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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
455 Knightsbridge Parkway, Lincolnshire, Illinois 60069-3620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 847/793-9030
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, New York Stock Exchange
and accompanying Preferred Stock Chicago Stock Exchange
Purchase Rights
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. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $3,283,966,623 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 1, 1999.
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 93,315,991 shares outstanding as of March 1, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 28, 1999 are incorporated by reference
into Part III hereof.
The Exhibit Index appears on page 15 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............................................................. 3-6
THE COMPANY........................................................ 3
GRAINGER INDUSTRIAL SUPPLY......................................... 3-4
ACKLANDS-GRAINGER INC.............................................. 4
GRAINGER PARTS..................................................... 5
GRAINGER, S.A. de C.V.............................................. 5
GRAINGER GLOBAL SOURCING........................................... 5
GRAINGER CUSTOM SOLUTIONS.......................................... 5
GRAINGER INTEGRATED SUPPLY......................................... 5
GRAINGER CONSULTING SERVICES....................................... 5
INTERNET COMMERCE.................................................. 6
LAB SAFETY SUPPLY, INC............................................. 6
INDUSTRY SEGMENTS.................................................. 6
COMPETITION........................................................ 6
EMPLOYEES.......................................................... 6
Item 2: PROPERTIES........................................................... 6-7
Item 3: LEGAL PROCEEDINGS.................................................... 7
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 7
Executive Officers Of The Company................................................... 7-8
PART II
Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.................................... 8
Item 6: SELECTED FINANCIAL DATA.............................................. 9
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS...................................... 9-14
RESULTS OF OPERATIONS.............................................. 9-11
YEAR 2000.......................................................... 12-13
FINANCIAL CONDITION................................................ 13
INFLATION AND CHANGING PRICES...................................... 14
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 14
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 14
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 14
Item 11: EXECUTIVE COMPENSATION............................................... 14
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 14
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 14
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K...... 15
Signatures.......................................................................... 16
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 17
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 18-38
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 the leading North American provider of maintenance, repair, and
operating (MRO) supplies, services, and related information to businesses and
institutions. W.W. Grainger, Inc. regards itself as being in the service
business. As used herein, "Company" means W.W. Grainger, Inc., and/or its
subsidiaries as the context may require.
In late 1997, the Company began an organizational restructuring with the
formation of several business operations. Several of these operations were
originally part of the Grainger branch-based business. In addition, Grainger
Integrated Supply began refocusing on serving customers through materials
management service contracts. These changes were made to create greater focus
and accountability in serving the diverse needs of the Company's customers. 1998
was a transition year in establishing the refocused organization.
The Company offers a breadth of MRO solutions by combining products, services,
and information. It tailors its capabilities toward the objective of providing
the lowest total cost MRO solution to select customer groups. The Company serves
the diverse needs of its customers through several focused businesses.
The Branch-based Distribution businesses serve traditional customers with
immediate MRO needs. The other businesses of the Company serve customers with
more complex needs and/or customers who prefer to purchase through less
traditional channels, such as the Internet and direct marketing.
The Company also has a business support function which provides coordination and
guidance in the areas of Accounting, Administrative Services, Aviation, Business
Development, Communications, Compensation and Benefits, Employee Development,
Finance, Government Regulations, Human Resources, Industrial Relations, Investor
Relations, Insurance and Risk Management, Internal Audit, International
Operations, Legal, Planning, Real Estate and Construction Services, Security and
Safety, Taxes, and Treasury services. These services are provided in varying
degrees to all of the business units.
A number of Company-wide strengths provide each business with an advantage in
serving its market. These strengths include technology and information
management, supplier partnerships, supply chain integration skills, and an
understanding of the customers' MRO environments. The Company's efforts are
guided by two major initiatives to drive growth and provide value:
o Create focused businesses to serve customer needs and find new growth
opportunities within existing businesses.
o Develop and embrace new technologies that strengthen the Company's current
capabilities and help drive the future of the MRO marketplace.
The Company does not engage in basic or substantive product research and
development activities. New items are added regularly to the Company's product
lines on the basis of market information, recommendations of its employees,
customers, and suppliers, and other factors. The Company's research and
development, instead, are focused on new methods of serving customers.
For a discussion of the Year 2000 issue, see "Item 7: Management's Discussion
and Analysis of Financial Condition and the Results of Operations" appearing
later in this report.
Branch-based Distribution Businesses
The Company's Branch-based Distribution businesses provide customers with
solutions to their immediate MRO needs throughout North America. Logistics
networks are configured for rapid availability. A broad selection of MRO
products is offered at local branches through user-friendly catalogs and via the
Internet. The Branch-based Distribution businesses include Grainger Industrial
Supply, Acklands-Grainger Inc., Grainger Parts, Grainger, S.A. de C.V.,
Puerto Rico, Grainger Export, and Grainger Global Sourcing.
Grainger Industrial Supply
- ---------------------------
The focus of Grainger Industrial Supply is to provide a broad-line of MRO
products quickly and easily to American businesses of all sizes. Its primary
customers are small and medium-sized companies. It also addresses large-sized
companies' immediate MRO needs.
Grainger Industrial Supply operates 349 branches in all 50 states. These
branches are located within 20 minutes of the majority of U.S. businesses and
carry inventory to support their local market needs. Products are available for
immediate pick-up, same-day shipment, or delivery.
3
An average branch has 15 employees and handles about 280 transactions per day.
During 1998, an average of approximately 98,100 sales transactions were
completed daily. Each branch tailors its inventory to local product demand. In
1998, Grainger Industrial Supply invested more than $8,900,000 in new branches,
relocations, and additions to branches. Three new branches were opened, seven
were relocated, and a number of remodeling projects were completed during the
year.
Grainger Industrial Supply has six Zone Distribution Centers (ZDCs) in
operation. The ZDC logistics network provides a break-bulk function for faster
branch stock replenishment. In addition, ZDCs handle shipped orders for all
branches located in their zone.
Large computer controlled stocks, which are maintained at two Regional
Distribution Centers (RDCs), located in Greenville County, South Carolina, and
Kansas City, Missouri, and a National Distribution Center (NDC) located in the
Chicago area, provide the branches and customers with some protection against
variable demand and delayed factory deliveries. The NDC is a centralized storage
and shipping facility servicing the entire network with slower moving inventory
items.
During 1998, Grainger Industrial Supply began its conversion from its legacy
systems to a new business enterprise system. This conversion will continue into
1999.
Grainger Industrial Supply sells principally to contractors, service shops,
industrial and commercial maintenance departments, manufacturers, hotels,
government, and health care and educational facilities. Sales transactions
during 1998 were made to more than 1,300,000 customers. Grainger Industrial
Supply estimates that approximately 24% of 1998 sales consisted of items bearing
the Company's registered trademarks, including DAYTON(R) (principally electric
motors, heating and ventilation equipment), TEEL(R) (liquid pumps), SPEEDAIRE(R)
(air compressors), AirHandler(R) (air filtration equipment), DEM-KOTE(R) (spray
paints), WESTWARD(R) (hand and power tools), and LUMAPRO(TM) (task and outdoor
lighting), as well as other trademarks. 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 generally
consisted of other well recognized brands.
Grainger Industrial Supply's marketing programs had important changes in 1998.
Now, all marketing resources are integrated to achieve maximum results during
each promotion. Sales calls, phone sales, branch merchandising, direct
marketing, and advertising are all focused around the overall marketing program.
The Grainger Industrial Supply Catalog offers more than 81,000 MRO products from
more than 1,000 suppliers, most of whom are manufacturers. Approximately 2
million copies of the catalog are printed and distributed. The most current
edition was issued in January 1999. The largest supplier in 1998, a diversified
manufacturer through 20 of its divisions, accounted for 10.8% of purchases. No
significant difficulty has been encountered with respect to sources of supply.
The Grainger Industrial Supply Electronic Catalog brings, directly to the
customer's place of business, a fast, easy way to select products. Through the
Electronic Catalog, the customer can use a variety of ways to describe a needed
product, and then review Grainger Industrial Supply's offerings, complete with
specifications, prices, and pictures. Another Electronic Catalog feature
includes a cross-reference function that allows customers to retrieve product
information using their own stock numbers. More than 350,000 copies of the
current version of the Electronic Catalog have been distributed. The Electronic
Catalog is also used at the branches as a training tool and a resource for
identifying appropriate products for customers' applications.
The Internet is an important growth initiative for Grainger Industrial Supply.
Access to Grainger Industrial Supply 24 hours a day, 7 days a week, is a major
convenience for many customers.
Acklands-Grainger Inc. (AGI)
- ----------------------------
AGI, acquired in December 1996, is the leading branch-based Canadian broad line
MRO distributor. It serves customers through 180 branches and 6 distribution
centers across Canada. AGI distributes tools, lighting, HVAC, safety supplies,
pneumatics, instruments, welding equipment and supplies, motors, and shop
equipment, as well as many other items. A comprehensive catalog is used to
showcase the product line and to help customers select products. This catalog,
with over 70,000 products listed, supports the efforts of 268 sales
representatives throughout Canada. A French language catalog was introduced
during 1998. During 1998, an average of 17,800 sales transactions were completed
daily.
4
Grainger Parts
- --------------
Grainger Parts provides access to over 250,000 parts and accessories through its
centralized warehouse located in Northbrook, Illinois. Over 180,000 pages of
parts diagrams are maintained on-line. Grainger Parts handled about 1,800,000
customer calls in 1998 through its call centers in Northbrook, Illinois and
Waterloo, Iowa.
Grainger Parts maintained its ISO 9002 certification in 1998. Grainger Parts'
100% compliance with ISO 9002 standards ranked them among the top 10% of all
ISO-certified companies.
Grainger, S.A. de C.V.
- ----------------------
Grainger, S.A. de C.V. serves the traditional MRO product needs of customers in
Mexico. The business employed 66 sales representatives at December 31, 1998.
From its 80,000 square foot facility outside Monterrey, the business provides
rapid delivery of over 60,000 products throughout Mexico.
