costs relative to the continuing development of Grainger Sanitary
Supplies and Equipment or any other collaborative efforts between the Grainger
Division and the other distribution businesses cannot be determined. The
Company's gross margin increase was attributable to improvements at both the
Grainger Division and at the Other Business Units. The improvement at the
Grainger Division was due to a favorable selling price category mix and a
favorable product mix partially offset by an unfavorable margin impact due to
the level of cost increases exceeding the level of price increases. The
improvement at the Other Business Units was primarily related to Lab Safety,
which had a higher gross margin than the average for the rest of the Other
Business Units and was included for all of 1993 versus eight months of 1992.
The 1992 percentage increase was less than the increase in net sales because of
operating expenses increasing at a higher rate than sales and decreased other
income, partially offset by improved gross profit margin. The increase in
operating expenses was caused primarily by increased costs associated with
acquired and start-up businesses and increased expenses at the Grainger
Division. The increased costs at acquired and start-up businesses, including
Jani-Serv, reflect increased amortization of goodwill and other acquisition
related costs due principally to the Lab Safety acquisition, the effect of
Lab Safety whose
10
operating expenses as a percent of sales were higher than the average for
the rest of the Company, and the Company's continuing investment in these
business units. The increase in expense at the Grainger Division was caused
primarily by higher payroll and benefits costs, advertising expenses related to
increased catalog costs caused by product additions, data processing expenses
associated with systems development, increased insurance expense, and
professional services related to marketing analysis. The Company increase in
gross margin primarily reflects improvement at the Grainger Division caused
principally by price increases and by a decrease in sales of seasonal products
which have lower margins than average, and by the addition of Lab Safety sales
which have a higher gross margin than the average for the rest of the Company.
Other income decreased due to lower interest income and higher interest expense.
The Company used both its marketable securities portfolio and short-term
borrowings during the second quarter to finance the acquisition of Lab Safety.
FINANCIAL CONDITION
Working Capital was $442,525,000 at December 31, 1993 compared to $478,784,000
at December 31, 1992 and $574,046,000 at December 31, 1991. The ratio of current
assets to current liabilities was 2.2, 2.5, and 3.0, at such dates.
Net cash flows from operations of $162,498,000 in 1993, $196,368,000 in 1992,
and $150,577,000 in 1991 have continued to improve the Company's financial
position and serve as the primary source of funding for capital requirements.
In each of the past three years, a portion of working capital has been used for
additions to property, buildings and equipment as summarized in the following
table.
1993 1992 1991
------- ------- -------
(In thousands of dollars)
Land, buildings, structures, and improvements $56,393 $31,632 $19,874
Furniture, fixtures, and other equipment 42,012 18,288 12,904
------- ------- -------
Total $98,405 $49,920 $32,778
======= ======= =======
The Company repurchased 1,777,000 shares of its common stock in 1993, 733,000
shares in 1992, and 1,354,000 shares in 1991. At December 31, 1993,
approximately 3,600,000 shares of common stock remained available under the
existing repurchase authorization.
Dividends paid to shareholders were $36,272,000 in 1993, $34,295,000 in 1992,
and $32,702,000 in 1991.
Through acquisition and expansion the Company continues to develop other
businesses. In 1992, the Company completed the acquisition of the assets of Lab
Safety Supply, Inc. for $161,343,000. The acquisition was funded by short-term
borrowings of $72,727,000, including bank borrowings aggregating $36,727,000,
internal funds of the Company, and the assumption of $8,227,000 of long-term
debt. Also during 1992, the Company completed its acquisition of Rice Safety
Equipment Company for $5,906,000. In 1991, Ball was acquired for $31,529,000 to
further expand the Company's sanitary supply business.
Long-term cash requirements, other than normal operating expenses, are
anticipated for ongoing Grainger Division branch expansion, continued expansion
of the Other Business Units, long-term debt repayments, and the payment of
dividends. In addition, relocation of existing owned and leased facilities to
newly purchased or constructed facilities is planned. The Company's ongoing
profitability continues to support these requirements. Internally generated
funds are the primary source for working capital and expansion needs,
supplemented by short-term borrowings as the need arises. At December 31, 1993,
the Company had short-term borrowings of $34,298,000. The Company had no
material individual commitments outstanding at December 31, 1992.
11
The Company continues to maintain a low debt ratio and a strong liquidity
position, which provide flexibility in funding working capital needs and
long-term cash requirements. Total debt as a percent of total shareholders'
equity was 7%, 3%, and 4% at December 31, 1993, 1992, and 1991, respectively.
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The use of the last-in, first-out (LIFO) method of accounting for
inventories and accelerated depreciation methods for financial reporting and
income tax purposes result in a substantial recognition of the effects of
inflation in the primary financial statements.
The major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost continues to be significant for these
long lived assets. The related depreciation expense associated with these assets
increases significantly when adjusting for the cumulative effect of inflation.
The Company believes the most positive means to combat inflation and advance the
interests of investors lies in continued application of basic business
principles, which include improving productivity, increasing working capital
turnover, and offering products and services which command proper price levels
in the marketplace.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 17 to 36.
See the Index to Financial Statements and Supplementary Data on page 16.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
With respect to Items 10 through 13, the Company has filed or will file with the
Securities and Exchange Commission, within 120 days of the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14-A.
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company is or will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 27, 1994, and, to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
under the caption "Executive Officers".
Item 11: Executive Compensation
Information regarding executive compensation is or will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 27, 1994, and, to the extent required, is incorporated herein by
reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is or will be set forth in the Company's proxy statement relating to
the annual meeting of shareholders to be held April 27, 1994, and, to the extent
required, is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is or will
be set forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 27, 1994, and, to the extent required, is
incorporated herein by reference.
12
Page
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1 Financial Statements. See Index to Financial Statements and Supplementary
Data.
2. Financial Statement Schedules. See Index to Financial Statements and
Supplementary Data.
3. Exhibits
(10) Material Contracts:
(a) No instruments which define the rights of holders of the Company's
Industrial Development Revenue Bonds are filed herewith, pursuant
the exemption contained in Regulation S-K, Item 601(b)(4)(iii). The
Company hereby agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any such instrument.
(b) Shareholders Rights Agreement dated April 26, 1989, incorporated
reference to Exhibit 10(m) to the Company's Annual Report on Form
10-K for the year ended December 31, 1989 and a related Certificate
of Adjustment incorporated by reference to Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.
(c) Lab Safety asset purchase agreement dated April 30, 1992,
incorporated by reference to Exhibit (2)(i) to the Company's Report
on form 10-Q for the period ended March 31, 1992.
(d) Lab Safety Supply real estate purchase agreement dated April 30,
1992, incorporated by reference to Exhibit (2)(i) to the Company's
Report on Form 10-Q for the period ended March 31, 1992.
(e) Compensatory Plans or Arrangements
(i) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive Plan
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
(ii) W.W. Grainger,Inc. 1975 Non-Qualified Stock Option Plan as
Amended and Restated March 3, 1988, incorporated by reference to
Exhibit 10(a) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1987.
