UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] 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 |
|
Title of each class Common Stock $0.50 par value, and accompanying Preferred Share Purchase Rights |
Name of each exchange on which registered New York Stock Exchange Chicago Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ___X____ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ___X____ No _______
The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $4,477,602,395 as of the close of trading reported on the Consolidated Transaction Reporting System on June 30, 2004. The Company does not have nonvoting common equity.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock $0.50 par value 90,665,414 shares outstanding as of January 31, 2005Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 27, 2005, are incorporated by reference into Part III hereof.
1
TABLE OF CONTENTS
| Page(s) | ||
|
PART I |
||
| Item 1: | BUSINESS | 3 - 5 |
| THE COMPANY | 3 | |
| BRANCH-BASED DISTRIBUTION | 3 - 4 | |
| INDUSTRIAL SUPPLY | 3 - 4 | |
| ACKLANDS – GRAINGER INC. | 4 | |
| FINDMRO | 4 | |
| GLOBAL SOURCING | 4 | |
| PARTS | 4 | |
| MEXICO | 4 | |
| LAB SAFETY | 5 | |
| INTEGRATED SUPPLY | 5 | |
| INDUSTRY SEGMENTS | 5 | |
|
COMPETITION |
5 | |
|
EMPLOYEES |
5 | |
|
WEB SITE ACCESS TO COMPANY REPORTS |
5 | |
| Item 2: |
PROPERTIES |
6 |
| Item 3: | LEGAL PROCEEDINGS | 6 - 7 |
| Item 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 7 |
| Executive Officers | 7 | |
| PART II | ||
| Item 5: | MARKET FOR
REGISTRANT’S COMMON
EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
7 - 8 |
| Item 6: | SELECTED FINANCIAL DATA | 8 |
| Item 7: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
9 - 19 |
| Item 7A: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 19 |
| Item 8: | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 19 |
| Item 9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
20 |
| Item 9A: | CONTROLS AND PROCEDURES | 20 |
| Item 9B: | OTHER INFORMATION | 20 |
| PART III | ||
| Item 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 21 |
| Item 11: | EXECUTIVE COMPENSATION | 21 |
| Item 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 21 |
| Item 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 21 |
| Item 14: | PRINCIPAL ACCOUNTING FEES AND SERVICES | 21 |
| PART IV | ||
| Item 15: | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
21 - 22 |
| Signatures | 23 | |
| Certifications | 59 - 62 | |
PART I
Item 1: Business
The Company
W.W.
Grainger, Inc., incorporated in the State of Illinois in 1928, is in the service
business. It distributes products used by businesses and institutions across
North America to keep their facilities and equipment running. In this report,
the words “Grainger” or “Company” mean W.W. Grainger, Inc.
and its subsidiaries.
Grainger uses a multichannel business model to serve approximately 1.6 million customers of all sizes with multiple ways to find and purchase facilities maintenance and other products through a network of branches, field sales representatives, call centers, direct marketing media and the Internet. Orders can be placed via telephone, fax, Internet or in person. Products are available for immediate pick-up or for shipment.
Operating results are reported in three segments: Branch-based Distribution, Lab Safety and Integrated Supply. The Branch-based Distribution businesses primarily serve the needs of North American businesses for facility maintenance products. Lab Safety Supply, Inc. (Lab Safety), a direct marketing company, serves customers who purchase safety, industrial and other products. Integrated Supply serves customers seeking to outsource some or all of their indirect materials management processes.
Grainger has internal business support functions which provide coordination and guidance in the areas of accounting, administrative services, business development, communications, compensation and benefits, employee development, enterprise systems, finance, human resources, insurance and risk management, internal audit, investor relations, legal, real estate and construction services, security and safety, taxes and treasury services. These services are provided in varying degrees to all business units.
Grainger does not engage in basic or substantive product research and development activities. Items are regularly added to and deleted from Grainger’s product lines on the basis of market research, recommendations of customers and suppliers, sales volumes and other factors.
