Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - W.W. GRAINGER, INC. | Financial_Report.xls |
EX-31.A - EXHIBIT 31A - W.W. GRAINGER, INC. | exhibit31a.htm |
EX-32.B - EXHIBIT 32B - W.W. GRAINGER, INC. | exhibit32b.htm |
EX-31.B - EXHIBIT 31B - W.W. GRAINGER, INC. | exhibit31b.htm |
EX-32.A - EXHIBIT 32A - W.W. GRAINGER, INC. | exhibit32a.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2009
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ______ to _______
Commission
file number 1-5684
W.W.
Grainger, Inc.
(Exact name of
registrant as specified in its charter)
Illinois
|
36-1150280
|
|
(State or
other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
100
Grainger Parkway, Lake Forest, Illinois
|
60045-5201
|
|
(Address of
principal executive offices)
|
(Zip
Code)
|
|
(847)
535-1000
|
||
(Registrant’s
telephone number including area code)
|
||
Not
Applicable
|
||
(Former name,
former address and former fiscal year; if changed since last
report)
|
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes
|
X
|
No
|
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).
Yes
|
X
|
No
|
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer T
|
Accelerated
filer £
|
||
Non-accelerated
filer £
|
Smaller
reporting company £
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
|
No
|
X
|
There were
74,315,435 shares of the Company’s Common Stock outstanding as of September
30, 2009.
TABLE OF CONTENTS
|
|||
Page No.
|
|||
PART I
|
FINANCIAL INFORMATION
|
||
Item 1.
|
Financial Statements (Unaudited)
|
||
Condensed Consolidated Statements of Earnings
for the Three
and Nine Months Ended September 30,
2009 and
September 30,
2008
|
3
|
||
Condensed Consolidated Statements of Comprehensive
Earnings for the Three
and Nine Months Ended
September 30,
2009 and September 30, 2008
|
4
|
||
Condensed Consolidated Balance Sheets
as of September
30, 2009 and December 31, 2008
|
5 – 6
|
||
Condensed Consolidated Statements of Cash Flows
for the Nine
Months Ended September 30, 2009 and
September
30, 2008
|
7 – 8
|
||
Notes to Condensed Consolidated Financial Statements
|
9 – 19
|
||
Item 2.
|
Management’s Discussion and Analysis of Financial
|
||
Condition and Results of Operations
|
20 – 28
|
||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
29
|
|
Item 4.
|
Controls and Procedures
|
29
|
|
PART II
|
OTHER INFORMATION
|
||
Item 1.
|
Legal Proceedings
|
29
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
30
|
|
Item 6.
|
Exhibits
|
30
|
|
Signatures
|
31
|
||
EXHIBITS
|
|||
Exhibits 31 & 32
|
Certifications
|
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of
dollars, except for share and per share amounts)
(Unaudited)
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 1,589,665 | $ | 1,839,475 | $ | 4,588,176 | $ | 5,257,377 | ||||||||
Cost of
merchandise sold
|
929,720 | 1,097,127 | 2,673,848 | 3,129,218 | ||||||||||||
Gross profit
|
659,945 | 742,348 | 1,914,328 | 2,128,159 | ||||||||||||
Warehousing,
marketing and administrative
expenses
|
473,225 | 510,891 | 1,414,465 | 1,526,044 | ||||||||||||
Operating earnings
|
186,720 | 231,457 | 499,863 | 602,115 | ||||||||||||
Other income
and (expense):
|
||||||||||||||||
Interest income
|
374 | 1,602 | 1,048 | 3,642 | ||||||||||||
Interest expense
|
(2,198 | ) | (4,393 | ) | (6,734 | ) | (9,591 | ) | ||||||||
Equity in net income of unconsolidated
entities – net
|
578 | 755 | 1,361 | 2,835 | ||||||||||||
Gain on previously held equity
interest – net
|
47,420 | – | 47,343 | – | ||||||||||||
Other non-operating
income
|
602 | 60 | 838 | 800 | ||||||||||||
Other non-operating
expense
|
(76 | ) | (791 | ) | (205 | ) | (231 | ) | ||||||||
Total other income and
(expense)
|
46,700 | (2,767 | ) | 43,651 | (2,545 | ) | ||||||||||
Earnings before income
taxes
|
233,420 | 228,690 | 543,514 | 599,570 | ||||||||||||
Income
taxes
|
88,856 | 88,667 | 210,106 | 232,130 | ||||||||||||
Net earnings
|
$ | 144,564 | $ | 140,023 | $ | 333,408 | $ | 367,440 | ||||||||
Earnings per
share:
|
||||||||||||||||
Basic
|
$ | 1.91 | $ | 1.80 | $ | 4.41 | $ | 4.68 | ||||||||
Diluted
|
$ | 1.88 | $ | 1.77 | $ | 4.34 | $ | 4.60 | ||||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||
Basic
|
74,047,973 | 75,967,774 | 73,919,924 | 76,813,709 | ||||||||||||
Diluted
|
75,202,845 | 77,407,743 | 74,972,410 | 78,226,698 | ||||||||||||
Cash
dividends paid per share
|
$ | 0.46 | $ | 0.40 | $ | 1.32 | $ | 1.15 |
The accompanying
notes are an integral part of these financial statements.
3
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of
dollars)
(Unaudited)
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
earnings
|
$ | 144,564 | $ | 140,023 | $ | 333,408 | $ | 367,440 | ||||||||
Other
comprehensive earnings (losses):
|
||||||||||||||||
Foreign
currency translation adjustments, net of tax (expense) benefit of
$(4,611), $2,534, $(6,962), and $4,133, respectively
|
27,925 | (18,636 | ) | 45,881 | (26,075 | ) | ||||||||||
Comprehensive
earnings
|
172,489 | 121,387 | $ | 379,289 | $ | 341,365 | ||||||||||
Less: Foreign
currency translation adjustment attributable to noncontrolling
interest
|
(774 | ) | – | (774 | ) | – | ||||||||||
Comprehensive
earnings attributable to W.W. Grainger, Inc.
|
$ | 171,715 | $ | 121,387 | $ | 378,515 | $ | 341,365 |
The accompanying
notes are an integral part of these financial statements.
4
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands of
dollars, except for share and per share amounts)
(Unaudited)
ASSETS
|
Sept. 30,
2009
|
Dec. 31,
2008
|
||||||
CURRENT
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 672,035 | $ | 396,290 | ||||
Accounts receivable (less allowances for
doubtful
|
||||||||
accounts of $28,358 and $26,481,
respectively)
|
638,531 | 589,416 | ||||||
Inventories
|
851,478 | 1,009,932 | ||||||
Prepaid expenses and other
assets
|
75,064 | 95,915 | ||||||
Deferred income taxes
|
47,686 | 52,556 | ||||||
Total current assets
|
2,284,794 | 2,144,109 | ||||||
PROPERTY,
BUILDINGS AND EQUIPMENT
|
2,216,668 | 2,131,863 | ||||||
Less accumulated depreciation and
amortization
|
1,278,383 | 1,201,552 | ||||||
Property, buildings and equipment –
net
|
938,285 | 930,311 | ||||||
DEFERRED
INCOME TAXES
|
87,213 | 97,442 | ||||||
INVESTMENT IN
UNCONSOLIDATED ENTITIES
|
3,341 | 20,830 | ||||||
GOODWILL
|
328,131 | 213,159 | ||||||
OTHER ASSETS
AND INTANGIBLES – NET
|
103,285 | 109,566 | ||||||
TOTAL
ASSETS
|
$ | 3,745,049 | $ | 3,515,417 |
5
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE
SHEETS (Continued)
(In thousands of
dollars, except for share and per share amounts)
(Unaudited)
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
Sept. 30,
2009
|
Dec. 31,
2008
|
||||||
CURRENT
LIABILITIES
|
||||||||
Short-term debt
|
$ | 33,650 | $ | 19,960 | ||||
Current maturities of long-term
debt
|
46,257 | 21,257 | ||||||
Trade accounts payable
|
279,660 | 290,802 | ||||||
Accrued compensation and
benefits
|
124,033 | 162,380 | ||||||
Accrued contributions to employees’ profit
sharing plans
|
91,151 | 146,922 | ||||||
Accrued expenses
|
96,302 | 118,633 | ||||||
Income taxes payable
|
2,791 | 1,780 | ||||||
Total current liabilities
|
673,844 | 761,734 | ||||||
LONG-TERM
DEBT (less current maturities)
|
454,895 | 488,228 | ||||||
DEFERRED
INCOME TAXES AND TAX UNCERTAINTIES
|
34,211 | 33,219 | ||||||
ACCRUED
EMPLOYMENT-RELATED BENEFITS
|
218,874 | 198,431 | ||||||
W.W.
