UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x]
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange
Act of 1934
For the quarterly
period ended June 30, 2003
or
[ ] Transition Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange
Act of 1934
For the transition
period from
______ to ______
Commission file number 1-5684
I.R.S. Employer Identification Number 36-1150280
W.W.
Grainger, Inc.
(An Illinois
Corporation)
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
Telephone: (847)
535-1000
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 is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 91,315,324 shares of the Company’s Common Stock were outstanding as of July 31, 2003.
1
| TABLE OF CONTENTS | ||
|---|---|---|
| Page No. | ||
| PART I | FINANCIAL INFORMATION | |
| Item 1. | Financial Statements (Unaudited) | |
| Condensed Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 2003 and June 30, 2002 |
3 - 4 | |
| Condensed Consolidated Statements of Comprehensive Earnings for the Three Months and Six Months Ended June 30, 2003 and June 30, 2002 |
5 | |
| Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 |
6 - 7 | |
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and June 30, 2002 |
8 - 9 | |
| Notes to Condensed Consolidated Financial Statements | 10 - 17 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
18 - 27 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 28 |
| Item 4. | Controls and Procedures | 28 |
| PART II | OTHER INFORMATION | |
| Item 6. | Exhibits and Reports on Form 8-K | 29 |
| Signatures | 30 | |
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 per share amounts)
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net sales | $ 1,172,661 | $ 1,194,792 | $ 2,311,930 | $ 2,320,057 | |||||
| Cost of merchandise sold | 768,589 | 795,230 | 1,514,002 | 1,537,466 | |||||
| Gross profit | 404,072 | 399,562 | 797,928 | 782,591 | |||||
| Warehousing, marketing, and | |||||||||
| administrative expenses | 311,292 | 305,298 | 613,741 | 598,367 | |||||
| Operating earnings | 92,780 | 94,264 | 184,187 | 184,224 | |||||
| Other income and (expense) | |||||||||
| Interest income | 729 | 917 | 1,502 | 1,896 | |||||
| Interest expense | (1,574 | ) | (1,407 | ) | (3,009 | ) | (2,941 | ) | |
| Equity in loss of unconsolidated | |||||||||
| entities | (769 | ) | (541 | ) | (1,824 | ) | (1,261 | ) | |
| Gains on sales of investment | |||||||||
| securities | 5 | -- | 5 | 7,308 | |||||
| Unclassified-net | 2,663 | (1,268 | ) | 1,017 | 1,477 | ||||
| Net other income and | |||||||||
| (expense) | 1,054 | (2,299 | ) | (2,309 | ) | 6,479 | |||
| Earnings before income taxes and | |||||||||
| cumulative effect of accounting | |||||||||
| change | 93,834 | 91,965 | 181,878 | 190,703 | |||||
| Income taxes | 37,841 | 37,466 | 73,481 | 77,746 | |||||
| Earnings before cumulative | |||||||||
| effect of accounting change | $ 55,993 | $ 54,499 | $ 108,397 | $ 112,957 | |||||
| Cumulative effect of accounting | |||||||||
| change | -- | -- | -- | (23,921 | ) | ||||
| Net earnings | $ 55,993 | $ 54,499 | $ 108,397 | $ 89,036 | |||||
The accompanying notes are an integral part of these financial statements.
3
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Continued)
(In thousands of dollars except for per share amounts)
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Earnings per share before cumulative | |||||||||
| effect of accounting change: | |||||||||
| Basic | $ 0.61 | $ 0.59 | $ 1.19 | $ 1.22 | |||||
| Diluted | $ 0.60 | $ 0.57 | $ 1.17 | $ 1.18 | |||||
| Cumulative effect of accounting | |||||||||
| change: | |||||||||
| Basic | $ -- | $ -- | $ -- | $ (0.26 | ) | ||||
| Diluted | $ -- | $ -- | $ -- | $ (0.25 | ) | ||||
| Earnings per share: | |||||||||
| Basic | $ 0.61 | $ 0.59 | $ 1.19 | $ 0.96 | |||||
| Diluted | $ 0.60 | $ 0.57 | $ 1.17 | $ 0.93 | |||||
| Weighted average number of | |||||||||
| shares outstanding: | |||||||||
| Basic | 90,834,004 | 92,751,999 | 90,849,675 | 92,685,427 | |||||
| Diluted | 92,369,529 | 95,384,343 | 92,477,141 | 95,406,237 | |||||
| Cash dividends paid per share | $ 0.185 | $ 0.180 | $ 0.365 | $ 0.355 | |||||
The accompanying notes are an integral part of these financial statements.