Branch-based Distribution
The Branch-based Distribution
businesses provide North American customers with product solutions for facility
maintenance and other product needs through logistics networks, which are configured for
rapid product availability. Grainger offers a broad selection of facility maintenance and
other products through local branches, catalogs and the Internet. The Branch-based
Distribution businesses consist of the following Grainger divisions: Industrial Supply,
Acklands – Grainger Inc. (Canada), FindMRO, Export, Global Sourcing, Parts, Grainger,
S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico) and China Distribution. The more
significant of these businesses are described below.
Industrial Supply
Industrial Supply offers U.S.
businesses and institutions a combination of product breadth, local availability, speed of
delivery, detailed product information, simplicity of ordering and competitively priced
products. Industrial Supply distributes material handling equipment, safety and security
supplies, lighting and electrical products, tools and test instruments, pumps and plumbing
supplies, cleaning and painting supplies and many other items. Its customers range from
small and medium-sized businesses to large corporations and governmental and other
institutions. During 2004, Industrial Supply completed an average of 89,000 sales
transactions daily.
Industrial Supply operates 408 branches located in all 50 states. These branches are generally located within 20 minutes of the majority of U.S. businesses and serve the immediate needs of their local markets by allowing customers to pick up items directly from the branches.
Branches range in size from small, will-call branches to large master branches. The Grainger Express® will-call branches average 1,800 square feet, do not stock inventory and provide convenient pick-up locations. Branches primarily fulfill counter and will-call needs and provide customer service. Master branches handle a higher volume of counter and will-call customers daily, in addition to shipping to customers for other branches in their area. On average, a branch is 20,000 square feet in size, has 11 employees and handles about 136 transactions per day. In 2004, Industrial Supply opened 19 new branches, relocated 15 branches and expanded or remodeled 17 branches. Five branches were closed in 2004.
In March 2004, Industrial Supply completed the project of reconfiguring its distribution network. The new network is comprised of nine distribution centers (DCs) – five new and four redesigned facilities – which handle most of the customer shipping and also replenish branch inventories. The new facilities average more than 300,000 square feet in size. The DCs, using automated equipment and processes, ship orders, including Internet orders, directly to customers for all branches located in their service areas. The DC located in Chicago is also a national distribution center providing customers and the entire network with slower moving inventory items.
3
Industrial Supply sells principally to customers in industrial and commercial maintenance departments, service shops, manufacturers, hotels, government, retail organizations, transportation businesses, contractors, and healthcare and educational facilities. Sales transactions during 2004 were made to approximately 1.3 million customers. Approximately 24% of 2004 sales consisted of private label items bearing the Company’s registered trademarks, including DAYTON® (principally electric motors, heating and ventilation equipment), TEEL® (liquid pumps), SPEEDAIRE® (air compressors), AIR HANDLER® (air filtration equipment), DEM-KOTE® (spray paints), WESTWARD® (principally hand and power tools), CONDOR™ (safety products) and LUMAPRO® (task and outdoor lighting). Grainger has taken steps to protect these trademarks against infringement and believes that they will remain available for future use in its business. Sales of remaining items generally consisted of products carrying the names of other well-recognized brands.
The current Industrial Supply catalog, issued in February 2005, offers more than 82,000 facility maintenance and other products. Approximately 1.4 million copies of the catalog were produced. A CD-ROM version of the catalog supplements the paper version. Approximately 690,000 copies of the CD-ROM catalog were produced.
Customers can also purchase products through grainger.com. This Web site serves as a prominent service channel for the Industrial Supply division. Customers have access to a much larger selection of products through grainger.com than is contained in the catalog. It is available 24/7, providing real-time product availability, customer-specific pricing, multiple product search capabilities, customer personalization, and links to customer support and the fulfillment system. For large customers interested in connecting to grainger.com through sophisticated purchasing platforms, grainger.com has a universal connection. This technology translates the different data formats used by electronic marketplaces, exchanges, and e-procurement systems and allows these systems to communicate directly with Industrial Supply’s operating platform. Orders processed through grainger.com resulted in sales of $611.3 million in 2004, $478.6 million in 2003 and $419.5 million in 2002.
Industrial Supply purchases products for sale from approximately 1,100 suppliers, most of which are manufacturers. No single supplier comprised more than 10% of Industrial Supply’s purchases and no significant difficulty has been encountered with respect to sources of supply.