(iii) Executive Death Benefit Plan dated December 30, 1983, incorporated
by reference to Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989.
(iv) Executive Deferred Compensation Plan dated December 30, 1983,
incorporated by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989.
(v) 1985 Executive Deferred Compensation Plan dated December 31, 1984
incorporated by reference to Exhibit 10(f) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.
(vi) Post-Service Benefits for Non-Management Directors as amended and
restated effective December 8, 1993. 41
(vii) Supplemental Profit Sharing Plan dated as of January 31, 1983 as
amended and restated effective January 1, 1992, incorporated by
reference to Exhibit (19)(10)(i) to the Company's Report on Form
10-Q for the period ended June 30, 1992.
13
PAGE
(viii) Plan for Payment of Directors' Fees dated February 29, 1984, as
amended and restated effective January 1, 1992, incorporated
by reference to Exhibit (19)(10)(ii) to the Company's Report on
Form 10-Q for the period ended June 30, 1992.
(ix) Summary Description of Corporate Management Incentive
Program Based on Improved Economic Earnings. 38-40
(11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data. 36
(22) Subsidiaries of the Company. 37
(23) Consent of Independent Certified Public Accountants. See Index
to Financial Statements and Supplementary Data. 36
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 1993.
14
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: March 25, 1994
ATTEST:
W.W. GRAINGER, INC.
D.W. Grainger
J. M. Baisley By:-------------------------------------
- ------------------------------- D. W. Grainger
J. M. Baisley Chairman of the Board of Directors
Vice President, General Counsel, (Principal Executive Officer)
and Secretary D. E. Bielinski
By:-------------------------------------
D.E. Bielinski
Vice President and Chief Financial
Officer (Principal Financial Officer)
P.J. Wallace
By:-------------------------------------
P.J. Wallace
Vice President and Controller
(Principal Accounting Officer)
George R. Baker R.L. Keyser
- ------------------ March 25, 1994 ------------------------- March 25, 1994
George R. Baker R.L. Keyser
Director President, Chief Operating Officer
and Director
Kingman Douglass John W. McCarter, Jr.
------------------ March 25, 1994 ------------------------- March 25, 1994
Kingman Douglass John W. McCarter, Jr.
Director Director
Robert E. Elberson James D. Slavik
------------------ March 25, 1994 ------------------------- March 25, 1994
Robert E. Elberson James D. Slavik
Director Director
J.D. Fluno Harold B. Smith
------------------ March 25, 1994 ------------------------- March 25, 1994
J.D. Fluno Harold B. Smith
Vice Chairman and Director Director
Wilbur H. Gantz Fred L. Turner
------------------ March 25, 1994 ------------------------- March 25, 1994
Wilbur H. Gantz Fred L. Turner
Director Director
15
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1993, 1992, and 1991
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...................... 17
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS........................................................... 18
LIABILITIES AND SHAREHOLDERS' EQUITY............................. 19
CONSOLIDATED STATEMENTS OF EARNINGS.............................. 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.................. 21
CONSOLIDATED STATEMENTS OF CASH FLOWS............................22-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................24-32
SCHEDULES
V - PROPERTY, BUILDINGS, AND EQUIPMENT........................... 33
VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY,....... 34
BUILDINGS, AND EQUIPMENT
VIII - ALLOWANCE FOR DOUBTFUL ACCOUNTS.............................. 35
EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE......................... 36
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........ 36
SCHEDULES OMITTED
Schedules not included above are omitted for the reason that they are not
applicable or not required or the required information is contained in Notes to
Consolidated Financial Statements.
16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
W.W. Grainger, Inc.
We have audited the accompanying consolidated balance sheets of W.W. Grainger,
Inc. and Subsidiaries as of December 31, 1993, 1992, and 1991, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of W.W. Grainger,
Inc. and Subsidiaries as of December 31, 1993, 1992, and 1991, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
We have also audited schedules V, VI, and VIII of W.W. Grainger, Inc. and
subsidiaries for the years ended December 31, 1993, 1992, and 1991. In our
opinion, these schedules present fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON
Chicago, Illinois
February 10, 1994
17
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
-----------------------------------------
ASSETS 1993 1992 1991
----------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 2,572 $ 44,809 $ 140,967
Accounts receivable, less
allowances for doubtful accounts
of $13,573 for 1993,$13,810 for
1992, and $12,826 for 1991......... 299,856 265,410 227,103
Inventories......................... 466,214 432,233 443,334
Prepaid expenses.................... 10,832 11,856 7,270
Deferred income tax benefits........ 44,408 39,958 35,616
----------- ---------- ----------
Total current assets 823,882 794,266 854,290
PROPERTY, BUILDINGS, AND EQUIPMENT
Land................................ 100,903 87,815 77,436
Buildings, structures and improvements 381,716 339,943 303,460
Machinery and equipment 11,567 11,557 11,556
Furniture, fixtures, and equipment.. 222,569 187,416 160,537
---------- --------- ----------
716,755 626,731 552,989
Less accumulated depreciation
and amortization................... 307,372 274,038 241,399
---------- --------- ----------
Property, buildings, and
equipment - net................. 409,383 352,693 311,590
OTHER ASSETS......................... 143,399 163,579 50,674
---------- --------- ----------
TOTAL ASSETS.........................$1,376,664 $1,310,538 $1,216,554
========== ========== ==========
18
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1993 1992 1991
--------- ---------- ----------
CURRENT LIABILITIES
Short-term debt........................ $ 34,298 $ - $ -
Current maturities of long-term debt... 21,662 24,954 19,417
Trade accounts payable................. 178,114 151,898 152,626
Accrued contributions to employees'
profit sharing and pension plans...... 44,587 39,450 31,411
Accrued expenses...................... 83,923 89,539 70,464
Income taxes.......................... 18,773 9,641 6,326
--------- ---------- ----------
Total current liabilities.......... 381,357 315,482 280,244
LONG-TERM DEBT (less current maturities) 6,214 6,936 11,327
DEFERRED INCOME TAXES................... 23,017 41,008 49,064
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS 24,171 15,903 15,482
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock-1993,1992,and
1991, $5 par value-authorized, 6,000,000
shares, issued and outstanding, none - - -
Common Stock-$0.50 par value-
authorized, 150,000,000 shares, 1993,
1992, and 1991; issued and outstanding,
50,684,983 shares, 1993, 52,375,812
shares, 1992, and 52,913,208 shares,
1991.................................. 25,342 26,188 26,457
Additional contributed capital......... 79,364 79,050 73,938
Unearned restricted stock compensation. (192) (299) (499)
Retained earnings...................... 837,391 826,270 760,541
---------- ---------- -----------
Total shareholders' equity........... 941,905 931,209 860,437
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................. $1,376,664 $1,310,538 $1,216,554
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
19
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
Years Ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
Net sales.............................$2,628,398 $2,364,421 $2,077,235
Cost of merchandise sold.............. 1,653,534 1,504,893 1,348,698