Grainger Global Sourcing
- ------------------------
Grainger Global Sourcing procures competitively priced, high quality products
sourced outside the United States. These items are sold primarily under private
label by Grainger Industrial Supply and the Company's other businesses. Products
obtained through Grainger Global Sourcing in 1998 include WESTWARD(R) tools and
LUMAPRO(TM) lighting products.
Other Business Units
While some larger companies have immediate MRO needs that can be handled by the
Company's Branch-based Distribution businesses, many also require integrated
supply or commodity management services to handle their more complex purchasing
and operating environments. In addition, as technology advances and the MRO
marketplace evolves, some customers are choosing to buy products through less
traditional channels such as the Internet and direct marketing. For these
customers, the Company offers a number of solutions. These businesses include
Grainger Custom Solutions, Grainger Integrated Supply, Grainger Consulting
Services, Internet Commerce, and Lab Safety Supply, Inc.
Grainger Custom Solutions
- -------------------------
Grainger Custom Solutions was formed in 1998 and serves large customers that are
looking to businesses to manage entire MRO product categories. Many companies
are looking for some of the benefits of integrated supply, but are not ready for
a total outsourcing solution or on-site management services.
Grainger Custom Solutions offers customers management of six major product
categories, along with access to the other broad product lines from Grainger
Industrial Supply. Customers are guaranteed specific cost reductions, with
incentives for both them and Grainger Custom Solutions if targets are exceeded.
In 1998, the business began operating two call centers and four distribution
centers. Grainger Custom Solution's customers' additional broad product needs
are fulfilled through the Grainger Industrial Supply branch system.
Grainger Integrated Supply
- --------------------------
Grainger Integrated Supply is focused on customers who have chosen to outsource
their entire indirect materials management process. By retaining Grainger
Integrated Supply for this purpose, these organizations are better able to focus
on their core business objectives and improve their global competitiveness.
Grainger Integrated Supply offers a full complement of on-site outsourcing
solutions, including business process reengineering, inventory management,
supply chain management, tool crib management, and information management.
Grainger Integrated Supply provides its clients with access to millions of
products through its relationships with world class manufacturers, service
providers, and distributors, including Grainger Industrial Supply. Products not
covered through these partnerships are found through Grainger Integrated
Supply's product sourcing process.
Grainger Consulting Services
- ----------------------------
Many customers realize that they are not effectively managing their MRO
procurement process, but are not sure what approach to take to improve the
process. Grainger Consulting Services is a leading professional services firm
specializing in MRO materials management consulting.
Grainger Consulting Services provides the expertise and professional resources
that help clients address indirect materials management issues and improve
operating efficiencies, productivity, and asset utilization. The business offers
consulting services which include process reengineering, inventory database
development, and "turn-key" stockroom set up.
5
Internet Commerce
- -----------------
The Company's product information content, relationships with leading
manufacturers and distributors, and access to over two million business
customers position the Company uniquely to benefit from Internet commerce. The
Grainger.com site was one of the first MRO Web sites. In 1998, Internet Commerce
continued to invest to increase its Internet presence. New functionality for
Grainger.com included the introduction of CasterMatch(SM), another in the
Company's MatchMaker(SM) series and a new, more powerful search capability was
added. Grainger.com also began accepting credit card purchases in 1998. The
Company was pleased to have Grainger.com once again be named among the top ten
business-to-business Internet sites in the world by Advertising Age's Business
Marketing Magazine.
In February 1999, the Company announced OrderZone.com by Grainger, an Internet
marketplace where customers can buy products from a number of different
suppliers using a single site. The Company has brought six industry leaders
together to create a one-stop, on-line, business-to-business service for the
procurement of a wide variety of products and services. OrderZone.com is a
powerful, easy, and convenient solution for businesses looking to streamline
their procurement process. Internet Commerce applied its expertise to create
this Internet-based multi-distributor site. Customers can search across products
from a number of leading complementary distributors. A single order can be
placed across multiple distributors, and customers will receive a single
invoice. Currently in test market, OrderZone.com is expected to open for
business later in 1999.
Lab Safety Supply, Inc.
- -----------------------
Lab Safety Supply is a leading direct marketer of safety products and other
industrial supplies to U.S. businesses. Located in Janesville, Wisconsin, Lab
Safety Supply reaches its customers through its General Catalog, targeted
catalogs, and other marketing materials which are distributed throughout the
year.
Customers select Lab Safety Supply for its extensive product depth (over 50,000
products in the 1999 General Catalog), its superior technical knowledge, and its
excellent service. It is a primary safety supplier for many small and
medium-sized companies and a critical safety back-up supplier for many larger
companies.
Industry Segments
The Company has concluded that it has one reportable industry segment:
Branch-based Distribution. For segment information and 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: 1998, $2,103,902,000; 1997, $1,997,821,000; 1996,
$2,119,021,000; 1995, $1,669,243,000; and 1994, $1,534,751,000.
Competition
The Company faces competition in all the markets it serves, from manufacturers
(including some of the Company's own suppliers) that sell directly to certain
segments of the market, from wholesale distributors, catalog houses, and certain
retail enterprises.
The principal means by which the Company competes with manufacturers and other
distributors is by providing local stocks, efficient service, account managers,
competitive prices, its several catalogs, which include product descriptions and
in certain cases, extensive technical and application data, procurement process
consulting services, utilizing electronic and Internet commerce technology, and
other efforts to assist customers in lowering their total MRO costs. The Company
believes that it can effectively compete on a price basis with its 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, 1998, the Company had 15,270 employees, of whom 12,967 were
full-time and 2,303 were part-time or temporary. The Company has never had a
major work stoppage and considers its employee relations generally to be good.
Item 2: Properties
As of December 31, 1998, the Company's facilities totaled 16,799,000 square
feet, an increase of 2.1% over 1997. The Company's Grainger Industrial Supply
and Acklands-Grainger Inc. (AGI) businesses account for the majority of the
Company's total square footage. Grainger Industrial Supply facilities are
located throughout the United States. AGI facilities are located throughout
Canada.
6
The Company's Grainger Industrial Supply branches range in size from 2,000 to
109,000 square feet and average 22,000 square feet. Most are located in or near
major metropolitan areas, many in industrial parks. 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 & National Distribution Center 1,517,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County, SC (1) Regional Distribution Center 1,090,000
United States (1) 6 Zone Distribution Centers 1,345,000
United States (2) 349 Grainger Industrial Supply branch locations 7,581,000
United States and Mexico (3) All other facilities 1,573,000
Canada (4) 181 AGI facilities 2,258,000
----------
Total square feet 16,799,000
==========
The Company is constructing an office facility to house a large portion of the
Chicago-area office workforce on owned property. Construction of this Lake
Forest, Illinois facility is scheduled to be completed during 1999. Certain
Chicago-area owned and leased office facilities will be vacated when this new
facility becomes operational.
- -------------------------------------------------------------------------------
(1) These facilities are either owned or leased with leases expiring between
1999 and 2003. The owned facilities are not subject to any mortgages.
(2) Grainger Industrial Supply branches consist of 278 owned and 71 leased
properties. The owned facilities are not subject to any mortgages.
(3) Other facilities represent owned and leased general branch offices,
distribution centers, and branches. 2 branches are located in Puerto Rico,
and 1 branch/distribution center is located in Monterrey, Mexico. The owned
facilities are not subject to any mortgages.
(4) The majority of these facilities were acquired through the acquisition of
the industrial distribution business of Acklands Limited on December 2,
1996. The properties consist of general offices, distribution centers, and
branches that are either owned or leased. 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 or its results of operations.
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 1998.
Executive Officers of the Company
Following is information about the Executive Officers of the Company as of March
1, 1999. Executive Officers of the Company generally serve until the next annual
election of officers, or until earlier resignation or removal.
Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
James M. Baisley (66) Senior Vice President (a position assumed in 1995
after serving as Vice President), General Counsel,
and Secretary.
Donald E. Bielinski (49) Group President, a position assumed in 1997 after
serving as Senior Vice President, Marketing and
Sales. Prior to assuming the last-mentioned
position in 1995, Mr. Bielinski served as Senior
Vice President, Organization and Planning. He has
also served as Vice President and Chief Financial
Officer.
Wesley M. Clark (46) Group President, a position assumed in 1997 after
serving as Senior Vice President, Operations and
Quality. Prior to assuming the last-mentioned
position earlier in 1997, Mr. Clark served as Vice
President, Field Operations and Quality.
Previously, he served as President of the Sanitary
Supply and Equipment businesses.
(continued on next page)
7
Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
Jere D. Fluno (57) Vice Chairman. Mr. Fluno is a member of the Office
of the Chairman.
Gary J. Goberville (52) Vice President, Human Resources. Before joining
the Company in 1995, Mr. Goberville served as an
executive with GenCorp, Inc.
David W. Grainger (71) Senior Chairman of the Board, a position assumed
in 1997 after serving as Chairman of the Board. He
was the Company's Chief Executive Officer until
1995 and President from 1992 to 1994. Mr. Grainger
is a member of the Office of the Chairman.
Richard L. Keyser (56) Chairman of the Board, a position assumed in 1997,
and Chief Executive Officer, a position assumed in
1995. Other positions in which he served during
the past five years were President, Chief
Operating Officer, Executive Vice President, and
Grainger Division President. Mr. Keyser is a
member of the Office of the Chairman.
P. Ogden Loux (56) Senior Vice President, Finance and Chief Financial
Officer, positions assumed in 1997 after serving
as Vice President, Finance. Prior to assuming the
last-mentioned position in 1994, Mr. Loux served
the Grainger Division as Vice President, Business
Support.
Robert D. Pappano (56) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995 after
serving as Vice President and Treasurer.
James T. Ryan (40) Vice President, Information Services, a position
assumed in 1994 after serving as President, Parts
Company of America. Prior to assuming the
last-mentioned position in 1993, Mr. Ryan served
as Director, Product Management of the Grainger
Division.
John A. Schweig (41) Senior Vice President (a position assumed in 1997
after serving as Vice President), Business
Development and International. Prior to assuming
these responsibilities in 1996, Mr. Schweig served
as Vice President and General Manager, Direct
Marketing. Previously, he served the Grainger
Division as Vice President, Marketing.