Acklands – Grainger
Inc. (Acklands)
Acklands is Canada’s leading
broad-line distributor of industrial, automotive fleet and safety supplies. It serves
customers through 166 branches and five distribution centers across Canada. Acklands
distributes tools, lighting products, safety supplies, pneumatics, instruments, welding
equipment and supplies, motors, shop equipment and many other items. During 2004,
approximately 14,000 sales transactions were completed daily. A comprehensive catalog,
printed in both English and French, showcases the product line to facilitate customer
selection. This catalog, with more than 43,000 products, supports the efforts of field
sales representatives throughout Canada. In addition, customers can purchase products
through www.acklandsgrainger.com.
FindMRO
FindMRO is a sourcing service.
Through sophisticated search technologies and sourcing expertise, FindMRO locates
facilities maintenance and other products when a source is unknown to the customer.
FindMRO has access to more than 4,000 suppliers and five million products. Orders can be
placed with a Grainger sales representative or a branch employee.
Global Sourcing
Global Sourcing procures
competitively priced, high-quality products produced outside the United States. Grainger
businesses sell these items primarily under private labels. Products obtained through
Global Sourcing include WESTWARD® tools, LUMAPRO® lighting products and
CONDOR™ safety products, as well as products bearing other trademarks.
Parts
Parts provides customers access to
more than 2.5 million parts and accessories, stocking nearly 76,000 of them in its
Northbrook, Illinois, warehouse. Customers can purchase parts over the telephone, at
grainger.com, or through a Grainger sales representative or branch employee. Trained
customer service representatives have online access to more than 300,000 pages of detailed
parts diagrams. Parts handled approximately 1.5 million customer calls in 2004 through its
call center in Waterloo, Iowa.
Mexico
Grainger’s operations in Mexico
provide local businesses with facility maintenance and other products from both Mexico and
the United States. From its six locations in Mexico and U.S. branches along the border,
the business provides delivery of approximately 43,000 products throughout Mexico. One new
branch was opened in 2004. The largest facility, an 85,000 square foot DC, is located
outside of Monterrey, Mexico. Customers can order products using a Spanish-language
general catalog or purchase them through www.grainger.com.mx.
4
Lab Safety
Lab Safety is a direct marketer of
safety and other industrial products to U.S. and Canadian businesses. Headquartered in
Janesville, Wisconsin, Lab Safety primarily reaches its customers through the distribution
of multiple branded catalogs, including a CD-ROM version, and other marketing materials
distributed throughout the year to targeted markets. Customers can purchase products
through www.lss.com, www.benmeadows.com and www.gemplers.com.
Lab Safety offers extensive product depth, technical support and high service levels. During 2004, Lab Safety issued 11 unique catalogs covering safety supplies, material handling and facility maintenance products, lab supplies, security and other products targeted to specific customer groups. Lab Safety provides access to more than 130,000 products through its targeted catalogs.
Integrated Supply
Integrated Supply serves customers
who have chosen to outsource some or all of their indirect materials management processes.
This service enables customers to focus on their core business objectives. Integrated
Supply offers a full complement of on-site outsourcing solutions, including business
process reengineering, inventory and tool crib management, purchasing management and
information management.
In 2005, Integrated Supply will no longer offer on-site integrated purchasing and tool crib management services. It will be merged into the Industrial Supply division and be reported in the Branch-based Distribution segment. Industrial Supply plans to fulfill, but not renew, existing Integrated Supply contracts.
Industry Segments
For 2004, Grainger is reporting three
industry segments: Branch-based Distribution, Lab Safety and Integrated Supply. Beginning
January 1, 2005, Integrated Supply will no longer be reported as a separate segment. For
segment and geographical information and consolidated net sales and operating earnings see
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Item 8: Financial Statements and Supplementary Data.”
Competition
Grainger faces competition in all
markets it serves, from manufacturers (including some of its own suppliers) that sell
directly to certain segments of the market, wholesale distributors, catalog houses and
certain retail enterprises.
Grainger provides local product availability, sales representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive technical and application data), electronic and Internet commerce technology and other services to assist customers in lowering their total facility maintenance costs. Grainger believes that it can effectively compete with manufacturers on small orders, but manufacturers may have an advantage in filling large orders.