---------- ---------- ----------
Gross profit..................... 974,864 859,528 728,537
Warehousing, marketing, and
administrative expenses............. 722,704 631,097 524,294
---------- ---------- ----------
Operating earnings............... 252,160 228,431 204,243
Other income or (deductions)
Interest income..................... 480 1,764 7,308
Interest expense.................... (1,727) (2,266) (1,817)
Unclassified - net.................. (884) (707) (340)
---------- ---------- ----------
(2,131) (1,209) 5,151
---------- ---------- ----------
Earnings before income taxes..... 250,029 227,222 209,394
Income taxes.......................... 100,762 89,980 81,657
---------- ---------- ----------
Net earnings before cumulative
effect of accounting changes..... 149,267 137,242 127,737
Cumulative effect of accounting changes (820) - -
---------- ---------- ----------
Net earnings......................$ 148,447 $ 137,242 $ 127,737
========== ========== ==========
Net earnings per common and
common equivalent share before
cumulative effect of accounting changes $2.88 $2.58 $2.37
Cumulative effect of accounting changes (0.02) - -
---------- ---------- ----------
Net earnings per common and common
equivalent share..................... $2.86 $2.58 $2.37
========== ========== ==========
Average number of common and
common equivalent shares
outstanding 51,910,906 53,256,629 54,000,647
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
20
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)
Additional Guarantee Restricted
Common Contributed of Unearned Retained
Stock Capital ESOP Debt Compensation Earnings
------ ----------- --------- ------------ --------
Balance at January 1, 1991..$27,054 $71,062 $(598) $ - $717,835
Exercise of stock options... 72 4,097 - - -
Purchase of 1,354,000 shares
of Common Stock............ (677) (1,825) - - (52,329)
Reduction of ESOP debt...... - - 598 - -
Issuance of 14,900 shares of
restricted Common Stock..... 8 604 - (612) -
Amortization of restricted
Common Stock compensation.. - - - 113 -
Net earnings................ - - - - 127,737
Cash dividends paid ($0.61
per share)................. - - - - (32,702)
------- ------- ---- ------ ---------
Balance at December 31, 1991 26,457 73,938 - (499) 760,541
Exercise of stock options... 98 6,138 - - -
Purchase of 733,000 shares
of restricted Common Stock (367) (1,045) - - (37,218)
Amortization of restricted
Common Stock compensation.. - 19 - 200 -
Net earnings................ - - - - 137,242
Cash dividends paid ($0.65
per share)................. - - - - (34,295)
------- ------- ---- ------ ---------
Balance at December 31, 1992 26,188 79,050 - (299) 826,270
Exercise of stock options.. 41 2,821 - - -
Purchase of 1,777,000 shares
of Common Stock........... (888) (2,712) - - (101,054)
Issuance of 2,700 shares
of Common Stock............ 1 154 - (155) -
Amortization of restricted..
Common Stock compensation.. - 51 - 262 -
Net earnings................ - - - - 148,447
Cash dividends paid
($0.705 per share)......... - - - - (36,272)
------- ------- ---- ------- --------
Balance at December 31,1993 $25,342 $79,364 - $(192) $837,391
======= ======= ==== ======= ========
The accompanying notes are an integral part of these financial statements.
21
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
-----------------------------
1993 1992 1991
-------- -------- -------
Cash flows from operating activities:
Net earnings................................. $148,447 $137,242 $127,737
Provision for losses on accounts
receivable.................................. 8,147 10,326 10,285
Depreciation and amortization:
Property, buildings, and equipment.......... 40,576 35,217 33,045
Intangibles and goodwill.................... 18,588 13,903 2,523
Loss(gain) on sale of property,
buildings, and equipment.................... 606 (308) 86
Change in operating assets and liabilities,
net of effects of acquisitions of businesses:
(Increase) in accounts receivable........... (42,593) (30,433) (12,801)
(Increase) in inventories................... (33,981) 23,692 (23,594)
Decrease (increase) in prepaid expenses..... 1,024 (736) 30
Increase (decrease) in trade accounts payable 26,216 (9,583) 13,631
(Decrease) increase in other current liabilities (479) 24,698 5,923
Increase (decrease) in current income taxes
payable.................................... 9,132 3,315 (6,422)
Increase in accrued employment related
benefits costs............................. 8,268 421 2,557
(Decrease) in deferred income taxes......... (22,441) (12,398) (924)
Other-net................................... 988 1,012 (1,499)
-------- -------- --------
Net cash provided by operating activities.... 162,498 196,368 150,577
Cash flows from investing activities:
Additions to property, buildings, and
equipment.................................. (98,405) (49,920) (32,778)
Proceeds from sale of property, buildings,
and equipment.............................. 533 1,072 397
Expenditures for business acquisitions - net
of cash balances assumed................... - (167,249) (31,529)
Other - net.................................. 866 (2,678) (4,051)
-------- -------- -------
Net cash (used in) investing activities...... (97,006) (218,775) (67,961)
22
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
(In thousands of dollars)
Years Ended December 31,
----------------------------
1993 1992 1991
-------- -------- --------
Cash flows from financing activities:
Net proceeds from short-term debt............. $ 34,298 $ - $ -
Proceeds from long-term debt.................. 1,400 2,950 -
Long-term debt payments....................... (5,414) (1,804) (5,757)
Retirements of long-term debt assumed in
business acquisition......................... - (8,227) -
Stock options exercised....................... 1,178 3,211 2,899
Tax benefit of stock incentive plan........... 1,735 3,044 1,270
Purchase of Company Common Stock.............. (104,654) (38,630) (54,831)
Cash dividends paid........................... (36,272) (34,295) (32,702)
-------- ------- -------
Net cash (used in) financing activities....... (107,729) (73,751) (89,121)
-------- ------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS... (42,237) (96,158) (6,505)
Cash and cash equivalents at beginning of year 44,809 140,967 147,472
-------- -------- --------
Cash and cash equivalents at end of year...... $ 2,572 $ 44,809 $140,967
======== ======== ========
Non-Cash Investing and Financing Activities
Acquisition of businesses:
Fair value of assets acquired............... $ - $186,747 $32,789
Liabilities assumed, net of long-term debt.. - (11,271) (1,260)
Long-term debt assumed in business
acquisition................................ - (8,227) -
--------- -------- -------
Net assets acquired........................... $ - $167,249 $31,529
========= ======== =======
The accompanying notes are an integral part of these financial statements.
23
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1992, and 1991
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is a nationwide distributor of equipment, components, and supplies
to the commercial, industrial, contractor, and institutional markets. The
Company operates within a single industry segment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated from
the consolidated financial statements.
ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note 14) and SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (see Note 9). In the fourth quarter of 1993, retroactive to January 1,
1993, the Company adopted SFAS No.112, "Employers' Accounting for Postemployment
Benefits" (see Note 9).
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is primarily
determined by the last-in, first-out (LIFO) method.
PROPERTY, BUILDINGS, AND EQUIPMENT
Property, buildings, and equipment are valued at cost. For financial statement
purposes, depreciation and amortization are provided in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives, principally on the declining-balance and sum-of-the-years-digits methods.