John W. Slayton, Jr. (53) Senior Vice President, Supply Chain Management, a
position assumed in 1997 after serving as Senior
Vice President, Product Management. Prior to
assuming the last-mentioned position in 1995, Mr.
Slayton served as Vice President, Product
Management of the Grainger Division.
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 1998 and 1997, as adjusted to reflect the Company's
2-for-1 stock split effective May 11, 1998, are shown below.
Prices
----------------------------
Quarters High Low Dividends
- ----------------------------------------------------------------------------
1998 First $51 13/16 $46 1/2 $0.135
Second 54 23/32 49 1/8 0.15
Third 51 13/16 39 3/16 0.15
Fourth 47 36 7/16 0.15
- ----------------------------------------------------------------------------
Year $54 23/32 $36 7/16 $0.585
- ----------------------------------------------------------------------------
1997 First $41 1/4 $36 13/16 $0.125
Second 40 1/2 35 1/4 0.135
Third 49 7/8 39 0.135
Fourth 49 9/32 42 5/8 0.135
- ----------------------------------------------------------------------------
Year $49 7/8 $35 1/4 $0.53
- ----------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 1,1999 was 1,800.
8
Item 6: Selected Financial Data
Years Ended December 31,
--------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Net sales............................. $4,341,269 $4,136,560 $3,537,207 $3,276,910 $3,023,076
Net earnings.......................... 238,504 231,833 208,526 186,665 127,874
Net earnings per basic share.......... 2.48 2.30 2.04 1.84 1.26
Net earnings per diluted share........ 2.44 2.27 2.02 1.82 1.25
Total assets.......................... 2,103,902 1,997,821 2,119,021 1,669,243 1,534,751
Long-term debt........................ 122,883 131,201 6,152 8,713 1,023
Cash dividends paid per share......... $ 0.585 $ 0.53 $ 0.49 $ 0.445 $ 0.39
NOTE: 1994 net earnings include restructuring charges of $49,779.
Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations
RESULTS OF OPERATIONS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No.131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 requires disclosure of certain business segment information based
on how management evaluates the business. In late 1997, the Company began an
organizational restructuring with the formation of several business operations
to meet the diverse needs of its customers. The Company has reported 1998 data
reflecting this new organization. 1997 and 1996 segment data were not reported
because it is impractical to restate these years to reflect the new
organization. (See Note 15 to the Consolidated Financial Statements included in
the Company's 1998 Form 10-K).
All per share data have been adjusted to reflect the 2-for-1 stock split
effective May 11, 1998.
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 percent of net sales for the years ended
December 31, 1998, 1997, and 1996, and the percent of increase (decrease) in
such items in 1998 and 1997 from the prior year.
Years Ended December 31,
---------------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percent of (Decrease) from
Net Sales Prior Year
--------------------------------- ----------------------
1998 1997 1996 1998 1997
----- ----- ----- ----- -----
Net sales............................................ 100.0% 100.0% 100.0% 4.9% 16.9%
Cost of merchandise sold............................. 63.2 63.9 64.2 3.8 16.4
Operating expenses................................... 27.4 26.6 26.0 8.0 19.5
Other (income) deductions, net....................... 0.2 0.1 (0.1) 102.5 (204.9)
Income taxes......................................... 3.7 3.8 4.0 2.9 12.4
Net earnings......................................... 5.5% 5.6% 5.9% 2.9% 11.2%
As used in "Item 7: Management's Discussion and Analysis of Financial Condition
and the Results of Operations," "Grainger branch-based business" reflects the
operations of the Company excluding Acklands-Grainger Inc., Lab Safety Supply,
Inc., and Grainger Parts.
Net Sales
The 1998 Company net sales increase of 4.9%, as compared with 1997, was
principally volume related. This increase primarily represented the effects of
the Company's market initiatives which included new product additions, and the
National Accounts, Integrated Supply, and direct marketing programs. Partially
offsetting the growth from these initiatives was a decline in sales at
Acklands-Grainger Inc. (AGI), the Company's Canadian subsidiary. This decline
resulted from an unfavorable change in the Canadian exchange rate. In Canadian
dollars, AGI's sales rate was relatively flat when comparing 1998 with 1997.
Weak demand in the mining, forestry, oil, exploration, and agriculture sectors
was the primary cause for AGI's flat sales performance. The Company's sales
growth rate was 6.1% after excluding AGI from both 1998 and 1997.
9
The Company's Grainger branch-based business experienced selling price increases
of about 0.7% when comparing 1998 with 1997. Sales to National Account customers
within the Grainger branch-based business increased to approximately
$1,120,000,000. Sales to National Account customers increased about 8%, on a
comparable basis, over 1997.
The 1997 Company net sales increase of 16.9%, as compared with 1996, was
principally volume related. This increase was affected by 1997 having one less
sales day than 1996 (on a daily basis, net sales increased 17.4%). Excluding the
incremental net sales of AGI, the Canadian industrial distribution business
acquired on December 2, 1996, net sales increased 7.7% (8.1% on a daily basis).
This increase primarily represented the effects of the Company's marketing
initiatives which included new product additions, the expansion of branch
facilities, and the National Accounts, Integrated Supply, and direct marketing
programs. Partially offsetting the growth from these initiatives were two
factors. Sales in the 1997 third quarter were negatively affected by the United
Parcel Service's (UPS) work stoppage which began on August 4, 1997, and lasted
more than two weeks. The Company estimates that 1997 sales were approximately
$14,000,000 lower as a result of the UPS work stoppage. The second factor was
that daily sales of seasonal products for the Company, excluding AGI, declined
an estimated 4% in the year 1997, as compared with the same 1996 period. Many
regions of the United States experienced milder weather during most of 1997
versus 1996.
The Company's Grainger branch-based business experienced selling price increases
of about 1.1% when comparing the year 1997 with 1996. The Grainger branch-based
business National Accounts program showed strong growth for the year, with sales
increasing to approximately $1,015,000,000. Daily sales to National Account
customers increased approximately 17%, on a comparable basis, over 1996.
Net Earnings
Net earnings for 1998 increased 2.9% over 1997. The increase for 1998 was lower
than the increase in net sales due to losses incurred in developing business
ventures, operating expenses increasing at a rate faster than the growth rate in
net sales, lower interest income, higher interest expense, and higher
unclassified-net expenses, partially offset by higher gross profit margins. A
number of factors contributed to 1998 net earnings increasing at a slower rate
than 1998 net sales.
1. The Company continues to invest in developing its business operations. The
following operations experienced pre-tax operating losses for the year
1998:
Operating
(Loss)
Net Sales (pre-tax)
--------- ----------
(In thousands of dollars)
Grainger Integrated Supply....... $80,577 $(17,685)
Mexico business.................. 49,325 (3,399)
Grainger Integrated Supply's average daily sales grew about 56% for the
year 1998 as compared with 1997. Grainger Integrated Supply serves
customers through materials management services contracts. These contracts
are characterized by a complete outsourcing of the indirect materials
process. Customers not meeting the above definition were transferred to
the Company's Grainger Custom Solutions and Grainger Industrial Supply
businesses during 1998. Average daily sales in Mexico grew about 21% for
the year 1998 as compared with 1997. Grainger Integrated Supply and the
Mexico business continue to grow sales, improve processes, develop
systems, and expand marketing programs.
2. The Company's business-to-business Web site, Grainger.com, allows
customers to do business using the Internet. The Company developed an
Internet marketplace where customers will be able to buy products from a
number of different suppliers using a single site. This marketplace
concept is currently being tested with customers. In developing these
Internet initiatives, the Company incurred operating expenses of
approximately $14,000,000 in 1998 and $6,000,000 in 1997.
3. Operating expenses related to data processing were higher by an estimated
$15,000,000 as compared with 1997, as adjusted for 1998 volume increases.
This was primarily due to incurring expenses related to Year 2000
compliance and the ongoing installation of the new business enterprise
system.
4. Operating expenses were also higher in 1998 versus 1997 as a result of the
following investments:
a. Development of the Grainger Custom Solutions business; and
b. Expanded marketing programs at Lab Safety Supply.
10
The decrease in interest income resulted from lower average daily invested
balances and from lower average interest rates earned. The increase in interest
expense resulted from higher average interest rates paid on all outstanding
debt, partially offset by lower average borrowings and by higher capitalized
interest. The higher unclassified-net expense primarily resulted from foreign
currency translation losses relating to the Company's operations in Mexico and
to a write-off of abandoned capital projects.
The Company's gross profit margin increased by 0.67 percentage point when
comparing the years 1998 and 1997. Of note are the following factors affecting
the Company's gross profit margin:
1. Ongoing programs to reduce product costs improved the gross profit margin.
2. Selling price increases of 0.7% on Grainger Industrial Supply Catalog
products improved the gross profit margin.
3. The change in product mix improved the gross profit margin. The sales of
Lab Safety Supply (generally higher than average gross profit margins)
increased as a percent of total sales. The sales of AGI (generally lower
than average gross profit margins) decreased as a percent of total sales.
Net earnings for 1997 increased 11.2% over 1996. This increase for 1997 was
lower than the increase in net sales due to operating expenses increasing at a
rate faster than the rate of growth in net sales, lower interest income, higher
interest expense, and a higher effective income tax rate, partially offset by
higher gross profit margins. Factors contributing to the increase in operating
expenses were the following:
1. Payroll and other operating expenses were higher as a result of the
following initiatives:
a. Continued expansion of the Company's integrated supply business;
b. Continued development of the Company's full service marketing
capabilities on the Internet;
c. Continued refocus and realignment of the Direct Sales force;
d. Increased advertising expenses supporting the Company's marketing
initiatives; and
e. Expansion of the Company's telesales capability.
2. Payroll and other operating expenses were higher by an estimated
$13,000,000 for Year 2000 compliance, of which approximately $10,000,000
related to outside services.
3. The operating expenses of AGI, which contributed to the increase, were
included for the entire year of 1997 as compared with only the month of
December in 1996.
The decrease in interest income resulted from lower average daily invested
balances. This decrease was partially offset by higher average interest rates
earned. The increase in interest expense resulted from higher average
borrowings, partially offset by lower average interest rates paid on all
outstanding debt. The increase in interest expense was primarily related to debt
added to finance the AGI acquisition and to the short-term debt added to
partially fund the repurchase of shares of the Company's common stock.