Grainger serves a number of diverse markets. Based on available data, Grainger estimates the United States market for facilities maintenance products to be approximately $100 billion, of which Grainger’s share is between 4 and 5 percent. There are a small number of large competitors, although most of the market is served by small, local and regional competitors.
Employees
As of December 31, 2004, Grainger had
15,523 employees, of whom 13,260 were full-time and 2,263 were part-time or temporary.
Grainger has never had a major work stoppage and considers employee relations to be good.
Web Site Access to
Company Reports
Grainger makes available, free of
charge, through its Web site, its Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably
practicable after this material is electronically filed with or furnished to the
Securities and Exchange Commission. This material may be accessed by visiting
www.grainger.com/investor.
5
Item 2: Properties
As of December 31, 2004, Grainger’s owned and leased facilities totaled 17,936,000 square feet, essentially the same as 2003. Decreases due to the sale of the former New Jersey facility and to the consolidation of Canadian facilities were offset by increases related to the market expansion program. Industrial Supply and Acklands accounted for the majority of the total square footage. Industrial Supply facilities are located throughout the United States. Acklands facilities are located throughout Canada.
Industrial Supply branches range in size from 1,200 to 109,000 square feet and average approximately 20,000 square feet. Most are located in or near major metropolitan areas with many located in industrial parks. Typically, a branch is on one floor, is of masonry construction, consists primarily of warehouse space, sales areas and offices and has off-the-street parking for customers and employees. Grainger considers that its properties are generally in good condition and well maintained.
A brief description of significant facilities follows:
| Location |
Facility and Use |
Size in Square Feet | ||||||
| Chicago Area (1) | Headquarters and General Offices | 1,179,000 | ||||||
| United States (1) | Nine Distribution Centers | 5,100,000 | ||||||
| United States (2) | 408 Industrial Supply branch locations | 8,059,000 | ||||||
| United States and Mexico (3) | Other facilities | 1,766,000 | ||||||
| Canada (4) | 166 Acklands facilities | 1,832,000 | ||||||
| Total Square Feet | 17,936,000 | |||||||
| (1) | These facilities are either owned or leased with most leases expiring between 2005 and 2009. The owned facilities are not subject to any mortgages. |
| (2) | Industrial Supply branches consist of 283 owned and 125 leased properties. The owned facilities are not subject to any mortgages. |
| (3) | Other facilities primarily include locations for Lab Safety, other business units and properties under construction. Two facilities are located in Puerto Rico and six are located in Mexico, all of which are leased. The owned facilities are not subject to any mortgages. |
| (4) | Acklands facilities consist of general offices, distribution centers and branches, of which 58 are owned and 108 leased. The owned facilities are not subject to any mortgages. |
Item 3: Legal Proceedings
Grainger has been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by Grainger. As of January 28, 2005, Grainger is named in cases filed on behalf of approximately 3,700 plaintiffs in which there is an allegation of exposure to asbestos and/or silica. In addition, during 2004, five cases previously filed against Grainger alleging exposure to cotton dust were amended to include allegations relating to asbestos; these cases involve approximately 2,100 plaintiffs.
Grainger has denied, or intends to deny, the allegations in all of the above-described lawsuits. In 2004, lawsuits relating to asbestos and/or silica and involving approximately 700 plaintiffs were dismissed with respect to Grainger, typically based on the lack of product identification. If a specific product distributed by Grainger is identified in any of these lawsuits, Grainger would attempt to exercise indemnification remedies against the product manufacturer. In addition, Grainger believes that a substantial portion of these claims are covered by insurance. Grainger is engaged in active discussions with its insurance carriers regarding the scope and amount of coverage. While Grainger is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on Grainger’s consolidated financial position or results of operations.
On September 28, 2004, the U.S. Environmental Protection Agency (EPA) filed an administrative complaint against Grainger seeking a civil penalty of $0.4 million for alleged violations of federal clean-air law and regulations. The complaint alleges that Grainger sold a “non-essential” wheel chock product which contained and/or was manufactured with an ozone-depleting substance (ODS). The complaint also alleges that Grainger sold aerosol cleaning fluids containing an ODS without displaying proper notification where the products were sold. According to the complaint, Grainger sold the cleaning fluids to persons who did not provide proof that they were commercial purchasers and failed to verify that such persons were commercial purchasers. Grainger does not believe that the resolution of this matter will have a material adverse effect on Grainger’s consolidated financial position or results of operations.