For income tax purposes, the Company uses the maximum allowable accelerated
methods.
Improvements to leased property are being amortized over the initial terms of
the respective leases or the estimated service lives of the improvements,
whichever is shorter. The Company capitalized interest costs of $1,258,000,
$1,110,000, and $1,381,000 in 1993, 1992, and 1991, respectively.
PURCHASED TAX BENEFITS
The Company has purchased tax benefits through leases as provided by the
Economic Recovery Tax Act of 1981. Realized tax benefits, net of repayments,
are included in Deferred Income Taxes.
INCOME TAXES
The Company uses the maximum allowable accelerated depreciation methods.
Deferred income taxes are provided to recognize the temporary differences
between financial and tax reporting.
PURCHASE OF COMPANY COMMON STOCK
Through December 31, 1993, the Company was required by its state of
incorporation to retire any Common Stock it purchased. The excess of cost over
par value was charged proportionately to Additional contributed capital and
Retained earnings. Effective January 1, 1994, the Company is no longer required
by its state of incorporation to retire Common Stock repurchases.
24
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are computed based upon the
weighted average number of shares outstanding during each year which includes
outstanding options for Common Stock, when dilutive.
NOTE 2-BUSINESS ACQUISITION
Effective May 1, 1992, the Company completed the acquisition of the assets and
business of Lab Safety Supply, Inc., a leading direct marketer and distributor
of safety products. The acquisition included cash payments of $161,343,000 and
the assumption of certain liabilities of Lab Safety Supply, Inc. including
$8,227,000 of long-term debt. The acquisition was accounted for as a purchase.
Included in the purchase price was $121,367,000 which was allocated to
intangibles including customer list and goodwill, to be amortized over useful
lives of five to forty years. The acquisition was funded from internal sources
and the issuance of $72,727,000 of short-term debt.
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and Lab Safety Supply, Inc. as if the acquisition
had occurred at the beginning of 1992 and 1991. The pro forma amounts give
effect to certain adjustments, including the amortization of intangibles, the
amortization of non-competition agreements, certain executive compensation,
increased interest expense, lost interest income, and income tax effects. This
pro forma summary does not necessarily reflect the results of operations as they
would have been if the companies had constituted a single entity during such
periods and is not necessarily indicative of results which may be obtained
in the future.
Years Ended December 31,
----------------------------
1992 1991
---------- ----------
(In thousands of dollars,
except for per share amounts)
Sales $2,411,758 $2,194,129
Net earnings $135,830 $122,618
Earnings per common and common equivalent share $2.55 $2.25
NOTE 3-CASH FLOWS
The Company considers investments in highly liquid debt instruments, with an
original maturity of ninety days or less, to be cash equivalents. For cash
equivalents, the carrying amount approximates fair value due to the short
maturity of those instruments.
Cash paid during the year for:
1993 1992 1991
-------- ------ --------
(In thousands of dollars)
Interest (net of amount capitalized) $1,837 $2,235 $1,914
======== ======= =======
Income taxes $106,085 $95,691 $87,399
======== ======= =======
NOTE 4-CASH
Checks outstanding of $16,521,000, $23,713,000, and $12,288,000 are included in
Trade accounts payable at December 31, 1993, 1992, and 1991, respectively.
NOTE 5-CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution. The Company has a broad customer base representing many diverse
industries doing business in all regions of the United States. Consequently, in
management's opinion, no significant concentration of credit risk exists
for the Company.
25
NOTE 6-INVENTORIES
Inventories primarily consist of merchandise purchased for resale. Inventories
would have been $179,450,000, $168,363,000, and $158,429,000 higher than
reported at December 31, 1993, 1992, and 1991, respectively, if the first-in,
first-out (FIFO) method of inventory accounting had been used.
NOTE 7-OTHER ASSETS
Included in other assets are intangibles such as customer lists and goodwill.
Customer lists are amortized on a straight-line basis over periods of five to
sixteen years. Goodwill represents the cost in excess of net assets of acquired
companies and is amortized on a straight-line basis over forty years. Other
assets at December 31, 1993, 1992, and 1991 were:
1993 1992 1991
-------- -------- -------
(In thousands of dollars)
Customer lists........................... $102,015 $102,015 $14,439
Goodwill................................. 46,283 46,197 19,417
Other intangibles........................ 6,472 6,472 3,738
-------- -------- -------
154,770 154,684 37,594
Less accumulated amortization............ 29,528 14,133 2,206
-------- -------- -------
125,242 140,551 35,388
Sundry................................... 18,157 23,028 15,286
-------- -------- -------
Total.................................... $143,399 $163,579 $50,674
======== ======== =======
NOTE 8-SHORT-TERM DEBT
During 1993, the Company borrowed funds to finance working capital needs. In
1992, the Company borrowed funds to partially finance the acquisition of Lab
Safety Supply, Inc. The following summarizes information concerning short-term
debt:
1993 1992
------- -------
(in thousands of dollars)
Bank Notes
Outstanding at December 31..................... $22,316 $ -
Maximum month-end balance during the year...... $27,725 $36,000
Average amount outstanding during the year..... $8,493 $ 5,035
Weighted average interest rates................ 3.4% 3.8%
Commercial Paper
Outstanding at December 31..................... $11,982 $ -
Maximum month-end balance during the year...... $28,581 $ -
Average amount outstanding during the year..... $ 7,935 $ 9,885
Weighted average interest rates................ 3.2% 3.9%
The Company had available lines of credit of $25,000,000 at December 31, 1993,
$75,000,000 at December 31, 1992, and $25,000,000 at December 31, 1991. These
credit lines carried commitment fees of 1/8%, and in one arrangement, an
additional 1/8% on that portion used to support actual commercial paper
outstanding.
26
NOTE 9-EMPLOYEE BENEFITS
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 15% of the total compensation paid to all eligible
employees. The Company also sponsors additional profit sharing and defined
contribution plans which cover most other employees.
Provisions under all plans were $42,056,000, $37,289,000, and $31,610,000 for
the years ended December 31, 1993, 1992, and 1991, respectively.
POSTRETIREMENT BENEFITS. The Company has a health care benefits plan covering
most of its retired employees and their dependents. A majority of the Company's
employees become eligible for these benefits when they qualify for retirement
while working for the Company. On January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The statement requires the Company to accrue the estimated cost of providing
postretirement benefits during the working careers of those employees who
could become eligible for such benefits when they retire. Because the Company
had previously accrued postretirement benefits, the effect of adoption of
SFAS No. 106 was not material.