The Company's effective income tax rate was 40.5% for the year 1997 versus 40.2%
for the year 1996. The increase in the effective income tax rate is attributable
to proportionately higher income generated in Canada (AGI), which is taxed at a
higher rate than domestic income.
The Company's gross profit margin increased by 0.30 percentage point when
comparing the years 1997 and 1996. Excluding AGI, the Company's gross profit
margin increased 0.56 percentage point when comparing the years of 1997 and
1996. Of note were the following factors affecting the gross profit margin for
the Company, excluding AGI:
1. The change in product mix was favorable as sales of seasonal products
(generally lower than average gross profit margins) declined, and Lab
Safety Supply sales (generally higher than average gross profit margins)
increased as a percent of total sales.
2. Selling price increases exceeded the level of cost increases. Partially
offsetting the above factors was an unfavorable change in selling price
category mix, which primarily resulted from the growth in sales to the
Company's larger volume customers.
Net earnings were negatively affected by the UPS work stoppage which occurred in
August 1997. The gross profit margin lost on the estimated $14,000,000 in lost
sales, along with the incremental operating expenses incurred to serve customers
during this period, resulted in an estimated negative effect on net earnings of
about $0.03 per share.
11
Year 2000
The Company uses various software and technology that is affected by the Year
2000 issue. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or in miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company has put in place project teams dedicated to implementing a Year 2000
solution and to improving the Company's overall systems capabilities. The teams
are actively working to achieve the objectives of Year 2000 compliance and
improved internal systems. The work includes the modification of certain
existing systems, a major new system initiative, replacing hardware and software
for other systems, the creation of contingency plans, and surveying suppliers of
goods and services with whom the Company does business.
In addition to solving some Year 2000 issues, the major new system initiative
reduces the complexity which has evolved over time from the development of
in-house systems. This complexity, which makes it difficult to change and modify
systems quickly, has resulted in a proliferation of programs and databases.
These issues will be addressed by the installation of a new business enterprise
system to replace a majority of the Company's primary operating systems. This
major system initiative has been undertaken to improve the Company's ability to
quickly respond to changing market conditions, to reduce the cost of maintaining
and supporting existing systems, and to leverage the use of information.
The Company is using a standard methodology with three phases for the Year 2000
compliance project. Phase I includes conducting a complete inventory of
potentially affected areas of the business (including information technology and
non-information technology), assessing and prioritizing the information
collected during the inventory, and completing detailed project plans to address
all key areas of the project. Phase II includes the remediation and testing of
all mission critical areas of the project, surveying suppliers of goods and
services with whom the Company does business, and the creation of contingency
plans to address potential Year 2000 related problems. Phase III of the project
includes the remediation and testing of non-mission critical areas of the
project, and the implementation of contingency plans as may be necessary. The
Company completed Phase I. Phase II and Phase III are in process.
The Company is using both internal and external resources to reprogram, replace,
and test the software and hardware for Year 2000 compliance. Year 2000 work for
mission critical and most non-mission critical systems and testing of all system
revisions is planned to be completed in the third quarter of 1999. The expenses
associated with this project include both a reallocation of existing internal
resources plus the use of outside services. Project expenses for 1998 and 1997
amounted to an estimated $39 million. The total remaining expenses associated
with the Year 2000 project are estimated to be between $34 and $39 million. Due
to the Year 2000 project and the major new system initiative, 1998 data
processing expenses were approximately $15 million higher than 1997 expenses as
adjusted for 1998 volume related charges. The data processing expenses for 1999
are estimated to be a net $10 to $12 million higher than the 1998 expenses as
adjusted for 1999 volume related changes. It is expected that these projects
will be funded through the Company's operating cash flows.
In addition to addressing internal systems, the Company's Year 2000 project team
has surveyed suppliers of goods and services with whom the Company does
business. This is being done to determine the extent to which the Company is
vulnerable to failures by third parties to remediate their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies,
including those on which the Company's systems interact, will be timely
converted. A failure to convert by another company on a timely basis or a
conversion by another company that is incompatible with the Company's systems,
may have a material adverse effect on the Company.
As part of Phase II of the Year 2000 project, the Company is creating
contingency plans to address potential Year 2000 related problems with key
business processes. These plans, which are scheduled to be completed and tested
in the second quarter of 1999, are expected to address risks to the Company's
systems as well as risks from third party suppliers, customers, and others with
whom the Company does business. It is recognized that while the Company cannot
eliminate all potential risks, the effect of the risks on the business can be
partially mitigated by creating and testing contingency plans where appropriate.
12
The estimated expenses for these projects and the dates by which the Company
will complete the Year 2000 work are based on management's current assessment
and were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that all components of Year 2000 compliance will be addressed as
planned. Uncertainties include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and the sources and timeliness of various systems
replacements.
Management believes that failure to address the Year 2000 issue on a timely
basis could have a material adverse effect on the Company and continues to be
committed to devoting the appropriate resources to address the Year 2000 issue.
FINANCIAL CONDITION
Working capital was $541,872,000 at December 31, 1998, compared with
$649,107,000 at December 31, 1997, and $704,175,000 at December 31, 1996. The
ratio of current assets to current liabilities was 1.8, 2.2, and 2.1 at such
dates.
Net cash flows from operations of $334,591,000 in 1998, $426,563,000 in 1997,
and $272,410,000 in 1996, have continued to improve the Company's financial
position and serve as the primary source of funding for capital requirements.
For information as to the Company's cash flows, see "Item 8: Financial
Statements and Supplementary Data."
In each of the past three years, a portion of working capital has been used for
additions to property, buildings, and equipment, and capitalized software as
summarized in the following table.
1998 1997 1996
-------- -------- -------
(In thousands of dollars)
Land, buildings, structures, and improvements....... $85,016 $78,529 $31,881
Furniture, fixtures, machinery, and equipment....... 45,170 29,723 30,170
-------- -------- -------
130,186 108,252 62,051
Capitalized software................................ 36,983 122 900
-------- -------- -------
Total............................................... $167,169 $108,374 $62,951
======== ======== =======
On April 29, 1998, the Company's Board of Directors voted to restore an existing
share repurchase authorization to its original level of 10,000,000 shares. The
Company repurchased 4,483,100 shares of its common stock during 1998, 8,435,972
shares of its common stock during 1997, and 819,200 shares of its common stock
during 1996. As of December 31, 1998, approximately 5,600,000 shares of common
stock remain available under this repurchase authorization.
Dividends paid to shareholders were $56,683,000 in 1998, $53,934,000 in 1997,
and $50,035,000 in 1996.
On December 2, 1996, the Company acquired AGI for approximately $289,334,000,
including transaction expenses. The purchase consisted of cash payments and
transaction expenses of $136,801,000 (funded principally by short-term debt of
$132,874,000), and the issuance of 4,079,772 shares of W.W. Grainger, Inc.
common stock valued at $152,533,000. The Company repurchased the 4,079,772
shares during 1997, which is included in the 8,435,972 shares repurchased during
1997.
Internally generated funds have been the primary source of working capital and
funds needed for expanding the business, supplemented by debt as circumstances
dictated. In addition to continuing facilities optimization efforts, business
development, and systems and other infrastructure enhancements, funds are being
expended for the consolidation of Chicago-area offices into the Lake Forest,
Illinois office facility currently being constructed.
The Company continues to maintain a low debt ratio and strong liquidity
position, which provides flexibility in funding working capital needs and
long-term cash requirements. In addition to internally generated funds, the
Company has various sources of financing available, including commercial paper
sales and bank borrowings under lines of credit and otherwise. Total debt as a
percent of shareholders' equity was 18%, 12%, and 11%, at December 31, 1998,
1997, and 1996, respectively.
13
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The predominant 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 can command proper price
levels in the marketplace.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 18 to 38.
See the Index to Financial Statements and Supplementary Data on page 17.
Item 9: Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 28, 1999, 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 will be set forth in the Company's
proxy statement relating to the annual meeting of shareholders to be held April
28, 1999, 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 will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 28, 1999, and, to the extent
required, is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will be set
forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 28, 1999, and, to the extent required, is
incorporated herein by reference.
14
PART IV
Item 14: Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. Financial Statements. See Index to Financial Statements and
Supplementary Data.
2. Financial Statement Schedule. See Index to Financial Statements and
Supplementary Data.
3. Exhibits: Exhibit Index
-------------
(3) (a) Restated Articles of Incorporation dated April 27, 1994,
incorporated by reference to Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(b) By-laws, as amended, incorporated by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(10) Material Contracts:
(a) No instruments which define the rights of holders of the
Company's Industrial Development Revenue Bonds are filed
herewith, pursuant to 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 by 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) Certificate of Adjustment pursuant to the Rights Agreement
dated as of April 26, 1989, between the Company and The
First National Bank of Boston, as Rights Agent, which
Certificate relates to the two-for-one stock split of the
Company effective at the close of business on May 11, 1998,
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
(d) Compensatory Plans or Arrangements
(i) W.W. Grainger, Inc. Director Stock Plan, as amended. 39-52
(ii) W.W. Grainger, Inc. Office of the Chairman Incentive
Plan, incorporated by reference to Appendix B of the
Company's Proxy Statement dated March 26, 1997.
(iii) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive
Plan, as amended. 53-66
(iv) W.W. Grainger, Inc. 1975 Non-Qualified Stock Option
Plan as Amended and Restated, incorporated by
reference to Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1987.
(v) Executive Death Benefit Plan, as amended. 67-75
(vi) Executive Deferred Compensation Plan, incorporated
by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989.
(vii) 1985 Executive Deferred Compensation Plan, as
amended. 76-87
(viii) Summary Description of Management Incentive Program
Based on Improved Economic Earnings. 88-93
(ix) Supplemental Profit Sharing Plan, as amended,
incorporated by reference to Exhibit 10(c)(ii) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(x) Form of Change in Control Employment Agreement
between the Company and certain of its executive
officers. 94-115
(11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.
(21) Subsidiaries of the Company. 116
(23) Consent of Independent Certified Public Accountants. See Index to
Financial Statements and Supplementary Data.