6
In addition to the foregoing, from time to time Grainger is involved in various other legal and administrative proceedings that are incidental to its business. These include claims relating to product liability, general negligence, environmental issues, employment, intellectual property and other matters. As a government contractor, from time to time Grainger is also subject to governmental or regulatory inquiries or audits. It is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on Grainger’s consolidated financial position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2004.
Executive Officers
Following is information about the Executive Officers of Grainger including age in February 2005. Executive Officers of Grainger generally serve until the next annual election of officers, or until earlier resignation or removal.
|
Name and Age |
Positions and Offices Held and Principal |
|
|
|
| Judith E. Andringa (44) | Vice President and Controller. Before joining Grainger in 2002, she was Controller of the Foodservice Division of Kraft Foods, Inc., a position assumed in 2000 after serving Kraft as Director of Finance, Marketing Services Group. |
| Nancy A. Hobor (58) | Senior Vice President (formerly Vice President), Communications and Investor Relations, a position assumed in 1999. |
| John L. Howard (47) | Senior Vice President and General Counsel, a position assumed in 2000. |
| Richard L. Keyser (62) | Chairman of the Board, a position assumed in 1997, and Chief Executive Officer, a position assumed in 1995. |
| Larry J. Loizzo (50) | Senior Vice President (formerly Vice President) of Grainger, a position assumed in 2003, and President of Lab Safety Supply, Inc., a position assumed in 1996. |
| P. Ogden Loux (62) | Senior Vice President, Finance and Chief Financial Officer, a position assumed in 1997. |
| James T. Ryan (46) | Group President, a position assumed in April 2004 after serving as Executive Vice President, Marketing, Sales and Service (for Grainger Industrial Supply). Before assuming the last-mentioned position in 2001, he served as Vice President of Grainger and President of grainger.com. |
PART II
Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information and
Dividends
Grainger’s common stock is
traded on the New York Stock Exchange and the Chicago Stock Exchange, with the ticker
symbol GWW. The high and low sales prices for the common stock and the dividends declared
and paid for each calendar quarter during 2004 and 2003 are shown below.
| Prices |
||||||||||||||
| Quarters |
High |
Low |
Dividends | |||||||||||
| 2004 | First | $ | 49.02 | $ | 45.00 | $ | 0.185 | |||||||
| Second | 57.66 | 47.55 | 0.200 | |||||||||||
| Third | 58.90 | 50.33 | 0.200 | |||||||||||
| Fourth | 66.99 | 56.26 | 0.200 | |||||||||||
| Year | $ | 66.99 | $ | 45.00 | $ | 0.785 | ||||||||
| 2003 | First | $ | 53.30 | $ | 41.40 | $ | 0.180 | |||||||
| Second | 50.80 | 42.54 | 0.185 | |||||||||||
| Third | 52.33 | 45.86 | 0.185 | |||||||||||
| Fourth | 50.83 | 43.70 | 0.185 | |||||||||||
| Year | $ | 53.30 | $ | 41.40 | $ | 0.735 | ||||||||
Holders
The approximate number of
shareholders of record of Grainger’s common stock as of January 31, 2005 was 1,300.
7
Issuer Purchases of Equity Securities – Fourth 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 | ||||||||||
| Oct. 1 — Oct. 31 | 2,601 | $ | -- | -- | 7,197,700 shares | |||||||||
| Nov. 1 — Nov. 30 | 60,545 | $ | 58.93 | 52,000 | 7,145,700 shares | |||||||||
| Dec. 1 — Dec. 31 | 66,285 | $ | 60.93 | 65,000 | 7,080,700 shares | |||||||||
| Total | 129,431 | $ | 60.04 | 117,000 | 7,080,700 shares | |||||||||
| (A) | The total number of shares purchased includes Grainger’s retention of 12,431 shares 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. Activity is reported on a settlement date basis. |
| (C) | Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors. As reported in Grainger’s Form 10-Q for the quarter ended September 30, 2002, which was filed on November 11, 2002, authority under the program was restored to 10 million shares on October 30, 2002. The program has no specified expiration date. No share repurchase plan or program expired, or was terminated, during the period covered by this report. |
Other
On May 21, 2004, Grainger timely
submitted to the New York Stock Exchange (NYSE) a 2004 Annual CEO Certification, in which
Grainger’s Chief Executive Officer certified that he was not aware of any
violation by Grainger of the NYSE’s corporate governance listing standards as of
the date of the certification.