The amount charged to operating expense for postretirement was $2,600,000,
$2,000,000 and $3,000,000 for the years ended December 31, 1993, 1992, and
1991, respectively. Components of the 1993 expense were as follows (in thousands
of dollars):
Service cost............................................... $1,566
Interest cost.............................................. 1,553
Actual return on assets.................................... (472)
Amortization of transition asset (22 year amortization).... (143)
Deferred asset gain........................................ 96
------
$2,600
======
Participation in the plan is voluntary at retirement and requires participants
to make contributions, as determined by the Company, toward the cost of the
plan. The accounting for the health plan anticipates future cost-sharing changes
to retiree contributions that will maintain the current cost-sharing ratio
between the Company and the retirees. A Group Benefit Trust has been established
as the vehicle to process benefit payments. The assets of the trust are
invested in a Standard & Poor's 500 index fund. The weighted average long-term
rate of return is 6.6%, which is net of a 34.1% tax rate.
The funding of the trust includes an estimated amount which is intended to allow
the maximum deductible contribution under the Internal Revenue Code of 1986, as
amended, and was $211,000, $1,579,000, and $443,000 for the years ended December
31, 1993, 1992, and 1991, respectively. A reconciliation of funded status as of
December 31, 1993 is as follows (in thousands of dollars):
Accumulated Postretirement Benefit Obligation (APBO):
Retirees and their dependents...............................$ (4,044)
Fully eligible active plan participants..................... (879)
Other active plan participants.............................. (17,165)
---------
Total APBO.................................................. (22,088)
Plan assets at fair value................................... 5,993
---------
Funded status............................................... (16,095)
Unrecognized transition asset............................... (2,999)
Unrecognized net loss....................................... 823
---------
Accrued postretirement benefits costs.......................$(18,271)
=========
In determining the APBO, the assumed weighted average discount rate used was
7.3%. The assumed health care cost trend rate for 1994 through 1998 was 10.0%.
Beginning in 1999, the assumed health care cost trend rate declines on a
straight-line basis until 2008, when the ultimate trend rate of 5.6% will be
achieved.
If the assumed health care cost trend rate was increased by one percentage point
for each year, the APBO as of December 31, 1993 would increase by $5,032,000.
The aggregate of the service cost and interest cost components of the 1993 net
periodic postretirement benefits expense would increase by $804,000.
27
POSTEMPLOYMENT BENEFITS. In the fourth quarter of 1993, retroactive to
January 1, 1993, the Company adopted SFAS No. 112, "Employer's Accounting for
Postemployment Benefits." This statement requires the accrual of certain
benefits provided to former or inactive employees, after employment but before
retirement, if attributable to an employee's service already rendered. The
Company benefits accrued under SFAS No. 112 included long-term disability health
care benefits, short-term disability salary continuation benefits, and COBRA
benefits in excess of participant contributions. The cumulative effect at
January 1, 1993 of adopting SFAS No. 112 reduced net earnings by $4,033,000 or
8 cents per share. The effect of this change on 1993 net earnings before
the cumulative effect of accounting changes was not material.
NOTE 10-LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1993 1992 1991
------- ------- -------
(In thousands of dollars)
Industrial development revenue bonds...... $26,225 $25,600 $23,450
Other..................................... 1,651 6,290 7,294
------- ------- -------
27,876 31,890 30,744
Less current maturities................... 21,662 24,954 19,417
------- ------- -------
$ 6,214 $ 6,936 $11,327
======= ======= =======
The industrial development revenue bonds include various issues that bear
interest at a fixed rate of 6.125%, a variable rate up to 15%, or variable
rates up to 80% of the prime rate. One of the bonds matures at the rate of
$75,000 each year through 1994, with the remaining bonds due in various amounts
from 2001 through 2011. Interest rates on some of the issues are subject to
change at certain dates in the future. The bondholders may require the Company
to redeem certain bonds concurrent with a change in interest rates, and
certain other bonds annually. At December 31, 1993, $26,150,000 of these bonds
were subject to these redemption options. Of these bonds, $4,895,000 are also
subject to agreements through 1995 between a bank and the Company which provide
that the bank will purchase any such bonds presented by the bondholders and
hold them for a period of not less than one year. In addition, $12,045,000 of
these bonds had an unsecured liquidity facility available at December 31, 1993
for which the Company compensated a bank through a commitment fee of 1/8%. There
were no borrowings related to these facilities at December 31, 1993. The Company
classified $21,255,000, $20,555,000, and $18,330,000 of bonds currently subject
to redemption options in current maturities of long-term debt at December 31,
1993, 1992, and 1991, respectively.
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1993 are as follows:
Amounts
Payable Amounts
Under Subject to
Terms of Redemption
Agreements Options
---------- ----------
(In thousands of dollars)
1994............................ $407 $21,255
1995............................ 299 -
1996............................ 146 -
1997............................ 163 -
1998............................ 182 -
28
NOTE 11-LEASES
The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases. At December
31, 1993, the approximate future minimum aggregate payments for all leases were
as follows:
Operating Lease
-----------------------------
Real Personal Capital
Property Property Total Leases
-------- -------- ------- --------
(In thousands of dollars)
1994.............................. $14,725 $2,082 $16,807 $ 243
1995.............................. 8,869 491 9,360 240
1996.............................. 7,630 216 7,846 240
1997.............................. 5,555 69 5,624 240
1998.............................. 2,884 1 2,885 240
1999-2034......................... 7,924 - 7,924 578
------- ------ ------- ------
Total minimum payments required... $47,587 $2,859 $50,446 1,781
Less imputed interest............. 582
------
Present value of minimum lease
payments (included in
long-term debt)................. $1,199
======
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $22,264,000, $21,421,000, and $19,480,000 for 1993,
1992, and 1991, respectively.
NOTE 12-STOCK INCENTIVE PLANS
The Company's Long-Term Stock Incentive Plan ("The Plan"), allows the Company
to grant a variety of incentive awards to key employees of the Company. These
awards involve the use of a maximum of 4,028,414 shares of common stock, in
connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights and other stock based awards.
The Plan authorizes the granting of restricted stock which is held by the
Company until certain terms and conditions as specified by the Company are
satisfied. Except for the right of disposal, holders of restricted stock have
full shareholders' rights during the period of restriction, including voting
rights and the right to receive dividends. Compensation expense related to
restricted stock awards is based upon market price at date of grant and is
charged to earnings on a straight-line basis over the period of restriction.
The Plan authorizes the granting of options to purchase shares at a price of not
less than 85% of the closing market price on the last trading day preceding the
date of grant. The options expire within 10 years after the date of grant. The
Plan also permits the granting of stock appreciation rights, either alone or in
tandem with options already granted and to be granted in the future. The stock
appreciation rights permit the holder to receive stock, cash, or a combination
thereof, equal to the amount by which the fair market value on the date of
exercise exceeds the option price. Exercise of a stock option or a stock
appreciation right automatically cancels any respective tandem stock
appreciation right or stock option.
Shares covered by terminated, surrendered or cancelled options or stock
appreciation rights that are unexercised, but forfeited restricted stock, or by
the forfeiture of other awards that do not result in shares being issued, are
again available for awards under the Plan.
29
In 1993, 4,615 shares of restricted stock were released. In 1992, 4,615 shares
of stock were also released. There were 2,650 shares of restricted stock issued
in 1993, and there were 14,895 shares of restricted stock issued in 1991.