(27) Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 1998.
15
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly issued this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: March 24, 1999
W.W. GRAINGER, INC.
By: /s/ R. L. Keyser By: /s/ P. O. Loux
--------------------------------- -----------------------
R. L. Keyser P.O. Loux
Chairman of the Board Senior Vice President, Finance
and Chief Executive Officer and Chief Financial Officer
(a Principal Executive Officer and (Principal Financial Officer)
a Director)
By: /s/ J. D. Fluno By: /s/ R. D. Pappano
--------------------------------- -----------------------
J. D. Fluno R. D. Pappano
Vice Chairman Vice President, Financial Reporting
(a Principal Executive Officer and and Investor Relations
a Director) (Principal Accounting Officer)
By: /s/ D. W. Grainger
---------------------------------
D. W. Grainger
Senior Chairman of the Board
(a Principal Executive Officer and
a Director)
/s/ George R. Baker March 24, 1999 /s/ James D. Slavik March 24, 1999
- ---------------------- --------------- --------------------- ---------------
George R. Baker James D. Slavik
Director Director
/s/ Robert E. Elberson March 24, 1999 /s/ Harold B. Smith March 24, 1999
- ---------------------- --------------- -------------------- ---------------
Robert E. Elberson Harold B. Smith
Director Director
/s/ Wilbur H. Gantz March 24, 1999 /s/ Fred L. Turner March 24, 1999
- ---------------------- --------------- -------------------- ---------------
Wilbur H. Gantz Fred L. Turner
Director Director
/s/ John W. McCarter, Jr. March 24, 1999 /s/ Janiece S. Webb March 24, 1999
- ------------------------- -------------- -------------------- ---------------
John W. McCarter, Jr. Janiece S. Webb
Director Director
16
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1998, 1997, and 1996
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... 18
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS.............................. 19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS................ 19
CONSOLIDATED BALANCE SHEETS
ASSETS.................................................... 20
LIABILITIES AND SHAREHOLDERS' EQUITY...................... 21
CONSOLIDATED STATEMENTS OF CASH FLOWS............................ 22-23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.................. 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... 25-36
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS............................ 36
EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE.......................... 37
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......... 38
17
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, 1998, 1997, and 1996, and
the related consolidated statements of earnings, comprehensive 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, 1998, 1997, and 1996, 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 Schedule II of W.W. Grainger, Inc., and Subsidiaries for
the years ended December 31, 1998, 1997, and 1996. In our opinion, this Schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Chicago, Illinois
February 3, 1999
18
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------ -------------
Net sales .............................. $ 4,341,269 $ 4,136,560 $ 3,537,207
Cost of merchandise sold ............... 2,743,598 2,642,208 2,269,993
------------- ------------- -------------
Gross profit ................... 1,597,671 1,494,352 1,267,214
Warehousing, marketing, and
administrative expenses .............. 1,189,689 1,101,193 921,685
------------- ------------- -------------
Operating earnings ............. 407,982 393,159 345,529
Other income or (deductions)
Interest income ...................... 1,560 2,896 4,554
Interest expense ..................... (6,652) (5,461) (1,228)
Unclassified--net .................... (2,043) (958) 33
------------- ------------- -------------
(7,135) (3,523) 3,359
------------- ------------- -------------
Earnings before income taxes ... 400,847 389,636 348,888
Income taxes ........................... 162,343 157,803 140,362
------------- ------------- -------------
Net earnings ................... $ 238,504 $ 231,833 $ 208,526
============= ============= =============
Earnings per share:
Basic ................................ $ 2.48 $ 2.30 $ 2.04
============= ============= =============
Diluted .............................. $ 2.44 $ 2.27 $ 2.02
============= ============= =============
Average number of shares outstanding:
Basic ................................ 96,231,829 100,604,518 102,295,506
============= ============= =============
Diluted .............................. 97,846,658 102,178,952 103,272,408
============= ============= =============
The accompanying notes are an integral part of these financial statements.
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net Earnings ................................ $ 238,504 $ 231,833 $ 208,526
Other comprehensive earnings:
Foreign currency translation adjustments .. (10,354) (6,948) (2,262)
--------- --------- ---------
Comprehensive earnings ...................... $ 228,150 $ 224,885 $ 206,264
========= ========= =========
The accompanying notes are an integral part of these financial statements.
19
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
------------------------------------
ASSETS 1998 1997 1996
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents .................................. $ 43,107 $ 46,929 $ 126,935
Accounts receivable, less allowances for
doubtful accounts of $15,951 for 1998, $15,803 for 1997,
and $15,302 for 1996 ..................................... 463,377 455,457 433,575
Inventories ................................................ 626,731 612,132 686,925
Prepaid expenses ........................................... 11,950 9,122 11,971
Deferred income tax benefits ............................... 61,200 59,348 60,837
---------- ---------- ----------
Total current assets ................................... 1,206,365 1,182,988 1,320,243
PROPERTY, BUILDINGS, AND EQUIPMENT
Land ....................................................... 135,636 133,213 132,095
Buildings, structures, and improvements .................... 662,236 583,823 510,386
Furniture, fixtures, machinery, and equipment .............. 411,295 370,122 343,231
---------- ---------- ----------
1,209,167 1,087,158 985,712
Less accumulated depreciation
and amortization ......................................... 548,639 494,245 434,728
---------- ---------- ----------
Property, buildings, and
equipment--net ......................................... 660,528 592,913 550,984
DEFERRED INCOME TAXES ........................................ 3,187 -- --
other assets
Goodwill ................................................... 177,355 187,963 192,555
Customer lists and other intangibles ....................... 89,573 89,699 91,882
---------- ---------- ----------
266,928 277,662 284,437
Less accumulated amortization .............................. 86,296 70,814 54,574
---------- ---------- ----------
180,632 206,848 229,863
Capitalized software--net .................................. 33,280 970 2,369
Sundry ..................................................... 19,910 14,102 15,562
---------- ---------- ----------
Other assets--net ........................................ 233,822 221,920 247,794
---------- ---------- ----------
TOTAL ASSETS ................................................. $2,103,902 $1,997,821 $2,119,021
========== ========== ==========
20
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)
December 31,
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 1996
----------- ----------- -----------
CURRENT LIABILITIES
Short-term debt ............................................. $ 88,060 $ 2,960 $ 135,275
Current maturities of long-term debt ........................ 22,831 23,834 24,753
Trade accounts payable ...................................... 287,055 261,802 240,779
Accrued contributions to employees'
profit sharing plans ...................................... 75,113 62,234 56,258
Accrued expenses ............................................ 158,214 148,149 131,199
Income taxes ................................................ 33,220 34,902 27,804
----------- ----------- -----------
Total current liabilities ............................... 664,493 533,881 616,068
LONG-TERM DEBT (less current maturities) ...................... 122,883 131,201 6,152
DEFERRED INCOME TAXES ......................................... -- 2,871 2,207
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ..................... 37,785 35,207 31,932
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--
$5 par value--authorized, 12,000,000 shares,
issued and outstanding, none .............................. -- -- --
Common Stock--$0.50 par value--authorized,
300,000,000 shares;
issued, 107,233,771 shares, 1998,
106,971,524 shares, 1997, and
106,676,052 shares, 1996 .................................. 53,617 53,486 53,338
Additional contributed capital .............................. 249,482 242,289 235,649
Treasury stock, at cost--13,728,672 shares, 1998,
9,249,572 shares, 1997,
and 819,200 shares, 1996 .................................. (572,900) (378,899) (32,090)
Unearned restricted stock compensation ...................... (17,238) (16,528) (17,597)
Cumulative translation adjustments .......................... (19,564) (9,210) (2,262)
Retained earnings ........................................... 1,585,344 1,403,523 1,225,624
----------- ----------- -----------
Total shareholders' equity .............................. 1,278,741 1,294,661 1,462,662
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........................................ $ 2,103,902 $ 1,997,821 $ 2,119,021
=========== =========== ===========
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,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net earnings ................................................ $ 238,504 $ 231,833 $ 208,526
Provision for losses on accounts receivable ................. 10,310 9,984 9,131
Depreciation and amortization:
Property, buildings, and equipment ........................ 58,256 63,257 61,585
Intangibles and goodwill .................................. 15,964 16,394 12,676
Capitalized software ...................................... 4,645 1,556 2,474
Change in operating assets and liabilities-
net of the effects of the
business acquisition:
(Increase) in accounts receivable ......................... (18,230) (31,866) (28,871)
(Increase) decrease in inventories ........................ (14,599) 74,793 (7,430)
(Increase) decrease in prepaid expenses ................... (2,828) 2,849 255
(Increase) decrease in deferred income taxes .............. (7,910) 2,153 70
Increase in trade accounts payable ........................ 25,253 21,023 1,891
Increase in other current liabilities ..................... 22,944 22,926 3,724
(Decrease) increase in
current income taxes payable ............................ (1,682) 7,098 4,339
Increase in accrued employment
related benefits costs .................................. 2,578 3,275 3,186
Other--net .................................................. 1,386 1,288 854
--------- --------- ---------
Net cash provided by operating activities ..................... 334,591 426,563 272,410
Cash flows from investing activities:
Additions to property, buildings, and equipment ............. (130,186) (108,252) (62,051)
Proceeds from sale of property, buildings,
and equipment--net ........................................ 4,315 3,066 8,069
Expenditures for capitalized software ....................... (36,983) (122) (900)
Net cash paid for business acquisition ...................... -- -- (136,144)
Other--net .................................................. (13,488) 1,682 (1,032)
--------- --------- ---------
Net cash (used in) investing activities ....................... (176,342) (103,626) (192,058)
22
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands of dollars)
Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt .................. $ 85,100 $(132,315) $ 111,698
Proceeds from long-term debt ................................ -- 126,127 1,500
Long-term debt payments ..................................... (1,079) (1,997) (2,549)
Stock options exercised ..................................... 443 2,239 2,890
Tax benefit of stock incentive plan ......................... 4,107 3,759 3,709
Purchase of treasury stock--net ............................. (193,959) (346,822) (32,090)
Cash dividends paid ......................................... (56,683) (53,934) (50,035)
--------- --------- ---------
Net cash (used in) provided by financing activities ........... (162,071) (402,943) 35,123
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ........................................ (3,822) (80,006) 115,475
Cash and cash equivalents at beginning of year ................ 46,929 126,935 11,460
--------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 43,107 $ 46,929 $ 126,935
========= ========= =========
Non-cash investing and financing activities
from acquisition of business:
Fair value of assets acquired ............................. $ 338,101
Liabilities acquired ...................................... (49,424)
Fair value of common stock issued ......................... (152,533)
---------
Net cash paid for business acquisition ........................ $ 136,144
=========
The accompanying notes are an integral part of these financial statements.