Item 6: Selected Financial Data
| 2004 |
2003 |
2002 |
2001 |
2000 | |||||||||||||
| (In thousands of dollars, except for per share amounts) | |||||||||||||||||
Net sales |
$ | 5,049,785 | $ | 4,667,014 | $ | 4,643,898 | $ | 4,754,317 | $ | 4,977,044 | |||||||
| Net earnings | 286,923 | 226,971 | 211,567 | 174,530 | 192,903 | ||||||||||||
| Net earnings per basic share | 3.18 | 2.50 | 2.30 | 1.87 | 2.07 | ||||||||||||
| Net earnings per diluted share | 3.13 | 2.46 | 2.24 | 1.84 | 2.05 | ||||||||||||
| Total assets | 2,809,573 | 2,624,678 | 2,437,448 | 2,331,246 | 2,459,601 | ||||||||||||
| Long-term debt | |||||||||||||||||
| (less current maturities) | -- | 4,895 | 119,693 | 118,219 | 125,258 | ||||||||||||
| Cash dividends paid per share | $ | 0.785 | $ | 0.735 | $ | 0.715 | $ | 0.695 | $ | 0.670 | |||||||
The results for 2004 included an effective tax rate, excluding the effect of equity in unconsolidated entities, of 35.6%, which was down from 40.0% in the prior year. The lower tax rate resulted in an increase to earnings of $19.4 million or $0.21 per diluted share. The tax rate reduction was primarily due to a lower tax rate in Canada, the realization of tax benefits related to operations in Mexico and to capital losses, the recognition of tax benefits from the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Medicare Act) and the resolution of certain federal and state tax contingencies.
The results for 2002 included an after-tax gain on the sale of securities of $4.5 million, or $0.04 per diluted share, and an after-tax gain on the reduction of restructuring reserves established for the shutdown of the Material Logic business of $1.2 million, or $0.01 per diluted share. These were offset by the cumulative effect of a change in accounting for the write-down of goodwill of $23.9 million after-tax, or $0.26 per diluted share, related to Grainger’s Canadian subsidiary.
The results for 2001 included an after-tax charge of $36.6 million, or $0.39 per diluted share, related to the restructuring charge established in connection with the closing of the Material Logic business and the write-down of investments in other digital enterprises.
The results for 2000 included an after-tax gain of $17.9 million, or $0.19 per diluted share, related to sales of investment securities.
For further information see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 3 and 5 to the Consolidated Financial Statements.
8
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
General.
Grainger is the leading broad-line supplier of facilities maintenance and other
related products in North America. For each of the three years presented in this
Annual Report on Form 10-K for the year ended December 31, 2004, Grainger
reported its operating results in three segments: Branch-based Distribution, Lab
Safety and Integrated Supply. 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, field sales forces, direct marketing including catalogs, and a variety
of electronic and Internet channels. Grainger serves customers through a network
of 582 branches, 17 distribution centers and multiple Web sites.
Beginning January 1, 2005, Grainger’s Integrated Supply business will no longer offer on-site integrated purchasing and tool crib management services and will be merged into Grainger’s Industrial Supply division within the Branch-based Distribution segment. Grainger Industrial Supply plans to fulfill, but not renew, existing Integrated Supply contracts. As such, in 2005 Integrated Supply will no longer be reported as a separate segment and Grainger will report its operating results in two segments: Branch-based Distribution and Lab Safety.
Business Environment. Several economic factors and industry trends shape Grainger’s business environment. The current overall economy and leading economic indicators forecast by economists provide insight into anticipated economic factors for the near term and help in the development of projections for the upcoming year. At the start of 2005, the Consensus Forecast-USA is predicting GDP and Industrial Production growth of 3 to 4 percent for 2005.