GRAINGER, INC. SHAREHOLDERS' EQUITY
|
||||||||
Cumulative Preferred Stock – $5 par value
–
12,000,000 shares authorized; none
issued
nor outstanding
|
– | – | ||||||
Common Stock – $0.50 par value
–
300,000,000 shares
authorized;
issued 109,659,219 shares
|
54,830 | 54,830 | ||||||
Additional contributed
capital
|
586,516 | 564,728 | ||||||
Retained earnings
|
3,904,086 | 3,670,726 | ||||||
Accumulated other comprehensive earnings
(losses)
|
6,582 | (38,525 | ) | |||||
Treasury stock, at cost –
35,343,784 and 34,878,190 shares,
respectively
|
(2,250,474 | ) | (2,217,954 | ) | ||||
Total W.W. Grainger, Inc. shareholders’
equity
|
2,301,540 | 2,033,805 | ||||||
NONCONTROLLING
INTEREST
|
61,685 | – | ||||||
Total shareholders' equity
|
2,363,225 | 2,033,805 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
|
$ | 3,745,049 | $ | 3,515,417 |
The accompanying
notes are an integral part of these financial statements.
6
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of
dollars)
(Unaudited)
Nine Months
Ended Sept. 30,
|
||||||||
2009
|
2008
|
|||||||
CASH FLOWS
FROM OPERATING ACTIVITIES:
|
||||||||
Net earnings
|
$ | 333,408 | $ | 367,440 | ||||
Provision for losses on accounts
receivable
|
11,165 | 11,867 | ||||||
Deferred income taxes and tax
uncertainties
|
9,131 | (18,432 | ) | |||||
Depreciation and
amortization
|
104,093 | 100,765 | ||||||
Stock-based compensation
|
33,170 | 36,655 | ||||||
Tax benefit of stock incentive
plans
|
1,206 | 1,612 | ||||||
Net losses (gains) on sales of property,
buildings and equipment
|
50 | (4,760 | ) | |||||
(Income) from unconsolidated entities –
net
|
(1,361 | ) | (2,835 | ) | ||||
(Gain) on previously held equity interest
– net
|
(47,343 | ) | – | |||||
Change in operating assets and liabilities
– net of business acquisitions
|
||||||||
(Increase) decrease in accounts
receivable
|
(23,390 | ) | (125,936 | ) | ||||
(Increase) decrease in
inventories
|
194,396 | (17,360 | ) | |||||
(Increase) decrease in prepaid expenses
and other assets
|
24,991 | 645 | ||||||
Increase (decrease) in trade accounts
payable
|
(33,064 | ) | 13,069 | |||||
Increase (decrease) in other current
liabilities
|
(112,810 | ) | (42,191 | ) | ||||
Increase (decrease) in current income
taxes payable
|
(1,056 | ) | 6,466 | |||||
Increase (decrease) in accrued
employment-related benefits cost
|
20,395 | 9,498 | ||||||
Other – net
|
(3,242 | ) | (1,186 | ) | ||||
Net cash provided by operating
activities
|
509,739 | 335,317 | ||||||
CASH FLOWS
FROM INVESTING ACTIVITIES:
|
||||||||
Additions to property, buildings and
equipment –
net of dispositions
|
(88,152 | ) | (131,590 | ) | ||||
Net cash paid for business
acquisitions
|
– | (33,995 | ) | |||||
Cash acquired, net of cash paid for
business acquisitions
|
10,428 | – | ||||||
Investments in unconsolidated
entities
|
– | (6,486 | ) | |||||
Other – net
|
826 | 19,211 | ||||||
Net cash used in investing
activities
|
$ | (76,898 | ) | $ | (152,860 | ) |
7
W.W.
Grainger, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands of
dollars)
(Unaudited)
Nine Months
Ended Sept. 30,
|
||||||||
2009
|
2008
|
|||||||
CASH FLOWS
FROM FINANCING ACTIVITIES:
|
||||||||
Net increase (decrease) in short-term
debt
|
$ | – | $ | (95,356 | ) | |||
Borrowings under line of
credit
|
38,971 | 19,136 | ||||||
Payments against line of
credit
|
(37,367 | ) | (8,799 | ) | ||||
Proceeds from issuance of long-term
debt
|
– | 500,000 | ||||||
Payment of long-term debt
|
(8,333 | ) | – | |||||
Stock options exercised
|
59,940 | 41,103 | ||||||
Excess tax benefits from stock-based
compensation
|
12,588 | 11,733 | ||||||
Purchase of treasury stock
|
(127,696 | ) | (307,552 | ) | ||||
Cash dividends paid
|
(100,049 | ) | (90,384 | ) | ||||
Net cash (used in) provided by financing
activities
|
(161,946 | ) | 69,881 | |||||
Exchange rate
effect on cash and cash equivalents
|
4,850 | (1,358 | ) | |||||
NET INCREASE
IN CASH AND CASH EQUIVALENTS
|
275,745 | 250,980 | ||||||
Cash and cash
equivalents at beginning of year
|
396,290 | 113,437 | ||||||
Cash and cash
equivalents at end of period
|
$ | 672,035 | $ | 364,417 |
The accompanying
notes are an integral part of these financial statements.
8
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND
AND BASIS OF PRESENTATION
W.W. Grainger, Inc.
distributes facilities maintenance products and provides services used by
businesses and institutions primarily in the United States, Canada and Mexico to
keep their facilities and equipment running. In this report, the
words “Company” or “Grainger” mean W.W. Grainger, Inc. and its
subsidiaries.
The Condensed
Consolidated Financial Statements of the Company and the related notes are
unaudited and should be read in conjunction with the consolidated financial
statements and related notes for the year ended December 31, 2008, included in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC).
The Condensed
Consolidated Balance Sheet as of December 31, 2008, has been derived from the
audited consolidated financial statements at that date, but does not include all
of the disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements.
The unaudited
financial information reflects all adjustments (primarily consisting of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the statements contained herein.
The Company has
evaluated subsequent events through October 29, 2009, the date the financial
statements were issued.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING
STANDARDS
In
April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed
in a Business Combination That Arise from Contingencies,” which is codified
primarily in Accounting Standards Codification (ASC) 805. ASC 805
requires that assets acquired and liabilities assumed in a business combination
that arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability
cannot be reasonably estimated, the asset or liability would generally be
recognized in accordance with FASB Statement No. 5, “Accounting for
Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of the
Amount of a Loss,” which are codified primarily in ASC 450. ASC 805 is effective
for assets or liabilities arising from contingencies in business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The
adoption of ASC 805 did not have a material effect on the Company’s results of
operations or financial position.
9
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
April 2009, the FASB issued three Staff Positions intended to provide
application guidance and revise the disclosures regarding fair value
measurements and impairment of securities. A summary of each Staff
Position is as follows:
|
·
|
FSP 157-4,
“Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,” codified primarily in ASC 820,
addresses the determination of fair values when there is no active market
or where the price inputs represent distressed sales. ASC 820
reaffirms the view in SFAS No. 157 that the objective of fair value
measurement is to reflect an asset’s sale price in an orderly transaction
at the date of the financial
statements.
|
|
·
|
FSP 107-1 and
APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,”
codified primarily in ASC 825, enhances consistency in financial reporting
by increasing the frequency of fair value disclosures to a quarterly basis
for any financial instruments for which it is practicable to estimate the
value, whether recognized or not recognized in the balance
sheet.
|
|
·
|
FSP 115-2,
FAS 124-2 and EITF 99-20-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” codified primarily in ASC 320, provides
additional guidance designed to create greater consistency to the timing
of impairment recognition and provide greater clarity about the credit and
noncredit components of impaired debt securities that are not expected to
be sold.
|
ASC 820, 825 and
320 are effective for interim and annual periods ending after June 15,
2009. The adoption of these ASCs did not have a material effect on
the Company’s results of operations or financial position.