There was no activity relating to stock appreciation rights in 1993, 1992, or
1991, and at December 31, 1993, there were no stock appreciation rights
outstanding.
Transactions involving stock options are summarized as follows:
Option Price
Option Shares per share Exercisable
------------- ------------ -----------
Outstanding at January 1, 1991..... 1,350,192 $8.75-$36.69 1,342,192
=========
Granted........................... 263,040 $40.06-$47.38
Exercised......................... (177,450) $8.75-$41.06
Cancelled or expired.............. (480) $41.06
------------- ------------
Outstanding at December 31, 1991... 1,435,302 $9.75-$47.38 1,418,802
=========
Granted........................... 204,440 $51.50
Exercised......................... (266,288) $9.75-$41.06
Cancelled or expired.............. (14,380) $40.06-$51.50
------------ -------------
Outstanding at December 31, 1992 1,359,074 $12.84-$51.50 1,152,514
=========
Granted........................... 193,510 $58.75
Exercised......................... (132,914) $12.84-$41.06
Cancelled or expired.............. (4,400) $43.00-$58.75
------------ -------------
Outstanding at December 31, 1993... 1,415,270 $31.31-$58.75 1,019,600
=========== =========
Options available for grant were 3,361,139, 3,552,899, and 3,742,959, at
December 31, 1993, 1992, and 1991, respectively. All options were issued at
market price on the date of grant.
NOTE 13-ISSUANCE OF PREFERRED STOCK PURCHASE RIGHTS
The Company has adopted a Shareholders Rights Plan and declared a dividend of
one preferred share purchase right (Right) for each outstanding share of the
Company's Common Stock. Each Right entitles the registered holder to purchase
from the Company one two-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $5.00 per share, at a price of $125.00 per one
two-hundredth of a Preferred share, subject to adjustment. The Rights would
become exercisable only if a person or group (other than a person or group
exempt under the Plan) were to acquire 20% or more of the Company's Common Stock
or were to announce a tender offer, the consummation of which would result in
ownership of 20% or more of the Common Stock.
At any time prior to thirty days following the acquisition by a person or group
(other than a person or group exempt under the Plan) of beneficial ownership of
20% or more of the Company's Common Stock, the Rights are redeemable by the
Company for $.01 per Right (the redemption price). The Rights are also
redeemable automatically, at the redemption price, in connection with the
consummation of any tender offer at a cash price per share equal to or greater
than the price approved by shareholders at a special meeting which would be
called under certain circumstances in accordance with procedures contained in
the Rights Agreement.
The Rights do not have voting or dividend rights, and, until they become
exercisable, have no dilutive effect on the earnings of the Company.
The Rights will expire on May 15, 1999 unless earlier redeemed.
NOTE 14-INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of this accounting change was income of
$3,213,000 or 6 cents per share. The adoption of SFAS No. 109 changes the
Company's method of accounting for income taxes from the deferred method to an
asset and liability approach. Previously the Company deferred the tax effects of
timing differences between financial reporting income and taxable
30
income. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the financial bases and the tax bases of assets and
liabilities. Income tax expense consisted of the following:
1993 1992 1991
------- ------- -------
(In thousands of dollars)
Current
Federal................................... $ 95,558 $ 82,915 $67,773
State..................................... 21,766 19,463 14,808
-------- ------- -------
Total current............................. 117,324 102,378 82,581
Deferred..................................... (11,795) (12,398) (924)
Net effect of the Omnibus Budget
Reconciliation Act of 1993................ (4,767) - -
-------- ------- -------
Total provision............................... $100,762 $ 89,980 $81,657
======== ======== =======
In accordance with the provisions of SFAS No. 109, the deferred income tax
benefit for 1993 represents the effects of the changes in the amounts of
temporary differences during 1993. The income tax effects of temporary
differences that gave rise to the net deferred tax asset as of December 31, 1993
were as follows (in thousands of dollars):
Current deferred tax assets (liabilities):
Inventory valuations.............................................. $21,263
Administrative and general expenses deducted
on a paid basis for tax purposes................................ 21,651
Employment related benefits expense............................... 1,313
Other............................................................. 181
-------
Total net current deferred tax asset........................... 44,408
-------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits............................................ (37,515)
Temporary differences related to property, building and equipment. (3,368)
Intangible amortization........................................... 7,247
Employment related benefits expense............................... 9,620
Other............................................................. 999
-------
Total net noncurrent deferred tax liability...................... (23,017)
--------
Net deferred tax asset............................................ $21,391
========
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981. A reconciliation of
income tax expense with federal income taxes at the statutory rate follows:
1993 1992 1991
------- ------- -------
(In thousands of dollars)
Federal income taxes at the federal
statutory rate.............................. $87,510 $77,256 $71,194
State income taxes, net of federal
income tax benefits........................ 12,077 11,170 9,569
Other-net.................................... 1,175 1,554 894
-------- ------- -------
Income tax expense...........................$100,762 $89,980 $81,657
======== ======= =======
Effective tax rate........................... 40.3% 39.6% 39.0%
======== ======= =======
31
The Omnibus Budget Reconciliation Act of 1993 increased the maximum corporate
federal tax rate from 34% to 35% retroactive to January 1, 1993. The effect of
this rate change on the Company's deferred tax balances was not material.
NOTE 15-SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
A summary of selected quarterly information for 1993 and 1992 is as follows:
1993 Quarter Ended
--------------------------------------------------
(In thousands of dollars except
for per share amounts)
March 31 June 30 Sept 30 Dec 31 Total
-------- -------- -------- -------- ----------
Net sales.................. $606,183 $660,407 $698,835 $662,973 $2,628,398
Gross profit............... 228,372 241,672 251,453 253,367 974,864
Net earnings before
cumulative effect
of accounting changes..... 34,185 35,445 38,714 40,923 149,267
Cumulative effect of
accounting changes....... (820) - - - (820)
Net earnings............... $ 33,365 $ 35,445 $ 38,714 $ 40,923 $ 148,447
Net earnings per common and
common equivalent share
before accounting changes. $0.65 $0.68 $0.75 $0.80 $2.88
Cumulative effect
of accounting changes
(as restated)............. ($0.02) - - - ($0.02)
net earnings per common and
common equivalent share... $0.63 $0.68 $0.75 $0.80 $2.86
======== ======== ======= ======== ==========
The cumulative effect of accounting changes has been restated, as of January 1,
1993, for two items. The Company elected early adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which resulted in an after
tax charge of 8 cents per share. The Company also recalculated the effect of
adopting SFAS No. 109, "Accounting for Income Taxes," restating the after tax
expense of 3 cents per share, by an after tax income amount of 9 cents per
share. The restated cumulative effect of accounting changes was a net after tax
expense of 2 cents per share.