4
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net earnings | $ 55,993 | $ 54,499 | $ 108,397 | $ 89,036 | |||||
| Other comprehensive earnings | |||||||||
| (losses): | |||||||||
| Foreign currency translation | |||||||||
| adjustments, net of tax benefit | |||||||||
| related to designated hedge | |||||||||
| of $4,348, $2,291, $7,466, | |||||||||
| and $2,189, respectively | 14,629 | 7,380 | 26,978 | 7,537 | |||||
| Gains (losses) on investment | |||||||||
| securities: | |||||||||
| Unrealized holding gains | |||||||||
| (losses), net of tax | |||||||||
| (expense) benefit of $(340), | |||||||||
| $359, $455, and $1,548, | |||||||||
| respectively | 532 | (561 | ) | (711 | ) | (2,421 | ) | ||
| Reclassifications for net | |||||||||
| (gains) losses included in | |||||||||
| earnings, net of tax expense | |||||||||
| (benefit) of $2, $0, $(627), | |||||||||
| and $2,850, respectively | (3 | ) | -- | 982 | (4,458 | ) | |||
| Comprehensive earnings | $ 71,151 | $ 61,318 | $ 135,646 | $ 89,694 | |||||
The accompanying notes are an integral part of these financial statements.
5
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except for per share amounts)
|
ASSETS |
(Unaudited) June 30, 2003 |
Dec. 31, 2002 | |||
|---|---|---|---|---|---|
| CURRENT ASSETS | |||||
| Cash and cash equivalents | $ 186,698 | $ 208,528 | |||
| Accounts receivable (less allowances for doubtful | |||||
| accounts of $26,030 and $26,868, respectively) | 464,462 | 423,240 | |||
| Inventories | 747,116 | 721,178 | |||
| Prepaid expenses and other assets | 50,780 | 36,665 | |||
| Deferred income tax benefits | 101,063 | 95,336 | |||
| Total current assets | 1,550,119 | 1,484,947 | |||
| PROPERTY, BUILDINGS, AND EQUIPMENT | 1,526,028 | 1,492,858 | |||
| Less accumulated depreciation and amortization | 794,910 | 756,051 | |||
| Property, buildings, and equipment-net | 731,118 | 736,807 | |||
| DEFERRED INCOME TAXES | 24,737 | 20,541 | |||
| INVESTMENTS IN UNCONSOLIDATED ENTITIES | 19,762 | 15,988 | |||
| GOODWILL | 152,164 | 114,428 | |||
| OTHER ASSETS AND INTANGIBLES, NET | 65,945 | 64,737 | |||
| TOTAL ASSETS | $2,543,845 | $2,437,448 | |||
The accompanying notes are an integral part of these financial statements.
6
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars except for per share amounts)
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
(Unaudited) June 30, 2003 |
Dec. 31, 2002 | |||
|---|---|---|---|---|---|
| CURRENT LIABILITIES | |||||
| Short-term debt | $ 1,135 | $ 2,967 | |||
| Current maturities of long-term debt | 5,320 | 6,505 | |||
| Trade accounts payable | 314,542 | 290,807 | |||
| Accrued expenses | 220,769 | 248,085 | |||
| Income taxes | 34,819 | 37,902 | |||
| Total current liabilities | 576,585 | 586,266 | |||
| LONG-TERM DEBT (less current maturities) | 139,163 | 119,693 | |||
| ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS | 70,974 | 63,791 | |||
| SHAREHOLDERS' EQUITY | |||||
| Cumulative Preferred Stock - $5 par value - 12,000,000 | |||||
| shares authorized; none issued or outstanding | -- | -- | |||
| Common Stock - $0.50 par value - 300,000,000 shares | |||||
| authorized; issued 109,154,283 and 109,017,642 | |||||
| shares, respectively | 54,576 | 54,509 | |||
| Additional contributed capital | 385,080 | 379,942 | |||
| Retained earnings | 2,158,000 | 2,083,072 | |||
| Unearned restricted stock compensation | (14,166 | ) | (17,144 | ) | |
| Accumulated other comprehensive losses | (8,493 | ) | (35,742 | ) | |
| Treasury stock, at cost - 17,910,127 and 17,449,587 | |||||
| shares, respectively | (817,874 | ) | (796,939 | ) | |
| Total shareholders' equity | 1,757,123 | 1,667,698 | |||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 2,543,845 | $ 2,437,448 | |||
The accompanying notes are an integral part of these financial statements.