23
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)
Unearned
Additional Restricted Cumulative
Common Contributed Treasury Stock Translation Retained
Stock Capital Stock Compensation Adjustments Earnings
----------- ----------- ----------- ------------ ----------- -----------
Balance at January 1, 1996 ............. $ 50,894 $ 61,101 $ -- $ (19) $ -- $ 1,067,133
Exercise of stock options .............. 169 6,404 -- -- -- --
Issuance of 4,079,772 shares
of common stock
for business acquisition ............. 2,040 150,493 -- -- -- --
Issuance of 470,000 shares
of restricted common stock ........... 235 17,625 -- (17,860) -- --
Amortization of unearned
restricted stock compensation ........ -- 26 -- 282 -- --
Purchase of 819,200 shares of
treasury stock ....................... -- -- (32,090) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (2,262) --
Net earnings ........................... -- -- -- -- -- 208,526
Cash dividends paid
($0.49 per share) .................... -- -- -- -- -- (50,035)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1996 ........... 53,338 235,649 (32,090) (17,597) (2,262) 1,225,624
Exercise of stock options .............. 138 5,753 -- -- -- --
Issuance of 20,000 shares
of restricted common stock ........... 10 793 -- (803) -- --
Amortization of unearned
restricted stock compensation ........ -- 107 -- 1,872 -- --
Purchase of 8,430,372 shares
of treasury stock, net of
5,600 shares issued .................. -- (13) (346,809) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (6,948) --
Net earnings ........................... -- -- -- -- -- 231,833
Cash dividends paid
($0.53 per share) .................... -- -- -- -- -- (53,934)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1997 ........... 53,486 242,289 (378,899) (16,528) (9,210) 1,403,523
Exercise of stock options .............. 105 4,316 -- -- -- --
Issuance of 52,500 shares
of restricted common stock ........... 26 2,706 -- (2,732) -- --
Amortization of unearned
restricted stock compensation ........ -- 129 -- 2,022 -- --
Purchase of 4,479,100 shares
of treasury stock, net of
4,000 shares issued .................. -- 42 (194,001) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (10,354) --
Net earnings ........................... -- -- -- -- -- 238,504
Cash dividends paid
($0.585 per share) ................... -- -- -- -- -- (56,683)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1998 ........... $ 53,617 $ 249,482 $ (572,900) $ (17,238) $ (19,564) $ 1,585,344
=========== =========== =========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
24
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is engaged in the distribution of maintenance, repair, and operating
(MRO) supplies, services, and related information to businesses and institutions
in North America.
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.
STOCK SPLIT
The consolidated financial statements have been retroactively restated to
reflect the 2-for-1 stock split effective May 11, 1998.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the estimates of revenues and expenses.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue at the date products are shipped or at the date
services are completed.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily 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. The principal estimated useful lives used in
determining depreciation are as follows:
Buildings, structures, and improvements.......... ... 10 to 45 years
Furniture, fixtures, machinery, and equipment........ 3 to 10 years
Improvements to leased property are 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 $2,323,000, $1,810,000, and
$1,772,000, in 1998, 1997, and 1996, respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are generally
measured using the local currency as the functional currency. Net exchange gains
or losses resulting from the translation of financial statements of foreign
operations, and related long-term debt, except for those from highly
inflationary economies, are recorded as a separate component of shareholders'
equity.
PURCHASED TAX BENEFITS
The Company 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
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes being provided
for temporary differences between financial and tax reporting.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income."
25
SFAS No. 130 requires disclosure of the components of and total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners.
The Company's comprehensive income includes foreign currency translation
adjustments with no related income tax effects. The cumulative amount of other
comprehensive income adjustments were ($19,564,000), ($9,210,000), and
($2,262,000) at December 31, 1998, 1997, and 1996, respectively.
SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers.
EMPLOYEE BENEFITS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The provisions of SFAS No. 132 revise employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or expense recognition of these plans.
CAPITALIZED SOFTWARE
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," is effective for fiscal years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use. The Company plans
to adopt SOP 98-1 beginning January 1,1999.
NOTE 2--BUSINESS ACQUISITION
Effective December 2, 1996, the Company purchased the stock of a subsidiary of
Acklands Limited (a Canadian corporation). The business acquired is the largest
nationwide distributor of broad line industrial supplies in Canada. The
aggregate purchase price was approximately $289,334,000 including transaction
expenses. The purchase consisted of cash payments and transaction expenses of
$136,801,000 (funded principally by short-term debt of $132,874,000) and the
issuance of 4,079,772 shares of W.W. Grainger, Inc. common stock valued at
$152,533,000. The acquisition is being accounted for as a purchase, and
accordingly, the financial statements include results of operations from the
date of acquisition. The purchase included intangibles, including trademarks and
goodwill, valued at $173,420,000 to be amortized over periods of five to forty
years.
The following unaudited pro forma summary presents the combined results of
operations of the Company and the acquired business, as if the acquisition had
occurred at the beginning of 1996. The pro forma amounts give effect to certain
adjustments, including the amortization of intangibles, foreign currency
translation, increased interest expense and income tax effects. This pro forma
summary does not necessarily reflect the results of operations as they would
have been if the businesses had constituted a single entity during this period
and is not necessarily indicative of results which may be obtained in the
future.
Year Ended December 31, 1996
(Pro forma,
in thousands of dollars
except for per share amounts)
Net sales................................. $3,847,665
Operating earnings........................ $ 368,203
Net earnings.............................. $ 216,680
Earnings per share:
Basic................................... $ 2.04
Diluted................................. $ 2.02
26
NOTE 3--CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
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 these instruments.
Cash paid during the year for:
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Interest (net of amounts capitalized).. $5,027 $5,773 $974
======== ======== ========
Income taxes........................... $165,668 $143,471 $131,726
======== ======== ========
NOTE 4--CASH
Checks outstanding of $74,183,000, $54,218,000, and $35,366,000, are included in
Trade accounts payable at December 31, 1998, 1997, and 1996, respectively. These
amounts are immaterial to the consolidated financial statements.
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 as well as other areas of North
America. Consequently, in management's opinion, no significant concentration of
credit risk exists for the Company.
NOTE 6--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $217,455,000, $215,707,000, and $209,305,000 higher
than reported at December 31, 1998, 1997, and 1996, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used for all
Company inventories. Inventories under FIFO approximate replacement cost.
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 periods of five to
forty years. The Company's goodwill is predominately denominated in Canadian
dollars and accordingly, the changes in the asset balance are due to foreign
exchange rate fluctuations.
Other assets also includes net capitalized software used in the Company's
business. During 1998, the Company acquired a new business enterprise software
system. Amortization of capitalized software is predominately on a straight-line
basis over five years. Amortization expense was $4,645,000, $1,556,000, and
$2,474,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
27
NOTE 8--SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
1998 1997 1996
---------- ---------- ----------
Bank Debt (In thousands of dollars)
- ---------------------------------------------------------------
Outstanding at December 31 .................................... $ 3,704 $ 2,960 $ 135,275
Maximum month-end balance during the year ..................... $ 3,704 $ 139,187 $ 135,275
Average amount outstanding during the year .................... $ 2,565 $ 119,962 $ 13,796
Weighted average interest rates during the year ............... 6.0% 3.5% 3.8%
Weighted average interest rates at December 31 ................ 5.7% 6.2% 3.2%
Commercial Paper
- ---------------------------------------------------------------
Outstanding at December 31 .................................... $ 84,356 -- --
Maximum month-end balance during the year ..................... $ 84,356 $ 81,355 --
Average amount outstanding during the year .................... $ 15,668 $ 15,429 $ 1,436
Weighted average interest rates during the year ............... 5.3% 5.7% 5.7%
Weighted average interest rates at December 31 ................ 5.4% -- --
The Company and its subsidiaries had committed lines of credit totaling
$318,069,000 and $168,983,000 at December 31, 1998 and 1997, respectively,
including $13,069,000 and $13,983,000 denominated in Canadian dollars. A Company
subsidiary also has a $32,673,000 and $34,958,000 uncommitted line of credit
denominated in Canadian dollars as of December 31, 1998 and 1997, respectively.
At December 31, 1998, borrowings under the subsidiaries' committed lines of
credit were $3,704,000. The Company has guaranteed these borrowings.
At December 31, 1996, available lines of credit were $186,483,000 including a
$36,483,000 working capital line of credit denominated in Canadian dollars.
At December 31, 1996, in connection with the business acquisition described in
Note 2, a Company subsidiary had approximately $131,000,000 in outstanding
banker's acceptances included in short-term debt. During 1997 this debt was
refinanced as described in Note 10.
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 primarily related 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
benefit plans which cover most of the other employees. Provisions under all
plans were $65,576,000, $55,052,000, and $49,450,000 for the years ended
December 31, 1998, 1997, and 1996, 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 participation when they qualify for retirement
while working for the Company.
The amount charged to operating expense for postretirement health care benefits
was $4,256,000, $3,653,000, and $3,578,000 for the years ended December 31,
1998, 1997, and 1996, respectively. Components of the expense were:
1998 1997 1996
------- ------- -------
(In thousands of dollars)
Service cost ............................................... $ 3,076 $ 2,442 $ 2,309
Interest cost .............................................. 2,546 2,272 2,080
Expected return on assets .................................. (968) (738) (611)
Amortization of transition asset (22 year amortization) .... (143) (143) (143)
Amortization of unrecognized gain .......................... (180) (262) (139)
Amortization of prior service cost ......................... (75) 82 82
------- ------- -------
$ 4,256 $ 3,653 $ 3,578
======= ======= =======
28
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 care benefits plan anticipates future
cost-sharing changes to retiree contributions that will maintain the current
cost-sharing ratio between the Company and the retirees. Plan design and
eligibility changes effective January 1, 1998, included modifications to
eligibility requirements and the adjustment of benefit maximums.