In
May 2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” codified primarily in ASC 855, to provide authoritative
accounting literature for subsequent events which was previously addressed only
in auditing literature. ASC 855 addresses events that occur after the
balance sheet date but before the issuance of the financial
statements. It distinguishes between subsequent events that should be
recognized in the financial statements and those that should
not. Also, it requires disclosure of the date through which
subsequent events were evaluated and disclosures for certain non-recognized
events. ASC 855 is effective on a prospective basis for interim or
annual financial periods ending after June 15, 2009. The Company
applied the provision of ASC 855 for the period ending September 30, 2009 and
disclosed the date through which it has evaluated subsequent events and the
basis for choosing that date. The adoption of ASC 855 did not have a
material effect on the Company’s results of operations or financial
position.
In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 167
(SFAS No. 167) which is a revision to FASB Interpretation No. 46 (Revised
December 2003), “Consolidation of Variable Interest Entities,” codified
primarily in ASC 810. This statement changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. ASC 810 will require a reporting entity to provide
additional disclosures about its involvement with variable interest entities and
any significant changes in risk exposure due to that involvement. ASC
810 will be effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009, or January 1, 2010, for a calendar year-end
entity. The Company does not expect the adoption of ASC 810 to have a
material effect on its results of operations or financial position.
10
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
June 2009, the FASB issued statement No. 168 “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,”
codified in ASC 105, which establishes the FASB Accounting Standards
Codification to become the source of authoritative U.S. generally accepted
accounting principles to be applied by non-governmental entities. The
Accounting Standards Codification will supersede all existing non-SEC accounting
and reporting standards. ASC 105 is effective for interim or annual
financial periods ending after September 15, 2009. The Company
applied this statement for the period ending September 30, 2009 and the adoption
did not have a material effect on its results of operations or financial
position.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring
Liabilities at Fair Value” (ASU 2009-05), codified primarily in ASC
820. If available, a quoted price in an active market for an
identical liability must be used. If such information is not
available, an entity may use one or more of the following
techniques:
|
·
|
The quoted
price of the identical liability when traded as an
asset
|
|
·
|
Quoted prices
for similar liabilities or similar liabilities traded as
assets
|
|
·
|
Another
valuation technique consistent with principles of ASC 820, such as the
income approach or a market
approach
|
ASU 2009-05
reintroduces the concept of an entry value, which is a means for valuing a
liability by use of a market approach based on the estimated proceeds that would
be received upon entering into an identical liability at the measurement
date. However, it also specifically affirms that a fair value
measurement should maximize observable inputs and minimize unobservable inputs,
which is likely to prevent issuers from using entry values for liabilities where
identical or similar liabilities quotes are observable as liabilities or as
assets. ASU 2009-05 also reaffirms the key measurement concept of
determining fair value based on an orderly transaction between market
participants, even though liabilities are infrequently transferred due to
contractual or other legal restrictions. In addition, under the new
guidance the fair value of a liability is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer. ASU 2009-05 is
effective the first reporting period after August 27, 2009. The
adoption of ASU 2009-05 did not have a material effect on the Company’s results
of operations of financial position.
11
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. ACQUISITIONS
In
June 2009, the Company acquired the remaining 50.1% of its joint venture in
India, Grainger Industrial Supply India Private Limited (Grainger India),
formerly known as Asia Pacific Brands India Private Limited, for $1.2
million. Grainger India had revenue of approximately US$32 million
for its fiscal year ended March 31, 2009. The Company originally paid
$5.4 million for its ownership interest which was effective July 21,
2008. At the time of the original investment, the Company and its
joint venture partner each made a $1.1 million capital infusion which was
intended to help grow the business. In the fourth quarter of 2008,
the Company wrote-off its investment in this joint venture due to the economic
slowdown in India and the loss of a major supplier which accounted for
approximately 25% of the joint venture’s annual revenue. These
conditions severely affected Grainger India’s ability to secure additional
financing to meet its current obligations and continue as a going
concern. Up through the time that the investment was written-off, the
Company used the equity method to account for this investment. During
2009 Grainger India’s business has improved. It has been able to
streamline its operations, strengthen its management and enhance its supplier
base. The results of Grainger India are now included in the Company’s
consolidated results from the date of acquisition.
On
September 14, 2009 the Company acquired 380,000 common shares of MonotaRO Co.,
Ltd. (MonotaRO) for approximately $4 million increasing its interest from 48
percent to 53 percent. Established in 2000 in Osaka, MonotaRO is a
direct marketer of maintenance, repair and operating (MRO) supplies to
businesses in Japan. MonotaRO is listed on the Mothers section of the
Tokyo Stock Exchange. MonotaRO has successfully innovated in the
Japanese MRO market, the second largest industrial market in the world, offering
more than 110,000 products to more than 320,000 customers. In 2008,
MonotaRO had revenues of $136 million and operating earnings of $11
million. As a result of the Company obtaining controlling voting
interest over MonotaRO, the Company consolidated MonotaRO’s balance sheet as of
September 30, 2009. MonotaRO’s earnings will be reported on a one
month lag beginning October 2009. The Company previously accounted
for its 48 percent interest in MonotaRO as an equity method
investment. Upon obtaining the controlling interest, the previously
held equity interest was remeasured to a fair value of $62 million, resulting in
a pre-tax gain of $47 million ($28 million after tax) reported in the Company’s
consolidated statement of earnings. The gain includes $3 million
reclassified from Accumulated other comprehensive earnings. Both the
gain on the previously held equity investment and the fair value of the
noncontrolling interest in MonotaRO of $61 million were based on the closing
market price of MonotaRO’s common stock on the acquisition date. The
Company preliminarily recorded intangibles, including Goodwill, from this
transaction of $97 million. The purchase price allocation has not
been completed and is subject to change as the Company obtains additional
information during the measurement period. The primary areas that are
not yet finalized relate to identifiable intangible assets. Goodwill
resulting from this transaction will not be deductible for tax
purposes.
12
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. DIVIDEND
On
October 28, 2009, the Company’s Board of Directors declared a quarterly dividend
of 46 cents per share, payable December 1, 2009, to shareholders of record on
November 9, 2009.
5. WARRANTY
RESERVES
The Company
generally warrants the products it sells against defects for one
year. For a significant portion of warranty claims, the manufacturer
of the product is responsible for the expenses associated with this warranty
program. For warranty expenses not covered by the manufacturer, the
Company provides a reserve for future costs based on historical
experience. The warranty reserve activity was as follows (in
thousands of dollars):
Nine Months
Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 3,218 | $ | 3,442 | ||||
Returns
|
(9,005 | ) | (10,218 | ) | ||||
Provision
|
8,920 | 10,495 | ||||||
Ending
balance
|
$ | 3,133 | $ | 3,719 |
6. EMPLOYEE
BENEFITS
Retirement
Plans
A
majority of the Company’s employees are covered by a noncontributory profit
sharing plan. This plan provides for annual employer contributions
based upon a formula related primarily to earnings before federal income taxes
with a minimum contribution of 8% and a maximum contribution of 18% of total
eligible compensation paid to all eligible employees.
Postretirement
Benefits
The Company has a
postretirement healthcare benefits plan that provides coverage for a majority of
its employees and their dependents should they elect to maintain such coverage
upon retirement. Covered employees become eligible for participation when they
qualify for retirement while working for the Company. Participation
in the plan is voluntary and requires participants to make contributions toward
the cost of the plan, as determined by the Company.