7
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
| Six Months Ended June 30, |
|||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Cash flows from operating activities: | |||||
| Net earnings | $ 108,397 | $ 89,036 | |||
| Provision for losses on accounts receivable | 3,908 | 9,151 | |||
| Deferred income taxes | (2,629 | ) | (8,908 | ) | |
| Depreciation and amortization: | |||||
| Property, buildings, and equipment | 39,182 | 38,827 | |||
| Other intangibles | 649 | 355 | |||
| Amortization of capitalized software | 9,642 | 8,598 | |||
| Gains on sales of investment securities | (5 | ) | (7,308 | ) | |
| Net gains on sales of property, buildings and equipment | (2,948 | ) | (3,211 | ) | |
| Write-down of investments | 1,614 | 1,844 | |||
| Losses on unconsolidated entities | 1,824 | 1,261 | |||
| Cumulative effect of accounting change | -- | 23,921 | |||
| Change in operating assets and liabilities-net of business | |||||
| acquisition and joint venture contributions: | |||||
| Increase in accounts receivable | (36,720 | ) | (56,882 | ) | |
| Increase in inventories | (7,921 | ) | (14,905 | ) | |
| Increase in prepaid expenses | (12,787 | ) | (660 | ) | |
| Increase in trade accounts payable | 19,281 | 29,646 | |||
| Decrease in other current liabilities | (30,914 | ) | (22,697 | ) | |
| (Decrease) increase in current income taxes payable | (5,606 | ) | 6,804 | ||
| Increase in accrued employment-related | |||||
| benefits costs | 7,183 | 4,445 | |||
| Other-net | 2,547 | 5,926 | |||
| Net cash provided by operating activities | $ 94,697 | $ 105,243 | |||
| Cash flows from investing activities: | |||||
| Additions to property, buildings, and | |||||
| equipment-net of dispositions | $(26,048 | ) | $(46,140 | ) | |
| Additions to capitalized software | (3,773 | ) | (4,368 | ) | |
| Proceeds from sales of investment securities | 675 | 15,957 | |||
| Net cash paid for business acquisition | (36,725 | ) | -- | ||
| Investments in unconsolidated entities | (3,564 | ) | (3,211 | ) | |
| Other-net | 319 | 702 | |||
| Net cash used in investing activities | $(69,116 | ) | $(37,060 | ) | |
The accompanying notes are an integral part of these financial statements.
8
W.W. Grainger, Inc., and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands of dollars)
(Unaudited)
| Six Months Ended June 30, |
|||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Cash flows from financing activities: | |||||
| Net decrease in short-term debt | $ (1,832 | ) | $ (2,230 | ) | |
| Long-term debt issuance | 329 | -- | |||
| Long-term debt payments | (1,185 | ) | (1,900 | ) | |
| Stock options exercised | 6,008 | 13,221 | |||
| Purchase of treasury stock-net | (21,071 | ) | (16,125 | ) | |
| Cash dividends paid | (33,469 | ) | (33,244 | ) | |
| Net cash used in financing activities | $(51,220 | ) | $(40,278 | ) | |
| Exchange rate effect on cash and cash equivalents | 3,809 | 2,538 | |||
| Net (decrease) increase in cash and cash equivalents | (21,830 | ) | 30,443 | ||
| Cash and cash equivalents at beginning of year | 208,528 | 168,846 | |||
| Cash and cash equivalents at end of period | $ 186,698 | $ 199,289 | |||
The accompanying notes are an integral part of these financial statements.
9
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF STATEMENT PRESENTATION
W.W. Grainger, Inc., “the Company,” is engaged in the distribution of facilities maintenance products, services, and related information to businesses and institutions in North America.
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, 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Condensed Consolidated Balance Sheet at December 31, 2002 has been derived from the audited 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, which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” It is an interpretation of FASB Statement of Financial Accounting Standards No. (SFAS) 5, 57, and 107 and rescission of FIN 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize at the inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. Disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this interpretation did not have a material effect on the Company’s results of operations or financial position. See Note 9 to the Condensed Consolidated Financial Statements for information regarding the Company’s warranty reserves. The Company has certain other guarantees as disclosed in Note 9 to the Condensed Consolidated Financial Statements.
10
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The statement amends and clarifies accounting for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of SFAS 149 that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. Adoption of SFAS 149 has not and is not expected to have a material effect on the Company’s results of operations or financial position.
In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Adoption of SFAS 150 is not expected to have a material effect on the Company’s results of operations or financial position.
3. GEMPLER’S ACQUISITION
On April 14, 2003, Lab Safety Supply, Inc. (Lab Safety), the Company’s wholly owned subsidiary, acquired substantially all of the assets and assumed certain liabilities of Gempler’s, a direct marketing division of Gempler’s, Inc., located in Wisconsin. The results of Gempler’s operations have been included in the Company’s consolidated financial statements since that date. Gempler’s, with annual sales in 2002 of approximately $32 million, serves agricultural, horticultural, grounds maintenance and contractor markets with tools, safety supplies, clothing and other equipment.
The aggregate purchase price was $36.7 million in cash and $0.7 million in assumed liabilities. Goodwill recognized in this transaction amounted to approximately $22.8 million and is expected to be fully deductible for tax purposes. Due to the immaterial nature of this transaction disclosures of amounts assigned to the acquired assets and liabilities and pro forma results of operations are not considered necessary.
11
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. STOCK INCENTIVE PLANS
The Company maintains various stock incentive plans. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company recognizes compensation cost for restricted shares and restricted stock units granted to employees. No compensation cost is recognized for stock option grants. All options granted under the Company’s plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, “Accounting for Stock-based Compensation,” to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||
| (In thousands of dollars, except for per share amounts) | |||||||||
| Net earnings as reported | $ 55,993 | $ 54,499 | $ 108,397 | $ 89,036 | |||||
| Deduct: | |||||||||