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 assumed weighted average long-term rate of return is 7.4%, which is
net of a 32.4% tax rate. The funding of the trust is an estimated amount which
is intended to allow the maximum deductible contribution under the Internal
Revenue Code of 1986, as amended, and was $2,444,000, $859,000, and $379,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation (APBO), the fair value of assets, and the
funded status of the benefit obligation as of December 31, 1998, 1997, and 1996,
is as follows:
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Benefit obligation at beginning of year .......... $ 35,866 $ 31,909 $ 33,482
Service cost ................................... 3,076 2,442 2,310
Interest cost .................................. 2,546 2,272 2,080
Plan participants' contributions ............... 366 376 293
Amendments ..................................... -- (2,516) --
Actuarial loss (gain) .......................... 3,503 2,544 (5,442)
Benefits paid .................................. (1,682) (1,161) (814)
-------- -------- --------
Benefit obligation at end of year ................ 43,675 35,866 31,909
-------- -------- --------
Fair value of plan assets at beginning of year ... 16,127 12,307 10,288
Actual return on plan assets ................... 4,444 3,745 2,161
Employer contribution .......................... 2,444 859 379
Plan participants' contributions ............... 366 377 293
Benefits paid .................................. (1,682) (1,161) (814)
-------- -------- --------
Fair value of plan assets at end of year ......... 21,699 16,127 12,307
-------- -------- --------
Funded status .................................... (21,976) (19,739) (19,602)
Unrecognized transition asset .................... (2,285) (2,428) (2,570)
Unrecognized net actuarial gain .................. (4,359) (4,589) (4,388)
Unrecognized prior (benefits) service cost ....... (927) (1,003) 1,595
-------- -------- --------
Accrued postretirement benefits costs ............ $(29,547) $(27,759) $(24,965)
======== ======== ========
To determine the APBO as of December 31, 1998, 1997, and 1996, the assumed
weighted average discount rate used was 6.8%, 7.0%, and 7.5%, respectively. The
assumed health care cost trend rate for 1999 is 8.0%. Beginning in 2000, the
assumed health care cost trend rate declines on a straight-line basis until
2009, when the ultimate trend rate of 5.0% is achieved.
If the assumed health care cost trend rate was increased by one percentage point
for each year, the APBO as of December 31, 1998, would increase by $9,822,000.
The aggregate of the service cost and interest cost components of the 1998 net
periodic postretirement benefits expense would increase by $1,453,000.
If the assumed health care cost trend rate was decreased by one percentage point
for each year, the APBO as of December 31, 1998, would decrease by $7,637,000.
The aggregate of the service cost and interest cost components of the 1998 net
periodic postretirement benefits expense would decrease by $1,108,000.
29
NOTE 10--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1998 1997 1996
-------- -------- -------
(In thousands of dollars)
Uncommitted revolving credit facility...... $117,885 $126,127 $ --
Industrial development revenue bonds....... 27,650 27,650 27,650
Other...................................... 179 1,258 3,255
145,714 155,035 30,905
Less current maturities.................... 22,831 23,834 24,753
-------- -------- -------
$122,883 $131,201 $ 6,152
======== ======== =======
As part of the permanent financing for a Canadian Subsidiary, the Company
maintained a $130,693,000 uncommitted revolving credit facility, denominated in
Canadian dollars. The Company has $117,885,000 outstanding at December 31, 1998
relating to this facility with a weighted average interest rate of 5.6%. The
Company has the intent and the ability to refinance the obligation on a
long-term basis through its credit lines and therefore it is included in
long-term debt.
The industrial development revenue bonds include various issues that bear
interest at a variable rate up to 15%, or variable rates up to 78.2% of the
prime rate, and come due in various amounts from 2001 through 2021. 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. In
addition, $13,545,000 of these bonds had an unsecured liquidity facility
available at December 31, 1998, for which the Company compensated a bank through
a commitment fee of 0.1%. There were no borrowings related to this facility at
December 31, 1998. The Company classified $22,755,000 of bonds currently subject
to redemption options in current maturities of long-term debt at December 31,
1998, 1997, and 1996.
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1998, are as follows:
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
------------- -----------
(In thousands of dollars)
1999.................................. $76 $22,755
2000.................................. 83 4,895
2001.................................. 20 --
2002.................................. -- --
2003.................................. 117,885 --
30
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, 1998, the approximate future minimum aggregate payments for all
leases were as follows:
Operating Leases
----------------------------------
Real Personal Capital
Property Property Total Leases
---------- ---------- ---------- -------
(In thousands of dollars)
1999 ................................................. $ 17,604 $ 798 $ 18,402 $ 75
2000 ................................................. 10,617 224 10,841 75
2001 ................................................. 7,503 -- 7,503 15
2002 ................................................. 6,349 -- 6,349 --
2003 ................................................. 3,426 -- 3,426 --
Thereafter ........................................... 4,751 -- 4,751 --
---------- ---------- ---------- -------
Total minimum payments required ...................... 50,250 1,022 51,272 165
Less amounts representing sublease income ............ 3,842 -- 3,842
---------- ---------- ----------
$ 46,408 $ 1,022 $ 47,430
========== ========== ==========
Less imputed interest ................................ 14
-------
Present value of minimum lease payments
(included in long-term debt) ....................... $ 151
=======
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $16,336,000, $21,396,000, and $18,434,000 for 1998,
1997, and 1996, 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. A maximum
of 8,056,828 shares of common stock are authorized for issuance under the Plan,
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.
The Plan authorizes the granting of options to purchase shares at a price of not
less than 100% of the closing market price on the last trading day preceding the
date of grant. The options expire within ten years after the date of grant.
Shares covered by terminated, surrendered or canceled options or stock
appreciation rights that are unexercised, by 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.
There were 52,500 shares of restricted stock issued in 1998 with a weighted
average fair market value of $52.04 per share. There were 20,000 shares of
restricted stock issued in 1997 with a fair market value of $40.125 per share.
There were 470,000 shares of restricted stock issued in 1996 with a fair market
value of $38 per share. The shares are scheduled to vest ten years from
issuance, although accelerated vesting is provided in certain instances.
Restricted stock released totaled 400, 1,000, and 2,000 shares in 1998, 1997,
and 1996, respectively. 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. Total compensation expense
relating to restricted stock was $2,022,000, $1,872,000, and $282,000 in 1998,
1997, and 1996, respectively.
31
During 1997, the Company adopted a Director Stock Plan in which non-employee
directors participate. A total of 500,000 shares of common stock were reserved
for issuance in connection with awards of stock, stock units, stock options,
restricted stock, and other stock-based awards under the new plan.
The Company awarded Stock Units under the Director Stock Plan in connection with
the termination of previous director compensation plans. A Stock Unit is
essentially the economic equivalent of a share of Company stock. Additional
deferred fees and dividends are converted to Stock Units based on the market
value of the stock at the relevant time.
Payment of the value of Stock Units generally will be made after the termination
of service as a director. As of December 31, 1998 and 1997, eight directors held
Stock Units, in connection with which the Company had recognized expense of
$286,000 and $1,850,000, respectively.
Transactions involving stock options are summarized as follows:
Weighted
Average
Price Per
Option Shares Share Exercisable
------------ ---------- -----------
Outstanding at January 1, 1996........... 3,027,884 $23.18 1,833,524
==========
Granted................................ 577,460 $33.81
Exercised.............................. (482,362) $17.00
Canceled or expired.................... (59,860) $31.06
----------
Outstanding at December 31, 1996......... 3,063,122 $26.01 1,710,182
==========
Granted................................ 694,660 $37.38
Exercised.............................. (412,702) $19.17
Canceled or expired.................... (51,720) $33.63
----------
Outstanding at December 31, 1997......... 3,293,360 $29.14 1,679,900
==========
Granted................................ 884,620 $51.35
Exercised.............................. (335,900) $19.94
Canceled or expired.................... (51,640) $38.32
----------
Outstanding at December 31, 1998......... 3,790,440 $35.01 1,732,300
========== ==========
All options were issued at market price on the date of grant. Options were
issued with initial vesting periods ranging from one to five years.
Information about stock options outstanding at December 31, 1998, is as follows:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Average
-----------------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
- ----------------- ----------- --------------------- --------
$13.94-$29.44 1,074,840 2.9 $23.32
$33.75-$38.75 1,822,020 7.2 $33.99
$41.13-$52.88 893,580 9.3 $51.06
Options Exercisable
- ------------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
- ----------------- ----------- ---------------------
$13.94-$29.44 1,074,840 $23.32
$33.75-$41.13 657,460 $30.95
Shares available for future awards were 3,877,538, 4,767,018, and 4,943,438, at
December 31, 1998, 1997, and 1996, respectively.
32
In accordance with Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
to account for stock compensation under Accounting Principles Board Opinion No.
25. Pro forma net earnings and earnings per share, as calculated under SFAS No.
123, are as follows:
1998 1997 1996
-------- -------- --------
(In thousands of dollars
except for per share amounts)
Net earnings.................. $234,257 $229,107 $206,696
Earnings per share:
Basic....................... $ 2.43 $ 2.28 $ 2.02
Diluted..................... $ 2.39 $ 2.25 $ 2.00
The weighted average fair value of the stock options granted during 1998, 1997,
and 1996 was $16.12, $12.95, and $10.88, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model based on
the date of the grant and the following weighted average assumptions:
1998 1997 1996
-------- -------- --------
Risk-free interest rate....... 5.8% 6.7% 6.6%
Expected life................. 7.0 years 7.0 years 6.5 years
Expected volatility........... 20.1% 21.0% 21.8%
Expected dividend yield....... 1.5% 1.5% 1.5%
NOTE 13--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS
The Company adopted a Shareholder Rights Plan, under which there is outstanding
one preferred share purchase right (Right) for each outstanding share of the
Company's common stock. Each Right, under certain circumstances, may be
exercised to purchase one four-hundredth of a share of Series A Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's common stock) at a price of $62.50, subject to
adjustment. The Rights become exercisable only after a person or a group, other
than a person or group exempt under the plan, acquires or announces a tender
offer for 20% or more of the Company's common stock. If a person or group, other
than a person or group exempt under the plan, acquires 20% or more of the
Company's common stock or if the Company is acquired in a merger or other
business combination transaction, each Right generally entitles the holder,
other than such person or group, to purchase, at the then-current exercise
price, stock and/or other securities or assets of the Company or the acquiring
company having a market value of twice the exercise price.