The net periodic
benefit costs charged to operating expenses, which are valued at the measurement
date of January 1 and recognized evenly throughout the year, consisted of the
following components (in thousands of dollars):
13
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Service
cost
|
$ | 3,077 | $ | 2,425 | $ | 9,229 | $ | 7,275 | ||||||||
Interest
cost
|
2,683 | 2,373 | 8,048 | 7,118 | ||||||||||||
Expected
return on assets
|
(851 | ) | (1,117 | ) | (2,552 | ) | (3,349 | ) | ||||||||
Amortization
of transition asset
|
(36 | ) | (36 | ) | (107 | ) | (108 | ) | ||||||||
Amortization
of unrecognized losses
|
1,034 | 328 | 3,101 | 984 | ||||||||||||
Amortization
of prior service credits
|
(304 | ) | (304 | ) | (911 | ) | (912 | ) | ||||||||
Net periodic benefit costs
|
$ | 5,603 | $ | 3,669 | $ | 16,808 | $ | 11,008 |
The Company has
established a Group Benefit Trust to fund the plan and process benefit
payments. The funding of the trust is an estimated amount, which is
intended to allow the maximum deductible contribution under the Internal Revenue
Code of 1986 (IRC), as amended. There are no minimum funding
requirements and the Company intends to follow its practice of funding the
maximum deductible contribution under the IRC. During the three and
nine months ended September 30, 2009, the Company contributed $1.1 million and
$2.9 million, respectively, to the trust.
7. SEGMENT
INFORMATION
Effective January
1, 2009 the Company revised its segment disclosure. The Company has
two reportable segments: the United States and Canada. In
the first quarter of 2009, the Company integrated the Lab Safety Supply business
into the Grainger Industrial Supply business and results are now reported under
the United States segment. The Canada segment reflects the results
for Acklands – Grainger Inc., the Company’s Canadian branch-based distribution
business. Other Businesses include the following: MonotaRO
Co., Ltd. (Japan), Grainger, S.A. de C.V. (Mexico), Grainger Industrial Supply
India Private Limited (India),
Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and
Grainger Panama S.A. (Panama). These businesses generate revenue
through the distribution of facilities maintenance products. Prior
year segment amounts have been restated in a consistent
manner. Following is a summary of segment results (in thousands of
dollars):
Three Months
Ended September 30, 2009
|
||||||||||||||||
United
States
|
Canada
|
Other
Businesses
|
Total
|
|||||||||||||
Total net
sales
|
$ | 1,398,576 | $ | 166,262 | $ | 34,901 | $ | 1,599,739 | ||||||||
Intersegment
net sales
|
(9,981 | ) | (31 | ) | (62 | ) | (10,074 | ) | ||||||||
Net sales to
external customers
|
$ | 1,388,595 | $ | 166,231 | $ | 34,839 | $ | 1,589,665 | ||||||||
Segment
operating earnings (losses)
|
$ | 204,439 | $ | 8,361 | $ | (1,958 | ) | $ | 210,842 | |||||||
14
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
`
Three Months
Ended September 30, 2008
|
||||||||||||||||
United
States
|
Canada
|
Other
Businesses
|
Total
|
|||||||||||||
Total net
sales
|
$ | 1,629,414 | $ | 190,754 | $ | 31,307 | $ | 1,851,475 | ||||||||
Intersegment
net sales
|
(11,671 | ) | (127 | ) | (202 | ) | (12,000 | ) | ||||||||
Net sales to
external customers
|
$ | 1,617,743 | $ | 190,627 | $ | 31,105 | $ | 1,839,475 | ||||||||
Segment
operating earnings (losses)
|
$ | 241,560 | $ | 14,168 | $ | (2,729 | ) | $ | 252,999 | |||||||
Nine Months
Ended September 30, 2009
|
||||||||||||||||
United
States
|
Canada
|
Other
Businesses
|
Total
|
|||||||||||||
Total net
sales
|
$ | 4,061,108 | $ | 470,781 | $ | 85,334 | $ | 4,617,223 | ||||||||
Intersegment
net sales
|
(28,631 | ) | (124 | ) | (292 | ) | (29,047 | ) | ||||||||
Net sales to
external customers
|
$ | 4,032,477 | $ | 470,657 | $ | 85,042 | $ | 4,588,176 | ||||||||
Segment
operating earnings (losses)
|
$ | 554,157 | $ | 24,055 | $ | (8,176 | ) | $ | 570,036 | |||||||
Nine Months
Ended September 30, 2008
|
||||||||||||||||
United
States
|
Canada
|
Other
Businesses
|
Total
|
|||||||||||||
Total net
sales
|
$ | 4,641,690 | $ | 565,924 | $ | 86,379 | $ | 5,293,993 | ||||||||
Intersegment
net sales
|
(36,059 | ) | (127 | ) | (430 | ) | (36,616 | ) | ||||||||
Net sales to
external customers
|
$ | 4,605,631 | $ | 565,797 | $ | 85,949 | $ | 5,257,377 | ||||||||
Segment
operating earnings (losses)
|
$ | 646,414 | $ | 41,856 | $ | (8,880 | ) | $ | 679,390 | |||||||
United
States
|
Canada
|
Other
Businesses
|
Total
|
|||||||||||||
Segment
assets:
|
||||||||||||||||
September 30,
2009
|
$ | 2,127,156 | $ | 508,853 | $ | 305,679 | $ | 2,941,688 | ||||||||
December 31,
2008
|
$ | 2,310,484 | $ | 448,660 | $ | 133,111 | $ | 2,892,255 | ||||||||
15
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following are
reconciliations of segment information with the consolidated totals per the
financial statements (in thousands of dollars):
Three Months
Ended
September 30,
|
Nine Months
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
earnings:
|
||||||||||||||||
Total
operating earnings for reportable segments
|
$ | 210,842 | $ | 252,999 | $ | 570,036 | $ | 679,390 | ||||||||
Unallocated
expenses and eliminations
|
(24,122 | ) | (21,542 | ) | (70,173 | ) | (77,275 | ) | ||||||||
Total consolidated operating
earnings
|
$ | 186,720 | $ | 231,457 | $ | 499,863 | $ | 602,115 |
Sept. 30,
2009
|
Dec. 31,
2008
|
|||||||
Assets:
|
||||||||
Total assets
for reportable segments
|
$ | 2,941,688 | $ | 2,892,255 | ||||
Unallocated
assets
|
803,361 | 623,162 | ||||||
Total consolidated assets
|
$ | 3,745,049 | $ | 3,515,417 |
Unallocated
expenses and unallocated assets primarily relate to the Company headquarters’
support services, which are not part of any business
segment. Unallocated expenses include payroll and benefits,
depreciation and other costs associated with headquarters-related support
services. Unallocated assets primarily include non-operating cash and
cash equivalents, certain prepaid expenses, deferred income taxes and
non-operating property, buildings and equipment.
The increase in
unallocated assets as of September 30, 2009 is primarily due to the Company’s
higher cash balance.
16
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. EARNINGS
PER SHARE
In
June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” codified primarily in ASC 260. The authoritative
guidance states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. Upon adoption, a
company is required to retrospectively adjust its earnings per share data
presentation to conform with the provisions of the guidance. The
authoritative guidance is effective for fiscal years beginning after December
15, 2008.
On
January 1, 2009, the Company adopted the authoritative guidance. The
Company’s unvested share-based payment awards, such as certain Performance
Shares, Restricted Stock and Restricted Stock Units that contain nonforfeitable
rights to dividends, meet the criteria of a participating security as defined by
ASC 260. The adoption has changed the methodology of computing the
Company’s earnings per share to the two-class method from the treasury stock
method. As a result, the Company has restated previously reported
earnings per share. This change has not affected previously reported
consolidated net earnings or net cash flows from operations. Under
the two-class method, earnings are allocated between common stock and
participating securities. ASC 260 provides guidance that the
presentation of basic and diluted earnings per share is required only for each
class of common stock and not for participating securities. As such,
the Company will present basic and diluted earnings per share for its one class
of common stock.