1992 Quarter Ended
--------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 Sept 30 Dec 31 Total
-------- -------- -------- -------- ----------
Net sales.............. $532,262 $606,347 $627,183 $598,629 $2,364,421
Gross profit........... 186,439 215,108 227,276 230,705 859,528
Net earnings........... $ 28,271 $ 36,015 $ 37,081 $ 35,875 $ 137,242
Earnings per common
and common equivalent
share.................. $0.53 $0.67 $0.70 $0.68 $2.58
======== ======== ======== ======== ==========
32
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE V-PROPERTY, BUILDINGS, AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(In thousands of dollars)
Balance at Balance
beginning Acquired Additions at end of
Classifications of period assets(a) at cost Retirements Other period
--------------- --------- -------- --------- ----------- ----- --------
Year Ended
December 31, 1993
Land............... $87,815 $ - $13,909 $ 124 $(697) $100,903
Buildings, structures
and improvements.. 339,943 - 42,545 1,407 635 381,716
Machinery and
equipment......... 11,557 - 10 - - 11,567
Furniture, fixtures,
and other equipment 187,416 - 42,134 6,850 (131) 222,569
-------- -------- ------- ------ ----- --------
$626,731 $ - $98,598 $8,381 $(193) $716,755
======== ======== ======== ====== ===== ========
Year Ended
December 31, 1992
Land................ $ 77,436 $ 500 $ 9,730 $ 29 $ 178 $ 87,815
Buildings, structures
and improvements... 303,460 15,596 21,889 832 (170) 339,943
Machinery and
equipment.......... 11,556 - 1 - - 11,557
Furniture, fixtures,
and other equipment 160,537 11,068 18,571 2,304 (456) 187,416
-------- -------- ------- ------ ----- --------
$552,989 $27,164 $50,191 $3,165 $(448) $626,731
======== ======= ======= ====== ====== =========
Year Ended
December 31, 1991
Land................ $ 73,021 $ - $ 4,385 $ 203 $ 233 $ 77,436
Buildings, structures
and improvements... 289,141 (360) 15,508 625 (204) 303,460
Machinery and
equipment.......... 11,556 - - - - 11,556
Furniture, fixtures,
and other equipment 147,047 1,124 12,881 486 (29) 160,537
-------- ------ ------- ------ ----- --------
$520,765 $ 764 $32,774 $1,314 $ - $552,989
======== ====== ======= ====== ===== ========
(a) Additions as a result of business acquisitions.
The principal estimated lives used in determining depreciation are as follows:
Buildings, structures, and improvements.................... 10 to 45 years
Machinery and equipment.................................... 5 to 10 years
Furniture, fixtures, and other equipment................... 3 to 10 years
33
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE VI-ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, BUILDINGS, AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(In thousands of dollars)
Additions
Balance at charged to Balance
beginning costs and at end of
Classifications of period expenses Retirements Other period
--------------- --------- --------- ----------- ----- --------
Year Ended
December 31, 1993
Buildings, structures
and improvements..... $136,976 $16,439 $1,206 $ (1) $152,208
Machinery and
equipment............ 3,667 410 - - 4,077
Furniture, fixtures,
and other equipment.. 133,395 23,727 6,036 1 151,087
-------- ------- ------ ------- --------
$274,038 $40,576 $7,242 $ - $307,372
======== ======= ====== ======= ========
Year Ended
December 31, 1992
Buildings, structures,
and improvements..... $122,669 $14,969 $ 657 $ (5) $136,976
Machinery and
equipment............ 3,086 581 - - 3,667
Furniture, fixtures,
and other equipment.. 115,644 19,667 1,744 (172) 133,395
-------- ------- ------ -------- --------
$241,399 $35,217 $2,401 $ (177) $274,038
======== ======= ====== ======== ========
Year Ended
December 31, 1991
Buildings, structures,
and improvements..... $108,988 $14,121 $ 488 $ 48 $122,669
Machinery and
and equipment........ 2,505 581 - - 3,086
Furniture, fixtures,
and other equipment.. 97,696 18,343 343 (52) 115,644
-------- ------- ------ -------- --------
$209,189 $33,045 $ 831 $ (4) $241,399
======== ======= ====== ======== ========
34
W.W. Grainger, Inc. and Subsidiaries
SCHEDULE VIII - ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(In thousands of dollars)
Balance at Charged Balance
beginning to costs and at end
Description of period expenses Deductions(a) Other(b) of period
- ------------------- ---------- ------------ ------------- -------- ----------
Allowance for
doubtful accounts
1993.............. $13,810 $ 8,147 $ 8,384 $ - $13,573
1992.............. 12,826 10,326 10,042 700 13,810
1991.............. 12,785 10,285 10,365 121 12,826
(a) Accounts charged off as uncollectible, less recoveries.
(b) Businesses acquired.
35
W.W. Grainger, Inc. and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1993 1992 1991 1990 1989
Average number of common shares
outstanding during the year.... 51,410,228 52,747,423 53,597,448 54,681,010 54,339,448
Common equivalents(a)
shares issuable under
outstanding options and stock
appreciation rights............ 1,304,037 1,367,030 1,349,541 1,072,882 947,292
Shares which could have been
purchased based on the average
market value for the period.... 809,773 870,576 953,873 852,814 770,956
---------- --------- --------- ---------- ---------
494,264 496,454 395,668 220,068 176,336
Dilutive effect of exercised
options and stock appreciation
rights prior to being exercised 6,414 12,752 7,531 4,214 3,890
---------- --------- -------- ---------- ---------
Shares for the portion of the
period that options and stock
appreciation rights were
outstanding.................... 500,678 509,206 403,199 224,282 180,226
---------- --------- -------- ---------- ---------
Average number of common and
common equivalent shares
outstanding during the year.... 51,910,906 53,256,629 54,000,647 54,905,292 54,519,674
========== ========== ========== ========== ==========
Net earnings before cumulative
effect of accounting changes $149,267,000 $137,242,000 $127,737,000 $126,775,000 $119,563,000
Cumulative effect of
accounting changes............. (820,000) - - - -
------------ ------------ ------------ ------------ ------------
Net earnings.................... $148,447,000 $137,242,000 $127,737,000 $126,775,000 $119,563,000
============ ============ ============ ============ ============
Earnings per share before
accounting changes............. $2.88 $2.58 $2.37 $2.31 $2.19
Cumulative effect of
accounting changes per share... (0.02) - - - -
------------- ------------ ----------- ------------ ------------
Earnings per share.............. $2.86 $2.58 $2.37 $2.31 $2.19
============= ============ =========== ============ ============
(a) Does not include options which are not dilutive. Effect under fully diluted
computation is immaterial.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report on page 14 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995, and 33-43902) and on Form S-4
(No. 33-32091) of W.W. Grainger, Inc.
