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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 SEPTEMBER 30, 2004

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
(State or other jurisdiction of incorporation or organization)		 36-1150280
(I.R.S. Employer Identification No.)
       
100 Grainger Parkway, Lake Forest, Illinois
  (Address of principal executive offices) 		 60045-5201
(Zip Code) 

                 (847) 535-1000                              
                   (Registrant’s telephone number including area code)                               



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 Exchange 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: 90,081,559 shares of the Company’s Common Stock were outstanding as of September 30, 2004.

 

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 Nine Months Ended
     September 30, 2004 and September 30, 2003

3

      
Condensed Consolidated Statements of Comprehensive
     Earnings for the Three Months and Nine Months Ended
     September 30, 2004 and September 30, 2003

4

      
Condensed Consolidated Balance Sheets
     as of September 30, 2004 and December 31, 2003

5 - 6

      
Condensed Consolidated Statements of Cash Flows
     for the Nine Months Ended September 30, 2004 and
     September 30, 2003

7 - 8

      
Notes to Condensed Consolidated Financial Statements

9 - 17

      
Item 2. Management’s Discussion and Analysis of Financial
     Condition and Results of Operations

18 - 29

      
Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

      
Item 4. Controls and Procedures

30

      
PART II OTHER INFORMATION
      
Item 1. Legal Proceedings

31

      
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

31

      
Item 6. Exhibits

32

      
Signatures

33

      
EXHIBITS
   
Exhibit 11 Computations of Earnings Per Share

      
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 per share amounts)
(Unaudited)


Three Months Ended
September 30,
 Nine Months Ended
September 30,
2004
        2003
        2004
        2003
Net sales     $ 1,301,057   $ 1,200,669   $ 3,784,830   $ 3,512,599  

Cost of merchandise sold		    821,774    775,805    2,398,255    2,259,493  
  Gross profit    479,283    424,864    1,386,575    1,253,106  

Warehousing, marketing and		  
  administrative expenses    371,839    330,543    1,071,492    974,598  
  Operating earnings    107,444    94,321    315,083    278,508  

Other income and (expense)		  
  Interest income    1,766    748    4,290    2,250  
  Interest expense    (1,214 )  (1,523 )  (3,867 )  (4,532 )
  Equity in income (loss) of  
     unconsolidated entities — net    505    (56 )  303    (1,880 )
  Gain on sale of unconsolidated  
     entity    --    --    750    --  
  Unclassified — net    365    1,273    783    2,295  
    Net other income and (expense)    1,422    442    2,259    (1,867 )
Earnings before income taxes    108,866    94,763    317,342    276,641  

Income taxes		    41,177    37,927    120,475    111,408  
    Net earnings   $ 67,689   $ 56,836   $ 196,867   $ 165,233  
Earnings per share:  

    Basic		   $ 0.75   $ 0.63   $ 2.18   $ 1.82  
    Diluted   $ 0.74   $ 0.62   $ 2.15   $ 1.79  
Weighted average number of  
    shares outstanding:  

    Basic		    90,295,071    90,650,797    90,250,231    90,783,382  
    Diluted    91,691,179    92,524,441    91,562,740    92,492,910  
Cash dividends paid per share   $ 0.200   $ 0.185   $ 0.585   $ 0.550  

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,
2004
        2003
        2004
        2003
Net earnings     $ 67,689   $ 56,836   $ 196,867   $ 165,233  
Other comprehensive earnings  
     (losses):  

     Foreign currency translation		  
       adjustments, net of tax  
       (expense) benefit of $(4,136),  
       $(71), $(5,667) and $7,395,  
       respectively    8,563    396    1,912    27,374  

     Gains (losses) on investment		  
       securities:  

       Unrealized holding gains,		  
          net of tax (expense) benefit  
          of $0, $(767), $0 and  
          $(312), respectively    --    1,199    --    488  

       Reclassifications for net		  
          (gains) losses included in  
          earnings, net of tax expense  
          (benefit) of $0, $469, $0 and  
          $(158), respectively    --    (734 )  --    248  
     8,563    861    1,912    28,110  
Comprehensive earnings   $ 76,252   $ 57,697   $ 198,779   $ 193,343  