The two-class
method includes an earnings allocation formula that determines earnings per
share for each class of common stock according to dividends declared and
undistributed earnings for the period. The Company’s reported net
earnings is reduced by the amount allocated to participating securities to
arrive at the earnings allocated to common stock shareholders for purposes of
calculating earnings per share.
The dilutive effect
of participating securities is calculated using the more dilutive of the
treasury stock or the two-class method. The Company has determined
the two-class method to be the more dilutive. As such, the earnings
allocated to common stock shareholders in the basic earnings per share
calculation is adjusted for the reallocation of undistributed earnings to
participating securities as prescribed by ASC 260 to arrive at the earnings
allocated to common stock shareholders for calculating the diluted earnings per
share.
17
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table
sets forth the computation of basic and diluted earnings per share under the
two-class method (in thousands of dollars, except for share and per share
amounts):
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net earnings
as reported
|
$ | 144,564 | $ | 140,023 | $ | 333,408 | $ | 367,440 | ||||||||
Less:
Distributed earnings available to participating securities
|
(759 | ) | (672 | ) | (2,199 | ) | (1,862 | ) | ||||||||
Less:
Undistributed earnings available to participating
securities
|
(2,601 | ) | (2,542 | ) | (5,578 | ) | (6,134 | ) | ||||||||
Numerator for
basic earnings per share –
Undistributed
and distributed earnings available to common shareholders
|
$ | 141,204 | $ | 136,809 | $ | 325,631 | $ | 359,444 | ||||||||
Add:
Undistributed earnings allocated to participating
securities
|
2,601 | 2,542 | 5,578 | 6,134 | ||||||||||||
Less:
Undistributed earnings reallocated to participating
securities
|
(2,562 | ) | (2,496 | ) | (5,501 | ) | (6,026 | ) | ||||||||
Numerator for
diluted earnings per share –
Undistributed
and distributed earnings available to common shareholders
|
$ | 141,243 | $ | 136,855 | $ | 325,708 | $ | 359,552 | ||||||||
Denominator
for basic earnings per share – weighted average shares
|
74,047,973 | 75,967,774 | 73,919,924 | 76,813,709 | ||||||||||||
Effect of
dilutive securities
|
1,154,872 | 1,439,969 | 1,052,486 | 1,412,989 | ||||||||||||
Denominator
for diluted earnings per share – weighted average shares adjusted for
dilutive securities
|
75,202,845 | 77,407,743 | 74,972,410 | 78,226,698 | ||||||||||||
Earnings per
share Two-class method
|
||||||||||||||||
Basic
|
$ | 1.91 | $ | 1.80 | $ | 4.41 | $ | 4.68 | ||||||||
Diluted
|
$ | 1.88 | $ | 1.77 | $ | 4.34 | $ | 4.60 | ||||||||
18
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. CONTINGENCIES
AND LEGAL MATTERS
As
previously reported, in December 2007, the Company received a letter from the
Commercial Litigation Branch of the Civil Division of the Department of Justice
(the “DOJ”) regarding the Company’s contract with the United States General
Services Administration (the “GSA”). The letter suggested that the
Company had not complied with its disclosure obligations and the contract’s
pricing provisions, and had potentially overcharged government customers under
the contract.
Discussions
relating to the Company’s compliance with its disclosure obligations and the
contract’s pricing provisions are ongoing. The timing and outcome of
these discussions are uncertain and could include settlement or civil litigation
by the DOJ to recover, among other amounts, treble damages and penalties under
the False Claims Act. While this matter is not expected to have a
material adverse effect on the Company’s financial position, an unfavorable
resolution could result in significant payments by the Company. The
Company continues to believe that it has complied with the GSA contract in all
material respects.
10. SUBSEQUENT
EVENTS
On
October 13, 2009 the Company acquired Imperial Supplies, LLC (Imperial), a
distributor of fleet maintenance products to the transportation industry,
headquartered in Green Bay, Wisconsin. Imperial had $67 million in
sales in 2008.
19
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Item
2.
Overview
General
Grainger is the
leading broad-line supplier of facilities maintenance and other related products
in North America. Grainger distributes a wide range of products used
by businesses and institutions to keep their facilities and equipment up and
running. Grainger uses a multichannel business model to provide
customers with a range of options for finding and purchasing products through a
network of branches, sales representatives, direct marketing including catalogs,
and a variety of electronic and Internet channels. Grainger serves
customers through a network of more than 600 branches, 18 distribution
centers and multiple Web sites.
Effective January
1, 2009 Grainger revised its segment disclosure. Grainger has two
reportable segments: the United States and Canada. In the
first quarter of 2009, Grainger integrated the Lab Safety Supply business into
the Grainger Industrial Supply business and results are now reported under the
United States segment. The Canada segment reflects the results for
Acklands – Grainger Inc., Grainger’s Canadian branch-based distribution
business. Other Businesses include the
following: Grainger, S.A. de C.V. (Mexico), Grainger Industrial
Supply India Private Limited (India), Grainger Caribe Inc. (Puerto Rico),
Grainger China LLC (China) and Grainger Panama S.A. (Panama).
Business
Environment
Several economic
factors and industry trends tend to shape Grainger’s business
environment. The overall economy and leading economic indicators
provide insight into anticipated economic factors for the near term and help in
forming the development of projections for the remainder of 2009. In
October 2009, Consensus Forecast-USA projected a 2009 Industrial Production and
GDP decline for the United States of 10.3% and 2.5%, respectively. In
October 2009, Consensus Forecast-USA projected a GDP decline of 2.4% for
Canada.
Historically,
Grainger’s sales trends have tended to correlate with industrial
production. According to the Federal Reserve, overall industrial
production decreased 6.1% from September 2008 to September 2009. The
continued decline in the economy has affected Grainger’s sales growth for the
third quarter of 2009, which declined 14 percent.
The light and heavy
manufacturing customer sectors have historically correlated with manufacturing
employment levels and manufacturing output. Manufacturing output
decreased 7.7% from September 2008 to September 2009 while
manufacturing employment levels decreased 12.0%. These declines
contributed to a high 20 percent decline in Grainger’s heavy manufacturing
customer sector for the three and nine months ended September 30, 2009, and a
low teen percent decline in the light manufacturing customer sector for the
three and nine months ended September 30, 2009.
20
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Matters
Affecting Comparability
There were 191
sales days for the first nine months of 2009, compared to 192 sales days for the
first nine months of 2008.
Since June 2009,
Grainger’s operating results have included the operating results of Grainger
Industrial Supply India Private Limited (India), formerly known as Asia Pacific
Brands India Private Limited, in the Other Businesses segment. See
Note 3 to the Consolidated Financial Statements for additional information
regarding this business acquisition.
Effective January
1, 2009 Grainger revised its segment disclosure. Prior year amounts
have been restated in a consistent manner.
Results
of Operations – Three Months Ended September 30, 2009
The following table
is included as an aid to understanding the changes in Grainger’s Condensed
Consolidated Statements of Earnings:
Three Months
Ended September 30,
|
||||||||||||
As a Percent
of Net Sales
|
Percent
Increase
(Decrease)
|
|||||||||||
2009
|
2008
|
|||||||||||
Net
sales
|
100.0 | % | 100.0 | % | (13.6 | )% | ||||||
Cost of
merchandise sold
|
58.5 | 59.6 | (15.3 | ) | ||||||||
Gross
profit
|
41.5 | 40.4 | (11.1 | ) | ||||||||
Operating
expenses
|
29.8 | 27.8 | (7.4 | ) | ||||||||
Operating
earnings
|
11.7 | 12.6 | (19.3 | ) | ||||||||
Other income
(expense)
|
2.9 | (0.2 | ) | (1,787.7 | ) | |||||||
Income
taxes
|
5.6 | 4.8 | 0.2 | |||||||||
Net
earnings
|
9.0 | % | 7.6 | % | 3.2 | % |
Grainger’s net
sales of $1,589.7 million for the third quarter of 2009 decreased 13.6% compared
with sales of $1,839.5 million for the comparable 2008 quarter. For
the quarter, sales were positively affected by price increases of approximately
4 percentage points which was offset by a decline in volume of 17 percentage
points. In addition, sales were negatively affected by approximately
1 percentage point due to foreign exchange. Sales in all customer
segments declined for the third quarter of 2009. Refer to the Segment
Analysis below for further details.