In 2004, Grainger benefited from the economic recovery in the United States. Grainger’s sales correlate positively with production growth. With the improvement in Industrial Production and general growth in the economy, Grainger realized an increase in sales across all customer segments. Grainger’s sales also tend to increase when non-farm payrolls grow, especially during economic recoveries. Non-farm payrolls increased approximately 1%, on average, in 2004 over 2003. For 2004, Grainger benefited from the combination of increased Industrial Production and non-farm payroll growth.
The light and heavy manufacturing customer segments, which comprised over 25% of Grainger’s total 2004 sales, have historically correlated with manufacturing employment levels and manufacturing production. Manufacturing employment levels increased less than 1% during 2004, while manufacturing output increased approximately 4.8%. This contributed to the double-digit sales growth in the light and heavy manufacturing customer segments for Grainger in 2004. Economic forecasts suggest that the manufacturing sector will continue to expand in 2005.
In 2004, Grainger launched a multiyear initiative to strengthen its presence in top metropolitan markets and better position itself to serve the local customer. The success of the market expansion program is expected to be a driver of growth in 2005 and beyond. Three phases of the market expansion program were in progress at December 31, 2004, and are scheduled for completion in 2005. Additional phases are scheduled for 2005 and beyond.
The customer’s buying behavior is also important in Grainger’s business environment. Grainger believes that customers will continue to focus on reducing their cost to procure facilities maintenance products. Grainger is therefore increasing product information available to employees for improved service to customers by installing an upgraded SAP operating system and accelerating the replacement of its legacy information systems with a new integrated software package also provided by SAP, starting with the U.S. branch-based businesses. Integration, volume and user acceptance testing is currently scheduled for the third quarter of 2005.
Grainger’s financial strength, including its low debt and strong cash flow, leaves it well positioned to fund major initiatives, improve effectiveness and accelerate top line growth. Capital spending in 2004 related to the branch network and information technology was approximately $118 million, with total capital expenditures of nearly $161 million. Capital spending was approximately $20 million higher than the most recent forecast due to the acceleration of the replacement and upgrade of the branch communication systems and the ongoing SAP initiatives.
In 2005, total capital expenditures of $150 to $180 million are anticipated. Grainger intends to continue its investment in the market expansion program and information technology enhancements with spending planned for the following major projects:
| •
$60 to $70 million for continued market expansion; • $35 to $40 million for information technology; and • $10 to $12 million for Canadian branch programs. |
Capital spending for the market expansion program may be affected by lease or purchase decisions, based on availability of facilities.
9
Matters Affecting Comparability. Grainger’s operating results for 2004 included a full year of operating results of Gempler’s. Grainger’s operating results for 2003 included the results of Gempler’s only from the acquisition date of April 14, 2003. Gempler’s results are included in the Lab Safety segment.
Grainger has made reclassifications to the prior years ended December 31, 2003 and 2002, to reduce cost of merchandise sold and increase operating (advertising) expenses for vendor provided funding in order to maintain comparable reporting with the year ended December 31, 2004. See Note 2 to the Consolidated Financial Statements.
Results of Operations
The following table is included as an
aid to understanding changes in Grainger’s Consolidated Statements of Earnings:
| For the Years Ended December 31, | ||||||||||||||||||||
| Items in Consolidated Statements of Earnings | ||||||||||||||||||||
| As a Percent of Net Sales |
Percent Increase/(Decrease) from Prior Year | |||||||||||||||||||
| 2004 |
2003 |
2002 |
2004 |
2003 | ||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 8.2 | % | 0.5 | % | ||||||||||
| Cost of merchandise sold | 62.2 | 63.8 | 64.3 | 5.6 | (0.3 | ) | ||||||||||||||
| Gross profit | 37.8 | 36.2 | 35.7 | 12.7 | 1.9 | |||||||||||||||
| Operating expenses | 29.1 | 27.9 | 27.2 | 12.5 | 3.0 | |||||||||||||||
| Operating earnings | 8.7 | 8.3 | 8.5 | 13.5 | (1.5 | ) | ||||||||||||||
| Other income (expense) | 0.1 | (0.1 | ) | 0.1 | 190.9 | (231.8< | ||||||||||||||