GRANT THORNTON
Chicago, Illinois
March 25, 1994
36
Exhibit 22 to the
Annual Report of
W.W. Grainger,Inc. on
Form 10-K for the
year ended
December 31, 1993
SUBSIDIARIES OF THE COMPANY
Allied Safety, Inc. (Virginia)
Bossert Industrial Supply, Inc. (Illinois)
Dayton Electric Manufacturing Co. (Illinois)
Grainger Caribe, Inc. (Illinois)
Grainger FSC, Inc. (U.S. Virgin Islands)
Lab Safety Supply, Inc. (Wisconsin)
WWG International, Inc. (Illinois)
37
Summary Description
Corporate Management Incentive Program
Based on Improved Economic Earnings
INTRODUCTION
The Corporate Management Incentive Program (MIP) became effective January 1,
1993. For eligible participants, this program replaces former participation
in both the Team Achievement Bonus (TAB) and the now discontinued Long-Term
Incentive Program (LTIP).
PURPOSE
The Company has adopted Economic Earnings (EE) as a key financial measurement.
EE incorporates the attributes of growth, asset management, and earnings to
evaluate financial performance. Conceptually, long-term improvements in EE
should correspond to long-term improvements in shareholder value.
The MIP is designed to encourage decision making that results in improvement in
EE and to compensate executives appropriately for positive and negative
performance resulting from business decisions. By linking EE to incentive
compensation, the MIP should influence managers to make business decisions
consistent with long-term shareholders' views.
ELIGIBILITY FOR PARTICIPATION
Eligibility to participate in this program is limited to those who are most
responsible for profit decisions and/or major policy direction. For purposes
of eligibility, 2 groups have been identified as follows:
1. Office of the Chairman.
2. Corporate officers and key managers.
Participants must be in an eligible position by July 1.
ADMINISTRATION OF PLAN
The administration of the MIP is the responsibility of the Compensation
Committee of Management (CCOM), subject to the review and approval of the
Compensation Committee of the Board.
OVERVIEW
The MIP consists of 2 components: quantitative and qualitative. The quantitative
component is built around target bonuses. The target bonuses are stated as
a percentage of base salary. The target bonuses for Corporate officers and key
managers are divided into 2 parts: 75% of the target bonus is based on Company
EE and 25% is based on Corporate EE. The target bonus for the Office of the
Chairman is based solely on Company EE. The target bonuses are adjusted upward
or downward based on the relationship between actual Company EE and target
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Company EE, and between actual Corporate EE and target Corporate EE, for each
year. These relationships are known as bonus multiples. The qualitative
component allows for a discretionary bonus. Any discretionary bonus begins as a
pool, and can be a positive or negative amount. Once the pool, if any, is
determined, it is allocated pro rata across the group according to the
quantitative component earned by each participant.
The total bonus earned for each year will be added to a MIP account for each
participant. MIP accounts are not funded with actual cash amounts; they are a
Company liability for unpaid earned bonuses. The beginning account balance, if
any, will be adjusted annually by the percentage increase in the salary
structure for eligible employees.
For 1993, the bonus paid will be equal to the target bonus times the 1993 bonus
multiple, plus any discretionary bonus. For 1994, the bonus paid will be equal
to the target bonus times an average of the 1994 and the 1993 bonus multiples,
plus any discretionary bonus. For 1995 and later years, the bonus paid will
be equal to the target bonus times an average of that year's and the prior
2 years' bonus multiples, plus any discretionary bonus. The only condition
imposed on these calculations is that payment of the bonus may not result in a
negative ending account balance.
For any given year, if a participant's performance rating falls below a
minimum level, no bonus will be earned or paid for that year.
Bonus payments for a given year are generally made in the first quarter of the
following year.
TERMINATIONS AND CHANGES IN EMPLOYMENT STATUS
The following shall apply to change of employment situations:
1. Death. The account balance immediately vests and, along with a pro rata award
for the current year, is paid as a lump sum on the next regular incentive
payment date.
2. Retirement or Long Term Disability. A pro rata award for the current year
will be added to the participant account balance, and the employee will
receive the account balance in a lump sum on the next regular incentive
payment date. Retirement is defined the same as under the W.W. Grainger,
Inc. Employees Profit-Sharing Plan.
3. Involuntary Termination. For "misconduct" means:
The participant has engaged, or intends to engage, in competition with the
Company, has induced any customer of the Company to breach any contract with
the Company, has made any unauthorized disclosure of any of the secrets or
confidential information of the Company, has committed an act of
embezzlement, fraud, or theft with respect to the property of the Company,
or has deliberately disregarded the rules of the Company in such a manner
as to cause any loss, damage, or injury to, or otherwise endanger the
property, reputation, or employees of the Company.
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In these instances, a participant's account balance will be forfeited and no
award will be granted for the current or prior year.
4. Voluntary Resignation. If a participant leaves after July 1, but before the
end of the calendar year, the employee will be deemed to have earned that
year's bonus and will receive that year's payment on the next regular
incentive payment date. The salary to be used in calculations will be the
actual amount paid in the year rather than an annualized amount. Any
remaining account balance will be forfeited.
5. Job Elimination or Downgrade. If a participant's job is eliminated or
downgraded and the employee's new job is at a non-participating level, a
pro rata payment for the current year will be made on the next regular
incentive payment date. The employee also will receive any remaining account
balance on that date. In the event the participant does not continue
employment, the provisions of Voluntary Resignation apply.
6. Transfer to Other Business Units. A person who transfers to another
W.W. Grainger, Inc. business unit and no longer participates in the MIP
will receive a pro rata payment for the period of time the person was in
a participating position on the next regular incentive payment date, and
also will receive any remaining account balance on that date.
7. First Year Participation for Continuing Employees. Individuals who are
hired, promoted, or transferred into a position eligible for participation
in the MIP and who are participants for 6 months or more, but less than a
year, will receive a pro rata payment.
Exceptions to the above provisions can only be approved by the CCOM. The
Company reserves the right to modify, amend, or terminate the program.
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Post-Service Benefits For Non-Management Directors
As Amended and Restated Effective 12/8/93
1. Consulting Service.
Each non-management Director who leaves the Board of Directors in good
standing, and who is eligible as defined below, will be entitled to a post-
service benefit of an amount equal to eighty percent (80%) of the basic
Board retainer fee in effect at the time of payment, for a number of years
equal to the number of years of service on the Board, up to a maximum of
10 years. Eligibility is determined by any one of the following:
(a) Age 70.
(b) Five or more years of Board service.
(c) Permanent disability or death.
As a condition for receiving these payments a subject Director shall be
available to the Company on a consulting basis, and shall not compete in any
way with the Company or engage in any practice detrimental to the Company.
The determination of whether the Director is engaging in competitive or
detrimental practices rests solely with the Company.
Payments entitled to a Director who dies in office or during the payout
period will be made to his or her spouse, but will cease on the spouse's
death.
Benefits under this program are not funded, and may not be assigned or
alienated by the Director. Payments, which commence at the time of
termination, will be made through the Corporate Secretary's office on a
quarterly basis.
This program may be amended or revoked at any time by the Board, except
that a series of post-service payments, once started, can be canceled only
on a determination of competitive or detrimental practices.
This program was adopted 12/5/84 and became effective 1/1/85.
2. Matching Charitable Gifts Program
During the term of payments under paragraph 1 above, the Director or his
spouse may participate in the Company's Matching Charitable Gifts Program
as in effect at the time.
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