Gross profit of
$659.9 million for the third quarter of 2009 decreased 11.1%. The
gross profit margin during the third quarter of 2009 increased 1.1 percentage
points when compared to the same period in 2008, primarily driven by price
increases exceeding product cost inflation, lower freight and handling costs and
a reduction in the LIFO inventory reserve, partially offset by an increase in
sales to large customers which are generally at lower margins.
Operating expenses
of $473.2 million for the third quarter of 2009 decreased
7.4%. Operating expenses decreased primarily due to lower payroll and
benefit costs, which were down due to lower headcount, reduced commissions and
no bonus accruals, partially offset by an increase in severance
costs. Approximately one third of the decrease in operating expenses
is expected to be permanent.
21
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating earnings
for the third quarter of 2009 totaled $186.7 million, a decrease of 19.3%
compared to the third quarter of 2008. The decrease in operating
earnings was primarily due to the decline in sales combined with operating
expenses, which declined at a lower rate than sales. These declines
were partially offset by an increase in gross profit.
Net earnings for
the third quarter of 2009 increased by 3.2% to $144.6 million from $140.0
million in 2008. The increase in net earnings for the quarter
primarily resulted from the one-time non-cash pre-tax gain of $47.4 million ($28
million after tax) from the step-up of the investment in MonotaRO Co., Ltd.
(MonotaRO) after Grainger became a majority owner in September
2009. Diluted earnings per share of $1.88 in the third quarter of
2009 were 6.2% higher than the $1.77 for the third quarter of 2008 primarily due
to the one-time gain from the MonotaRO transaction. In the first
quarter of 2009 Grainger adopted FSP 03-6-1 “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
resulting in a two cent reduction to the previously reported 2008 third quarter
earnings per share.
Segment
Analysis
The following
comments at the segment level refer to external and intersegment net
sales. Comments at the business unit level include external and
inter- and intrasegment net sales. See Note 7 to the Condensed
Consolidated Financial Statements.
United
States
Net sales were
$1,398.6 million for the third quarter of 2009, a decrease of $230.8 million, or
14.2%, when compared with net sales of $1,629.4 million for the same period in
2008. Sales in all customer segments declined for the third quarter
of 2009. The overall decrease in net sales was led by a high 20
percent decline in the heavy manufacturing customer sector and a mid 20
percent decline in the reseller customer sector. The light
manufacturing customer sector declined in the low teens, while the government
customer sector performed the strongest, declining in the mid single
digits.
Grainger added
approximately 50,000 net new products to the catalog issued in February
2009. The 2009 catalog includes a total of 233,000
products. Grainger will continue to expand the product line
throughout the year and anticipates having almost 300,000 products in the 2010
catalog. There are 27,000 Lab Safety products also currently
available on grainger.com.
Gross profit margin
increased 1.9 percentage points in the 2009 third quarter over the comparable
quarter of 2008. The improvement in gross profit was primarily driven
by price increases exceeding product cost inflation, lower freight and handling
costs and a reduction in the LIFO inventory reserve, partially offset by an
increase in sales to large customers which are generally at lower
margins.
Operating expenses
were down 7.3% in the third quarter of 2009 versus the third quarter of
2008. Operating expenses decreased primarily due to lower payroll and
benefit costs, which were down due to lower headcount, reduced commissions and
no bonus accruals, partially offset by an increase in severance
costs.
22
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating earnings
of $204.4 million for the third quarter of 2009 decreased 15.4% from
$241.6 million for the third quarter of 2008. The decrease in
operating earnings for the quarter was primarily due to the decline in net sales
and operating expenses which declined at a lower rate than sales, partially
offset by an increase in gross profit margin.
Canada
Net sales were
$166.3 million for the third quarter of 2009, a decrease of $24.5 million,
or 12.8%, when compared with $190.8 million for the same period in
2008. In local currency, daily sales decreased 8.2% for the
quarter. The decrease in net sales was led by declines in the
forestry, natural gas and manufacturing industries, partially offset by growth
in the petroleum and utilities sectors.
The gross profit
margin decreased 2.6 percentage points in the 2009 third quarter versus the
third quarter of 2008, primarily due to higher product costs due to unfavorable
foreign exchange rates, price competition and an increase in the mix of lower
margin sales, particularly to large customers.
Operating expenses
were down 13.4% in the third quarter of 2009 versus the third quarter of
2008. In local currency, operating expenses decreased 8.7% primarily
due to lower commissions and bonus accruals, and other non-payroll related
expenses including lower travel and bad debt expense.
Operating earnings
of $8.4 million for the third quarter of 2009 were down $5.8 million, or 41.0%
from $14.2 million for the third quarter of 2008. In local currency,
operating earnings declined 37.6% in the third quarter of 2009 over the same
period in 2008. The decrease in earnings was primarily due to the
decline in net sales and gross profit margin.
Other
Businesses
Net sales for other
businesses, which include Mexico, India, Puerto Rico, China and Panama,
increased 11.5% for the third quarter of 2009 when compared to the same period
in 2008. The sales increase was due primarily to the acquisition of
the business in India in June 2009, along with contributions from China and
Panama. Sales in Mexico decreased 20.6% in the third quarter of 2009
versus the third quarter of 2008. In local currency, daily sales
increased 2.2%. In China, sales increased 44.9% in the third quarter
of 2009 versus the third quarter of 2008. Operating losses for other
businesses were $2.0 million or a 28.3% improvement over operating losses of
$2.7 million in the third quarter of 2008.
Other
Income and Expense
Other income and
expense was income of $46.7 million in the third quarter of 2009 compared to
$2.8 million of expense in the third quarter of 2008. This increase
was primarily due to the one-time non-cash gain of $47.4 million from the
step-up of the investment in MonotaRO after Grainger became a majority owner in
September 2009.
Income
Taxes
Grainger’s
effective income tax rates were 38.1% and 38.8% for the third quarter of 2009
and 2008, respectively. The decrease in the effective rate is due to
a one-time tax benefit from the expiration of a statute related to a prior tax
year, partially offset by lower earnings reported in non-U.S. tax jurisdictions
with lower tax rates, as well as an increase in current estimates of the overall
U.S. state income tax rates. Excluding the effect of this one-time
tax benefit, the effective tax rate for the third quarter of 2009 would have
been 39.1%.
23
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Results
of Operations – Nine Months Ended September 30, 2009
The following table
is included as an aid to understanding the changes in Grainger’s Condensed
Consolidated Statements of Earnings:
Nine Months
Ended September 30,
|
||||||||||||
As a Percent
of Net Sales
|
Percent
Increase
(Decrease)
|
|||||||||||
2009
|
2008
|
|||||||||||
Net
sales
|
100.0 | % | 100.0 | % | (12.7 | )% | ||||||
Cost of
merchandise sold
|
58.3 | 59.5 | (14.6 | ) | ||||||||
Gross
profit
|
41.7 | 40.5 | (10.0 | ) | ||||||||
Operating
expenses
|
30.8 | 29.0 | (7.3 | ) | ||||||||
Operating
earnings
|
10.9 | 11.5 | (17.0 | ) | ||||||||
Other income
(expense)
|
1.0 | (0.1 | ) | (1,815.2 | ) | |||||||
Income
taxes
|
4.6 | 4.4 | (9.5 | ) | ||||||||
Net
earnings
|
7.3 | % | 7.0 | % | (9.3 | )% |
Grainger’s net
sales of $4,588.2 million for the first nine months of 2009 decreased 12.7%
compared with sales of $5,257.4 million for the comparable 2008
period. Daily sales were down 12.3%. For the first nine
months of 2009, sales were positively affected by price increases of
approximately 5 percentage points which was offset by a decline in volume of 16
percentage points. In addition, sales were negatively affected by 2
percentage points due to foreign exchange, while sales from acquisitions
contributed approximately 1 percentage point. Sales in all customer
segments declined for the first nine months of 2009. Refer to the
Segment Analysis below for further details.