The Rights expire on May 15, 1999, unless earlier redeemed. They generally are
redeemable at $.01 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 20% or more of the Company's common stock. They are also automatically
redeemable, at the redemption price, upon consummation of certain transactions
approved by shareholders in accordance with procedures provided in the plan. The
Rights do not have voting or dividend rights and, until they become exercisable,
have no dilutive effect on the earnings of the Company.
NOTE 14--INCOME TAXES
Income tax expense consisted of the following:
1998 1997 1996
-------- --------- --------
(In thousands of dollars)
Current provision:
Federal (including foreign).......... $141,462 $128,470 $113,968
State................................ 28,791 27,180 26,324
-------- --------- --------
Total current...................... 170,253 155,650 140,292
Deferred tax (benefits) expense........ (7,910) 2,153 70
-------- --------- --------
Total provision........................ $162,343 $157,803 $140,362
======== ========= ========
The deferred tax (benefits) expense represent the net effect of the changes in
the amounts of temporary differences.
33
The income tax effects of temporary differences that gave rise to the net
deferred tax asset as of December 31, 1998, 1997, and 1996 were:
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Current deferred tax assets (liabilities):
Inventory valuations ..................................... $ 22,648 $ 23,761 $ 25,059
Administrative and general expenses
deducted on a paid basis for tax purposes .............. 30,926 28,267 26,759
Employment related benefits expense ...................... 2,454 2,160 1,778
Restructuring costs ...................................... 5,214 5,432 7,428
Other .................................................... (42) (272) (187)
-------- -------- --------
Total net current deferred tax asset ................... 61,200 59,348 60,837
-------- -------- --------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits ................................... (22,185) (26,185) (29,693)
Differences related to property,
buildings, and equipment ............................... (388) (816) (400)
Intangible amortization .................................. 9,135 9,116 14,681
Employment related benefits expense ...................... 15,038 14,012 12,709
Net operating loss carryforwards ......................... 4,372 1,785 --
Other .................................................... 1,587 1,002 496
-------- -------- --------
Total gross noncurrent deferred tax asset (liability) .... 7,559 (1,086) (2,207)
Less valuation allowance ................................. (4,372) (1,785) --
-------- -------- --------
Total net noncurrent deferred tax asset (liability) .... 3,187 (2,871) (2,207)
-------- -------- --------
Net deferred tax asset ..................................... $ 64,387 $ 56,477 $ 58,630
======== ======== ========
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981.
Net Operating Loss carryforwards (NOLs) represent temporary differences that
enter into the calculation of deferred tax balances. Since 1997, the Company has
experienced NOLs for a foreign start-up operation. The full amount of the
deferred tax asset is offset by a valuation allowance due to the uncertainty of
utilizing these NOLs.
A reconciliation of income tax expense with U.S. federal income taxes at the
statutory rate follows:
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Federal income taxes at the statutory rate.................. $140,296 $136,373 $122,111
Foreign rate differences.................................... 1,703 2,034 (4)
State income taxes, net of federal income tax benefits...... 17,637 17,954 17,010
Other--net.................................................. 2,707 1,442 1,245
-------- -------- --------
Income tax expense........................................ $162,343 $157,803 $140,362
Effective tax rate........................................ 40.5% 40.5% 40.2%
34
NOTE 15--SEGMENT INFORMATION
The Company has one reportable segment: Branch-based Distribution. The
Branch-based Distribution segment provides customers with solutions to their
immediate MRO needs. Branch-based Distribution is an aggregation of the
following business segments: Grainger Industrial Supply, Acklands-Grainger Inc.,
Grainger Parts, Grainger, S.A. de C.V., Puerto Rico, Grainger Export, and
Grainger Global Sourcing. The Other column includes the Grainger Custom
Solutions, Grainger Integrated Supply, Grainger Consulting Services, Internet
Commerce, and Lab Safety Supply, Inc. segments.
The Company's segments offer differing ranges of services and/or products and
require different resources and marketing strategies. The segments were formed
in late 1997 as the Company refocused its organization to meet the diverse needs
of its customers. The restatement of comparable financial information for 1997
and 1996 is not practicable.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment transfer prices were
established at external selling prices less costs not incurred due to the
related party sale.
1998
---------------------------------------
(In thousands of dollars)
Branch-based
Distribution Other Totals
---------- ---------- ----------
Total net sales ...................... $3,881,237 $ 728,020 $4,609,257
Intersegment net sales ............... 260,230 7,758 267,988
Net sales from external customers .... 3,621,007 720,262 4,341,269
Segment operating earnings ........... 435,167 11,214 446,381
Segment assets ....................... $1,805,396 $ 189,298 $1,994,694
Depreciation and amortization ........ 54,500 19,638 74,138
Additions to long-lived assets ....... 115,905 21,954 137,859
Following are reconciliations of the segment information with the consolidated
totals per the financial statements (in thousands of dollars).
1998
------------
Operating earnings:
Total operating earnings for reportable segments ............ $ 446,381
Unallocated expenses ........................................ (38,326)
Elimination of intersegment profits ......................... (73)
------------
Total Consolidated operating earnings ..................... $ 407,982
============
Assets:
Total assets for reportable segments ........................ $ 1,994,694
Unallocated assets .......................................... 109,208
------------
Total Consolidated assets ................................. $ 2,103,902
============
1998
--------------------------------------
Segment Consolidated
Other Significant Items: Totals Adjustments Totals
-------- ---------- ------------
Depreciation and amortization ........ $ 74,138 $ 4,727 $ 78,865
Additions to long-lived assets ....... 137,859 31,981 169,840
Long-lived
Geographic Information: Revenues Assets
---------- ----------
United States ............................ $3,940,604 $ 692,747
Canada ................................... 329,565 180,613
Other foreign countries .................. 71,100 1,080
---------- ----------
$4,341,269 $ 874,440
========== ==========
Long-lived assets consists of property, buildings, equipment, capitalized
software, goodwill, and other intangibles.
Revenues are attributed to countries based on location of customer.
35
NOTE 16--SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
A summary of selected quarterly information for 1998 and 1997 is as follows:
1998 Quarter Ended
----------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------- ------------- ------------- ------------ -------------
Net sales ........................ $ 1,057,107 $ 1,118,970 $ 1,120,038 $ 1,045,154 $ 4,341,269
Gross profit ..................... $ 385,155 $ 401,959 $ 405,311 $ 405,246 $ 1,597,671
Net earnings ..................... $ 57,172 $ 59,250 $ 56,089 $ 65,993 $ 238,504
Earnings per share--basic ........ $ 0.59 $ 0.61 $ 0.58 $ 0.70 $ 2.48
Earnings per share--diluted ...... $ 0.58 $ 0.60 $ 0.57 $ 0.69 $ 2.44
1997 Quarter Ended
----------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------- ------------- ------------- ------------ -------------
Net sales ........................ $ 985,556 $ 1,051,206 $ 1,066,927 $ 1,032,871 $ 4,136,560
Gross profit ..................... $ 353,280 $ 371,029 $ 373,152 $ 396,891 $ 1,494,352
Net earnings ..................... $ 54,609 $ 57,559 $ 56,480 $ 63,185 $ 231,833
Earnings per share--basic ........ $ 0.52 $ 0.57 $ 0.57 $ 0.64 $ 2.30
Earnings per share--diluted ...... $ 0.52 $ 0.56 $ 0.56 $ 0.63 $ 2.27
W.W. Grainger, Inc., and Subsidiaries
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions (a) Other (b) of period
- ---------------------------------- --------- ---------- -------------- --------- ---------
(In thousands of dollars)
Allowance for doubtful accounts
1998.............................. $15,803 $10,310 $10,162 $ -- $15,951
1997.............................. 15,302 9,984 9,483 -- 15,803
1996.............................. 14,229 9,131 8,824 766 15,302
(a) Accounts charged off as uncollectible, less recoveries.
(b) Business acquired.
36
W.W. Grainger, Inc., and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1998 1997 1996
------------ ------------ ------------
Basic:
Average number of shares outstanding during the year ................. 96,231,829 100,604,518 102,295,506
============ ============ ============
Net earnings ......................................................... $238,504,000 $231,833,000 $208,526,000
============ ============ ============
Earnings per share ................................................... $ 2.48 $ 2.30 $ 2.04
============ ============ ============
Diluted:
Average number of shares outstanding during the year (basic) ......... 96,231,829 100,604,518 102,295,506
Common equivalents
Shares issuable under outstanding options ........................ 3,187,915 3,249,490 3,065,756
Shares which could have been purchased based on
the average market value for the period ........................ 2,114,482 2,184,102 2,193,264
------------ ------------ ------------
1,073,433 1,065,388 872,492
Dilutive effect of exercised options prior to being exercised ........ 21,604 18,046 33,442
------------ ------------ ------------
Shares for the portion of the period
that the options were outstanding .................................. 1,095,037 1,083,434 905,934
Contingently issuable shares ......................................... 519,792 491,000 70,968
------------ ------------ ------------
1,614,829 1,574,434 976,902
------------ ------------ ------------
Average number of shares outstanding during the year ................. 97,846,658 102,178,952 103,272,408
============ ============ ============
Net earnings ......................................................... $238,504,000 $231,833,000 $208,526,000
============ ============ ============
Earnings per share ................................................... $ 2.44 $ 2.27 $ 2.02
============ ============ ============
37
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report on page 18 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, 33-43902, and 333-24215) and on
Form S-4 (No. 33-32091) of W.W. Grainger, Inc.
GRANT THORNTON LLP
Chicago, Illinois
March 24, 1999
38