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 per share amounts)


ASSETS
 (Unaudited)
Sept. 30, 2004
       Dec. 31, 2003
CURRENT ASSETS            
  Cash and cash equivalents   $ 393,663   $ 402,824  
  Accounts receivable (less allowances for doubtful  
    accounts of $27,148 and $24,736, respectively)    501,858    431,896  
  Inventories    655,294    661,247  
  Prepaid expenses and other assets    45,756    37,947  
  Deferred income taxes    104,240    99,499  
    Total current assets    1,700,811    1,633,413  

PROPERTY, BUILDINGS AND EQUIPMENT		    1,597,289    1,545,150  
  Less accumulated depreciation and amortization    870,815    813,158  
  Property, buildings and equipment — net    726,474    731,992  

DEFERRED INCOME TAXES		    8,378    20,296  

INVESTMENTS IN AND LOANS TO UNCONSOLIDATED		  
  ENTITIES    23,759    22,822  

GOODWILL — NET		    159,266    156,268  

OTHER ASSETS AND INTANGIBLES — NET		    70,808    59,887  
TOTAL ASSETS   $ 2,689,496   $ 2,624,678  

 

5

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)
Sept. 30, 2004
       Dec. 31, 2003
CURRENT LIABILITIES            
  Current maturities of long-term debt   $ 4,590   $ 144,135  
  Trade accounts payable    313,147    257,806  
  Accrued expenses    298,433    261,009  
  Income taxes    35,102    43,690  
    Total current liabilities    651,272    706,640  

LONG-TERM DEBT (less current maturities)		    4,895    4,895  

ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS		    75,465    68,008  


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 109,672,938 and 109,377,216 shares,  
    respectively    54,837    54,689  
  Additional contributed capital    431,654    394,409  
  Retained earnings    2,386,388    2,242,762  
  Unearned restricted stock compensation    (16,469 )  (11,471 )
  Accumulated other comprehensive earnings    4,506    2,594  
  Treasury stock, at cost —  
    19,591,379 and 18,356,227 shares, respectively    (903,052 )  (837,848 )
  Total shareholders’ equity    1,957,864    1,845,135  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 2,689,496   $ 2,624,678  

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,
2004
       2003
CASH FLOWS FROM OPERATING ACTIVITIES:            
  Net earnings   $ 196,867   $ 165,233  
  Provision for losses on accounts receivable    7,906    8,152  
  Deferred income taxes    7,517    (1,207 )
  Depreciation and amortization:  
    Property, buildings and equipment    66,774    58,556  
    Other intangibles    1,464    1,136  
    Capitalized software    8,101    11,963  
  Tax benefit of stock incentive plans    8,137    1,848  
  Gains on sales of investment securities    (50 )  (1,208 )
  Net gains on sales of property, buildings and equipment    (709 )  (3,056 )
  Gain on sale of unconsolidated entity    (750 )  --  
  Write-downs of investments    --    1,614  
  (Income) losses of unconsolidated entities    (303 )  1,880  
  Change in operating assets and liabilities — net of business  
    acquisition:  
    (Increase) in accounts receivable    (76,198 )  (38,794 )
    Decrease in inventories    8,376    32,822  
    (Increase) in prepaid expenses    (7,792 )  (4,503 )
    Increase (decrease) in trade accounts payable    54,724    (5,681 )
    Increase (decrease) in other current liabilities    36,951    (13,500 )
    Increase (decrease) in current income taxes payable    (14,686 )  4,963  
    Increase in accrued employment-related  
      benefit costs    7,456    10,926  
  Other — net    1,533    1,953  
      Net cash provided by operating activities   $ 305,318   $ 233,097  
CASH FLOWS FROM INVESTING ACTIVITIES:  
  Additions to property, buildings and  
    equipment — net of dispositions   $ (59,711 ) $ (45,575 )
  Additions to capitalized software    (17,337 )  (5,864 )
  Proceeds from sales of investment securities    50    6,115  
  Net cash paid for business acquisition    --    (36,709 )
  Investments in and loans to unconsolidated entities    --