Gross profit of
$1,914.3 million for the first nine months of 2009 decreased
10.0%. The gross profit margin during the first nine months of 2009
increased 1.2 percentage points when compared to the same period in 2008,
primarily driven by price increases exceeding product cost inflation, lower
freight and handling costs and a reduction in the LIFO inventory reserve,
partially offset by an increase in sales to large customers which are generally
at lower margins.
Operating expenses
of $1,414.5 million for the first nine months of 2009 decreased
7.3%. Operating expenses decreased primarily due to lower
commissions, lower profit sharing and no bonus accruals and other non-payroll
related expenses including lower travel, supplies and advertising costs,
partially offset by an increase in severance costs.
Operating earnings
for the first nine months of 2009 totaled $499.9 million, a decrease of 17.0%
from the first nine months of 2008. The decrease in operating
earnings was primarily due to the decline in sales combined with operating
expenses, which declined at a lower rate than sales. These declines
were partially offset by an increase in gross profit margin.
24
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net earnings for
the first nine months of 2009 decreased by 9.3% to $333.4 million from $367.4
million in 2008. The decrease in net earnings for the nine months
primarily resulted from the decline in operating earnings, partially offset by
the one-time non-cash pre-tax gain of $47.4 million ($28 million after
tax) from the step-up of the investment in MonotaRO after Grainger became a
majority owner in September 2009. Diluted earnings per share of $4.34
in the first nine months of 2009 were 5.7% lower than the $4.60 for the first
nine months of 2008 primarily due to the decrease in net earnings, partially
offset by lower shares outstanding and the one-time gain from the MonotaRo
transaction. During the first quarter of 2009 Grainger adopted FSP
03-6-1 “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” resulting in a five cent reduction to
the previously reported earnings per share for the first nine months of
2008.
Segment
Analysis
The following
comments at the segment level refer to external and intersegment net
sales. Comments at the business unit level include external and
inter- and intrasegment net sales. See Note 7 to the Condensed
Consolidated Financial Statements.
United
States
Net sales were
$4,061.1 million for the first nine months of 2009, a decrease of $580.6
million, or 12.5%, when compared with net sales of $4,641.7 million for the same
period in 2008. Daily sales were down 12.0%. Sales in all
customer segments declined for the first nine months of 2009. The
overall decrease in net sales was led by a high 20 percent decline in the heavy
manufacturing customer sector and a low 20 percent decline in the reseller
customer sector. The light manufacturing customer sector declined in
the low teens, while the government customer sector performed the strongest,
declining in the low single digits.
Grainger added
approximately 50,000 net new products to the catalog issued in February
2009. The 2009 catalog includes a total of 233,000
products. Grainger will continue to expand the product line
throughout the year and anticipates having almost 300,000 products in the 2010
catalog. There are 27,000 Lab Safety products also currently
available on grainger.com.
Gross profit margin
increased 1.7 percentage points in the 2009 first nine months over the
comparable 2008 period. The improvement in gross profit was primarily
driven by price increases exceeding product cost inflation, lower freight and
handling costs and reduction in the LIFO inventory reserve, partially offset by
an increase in sales to large customers which are generally at lower
margins.
Operating expenses
were down 5.9% in the first nine months of 2009 versus the first nine months of
2008. Operating expenses decreased primarily due to lower headcount,
reduced commissions and profit sharing accruals, as well as no bonus accruals,
partially offset by an increase in severance costs.
Operating earnings
of $554.2 million for the first nine months of 2009 decreased 14.3% over
$646.4 million for the first nine months of 2008. The decrease
in operating earnings for the nine months was primarily due to the decline in
net sales and operating expenses which declined at a lower rate than sales,
partially offset by an increase in gross profit margin.
25
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Canada
Net sales were
$470.8 million for the first nine months of 2009, a decrease of $95.1
million, or 16.8%, when compared with $565.9 million for the same period in
2008. On a daily basis sales decreased 16.4%. In local
currency, daily sales decreased 4.4% for the first nine months of
2009. The decrease in net sales was led by declines in the forestry,
natural gas and manufacturing industries, partially offset by growth in the
petroleum and utilities sectors, as well as strong sales to the
government.
The gross profit
margin decreased 2.0 percentage points in the first nine months of 2009 versus
the comparable period in 2008, primarily due to higher product costs due to
unfavorable foreign exchange rates, price competition, and an increase in the
mix of lower margin sales, particularly to large customers.
Operating expenses
were down 16.1% in the first nine months of 2009 versus the first nine months of
2008. In local currency, operating expenses decreased 3.9% primarily
due to lower commissions and bonus accruals, and other non-payroll related
expenses including lower travel, data processing and advertising costs,
partially offset by an increase in severance costs.
Operating earnings
of $24.1 million for the first nine months of 2009 were down $17.8 million, or
42.5% from $41.9 for the first nine months of 2008. In local
currency, operating earnings declined 34.6% in the first nine months of 2009
from the same period in 2008. The decrease in earnings was primarily
due to the decline in net sales and gross profit margin.
Other
Businesses
Net sales for other
businesses, which include Mexico, India, Puerto Rico, China and Panama, were
down 1.2% for the first nine months of 2009 when compared to the same period in
2008. Daily sales decreased 0.7%. The decrease in net
sales was due primarily to the decline in Mexico, partially offset by the
acquisition of the business in India in June 2009, along with contributions from
China and Panama. Daily sales in Mexico decreased 23.5% in the first
nine months of 2009 versus the first nine months of 2008. In local
currency, daily sales decreased 0.8%. In China daily sales increased
54.4% in the first nine months of 2009 versus the first nine months of
2008. Operating losses for other businesses were $8.2 million, a 7.9%
improvement over operating losses of $8.9 million for the first nine months of
2008.
Other
Income and Expense
Other income and
expense was income of $43.7 million in the first nine months of 2009 compared
with $2.5 million of expense in the first nine months of 2008. This
increase was primarily due to the one-time non-cash gain of $47.4 million from
the step-up of the investment in MonotaRO after Grainger became a majority owner
in September 2009.
Income
Taxes
Grainger’s
effective income tax rate was 38.7% for the first nine months of 2009 and
2008. The tax rate for the first nine months of 2009 benefited from a
one-time tax benefit from the expiration of a statute related to a prior tax
year, partially offset by lower earnings reported in non-U.S. tax jurisdictions
with lower tax rates, as well as an increase in current estimates of the overall
U.S. state income tax rates. Excluding the effect of this one-time
tax benefit, the effective tax rate for the first nine months of 2009 would have
been 39.1%.
26
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Financial
Condition
For the nine months
ended September 30, 2009, working capital of $1,611.0 million increased by
$228.6 million when compared to $1,382.4 million at December 31,
2008. The increase in working capital primarily relates to a higher
cash balance. The ratio of current assets to current liabilities
increased to 3.4 at September 30, 2009, versus 2.8 at December 31,
2008.
Net cash provided
by operating activities was $509.7 million and $335.3 million for the nine
months ended September 30, 2009 and 2008, respectively. Net cash
flows from operating activities serve as Grainger’s primary source to fund its
growth initiatives. Contributing to cash flows from operations were
net earnings in the nine months ended September 30, 2009 of $333.4 million and
the effect of non-cash expenses such as stock-based compensation, and
depreciation and amortization. Also contributing to net cash provided
by operating activities were changes in operating assets and liabilities, which
resulted in a net source of cash $69.5 million for the first nine months of
2009. The principal operating sources of cash was a decrease in
inventory due to lower purchases. Other current liabilities declined
primarily due to reduced profit sharing accruals, as well as no bonus
accruals.
Net cash used in
investing activities was $76.9 million and $152.9 million for the nine months
ended September 30, 2009 and 2008, respectively. Cash expended for
additions to property, buildings, equipment and capitalized software was $89.9
million in the first nine months of 2009 versus $140.5 million in the first
nine months of 2008. Capital expenditures in 2009 included funding of
infrastructure improvement projects in the distribution centers in the United
States, Canada and Mexico. Net cash acquired in business acquisitions
was $10.4 million for the first nine months of 2009 compared to cash expended
for business acquisitions of $34.0 million for the first nine months of
2008.
Net cash used in
financing activities was $161.9 million for the nine months ended September 30,
2009, versus net cash provided by financing activities of $69.9 million for the
nine months ended September 30, 2008. The $231.8 million difference
in cash used versus provided in financing activities for the nine months ended
September 30, 2009 was due primarily to a four-year bank term loan of $500
million obtained in May 2008. Amounts used in financing activities
included treasury stock purchases of $127.7 million for the first nine months of
2009 versus $307.6 million for the first nine months of
2008. Grainger repurchased 1.9 million shares and 4.3 million shares
in the first nine months of 2009 and 2008, respectively. Grainger
also used cash in financing activities to pay dividends to shareholders of
$100.0 million and $90.4 million for the first nine months of 2009 and
2008, respectively. Offsetting these financing cash outlays were net
proceeds from short-term borrowings of $1.6 million in the first nine months of
2009 versus net payments of $85.0 million in the first nine months of
2008. Also offsetting cash outlays were proceeds and excess tax
benefits realized from stock options exercised of $72.5 million and $52.8
million in the first nine months of 2009 and 2008, respectively.
Grainger maintains
a debt ratio and liquidity position that provide flexibility in funding working
capital needs and long-term cash requirements. In addition to
internally generated funds, Grainger has various sources of financing available,
including commercial paper sales and bank borrowings under lines of
credit. Total debt as a percent of total capitalization was 18.5% at
September 30, 2009, and 20.7% at December 31, 2008.
27
W.W.
Grainger, Inc. and Subsidiaries
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Critical
Accounting Policies and Estimates
The preparation of
financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make judgments,
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses in the financial
statements. Management bases its estimates on historical experience
and other assumptions, which it believes are reasonable. If actual
amounts are ultimately different from these estimates, the revisions are
included in Grainger’s results of operations for the period in which the actual
amounts become known.
Accounting policies
are considered critical when they require management to make assumptions about
matters that are uncertain at the time the estimate is made and when different
estimates than those management reasonably could have made have a material
impact on the presentation of Grainger’s financial condition, changes in
financial condition or results of operations. For a description of
Grainger’s critical accounting policies see the Company’s Annual Report on Form
10-K for the year ended December 31, 2008.
Forward-Looking
Statements
This Form 10-Q
contains statements that are not historical in nature but concern future results
and business plans, strategies and objectives and other matters that may be
deemed to be “forward-looking statements” under the federal securities
laws. Grainger has generally identified such forward-looking
statements by using words such as “anticipates, believes, continue to
expand, continues to believe it complies, could, expect,
expected, intended, intends, likely, may, not been completed, not yet
finalized, plans, projected, projections, should, tended, timing and outcome are
uncertain, and will" or similar expressions.
Grainger cannot
guarantee that any forward-looking statement will be realized although Grainger
does believe that its assumptions underlying its forward-looking statements are
reasonable. Achievement of future results is subject to risks and uncertainties
which could cause Grainger’s results to differ materially from those which are
presented.
Factors that could
cause actual results to differ materially from those presented or implied in a
forward-looking statement include, without limitation: higher product
costs or other expenses; a major loss of customers; loss or disruption of source
of supply; increased competitive pricing pressures; failure to develop or
implement new technologies or business strategies; the outcome of pending and
future litigation or governmental or regulatory proceedings; investigations,
inquiries, audits and changes in laws and regulations; disruption of information
technology or data security systems; general industry or market conditions;
general global economic conditions; currency exchange rate fluctuations; market
volatility; commodity price volatility; labor shortages; facilities disruptions
or shutdowns; higher fuel costs or disruptions in transportation services;
natural and other catastrophes and unanticipated weather
conditions.
Caution should be
taken not to place undue reliance on Grainger’s forward-looking statements and
Grainger undertakes no obligation to publicly update the forward-looking
statements, whether as a result of new information, future events or
otherwise.
28
W.W.
Grainger, Inc. and Subsidiaries
PART
I – FINANCIAL INFORMATION
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
For quantitative
and qualitative disclosures about market risk, see “Item 7A: Quantitative and
Qualitative Disclosures About Market Risk” in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
Item
4. Controls and Procedures
Disclosure Controls and
Procedures
Grainger carried
out an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of Grainger’s
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that Grainger’s disclosure controls and
procedures were effective as of the end of the period covered by this
report.
Changes in Internal Control
Over Financial Reporting
There were no
changes in Grainger’s internal control over financial reporting that occurred
during the first nine months, that have materially affected, or are reasonably
likely to materially affect, Grainger’s internal control over financial
reporting.
PART
II – OTHER INFORMATION
Items 1A, 3, 4 and
5 not applicable.
Item
1. Legal Proceedings
As
previously reported, in December 2007, the Company received a letter from the
Commercial Litigation Branch of the Civil Division of the Department of Justice
(the “DOJ”) regarding the Company’s contract with the United States General
Services Administration (the “GSA”). The letter suggested that the
Company had not complied with its disclosure obligations and the contract’s
pricing provisions, and had potentially overcharged government customers under
the contract.
Discussions
relating to the Company’s compliance with its disclosure obligations and the
contract’s pricing provisions are ongoing. The timing and outcome of
these discussions are uncertain and could include settlement or civil litigation
by the DOJ to recover, among other amounts, treble damages and penalties under
the False Claims Act. While this matter is not expected to have a
material adverse effect on the Company’s financial position, an unfavorable
resolution could result in significant payments by the Company. The
Company continues to believe that it has complied with the GSA contract in all
material respects.
29
W.W.
Grainger, Inc. and Subsidiaries
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
Issuer
Purchases of Equity Securities – Third Quarter
Period
|
Total Number
of Shares Purchased (A)
|
Average Price
Paid per Share (B)
|
Total Number
of Shares Purchased as Part of Publicly Announced Plans or Programs
(C)
|
Maximum
Number of
Shares that
May Yet be Purchased Under the
Plans or
Programs
|
|
July 1 – July
31
|
–
|
–
|
–
|
5,683,580
|
shares
|
Aug. 1 – Aug.
31
|
3,659
|
–
|
–
|
5,683,580
|
shares
|
Sept. 1 –
Sept. 30
|
–
|
–
|
–
|
5,683,580
|
shares
|
Total
|
3,659
|
–
|
–
|
|
(A)
|
There were
3,659 shares withheld to satisfy tax withholding obligations in connection
with the vesting of employee restricted stock
awards.
|
|
(B)
|
Average price
paid per share includes any commissions paid and includes only those
amounts related to purchases as part of publicly announced plans or
programs.
|
|
(C)
|
Purchases were made pursuant to a
share repurchase program approved by Grainger’s Board of Directors on
April 30, 2008. The Board of Directors granted authority to
repurchase up to 10 million shares. The program has no
specified expiration date. No share repurchase plan or program
expired or was terminated during the period covered by this
report. Activity is reported on a trade date
basis.
|
Item
6.
|
Exhibits
|
||
(a)
|
Exhibits
(numbered in accordance with Item 601 of Regulation
S-K)
|
||
(31)
|
Rule 13a – 14(a)/15d – 14(a) Certifications
|
||
(a) Chief
Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
(b) Chief
Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
(32)
|
Section 1350 Certifications
|
||
(a) Chief
Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|||
(b) Chief
Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|||
30
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
W.W.
Grainger, Inc.
|
||
(Registrant)
|
||
Date:
October 29, 2009
|
By:
|
/s/ R. L.
Jadin
|
R. L. Jadin,
Senior Vice President
and Chief
Financial Officer
|
||
Date:
October 29, 2009
|
By:
|
/s/ G. S.
Irving
|
G. S. Irving,
Vice President
and
Controller
|
31